When Poverty Is Profitable

A new book details how foster-care agencies and other safety-net programs hire consultants to maximize their funding and divert it from its intended use.

Carlo Allegri / Reuters

America’s safety-net programs are meant to help the poorest and most vulnerable access meet their basic needs—food, medical care, and safe housing—and there’s an ongoing debate about just how robust and successful these programs are.

In his new book, The Poverty Industry: The Exploitation of America’s Most Vulnerable Citizens, Daniel L. Hatcher, suggests that the problems plaguing programs such as foster care and Medicaid are deeper and more troubling than most realize. Hatcher, a professor at the University of Baltimore’s School of Law, writes:

States and their human service agencies are partnering with private companies to form a vast poverty industry, turning America’s most vulnerable populations into a source of revenue … The resulting industry is strip-mining billions in federal aid and other funds from impoverished families, abused and neglected children, and the disabled and elderly poor.

How does this happen? Hatcher uses the example of the foster-care system, where some states enlist the help of private consultants to come up with strategies to maximize disability claims for children in its care. That results in higher payouts from the federal government. But instead of using that money to care for children, the money is diverted, and used for other things the state deems necessary.

I spoke with Hatcher about his book, how states and private groups help abuse the safety net, and how to prevent such abuses. The interview below has been lightly edited for clarity.

Gillian B. White: One of the central themes you discuss in the book is this premise of an “iron triangle” related to poverty.  The term “iron triangle” is a general way of describing the intersecting relationship between government agencies, special-interest groups, and legislators. Can you walk me through how this concept applies to the mechanisms that are supposed to protect the poorest Americans?

Daniel L. Hatcher: With poverty's iron triangle, you have the relationship between the federal government, between the state government, and between the poverty-industry private contractors. Funds that are intended to help vulnerable populations are misused, either the states are misusing the funds and routing them into general coffers or sometimes other uses. And a significant amount of that federal aid is used to pay the private contractors.

White: You cite some pretty disturbing, egregious first-hand examples of poor people being gamed by the very services meant to protect them. How did you happen upon this information?

Hatcher: My first job at Legal Aid was representing children in the Baltimore City foster-care system. Over a year, I probably represented 300 children or more. That experience has stayed with me: Seeing what these children are going through both while they're in foster care, what brought them into foster care, and how they're struggling when they leave foster care. I encountered this practice where the agencies that exist to serve foster children are taking their resources. It really spurred me into action.

White: How does this exploitation work, say in the case of foster services?

Hatcher: You have foster agencies across the country—these agencies that exist to serve abused, neglected children—partnering with revenue-maximization consultants. One of the strategies they use is to go after children’s survivor and disability benefits. They hire contractors to try to increase the number of children in their care determined to be disabled, or target those children that have deceased parents. It’s not to provide additional resources to those children or actually use those services to improve services for the child's conditions, but to take the money as a state-revenue source. Then contractors will cut sometimes a contingency fee, sometimes a flat fee, depending on the arrangements.

I represented a former foster child in Maryland. He had been in foster care since he was 12. His father died while he was in foster care. The father worked, paid into the system, and so his child earned a survivor benefit, which is much like life insurance. The state applied for that money on his behalf and applied to become a representative payee to take control of the money. And then took the money. The foster-care agency took his money without even telling him he had this benefit that his father had left him. So that harm is not only just taking a cash benefit from a maltreated child, but it's taking away a connection to a deceased parent that can have a vast emotional benefit.

White: And the foster-care system is just one example, right? Where else to these abuses exist?

Hatcher: What's most rampant are Medicaid maximization and diversion strategies. For these plans, states target nursing homes or hospitals that serve a disproportionate share of the poor, or schools with disabled children. They claim additional funds and then route the federal aid to general state coffers.

There are some states that are using the money as intended, but I look at the states that are, in my view, misusing federal aid. New Jersey, for example: You have the Christie administration forcing school districts—by statute —to participate in a statewide project, working with a private contractor to maximize the number of schoolchildren receiving school-based Medicaid. The Medicaid funds are intended to help provide for special-education and special services for those children. But when the schools participate, they often have to pay for the state’s share of costs to start with, and that administration’s budget is taking over 80 percent of the funds from the disabled-school children to bolster general state coffers.

White: How would such flagrant abuses manage to go unchecked?

Hatcher: Most people have no idea this is happening or they can't understand it when they read a report about this budget shell game.

Part of the problem is a lot of the economic theory behind fiscal federalism has ignored the relationship between government and private contractors, and ignored the fact that state governments are cash-strapped, so they're looking for money wherever they can get it. They're going after these sources of federal aid not to provide the aid services as intended, but as a general revenue mechanism.

White: What’s the solution? Is there one?

Hatcher: The regulations that are implemented in terms of how states use money need more teeth. I don't think that the federal government has been strong enough in making it absolutely clear that federal Medicaid funds are supposed to be used for their intended purposes. That could be done either through regulation or through legislation. Often the agencies already have the capacity under the current regulatory structure to do this. One concern is private contractors. You have states hiring private contractors to come up with all these illusory strategies to maximize federal-aid funds, and then the states will sometimes divert those funds to other use. Sometimes those very same private contractors are then hired by the federal government to try to reduce payout of federal-aid funds.

I think that the book provides strong evidence that block grants are a horrible idea. If you have a governor, under the current structure of Medicaid that includes complex, strict, regulatory requirements—in terms of how the money is supposed to be claimed and used—who's still finding ways to use budget shell games to maximize and divert funds, what would that governor do if you just hand him a blank check? We need to have simplified systems, to be sure, and greater monitoring to ensure that money is being used as intended. But a block grant would lead to greater misuse of aid funds intended for vulnerable populations.

White: Money is at the heart of all of this and you talk a lot about how states are cash strapped. How can that obstacle be overcome?

Hatcher: Fairer tax mechanisms to raise revenue that the states need are necessary in order to fund government. You have foster agencies that are so underfunded that they've reached the point that they're even looked to taking money from beneficiaries. That should be a huge red flag that something's wrong with the way our government is financed.

I don't think that the evidence and the research findings in the book support any conclusions to cut government aid. We're already incredibly underfunded in terms of the services that are provided to low-income individuals and children. If you have a governor that's misusing federal aid the answer isn't to cut federal aid—it's to stop the governor from misusing the federal aid.

White: Are you hopeful that these changes will actually happen?

Hatcher: Awareness is key here. It's very simple: a realignment of purpose. States and agencies that exist to serve vulnerable populations need to stay true to their reason for existing.

When we become aware that foster-care agencies are taking funds for abused and neglected children, hopefully our outrage will increase to a level where we stop the practices. When we become aware that a state like New York is receiving an F grade in nursing-home care, but is using nursing homes to leverage additional federal funds and then taking those monies away from the nursing homes, I hope that outrage will increase to the point where we curtail those practices.