Central City Concern, a major health-care provider for homeless and low-income Portlanders, has agreed to repay $1.4 million it improperly collected from the state for a year and a half.

This month's settlement—among the largest in Oregon's history for a nonprofit—after a nearly two-year audit has more to do with the struggle to sustain services as health-care dollars dwindle than with any Enron-style accounting scandal.

But the upshot for Central City is twofold. The nonprofit has tapped its reserves, and it won't be able to offer as many services.

The disagreement between the state and Central City Concern centered on rules that govern state Medicaid reimbursements for the neediest patients.

Auditors from the state Office of Medical Assistance Programs believe Central City Concern was billing the state for services that weren't covered. Audit manager Mike McCormick calls the nonprofit a "great organization" but says the dispute came down to "an interpretation question."

The nonprofit counters that recent cuts have created increasingly unmet needs for the hundreds of people it serves each day—and that the state coverage interpretation squeezes out vital programs.

Because payments from the state were frozen during the audit, Central City also spent nearly $2 million in reserves, nearly emptying that fund.

The nonprofit, which has an annual budget of $28 million, says it can rebuild its reserves. And its officials insist that while they'll have to stop providing the services the state refuses to cover, the settlement won't cut into other programs.

"We will serve fewer people in alcohol and drug treatment, mental health and physical health care," says Central City director Richard Harris. "Some of the things we interpreted to be billable under the health plan are disallowed under the agreement."

The Office of Medical Assistance Programs, which oversees Medicaid payments, began the audit in March 2004 when it noticed Central City still charged for services that had typically fallen under a since-axed benefit for chemical dependency treatment.

In its review of billing from July 2002 through December 2003, auditors found three main errors:

—Acupuncture for patients who were also diagnosed with alcohol and drug dependency.

The state believes the acupuncture, billed as a treatment for anxiety or depression, was really for the underlying dependency problem. Oregon had stopped covering addiction treatment for the largest group of state health-plan patients during the audit period, but has since reinstated the funding.

—Preventive group treatment for patients with a range of diagnoses, from diabetes to depression, that focused on changing behavior by teaching healthy habits. Auditors believed the sessions for up to about a dozen people were actually classes, which aren't covered by the state Health Plan.

—Multiple services for one diagnosis during one visit. Central City allowed drug and alcohol patients to combine acupuncture treatment with counseling sessions, which violated a state rule against paying for multiple same-day treatments.

To anyone who's done the managed-care mambo, the billing "errors" might look like a gentle bending of the rules, a way for nonprofits to continue providing services already cut by the state.

Ed Blackburn, director of health and recovery services at Central City Concern, says his organization never meant to test the rules, but adds there is a need to fill gaps in care for his clients, 80 percent of whom are homeless.

"There's quite a bit of pressure when you're confronted with people who are really sick, who need help," Blackburn says, "to find a way of getting them that help."