Minnesota officials seek new powers to catch, prevent child-care fraud

Facing a wave of criticism because the state failed to detect millions of dollars in fraud, the administration of Gov. Tim Walz is seeking new powers to crack down on overbilling, kickbacks and other illegal activity within the state-subsidized child care assistance program.

Officials said the Minnesota Department of Human Services (DHS) lacks an adequate case-tracking system and data-mining tools to identify warning signs of fraudulent activity in the state's Child Care Assistance Program, which distributed about $254 million last year. As a result, the agency that administers the program isseverely limited in its ability to detect suspicious activity and prevent fraud before it happens, and instead relies on tips from the public, officials acknowledge.

Deputy Human Services Commissioner Chuck Johnson said his agency is seeking broad new powers, including funding for a new case-tracking system and the ability to conduct more frequent monitoring of new day-care centers. Over the next few years, DHS also wants to develop a new electronic system for verifying attendance, which would prevent overbilling for children who are not actually present at the day-care centers, according to the agency's proposal.

"People who are defrauding us are always evolving in how they are doing this, and we need to evolve our methods," Johnson said in an interview Wednesday.

The Walz administration's proposal comes amid heightened public scrutiny over how DHS investigates fraud in the state-subsidized program, which covers the cost of day care for about 30,000 low-income children. In a detailed report issued last week, the Office of the Legislative Auditor found that, despite multiple attempts to tighten enforcement in recent years, fraud remains a serious problem, and legal barriers to prosecuting fraudulent providers still persist.

The legislative auditor's investigation was prompted by a Fox 9 news report last spring alleging that about $100 million was being stolen from the program, with some of the money used to fund terrorist activities overseas. The auditor's investigation did not substantiate those claims, but it found that fraud in the program likely exceeds the $5 million to $6 million that prosecutors have proved over the past several years. An independent consulting firm hired by DHS estimated that since 2013, about 7 percent of payments were made to centers that used fraudulent billing practices, totaling $72 million over five years, according to the consultant's report.

The auditor's findings aroused a storm of criticism from some lawmakers while shining a fresh spotlight on a public program that has been notoriously difficult to police for fraud. The challenge stems from the fact that the services are being provided in the community and are not easily monitored, and the paper attendance records at child-care centers are relatively easy to falsify. In a number of high-profile fraud cases, DHS investigators have determined that child-care providers sought to maximize their billings to the program by offering parents kickbacks in return for enrolling their children. Yet cash payments are difficult to trace, and some child-care centers have opened "shell businesses" to hide payments, investigators found.

Concerns about fraud in the child-care assistance program are hardly new.

As far back as 2010, counties and DHS began noticing a worrisome trend: a significant increase in the number of child-care centers that employ large numbers of parents who receive child-care subsidies. At times, some of these centers had more than 200 children of employees on assistance, according to DHS records. By itself, the presence of employees' children is not evidence of fraud. But officials were concerned because when a child-care center is also the parent's employer, there are fewer checks against fraud; there is also a built-in incentive to schedule work and child care in a way that maximizes payments under the program, officials say.

In response, lawmakers passed legislation in 2017 that set new limits on the program. Under the changes, the child-care assistance program cannot pay for more than 25 children to attend a center where their parents work. The law also placed limits on children using multiple providers, which had become another trend. From 2010 to 2016, the number of children using multiple providers more than doubled from 1,000 to 2,400 statewide, DHS found.

Still, without the consistent use of data analytics, the state's enforcement efforts have fallen short. The consultant's report, released last week, noted that the investigative unit within the assistance program lacked an integrated, real-time case management system, which would enable investigators to analyze trends and identify characteristics of fraudulent providers. Instead, the agency has been largely reactive, carrying out investigations triggered by tips, leads and referrals that it receives from members of the public, the report said.

Because of the lack of reliable data, "We don't know what the predictors [of fraud] are" within the program, Johnson said. "We have experienced investigators, but a lot of it is based on their own experience and what they are seeing."

The Walz administration is also proposing legislation that would clearly establish in state law that payment or receipt of kickbacks is a crime and the basis for an enforcement action against providers. Officials also want to make it easier to disqualify fraudulent providers from the program by changing the burden of proof from "clear and convincing" to "preponderance of the evidence."

In addition, Walz's supplemental budget, to be released Friday, will contain a request for more staff in DHS' licensing division. These new staff will be focused on conducting more front-end inspections of new child-care centers to identify issues early, including potential fraud. Licensing inspectors would visit these new centers every three months, rather than the current schedule of once a year.

"Some of these centers start up and it may take awhile to figure out whether they are running a legitimate business," Johnson said. "You lose time in that process."