The Poverty Industry: How state and local service agencies scam both the federal government and their intended beneficiaries

Wealth does not trickle down but inequality sure does, poisoning every institution it touches. It especially corrupts public service agencies as states and localities adjust to steeply declining revenues. Daniel L. Hatcher’s The Poverty Industry: The Exploitation of America’s Most Vulnerable Citizens (2016) documents the extent to which the care of poor families and children has been perverted into a system of scamming both the federal government and the intended beneficiaries.

There’s been much in the news about the corruption of the criminal justice system. Aided by private contractors, financially strapped courts fund themselves by piling fines onto poor minor offenders, sending them to jail for nonpayment. Public and for-profit prisons alike reduce the number, pay, and training of staff, and withhold medical care from inmates. Jeffrey Epstein’s suicide shouldn’t have been a surprise given the insufficient and exhausted staff assigned to watch him.

The same corruption permeates child services. According to Hatcher, the federal government offers much more generous funding for foster care than for keeping families together. This leads local government agencies to push poor children into foster care to collect more money, instead of providing services to their families, such as housing assistance, medical care, or drug treatment. In addition, federal Social Security Disability funding leads agencies to over diagnose children with disabilities, particularly mental disabilities like ADHD, with payments going to the agencies. On top of that, if a child has other assets, such as survivor’s benefits or a small inheritance after the death of a parent, the agencies keep those, too, without even informing the child. Often little or none of this money actually goes to the child’s care. Nor does the money stay with the local agencies either, because the state in turn transfers it to fill holes in the state budget. All along the way, private contractors help local and state agencies devise fund-extraction strategies, for a share of the revenue.

Then there’s child support. If a poor single mother with children applies for public assistance, she’s required to name and sue the father for child support. If, as usually happens, the father is also poor, he is liable to have as much as 65% of his paycheck garnished, lose his driver’s license, or even wind up in jail for nonpayment of escalating late fees. The money extracted from him will not go to the mother, but to the agencies and their private allies. Pursuing poor fathers for support simply alienates them from their children and can ruin their lives or worse. For example, in 2015 in North Charleston, S.C., a policeman shot Walter Scott in the back when he fled from a traffic stop, apparently because he feared being arrested again for back child support.

Overarching all this are the medical scams. The federal Medicaid program matches state healthcare spending on a sliding scale, from 50% for richer states to 76% for the poorest state, Mississippi. States can scam Medicaid by paying a certain amount to hospitals, claiming the matched money from the federal government, and then taking the money right back from the recipient hospitals in the form of a “bed tax.” Or, if the federal government caps the money to a nursing home at, say, $150 per resident, the state can collect the $150, but send only $35 to the home. Meanwhile nursing homes make deals with pharmaceutical companies to get federal funding for medications, including powerful antipsychotics to make the residents manageable with a smaller staff. At the end of life, there’s federal funding for hospice care, intended for individuals with less than six months to live. But state and local agencies can collect money here too—by requesting hospice for healthier people, who will last the whole six months and whose care will be cheaper than that of truly terminal patients. In all these instances, private contractors help states and localities with setting up the scams in exchange for a cut of the loot.

Local government agencies and their private contractors face little meaningful accountability when they misuse federal funds. States are only required to show they are somehow taking care of vulnerable populations, not how they do it. Federal agencies occasionally issue damning reports and even fine the private contractors, but the regulatory agencies seem unable to keep up with the ingenuity of the scammers.

Hatcher, a professor of law at the University of Baltimore who has represented scam victims through his work with Legal Aid in Maryland, offers few substantive policy responses. The scams are bipartisan. The scamming government bureaucracies aren’t trying to make a profit, but just to survive.

Unfortunately, righteous whistle-blowing doesn’t go very far in an era of grinding public austerity—itself a symptom of the way the economy is increasingly rigged to favor the .001%. Little will change until we return to progressive taxes, break up the big corporate monopolies, especially the big banks, and provide public service agencies with enough funding to do their jobs.

This review of The Poverty Industry by Daniel Hatcher appeared in the September 2019 issue of Dollars and Sense Magazine.

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