Fraud, Waste, and Excess Profits

November 18, 2015

A report on Medicaid and Medicare fraud, excessive waste, and frivolous expenditures-all at the expense of those who suffer from psychiatric illness.

[[{"type":"media","view_mode":"media_crop","fid":"43366","attributes":{"alt":"","class":"media-image media-image-right","id":"media_crop_401790604418","media_crop_h":"0","media_crop_image_style":"-1","media_crop_instance":"4721","media_crop_rotate":"0","media_crop_scale_h":"200","media_crop_scale_w":"118","media_crop_w":"0","media_crop_x":"0","media_crop_y":"0","style":"float: right;","title":" ","typeof":"foaf:Image"}}]]On September 28, I co-authored a report estimating that between 10% and 20% of state mental health funds-$4 to $8 billion-are being lost to fraud, waste, and excess profits to for-profit managed care companies.1 This loss is important because even $4 billion, if it was not being lost, could buy 3 months of hospitalization for 112,000 individuals, 1 year of supported housing for 335,000 individuals, or 1 year of clozapine treatment for 667,000 individuals. There is thus a direct connection between such losses and the deterioration of public services for individuals with serious mental illnesses.

It was not always this way. At one time state mental health authorities directly controlled almost all of the states’ mental health expenditures because the money was spent on state-owned mental hospitals and, in states such as New Hampshire, on state-owned mental health centers. As recently as 1981, 63% of the state funds were still going to state hospitals. By 2009, however, the percent of state mental health funds going to state hospitals, and thus directly controlled by the state, had decreased to 26%, and in the intervening years it has continued to further decrease. Thus, the vast majority of state-controlled mental health funds, which in 2012 totaled $40 billion, support community mental health services mostly through Medicaid, Medicare, not–for-profit organizations and, increasingly, for-profit managed care companies.

What kind of fraud are we talking about? For Medicaid and Medicare fraud carried out by mental health providers, our study identified almost $1 billion in false claims in media studies reported in 2014 alone. A social worker in Charlotte billed for 64 hours of therapy in a single day. A mental health center in Baton Rouge billed Medicare for $258 million in fraudulent partial hospitalization claims; following a trial in 2014, one of the center’s owners was fined $43.5 million and sentenced to 7 years in jail. A psychiatrist at a mental health center in Miami was convicted for being part of a $55 million Medicare fraud; he was sentenced to 12 years in prison. In 2012, the former administrator of the Centers for Medicaid and Medicare Services estimated that approximately 10% of all Medicaid and Medicare funds are lost to fraud.2 In 2014, the former Inspector General of the federal Department of Health and Human Services claimed that “many health care fraud investigations believe mental health care givers, such as psychiatrists and psychologists, have the worst fraud records of all disciplines.”3

In addition to Medicaid and Medicare fraud, our study identified other examples of waste of mental illness funds. A recent example of such waste was in California where in 2004 voters approved a special tax specifically to help individuals diagnosed with serious mental illness. The tax has produced over $1 billion per year. However, some of the money was diverted to activities such as yoga, line dancing, therapeutic drumming, and community gardens. As the San Francisco Examiner noted: “Unfortunately, $1 out of every $5 may be funding mildly therapeutic programs for people who do not remotely suffer from serious illness-or may even be funding frivolous perks for government employees.”4

Perhaps the largest amount of state-controlled mental health funds, however, is being lost through excess profits taken by for-profit managed care companies. Such companies have proliferated since the 1980s when most states assigned health care responsibilities for Medicaid recipients to them. In 1995 the Wall Street Journal called for-profit managed care companies “extremely profitable” with “plenty of potential for additional growth.”5 Studies have reported that the administrative costs of for-profit psychiatric hospitals are 32% higher than non-profit psychiatric hospitals and 83% higher than public psychiatric hosptials.6 According to data from the Kaiser Family Foundation, there are currently approximately 20 for-profit managed care companies that manage psychiatric (called “behavioral health”) patients, usually those receiving Medicaid, under state contracts in 39 states.

Scandals involving for-profit psychiatric care companies have been common. In Rhode Island, United Behavioral Health Systems was fined $100,000 for paying incentive bonuses to the company’s chief psychiatrist contingent on the company’s profits. In Iowa, Merit Behavioral Care was paid a “commission” of $880 for each adult who applied for, but was denied admission to, a psychiatric unit.

WellCare is an example of such a company. It began in 1985 with a contract for the managed care of Florida’s Medicaid patients. Under what is known as Florida’s 80/20 law, WellCare was required to spend 80% of the Medicaid premiums on mental health services but could keep the remaining 20% for administrative costs and profits. According to court documents, WellCare “allegedly set up a subsidiary to hide money from Florida regulators and falsified information on payments to doctors and mental health centers.”7,8 This criminal behavior came to light when a WellCare financial analyst became a whistleblower and began secretly recording conversations with WellCare executives. One company vice president was recorded claiming that WellCare was in fact keeping 50% of the Medicaid premiums. In 2007, the FBI raided WellCare’s headquarters in Tampa, and fraud charges were brought against the company’s top executives. In a 2013 trial, 3 were convicted and sentenced to prison. WellCare has also paid over $400 million in restitution and fines. Despite WellCare’s past criminal behavior, it has continued in business, with Medicaid contracts in 9 states, including Florida.

In addition to WellCare, we examined some of the psychiatric activities of United Health Group, Centene, and Magellan Health Services in our report. We have no information, however, that would suggest that these companies are any better or worse than other for-profit managed care companies that are managing state contracts for psychiatric care.

So what can we learn from the loss of these mental health funds through fraud, waste, and excess profits? First, the loss of these funds is one reason why public mental health services in the US are so inadequate and appear to be getting worse. As noted above, even $4 billion can buy many needed services, including 1 year of Assertive Community Treatment team care for 267,000 individuals; 1 year of Fountain House clubhouse psychiatric services and rehabilitation for 364,000 individuals; or 1 year of Assertive Outpatient Treatment (AOT) for 800,000 individuals who have exhibited a need for such services. Such AOT services would cover the entire 350,000 individuals with serious mental illness in jails and state prisons as well as the 216,000 individuals with serious mental illness who are homeless.

Second, the main reason why the public mental illness system is failing so badly is that the incentives are all wrong. For states, the main incentive is to save state money by discharging patients and closing state hospital beds. Once patients are in the community, they are eligible for federal funds under Medicaid, Medicare, Supplemental Security Income, and Social Security Disability Insurance; the major portion of the cost of their care has thus effectively been shifted from the state to the federal government. A generally unrecognized fact about the deinstitutionalization movement is that not only were patients deinstitutionalized, but state funds were deinstitutionalized as well.

Many discharged patients in the 39 states where for-profit managed care companies operate receive outpatient care from these companies. But for-profit medical companies, by their nature as investor-owned enterprises, usually place the interest of their shareholders above the interest of patients in order to maximize their profits and stock price. As one critic phrased it, “What’s good for the shareholders is bad for patients.”9

Under most state contracts, for-profit companies receive a specified amount of money each month for each psychiatric patient assigned to them. This incentivizes them to provide treatment for the easiest and least expensive patients to treat and to provide as little treatment as possible for the most difficult and thus most expensive patients to treat. In practical terms, this means patients with depression, eating disorders, and anxiety disorders may receive good treatment, but those who have paranoid schizophrenia with poor medication compliance, or recurrent mania with substance abuse, are ignored whenever possible. If such patients end up homeless or incarcerated-as is often the case-they then cost the company nothing, since the company has already been paid for their care. And if the managed care company is not providing the services it should, states have little incentive to find this out because they would then have to either find another company or provide the services themselves. This is why states often are oblivious to egregious failures by managed care companies. The states’ motto is see no evil, hear no evil, and speak no evil.

Finally, the problem with the public mental health care system is not just a money problem, as is almost universally alleged. According to annual data collected by the National Association of State Mental Health Program Directors, the money available to state mental health agencies in 2012 was 36% more, in constant dollars, than was available in 1981. Thus, simply throwing more money at the problem will not necessarily solve it. The issue is not just how much money is available but rather how it is spent.

So what should be done? Our report makes several recommendations. The federal Health Care Fraud Prevention and Enforcement Action Team (HEAT Task Force) should be significantly expanded, since it has been shown to pay for itself. State mental health agencies should also exert active, assertive oversight over community programs. This should include vigorous examination of Medicaid and Medicare claims, unannounced audits of community mental health programs looking for theft and waste, and a prohibition on the use of for-profit managed care companies. Such corrective actions are unlikely to happen unless mental health advocacy groups and the public in general demand it.


Dr Torrey is a research psychiatrist who specializes in schizophrenia and bipolar disorder. He is founder of the Treatment Advocacy Center and Associate Director of the Stanley Medical Research Institute, which supports research on schizophrenia and bipolar disorder, and he is Professor of Psychiatry at the Uniformed Services University of the Health Sciences in Bethesda, MD.


1. Torrey EF, Jaffe DJ, Geller DJ, Lamb R. Fraud, waste and excess profits: the fate of money intended to treat people with serious mental illness. Mental Illness Policy Org. 2015. Accessed October 7, 2015.

2. The $272 billion swindle. The Economist. May 31, 2014; 26-27. Accessed October 7, 2015.

3. Kusserow R. Kusserow’s corner: mental health ranks high on fraud scale. 2014. Accessed October 7, 2015.

4. Funds meant for mental illness. The Examiner. 2012. Accessed October 7, 2015.

5. Hymovitz C, Pollack EJ. Cost cutting firms monitor couch time as therapists fret. Wall Street Journal. July 13, 1995:A1,A3.

6. Woolhandler S, Himmelstein DU. Costs of care and administration at for-profit and other hospitals in the United States. N Engl J Med. 1997;336:769-774. Accessed October 7, 2015.

7. Babcock C. Fraud trial for WellCare ex-CEO shows Medicaid abuse. Bloomberg Business. November 20, 2012. Accessed October 7, 2015.

8. Tillman J. Judge sentences former WellCare execs to prison in Medicaid fraud. Tampa Bay Times. May 19, 2014. Accessed October 7, 2015.

9. Martinez B. In Medicaid, private HMOs take a big, profitable, role. Wall Street Journal. November 15, 2006. Accessed October 7, 2015.