Medicaid is the third largest social program in the federal budget and is also one of the largest components of state budgets. Although it is one federal program, Medicaid consists of 56 distinct state-level programs—one for each state, District of Columbia, Puerto Rico, and each U.S. territory. Each state has a designated Medicaid agency that administers its program under broad federal guidelines. The federal government matches state Medicaid spending for medical assistance according to a formula based on each state’s per capita income. The federal share can range from 50 cents to 83 cents of each Medicaid dollar spent. HCFA administers the Medicaid program at the federal level. In accordance with the Medicaid statute, it sets broad guidelines for the states, but within them, each state establishes its own eligibility standards; determines the type, amount, duration, and scope of covered services; sets payment rates; oversees the integrity of its program; and develops its administrative structure. States are required to describe the nature and scope of their program in a comprehensive written plan submitted to HCFA—with federal funding for state Medicaid services contingent on HCFA’s approval of the plan. HCFA is responsible for ensuring that state Medicaid programs meet all federal requirements. In addition to Medicaid, HCFA also has responsibility for administering Medicare, a federal health insurance program for certain disabled persons and those 65 years and older. While Medicaid and Medicare have different structures and governance, some low-income beneficiaries and many providers participate in both programs. There are also—in 47 states and the District of Columbia—separate MFCUs that are responsible for investigating and prosecuting Medicaid provider fraud, patient abuse, and financial fraud. In 1999, MFCUs received authority to investigate cases involving Medicare fraud as well. Most MFCUs are part of the state Attorney General’s office, and most prosecute the cases they investigate. MFCUs that have been federally certified for more than 3 years receive 75 cents in federal funding for every dollar they spend, up to a limit established by federal regulations. In addition to state Medicaid agencies and MFCUs, other state and federal agencies assist in dealing with Medicaid improper payments. Because of their responsibilities to ensure sound fiscal management in their states, state auditors or state inspectors general may become involved in Medicaid payment safeguard activities through efforts such as testing payment system controls or investigating possible causes of mispayment. At the federal level, the Federal Bureau of Investigation (FBI) and the OIG investigate, and U.S. Attorneys prosecute, certain Medicaid fraud cases, such as those that involve multiple states or also involve fraud against other health care programs. Funding for these agencies to pursue fraud and abuse in federal health care programs is available from the Health Care Fraud and Abuse Control Program (HCFAC). Established in 1996 by Section 201 of the Health Insurance Portability and Accountability Act (HIPAA), it funds, consolidates, and strengthens federal fraud control efforts under the Department of Justice (DOJ) and HHS. This fund provided $154.3 million in fiscal year 2000 to the OIG and DOJ. Separately, the FBI received an additional $76 million in HIPAA-specified funding for fiscal year 2000. Medicare has been the major focus of this effort, but Medicaid has also benefited. In its joint report with DOJ on the HCFAC fund, HHS reported returning nearly $45 million dollars to Medicaid as a result of these fraud control activities for fiscal years 1997 through 1999. With state and federal Medicaid payments projected to total $221.6 billion this fiscal year, even a small percentage loss due to improper payments represents a significant loss to taxpayers. The magnitude of improper payments throughout Medicaid is unknown, although a few states have attempted to determine the level by measuring the accuracy of their program’s payments. An even more difficult portion of improper payments to identify are those attributable to intentional fraud—recent cases in California and other states provide examples of losses due to fraudulent activities. There are no reliable estimates of the extent of improper payments throughout the Medicaid program. However, at least three states have conducted studies to try to measure their program’s payment accuracy rates and pinpoint where payment vulnerability occurs, with varied success. Illinois, in 1998, reported an estimated payment accuracy rate of 95.3 percent, with a margin of error of +/- 2.3 percentage points, of total dollars paid. The estimate was based on a sample of individual paid claims, for which the state reviewed medical records and interviewed patients to verify that services were rendered and medically necessary. As a result of this audit, the state identified key areas of weakness and targeted several areas needing improvement. For example, because the Illinois payment accuracy review indicated that nearly one-third of payments to nonemergency transportation providers were in error, the Illinois Medicaid program has taken a number of steps to improve the accuracy of payments to this provider type. Texas, also in 1998, reported an estimated payment accuracy rate of 89.5 percent in the acute medical care fee-for-service portion of the program. However, in making that estimate, reviewers had trouble locating many patients and records due to statutorily imposed time constraints. Further work led the state, in 1999, to revise the estimate to between 93.2 and 94 percent. In developing the estimate, the state identified ways to reduce improper payments through expanded use of computerized fraud detection tools, such as matching Medicaid eligibility records with vital statistics databases to avoid payments for deceased beneficiaries. In January 2001, Texas reported that a more recent study estimated a payment accuracy rate of 92.8 percent in its acute medical care fee-for-service payments. Kansas, in 2000, reported an estimated payment accuracy rate of 76 percent with a margin of error of +/- 9 percentage points. The estimate was based on a sample of individual paid claims, as in Illinois. The payment accuracy study recommended increased provider and consumer education, as well as improvements to computerized payment systems. In addition, Kansas officials undertook focused reviews of certain types of claims that were identified as vulnerable to abuse. In their payment accuracy studies, these states commonly identified errors such as missing or insufficient documentation to show whether the claim was claims for treatments or services that were not medically necessary; claims that should have been coded for a lower reimbursement amount; and claims for treatments or services that the program did not cover. Because payment accuracy studies can provide useful guidance toward developing cost-effective measures to reduce losses, HCFA has sought HCFAC funding for grants to states for such efforts. HCFA also has established a workgroup to develop guiding principles, definitions, and reporting protocols for payment accuracy studies. HCFA and its workgroup of state officials are also trying to assess whether, given the many differences among the various Medicaid programs, a common methodology can be developed that would allow valid comparison of error rates across states. State payment accuracy studies may not fully identify improper payments that might be related to fraud, due primarily to fraud’s covert nature. Losses due to fraudulent billing and other related practices are difficult to quantify. However, these amounts can be significant, as was demonstrated recently in California’s program, in which millions of dollars were paid to numerous fraudulent providers. Since July 1999, a state-federal task force targeting questionable pharmaceutical and durable medical equipment suppliers for improper billing has charged 115 providers, wholesalers, and suppliers in cases involving about $58 million in fraud. At least 69 individuals have been convicted and paid about $20 million in restitution. An additional 300 entities are being investigated for suspected fraud that could exceed $250 million. In one case, a family-run equipment company defrauded the program out of more than $9 million by submitting thousands of claims for equipment and supplies that were never delivered to patients. Investigators also found the following. “Bump and run” schemes in which individuals bill for a few months for services that are not rendered, stop billing before being detected, and then start again under a new name. Wholesalers who gave pharmacies and suppliers false invoices to substantiate false claims. Use of “marketers” who recruit and pay beneficiaries $100 or more to lend their Medicaid identification cards for use in improper billing. Use of beneficiary identification numbers stolen from a hospital to bill for services not provided. Use of identification from providers who had retired or moved out of the state. Purchase of an established business in order to fraudulently bill under its name. Administrative weaknesses in the California Medicaid program made these activities easier to accomplish. For example, the program was issuing new billing numbers to individuals with demonstrated histories of current or past questionable billing practices. The program allowed providers to have multiple numbers, and applicants did not have to disclose past involvement in the program or any ongoing audits. As a result, in some cases, individuals who had past questionable billings applied for a new provider number and were reinstated with full billing privileges. In addition, applicants for a billing number for a business that needed a license—such as a pharmacy— did not have to disclose that actual owners were not the licensed individuals. This allowed unlicensed individuals to pay medical professionals for the use of their licenses to obtain a provider number. California has taken steps to try to close such loopholes. In addition to single-state schemes, fraudulent activities sometimes involve large-scale multistate schemes. One case led to a $486 million civil settlement in early 2000—one of the largest health care settlements ever. It followed a 5-year investigation of a dialysis firm billing Medicare and several state Medicaid programs for intradialytic parenteral nutrition that was not necessary or not provided in the quantity claimed. The company had an ownership interest in a laboratory that also double-billed for unnecessary tests and paid kickbacks to nephrologists and clinics that used the laboratory. In another case, a national laboratory headquartered in Michigan was ordered to pay $6.8 million in a multistate settlement for billing Medicare and five Medicaid programs for bogus medical tests.