When a North Carolina home health agency takes state Home Health Services money, does it have to open its books to the State Auditor?

Plain-English summary

The Department of Environment, Health and Natural Resources ran the Home Health Services program through its Division of Adult Health. The program reimbursed private home health agencies, up to an annual allocation, for services to patients who could not pay and for whom no third-party payor would cover the bill. Payment rates were pegged to Medicaid and Medicare amounts. No federal funds flowed through.

The audit question came down to whether HHS dollars were "for the purchase of goods or services" under the exception in N.C.G.S. § 143-6.1 (recently amended by the 1991 Appropriations Act), or whether they were grant funds subject to the audit requirements. Special Deputy Attorney General Gayl M. Manthei concluded they were grants and were subject to audit.

The AG's reasoning turned on who controlled the use of the money. In a pure purchase contract, the buyer (the State) defines what it wants, identifies who or what gets the goods or services, and pays based on delivery. In the HHS program, the home health agency did most of those steps: the agency identified the patient as needing the service, the agency applied the program's financial eligibility formula to that patient, the agency checked for other third-party payors before billing the program, and the agency rendered the service it had decided was appropriate. The State set rates and reviewed program-wide compliance, but it did not pick patients or decide on services case by case.

Because the spending decisions were decentralized to the agencies, the State Auditor needed agency-level financial and compliance information to know whether the money had actually been spent on eligible patients for legitimate services. The opinion enumerated the audit's two prongs: a financial statement audit (showing that the funds were actually spent on the services they were billed for), and a compliance audit (showing that the eligibility determinations and third-party payor pursuit procedures met program rules). Both required agency-level books and records.

The AG rejected the broad reading of "purchase of goods or services" that would have exempted the HHS program. Taken at face value, almost every government grant produces some good or service for the public, and the exception would swallow the rule. The narrower reading the AG adopted (the exception covers traditional procurement where the State specifies the deliverable and the contractor delivers it, but not reimbursement programs where the recipient controls who gets the services) is what gives § 143-6.1 work to do.

The opinion footnoted that the 1991 amendment to § 143-6.1 changed the exception language from "compensation for the purchase of goods or services" to "for the purchase of goods or services." The AG noted that the conclusion applied equally to both versions.

Currency note

This opinion was issued in 1991. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The audit framework in N.C.G.S. § 143-6.1 has been amended several times since 1991, and the State Auditor's specific reporting requirements have evolved. The HHS program structure has also changed substantially with the expansion of Medicaid-managed home health care. The substantive grant-versus-purchase analytical framework in the opinion remains useful as a starting point, but specific dollar thresholds and reporting forms in the audit rules should be verified against current law.

Background and statutory framework

N.C.G.S. § 143-6.1 is the State Auditor's primary lever for ensuring that non-State entities that handle State money actually account for it. The statute does two things: (1) restricts use of State funds to the purposes for which they were appropriated, and (2) requires entities that receive $25,000 or more annually to file financial statements with the State Auditor and provide books and records for audit.

The "purchase of goods or services" exception was meant to keep the State Auditor out of regular procurement contracts. When the State buys office supplies, lawn maintenance, or photocopier service, the State knows what it got because it specified the deliverable; the vendor's internal books are not relevant to whether the State got value for its money. The audit framework exists for situations where the State does not have that direct line of sight.

Grant programs sit on the other side of that line. The State sends money to a recipient who then uses it under the program's rules. The State's view into whether the money was used correctly depends on access to the recipient's records, because the State did not specify each individual transaction. § 143-6.1 was designed to give the State Auditor that access.

The HHS program in 1991 was a hybrid. The State set rates (procurement-like) but did not pick patients (grant-like). The decentralized patient identification and eligibility determination is what pulled the program onto the grant side of the line, in the AG's reading.

State v. White, the canon-of-construction case the AG cited, supplied the methodology: read the statute by looking at the purposes appearing from the whole text, the mischief to be remedied, the remedy, and the end to be accomplished. Applied to § 143-6.1, the purpose is auditor accountability over decentralized spending decisions. The HHS program's structure put it inside that purpose.

The opinion did not address what an HHS provider audit actually involved in terms of forms, schedules, or fees, or what the consequences were for an agency that refused to participate. Those operational details were governed by the State Auditor's regulations, which evolved over time.

Common questions

What was the dollar threshold for the audit requirement?

$25,000 per year. An agency that received less than that did not have to file annually with the State Auditor.

Could an HHS provider use a single audit covering its other federal or state funding to satisfy § 143-6.1?

The opinion did not address this. In practice, providers receiving multiple funding streams often coordinated audits through a single auditor under uniform standards, but compliance with § 143-6.1 was a separate question driven by State Auditor procedures.

What if the home health agency was a hospital or other entity already subject to other state regulation?

The audit requirement attached to the receipt of State funds, not to the recipient's other regulatory status. A hospital that received HHS funds above the threshold had to comply, regardless of any other audits it underwent.

Were nonprofit and for-profit home health agencies treated differently?

No. The statute and the opinion did not distinguish on the basis of for-profit or nonprofit status. The trigger was receipt of State funds above the threshold for a non-purchase use.

Did the AG's analysis affect any other DHHS programs?

The reasoning would apply to any state grant program where the recipient identifies the ultimate beneficiary, determines eligibility, and decides when to draw funds. Many other DHHS service-reimbursement programs share that structure.

Citations

• N.C.G.S. § 143-6.1 (audit requirements)
• 15A NCAC 16A.0202(10), 16A.0204, 16A.0208 (HHS program rules)
• 1991 Session Laws, c. 689 (Appropriations and Budget Revenue Act, amending § 143-6.1)
• State v. White, 58 N.C. App. 558, 294 S.E.2d 1 (1982)

Source

• Landing page: https://ncdoj.gov/opinions/audit-requirements/

Original opinion text

Subject: Audit Requirements; G.S. § 143-6.1

Requested by: John C. Hunter, General Counsel, Department of Environment, Health and Natural Resources

Question: Are private home health agencies which receive funds from the Division of Adult Health, Department of Environment, Health and Natural Resources, subject to the audit requirements of G.S. § 143-6.1?

Conclusion: Yes.

The Home Health Service (HHS) program, administered by the Division of Adult Health, provides funds to home health agencies to pay for home health services furnished to eligible patients. Each year, the HHS program allocates available funds, determines a maximum amount which each participating home health agency may receive and enters into a contract with each home health agency. Pursuant to the contract and the rules of the HHS program, the home health agency is reimbursed, up to the annual maximum allocation, for services rendered to financially eligible individuals when reasonable measures to determine and collect from other third party payors do not result in payment. 15A NCAC 16A.0208. The home health agency determines whether a given individual is financially eligible for HHS funds based on a formula established by the HHS program. 15A NCAC 16A.0204. The amount reimbursed for the services is based upon Medicaid and Medicare amounts. 15A NCAC 16A.0202(10). No federal funds are used by the HHS program.

The question presented is whether the HHS funds are subject to the audit requirements of G.S. § 143-6.1 or whether such funds are exempt from such requirements under the exclusion for funds which are for the purchase of services. G.S. § 143-6.1, as amended by the Appropriations and Budget Revenue Act of 1991, sec. 12 and sec. 190, ch. 689, 1991 Session Laws n1, provides, in relevant part:

Each corporation, organization, and institution which receives, uses or expends any State funds shall use or expend such funds only for the purposes for which such State funds were appropriated by the General Assembly or collected by the State.

Each corporation, organization, and institution which receives, uses or expends State funds in the amount of twenty-five thousand dollars ($25,000) or more annually, except when the funds are for the purchase of goods or services, shall file annually with the State Auditor and with the Joint Legislative Commission on Governmental Operations financial statements in such form and on such schedule as shall be prescribed by the State Auditor, and shall furnish to the State Auditor for audit all books, records and other information as shall be necessary for the State Auditor to account fully for the receipt, use and expenditure of State funds.

n1 The 1991 amendment, inter alia, substituted the phrase "except when the funds are for the purchase of goods or services" for the phrase "except when the funds are compensation for the purchase of goods or services". Since this request for an Attorney General's opinion was received prior to the enactment of the 1991 amendment, it should be noted that the conclusions of this opinion apply equally to the earlier version of the statute.

Opponents to requiring an audit from HHS program participants argue that the HHS funds should be exempt because the funds are used to purchase home health services. We disagree. In the broadest sense, virtually all uses of state funds, including grants, result in some advantage to the state or to the public which could be classified as either a "good" or a "service". Thus, the exception cannot apply merely because the funds result in a service being furnished.

Among the indicia to consider in construing a statute are the purposes appearing from the statute taken as a whole, the mischief to be remedied, the remedy and the end to be accomplished. State v. White, 58 N.C. App. 558, 294 S.E.2d 1 (1982). The stated purpose of G.S. § 143-6.1 is to obtain the information which is necessary for the State Auditor to account fully for the receipt, use and expenditure of state funds. Thus, the distinction between "the purchase of goods and services" and other uses of state funds, such as grants, is the extent to which the user of the funds exercises independent control over the use of those funds.

Opponents argue that financial information regarding the home health agencies is not necessary in order to account for state funds because the home health agencies are paid on a fee for service basis and the fee is predetermined by the state, based upon Medicaid and Medicare reimbursement amounts, regardless of the cost to the home health agency of providing the service. The financial information is relevant to the State Auditor, however, in determining whether the billed services were actually rendered. Further, the audit report includes, in addition to the financial statement, a compliance report which reviews the home health agency's compliance with program requirements such as the process for determining eligibility and the efforts to obtain third party reimbursement.

In the HHS program, unlike in a typical vendor contract, the home health agency, and not the state, identifies the need for the services. Although the HHS program does consider community needs in establishing its annual allocation to each home health agency and although the HHS program establishes financial eligibility standards, it is the home health agency which determines whether a given case is an appropriate case for drawing down the HHS funds. 15A NCAC 16A.0204. Further, the home health agency is responsible for determining whether another third party payor might be available to pay for the services, prior to billing the HHS program. 15A NCAC 16A.0208.

Thus, a review of the procedures established by the home health agency in determining eligibility and the compliance by the home health agency with those procedures; a review of the procedures established by the home health agency in identifying and billing third party payors and the compliance with the home health agency with those procedures; and a review of other substantiating information to show that the billed services were appropriate and were, in fact, rendered, are all necessary to the State Auditor in accounting for the receipt, use and expenditure of the state funds. Accordingly, the HHS funds are not merely payment for goods and services but are grant funds subject to the audit requirements of G.S. § 143-6.1.

LACY H. THORNBURG, Attorney General
Gayl M. Manthei, Special Deputy Attorney General