A Rhode Island hospital kept billing for nursing home care and Medicaid kept writing checks, no questions asked.
No questions about costs as high as $550,000 per patient, per year. No questions about invoices for services rarely allowed at nursing homes, including physically and chemically restraining patients. No questions about why some medical patients remained hospitalized for years with diagnoses as benign as high blood pressure.
In fact, state-owned Eleanor Slater Hospital wasn’t a nursing home at all. It was a psychiatric facility where some patients remained locked up for years, and Medicaid doesn’t cover costs at psychiatric facilities with more than 16 beds.
So state health officials used different billing codes. And Gainwell Technologies LLC, the contractor hired by Rhode Island to process Medicaid claims and detect fraud, kept approving the payments.
By the time three hospital administrators exposed the scheme, it had gone on for more than a decade. The full scope remains unknown, but estimates of how much money taxpayers were bilked out of run into the hundreds of millions of dollars.
“I could not believe that it was so blatant,” said Jennifer White, a former ESH administrator and one of the whistleblowers.
As congressional leaders target what they claim to be $50 billion a year in Medicaid waste, a Bloomberg Law investigation found the federal government loses billions of dollars each year because state health departments and their Medicaid contractors routinely fail to catch, and sometimes ignore, even the most obvious fraud and misspending.
The federal government relies on states and their contractors to keep Medicaid billing honest. But rather than provide checks on each other, the two parties often work to approve as many claims as possible to keep federal Medicaid dollars flowing, even if it means letting waste or improper billing go unaddressed. That brings in money for the companies as well as states: In Rhode Island, for instance, Gainwell was paid more than $100 million between 2013 and 2020.
Claims-processing contractors have largely stayed under the radar amid the talk of cutting spending on Medicaid, which covers comprehensive health and long-term care for low-income populations and accounts for for one-fifth of US healthcare spending.
The biggest is Gainwell, based in Irving, Texas, which operates in more than two-thirds of US states. Gainwell and its affiliates have contracts touching about 70 million of the approximately 80 million Americans enrolled in Medicaid.
But its parent is also laboring under $5.8 billion in debt, the result of a series of mergers and acquisitions that gave it dominance in the market. That company has cut staff and sent hundreds of jobs overseas.
Gainwell asserts in bid proposals that it has the best data collection tools in the business and “takes a multi-layered approach to identify, address and prevent fraud at all levels.”
Two former Gainwell managers said that isn’t true, alleging in separate lawsuits that the company lies about its capabilities in order to win contracts and then promises more than it can deliver once the agreements are in hand. In New York, the state comptroller’s office identified “flaws” in the company’s ability to determine whether hundreds of millions of dollars in Medicaid claims should have been billed to private insurance.
Bloomberg Law repeatedly offered Gainwell opportunities to respond to the findings. The company said it doesn’t discuss client relationships and legal matters. The CEO didn’t return emails.
This account is based on Bloomberg Law’s review of lawsuits, financial audits, state government records, and interviews with more than a dozen people.
Honor System
If the federal government or Gainwell had taken even a passing look at Rhode Island’s submissions for payments, they would have flagged issues immediately, former hospital employees said in a lawsuit and in interviews.
Warning signs were everywhere, said Brian Daly, one of three former top officials at Eleanor Slater who filed a federal False Claims Act lawsuit against Gainwell that was unsealed last year.
Daly said he noticed problems on his first day at work in 2018 and became more disturbed the further he dug.
Eleanor Slater is designated as a long-term acute-care hospital by both the state’s health department and the federal Centers for Medicare & Medicaid Services, treating patients with both medical and mental health conditions. It has never been licensed as a nursing home, but records included in the lawsuit show hospital claims were filed with Medicaid under nursing-home billing codes.
The average length of stay at long-term acute care hospitals is roughly 25 days. Daly said he met a patient who had been housed at the hospital for 60 years. Gainwell should have caught this, he said.
“There’s nobody who does this who couldn’t look at a sheet and say, ‘this same name of this same patient has been coming here for 18 years, and it’s an acute care hospital, that’s peculiar,’” Daly said in an interview.
White, chief financial and operating officer for the state’s behavioral health department from May 2019 to July 2021 and ESH’s interim CEO for part of that time, said in an interview that “it took me three weeks” to notice issues with the billing. But officials at the state health department and the governor’s office told them to keep billing Medicaid, she said.
By billing as a nursing home, “ESH was able to avoid CMS scrutiny of its extended lengths of stay, inadequate care, and inflated costs,” the former hospital administrators said in their lawsuit.
In oral arguments, Gainwell attorney Jonathan Phillips of Gibson, Dunn & Crutcher LLP called his client “the very entity they defrauded.” After the hearing, Phillips wouldn’t say how Gainwell was defrauded or when it knew of the deception. Gainwell didn’t respond when asked what steps it took to notify authorities of the fraud.
Phillips said in court that the company’s contracts don’t require it to “independently evaluate” rates approved by the federal government. Gainwell argued in court filings that the company did what Rhode Island contracted it to do.
US District Judge
Still, Daly said, the prior authorizations and other billing reviews required under Gainwell’s contract should have alerted the company and the state to the improper billing.
“If they advertise that they’re supposed to be rooting out fraud, they should at least be reporting it,” Daly said.
Sorokin allowed the plaintiffs, represented by the Washington firm of Guttman, Buschner & Brooks PLLC, to refile an amended complaint, which the attorneys said will happen in the coming weeks.
CMS said in an email that it works with states to develop strategies to address root causes of improper payments. But the federal government doesn’t have bandwidth to oversee implementation of those contracts, creating what attorneys and former senior Medicaid advisers have described as an honor system.
“(Health and Human Services) just wants to know you hired a fraud auditor; they will never check to see how well the contractor or the states are actually doing,” said Rick Mountcastle, a former federal prosecutor who led investigations into
Rhode Island temporarily gave up its federal Medicaid reimbursements for Eleanor Slater between 2019 and part of 2021, forfeiting about $100 million, after the whistleblowers went public. In 2020, the state returned roughly $3.5 million in federal funds associated with Eleanor Slater overpayments, CMS said in an email. This, however, only covered billing for a five-week period in 2019, and roughly 5% of the approximately $60 million the hospital received from the federal government each year.
Kerri White, director of communications for Rhode Island’s health department, declined to comment, citing the litigation.
The Rhode Island attorney general’s office investigated allegations of patient abuse and billing issues at Eleanor Slater in 2021 and 2022, but couldn’t substantiate them and “that matter is closed,” Timothy Rondeau, the office’s communications director, said in an email.
Gainwell’s Role
Gainwell’s years in the field—through various name changes and mergers—have made it the dominant player among Medicaid fiscal-agent contractors, said Brett Friedman, who directed New York state Medicaid from August 2021 to June 2022.
While Gainwell has competitors—including Conduent Inc., Magellan Health Inc., and Optum Inc.—the company is “sort of the incumbent in most markets,” leading some states to say “New York uses Gainwell, so we’ll use Gainwell,” Friedman, now a partner at Ropes & Gray LLP, said in an interview.
The closely held company was expected to have negative cash flow of more than $100 million for fiscal year 2025. That stems from the cost of servicing its debt, much of which comes due in 2027, and unexpectedly high expenses implementing some new contracts, Standard & Poor’s wrote in an August 2024 report. Fitch Ratings was more upbeat in a March 11 report, citing Gainwell’s plan to cut expenses by $200 million. Fitch said that effort is about 75% completed.
Approve Everything
Ohio, which in fiscal 2023 received more than $23 billion in federal Medicaid funding, hired Gainwell in 2021 to run the program’s new Single Pharmacy Benefit Manager system. That contract, worth more than $150 million, replaced multiple PBMs that previously ran Medicaid prescription drug coverage. State leaders had boasted the program would help save more than $200 million per year.
The arrangement was fraught from the beginning, according to a 2023 lawsuit filed by RoxAnne Lockhart, a compliance officer hired to manage the startup. Lockhart claimed she was fired for elevating concerns that Gainwell failed to comply with federal regulations and terms of the contract.
“From its initial Medicaid contract proposal submission, [Gainwell] knowingly submitted falsified claims and/or records to the Ohio Department of Medicaid,” Lockhart alleged.
Gainwell had an analytics tool called FraudCapture that it used at the time in contracts with at least two other states. Lockhart said she requested access to it but was repeatedly denied by her managers. The Ohio program, therefore, lacked a fraud tool to “spot and respond timely to potential risks such as controlled substance abuse, members acquiring prescriptions under false pretenses or providers writing illegal prescriptions,” Lockhart argued in her lawsuit.
“Lockhart detailed numerous instances in which she not only identified but also vocally opposed fraudulent practices within Gainwell,” US District Judge Susan K. DeClercq wrote in an August opinion declining to dismiss the lawsuit. “Gainwell not only undermined the role of its compliance program, but also acted in a manner that could be perceived as retaliatory.”
Gainwell and Lockhart settled the case in January.
As the new system rolled out in October 2022, Gainwell pharmacist supervisor Brandon Haas was ordered by state and Gainwell leadership to approve all prescription drug claims, even those that didn’t have required prior authorization or, like weight loss drugs, weren’t eligible for Medicaid coverage, he alleged in a separate lawsuit.
Temporarily dropping prior authorization requirements made sense for Ohio at the start to ensure patients didn’t go without necessary medications, said Kip Piper, a longtime Medicaid insider who has worked for states and the federal CMS system. In California, one of Gainwell’s competitors, Magellan Health, had been accused of improperly holding up and denying Medicaid pharmacy claims during that program’s early 2022 rollout. This program underwent a transition last year when Prime Therapeutics acquired Magellan Rx.
But another motivation, Haas alleged, was a desire to maximize payments from the Medicaid Drug Rebate Program. States receive rebates from more than 780 drug manufacturers to partly offset their costs of dispensing medications.
He alleged that when he attempted to elevate concerns on suspected billing violations, a state Medicaid official said in a team meeting that they “really need those rebates.”
Haas said he was concerned the practice “could lead to patient safety issues.” When he complained, Ohio Medicaid requested he be barred from meetings on the contract and Gainwell complied, according to the lawsuit. He was fired a short time later.
Gainwell denied some of the allegations, but admitted in response to the lawsuit that “some problems arose during the ‘go live’ phase.” One of Ohio Medicaid’s leaders asked Haas not to do prior authorization reviews, it acknowledged, but the agency characterized those as second reviews of medications already approved for coverage.
Gainwell settled with Haas in October.
‘Doing Gainwell’s Work’
Issues with Gainwell’s performance and ability to detect waste, fraud, and abuse continued beyond the Ohio program’s rollout, according to documents obtained by Bloomberg Law through a public records request.
State officials complained repeatedly about a number of issues, including that it was “uncertain whether Gainwell has in place adequate program integrity processes for identifying and reporting potential fraud, waste, and abuse.”
In a January 2023 corrective action plan with Gainwell, Ohio Medicaid said the company only had one staff member working on member complaints—which it cited as a likely reason it couldn’t resolve grievances, including reports of patients unable to get their prescriptions filled, in a timely way.
The agency also said Gainwell fell so far behind in processing claims that state officials had to step in to help.
“ODM has been doing Gainwell’s work,” according to an April 2023 letter from ODM Deputy Director Steven T. Voigt to Gainwell. “These pharmacists have been pulled away from other important work of the agency to assist Gainwell with its backlog.”
In a July 2023 letter following up on the April demands, Ohio Medicaid said Gainwell had failed to take several corrective actions and faced a roughly $2 million fine if the issues weren’t quickly addressed.
But there’s no indication that the state followed up and Gainwell didn’t formally notify the state that it had addressed the issues—until Bloomberg Law, in early February, asked Ohio Medicaid for records of corrective action plans or performance improvement plans it issued to Gainwell.
Gainwell told the state in formal closure letters that the deficiencies mentioned in the notices were addressed within months of receiving them. The closure letters, however, were dated March 14, 2025.
That followed a Feb. 28 meeting between the state and Gainwell to “discuss and agree upon” a reporting timeline for 2025 reports on its data security and privacy, according to one of Gainwell’s letters. The state said in an October 2024 notice to Gainwell that it had learned someone at the company “inexplicably instructed” its outside auditor not to prepare 2024 reports.
Ohio Medicaid declined to comment on the Lockhart and Haas lawsuits, but spokesperson Stephanie O’Grady said in an email that the state “has closely monitored Gainwell’s performance and has been proactive in identifying issues.”
“Gainwell has worked with the state to correct identified issues,” O’Grady said, adding that the updated prescription drug benefits system “has streamlined service delivery to members, added increased transparency to the program, and reduced overall program costs by $140 million over two years.”
Contentious Audits
In some states, Gainwell’s contractual responsibilities include recovering overspent funds. Many Medicaid patients have some form of private insurance, and fiscal agents like Gainwell are supposed to identify and verify commercial insurance coverage to recover Medicaid payments that should have been billed to third parties.
Once an improper claim is approved and paid, “the chances of retrieving money from third party insurers after it’s been paid out are pretty low,” Mountcastle said.
The New York Comptroller’s office, in audits over the past decade, has found that Gainwell and its affiliate HMS failed to properly apply Medicaid rules, and that some of its systems were faulty when it came to recovering money from from third-party insurers.
New York spent almost $300 million for Medicaid pharmacy services over nearly five years without properly checking to see if private insurers should have been billed, the comptroller’s office found.
Gainwell recovered only a fraction of the money, in part because the company used “flawed and incomplete rationales” in its recovery methods, the comptroller’s office wrote. Gainwell and state Medicaid officials also made only “limited” efforts to recover payments, meaning “potentially tens of millions of dollars were never recouped,” according to a January 2024 letter from the comptroller to state health officials.
The state’s Office of the Medicaid Inspector General clashed with many of the comptroller’s assertions, often in written responses to the findings and recommendations.
One recommendation called for the health officials to “review the $292 million in Medicaid payments for pharmacy services to patients with [third party health insurance] we identified and ensure overpayments are appropriately recovered.”
On Jan. 2, 2023, the IG’s office responded that it and Gainwell “fundamentally disagree with the underlying assertions of this recommendation.”
In its 2023 annual report, New York’s inspector general said its work with HMS, a Gainwell company, resulted in $223 million recovered from third party insurers. The report did not specify what percentage of money was never recovered.
The inspector general argued the existence of third-party health insurance “does not mean that a Medicaid claim is recoverable,” adding that Gainwell’s third-party insurance edits are “thoughtfully developed and rigorously tested to identify claims for recovery, but also eliminate claims that were billed appropriately to Medicaid.”
Mountcastle said the inspector general response “doesn’t make any sense.”
“Instead of saying we will work with Gainwell to fix it, the IG is coming to their defense with ridiculous responses,” he said.
In an email response to questions, the New York Medicaid inspector general’s office said some of the complaints mentioned in the Ohio lawsuits “do not reflect New York’s experience.”
Systemic Solutions
Just by addressing claims processing, Congress and CMS could find billions in Medicaid savings without resorting to the kinds of immediate, massive cuts being debated that would withdraw coverage to millions of people, policy insiders and attorneys say.
Any broad-based solution for rooting out obvious fraud and waste requires altering the financial incentives for states and their contractors to look the other way, they say.
Because the federal government covers about 70% of Medicaid spending, or more than $600 billion annually, states and their contractors are often forced to decide which is more important: preventing fraud, waste, and abuse, or making sure patients’ claims pass through with limited disruptions, said Susan Banks, a partner at Holland & Knight LLP who counsels hospitals, health systems, and other providers on Medicaid compliance and reimbursement.
“That tension is unavoidable,” she said.
To try to limit the effects of that tension, CMS first has to come up with better measurements for waste, fraud, and abuse so Congress gets a complete understanding of the issue, said Piper, the longtime Medicaid insider.
In annual estimates to Congress, CMS has made clear that the majority of improper payments it reports are due to procedural errors, such as improper documentation in a beneficiary’s case file, and “do not necessarily indicate fraud or abuse.”
“Should it have been paid? Was it medically necessary? Was it an allowable cost that the insurer should have incurred or not? Those things are not reviewed,” Piper said.
The federal agency could require states to participate in regular audits with a dedicated team focused on tracking states’ work with vendors, from the procurement of the contract to its implementation, Piper said.
CMS could also require states to include language in their contracts that the companies will be subject to reviews on their billing, recoveries, and other activities. There would need to be strict penalties, including pre-determined damages, if contractors fail to comply, Piper said.
While there would be some cost to implement these requirements, Piper noted, CMS already has congressionally-appropriated funds for essential contractor and IT activities. For fiscal 2025, the agency has authority to spend $11 billion from this account.
Any findings that come up in a review—such as a company repeatedly denying claims or approving ones they shouldn’t be—could be reported to CMS for the agency to consider when it’s asked to approve or renew state contracts with fiscal intermediaries, Piper said. CMS also has to be willing to get criminal investigators involved in cases such as the Rhode Island fraud, Mountcastle said.
“CMS certainly has the authority to engage in these states, but to do it in a way that is designed to undo the act, undo the problem, compensate for it, and reduce the probability of it ever happening again,” Piper said.
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