The Perversion of Fiscal Federalism: Daniel L. Hatcher’s, “The Poverty Industry: The Exploitation of America’s Most Vulnerable Citizens”


It’s not that we do not know that Medicaid and Medicare fraud is rampant.  A 2012 estimate by the former CMS administrator, Donald Berwick, estimated the amount at $100 billion annually.  Nor are we unaware, that drug companies routinely pay massive fines for illegal business practices: eight firms have paid in sum over $11.2 billion in civil and criminal fines since 2010.  Beyond these issues what is possibly most disturbing about the numerous inter-related health and human services issues “The Poverty Industry” raises is Professor Hatcher’s detailed discussion of how state human service agencies, in partnership with private contractors, have monetized poverty or turned vulnerable populations into a source of state revenue.  As Hatcher says in his introduction, states are, “strip-mining billions in federal aid and other funds from impoverished families, abused and neglected children and the disabled and elderly poor. ” 

Hatcher, a law professor at the University of Baltimore, is largely concerned with state abuse or misuse of federal foster care (Title IV-E) and federal Medicaid funding.  What drives abuse, he argues in this thoroughly researched work, is rampant self-interest, that has resulted in “poverty’s iron triangle” in which self-dealing states and state agencies sustain or gain power by furthering mutually beneficial relationships with business constituents who, being fare more resourced and organized, outmaneuver the poor.  This enables them to have, as President Eisenhower infamously noted two weeks before he left office, “unwarranted influence,” leaving agency clients, again the poor children and elderly, as a source of income or collateral in instances of child custody.

In foster care, children become, as the consulting firm MAXIMUS states, a “revenue generating mechanism”.  Hatcher estimates that foster care agencies, aided by contingency pay-based contractors, take more than $250 million in assets each year from children under their care.  This is typically accomplished by agencies presumptively assigning themselves the role of the foster child’s representative Social Security Insurance (SSI) payee despite the fact that, per federal regulation, the payee must use SSI funds “only for the use and benefit” of the child.  Hatcher provides several examples, including one of a Maryland boy who, after the death of his mother, father and brother, was left penniless when the state foster care agency acquired, unbeknownst to the child, his Social Security survivor benefits.  “The Poverty Industry” details how the Kentucky foster care agency’s contractor mines disabled children’s SSI benefits; how Nebraska’s contractor so automated the state-as-representative-payee system that the state’s foster care agency ceased to even be a part of the process.  (Nebraska even obtains foster children’s burial spaces.)  Foster care agency contractors in Georgia, Iowa, and Florida use sophisticated data mining algorithms and predictive analytics to maximize SSI “units” and SSI “penetration rates.” Professor Hatcher details how these practices are enabled by the Social Security Administration (SSA), which routinely fails to identify the most appropriate person as the foster child’s representative payee.  The SSA has so abrogated its responsibility that it runs a computer program, termed the “kiddie loop,” to process faster foster agency SSI payee application approvals.

State foster care agencies explain their malfeasance by arguing that taking SSI benefits reduces their  funding needs and that if the foster care agency does not act as the SSI representative payee, the foster child will lose their SSI benefits.  Agencies also point out that since they spend money to care for foster children, they should be able to reimburse themselves via a maintenance fee.  Hatcher demonstrates instances in which states go so far as to hold children as de facto collateral or terminate parental rights, all in the name of enforcing maintenance fee collections.  Furthermore, states claim that by taking the foster child’s SSI benefits, that child’s $2,000 asset limit is avoided.  Hatcher points out that states are legally required to provide and pay for foster care for abused and neglected children.  The state’s share of foster care costs must be paid with state, not the child’s, funds.  If no suitable representative SSI payee is found, the SSA is required to conserve SSI benefits until a suitable representative payee is found or benefits are to be paid to the child upon their reaching adulthood.  Hatcher also notes per the 1967 Supreme Court case, In re: Gault, children have constitutional due process rights.  A state foster care agency cannot simply expropriate a foster care child’s property, here moreover income.      

As startling as these foster care practices are, Hatcher notes, they pale in comparison “to the scope of revenue strategies involving Medicaid,” that Hatcher generally terms, “Medicaid money laundering.”  Readers familiar with the Medicaid program are likely aware of how states have been gaming federal matching Medicaid funding, largely via Medicaid “enhancement” or “bed” taxes, for years.  Hatcher describes how states like New Hampshire, Wisconsin, Massachusetts and Missouri use a strategy of imposing a tax on a hospital or other provider based on revenues that drive greater federal Medicaid matching, or FMAP (Federal Medicaid Assistance Percentage) funding.  Once that additional federal funding is received, the tax dollars are refunded to the hospital, nursing home, psychiatric institution or other provider.  These additional federal Medicaid dollars are then used as the state wishes.  In a 2007 GAO report, Hatcher cites, auditors estimated these financing arrangements amounted to billions of dollars in Medicaid fraud.  Variations on this approach include, again with the help of private “revenue maximization consultants,” falsely relating the federal Medicaid match funding to pre-school and special education programming.  Hatcher is particularly interested in how Medicaid-reimbursed nursing home care is gamed.  He notes as an example that Indiana, via a bed tax termed a “quality assessment fee,” was able to divert $136 million in federal Medicaid funds to its general fund between 2011 and 2013.  Maryland’s nursing home bed tax has proven so useful, the state increased the tax from two to six percent between 2010 and 2012 and in 2010 statutorily required 35 percent of moneys be used for general fund purposes.   

Hatcher makes special note of the use of Medicaid funds to over-prescribe anti-psychotics to sedate nursing home residents and foster children, thereby allowing for lower staffing levels and driving increased profits.  This practice is particularly perverse, because side effects of these medications can include instant death.  In 2007 Congressional testimony, the FDA estimated that 15,000 nursing home residents die each year from anti-psychotic medication misuse.  Foster children, including infants, particularly those in group settings, Hatcher found, comparatively are given much higher rates of psychotropic drugs, including anti-psychotic medications.  In Massachusetts and Texas, for example, upwards of 40 percent of foster children were found to be taking psychotropics.  In Colorado, nine of the ten most prescribed Medicaid medications for foster children were psychotropics, compared to one of ten for non-foster children in Medicaid.

After documenting “poverty’s iron triangle,” Hatcher is left to call into question the legitimacy of fiscal federalism, the framework upon which grant in aid programming is conducted.  In theory, fiscal federalism is defined as a cooperative effort whereby the federal government efficiently raises revenue that is dispersed to states better able to define programs that address regional needs.  Federal funding is conditional in that states agree to spending instructions.  Since Hatcher is so unsparing in his account of failed fiscal federalism in practice, his recommendations for “reeling in the poverty industry” are surprisingly optimistic.  State agencies, he says, need to be more “enlightened” and begin to act in the best interests of their beneficiaries.  State agencies also need to abandon contingency fee contracting that, in part, increases the occurrence of fraudulent federal claims (and False Claim Act settlements from which poverty triangle contractors are far from immune).   Litigation must continue, particularly since Hatcher notes the courts have in sum failed to adequately address the fact that foster care agencies have a legal obligation to pay foster care costs.  He argues that the Congress should pass legislation to ensure the resources allocated to foster children are not abused, and cites the 2010 Foster Children Self Support Act as an example.  He believes CMS should better monitor how states claim Medicaid moneys, that the SSA should improve its monitoring of the representative payee system.  Federal grant in aid programming, such as-open ended block or opportunity grants, or so called flex funds, popular among Republican members of Congress, should be evaluated with, Hatcher states, “caution and concern. ”  Regardless of whether any or all of these recommendations can be implemented to effectively reel in the poverty industry, Hatcher’s effort to expose pervasive abuse and raise awareness of the devastating effects they have on our nation’s most vulnerable populations is of significant value. 

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