The Minnesota Welfare Fraud Story Is Really About a Broken Medicaid Bureaucracy

Federal Medicaid policy creates little incentive for states to stop potential fraudsters. Fixing that should be the priority, not demonizing Somali immigrants.

A sprawling welfare scheme that saw fraudsters steal over $9 billion in Minnesota is a damning indictment of a federal and state bureaucracy that failed at some of its most basic responsibilities to taxpayers.

That fraud is back at the top of the news this week after YouTuber Nick Shirley went viral with a 42-minute video in which he claims to be "investigating" the fraud scandal. In the video, Shirley knocks on the doors of several day care centers and demands to know whether the centers are engaged in fraud. It's a flashy piece of media, to be sure, and it caught fire over the Christmas weekend on YouTube and Twitter, where Shirley won praise from conservatives for covering a story that the mainstream media is supposedly refusing to touch.

But that is simply not true. Indeed, media outlets in Minnesota and around the country have been covering this story for months. Locally, the day care fraud story has been in the news for years—here's a Minnesota Public Radio article from 2015 about prosecutors targeting four potentially fraudulent day cares.

I bring this up not to make a point about media criticism—that's the realm of Reason's Robby Soave, who may have more to say about all this in the near future.

No, my point in bringing this up is to highlight how long state and federal officials have ignored obvious and recurring problems with the Medicaid-funded programs that are at the center of the Minnesota welfare fraud story. Look at that MPR article from 2015. It deals with four preschools that received funding through the Minnesota Child Care Assistance Program. You can probably guess what state-run program spent $4 million on the "Quality Learing Center," one of the daycare facilities featured heavily in Shirley's video.

In fairness, the Minnesota Child Care Assistance Program has a lot of company. So far, federal prosecutors have convicted 59 people and charged dozens more in various schemes that stole money from a wide range of programs, including ones aimed at feeding needy families and providing therapy for children with autism. One federal prosecutor suggested earlier this month that "half or more" of the $18 billion Minnesota has spent on Medicaid-funded welfare programs since 2018 might have been lost to fraud.

Minnesota Gov. Tim Walz, who is now scrambling to cover his butt after this scandal exploded in the middle of his reelection campaign, has ordered a state audit of 14 Medicaid-funded programs deemed by the federal Department of Health and Human Services to be at "high risk" of fraud. It seems likely that the scandal will grow as more fraud is uncovered, more charges are brought, and public awareness of the mess grows.

There's no doubt that the scandal has become a bigger story because of Walz, who gained national prominence last year as Kamala Harris' running mate, and because it presents an opportunity to scapegoat the entire Somali immigrant and Somali-American community in Minnesota for crimes committed by a tiny fraction of those individuals.

Still, the real problem here is a much more boring and less partisan one, and it starts with Medicaid.

Technically, Medicaid is a joint federal-state program, but the federal government's share has grown dramatically in recent decades while the state funding has flatlined. That's due to two provisions in federal law. First, there is the federal medical assistance percentage (FMAP) rate, which varies by state and program. By law, a state's FMAP rate can be no less than 50 percent and no more than 83 percent.

Second, and thanks to the Medicaid expansion included in the Affordable Care Act (ACA), Medicaid services provided to enrollees covered by the ACA are funded at 90 percent by the federal government.

Regardless of the exact math, this cost-sharing scheme creates two correlated problems.

First, it incentivizes states to come up with new Medicaid programs—for every dollar that state lawmakers agree to spend, they get several "free" dollars from the federal government to help pad the budget. In Minnesota, for example, only 42 percent of Medicaid spending is funded by the state.

The second problem is that states have little incentive to police the Medicaid spending they oversee. Governments are always bad at spotting fraud because they are spending other people's money, but the Medicaid matching grants double down on that problem: Most of the dollars being spent are not just someone else's money; they are coming from another government's budget.

Think about the fact that state and federal prosecutors have been trying to bust fraudulent preschools and other Medicaid fraud schemes in Minnesota for more than a decade. And yet, there are always more. Law enforcement is doing its best, but the problem seems to be that the state's welfare bureaucracy is doing a terrible job of stopping the scammers in the first place.

The more you look at what prosecutors are saying about the latest fraud charges and convictions, the more obvious this conclusion becomes. Earlier this month, Assistant U.S. Attorney Joe Thompson told reporters that two men from Philadelphia heard there was "easy money" to be made by scamming Minnesota's Housing Stabilization Services program, so they traveled to the state, enrolled their businesses, went back to Philadelphia, and filed fraudulent claims from there.

Thompson called that "fraud tourism," but I see it more as the type of thing that should have been easily blocked if someone, anyone, in the Minnesota Housing Stabilization Services system was paying attention.

In fact, there was so much fraud in that one program that the state pulled the plug on it in August. And for good reason. As the Minneapolis Star-Tribune reported in July (further proof that local media were not ignoring this story), the Housing Stabilization Services program was expected to cost about $2.6 million annually when it was created in 2017. By 2024, it was costing the state (and, thanks to Medicaid, federal taxpayers too) $107 million, and over 700 companies were on the dole.

This is not just a problem in Minnesota either. Medicaid fraud is remarkably common. The federal departments of Justice and Health and Human Services run a joint program to catch fraudsters, and in 2024 alone it accounted for 1,151 convictions that recovered almost $1.4 billion.

Indeed, maybe the most noteworthy part of the Minnesota welfare fraud story is that it became such a big story at all. Again, I assume that's because these alleged frauds revolve around a pair of politically convenient topics: the Somali immigrant community in Minnesota and the state's hapless governor.

Anyone who wants to stop Medicaid fraud should focus less on scoring partisan political points or demonizing immigrants and more on the boring work of fixing federal policy.

Telling states to pay for a larger share of their own Medicaid spending seems like an obvious step in the right direction. It would give state officials—from governors like Walz all the way down to the lowest-ranking bureaucrat—a stronger incentive to prevent waste and fraud in the first place. It would reduce the burden placed on out-of-state taxpayers when states with lax enforcement allow fraud like this to occur.

As a bonus, it would also help reduce the federal budget deficit. Simply reducing the higher matching rate paid for enrollees covered by the ACA could save $500 billion over a decade, according to the Congressional Budget Office.

Then, of course, you also have to do the hard work of actually ensuring that welfare dollars are targeting the truly needy. Bureaucracies will never be perfect, but it sure seems like the one in Minnesota could be greatly improved.