What went wrong with Minnesota’s ‘groundbreaking’ program to fight homelessness?

Homeless encampments were cropping up across the Twin Cities in the summer of 2020 when Minnesota began a pioneering program that uses Medicaid dollars to help people find and keep housing.

Five years later, the Housing Stabilization Services benefit once heralded as “groundbreaking” is the latest Minnesota program to be mired in claims of fraud. Scammers have reportedly targeted dollars state leaders hoped would be life-changing for vulnerable people in what an FBI agent described as a “massive scheme” to defraud the government.

What went wrong?

“Housing Stabilization Services was designed to be an easy-to-obtain benefit and a program that imposed relatively few eligibility requirements for individuals to receive services,” said acting U.S. Attorney for Minnesota Joe Thompson. “This has left the program vulnerable to bad actors and to fraud, and people billing for services that weren’t needed and were never provided.”

Social service providers who have long seen people wronged by some housing stabilization businesses were well aware of the program’s flaws. They pointed to insufficient vetting and training of providers, minimal guardrails to prevent bad actors from billing large sums and a lack of accountability and transparency to ensure enrollees actually got help.

State officials recently made numerous changes to prevent such fraud, and many people trying to address homelessness in Minnesota said they hope the program can be reformed and preserved.

But the changes are coming only after several years of exploitation, both of people and tax dollars.

Minnesota was one of the first states to jump at the option.

The state has a long history of being among the first to try something, and that comes with risks, said Tony Lourey, a former DHS commissioner and state senator. He was a sponsor of the 2017 bill to create the housing stabilization program.

“Housing was seen, along with nutrition, as the ladders to self-sufficiency,” Lourey said. “You can’t hold down a job if you can’t get cleaned up in the morning [and] get there in a presentable fashion. You can’t eat in a manner that is affordable if you don’t have a refrigerator and cooking facilities. All of these things are integral to health of a person.”

The idea had bipartisan support, with advocates saying it would allow Minnesota to help more people facing homelessness while saving the state money by leveraging federal funds.

Because it was the first of its kind, Minnesota officials didn’t have other states to look to as examples, said DHS Assistant Commissioner Eric Grumdahl. He said officials relied on data from the annual point-in-time count of homelessness in Minnesota to estimate that about 8,000 people would use the benefit.

As of last month, DHS said about 21,300 were enrolled.

Meanwhile, the state saw rapid growth in the number of providers and how much they were getting paid.

The state initially estimated the benefit would cost about $2.6 million a year. But providers received $3.3 million in 2020, and by 2024 that escalated to more than $107 million, according to data DHS provided to the Minnesota Star Tribune. The state’s provider directory lists more than 1,700 housing stabilization providers and DHS data shows more than 700 companies were paid to provide the services last year.

People applying to be a housing stabilization provider needed to pay a fee and fill out documents, including an assurance statement attesting they meet requirements, like having knowledge of local housing resources and passing an online training class.

Some companies started billing significant sums within a year of startup, a Star Tribune review of billing data and Secretary of State business filings found.

Investigators recently searched five companies suspected of fraud. Those businesses started billing for housing stabilization services at different points. Faladcare was the first to enroll and received about $3,800 in 2020, escalating to hundreds of thousands a year by 2022, according to DHS data. The other four started billing in 2022 or 2023.

Search warrant affidavits are filled with stories of clients who said they got little or no help, despite the companies billing Medicaid for services.

One provider, Leo Human Services, reported spending an hour researching housing options for a client who was about age 40, but notes consisted of “little more than identifying a single apartment complex,” which turned out to be for the elderly, according to the search warrant affidavit. The following day Leo Human Services billed for another hour, and notes showed they did little more than look up the same complex.

In another case, a woman said the only services she received from a company was when a man dropped off a vacuum at her home. The business, Brilliant Minds LLC, billed for $2,000 in services purportedly provided to her over several months.

Such stories weren’t news to some other providers working with people who are homeless.

At the Listening House, a drop-in resource center in St. Paul, executive director Molly Jalma said that people who didn’t seem legitimate started coming to their center in 2022 trying to sign people up for Housing Stabilization Services. She said as a result they expanded how they vet those wanting to provide services to their clients.

“It’s heartbreaking,” she said. “The people who are the most vulnerable in our community, who need the most help, they have become a business opportunity for others.”

Officials with housing and homeless organizations, several of whom asked not to be named for fear of retribution, said they raised concerns with DHS officials over the past couple of years but it wasn’t clear what the state did afterward.

Hennepin County Housing Stability Director David Hewitt said staffers began hearing such concerns in the summer of 2022. They passed them on to DHS informally at first and then DHS shared an email address for counties and others to notify the state of issues, he said.

“Our direction was clear: If we see something, say something,” Hewitt said.

Asked when DHS first heard about fraud concerns and what has happened since, Grumdahl did not comment on when they first knew of the problems. But he said the agency’s Office of Inspector General builds detailed investigations to uncover fraud, waste and abuse. The cases take “considerable time” and need to be kept private to ensure their integrity, he added in a statement.

The search warrants that were executed resulted from relationships between the agency and law enforcement partners, he said, and DHS is continuing to investigate.

Potential fraud is not the only issue with Housing Stabilization Services. People in the housing industry said a multitude of problems have deterred some good providers from participating.

Organizations described confusion with the program from the get-go and said there was not enough state staff to answer questions. The lack of staff later resulted in monthslong backlogs in processing client applications.

They also said a requirement that organizations bill in 15-minute service increments has been hard to work with, and the program has complicated some agencies’ ability to provide supportive services through another state housing program.

Nancy Cashman, the organization’s executive director, said the state inadvertently set up a program with a lot of hurdles that made it difficult to do the work. Meanwhile, there was a failure to monitor and report how providers used the money.

“It’s a really great opportunity,” she said. “If we can streamline it and also have accountability, it could make a tremendous difference for people who are living on the streets in Minnesota.”

Changes to the program have been rolling out this summer, including making providers subject to unannounced site checks and fingerprinting owners, as well as pre-enrollment risk assessments that look at a provider’s history, internal controls and their capability and capacity to do the work. Starting Aug. 1, organizations must submit additional documentation, including having clients sign off to verify services.

Housing Stabilization Services is also the first program where DHS is using new data analytics tools to search for risk factors like billing anomalies, said DHS temporary Commissioner Shireen Gandhi. She said they are investigating providers based on those findings rather than just relying on tips.

“Just as the fraudsters are becoming more sophisticated, we need to be become more sophisticated too,” she said, stressing that such programs must be protected. ”Done well, these programs are incredibly important for the health and welfare of Minnesotans.”