They were just a few words slipped into D.C. budget legislation, but they cost city businessman Jeffrey E. Thompson millions.

The passage — “up to $2 million shall be allocated . . . to perform comprehensive audits of programs within Medicaid” — was aimed at three health-care companies thatcoordinated care and handled billings for tens of thousands of low-income city residents.

Thompson’s D.C. Chartered Health Plan was by far the largest, handling $124.8 million in local and federal funds at the time, with scant oversight. The audit that followed the 2005 legislation found questionable business practices at Chartered and resulted in an unprecedented court settlement.

Long a prodigious political donor, Thompson, 56, is now a key figure in a federal investigation into campaign finance in the District. His home and offices were searched March 2 by federal agents, and his name appears on subpoenas delivered recently to several D.C. Council members.

That a single sentence in a 142-page bill could cost him so dearly — even after the provision was watered down with the assistance of well-connected lobbyists — illustrates Thompson’s stake in maintaining his political clout. Chartered now handles in excess of $300 million a year in taxpayer funds, and Thompson’s fundraising network can be traced to hundreds of thousands of dollars in donations to District campaigns in the past decade.

“I don’t think anyone should be surprised that [Thompson] was heavily engaged in the process, because he had a lot at stake in the outcome,” said D.C. Council member David A. Catania (I-At Large), who placed the audit language in fiscal 2006 budget legislation.

Thompson’s attorney, Brendan V. Sullivan Jr., has declined to comment on the federal investigation.

Former council member John L. Ray, who has lobbied the city government on Thompson’s behalf, said his contributions to health care for the city’s poor are underappreciated. “Chartered, at great risk, played a very important role in making this system what it is today,” he said.

But regulatory filings, audit reports, financial statements and lobbying records reviewed by The Washington Post show how deeply Thompson’s finances have become intertwined with politics.

Building an empire

Starting in the late 1980s, Thompson built his accounting firm — Thompson, Cobb, Bazilio & Associates — into one of the country’s largest minority-owned firms, in part by courting government clients for auditing, consulting and technology work.

But in the late 1990s, he saw a new government business opportunity. A political ally, Mayor Anthony A. Williams (D), was pushing to change the way District government handled health care for its neediest residents, relying more heavily on private companies to manage public health spending.

Thompson bought Chartered Health Plan in May 2000 in a $4 million bankruptcy sale. The company had been in the red for at least two years, but under Thompson’s control, Chartered returned quickly to profitability.

The company’s enrollment would grow from about 27,000 members at the time of the purchase to more than 59,000 by 2006. For 2006, the company was recorded a surplus of $6 million and paid its parent company — D.C. Healthcare Systems, solely owned by Thompson — a $1.54 million dividend, according to regulatory filings. In the next two years, the company would pay an additional $6.1 million in dividends.

But in early 2005, a threat had emerged. Catania had taken over the council’s Health Committee, and he wanted the city to take a closer look at managed-care spending, the biggest line item in the city budget.

His committee put the language in budget legislation that directed the D.C. Department of Health to spend as much as $2 million on “comprehensive audits of the Medicaid managed care organizations providing health care services to Medicaid enrollees in the District.” Moreover, the language specified that the reviews needed to be performed by a firm without a “prior contractual relationship” with the department — disqualifying Thompson, Cobb, Bazilio & Associates, which is 79 percent-owned by Thompson and which audited Chartered’s books in the late 1980s.

After Catania released the audit language in early May, city reports show, Chartered’s lobbyists — Ray and his associate Tina Ang — held about two dozen meetings with council members and staff over the next two months to discuss the budget legislation.

Another lobbyist, David W. Wilmot, was engaged on behalf of the D.C. Association of Health Maintenance Organizations, of which Chartered is a member.

The lobbying continued to the last minute: Ang met with council staff the day before and the day of the final budget vote in July 2005 “regarding revised language for Medicaid audit,” according to a lobbying report.

Ray does not recall the dispute over the budget language, but legislative records show that his efforts were not entirely successful. The final budget bill kept the $2 million earmark, although the language was less specific, dropping the requirement of an outside auditor and referring only to “programs within Medicaid.” Catania worked behind the scenes to ensure that the audits were done as he had intended.

Audit’s findings

The resulting audit of Chartered’s 2005 books, completed by Philadelphia-based Milligan & Co., found that it had overpaid firms also owned in whole or in part by Thompson. It identified $7.7 million in charges to Thompson-owned companies that were “potentially excessive or were unsupported” — transactions that provided Thompson with additional profit.

For instance, auditors noted that Chartered paid an affiliated clinic rates that were more than double the rates it paid clinics in which Thompson didn’t have an ownership stake. It paid Thompson’s transportation company, RapidTrans, a rate three times what a competing plan was paying RapidTrans. And Chartered paid its parent company $1.8 million for management and consulting services that included billings for work performed by Thompson without providing invoices to auditors.

Audits of the other two health-care contractors, Health Right and Amerigroup, found less serious issues. Those firms have since withdrawn as city contractors.

Chartered challenged Milligan’s expertise and said the transactions with the affiliated clinic and RapidTrans “were conducted at fair market value and were consistently disclosed.” The transactions with its corporate parent, it said, were outside the scope of the audit.

In March 2008, the District sued Chartered. Had the action gone to court, the company could have been liable for tens of millions of dollars in damages. Thompson settled the case, agreeing to pay $12 million and to restrict Chartered’s transactions with companies he has an interest in.

“He was unhappy,” said Peter J. Nickles, who signed the settlement as the District’s acting attorney general and speculated that Thompson agreed to do so to protect his business interests with the District.

Ray said the case was settled against his advice. “Chartered felt that they just needed to get along with the city,” he said.

Amid the litigation, the District entered into a new contract with Chartered. But financial statements show that the settlement had a significant effect on Thompson’s bottom line. The clinic has since been sold, and RapidTrans has ceased operations. Chartered recorded a $5.47 million operating loss in 2009, and it has not paid a dividend since 2008.

In 2010, Thompson sought an additional payment of nearly $15 million from the city, on the grounds that it set “actuarially unsound” reimbursement rates for certain dental procedures. Thompson went to Nickles and other Fenty administration figures pleading his case. Nickles said that he thought the claims had some merit but that he insisted that Thompson take the dispute to court.

Chartered filed a contract appeal in September 2010, weeks after Fenty lost the Democratic mayoral primary to his eventual successor, Vincent C. Gray — to whose campaign’s, like Fenty’s, Thompson had donated heavily.

The dispute was settled by the Gray administration in September, with the city agreeing to pay Chartered $7.5 million.

Uncertain recovery

It is unclear whether Chartered, which manages the health care of more than 110,000 city residents, is solidly in the black again. Chartered’s most recent regulatory filing showed the company running a $763,000 surplus. But the $7.5 million settlement appears to have been booked already, offsetting a $7.13 million underwriting loss.

The District’s other current managed-care contractor, UnitedHealthcare, has reported a $15 million loss in its annual filing for 2011. Chartered’s 2011 annual filing has been delayed to April for unspecified reasons.

Since last month’s raids, Thompson has seen another setback in his D.C. government business.

His accounting firm recently missed a chance at a major business opportunity when a contract to develop a new property tax system, worth as much as $8 million over two and a half years, was unexpectedly canceled March 22 by the Office of the Chief Financial Officer.

A letter to losing bidders in January said Thompson, Cobb had won the contract “pending Council review and approval,” but the award was never forwarded for approval. Another letter sent to bidders after the cancellation said the agency “determined that a complete review of the requirements is necessary as specifications have been found to be inadequate and in need of revision.”

David Umansky, a spokesman for the finance office, said the cancellation was not related to the federal investigation.

But it spared council members from voting on a Thompson-related contract while several of them are under federal subpoena to produce records relating to donations they took from him.

On March 21, Thompson stepped down from Thompson, Cobb’s management, according to a letter sent to at least one of its clients and first reported by WAMU-FM.

“To assure that the current investigations do not impact the firm and our clients, Mr. Jeffrey E. Thompson has withdrawn from the firm,” read the letter from partner Ralph B. Bazilio. He has assumed Thompson’s roles as president and chief executive. He has not returned several recent calls for comment.