Aug 29, 2016
9 Min read time
States are stealing from orphans to pad their budgets. And it's legal.
The Poverty Industry: The Exploitation of America’s Most Vulnerable Citizens
Daniel L. Hatcher
NYU Press, $35 (cloth)
At least since the passage of California’s Proposition 13 in 1978—in which property owners voted to halve their property taxes—the United States has struggled with an anti-tax mentality revolving around the belief that government is ineffective. That sentiment is nowhere so clearly expressed as in wingnut Grover Norquist’s famous dictum that government should be small enough to drown in a bathtub. Indeed, the right’s efforts to starve government of the level of resources necessary for competent functioning have made a self-fulfilling prophecy of the claim that government is moribund.
Daniel L. Hatcher’s The Poverty Industry exposes one way that states have responded to the anti-tax climate and diminishing federal funds. Facing budget crises but reluctant to raise taxes, many state politicians treat federal dollars available for poverty-relief programs as an easy mark from which they can mine revenue without political consequence. They divert federal funding earmarked for social programs for children and the elderly, repurposing it for their general funds with the help of private companies that in effect launder money for them. A law professor at the University of Baltimore who has represented Maryland victims of such schemes, Hatcher presents a distressing picture of how states routinely defraud taxpayers of millions of federal dollars.
This is possible because there is a near-total absence of accountability for how states use federal money intended to fight poverty. Remarkably, states do not even have to pretend to have used all the funds for the stated purpose; they are only required to show that they are taking care of the populations for which the funds were intended. Medicaid, for example, operates as a matching program: states receive federal payments that match state spending on health care for low-income residents. The purpose of this “fiscal federalism” is to merge federal resources with states’ understandings of their own populations’ needs. But the grant system is rife with abuse. The more money that states claim they spend on qualifying Medicaid services, the more federal money they can receive. Hatcher demonstrates how states contract with companies to find ways to claim very high administrative costs for these social programs, which the federal government will reimburse, creating more money they can siphon off into the general fund.
These private companies are, quite literally, stealing from the poor.
Exacerbating states’ natural inclination toward grift, private companies have taken power at all stages of the welfare system and have done so with an eye on states’ and their own bottom lines. States almost universally contract with private corporations to administer their welfare programs. Welfare providers, such as hospitals, also hire private companies to help them maximize payment claims. States then hire additional private companies to help them reduce their payouts to providers and increase their claims from the federal government. The federal government hires the same or similar companies to audit Medicaid and other industries and to review state actions. These companies lobby heavily at the state and national levels for their own interests and with little public scrutiny brought to bear on how they conduct their business. Hatcher details how often conflicts of interest and pay-to-play arrangements influence the votes of state politicians, for example. At each step, the companies profit off a system designed to provide a safety net for our most vulnerable citizens. They are, quite literally, stealing from the poor. And although it has the authority to do so, the federal government rarely pursues prosecution against revenue maximization schemes.
Agency confidentiality statutes mean that it is very difficult to prove misallocation claims against state agencies, which regularly rebuff efforts to collect evidence by saying that opening records would violate recipients’ privacy. In 2004 Alabama spent enough money on child welfare to pay each child $3750 a month, but it only paid its foster care providers between $400 and $450 per month. The state claims the rest of the money is spent on providing services for the children, but accounting for nearly 90 percent of that money remains nearly impossible. And while Hatcher notes that some of it did go toward the intended services, much of it almost certainly found its way into poverty industry hands.
• • •
A leading corporate perpetrator of the poverty industry, in Hatcher’s telling, is MAXIMUS. Founded in 1975, the company works with governments around the globe as a private contractor for government aid programs. The company was found guilty of intentionally creating incorrect Medicaid claims while in a revenue maximization contract with the District of Columbia, and had to pay a $30 million federal fine in 2007. Yet its methods are so intensely profitable—for both states and itself—that it continues to win more state contracts. Hatcher uncovered MAXIMUS emails to Maryland officials in which it warned that the state was losing out by not pocketing more money intended for poor children; in the same email, it offered to help in that process.
Companies that arose in the military-industrial complex, including Northrup Grumman and Lockheed Martin, are now helping to create the poverty-industrial complex by going into this profitable revenue maximization business themselves. These companies make money if they can remove children from welfare rolls. A whistleblower lawsuit revealed that WellCare—a company that had already paid a $10 million fine for defrauding Florida’s Medicaid and Healthy Kids programs, and that has acknowledged illegal campaign finance contributions—held a celebratory dinner after removing 425 babies from state welfare rolls, lessening its financial responsibility and increasing corporate profits. WellCare had to pay a $137.5 million settlement to the Justice Department to settle that lawsuit.
As Hatcher explains, there are a number of ways for states to make money off of foster children. For example, the state can declare them disabled and therefore eligible for Social Security benefits. The state then names itself their trustees and gets to keep the money. Hatcher argues that the same is true for children receiving veterans’ benefits. For example, a guardian state can manufacture ways to increase the administrative costs of managing and dispersing benefits so that it can add those charges to the federal government’s tab. It may also seek to place children in its care with foster families rather than find a relative who can care for the child because it then profits from continuing to administer benefits for the child. It might put children in its care on prescription drugs to sedate their behavior so it can reduce staffing costs and charge for the medicines, even if their behavior can be managed without sedation. Tragically, states often treat vulnerable children in their care as cash machines.
WellCare held a celebratory dinner after removing 425 babies from state welfare rolls.
Poverty contractors regularly act of their own accord even when the state has no vested interest, as with child support cases. Cases of unpaid child support arise overwhelmingly from dire poverty: most in arrears are destitute fathers who simply cannot afford to pay, and most claimants are destitute mothers who cannot afford to go without their payments. The Federal Office of Child Support Enforcement reports that over one-quarter of child support debt—$28.5 billion—is owed to the government. But states do not make a tremendous amount of money from child support via their entitlement to a portion of the money owed. That is because the cost of administering child support collection is often more than the amount the state saves from children who no longer need state support. Thus, it makes no financial sense for the state to pursue restitution. Although the amounts companies will collect per case are also small, the poverty companies, like debt collection companies, have a business model of relentlessly pursuing even tiny debts, so they prosecute delinquent fathers, absorbing much of the collected money.
Children are not the only victims of such schemes. States routinely use nursing homes as funding sources or opportunities for budget slashing. A popular strategy is to sedate relatively healthy elderly patients in order to reduce staffing costs. At one Connecticut nursing home, two-thirds of residents were found to be under the influence of antipsychotic drugs despite having no condition that warranted their use. An Indiana company, Health and Hospital Corporation, used revenue maximization strategy to take over formerly public nursing homes. Ten of the seventeen homes HHC purchased in 2003 fared worse on state report card scores by 2010, several of which were also on the federal government’s list of “most poorly performing homes.”
States also outsource probation services and court fine collections, juvenile detention centers, and hospice care—usually with similarly extortionary results.
• • •
Hatcher reserves some of his greatest contempt for Republican governors who participate in engineering and perpetuating these poverty extraction schemes. He savages Mitt Romney, in particular, for his comment made during the 2012 election season that 47 percent of Americans are freeloaders living off of entitlements. Meanwhile, as governor of Massachusetts, Romney balanced the state’s budget by diverting Medicaid money into the general fund. Other ambitious Republican governors, such as Rick Perry of Texas and Bobby Jindal of Louisiana, come under fire as well. However, as Hatcher makes clear, Democratic politicians are equally guilty of schemes to profit from the poor. Oregon and Maryland engage in these strategies along with Nebraska and Kentucky. In other words, the misappropriation of funds intended for the poor is not a partisan problem; it is a problem that springs from the dysfunction of American governance writ large.
No one policy or law was responsible for creating the disaster we face; rather, a patchwork of terrible policy decisions have added up to the perfect storm. Title IV-D of the Social Security Act of 1975 created avenues for states to take a percentage of child support away from poor families to offset for their own expenses. In 1984, Congress inserted language into Title IV-E of the Social Security Act—the Federal Foster Care Program—that required states to fund their own foster care costs out of what they can recover from families, giving states and their contracting companies license to doggedly pursue and fleece destitute parents. The 1998 Federal Activities Inventory Reform Act required government agencies to detail activities that might be contracted to the private sector, creating a laundry list for anti-government activists. And so on.
In reaching for a solution, Hatcher stresses common sense. Money for children should be spent on children. Money for the elderly should be spent on the elderly. Private agencies should not profit off of the poor. States should not balance their budgets by stealing from the poor. Hatcher calls for new federal laws banning these practices but also believes that relatively minor regulatory changes could help. Surprisingly, Hatcher believes corporations could have a positive role in running social services, for instance, in helping states decide when to apply for disability benefits for a child or to help foster care agencies manage children’s funds. Hatcher’s solutions will read as common sense to many readers, but they are unlikely to convince any governors or agency heads with career ambitions. It is unclear that corporations would shift focus if avenues to tremendous profit were closed. At any rate, in a political environment in which leading Republicans, such as Paul Ryan and Marco Rubio, hope to restructure poverty programs by outsourcing them entirely to corporations, change seems unlikely.
Long-term solutions must go deeper. At the core of the problem is the profound distrust of government that defines much of American life in the twenty-first century. Until Americans see government as more effective and trustworthy than corporations in managing social problems, and until we fund our social services with tax increases that must fall primarily on the wealthy, states will continue exploiting their poorest citizens.
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August 29, 2016
9 Min read time