Tim Walz says Minnesota is auditing payments in Medicaid programs vulnerable to fraudsters. But the scope of the audit is quite limited

A press conference last week gave Gov. Tim Walz the opportunity to say what steps his administration has taken to uncover scam health care providers that are defrauding the Minnesota Department of Human Services.

Amid questions that ranged from whether Medicaid fraud complicated the state's budget prognosis to whether publicity from fraud indirectly led to Immigrations and Customs Enforcement agents descending upon Minneapolis, Walz repeatedly returned to the fact that the Department of Human Services, or DHS, hired an independent auditor to investigate payments in 14 Medicaid programs.

"We know that the programs have been paused," Walz said last Thursday. "We have an independent auditor from the outside with the power to stop payments."

But the governor omitted an important detail.

The independent auditor—Optum State Government Solutions, a subsidiary of health insurance giant UnitedHealth—only reviews payments made directly by DHS. Optum does not review payments made by health insurers, who are contracted by Minnesota Medicaid.

Ninety percent of the state's approximately 1.2 million Medicaid recipients access services billed directly to these health insurers—which are known as managed care organizations—and not DHS.

Moreover, according to DHS, managed care organizations pay 80% of direct care costs in Medicaid.

Put another way, the audit touted by Walz reviews roughly 20% of these 14 programs' direct care costs, costs that are ultimately paid by taxpayers as—at the end of the day—Medicaid is entirely financed by the federal and state government.

That the audit only examines a small portion of claims came as a surprise even to lawmakers whose job it is to address Medicaid fraud.

State Rep. Kristin Robbins, R-Maplewood, said in an interview Monday that she had no idea the audit only covered claims directly paid out by DHS, even though a late October governor's press release announcing the audit pointed this out.

Robbins, chair of the House Fraud Prevention Committee and a Republican candidate for governor, said that she nonetheless got the impression from news reports that the audit covered all payments in these programs.

Robbins said that she felt misled by DHS—which did not respond until Monday to an Oct. 31 letter that she wrote inquiring about the audit's scope. Robbins now says that the Optum audit is an insufficient step to addressing fraud.

"The vast majority of payments are done through managed care organizations and so I would guess that the vast majority of the fraud is on the managed care side," Robbins said.

Rep. Steve Elkins, DFL-Bloomington, also sits on the Fraud Prevention Committee. Elkins has expertise in ferreting out health care fraud having worked as a data architect for Optum Technology.

But even Elkins said that he was flummoxed by the audit's reach, a misunderstanding that he said he came to after reading the 26-page contract brokered by Optum and DHS.

"I read the contract and it was such generic boilerplate that I couldn't tell what services would be provided and did not know that it only covered fee-for-service claims," Elkins said.

(Fee-for-service means direct DHS payments in this context. More on that in a sec.)

A spokesperson for the governor's office said that they limited the breadth of the audit to direct service payments because it would break existing contracts with the managed care organizations.

The spokesperson added that if patterns of fraud are diagnosed by Optum in direct payment claims, the governor and DHS may then pursue targeted action in ferreting out waste in payments done by the managed care organizations.

Walz's spokesperson said that he did not specify the limitations of the audit last week because it would be too complicated in a press conference format—where a throng of reporters shout questions at the governor.

"At some point, we have an obligation to explain in plain language what we're doing or it becomes meaningless," said a governor's spokesperson.

Here is the simplest explanation possible about what this audit really does.

Could you first review what people are talking about when they discuss Medicaid fraud in Minnesota?

The U.S. Attorney's Office of Minnesota announced in September that eight defendants were charged in defrauding the Housing Stabilization Services Medicaid program.

The indictment alleges that these providers billed over $8 million in total to Medicaid, claiming that they were helping program recipients find housing, when they were, in fact, simply pocketing the money. The cases are before a federal judge.

Also, DHS in August shut down the Housing Stabilization Services program.

DHS budgeted Housing Stabilization Services to cost $2.6 million annually when it started in 2020. Instead, the program racked up over $300 million in total payments before its termination.

The U.S. Attorney's Office also accused a company called Smart Therapy of submitting $14 million in false claims for a Medicaid program to help children with autism.

The U.S. Attorney's Office and DHS Inspector General say that they are just scratching the surface of uncovering fraud.

"What is still needed to address provider fraud? A lot," said DHS Inspector General James Clark at a September hearing of the Fraud Prevention Committee. "Greedy people in businesses have learned to exploit our programs."

What do you mean by direct payments and how does it contrast with this managed care?

The part of these 14 high-risk programs that Optum audits are direct payments, or—in Medicaid jargon—fee-for-service.

(These 14 programs being investigated include a post-mortem on Housing Stabilization Services as well as audits of early childhood autism services and a program giving assistance to adults with disabilities.)

Fee-for-service means what it sounds like.

To tweak the above example, DHS—and not a managed care organization—pays a $200 fee to the autism therapist for their service.

Let's say that a Medicaid patient brings their child to a therapist specializing in autism care. The therapist charges $200 for an hourlong consultation.

DHS—after reviewing to make sure the claim is legit—then pays the therapist that $200 for their health care service.

Here, by contrast, is how managed care organizations work.

There are currently eight managed care organizations with contracts, all of which are nonprofit. Examples include Hennepin Health and PrimeWest Health.

Under managed care in the above example, it is Hennepin Health, or whomever the managed care organization is, that reimburses the $200 for that therapist.

Hennepin Health is later reimbursed by DHS. How much Hennepin Health is reimbursed is based on a formula by DHS that takes into account the numbers of patients enrolled in the managed care plan.

To repeat, payments that shuttle through managed care are 80% of the direct care costs in Minnesota Medicaid.

And—to repeat—these payments are not audited by Optum.

Instead, the managed care organizations police their own payments.

"Managed care organizations are contractually responsible for investigating fraud allegations that concern MCO recipients and payments, referring providers to law enforcement, and sanctioning providers," said a spokesperson for DHS. "Each managed care organization crafts their fraud, waste and abuse detection and prevention practices within DHS standards."

Did the alleged Medicaid fraud happen from fee-for-service claims or managed care claims?

DHS said it could not ascertain this information by this story's deadline. Messages left with the U.S. Attorney's office were not returned.

The indictments themselves yield a glimmer of information.

The indictment against the founders of Brilliant Minds, a purported Housing Stabilization Services provider, said that they bilked $2.3 million out of Medicaid by submitting, "HSS program reimbursement claims to about nine different insurers."

Until last year, when DHS dropped UnitedHealth, Minnesota Medicaid featured nine different insurers.

According to Elkins, managed care organizations have a clear incentive to detect fraud, since they are working with a fixed amount of DHS funds.

"The managed care organization carriers each receive a fixed, flat amount per member assigned to them so it behooves them to take their own actions to prevent fraud," Elkins said. "They have to eat any fraud involving their membership base."

But, at the same time, Elkins noted that—like DHS—managed care organizations can become overwhelmed by the number of billing claims and can be susceptible to sophisticated fraudsters.

What is this Optum contract good for, then?

Optum has a one-year contract worth $2.3 million to provide a second set of eyes on incoming fee-for-service payment claims.

"We've got that third-party auditor out there," Walz said last week. "We've shut the program down for 90 days."

But even the portion of these programs that are direct payments from DHS are not shutting down.

What the 90 days conceivably refers to is that, under Minnesota law, DHS must pay a Medicaid provider within 90 days of getting a bill, unless they detect funny business.

In other words, the 90 day figure, cited repeatedly by the governor last week, is actually an assurance to legitimate health care providers that they will eventually get paid. It is not a time mark of how long swaths of a Medicaid program will shut down.

According to the governor's office, the work done by Optum combined with that of Inspector General Clark at DHS will provide data trends that can be shared with managed care organizations "to prevent issues in a uniform way once identified in a fee-for-service."