“Clinics” with suspect professional credentials running up bills for publicly-insured low-income patients. Outlandish claim volumes for questionable services, including unneeded tests and consultations. Harmful and abusive treatment of patients in some cases. And then the understandable outrage in Washington, DC that no one at the state level seems to notice or care that federal taxpayers are being ripped off.

It was all there. Medicaid, the program Congress had created in 1965 to serve as the nation’s health care safety net for the poor, was being transformed into an open tap on the federal Treasury for the unscrupulous to exploit. The year? 1976.

The program was then in its tenth year of implementation, and its federal costs were growing at the incredible annual rate of 27 percent. With expenditures spiraling and stories spreading of abusive clinics taking advantage of lax oversight, it was dawning on those who had proudly shepherded the program into federal law that unless the problems were addressed aggressively and quickly political support for its continuation might collapse.

The Democratic leaders of the Senate Aging Committee decided to take the matter into their own hands by ordering a staff investigation. Their findings were shocking. As summarized in a story that ran in the New York Times, the investigators estimated that as much as half of Medicaid spending was being lost to outright fraud and unneeded services.

The final Aging Committee report offers surprisingly colorful reading. Among the tactics used to document the abuses was a form of secret shopping by fictitious patients, including by then-Senator Frank E. Moss (D-UT), who was an early champion of the program. He posed as a Medicaid beneficiary on a visit to a clinic in New York City and described having symptoms of a common cold. He ended up getting numerous unneeded tests that were wholly unrelated to any plausible diagnosis and a referral to the chiropractor working out of the office upstairs. When he provided a blood sample, he ended up with extensive bruising on both arms.

Fast forward a half century, and stories with similar themes are now circulating. Prosecutors have seemingly uncovered an organized group of purposeful criminals taking advantage of unsupervised corners of Medicaid in Minnesota. In response, the Trump administration has announced its intention to investigate and crack down on what it says is continued rampant fraud in multiple states, which it asserts will deliver much needed relief to the federal budget with no harm whatsoever to any patients.

Before counting on the savings, however, it might be useful to review what guardrails Congress and previous administrations have previously put in place to fight fraud and abuse in Medicaid, and what has been missing from these efforts that allowed schemes such as what was uncovered in Minnesota to emerge once again.

A First Response, and Then Many More

On the heels of the Senate investigation and media attention, key leaders in Congress knew they had to do something. The result was passage of the Medicare-Medicaid Anti-Fraud and Abuse Amendments of 1977, which was the first of numerous congressional efforts to tackle what has proved to be a persistent problem of fraudulent and abusive practices. The vote on final passage on this initial effort was 402 in favor and 5 opposed in the House. The Senate passed it by unanimous consent.

The 1977 law encouraged states to establish Medicaid fraud control offices that would operate independently from the state agencies responsible for program administration. Those units are now effectively mandatory and exist in all 50 states and territories receiving Medicaid funds, with the federal government financing 90 percent of their administrative costs during an initial implementation period and then 75 percent on an on-going basis starting with a unit’s fourth year of operations. The state Medicaid anti-fraud teams have investigative and prosecutorial authority.

In addition to this institutional change, the 1977 amendments placed substantial new requirements on states to more closely track claims payment protocols. A new system of incentives would reward states for accurate and timely payment of only valid reimbursement requests. The law also authorized state experimentation with more effective anti-fraud practices.

Although fraud and abuse certainly continued after the 1977 law was enacted, there was a sense of reasserted political control and fewer outlandish stories. But that might have been deceiving. As is the case today, determined perpetrators can adjust their tactics to take advantage of new opportunities. And so began a long series of congressional interventions aimed at curbing the most recent and high-profile cases of abuse highlighted by investigators and news outlets. Table 1 provides a summary of the most important of these changes.

Table 1. A Partial List of Federal Anti-Fraud and Abuse Laws Affecting Medicaid

Source: MACPAC (Medicaid and CHIP Payment and Access Commission)

GAO’s View

The Government Accountability Office (GAO) has been publishing an annual list of federal agencies and programs that are unusually vulnerable to abuse and fraud. Medicare has been on it continuously since 1990, and Medicaid since 2003.

GAO estimates Medicaid makes improper payments totaling $31 billion annually, or 5.1 percent of spending, based on a review of approved claims. These payments are associated with numerous deficiencies, such as insufficient medical justifications and managed care plans receiving funds in excess of what is allowable under federal law and regulations.

The goal of course should be zero improper payments, which, in theory would eliminate hundreds of billions of dollars from expected federal deficits in the coming years.

But that is likely to be an elusive objective. Many improper payments, when refiled with the needed documentation, are converted into valid claims. Moreover, Medicaid is a sprawling program with multiple statutory missions. It is likely that far more is lost by the program to waste on claims that on paper are legal and legitimate but are for low-value services or support programs that charge far too much or should not be part of a health program in the first place. As regards fraud, the tools are there, but interest and effort can indeed wane.

The Current Round

When federal prosecutors uncovered rampant fraud in Minnesota’s social services structure, they set off a political firestorm. While the cases in question are still moving through the legal process (and go beyond Medicaid), it appears that 100 or more people have been involved in creating a 21st century version of the suspect clinics of 1976. In the current Minnesota version, “providers” were seemingly billing Medicaid for disability-related services and housing support with little justification, no expertise, and exorbitant costs. Prosecutors say the sums involved could reach $1.0 billion across multiple years.

In response, the Trump administration is moving aggressively to investigate suspected fraud in four additional states beyond Minnesota (California, Florida, Maine, and New York), and congressional Republicans are looking into potential abuses in three of the same states targeted by CMS (California, Maine, and New York) plus seven more (Colorado, Massachusetts, Nebraska, Oregon, Pennsylvania, Vermont, and Washington state).

The most important shift in this latest anti-fraud battle is the administration’s planned use of deferrals during investigations. Medicaid law requires federal matching payment for legitimate state spending, but improper payments can be reclaimed later through a process known as a “disallowance,” which occurs after federal funds have already gone out the door. The Centers for Medicare and Medicaid Services (CMS) can attempt to get illegitimate spending back through a disallowance, but that process often leads to years of litigation before the cases are ultimately resolved. After the Minnesota story emerged, CMS announced it would defer $260 million in Minnesota matching funds pending its investigation of suspected fraudulent claims. With a deferral, the questionable money is not sent until the matter is resolved, which is a potentially powerful weapon, albeit also one that is likely to be challenged in court.

Beyond deferrals, CMS has announced an initiative it calls Comprehensive Regulations to Uncover Suspicious Healthcare, or CRUSH, with a request for information from interested parties as a starting point. The appropriately ambitious goal is a comprehensive rewrite of Medicare and Medicaid rules to harness advanced AI data tools to screen out fraud and abuse before claims are processed.

Vulnerable by Design

After multiple decades of effort, the federal and state governments have large permanent staffs in place to fight fraud and abuse in both Medicare and Medicaid. The Department of Justice has its own team devoted to the same objective, as do state attorney’s general offices. Proven fraudulent activity risks strict criminal and monetary penalties, and removal from future payments by the large public insurance programs. Moreover, states found negligent in their oversight of Medicaid risk losing hundreds of millions of dollars in federal payments.

The laws and rules are there. But that is only part of the story.

Medicaid’s immense size and complexity make policing every corner of it at all times exceptionally challenging. Congress and the states want zero fraud, but, at least previously, there was also a desire to ensure ready access to needed services by those who are enrolled in it. Providers will not care for patients indefinitely if the prospect of getting paid is uncertain. The tighter the screens, the more likely it is that legitimate claims will be denied along with those that are illegitimate.

Moreover, the financing of Medicaid through matching payments unquestionably incentivizes large state programs. There has been a steady long-term trend toward expanding the program’s safety net role, with many states using it to pay for school health clinics, transportation services, and in-home alternatives to nursing home care. With so many different missions and experiments underway, fraudulent actors can often find new vulnerabilities.

In this context, the Trump administration’s efforts are welcome and should be supported but also should target abuse wherever it is suspected and not just in places where there might be political advantages to becoming stricter and more vigilant.

Further, the most enduring reforms will be those that are not tied to specific facts of specific states but are more institutional in nature. Of the CMS proposals announced to date, the CRUSH regulatory initiative holds the most promise as it has the potential to use information technology and AI to get one step ahead of the bad actors. The request for information on how to proceed with those rule changes is likely to elicit a robust and potentially encouraging response. In other words, the discovery of rampant fraud in Minnesota, and the resulting political response to the scandal, could lead to another chapter being added to the already very long story of Medicaid anti-fraud efforts.

The long-run solution is also clear. As others have noted, the most effective reform would be to end Medicaid’s open-ended access to the federal Treasury. That has proved to be an impossibly tempting target not only for fraud but for states looking to offload their social service expenses onto federal taxpayers. The case is strong for moving to capped per-person payments instead of matching funds for services because doing so would force states to take far more seriously their essential role in policing program expenditures. That would be the ultimate anti-fraud initiative.