Nevada may have lost more than $2.1 million because of overbilling, fraud and overall lack of oversight of the same community homes that were found earlier this year to be providing squalid living conditions to the state’s most vulnerable residents, legislative auditors said Monday.

According to an audit report presented to an interim legislative panel, the state’s Division of Public and Behavioral Health likely lost up to $1.5 million in possible overpayments because of overbilling from providers of so-called community-based living arrangement homes for people with mental illnesses — and lost another $600,000 because of a discrepancy in rates paid for similar services.

The home-based care model was designed to remove patients from institutions and provide them with an independent living experience while still allowing them to receive ongoing care but has faced significant scrutiny after a January audit found “filthy” and “unsafe” living conditions for people with mental health issues living in many of the homes.

The report also identified several “questionable” payroll practices by community home providers in Southern Nevada, including many who likely improperly treated employees as independent contractors to avoid paying payroll taxes, even as they performed largely the same tasks as employees and others who simply did not keep records of hours worked through timesheets. It also identified a handful of employees of the providers who were paid less than the state’s minimum wage, including one caregiver who was paid approximately $3.74 per hour.

The financial audit presented Monday identified various questionable and potentially fraudulent billing practices by those operating the homes, including billing more hours than those recorded on time sheets, reporting serving more than one client at the same time, charging for duplicative services and paying different rates for similar services from various providers. Auditors told lawmakers that while some of the overbillings may be the result of “unintentional errors” by providers, others may be the result of provider fraud, and that they had forwarded their findings to the governor, attorney general and all 63 legislators for possible action.

A spokeswoman for the governor said Monday that he had been "notified" of the audit's findings and that the department was "working with (the Legislative Counsel Bureau) to take action."

Auditors said that “inadequate review” by state officials led to the overbillings, including one provider who billed the division for 553 service hours recorded over a month while the actual timesheets tallied only 390 hours. The audit found “significant discrepancies” among providers who used timesheets, though a full analysis wasn’t possible as most of the providers did not use timesheets.

At the Monday hearing, lawmakers on both sides of the aisle expressed serious reservations about the ability of the community-based living arrangement model to meet the needs of Nevadans struggling with mental health issues and wondered whether the homes were too broken to fix. Sen. Ben Kieckhefer, a Republican, questioned whether appropriate checks and balances could be put in place to ensure the integrity of the system.

“As we know, we've been housing them in somewhat deplorable conditions and now we know we're overpaying for it,” Kieckhefer said. “It’s a system that I just see as broken right now, and we need to find a better way to do this because there are people whose lives are relying on us to find a better way.”

Julie Kotchevar, the Division of Public and Behavioral Health administrator, said that state officials contemplated whether they were just “picking up the pieces of something that should never have been made in the first place” after the first audit. But she said that the homes fill a void in reintegrating those with mental health issues into the community.

“I think that we have shown already that we can make this better and that it's important enough for people to have a sense of independence for us to keep trying,” Kotchevar said. “While I absolutely had the same questions that you did, I still believe that the flaws are ours and not necessarily the concept of serving people in the community. We have to fix our flaws instead of giving up on people being able to live safely in the community.”

Kotchevar said the division had accepted all 12 recommendations made by auditors, had already begun making some changes to address issues raised by auditors and hoped to have most of the required regulations changed by December at the latest.

To prepare the report, auditors randomly selected 45 monthly home payments made to community home providers in 2017, tracking their staff logs and more than 19,500 hours of work, as well as payroll information and other documents. The $1.5 million figure was estimated from a statistical extrapolation of the 45 tested payments.

The audit also estimated another $600,000 that could have been saved in the past fiscal year because of a lack of “proper oversight” of home staff service hours and client housing costs, noting that billing in Southern Nevada was higher than in Northern Nevada despite similar services provided. Where providers in the North would bill all daytime hours as direct support to clients at a $19.51 rate, those in the South would bill some daytime hours as support and others as merely as supervision at a lower, $15.90 rate.

The auditors determined that most service hours provided by staff should be supervision, not support, hours, and noted that it was unclear whether staff billing at a higher rate were actually trained to teach skills to clients to work toward independence as the state does not consistently keep records of provider training. Auditors even found that providers were billing service hours for skills training despite staff speaking a different language than residents of the community homes.

“The training of individuals with mental illness necessitates that provider staff can effectively teach the appropriate skills, and the ability to speak the language of the individual is a key component to effectively teaching,” the report stated.

The audit also found that about one quarter of the staff service logs documenting details of support provided to residents were difficult to read or illegible, another 30 percent didn’t include when a service started or ended, and another 43 percent used “recycled” language. Overall, 62 percent of tested service logs had at least one deficiency observed.

As part of an effort to prevent overbilling in the future, Kotchevar said that the division is moving toward adopting a daily rate for services, which would allow the state to pay out a higher level to providers for patients needing a higher acuity of care. Other recommendations included in the report include reviewing recent billings in an attempt to try to obtain refunds and establishing policies and procedures to ensure providers are adequately qualified to provide services, not billing service hours for multiple clients and appropriately splitting housing costs between residents.

But Kotchevar said that determining a fair daily rate would likely take until next spring, as the current methodology to determine reimbursement rates for providers did not appear to be based on anything substantive.

“That’s really the struggle that we have faced,” she said. “There was no methodology that went into creating any of this originally that I can find, so I can’t validate that any of what is here is functional or even appropriate.”

Legislators also questioned wide variances and a lack of oversight into the financial condition of the community homes, as the audit identified that community homes with similar numbers of residents varied widely in profitability based seemingly on the average number of hours billed and with little regard to number of clients living in each home.

“The placements and the number of service hours provided are entirely contingent on a single individual making a decision where a client gets based, that’s a system that’s rife for corruption,” Kieckhefer said.

Legislators, including Democratic Assemblywoman Maggie Carlton, questioned whether or not the proposed fixes by the division would be enough to prevent similar issues from arising again and lamented that residents would need to wait several months for the proposed changes to be adopted before their conditions could improve.

“Are we trying to fix something that’s so broken, that we need to just look at a different way to provide these services?” she asked. “If we’re going to be doing a whole rehash of this whole thing, is this the way we take care of them?”

Lawmakers also heard an update on Monday on what action the state is continuing to take to rectify physical problems with the homes identified in the January audit, including filthy living conditions, mold and mildew problems, rodent and insect infestations and evidence of human waste. The Governor’s Finance Office, which performed re-inspections of all of the homes legislative auditors inspected in the January report that are still operating, said in a memo that no homes currently have “substandard environmental conditions” as documented in the audit and there were no homes where the health and safety of residents appeared at risk.

The memo also noted that all of the recommendations relating to the audit have only been partially implemented and that the division is continuing to adopt policies and procedures to stop the problems from happening again or catching them earlier if they do.

Kotchevar said that the division has conducted close to 300 inspections since the last audit, noting that some of the residents had become annoyed at the constant status checks. She said the biggest “culture change” was getting across the message that closure of a home would not result in residents being left on the streets.

“No one has gone out on the street and we’ve closed a lot of homes, and we’ve found other placements for them,” she said.