Medicaid fraud has been a big problem for years, and as states ramp up for the Affordable Care Act’s Medicaid expansion deadline in 2014, it could become an even bigger one. More enrollees plus more providers equals more fraud potential. When estimates place the amount of Medicaid waste in 2012 at $19 billion for the feds and $11 billion in 2010 for the states, we’re talking real money. Can states really put a lid on fraud? And, more important, is it worth the cost to do so?

The first question can be answered by the Centers for Medicare & Medicaid Services, which recently compiled a list of “noteworthy picks,” or on-the-ground state policies that had succeeded at eliminating fraud. The answer to the second is a bit trickier. But the numbers from three states -- California, Florida and New Jersey -- suggest fraud prevention pays.

Let’s start with California. Lauded for its prevention measures, the state conducts a “Medi-Cal Payment Error Study” once a year to find patterns that would suggest fraud or waste. Bruce Lim, deputy director of audits and investigations for the Department of Health Care Services, calls the study “our road map.” It focuses on fee-for-service providers, and in 2009, the error study “showed about $1 billion in potential overpayments, which could include administrative and other errors,” Lim says. “Of that $1 billion, there is about $228 million in potential fraud.

“[We are] trying to stop the bleeding instead of the usual pay-and-chase model,” he says. The numbers suggest the state’s strategy is working. In fiscal 2011-2012, fraud prevention had a $445 million “positive impact” in areas such as overpayment prevention ($106 million), cost avoidance ($28 million), cost savings ($47 million) and recovery ($102 million). With a department budget of $75 million, that computes to a return on investment of about 6:1. Lim thinks he can do even better: “I know that with newer technologies and data mining we can do more.”

Florida’s approach is less high tech and more gumshoe. State officials conduct random, unannounced site visits for all kinds of providers, both before contracting with them and after. In one six-month period, officials visited 244 active providers and administered 175 sanctions. Overall, in fiscal 2010-2011 audit recoveries and cost avoidance amounts totaled $90.1 million, yielding an ROI of 6.8:1. “The value [of fraud prevention] is extraordinary,” says Kelly Bennett, Florida’s Medicaid fraud and abuse liaison. “Because we are out there visiting providers, we believe we increase compliance, which equates to cost savings.”

New Jersey has an initiative with the cool, spy-like moniker “Operation X.” The program tries to prevent individuals who have previously engaged in unethical or fraudulent practices from collecting Medicaid in the first place. The office matches information from a federal exclusion database against state wage and labor roles, says Mark Anderson, director of the Medicaid Fraud Division. “The feds give us access to their database, and we see if any of their folks have gotten any money whatsoever in New Jersey. Once matched, we assign an investigator to determine if that person worked at any place with Medicaid funding or services. If so, we seek to recover money from that individual and the places he or she worked, and if he or she was a provider, we try to recover the money.”

This one practice nets anywhere from 50 to 200 leads per month, Anderson says, and about 10 to 12 percent of those get investigated. Most cases settle; in total, Operation X sought or collected $970,000 between June 2009 and June 2011. That goes toward New Jersey’s fraud prevention bottom line, which in fiscal year 2011 totaled about $502 million in recovered and avoided payments on office costs of about $8 million, an ROI of about 6.3:1.

So does fraud prevention pay? As these three states show, it certainly can. The takeaway, however, may be in how its done.

This story was originally written and published by Governing magazine.

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David Levine  |  GOVERNING Contributor

David Levine is a GOVERNING contributor and freelance writer, who specializes in health and medical issues. His work has been published in the New York Times, American Heritage, Sports Illustrated and many other publications. Levine is the author/co-author of six books about sports. He is also a contributing editor at Wainscot Health Media and a contributing writer at Hudson Valley magazine.