For more than a decade, Medicaid has been the fastest-growing item on many state budgets. Unfortunately, state and federal efforts to uncover and stamp out the astonishing amount of fraud in the program (whose costs the states split with Washington) have lagged. Experts estimate that abuses of Medicaid eat up at least 10 percent of the program’s total cost nationwide—a waste of $30 billion a year. Unscrupulous doctors billing for over 24 hours per day of procedures, phony companies invoicing for phantom services, pharmacists filling prescriptions for dead patients, home health-care companies demanding payment for treating clients actually in the hospital—on and on the rip-offs go. The cheating is brazen because scam artists have figured out that years of lax oversight have made Medicaid easy plunder.

But some state legislators and regulators, worried about Medicaid’s skyrocketing costs and taxpayer anger, are finally getting tough. As a result, several states are beefing up enforcement staffs, installing high-powered fraud-tracking computer programs, toughening penalties, and making it harder for crooked providers to get Medicaid dollars. To succeed, these reform efforts will need to overcome powerful health-care-industry interests and their legislative and bureaucratic allies, who don’t want greater scrutiny of the program but only greater funding for it. Yet if the new initiatives can cut Medicaid abuse by even a few percentage points, they’ll save taxpayers billions. Using new software that analyzes Medicaid billing patterns, New York’s Rockland County, for example, has uncovered thousands of suspicious transactions. “If even just half of the questionable cases we’ve turned up are fraudulent or incorrect billings, the savings will turn out to be enormous,” enthuses County Executive Scott Vanderhoef.

Created in 1965 as part of the Great Society, Medicaid saw its expenditures soar out of control almost overnight. Costing $1 billion in its first year, the program, administered by each state as it sees fit under broad federal guidelines, grew into a $6.3 billion monster after just five years, and an $18 billion behemoth by 1977. Early in the Reagan years, the states and the federal government started cracking down on Medicaid fraud and waste, and briefly stalled the program’s growth. But costs started rising again in the late eighties and really took off a decade later, as states, flush with Internet-boom revenues and encouraged by the Clinton administration, loosened eligibility requirements and generously showered new services on patients. In just the last ten years, spending has doubled—a staggering $150 billion net increase.

All the Medicaid spending has state budgets groaning. The program is now the largest item in California’s state budget, surpassing even education spending. Florida’s Medicaid rolls, swollen over 40 percent in five years, gobbled up 25 percent of the state budget last year. Rhode Island’s Medicaid spending jumped from a quarter of the state budget in 2000 to more than 30 percent last year.

Neither the feds nor the states accompanied this huge spending increase with additional resources for fraud detection. Many programs spend derisory sums on enforcement. Over half of states now spend less than one-tenth of 1 percent of their Medicaid budgets to fight fraud. New York cut the number of health-department staffers combating Medicaid scams from 200 in the late eighties to 50 by 2005, even though the state’s program (including federal, state, and local expenditures) has grown by $30 billion since then. Several states still use decrepit eighties-era software to try to track hundreds of millions of Medicaid claims yearly, while 14 out of the nation’s 53 state and local Medicaid programs employ no experts to analyze and interpret data and detect fraud and waste, a Government Accountability Office study found.

Federal supervision of these fraud-fighting efforts is almost nonexistent. The GAO report disclosed that the federal agency responsible for overseeing Medicaid employs just eight people, wielding a minuscule budget of $26,000 annually (apart from salaries), to oversee anti-fraud initiatives—a level of funding that the GAO describes as “disproportionately small relative to the risk of serious financial loss.”

No surprise, then, that Medicaid fraud has become ever more pervasive and audacious. Lightly regulated optional Medicaid services that states have recently added or expanded, such as the provision of medical equipment, are particularly scam-ridden. In one brash scheme, begun in 2000, Nigerian immigrants set up a network of fraudulent medical-supply stores in the Southwest, hoping to swindle Medicaid and its sister program Medicare, the federal insurance program for seniors. The gang hired recruiters to bring them gullible patients eligible for Medicaid or Medicare. They then paid off local doctors to prescribe motorized wheelchairs worth $7,500 a pop for the patients but instead gave them motor scooters worth just $1,500, pocketing the difference. Investigators shut down the scheme after noticing billings for wheelchairs in Arizona, Texas, and other states scaling into the hundreds of millions of dollars—much of it lost for good.

Patient transportation services is another field so lucrative and loosely regulated that it draws Medicaid cheats like flies. A Virginia company supposedly founded to shuttle patients to their appointments instead spent its time collecting patient identity info and then billing the government for services it never delivered. In New York State, ambulette firms charge Medicaid over $300 million yearly for undelivered or unnecessary services, often provided in flagrant violation of state rules. A New York Times study of the state’s Medicaid transportation billings found suspicious patterns galore, including one patient supposedly driven 153 times to doctors’ offices and back in one year. And many ambulette-shuttled patients have no trouble walking, investigations going back to the early 1990s have shown, making them ineligible for a service intended for the impaired. I spent a day with a private investigator in Brooklyn and Queens a few years back, watching these companies operate; the vast majority of transported patients were clearly ambulatory. Despite the glaring problems, New York has done little to police the field.

Home health care, originally introduced by states into Medicaid to save on nursing-home bills, is also rife with abuse. Since Ohio’s home health-care program got under way seven years ago, for instance, practitioners have collected millions of dollars for services never rendered. In one particularly egregious case, a visiting nurse billed the state $338,000 over two years for visits (many of them phony) to just two patients.

It’s not just providers of new services who game the system. Unscrupulous licensed practitioners—dentists, MDs, nurses, pharmacists, and even hospitals—rip off the system, too. A Brooklyn dentist built the biggest Medicaid dental practice in New York State within just a year of opening it by submitting a mountain of phony bills, on one occasion billing for 991 procedures for a single day. It was the New York Times—and not state investigators—that exposed her, using a simple laptop computer to scrutinize her records.

Administrators at New Jersey’s biggest health-care institution, the state-subsidized University of Medicine and Dentistry of New Jersey, knowingly billed Medicaid once for treatments that its staff doctors had provided in their offices—and then billed the program again for the same treatments, claiming that they’d taken place in the hospital. The U.S. attorney for New Jersey uncovered the deceit and forced a court-appointed monitor on the UMDNJ; the investigation is ongoing and may result in indictments. Whatever the outcome, it’s New Jersey taxpayers who’ll shoulder the burden of repaying the federal government.

While flagrant Medicaid rip-offs like these make headlines, less exaggerated bill padding is commonplace, as practitioners try to cushion their practices from the stingier payments and tougher terms that HMOs and other private insurers have imposed on them. “What you find is that providers put all kinds of things into a bill,” says Brian Flood, Medicaid inspector general of Texas. “They pad. You have to be more vigilant.”

Medicaid’s dramatic expansion has given rise to powerful health-care special interests, including unions and hospital administrators, who very effectively lobby legislators to increase the program’s size, rather than contain its costs. Across the country, unions representing home health-care workers, for example, have helped secure Medicaid spending for their services: fraud is rampant in the field. An alliance between a union and politically connected nursing-home operators in Ohio recently thwarted legislative efforts to lower costs in nursing homes—institutions that have also proven frequent Medicaid cheats.

Nowhere are these special interests more powerful than in New York. Medical transportation firms hired the state senate majority leader’s son as a lobbyist; he helped protect their funding, despite the fact that much of it isn’t necessary. State hospitals have also joined with New York’s top union boss, Dennis Rivera of the hospital workers’ Local 1199, to pressure both Democrats and Republicans to funnel extra revenues into what is already the country’s largest Medicaid program, warning that any attempt to restrict the flow of tax dollars would imperil the state’s fragile hospitals and cost thousands of jobs. In short, Medicaid, designed to provide health care to the poor, has become a benefactor of the health-care industry, a jobs program, and a gigantic arena of political manipulation.

With such powerful interests protecting Medicaid spending, enforcement reform isn’t high on most New York pols’ priority lists. Last spring, some state senate Republicans, concerned about Governor George Pataki’s and Attorney General Eliot Spitzer’s seeming lack of interest in Medicaid fraud, proposed the creation of a kind of super-cop to fight health-care scams. But the Democrat-controlled state assembly blocked the legislation, fearing that the new position would strip power from Spitzer, a fellow Democrat running for governor. Spitzer himself opposed the new fraud unit, arguing that it would impose onerous new costs on New York government, though research has shown that the typical anti-Medicaid-fraud worker recovers, on average, $200,000 per year. Spitzer’s spokesman defended his boss’s anti-Medicaid-scam efforts as “successful.” But a subsequent New York Times series demonstrated that New York has fallen behind other states in fighting Medicaid fraud and recovering funds. The revelations underscored how Spitzer, who has won a tough-guy rep for going after Wall Street firms, becomes a pussycat when it comes to public-sector corruption, perhaps because he feels the need to play ball with major players like Rivera in order to win the gubernatorial race.

Vigorous oversight hasn’t seemed important to many state health-care bureaucrats who administer Medicaid, either. A 2005 investigation by Ohio’s inspector general, for instance, found that health officials in that state prefer to “educate” doctors, hospitals, and others who overbill Medicaid rather than refer cases for investigation and possible prosecution. Sloppy record keeping and slack pursuit of wrongdoers are endemic. The Ohio agency that supervises Medicaid proved so careless with taxpayer dollars that it accepted a mere $409 to settle a $500,000 overpayment to an ambulance service. In another case, the state demanded payment of just $155,000 from speech centers that had overbilled by $3.4 million. Florida’s Medicaid fraud unit couldn’t tell auditors what happened to $133,000 in fines levied against one defendant—or if the state had ever gotten paid. More outrageous still, the unit settled a $40 million fraud case against nursing-home operators for a mere $100,000. A federal investigation warned Florida that its anti-Medicaid-fraud effort was so slipshod that it risked losing federal funding.

But the stories of epidemic mismanagement and abuse are pushing some states to take action. 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. As a result, 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. In 2004, the inspector general’s office recommended 257 cases for prosecution, compared with just 37 fraud cases prosecuted in New York. Last year, Texas recovered $441 million in erroneous or fraudulent billings.

Following Texas’s lead, Kansas recently set up an inspector general’s office, while 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 New York state senator and deputy 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 do not 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 some states are toughening enforcement laws. New Jersey, for instance, now hands out up to ten-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. Kansas’s legislature, meanwhile, is close to passing bills that would expand the state’s asset forfeiture law to cover Medicaid fraud.

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. After fraudulent Medicaid claims bilked California out of $250 million over several years, that state now requires all new vendors to be on probation for up to 18 months. California inspectors also have started to make on-site visits to providers in fraud-prone services, to keep sham companies out of the program.

Trial Lawyers Aren’t the Answer

In the armory of weapons used to combat Medicaid fraud, the False Claims Act gets the most press. The federal law allows whistle-blowers who report fraud against the government to collect up to 30 percent of any money recovered from investigations their information prompts. In recent years, prosecutors aided by whistle-blowers have successfully pursued several huge Medicaid-fraud cases using the FCA, resulting in hundreds of millions of dollars in fines and penalties against drug companies and hospital chains for overbilling the program. Tens of those millions went into the pockets of the whistle-blowers and the lawyers working with them on a contingency basis. These payoffs have set off a flood of further lawsuits. Since Congress amended the law in 1986, hiking the potential payout to whistle-blowers, suits have increased by tenfold, with nearly 70 percent of them involving health-care companies.

But the big paydays have also raised concerns that the FCA is turning into America’s latest version of jackpot justice and is distracting attention from more effective ways to fight Medicaid fraud. Whistle-blowers, plaintiffs’ attorneys, and even government prosecutors increasingly appear to be abusing the FCA, targeting legitimate businesses for big payouts and using the act’s steep penalties, which include the threat of permanent exclusion from government programs as well as big fines and damages, to coerce some companies into settling cases rather than risking a trial verdict that could bankrupt them. A 1999 study by the Government Accountability Office criticized some FCA cases—including one in which the GAO concluded that hospitals that had already agreed to pay steep fines to avoid going to trial had in fact been improperly accused. The GAO study found that prosecutors and whistle-blowers targeted some companies for investigation not because they were plausible fraud suspects but merely because they were the biggest contractors in government health-care programs—that is, the deepest pockets for large paydays.

Plaintiffs’ attorneys have helped fuel the fervor for FCA lawsuits, using some of the same tactics that they used to spur litigation frenzy in areas like asbestos and medical malpractice. Shortly after Congress amended the FCA in 1986, a public interest lawyer named John Phillips, who had lobbied heavily for the new legislation, set up a taxpayer-friendly-sounding group,

Taxpayers Against Fraud, to tout the FCA to the press, to prosecutors, and to potential whistle-blowers. He also set up his own private practice to cash in on the act. Over the last 20 years, Phillips’s firm has won some $100 million in contingency fees pursuing FCA cases, according to Forbes magazine, and its successes have attracted some 200 more contingency lawyers into the FCA field. Meanwhile, Taxpayers Against Fraud has served as an effective proselytizer. Cited dozens of times a year in press stories as an advocate for the FCA, it has successfully encouraged a handful of states to enact their own versions of the legislation, though press accounts rarely mention that the group is not really a taxpayer organization but a propaganda instrument of the lawyers who benefit from the legislation the group espouses.

One danger of the false-claims lawsuit frenzy is that it will distract from the hard work of tracking down Medicaid fraud, which requires a multifaceted strategy. After the New York Times ran a series on New York’s lagging anti-fraud efforts, for instance, state attorney general candidate Mark Green, who began his public career working for trial-lawyer ally Ralph Nader, penned an op-ed piece in the Times to lobby for a version of the False Claims Act that New York legislators had drafted as the remedy for the state’s Medicaid woes, without proposing any of the numerous additional anti-fraud measures that other states now employ. Green even quoted Taxpayers Against Fraud without mentioning that the group’s current chairman, Neil Getnick, is a supporter of Green’s election bid, and that his FCA law firm could benefit enormously from a New York State law. (Getnick appears in a group photo on Green’s campaign site with other lawyer-supporters.)

Correctly conceived, the False Claims Act can be one weapon in an arsenal against Medicaid fraud. But the act needs sensible reforms to discourage abuses, including limiting the size of whistle-blower awards and requiring that whistle-blowers try to end fraud at their employer before filing suits (in some cases, insiders have instead let fraud go on for years after they detected it, and then left the company and sued). Americans for Tax Reform has suggested such reforms of the federal act.

The current law has created open season on legitimate companies and sparked a plaintiffs’-bar feeding frenzy. That’s not what Congress intended.

Governments are also investing in sophisticated new technology that can monitor Medicaid’s staggering number of transactions for suspicious billing patterns. Texas has contracted with University of Texas computer scientists to apply the latest mapping software to its Medicaid database, allowing the state to pick out doctors and pharmacists who attract Medicaid patients from far away—a red flag for possible fraud. “If patients are traveling hundreds of miles and bypassing other providers to go to a certain doctor, you have to wonder why and look more closely at that provider,” says state inspector general Brian Flood.

New York counties must share Medicaid costs with the state, and some have finally gained access to the state’s billing database and are using fancy new software programs designed by IBM and Salient Corp. to scrutinize records, looking for potential swindles. Rockland County zeroed in first on prescription drug costs, a swelling part of the Medicaid budget, by running checks on pharmacies that fill the greatest number of Medicaid scripts locally. The county found that one-fifth of all invoices—amounting to more than $12 million—had problems so serious that they warranted further investigation, suggesting either fraud or unintentional overbilling, including prescriptions filled for dead people. Nassau County officials studied transportation costs and, based on the patterns that their software noticed, started questioning providers about bills. In one year, before the county had brought any fraud cases, transportation billings plummeted 10 percent. “Now they knew we were watching them,” says a county official. Nassau officials found the decline eye-opening, since “costs never go down,” the official notes. Gotham has not joined the program.

Another promising approach is for government watchdogs to merge Medicare billing records with state Medicaid databases, enabling powerful software to examine both sets of records at once. Providers that dupe Medicaid, it turns out, tend to abuse Medicare, too. Calculating the average time that certain procedures take, a pilot computer-driven effort in California found a doctor whose combined Medicaid and Medicare billings added up to over 24 hours per workday. Merely looking at each program separately would not have caught the cheat. California estimates that matching the two databases has saved it nearly $60 million and led to around 80 fraud investigations. Based on the California experiment, six more states are now working with the Medicare database.

Perhaps the most ambitious use of advanced technology against Medicaid fraud 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—about 10 percent of the dollars lost to fraud in the program. Patients swipe the cards not only at the start of a visit but at the end, to record the time they spent at the facility—a safeguard against doctor and hospital 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. With even faster growth rates projected in the immediate future, trying to minimize fraud, waste, or simple errors in Medicaid will only get harder. “All this complexity has created a breeding ground for fraud and abuse,” Florida governor Jeb Bush said last year.

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. In effect, Florida will be breaking its Medicaid system into dozens of smaller units, managed by the private sector, where 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.

Research for this article was supported by the Brunie Fund for New York Journalism.