To Stop Medicaid's Bleeding

For nearly 40 years, New York counties have had the worst of all possible Medicaid worlds, because they've been forced to pay a big chunk of the state's cost for the gigantic health care program while they had little say over how it was designed or administered. Among other frustrations, county officials have watched as the state reduced its efforts at detecting fraud amid widespread reports of corruption and inefficiency.

But under intense pressure, state officials have finally given a handful of counties the right to begin scrutinizing their local Medicaid programs to search for fraud, abuse and waste—and the initial results are astonishing.

In Rockland County, a preliminary investigation into the prescribing practices of high-volume pharmacies found that nearly half of all their bills, constituting $13 million in payments, were questionable, and up to a quarter of the bills were so problematic that they could well involve fraud. "If even just half those questionable cases turn out to be fraudulent or incorrect billings, the savings will turn out to be enormous," says Rockland County Executive C. Scott Vanderhoef, who adds, "this is just the beginning of our efforts."

At $300 billion, Medicaid is one of our federal government's biggest programs—one it shares with the states, which administer it. Unfortunately, Medicaid often also seems like one of our most-abused programs, the subject of an estimated $30 billion in waste and fraud each year by recipients, health-care providers and outright scam artists who target the program.

But after decades of lax enforcement by states, the stories of mismanagement and abuse within Medicaid are pushing some states and counties to take action. They're showing that we needn't tolerate abuse of the program. New York state could take a page from what's happening elsewhere.

Leading the way is Texas. In 2003, its Legislature created an inspector general's office, responsible for all of the state's Medicaid enforcement functions. The state hired dozens of new oversight workers to reinforce its troops of computer experts, nurses and pharmacists who scrutinize patient records, and prosecutors. Today, Texas's Medicaid program, which at $18 billion a year is about 60 percent smaller than New York's, has four times as many people working to uncover fraud and prevent billing errors. Last year, Texas recovered $441 million in erroneous or fraudulent billings.

Following Texas's lead, Ohio's Legislature has authorized its state auditor to start inspecting Medicaid providers (previously, only the state's health department could do so). Even New York is now contemplating an inspector general's office. "We need to have one agency and one person who has ownership of the Medicaid fraud problem," says Deputy Senate Majority Leader John DeFrancisco. "Right now, no one person is accountable."

Such officials will be mere window dressing unless legislators give them the tools to prosecute Medicaid fraud effectively—including tougher laws. Many states still don't criminalize Medicaid fraud, so officials must prosecute on insurance fraud, mail fraud or racketeering charges. That's not always easy, since some courts refuse to recognize Medicaid as an insurance program.

But under laws enacted in the 1990s, New Jersey now hands out up to 10-year prison sentences for Medicaid fraud, as well as fines of up to five times the amount involved. Other states, such as North Carolina, have made it easier for prosecutors to win judgments against sham Medicaid providers in civil court.

States are also making it harder for service vendors and health-care practitioners to become eligible to receive Medicaid funds. Illinois has amended its Medicaid law to require ambulette firms—"a hotbed for potential fraud and abuse," says the state inspector general—to undergo criminal background checks and fingerprinting before participating in the program.

Governments are also investing in sophisticated new technology, like that being used by Rockland County, which can monitor Medicaid's staggering number of transactions for suspicious billing patterns. Perhaps the most ambitious use of advanced technology is a Texas pilot program that relies on fingerprinting and biometric readers in doctors' offices and hospitals. Medicaid recipients get a "smart card," imprinted with their fingerprint. Electronic card readers then check the fingerprint to verify that the patient applying for care is indeed the cardholder, thereby reducing recipient fraud. Patients swipe the cards at the start and end of a visit, to record the time they spent at the facility—a safeguard against overbilling or charging for more elaborate services than those actually provided.

Even with tougher enforcement, states must confront the troubling reality that Medicaid programs have grown too large and complex to manage easily. That's why the best idea for reducing fraud over the long term may be Florida's push to overhaul its entire Medicaid program.

Last fall, the federal government gave Florida permission to try a drastic revamping of the system. The state will stop acting as a giant health insurer and instead move recipients into private plans. Florida will pay the insurance companies a yearly fee to enroll the recipients, in the same way that a private employer now pays for its employees to receive health coverage. As in the private sector, each insurer will be responsible for auditing bills and sniffing out fraud by providers or recipients in its system, and lax efforts to eliminate waste, inefficiency and incorrect billings will eat away at companies' bottom lines.

Other states have pledged to watch Florida's effort carefully over the next five years. If it succeeds, it may well become the next Medicaid model. Until then, states still have plenty of room for improvement in their efforts to stem Medicaid fraud.

Adapted from the Spring issue of the Manhattan Institute's City Journal, where Steven Malanga is a contributing editor.