The state's top government watchdog has concluded that "troubling dysfunction" at the Minnesota Department of Human Services (DHS) resulted in the agency making $29 million in improper payments to two Indian bands for opioid treatment.

In a scathing report issued Tuesday, Legislative Auditor James Nobles said the DHS did not have legal authority to make the payments, and the DHS did not document why, when, and who decided it was appropriate to make them. In addition, he found that no one at the agency has taken responsibility for the decision or provided a rationale for the overpayments, which continued over several years and did not stop until an outside agency brought them to light.

The absence of a clear explanation for how the overbillings occurred pointed to much deeper problems within the state's Medicaid program, which covers 1.1 million Minnesotans. Currently, the agency does not have adequate processes in place to ensure that Medicaid funds are spent in a way that comply with federal and state law, the auditor found. And to the alarm of some lawmakers, the agency lacks a policy that requires its various units to obtain approval from Medicaid officials before making spending decisions.

"The fact that so many DHS management officials allowed the department to make millions of dollars in unauthorized payments over multiple years is inexcusable," the Office of the Legislative Auditor said in the 23-page report. "We think fundamental and deep reforms within DHS are needed."

Two Indian bands, White Earth Nation and the Leech Lake Band of Ojibwe, received $29 million in payments for medications that help wean patients from addiction, even though the patients were taking the medications at home. In July, DHS officials told leaders from both bands that they would have to pay back the money.

The embarrassing findings come as Gov. Tim Walz's administration attempts to stabilize the DHS, which oversees the state Medicaid program and is the state's largest agency with a $17.5 billion biennial budget. Since July, the DHS has been roiled by an unusual series of resignations in top leadership, revelations of nearly $80 million in improper payments and allegations of retaliation against internal whistleblowers.

The overbillings also have created a rift between Minnesota's tribal governments and the Walz administration, while fueling fears of painful cuts on the Leech Lake and White Earth reservations, which had used the Medicaid payments to fund a range of social ­programs.

Jodi Harpstead, former chief executive at Lutheran Social Service of Minnesota, took the helm of the DHS last month and has pledged to rebuild trust in the agency. In a statement, Harpstead acknowledged that her agency gave incorrect guidance to the Indian bands and this error "was not caused by one individual or one commissioner." At the same time, she repeated the agency's position that state law requires the state to recover the improper payments.

"Any solution to an error made by the Department that punishes the Minnesotans receiving services, or the tribal governments that help us to administer those services would be unfortunate," she wrote.

The overpayments were made for a medication-assisted treatment program offered by the Indian bands that was designed to treat opioid addiction. Under an unorthodox billing model, the bands were allowed to bill the Medicaid program a much higher in-clinic rate — $455 per day — for Suboxone, a medication that can ease withdrawal symptoms and suppress cravings, even when patients took the anti-addiction drug at home. The agency should not have used that rate, the state auditor found, because it can only be used when there is a face-to-face interaction between a patient and a health professional within a clinic.

The Legislative Auditor's Office, a nonpartisan arm of the state Legislature, opened an investigation of the wrongful payments in early August. Despite an extensive review, it was not able to identify who was responsible for the decisions or their rationale. In interviews, some officials said they were aware of the overpayments but did nothing because "it was not their responsibility to question an established payment practice," the report said.

'Profoundly bad snapshot'

Sen. Jim Abeler, R-Anoka, chairman of the Senate Human Services Reform Finance and Policy Committee, said the report highlights a "dangerous lack of oversight" over how the DHS makes decisions for spending Medicaid money. He was surprised to learn, upon reading the report, that the DHS does not require staff and officials to document their policy decisions or to obtain approval from Medicaid officials when they make spending decisions.

"Now I have to question everything this agency says about money because it appears that no one is minding the till," said Abeler. "This is a profoundly bad snapshot of a department that is in greater distress than I had imagined."

At a legislative hearing Tuesday, Nobles questioned why it took so long for the DHS to respond to the problem. The agency discovered the wrong payments in February yet did not stop the payments until May. The Legislative Auditor's Office was not informed of them until July, he said.

"That gap in time is unfortunate," Nobles said.

The Medicaid payments for opioid treatment were a substantial source of revenue for the Indian bands. On the Leech Lake reservation, the payments were used to fund recreation programs for youth, a homeless shelter and a program for tribal elders. Officials with White Earth have warned they may have to sell assets to offset the effect of the lost revenue.

In testimony Tuesday, LeRoy Staples Fairbanks, a member of the Leech Lake Tribal Council, warned of "catastrophic cuts" to tribal services and programs, and he repeated his band's position that it would not repay the money "because we are not at fault."

In his report, Nobles recommended that the state Legislature require the human services commissioner to design an internal system to ensure that payments made by the agency comply with state and federal legal requirements. He also recommended that state lawmakers consider enacting an exception to the state law that requires the DHS to recover payments that result from the department's own errors. He noted that current law mandating repayment "allows the department to avoid any accountability for egregious mismanagement."

Chris Serres • 612-673-4308 Twitter: @chrisserres