Hearing Wrap Up: Fraud Runs Rampant When States Do Not Prevent It

WASHINGTON-Yesterday, the Subcommittee on Government Operations held a hearing titled "Fraud Prevention: Understanding Fraud in Federally Funded Programs Run by the States." During the hearing, members examined why fraud exists in federally funded, state-administered programs and the incentives states have to use unlimited or matching federal program funding to maximize state resources rather than efficiently fund the programs they are designed for. Members also analyzed the outdated methods and technology that states use to detect fraud and identified how to make states more better users of existing tools, techniques, and data to combat fraud.

Key Takeaways:

The United States loses billions in taxpayer dollars to fraud schemes in state-run federal programs. Federal and state agencies must improve their fraud detection measures to prevent more loss of funds.

• Seto Bagdoyan, Director of Forensic Audits and Investigative Services at the U.S. Government Accountability Office (GAO), testified that "Illustrating this, GAO estimated a while ago that up to $135 billion in pandemic era unemployment insurance benefits, or 15% of the total spending, was lost due to fraud, resulting from poor controls. Most of these losses were never recovered. Spending on federal assistance programs administered by states exceeds about $1 trillion annually, rendering them inherently at risk of fraud… What underscores the present state of the fraud risk landscape is a fundamental failure by federal and state agencies to acknowledge that [fraud] exists, is significant, and requires a decisive response. This mentality must change and quickly to mitigate both the present and future risk landscapes as symptoms of the failure to acknowledge [fraud's] existence."
  
• Allison Ball, Auditor of Public Accounts for the Commonwealth of Kentucky, testified that "In just one year, we've been able to assist the Commonwealth in dropping its SNAP payment error rates from 9.1 percent to 3.5 percent, but there is still more work to be done because federal rules for other programs have been more relaxed since the passage of the One Big Beautiful Bill last year. Kentucky's executive branch simply has not paid as much attention to the other programs as it should-that's why Kentucky has a payment error rate of 47.5 percent for Medicaid Long Term Care Program, 28.5 percent for the Medicare Savings Program, 9.7 percent for the TANF program, and 5.3 percent of the Medicaid program. These error rates likely implicate hundreds of millions of dollars in federal funding."

Some states do not have elected officials, like treasurers and auditors, responsible for overseeing state spending, and state agencies frequently forego simple applicant checks, such as identity and eligibility verification, to prioritize program access and service delivery.

• Mr. Bagdoyan also testified that "Principal factors contributing to fraud risks at the federal and state levels include: absence of leadership priority to drive effective responses, weak fraud risk management capacity, such as superficial risk assessments and counter fraud strategies, inadequate preventative front and back end controls, especially regarding verifying identity, determining eligibility, calculating benefit amounts and tracking their duration, averting duplicate benefits across multiple jurisdictions, and recovering financial losses."
• Dr. O.J. Oleka, CEO of the State Financial Officers Foundation, recommended that "Number one, state financial officers routinely identify fraud, waste, and abuse in federally funded programs administered at the state level, but there is no formal mechanism to share that information with federal Inspectors General. Amend the Inspector General Act to require every federal Inspector General to establish standing liaisons with state financial officers, mandatory data sharing protocols and joint task forces. Number two, federal benefit programs such as Medicaid, SNAP, and unemployment insurance still rely heavily on self-attestation, as was just mentioned, or periodic checks, rather than real-time verification of income, residency and citizenship status before payments are issued."

State agencies do not have access to the most useful federal information-specifically, tax and income data-for preventing and detecting fraud.

• Dr. Oleka continued in his testimony "Federal agencies are still catching most fraud after payments have been made, rather than preventing it in real time, even though advanced tools already exist. Accelerate adoption of modern fraud detection technologies across all federal benefit programs. Number four, many federal benefit programs administered by states continue to experience high rates of improper payments and fraud, despite existing federal rules. Under the current system, states receive full federal matching funds regardless of how effectively they verify eligibility, detect fraud, or reduce waste. Expand performance-based funding across federal benefit programs administered by states to help resolve that problem. Number five, taxpayers and elected officials currently lack a single accessible, real-time view of fraud, waste, and improper payments across federal programs. Create a single real time public dashboard so taxpayers can see exactly where their money is going and how much is lost to fraud and waste."

The House Oversight Committee has been dedicated to rooting out waste, fraud, and abuse in state-run federal programs.

• Auditor Ball also testified that "[The] unfortunate reality is that some people simply won't change their ways unless the harm they are causing to their state is exposed. Congress is well suited to hold accountable the nefarious and incompetent state actors who waste taxpayer money and defraud the American people. And like today, state auditors offices can assist Congress in doing so. This is a nonpartisan issue. If we take waste, fraud, and abuse seriously, we can ensure that every family gets needed assistance without breaking the backs of American taxpayers."

Member Highlights:

Subcommittee Chairman Pete Sessions (R-Texas) asked about more efficiently utilizing the Pandemic Response Accountability Committee (PRAC)'s extensive database nationwide to detect and prevent fraud, rather than waiting until fraud has already occurred.

Subcommittee Chairman Sessions: "I'm not trying to get you to jam into all the answers at the same time, but the PRAC has some 7 billion, 700 million pieces of data. That is not indicative that it is broad, but it's indicative that you need to ask or gain more information. You need to know that maybe the term 'red flag' may or may not be appropriate, but an indication. Please go look at this. And that should be an indication perhaps where we would start with wandering into the world. 'Do we know who you are? Do you need to come and present yourself' And, and I've just gone through Social Security issues, and they vetted me to make sure they knew who I was. It would have been nice if I, if they had said, please come to Waco, Texas to the Social Security office. But not everybody likes that. And there's a line between what is required and what is requested. I just think we've got to get closer to understanding. So talk to me about the use of data and information as this helps itself to get closer, Mr. Westbrook."

Bob Westbrook, former Executive Director of the PRAC: "Yeah, thank you for that question. So the PRAC has an enormous amount of data, as does the Treasury's Do Not Pay or payment integrity center. The way the system is structured, though, the states would really connect with Treasury's Do Not Pay[system] . That's where the connection point should be, where you would check eligibility against the various databases. I think the PRAC needs to be and is working towards being closer aligned with Do Not Pay and the Department of Treasury. So it's not a pay and chase after the fact. It's a it's on a much more real time basis. But I do think it's critical that we have that centralized government data system… So that's one of the things that we need to look at when we balance this idea of centralized repositories for identification is who's going to be holding it and how secure is it because it can do irreparable harm. That's why we're seeing the repercussions [of] these bad international fraud rings, [they] are literally buying personal information for the cost of a Happy Meal on the dark web because of these hacking of government systems. So that's the thing that concerns me, as much as fraud is personal protection of personal information. Thank you."

House Committee on Oversight and Government Reform Chairman James Comer (R-Ky.) asked if Kentucky Governor Andy Beshear has provided helpful information on the amount of fraud occurring in the state.

Chairman Comer: "Out of curiosity, has Governor Beshear worked with you any during your audit, were they (the administration) helpful in turning over information or anything to help come to the conclusions that you came to with respect to the amount of fraud?"

Auditor Ball: "That's a good question, because I really do believe these are nonpartisan issues and we should be able to work together. Unfortunately, I have to say it's not been a great system of cooperation. Boots on the ground people have been helpful. When it comes to rising levels of leadership, it does get to be more difficult to get information from them. And it's only actually only gotten more difficult as time has gone by, so the unfortunate answer is no. It's actually been disappointing that I've not had good cooperation from the top level of the Beshear Administration."

Chairman Comer: "Do they dispute the findings? I know you came up with this a few weeks ago. Has there been any communication between the administration and the auditor's office?"

Auditor Ball: "So that's a good question. Their response was mostly that it's not unique to Kentucky, that this happens in other places as well, which, in my view, that's true. It actually does happen in other places as well. But I think that that attitude makes it less likely to be addressed. Just because it happens somewhere else doesn't mean that it's not serious and important."

Rep. Tim Burchett (R-Tenn.) asked about the issues that may prevent federal agencies from addressing fraud risks.

Rep. Burchett: "I want to just go down the line. What issues do the state and federal agencies face in addressing fraud risk in their program? And I mean to say what issues that stop them from addressing it?"

Mr. Bagdoyan: "I'm glad we have that understanding. So, as I mentioned, you know, the culture is very important. So that drives whatever happens below, but it is essential to have a robust fraud risk management capacity. You have to have the leadership, you have to have the strategy, you have to have the controls and execute those effectively. But at the federal, state level, many times, as I mentioned in my opening remarks, you have this issue of program design, either statutory and or regulatory restrictions on what a state and a federal government can do or a permissive attitude as well, which allows extensive reliance on self-attestation, which as I described as the bane of any auditor. So that is something that really needs to be looked at."

Dr. Oleka: "I might offer actually the same response. There's a challenge sometimes where state elected officials aren't aware of all the resources available to them. For example, the Do Not Pay list. It's a great resource that has the federal government's support."

Rep. Burchett: "What is the Do Not Pay? I know what it is, but I'm sure the rest of the Committee does not."

Dr. Oleka: "It's compiled by the federal government. It's resource that allows states to effectively look through folks that they shouldn't give benefits to, that they can actually review to make sure that there is no implication of fraud. If you were to give some folks some resources, you can utilize that tool, and it can be expansive based on the data that is given to it from states. So you pass data back and forth when you've got a policy response in that way. It makes more robust the resources that are available. So if state financial officers in particular had access and knowledge to that, that could help things as well as the statutory authority. There's a single audit act for Medicaid that effectively puts state financial officers, auditors in particular, in a position where they've got to audit Medicaid. If you had once a year, if you had that for every program, then you are more likely to find fraud."

Auditor Ball: "So I'm going to pay you back a little bit on the culture issue, because we found that on this $836 million of waste that we discovered, because when we started doing interviews with boots on the ground and then with leadership, we found out that people that were actually doing the work were told, 'hey, this is not that big of a deal. It's low priority. If you get to checking somebody's residency, you know, that's good, but it's really not that big of a deal.' So it really did expose that the attitude at the top really does make a difference. I think that's why it's really important today that we're here, because you are indicating to all the American people, 'hey, this really matters.' And that has a cultural response and a cultural change. So I would say the culture is important. I also think that we need to be reviewing things at all levels. So as we've started to get more aggressive on reviewing the error rates, those error rates have begun to go down. We saw that with snap, we went from 9.1 percent to 3.5 percent error rates, just because we were actually involved in the process and we were identifying particular errors. I think that has to be part of it. And then another thing, actually this piggybacks on what [Dr. Oleka] was just saying. The real time review was a serious problem on this particular audit that we did, because they were doing what was called 'PARIS Alerts.' We were getting from the federal government, from a program, but it only happened like once a quarter."

Rep. Virginia Foxx (R-N.C.) inquired about the types of checks states could use to help verify state residents' identities and eligibility for federal programs.

Rep. Foxx: "There's no, quote, 'federal money or state money,' but rather taxpayer money. Therefore, all levels of government have the same obligation to be good stewards of taxpayers' money. So what prevents state agencies from implementing stronger guardrails for detecting and preventing fraud in programs that receive federal funds, such as eligibility and identity checks? What kinds of checks could state agencies implement quickly to help verify eligibility and identify as part of these programs?"

Mr. Bagdoyan: "Yeah, thank you for your question. So the response is multifold. I think I will keep going back to the, um, culture of accountability, which drives everything else. You can have very elegant fraud risk management systems, but if you don't have the leadership to make that happen, nothing's going to work. So that's an important thing. The other one, which was manifested during the pandemic, is unemployment insurance, where states were just overwhelmed. I think as one of my fellow witnesses mentioned with massive claims for, for benefits, they didn't have the systems, they didn't have the expertise, they didn't have the data to respond to, to that onslaught of what happened. Unfortunately, after much of the benefits were dispensed, federal government provided funding as well as expertise. These so-called "Tiger Teams" from the Department of Labor that helped stem some of the more egregious problems, including the self-attestation issue that I mentioned earlier. So that showed success during the pandemic, but I don't think it's being sustained at this present time."

Rep. Foxx: "But we could have had in the law, you couldn't self-attest? We could have put that into legislation? That you couldn't do that, correct?"

Mr. Bagdoyan: "You can, but it has to be verified. That's where states fell short. You know, I attested myself as being eligible for unemployment insurance. I sign my name, but you know, who's going to verify that? And then data analytics is very important. Real time data analytics, but you also have to respond to the results of those data analytics."

Click here to watch the hearing.