WASHINGTON - It began with a $30 million "voluntary contribution" to Minnesota taxpayers from one of the state's nonprofit Medicaid contractors, an unprecedented act of corporate generosity that raised eyebrows from St. Paul to Washington.

Skepticism about the payment focused first on DFL Gov. Mark Dayton, whose administration sought to keep the money in state coffers rather than share it with the federal government, which foots half the bill for Medicaid.

Then congressional investigators pounced, setting off on a trail of suspected overpayments to state Medicaid contractors that could potentially reach hundreds of millions of dollars and going back a decade to the administration of Republican Gov. Tim Pawlenty.

That search culminated on Tuesday, when House and Senate investigators in Washington spent three hours privately questioning Nancy Feldman, chief executive officer of UCare Minnesota, a managed-care contractor that made the $30 million payment last year. The investigators say that Feldman, who was accompanied by two lawyers, is not suspected of any criminal wrongdoing. Through a spokesman, Feldman said she was "happy to assist the staff, and was pleased by the tenor and outcome of the discussion."

But the meeting on Capitol Hill deepened the federal probe into allegations that the state has been overbilling federal taxpayers for Medicaid payments to UCare and other state HMOs to offset their losses on other state-funded health programs. Whatever the outcome, a state that once prided itself on its expansive coverage for the disadvantaged is being branded in Congress as "Case Study No. 1" in what federal investigators say is a nationwide pattern of states claiming excessive federal dollars to plug their own budget gaps.

"Minnesota provides a stunning example of how states are failing to properly ensure the appropriate use of taxpayer dollars spent on Medicaid managed care," wrote investigators for the U.S. House Oversight and Government Reform Committee, which has already taken testimony from Minnesota Department of Human Services (DHS) Commissioner Lucinda Jesson.

Smoking gun

If there's a smoking gun, it was provided by Feldman in a March 2011 letter explaining the $30 million payment. She wrote that rates paid by the Minnesota Department of Human Services to HMOs for the state's General Assistance Medical Care (GAMC) program "resulted in health plan losses which were offset by higher [Medicaid] payments."

Moreover, Feldman noted, the higher Medicaid rates were not adjusted after the Pawlenty administration ended the state-funded GAMC program in 2010.

That has raised three questions for investigators in Washington: Were federal Medicaid dollars being used to underwrite Minnesota's program? Why didn't federal regulators catch it? And was the $30 million UCare payment, which the state called a "donation," an attempt to return excess payments and lower the heat level?

"It looks like CMS was asleep at the switch," said a congressional staffer close to the investigation. "I think it's pretty obvious cross-subsidization was going on."

Whether any of that amounted to fraud is now the focus of at least three federal probes, two by congressional Republicans and one by the Justice Department.

Officials in the Dayton and Pawlenty administrations say they have done nothing wrong. Industry executives likewise deny that the health plans are overpaid, noting that state business was unprofitable for them in 2006 and 2007, and less profitable than their private-sector business in other years.

The state is expected to address investigators' question in a filing due on Monday.

At the same time, Republican lawmakers in Washington are raising broader questions about wasted money and lack of federal oversight in the nation's $457 billion Medicaid program -- a system that already covers nearly one in five Americans and is slated to expand dramatically under the federal health care overhaul signed by President Obama.

"Somebody's getting the money, but it's not going to the poor people this program was intended to help," said Minnesota Republican Rep. Michele Bachmann, an outspoken critic of the Obama law.

In Minnesota, the criticism has been equally sharp on the other end of the political spectrum. "The trouble is, nobody's minding the store," said state Sen. John Marty, DFL-Roseville, a critic of the state's experiment with outsourcing public health coverage to private managed-care companies. "It's not the image people have of Minnesota."

'First indication'

State legislators in both parties have been asking questions for years about the rates paid to managed-care companies, a nexus of nonprofits that were paid a combined $3.3 billion in 2010 to care for some 524,000 Minnesotans on public medical assistance. State and congressional reports detail HMO operating margins that are often greater from their state business than from their commercial plans.

Much of the legislative interest has been stirred by St. Paul attorney David Feinwachs, who says he was fired by the Minnesota Hospital Association after accusing the health plans of over-charging the state. "What unites both left and right is, whether you're a deficit reduction guy, or an access-to-health care guy, it's clear that this thing is a giant rip-off," he said.

Marty, Bachmann, and state Sen. Sean Nienow, R-Cambridge, have been calling for independent, third-party audits. Nienow notes that the questions go back at least to 2003, when the feds raised questions with the Pawlenty administration about HMO rates. "That was the first indication that something less than proper was going on," Nienow said.

But the HMOs also have their defenders among Democrats and Republicans. State Sen. David Hann, an Eden Prairie Republican who chairs a health committee, says there is no shortage of audits and reports in the heavily regulated industry.

Hann's beef is with the federal Medicaid system itself, which he calls "fundamentally flawed," in part because it encourages states to leverage every last dollar they can get from Washington -- exactly what Pawlenty and Dayton are accused of doing.

Hann supports a plan by congressional Republicans to turn Medicaid into a federal block grant program, which he says would eliminate the states' incentives to game the system.

Competitive bidding

Some Democrats, including former Minnesota Attorney General Mike Hatch, suspect that whatever the merit of the GOP probes, their underlying agenda could be to weaken political support for the Medicaid program.

For their part, Dayton officials boast that they have moved to a new system of competitive bidding for Medicaid business and expect to reap some $600 million in savings over the next two years. In the meantime, they forged agreements with the state's four Medicaid contractors -- UCare, Medica, HealthPartners and Blue Cross and Blue Shield -- to cap 2011 profits at 1 percent, a step that returned $73 million to taxpayers this year.

"We wanted to make sure there weren't excessive profits being made," said Assistant Human Services Commissioner Scott Leitz.

But UCare's $30 million payment, touted as a windfall, clouded what might otherwise have been seen as one of the signal reforms of the Dayton administration. Noting that UCare was the only one of the four Medicaid HMOs to cough up the money, Hatch said: "No good deed goes unpunished."

Kevin Diaz is a correspondent in the Star Tribune Washington Bureau.