More than 50 million persons enrolled in the  Medicaid program in fiscal year 2006. In fiscal year 2006, according to  CMS, total outlays for Medicaid (federal and state) were approximately  $324 billion, of which about $185 billion was paid by the federal  government. Centers for Medicare & Medicaid Services

Although the federal government establishes general guidelines for the  Medicaid program, requirements are established by each state. Magnitude of Unpaid Federal Taxes of Medicaid Providers

Our analysis found that over 30,000 Medicaid providers at the selected  states had over $1 billion in unpaid federal taxes as of September 30,  2006. The amount of unpaid federal taxes we identified among Medicaid  providers is likely understated because (1) we intentionally limited our  scope to providers with agreed-to federal tax debt for tax periods prior to  2006, and (2) the IRS taxpayer data reflect only the amount of unpaid  taxes either reported by the taxpayer on a tax return or assessed by IRS  through its various enforcement programs and thus the unpaid tax debt  amount does not include entities for which IRS had not identified that they  did not file tax returns or underreported their income. Examples of Extent and Nature of Medicaid Providers’ Abusive and Potentially Criminal Activity Related to the Federal Tax System

For all 25 cases that we audited and investigated, we confirmed that their  activities were abusive and in many instances found criminal activity  related to the federal tax system. However, rather than fulfill their role as “trustees” of this  money and forward it to IRS, these Medicaid providers diverted the money  for other purposes, including their own salaries. The pharmacy received nearly $100,000 in Medicaid  payments during fiscal year 2006. Providers with Unpaid Federal Taxes Are Not Prohibited from Enrolling or Receiving Payments from Medicaid

CMS and the selected states do not prevent health care providers who  have tax debts from enrolling in or receiving payments from Medicaid. CMS has not developed regulations to require states to (1) screen health  care providers for unpaid taxes and (2) obtain consent for IRS disclosure  of federal tax debts. CMS officials stated that such a requirement  could be a burden to the states in their enrollment of providers and could  adversely impact states’ ability to provide health care to the poor. If there had been an effective levy program in place, we estimate that the  selected states could have levied payments for the federal government and  collected between $70 million to about $160 million of unpaid federal  taxes during fiscal year 2006. Many of the individuals involved in  our cases have consistently not paid their taxes yet have received millions  of dollars in Medicaid payments and have faced no criminal consequences. We selected the  states of California, Colorado, Florida, Maryland, New York, Pennsylvania,  and Texas based on the magnitude of payments made to Medicaid  providers and the geographical location of those states. We obtained and  analyzed Internal Revenue Service (IRS) tax debt data as of September 30,  2006. To identify indications of abuse or potentially criminal activity, we  selected 25 Medicaid providers for a detailed audit and investigation. The case studies involving businesses  primarily involved unpaid payroll taxes.
Why GAO Did This Study

In fiscal year 2006, outlays for Medicaid were about $324 billion; about $185 billion was paid by the federal government. Because GAO previously identified abusive and criminal activity associated with government contractors owing billions of dollars in federal taxes, the subcommittee requested GAO expand our work to Medicaid providers. GAO was asked to (1) determine if Medicaid providers have unpaid federal taxes, and if so, the magnitude of such debts; (2) identify examples of Medicaid providers that have engaged in abusive or criminal activities; and (3) determine whether the Centers for Medicare & Medicaid Services (CMS) and the states prevent health care providers with tax problems from enrolling in Medicaid or participating in the continuous levy program to pay federal tax debts. To perform this work, GAO analyzed tax data from the Internal Revenue Service (IRS) and Medicaid data from seven selected states based on magnitude of Medicaid payments and geography. GAO also performed additional investigative activities.

What GAO Found

Over 30,000 Medicaid providers, about 5 percent of those paid in fiscal year 2006, had over $1 billion of unpaid federal taxes. These 30,000 providers were identified from a nonrepresentative selection of providers from seven states: California, Colorado, Florida, Maryland, New York, Pennsylvania, and Texas. This $1 billion estimate is likely understated because some Medicaid providers have understated their income or not filed their tax returns. We selected 25 Medicaid providers with high federal tax debt as case studies for more in-depth investigation of the extent and nature of abuse and criminal activity. For all 25 cases we found abusive and related criminal activity, including failure to remit individual income taxes or payroll taxes to IRS. Rather than fulfill their role as "trustees" of federal payroll tax funds and forward them to IRS, these providers diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Individuals associated with some of these providers diverted the payroll tax money for their own benefit or to help fund their businesses. Many of these individuals accumulated substantial assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. In addition, some case studies involved businesses that were sanctioned for substandard care of their patients. Despite their abusive and criminal activity, these 25 providers received Medicaid payments ranging from about $100,000 to about $39 million in fiscal year 2006. CMS and our selected states do not prevent health care providers who have federal tax debts from enrolling in Medicaid. CMS officials stated that such a requirement for screening potential providers for unpaid taxes could adversely impact states' ability to provide health care to low income people. Further, federal law generally prohibits the disclosure of taxpayer data to CMS and states. No tax debt owed by Medicaid providers has ever been collected through the continuous levy program. During our audit, IRS had not made a determination on whether Medicaid payments are considered "federal payments" and thus eligible for its continuous levy program. For fiscal year 2006, if an effective levy was in place for the seven selected states, GAO estimates that the federal government could have collected between $70 million and $160 million.