Obama-Era Scheme Illegally Paid $227 Million to States as a Result of Miscalculations

Rushed Medicaid bonus failed to vet inflated state enrollment figures

Former US president Barack Obama / Getty Images

The federal government incorrectly paid states hundreds of millions of dollars in bonuses to expand health care coverage before Obamacare's implementation.

The Obama administration erroneously sent $277 million to state governments that inflated the number of children enrolled in Medicaid and the Children's Health Insurance Program (CHIP). The federal government began offering bonuses to state programs to help cover the costs of expanded child coverage shortly after Obama took office in 2009. Over the next four years, the program paid out $645 million in bonuses, 43 percent of which turned out to be "unallowable," according to a new report by the inspector general of the Department of Health and Human Services.

Miscalculations and administrative errors, such as counting disabled people as children in the total tally, drastically inflated the number of children covered by state health care systems, leading to chronic overpayment.

The Centers for Medicare & Medicaid Services (CMS) distributed the bonus payments to states if they enrolled more children in health care programs than a baseline quota established by the CMS. The agency, however, relied on data submitted by the states to evaluate how many kids were enrolled. CMS did not double-check the figures.

"CMS did not have access to accurate State data in time to make correct bonus payments and did not use these data once they became available to verify the accuracy of the current enrollment that the States reported," the IG report read.

The inspector general's audit of all payments in the period found that 11 states including Alaska, Louisiana, and Virginia, overstated the number of children enrolled in state health care programs.

The states inflated the number of children under their care as a result of several miscalculations and administrative errors. Nine states, for instance, incorrectly included people who were not children, such as blind and disabled people, into the total tally. Alabama, meanwhile, calculated the total number of kids enrolled in Medicaid instead of providing current enrollment counts.

The IG report did not make clear whether states intentionally misreported their numbers to CMS.

Alabama received $95 million from CMS—the most of any state—while the program was active even though it only qualified for $7 million in funding. Louisiana did not qualify for any bonus payments, but CMS paid it $7 million. Both states told the inspector general's office the errors were unintentional and that they had reformed their systems.

The report lays part of the blame on the rushed rollout of the initiative. After the Children's Health Insurance Program Reauthorization Act passed in February 2009, CMS had only a few months to pay out state bonuses. As a result, the agency did not always have the full data set necessary to audit the reported figures.

CMS has taken "significant action to recover these overpayments," according to the report. It has withheld nearly $51 million from three states with unspent bonus payment funds and has issued letters asking for the money back. Three states have voluntarily returned the overpaid amounts, but $190 million remains uncollected. The report does not clarify what the CMS should do if the states are reluctant to return the funds.

States that have not voluntarily returned the bonus payments have appealed the overpayment decision to the Departmental Appeals Board. Louisiana promised to reform its practices to prevent future errors, but did not explicitly commit to returning the funds in a 2014 letter to the IG. Meanwhile, Alabama said it has already changed its practices to prevent errors, and argued to the IG that it qualified for the bonus payments and refused to return them in 2013.

The IG warned that future programs with similar intentions might fall victim to dysfunction if regulators do not develop accountability measures.

"We recommend that CMS … consider the results of these reviews when designing internal controls for similar programs to ensure that timely and accurate data are available for adequate oversight, followup, and verification," the report concluded.