HARRISBURG - The state wastes millions of dollars every year on erroneous Medicaid payments for residents who are no longer eligible for the benefits, according to a state audit released yesterday.

The report by Auditor General Jack Wagner's office found that the Department of Public Welfare, through its county assistance offices, failed to properly determine eligibility for more than 1,600 Medicaid applicants between January 2005 and March 2008, resulting in $3.3 million in improper payments.

And Wagner pointed out yesterday that the cases reviewed by his office represented only a small sample of the overall Medicaid caseload handled by the Public Welfare Department - and that the state has likely lost millions of dollars more.

"If you begin to look at the total body of Medicare payments . . . that dollar volume could be substantial," Wagner said at a news conference yesterday. "We're sure there could be savings in the area of tens of millions of dollars a year."

The audit comes as the Rendell administration is facing an ever-widening budget gap and is contemplating employee layoffs.

According to Wagner's audit, many of the improper eligibility determinations were due to what his auditors believe is the Public Welfare Department's failure to consistently review changes in a person's income, age, disability, family status and other data that determine eligibility for benefits.

Some of those problems, Wagner said yesterday, can be fixed by better technology and improved case management.

Stacey Witalec, the Public Welfare spokeswoman, said the department has asked Wagner's office to explain the methodology used in the audit, but so far has not received an answer.

She also said department officials believe that, when conducting the audit, Wagner didn't examine every factor that could make a person eligible for Medicaid.

"We think that he is dramatically overestimating the potential problem," said Witalec. "We are constantly in the mode of making sure that our programs are running as efficiently and effectively as they possibly can. And we are doing more with less."

Wagner said his audit found errors in 14 percent of the 11,700 Medicaid cases it randomly sampled from across the state.

"A 14 percent error rate is unacceptable," he said, adding: "Medicaid is a safety net, and a very important safety net for Pennsylvanians. . . . We want to make sure all the available resources are there."

Contact staff writer Angela Couloumbis at 717-787-5934 or acouloumbis@phillynews.com.