by James C. Sherlock

Federally-funded programs administered by the states are primary targets of fraud and abuse because of the vast sums at stake.  The amount of money at risk is literally unimaginable. Medicare and Medicaid alone exceed two trillion dollars a year. 

Federal programs are widely victimized in Virginia because the Commonwealth does not defend them well.  The Commonwealth recovers millions of dollars. Billions escape.

State defenders against fraud in many federally funded programs run by the Commonwealth have a too-narrow focus. Actively hampered by the General Assembly, they are ignoring the forest as they examine the trees.

States operate their own programs under federal and state guidelines for:

• administering Medicaid,
• licensing and overseeing providers of healthcare and of assistance to people with intellectual and developmental disabilities (I/DD);
• managing unemployment insurance systems. Those are funded through a joint federal-state partnership financed by employer payroll taxes — state unemployment taxes (SUTA) for benefits and federal unemployment taxes (FUTA) for administration.  
• conducting public assistance programs for the needy that are largely funded by the federal government.  Major programs like SNAP (food assistance) and TANF (cash assistance) are funded by the federal government but managed at the state level.

In Virginia and other states, there are four lines of defense against program fraud, waste, and abuse:

• state regulators,
• state Inspectors General (sometimes called the State Auditor),
• Attorneys General, and
• state courts.  

The earlier the fraud is caught and stopped in that chain, the better.  None of those barriers has proven effective in Virginia.  

In each case of program fraud, there are two sets of victims: the federal and state fiscs, and the people whom the money was supposed to help.  

In healthcare-related fraud, the victims suffer terribly.  In Virginia, too many victims are subjected to well-reported patterns of neglect, abuse, injury, and tragic deaths without effective consequences to the people who are paid to care for them.

We’ve reported here systematic, large-scale fraud in out-of-state chains that has reached a third of Virginia’s nursing homes in five years.  Similar problems in individual I/DD providers have been highlighted in our series on Louise Lucas and Lucas Lodge.  That reporting has been fully backed by detailed evidence from government records.  

Yet:  

• Virginia has not addressed the systematic fraud visible in the business models that infect nearly a hundred Virginia nursing homes run by out-of-state chains.  
• Virginia did not act against the state-documented abuses by Lucas Lodge; the federal government did.

Failures in state regulation and prosecution of fraud by healthcare providers, providers of assistance to the I/DD community, unemployment insurance claimants, and public assistance recipients make national headlines.  They have prompted federal investigations and funding cutoffs in other states.  Virginia is at risk of joining them soon.

Virginia regulators of all of those programs work for the Secretary of Health and Human Resources.  They include, but are not limited to,

• The Department of Medical Assistance Services (DMAS/ Virginia Medicaid) contracts with providers, and is expected to enforce those contracts with the help of the Attorney General’s federally-mandated and partially federally funded Medicaid Fraud Control Unit (MFCU);
• The Department of Health (VDH) is not only the licenser and state regulator of all healthcare-related programs.  It licenses hospitals, nursing homes, home care organizations, hospices, and hospice facilities, and inspects them for state licensing purposes.  It also works under contract with the Centers for Medicare & Medicaid Services (CMS) to inspect (survey) and certify nursing homes, home care organizations, hospices, and hospice facilities for Medicare participation.  
• The Department of Behavioral Health and Disability Services (DBHDS) operates state mental hospitals and licenses both intermediate care facilities and community-based care programs for individuals with intellectual and developmental disabilities (I/DD).  That whole program in Virginia has been subject to oversight by a federal court in Richmond since 2012 and is now under a permanent injunction to comply with a strict set of court-prescribed rules.  State laws and regulations were changed to comply with the court order.  It would be good if they were enforced.
• The Virginia Department of Social Services (VDSS) is the primary state agency responsible for managing public assistance programs for the needy.  VDSS supervises 120 local departments of social services that deliver benefits, including TANF, SNAP, energy assistance, and Medicaid.

The General Assembly and JLARC

This reporter has no expertise in the programs run by VDSS, but has long documented how Virginia’s healthcare and I/DD regulators have been neutered by restrictive laws and budgets passed by the General Assembly to return the favor to big donors in those industries.  

Attempts by the General Assembly to address the problems it has created, without solving them or acknowledging their source, have a long history.  

Most of those study efforts preceded the large-scale introduction of business-model-driven Medicare and Medicaid fraud in Virginia initiated by out-of-state chains, which began in 2020 and now controls nearly a third of our nursing homes. 

House Joint Resolution 127 (2010) directed the Joint Legislative Audit and Review Commission (JLARC) “to identify opportunities to reduce waste, inefficiency, fraud, and abuse” in Medicaid.  JLARC members are all senators and delegates.  It is unreasonable to expect them to draw attention to the General Assembly as the source of any problem, especially when the problem stems from corruption within that body.

Acting within that limitation, an Interim Report: Fraud and Error in Virginia’s Medicaid Program, published by JLARC in December 2010, cataloged “Potential Opportunities to Further Reduce Fraud and Error”  starting on page 89, contemplated upgrading Virginia’s Auditor General to an Inspector General, and included many of the right targets for fraud reduction.  

But the recommendations (on page 99) did not address those findings.  They were weak and focused on Medicaid eligibility-determination error rates for local departments of social services.  They did not anticipate industrial-scale provider fraud and made no recommendation to prevent or stop it.

That was followed in January 2012 by JLARC’s  Mitigating the Risk of Improper Payments in the Virginia Medicaid Program.  It once again focused on recipients rather than providers who were such generous sources of campaign funds.

Enrollment of Ineligible Medicaid Recipients Presents Greatest Risk of Improper Payments

Improvements Needed to Further Improve and Sustain DMAS’s Strong Performance of Provider Review Activities

The report indicated that the costs of fraud were minimal, and a better analysis of audit outcomes would solve the relatively small problem.  It was proven wrong on both counts.

Analytical Failures

JLARC, DMAS, VDH, Virginia’s Attorneys General, the federal Centers for Medicare and Medicaid Services, and the Justice Department have all failed to address the provider forest in Virginia.  

Analytical failures have occurred because the focus was too narrow.  It has concentrated on spending, claims data, and the qualifications of service recipients, without consulting available documentation on provider staffing, occupancy, provider inputs that drive payments, and inspection results.

The results of VDH and DBHDS facility inspections supporting licensing and Medicare certification have been analyzed by this author in Bacon’s Rebellion to identify large-scale patterns of fraud in the Virginia nursing home industry.  

• Since 2020, there have been numerous claims for services totaling billions of dollars.  Data from inspections, occupancy reports, and staffing reports show that those services were not, and could not have been, delivered.  
• Driven by extremely low staffing and nearly full average occupancy assisted by COPN, daily nurse hours per resident have plummeted and remained at crisis levels across some chains’ entire Virginia portfolios.  Those ratios are entirely under the control of the provider facilities and their chains.  They complain about the numerator of the fraction, nursing hours, being driven by recruiting challenges that their peers have overcome, while failing to acknowledge that they directly control the denominator, which is the number of residents.  They are never sanctioned on their system-wide business model, even when inspections of their individual facilities result in findings of immediate jeopardy to residents.  The truth is that Virginia would not know what to do with so many nursing homes if their owners were banned from doing business in Virginia.  Which should happen.  There is no state Plan B.
• Parallel government data have shown consistent patterns of nursing home upcoding of patient medical and activities-of-daily-living support requirements in the same chains, resulting in massive overpayments.  
• Municipal property reports show co-ownership of properties and their nursing home and ID/D services tenants, creating opportunities to tunnel Medicare and Medicaid funds away from resident support through sky-high rents “negotiated” by the co-owners with themselves.  So do co-ownership of providers of other goods (e.g. food, cleaning services, supplies) and services paid  (e.g., non-emergency transportation and durable medical equipment) reimbursed as costs by subsequent rate increases or as direct charges by Medicare and Medicaid

None of those would show up in state audits as individual improper claims.

State agencies still don’t use those metrics to indicate fraud, while CMS and the Justice Department have warmed to that approach.  It will be instructive to see whether the dreadful results of DBHDS state inspections and death and serious-incident reports for Lucas Lodge, documented here and largely ignored by state regulators and prosecutors, are used as evidence in the federal case against Lucas Lodge.

The Office of Inspector General

Next in this series, we will review the outcome of the 2011 decision by the General Assembly that renamed the Virginia State Auditor as Inspector General and centralized the fight against fraud, waste, and abuse across all government programs in Virginia in his office.

It has proven to be a major mistake.  JLARC itself kneecapped that office in “Operations and Performance of the State Inspector General” published in 2019.  This author has never seen anything remotely like it from that source.

OSIG is not adequately fulfilling its intended role as a centralized investigative agency

OSIG has not adequately fulfilled its statutory responsibility to oversee behavioral health and developmental services facilities and providers

OSIG has struggled to build a fully effective performance audit function

Ouch.  Those were its three major functions.  The incumbent IG did not resign.  He remains there today.

We’ll look next time.

Note:  At 16:15 on May 13, the author added linked examples of the spreadsheets he created in March related to nursing home fraud and the Lucas Lodge scandal.