Congressional Inquiry Reveals Systemic Fraud in State-Run Federal Programs

Billions of dollars in taxpayer funds continue to be siphoned from state-administered federal programs due to outdated technology, a lack of political will, and systemic design flaws. That was the central conclusion from a hearing held yesterday by the Subcommittee on Government Operations, titled “Fraud Prevention: Understanding Fraud in Federally Funded Programs Run by the States.” Lawmakers and expert witnesses examined how the current structure incentivizes states to maximize federal funding streams without implementing adequate safeguards, leading to significant losses that often go unrecovered.

Background and Context

The hearing highlighted the sheer scale of the financial risk facing the United States. According to Seto Bagdoyan, Director of Forensic Audits and Investigative Services at the U.S. Government Accountability Office (GAO), federal assistance programs administered by states exceed $1 trillion in annual spending, rendering them inherently vulnerable to exploitation. Bagdoyan noted that during the pandemic, the GAO estimated that approximately $135 billion in unemployment insurance benefits—roughly 15% of total spending—was lost to fraud due to poor controls. He testified that most of these losses were never recovered, underscoring what he described as a fundamental failure by federal and state agencies to acknowledge the scale of the problem.

Key Figures and Entities

Witnesses described a landscape where accountability is often fragmented across different levels of government. Allison Ball, Auditor of Public Accounts for the Commonwealth of Kentucky, provided specific data points regarding her state’s performance. While Kentucky successfully reduced SNAP payment error rates from 9.1% to 3.5% in one year, Ball testified that other programs remain plagued by inefficiency, citing a 47.5% error rate in the Medicaid Long Term Care Program and a 28.5% error rate in the Medicare Savings Program.

Ball also addressed political obstacles, stating that cooperation from the office of Governor Andy Beshear had been disappointing. She told the committee that while “boots on the ground” employees were helpful, rising levels of leadership were resistant to providing information, often dismissing the findings as common issues elsewhere rather than addressing them directly. Dr. O.J. Oleka, CEO of the State Financial Officers Foundation, pointed to a disconnect between state financial officers and federal oversight bodies, arguing that while state officers routinely identify fraud, there is no formal mechanism to share this intelligence with federal Inspectors General.

Legal and Financial Mechanisms

A significant portion of the testimony focused on the mechanisms—or lack thereof—used to verify eligibility. Bagdoyan identified the absence of preventative controls, such as identity verification and duplicate benefit tracking, as primary risk factors. He criticized the reliance on “self-attestation,” a process where applicants simply declare their eligibility without immediate verification, calling it the “bane of any auditor.” Dr. Oleka echoed this sentiment, noting that federal programs like Medicaid and Unemployment Insurance still rely heavily on self-attestation rather than real-time verification of income, residency, and citizenship.

Bob Westbrook, former Executive Director of the Pandemic Response Accountability Committee (PRAC), discussed the potential of utilizing massive datasets, such as the PRAC’s 7.7 billion data points, in conjunction with the Department of Treasury’s Do Not Pay system. Westbrook noted that currently, the system is often reactive (“pay and chase”) rather than preventative, and emphasized the need for centralized government data systems while acknowledging the privacy risks involved.

International Implications and Policy Response

While the hearing focused on domestic programs, the implications touch on broader cybersecurity and data integrity concerns. Westbrook warned that centralized data repositories could become targets for international fraud rings if not secured, noting that personal information is often sold cheaply on the dark web following government hacks. He stressed that protecting personal information is as critical as preventing financial loss.

In terms of policy response, witnesses recommended legislative and structural changes. Dr. Oleka proposed amending the Inspector General Act to mandate standing liaisons with state financial officers and data sharing protocols. Additionally, he called for expanding performance-based funding, suggesting that states should not receive full federal matching funds regardless of how effectively they verify eligibility or reduce waste. He also recommended the creation of a single, real-time public dashboard to allow taxpayers to see exactly where their money is going and how much is lost to fraud.

Sources

This report is based on the House Committee on Oversight and Accountability hearing titled “Fraud Prevention: Understanding Fraud in Federally Funded Programs Run by the States,” testimonies from the U.S. Government Accountability Office, the Kentucky Auditor of Public Accounts, and the State Financial Officers Foundation.