Former North Carolina government workers allege that senior state health officials used false information to obtain federal funding for a troubled Medicaid technology overhaul. A recently unsealed federal lawsuit also accuses regulators of repeatedly approving money without information normally required for approval.

The claims were filed under seal more than two years ago. The complaint alleges years of mismanagement, noncompliance and misrepresentation involving leaders at the North Carolina Department of Health and Human Services and regulators at the U.S. Centers for Medicare & Medicaid Services, known as CMS.

The False Claims Act lawsuit was unsealed this month but has been dismissed, delivering a legal victory to the state. The whistleblowers nevertheless told WRAL that they intend to continue their fight in federal court, even though courts found that the complaint failed to state a valid claim.

None of the allegations has been proven in court. Still, the lawsuit provides another view of a Medicaid modernization project that state and federal officials acknowledge is years behind schedule, with delays costing taxpayers hundreds of millions of dollars.

CMS has provided money to North Carolina and other states to replace outdated legacy technology. The effort requires states to use the Medicaid Enterprise System, or MES, to improve information sharing and identify potential fraud.

Former state Medicaid workers Rob Morehead and Rhonda Keyes-Morehead alleged that they “found evidence of a conspiracy among NC DHHS State employees to make fraudulent claims to receive [federal funding].” Their complaint accused DHHS of falsifying documents submitted to CMS to obtain Federal Funding Participation and project approvals.

The whistleblowers also alleged that state officials relied on false financial statements and other false representations that were important to funding requests. They further accused officials of using noncompetitive bidding practices and failing to spend federal money for the purposes presented to CMS.

Morehead and Keyes-Morehead said CMS failed to follow its own funding rules, describing the conduct as “a significant departure from expectations.” They alleged that regulators knew there were problems with North Carolina’s implementation but kept providing money despite inadequate responses to information requests that normally would have resulted in rejected funding.

The complaint further blamed CMS for contributing to the software transition’s failure by neglecting basic project management practices. “Because it failed to regulate NC Medicaid properly before and beyond 2018, CMS contributed to the conditions preventing low-income North Carolinians from receiving quality, affordable healthcare,” the whistleblowers said.

A DHHS spokesperson told WRAL that the agency remained committed to delivering care while responsibly managing public resources. The spokesperson said protecting NC Medicaid’s integrity was essential to safeguarding taxpayer money and the care people in North Carolina depend upon.

The lawsuit was filed in Maryland, where CMS is based. U.S. Attorney for Maryland Kelly Hayes opposed the claims, and the complaint named DHHS, CMS and numerous current and former officials, including current DHHS deputy secretary for Medicaid Melanie Bush and former DHHS secretaries Mandy Cohen and Kody Kinsley.

Kinsley, Bush and CMS spokespeople did not respond to requests for comment. Cohen told WRAL that she was unaware of the lawsuit and declined further comment, while DHHS said none of its affiliated defendants had been formally notified or served, to the agency’s knowledge.

The federal government supplies most Medicaid funding, while states administer the program for people with low incomes and disabilities. More than one quarter of North Carolina residents are enrolled in Medicaid.

North Carolina began planning the modernization in 2017. By 2022, it had received $120 million in federal money for planning and management, but a dozen planned upgrades were behind schedule, according to a draft state audit obtained and authenticated by WRAL.

Also in 2022, at least one CMS employee warned officials about possible cost overruns tied to delays and concluded that limited progress had caused “a degradation in program services.” A federal memo obtained by WRAL questioned whether state Medicaid technology leaders had enough experience to manage a project of that size.

The new system was supposed to be completely installed by the end of June 2024. State officials now say the remaining work will not be completed until the end of 2029, creating a rollout of nearly 13 years.

North Carolina is paying a contractor more than $600 million to continue operating its existing Medicaid system, NCTracks. The state may have to spend additional money to keep that legacy system running beyond summer 2027.

Bush previously rejected the suggestion that something had gone wrong, citing the complexity of the systems. She said the state had made changes after federal regulators and state watchdogs raised concerns and believed the project was on a solid path forward.

Morehead, a former DHHS project manager, previously told WRAL he was fired after raising concerns about the modernization effort. The state later settled a separate whistleblower lawsuit that he brought.

Morehead and his wife, former DHHS consultant Rhonda Keyes-Morehead, sought damages, attorney fees and expenses under the False Claims Act. A judge ultimately agreed with federal prosecutors that their allegations did not establish a valid claim, but allowed the possibility of a new lawsuit.

The couple told WRAL that they plan to file again. “I sat in meetings and watched this develop,” Morehead previously said. “And it just got to the point where enough was enough. I blew the whistle. I'm still blowing the whistle and I continue to blow the whistle.”