WASHINGTON — A long-awaited audit of Maryland's health insurance exchange has found that the state improperly billed the federal government $28.4 million as former Gov. Martin O'Malley's administration struggled to launch what would become one of the most troubled websites in the nation.
Though the year-long probe by the Department of Health and Human Services inspector general found no fraud or criminal wrongdoing, auditors said the state lacked oversight and internal controls — and they recommended that Maryland refund what the federal government paid to subsidize the cost of signing people up for coverage.
The report — obtained by The Baltimore Sun ahead of its release — is the latest fallout from the disastrous launch in 2013 of Maryland's health insurance marketplace, a central component of President Barack Obama's Affordable Care Act. The Maryland website crashed on its first day and was plagued by feuding contractors and software glitches.
By refocusing attention on a dark period of his tenure, the report also could have political implications for O'Malley as he crisscrosses the country in anticipation of a possible run for president next year. The Democrat has pitched himself as a modern, tech-savvy manager.
"How do you misallocate that large amount of money?" asked Rep. Andy Harris, a Baltimore County Republican and critic of the health care law who first requested the audit last year. "Neither answer is good: It was either incompetence or it was intended."
Exchange officials deny that any money was "misallocated" as the audit title suggests. They said they believed they were following federal guidelines and dispute most of the audit's findings.
At issue is how the exchange billed the federal government for signing people up for health insurance.
The exchange in Maryland and others around the country were entitled to federal reimbursement based on projections of how many people bought private insurance and how many qualified for Medicaid, the federal-state health program for the poor.
Those state projections turned out to be way off. While Maryland officials publicly acknowledged that fact before the end of the first open enrollment period in 2014 — cutting in half the number of people expected to buy private policies — federal auditors say the officials did not correct the record with regulators at the Centers for Medicare and Medicaid Services for months.
States were reimbursed more for enrolling people in private plans than for Medicaid. The auditors contend that the state not only collected from the wrong pot of money but received too much money.
The auditors recommended that Maryland pay back the $28.4 million and then apply for the amount it is actually due.
Carolyn Quattrocki, the exchange director, said she is working with federal regulators to resolve the matter.
"We really feel we followed federal guidance," she said. "We had no red flags along the way that we were doing anything that was not in keeping with the guidelines."
A spokeswoman for O'Malley referred questions to former state health officials.
The audit's recommendations created the possibility that the state — in the midst of negotiating a $40.7 billion budget — will have to reimburse the federal government for some portion of the money.
A spokesman for Gov. Larry Hogan declined to say whether the state would do so.
"Governor Hogan has continually raised concerns about the manner in which Maryland's health exchange was developed and then rolled out — a disaster which cost taxpayers millions," spokesman Doug Mayer said.
The audit found two accounting errors. The largest — a $15.9 million misallocation — was the result of the out-of-date enrollment data provided by the state to the federal government.
Another $12.5 million was the result of incorrect calculations by a contractor, which is not identified in the report.
According to state officials, that contractor was the Hilltop Institute at the University of Maryland, Baltimore County, a nonpartisan heath research organization, which made the projections for the exchange.
The institute has acknowledged the mistake. Officials there notified the exchange that it had inadvertently counted projections for two enrollment periods. Once corrected, that reduced the number of people expected to buy private plans in the first enrollment period to about 70,000 from 150,000.
Before the correction, there was criticism that the exchange was failing to reach enrollment targets. The state eventually met the lowered projections.
The exchanges were established by the Affordable Care Act to help people who do not receive insurance coverage through their employer or a government program.
Although Maryland's site was among the worst-performing in the nation, state officials say more than 450,000 people eventually signed up during the first open enrollment period and the months afterward. During the second open enrollment that ended in mid-February, about 290,000 people signed up.
A new Gallup poll found that the number of uninsured in Maryland dropped to 7.8 percent in 2014 from 12.9 percent in 2013.
Significant public funding has been used to develop and repair Maryland's health exchange. Maryland has not detailed all of its spending, but estimates have put the tab at about $261 million by the end of 2015 — more than 80 percent of it federal money.
Email and other documents obtained by The Sun showed that the development of the website had been troubled for months before its launch by technical problems and disputes between contractors.
The inspector general's audit, which led to the issuance of subpoenas in August, was narrowly focused. It explored only whether the state followed federal guidelines in how it handled the grants. Auditors, who conducted their field work at the state agency's offices in Baltimore from March through September, did not assign blame to any individuals.
Quattrocki said she believes federal auditors have completed their work. A separate state financial audit is nearly complete, she said.
Harris, who has been pressing federal health officials on the issue in Capitol Hill hearings, said the results could prompt other states to review how they sought reimbursement from the federal government.
Asked whether the inspector general had completed its work in Maryland, Harris said he isn't sure.
"I'm not certain at all that this is the last we've heard from the inspector general on what went wrong in Maryland," he said.