Want to Close State Budget Deficits? Start by Reducing Fraud

Most state governments are facing their worst budget deficits in history; the underfunding of state pensions alone could reach $3 trillion, according to recent reports. This coupled with unfunded or underfunded healthcare liabilities, flat or lower tax revenues, and smaller federal outlays will add to the budget gaps states face.

Against this dire backdrop, lawmakers in state capitals around the nation will soon be voting on their 2012 budgets, considering the traditionally limited range of actions, from tax increases to cuts in services.

They need all the help they can get, especially in the face of growing popular sentiment that traditional methods are no longer sufficient. In fact, citizens want neither of the standard responses – tax increases or a reduction in teachers or service. We need another way forward, and fortunately, at least one is emerging. It’s a big one, and it’s a worthy target – systematically shutting down sources of fraud in the system.

Tax collection is one area that can benefit dramatically from newly available technological advances – which in effect, find the outliers – the needles in the haystack of millions of returns. And beyond criminal activity, the average state loses billions of dollars every year in taxes that are just delinquent. But new analytics technologies can help governments identify the best ways to collect.

A few states have started reaping the benefits. The New York State Department of Taxation and Finance, which collects more than $3 billion in annual tax revenue through its compliance efforts, has been using analytical software applications since 2004 to identify questionable refund claims, resulting in savings of more than a billion dollars.

Now, it is using a new system that automatically helps tax agents optimize their time. For example, it determines whether the next collection attempt should be a letter, a phone call or a personal visit, while weighing each action against the potential result. In this way, the state has recovered $83 million in delinquent taxes since the system was deployed in 2010.

It isn’t just about collecting more money. These advanced techniques enable governments to be much smarter about identifying the cheaters while leaving alone the vast majority of citizens who are honest.

Medicare can also benefit from new technologies. Improper payments in Medicare programs alone cost nearly $50 billion in 2010, according to the Government Accountability Office [GAO]. Some were caused by simple mistakes, while others were due to outright fraud.

Unfortunately, even today, the single most effective method of spotting fraud is often a tip from someone calling a hotline about suspected abuse. This will only identify a small fraction of the actual savings that are available across each state.

The upcoming expansion of Medicaid coverage to everyone under 133% of the federal poverty line – along with growing cost pressures on both Medicare and Medicaid – means that the government has more reason than ever to hold the line on costs and identify lawbreakers looking to beat the system.

This is more than just a federal problem. The fifty U.S. states administer the programs, and each state has its own set of challenges. For example, false claims for prosthetic limbs can be rampant in one state, while in another, misrepresentation of home health claims could be draining the coffers of another.

The problem is exacerbated by rules requiring the government to pay these claims within 30 days, making investigation on the front end extremely difficult. The result is often a game of “pay and chase” in which claims are paid and then later — sometimes years later — investigated for fraud. These after-the-fact collections are almost never paid in full.

Several states are beginning to use advanced systems to identify and go after improper payments. In one instance, North Carolina uses software to analyze the records of 60,000 health care providers and two million Medicaid recipients, immediately flagging suspicious cases. Expected savings are in the tens of millions of dollars.

Sophisticated analytics techniques are increasingly prevalent in all aspects of business and life. Analytics help health officials understand the spread of food-borne illnesses and enable financial institutions to better manage risk. Physicians use analytics to help diagnose diseases.

With all that’s on the line during the upcoming budgetary process, it’s time that lawmakers embrace innovative ways to reducing fraud in the system.

Todd Lavieri is General Manager of IBM Global Business Services.