Arizona's Medicaid fraud may have cost taxpayers more than $2 billion, legislator says

Fraudulent scams that targeted Arizona's Indigenous communities may have cost taxpayers more than $2 billion, a state legislative subcommittee heard Thursday.

For some Arizonans, many of them Native Americans, promises of recovery from drug and alcohol dependence "were pure fantasy," state Rep. Matt Gress, R-Phoenix, told the House Subcommittee on Budgetary Funding Formulas.

He spoke during a hearing that focused on the massive fraud of money from the state's Medicaid program, known as the Arizona Health Care Cost Containment System.

"Hundreds of providers that we know of right now dangled hope for people suffering only to create a fraudulent, billable event to charge our state's Medicaid program," said Gress, the subcommittee's chair. "According to recent testimony before the full appropriations committee, this fraud may have cost taxpayers more than $2 billion over the last three years."

The fraud is often referred to as Arizona's "Sober Living Scandal," and is what Attorney General Kris Mayes has called "a stunning failure of government" and "one of the biggest scandals in the history of the state of Arizona when it comes to our government."

The schemes to defraud AHCCCS appear to have evolved over time, but one of the more common ways that providers appear to have gamed the system was by allegedly providing outpatient behavioral health care as a registered AHCCCS provider and treating patients housed in what were often unlicensed facilities known as sober living homes.

In many cases, there was "ghost billing," or billing AHCCCS for services that were never provided, leaving vulnerable people trying to recover from drug or alcohol dependence without the help they needed, state officials say. And in some cases, their conditions worsened. There are reports of people going missing and dying as a result of the scam.

About 371 sober living homes are licensed through the Arizona Department of Health Services but unlicensed facilities exist, too. While it's illegal for a facility that's not licensed as a hospital in Arizona to call itself a hospital, for example, the same is not true for sober living facilities. Sober living providers across the country have been growing exponentially as the country's opioid crisis, which has now moved into fentanyl, persists.

It's difficult to pinpoint an exact dollar amount for the toll of the fraud since many of the cases remain under investigation, but current estimates are a range of $1.5 to $2.5 billion over about two years, AHCCCS director Carmen Heredia said in an interview.

Heredia took the helm of AHCCCS in January 2023, which was also when Democratic Gov. Katie Hobbs and Mayes, also a Democrat, assumed office.

Sober living: Mass evictions at Mesa townhome complex tied to crackdown on sober living operator

Indigenous health care program enrolled non-indigenous people

State officials have said bad actors fleeced AHCCCS primarily by targeting its American Indian Health Program, which makes the dollar amount of the fraud even more staggering because the program comprises less than 10% of enrolled AHCCCS members.

The enrollment in the American Indian Health Program is 129,535, the most recent AHCCCS records show, just 6% of the total AHCCCS enrollment of 2.2 million people.

Heredia testified that enrollment problems with its American Indian Health Program were rampant and that many of the people who enrolled in the program and were targeted by the scam weren't even indigenous.

The exact years when the fraud happened are not entirely clear but indictments related to the scandal pinpoint fake billing associated with behavioral health programs going at least as far back as January 2019 when Republican Doug Ducey was governor and Republican Mark Brnovich was the attorney general and Jami Snyder was in charge of the AHCCCS program.

Hobbs, Heredia and Mayes made a public announcement about the fraud in May and Heredia said AHCCCS was putting measures in place to prevent it from happening again.

The American Indian Health Program is fee-for-service, which means providers bill AHCCCS directly for individual services rather than offering managed care services under a fixed budget. The program is flexible and enables those enrolled to receive health care services from Indian Health Service facilities as well as from AHCCCS-registered providers.

Also staggering is the way the fraud schemes worked, where vulnerable patients were financial assets, used and bartered for the benefit of the people stealing taxpayer dollars. Allegations include reports of people in white vans targeting tribal members on Arizona reservations, in some cases kidnapping them, giving them drugs and alcohol, and holding them in unlicensed sober living facilities against their will, for financial gain.

"It's very sad," Heredia told the subcommittee. "Is that technically human trafficking? It certainly looks like human trafficking. ... It is completely outrageous and the stories are horrific."

Has AHCCCS fraud crackdown been too severe?

Most people enrolled in AHCCCS get care through managed care organizations. Some of the people targeted by scammers were managed care patients, but they were not the primary targets.

Managed care organizations tend to have strong protections against fraud and abuse, but the fraudsters apparently detected weakness in the AHCCCS fee-for-service model. Mayes' office says some of the phony clinics were getting more than $1,000 per patient per day from clinics that didn't provide the treatment they promised. In some cases, no treatment was provided.

AHCCCS has since suspended payments to about 298 providers, which Heredia noted is not a lot given that the agency has 93,000 registered providers. Still, Gress said he's concerned that provider suspensions, combined with a moratorium on new enrollment for three provider types until at least June, could mean people with behavioral health needs don't get the services they need.

Arizona should be balancing the need to bring bad actors to justice with what appears to be a "government overcorrection" in trying to stop more scams, Gress said.

The subcommittee heard testimony that legitimate providers have been wrongfully accused of fraud as part of the AHCCCS crackdown and because of the overwhelming volume of suspected fraud, the administrative process to appeal suspensions has been severely delayed.

AHCCCS is a $23.7 billion program that primarily provides health coverage to low-income people typically living at about 138% or less of the federal poverty level and to people with disabilities, though financial thresholds for various programs vary. An annual income of $20,120 per year for a single person is 138% of the federal poverty level and for a family of three it's an annual household income of $34,307. The agency's budget has doubled since 2017.

Reach health-care reporter Stephanie Innes at stephanie.innes@gannett.com or at 480-313-3775. Follow her on X, formerly known as Twitter @stephanieinnes.

This article originally appeared on Arizona Republic: Arizona sober living scandal may have cost taxpayers $2 billion-plus