AUGUSTA – The auditing firm hired to examine accounting discrepancies in Maine’s administration of Medicaid funds has identified $38.8 million the state must replace.

The 26-page PricewaterhouseCoopers report released Wednesday at a State House news conference faults inadequate accounting and budgeting processes within the state Department of Human Services. Specifically, the report cites lack of communication and oversight, inconsistent accounting practices, staff turnover and delayed filings for federal reimbursements.

“The accounting processes in place at DHS are inadequate to handle the volume and complexity of the programs being administered,” the report reads, “and DHS has insufficient resources to adequately manage fiscal operations.”

At the news conference, Gov. John Baldacci stressed that some corrections are already in place and took the opportunity to appoint a former state budget manager to assume leadership of financial operations at the department.

John Nicholas, who served as Maine’s state budget officer from 1992 to 2002, was named incoming deputy DHS commissioner with responsibility for all budget planning, report generating and accounting functions within the agency.

He also will be responsible for implementing the specific recommendations of the report, including the expansion and training of the financial staff.

The addition of Nicholas will provide much needed expertise, guidance and oversight, Baldacci said.

Adding to the financial woes that Nicholas will be dealing with at DHS is the prediction by state analysts of another shortfall of as much as $112 million in funding for Medicaid programs in the fiscal year that starts July 1.

State officials said that shortfall was related to higher-than-expected payments to hospitals and to upward trends in enrollments and use of the Medicaid program, a state-federal partnership created to provide medical care to low-income people.

The $112 million is separate from the $38.8 million the state will have to raise in the same budget year to cover the accounting shortfall identified by PricewaterhouseCoopers.

The administration did not say Wednesday how it intended to come up with the money but said a proposal for covering the DHS budget gap is expected sometime next month.

“We’ll be presenting a budget strategy to the Appropriations Committee,” Baldacci said Wednesday.

Quelling speculation, Baldacci stressed that making up the shortfalls will not stand in the way of implementing his Dirigo Health plan in July 2004.

The governor said the health care system reforms contained in the Dirigo legislation are part of the solution to uncontrolled health care spending.

“If anything, hospital planning and the certificate of need program need to be put on a faster track,” he said.

Unlike last spring’s examination of accounting problems within DHS’s Temporary Aid for Needy Families program, which determined that $37 million in funds had simply been faultily recorded, the shortfall identified in the PricewaterhouseCoopers report reflects “real budget dollars from the state’s cash flow,” according to Rebecca Wyke, commissioner of Administrative & Financial Services.

“This is money we owe ourselves,” she said, and it will have to be recovered from spending programs through a supplemental budget process during the coming legislative session.

Wyke said the amount of the shortfall reflects years of poor accounting practices that masked growth in Maine’s Medicaid program – growth in enrollments, expansion of covered services and increased cost of services.

The report shows that Medicaid dollars since 1996 were spent on legitimate Medicaid programs, Wyke said, but DHS failed to request additional money from the state’s General Fund when it should have.

“They didn’t know they needed it,” Wyke said. Additionally, some requests for matching federal funds from the federal Centers for Medicare and Medicaid Services were delayed or never made at all.

Instead, the department continued to spend money on paper that it didn’t have in hand. It paid out monies from the wrong funds, used federal dollars to pay state obligations and missed federal deadlines for attracting money to which it was entitled.

Not until October 2002 did a pattern of heavy federal draws emerge, indicating that something was amiss in the system and alerting state and federal officials to the growing problem. The state commissioned the accounting study shortly afterward.

The Associated Press contributed to this report.