Walker's administration said the more than half a billion dollars in cuts it is proposing are necessary given the rapid growth in Medicaid programs, which currently cover about 20 percent of the state's population. The number covered has grown by nearly 10 times the rate of the state's population during the past two decades, driven both by need and expanded program offerings.

The total spent on Medicaid programs, which include a mixture of state and federal spending, increased more than 40 percent from $5 billion in 2006 to $7.5 billion in 2010.

Of the nearly 1.2 million people in the program as of January, 42 percent were children, 22 percent were parents or caretakers, 14 percent were people with disabilities and 12 percent were elderly. About 4 percent were childless adults, 2 percent were pregnant women and nearly 5 percent were people receiving limited benefits such as cancer screenings and family planning.

Department of Health Services leaders, both in comments made to the Audit Bureau and in statements released Tuesday, said they were willing to implement many of the recommended improvements.

"Taxpayers, health care providers and Medicaid recipients should expect zero tolerance for inefficiency, waste and fraud," said DHS deputy secretary Kitty Rhoades in a statement reacting to the audit.

Rhoades said the department has recognized many areas needing improvement and began looking at where changes could be made.

The audit was ordered in January by Republican state lawmakers shortly after they took over majority control of the Legislature. They have long argued there is widespread waste in the Medicaid programs and had attempted for years to get an audit, but Democrats then in control of the Legislature blocked it.

But the audit did not uncover any examples of widespread fraud.

However, it did find that the reported number of investigations of potential Medicaid fraud dropped from 2,166 in 2006 to 1,424 in 2010, largely because of a reduction in state funding for those queries.

Department of Health Services Secretary Dennis Smith, in his Dec. 13 response letter to the Audit Bureau, noted that DHS has recently created a new Office of Inspector General to coordinate and reinvigorate efforts to crack down on fraud and abuse in the program.

The audit also faulted the Department of Health Services for spending beyond what was budgeted and not clearly accounting for how money is moved around among the various subprograms.

Republican Sen. Rob Cowles of Green Bay, co-chair of the Legislature's Audit Committee, said he had no idea the department didn't consistently separately track funding and spending for all its subprograms as the audit revealed. Not doing that makes it more difficult to gauge the effectiveness of those programs, Cowles said.

Smith said separately tracking budget activity for all the individual programs would be time consuming and difficult and limit the department's flexibility to manage fluctuations.

Smith said DHS has implemented a new process to review all contract changes to make sure enough money is available and proper rules are being followed. Smith said all existing Medicaid contracts are being reviewed to assess their value and relevance.

The department is also working with counties to put in place a new program for determining eligibility for Medicaid and FoodShare programs, Smith said.

The audit also said DHS did not ensure that adequate funding was available before authorizing additional contract work or make sure that services were obtained at a competitive price.

Payments to vendors who provide administrative support to the Medicaid program grew by 73 percent from about $66 million in 2006 to nearly $115 million in 2010.

The audit says that the department's increasing reliance on vendors may hamper its ability to provide guidance to those contracted staff and to maintain adequate oversight.

Smith said the department is also exploring opportunities to use state employees instead of outside contractors where appropriate.