By Marjorie Censer
Monday, August 30, 2010; 11
The state of North Carolina wanted to partner with IBM to get back Medicaid payments it had made on improper claims, but it faced what seemed an impassable obstacle: no money to allocate for the needed software or services, according to IBM.
In a traditional contracting arrangement, the conversation would stop there. But in this case, the technology firm agreed to take on the job of analyzing the state's Medicaid payments for overbilling and to take a cut of what it found.
Now, IBM has a yearlong contract to comb through six years of data -- the statute of limitations is six years -- to find questionable payments that the state can investigate and, if inaccurate, demand be repaid.
The program is just one of many through which contractors are helping governments recoup lost assets and protect their money -- a need that has only become more pressing following the recession and tightening of state and local budgets.
The efforts vary. Shaun C. Barry, director for fraud solutions in IBM's public sector business, said his company began working with the state of New York after its tax department estimated it was losing $1 billion annually in improper tax refunds.
So IBM built a predictive model that would score every refund request on the likelihood it was valid -- the 4 percent of returns deemed the most questionable were rejected outright. Investigators examined others considered high risk to decide whether or not they were valid.
Over the last five years, the state has denied $889 million in refunds, Barry said, even taking into account successful appeals. Today, the state continues to run the program on its own.
William Comiskey, deputy commissioner in the state's Office of Tax Enforcement, said the key to the program is its ability to rapidly evaluate refund requests while the money is still in hand -- meaning the office doesn't have to try to recoup payments made based on improper claims.
"It's something that every state should have," he said. "It's a true government success story."
Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, which analyzes the government market, said the idea of helping government agencies prevent or recoup improper payments is not new, but that it's gained traction.
"It is becoming, I think, more important not only at the federal level, but especially at the state and local level, because they have been really hurting on revenue," he said.
Basing a contractor's fees on the recouped money it identifies may also become more common, said Angie Petty, a principal analyst at Input, which also analyzes the government market.
Though the scenario doesn't work in all situations, she said many government agencies are open to the idea.
According to Bjorklund, those types of partnerships are more common with state and local governments, because federal laws are more constraining. If the model succeeds in one state, it could expand rapidly, he added.
If "they test a concept say in the state of Kansas ... they're going to go try and sell it to Nebraska," Bjorklund said.
In the case of North Carolina, the state agreed to give IBM 10 percent of the amount it demanded to be repaid in letters sent to violators. The minimum contract value was set at $1.5 million, the maximum at $6 million. The state estimated it will find $54 million to recoup.
Barry said he expects the alternate payment structure to become increasingly popular.
"Not all government leaders have an appetite for that kind of shared risk, but for those that do ... it will be an option they take much more seriously," he said.
LexisNexis, too, is seeking to expand its role in helping the government weed out fraud. Andy Bucholz, director of tax and revenue markets at LexisNexis Advanced Government Solutions, is overseeing the pilot of a homestead exemption fraud detection solution.
The product is meant to help local governments identify individuals who improperly file for a homestead exemption, a tax exemption meant to protect homeowners from rising property taxes or other circumstances that might force them to lose their homes. The exemption is applicable only at a primary residence, and homeowners can't claim the exemption for more than one home.
In Hallandale Beach, Fla., where vacation homes are hardly unusual, LexisNexis turned up more than 600 problematic cases, said Ronald J. Cacciatore of the Broward County Property Appraiser's Office.
"I think we're more susceptible because we're South Florida," he said. "A lot of people own second homes here."
LexisNexis ran the program in Hallandale Beach as a pilot -- meaning it didn't cost Broward County anything. But the company was able to identify that 6.9 percent of the 8,900 homes improperly claimed the exemption.
As a result, the city identified $1.2 million in back taxes and penalties it is owed and put about $39 million worth of assessed value back on its tax rolls, Cacciatore said. That money is particularly needed in Florida, where the real estate market's downturn has been especially evident.
LexisNexis's product, which links public data, news articles and other information sources to determine whether an individual is truly eligible for the credit, is still being piloted in Florida, Georgia, South Carolina and Texas. It typically finds 5 percent fraud, according to the company.
"At this point, [governments have] already turned over the normal rocks to look for cash," Bucholz said. "Now, they're [saying], 'We need to turn over rocks, and we don't have the ability to turn them over and we don't know where they are.' "