James Sheehan was getting tired of paying for health care for dead people.

As the New York state Medicaid inspector general, Sheehan had a list of such outlays, thanks to a new enforcement regimen the state implemented in the fall of 2009. In mid-November, Sheehan's office ran a database query that tagged 303 providers who were billing for services to deceased patients. Dead doctors surfaced too: A handful of physicians seemed to be writing prescriptions and ordering tests from beyond the grave.

Sheehan's office went into action. Staffers prepared a letter for providers, asking them to clarify who had served and billed the departed--within 15 days. Since state death records have a small margin of error, Sheehan's office also offered providers the opportunity to establish that the patients were still alive.

The first round's results: Sixty-seven of the contacted providers reported that the patients were indeed deceased and the billing had occurred as a result of an error. Fifty providers claimed that eligibility records or a provider indicated the beneficiary was alive. And nearly 150 reported that the patients were still alive at the time the services were provided.

"We're pretty sure that's wrong," says Sheehan. His office is now matching records with death certificates to be sure.

Dead patients are just the start. During his three years as inspector general, Sheehan has seen almost every kind of scam, from Long Island millionaires pretending to be paupers to dental clinics that pay Medicaid recipients to come in for expensive treatments. And New York isn't alone in dealing with criminal creativity: In Florida, a 2008 report from the Office of Program Policy Analysis and Government Accountability, a research unit of the Florida Legislature, estimated Medicaid fraud costs to the state at between $940 million to $3.7 billion per year--that's 5 to 20 percent of its total Medicaid spending.

With waste like that hitting an already expensive program, a growing number of states are putting money and personnel into the problem. In Ohio, for example, the addition in 2009 of 10 new staff positions to the Medicaid Fraud Control Unit helped the state increase its recoveries from $65 million in 2008 to $91 million in 2009. In addition, state Medicaid fraud units also are teaming up to mount complex, multistate cases, many targeting pharmaceutical companies promoting unapproved, off-label prescription drug use, a strategy that in 2008 alone recovered $1.4 billion from 13 multistate civil suits.

The federal government is offering a helping hand to recover money lost to scams. In 2005, the federal Centers for Medicare and Medicaid Services (CMS) created the Medicaid Integrity Program and gave it a very specific charge: Provide state Medicaid programs with the technical assistance, such as sophisticated data mining, to identify overpayments. The feds are sure the states won't come up empty-handed. "For me, the No. 1 way of knowing we have a lot of fraud," says Peter Budetti, deputy administrator and director of the CMS Center for Program Integrity, "is that whenever we look, we find more."

Efforts to combat Medicaid fraud aren't new. In the 1970s, Congress passed legislation that required states to create Medicaid Fraud Control Units (MFCU) that consist of teams of investigators, auditors and attorneys. But state laws differ widely in what they permit MFCUs to do. In New York, for instance, prosecutors in the MFCU develop their cases and then take them to court. In contrast, MFCUs in Florida, Texas and Virginia turn the cases over to county district attorneys or a statewide prosecutor to initiate a prosecution. "That makes it more difficult," says Barbara Zelner, executive director of the National Association of Medicaid Fraud Control Units. "They have to sell it to another agency, and that agency may not have the resources to take it on."

Another major difference in state efforts revolves around incentives for whistle-blowers. Twenty-four states have enacted so-called qui tam or whistle-blower statues that encourage informants to step forward. Such laws offer states a chance to profit: The federal government allows states with qui tam laws to recoup an additional 10 percent of the cash recovered from joint federal-state Medicaid fraud prosecutions.

While states differ on tactics, there's widespread agreement on at least one issue: Efforts to combat fraud more than pay for themselves. According to CMS's Budetti, studies of fraud prosecutions have found that health insurers recoup money on a seven-to-one ratio. Angela Brice-Smith, acting director of the CMS Medicaid Program Integrity Group, is a bit more cautious: She says the return on investment for her program has been closer to two for one. But both estimates point to a clear conclusion: States should be doing more. One place that illustrates how much money can be recovered is New York.

The scale of New York's Medicaid program can be hard for outsiders to grasp. In fiscal 2009-2010, some 60,000 providers and 20 managed care plans billed the New York Medicaid program more than $50 billion, a sum larger than most states' budgets. No state (including California, which serves 50 percent more recipients) spends more on health care for the poor. For years, though, the state did little to ensure that its funds were being well spent. That changed five years ago after The New York Times ran a five-part series on fraud in the Medicaid program. That story revealed that the state had been "misspending billions of dollars annually because of fraud, waste and profiteering."

New York responded with a two-pronged approach. The first part involved a renewed push by New York's MFCU to crack down on crime. In 2008, New York's MFCU secured nearly 150 convictions and recovered $263 million, more than any other MFCU in the country. The second involved the creation of a new Office of the Medicaid Inspector General. The state turned to Sheehan to head it.

Sheehan was well versed in health-care fraud. As an assistant U.S. attorney in Philadelphia, he spent nearly two decades working fraud cases. He also played a major role in a case against pharmaceutical company SmithKline Beecham that resulted in a $332 million settlement. His new position, however, presented a whole new level of challenges. After the exposé in The New York Times, the state negotiated a $1.5 billion payment from Washington, D.C., to fix the problems exposed. But the payment came with a catch: The money had to be recouped. That meant New York had four years to reduce fraud by $1.5 billion. If it fell short, the state would have to repay the difference. The most any state had hitherto collected in a single year was $126 million. The second highest collection in a given year was $26 million. Not surprisingly, doubters were legion. One state senator told Sheehan point blank: "Everyone knows we're not going to meet those goals."

Taking advantage of New York's comparatively robust Medicaid database, Sheehan's office and staff from the state's Medicaid program teamed up to identify the outliers--the providers whose billing practices clearly stood outside the norm. Sheehan breaks that group into three subgroups: good providers who sometimes struggled with complex systems; providers who simply wouldn't follow the rules; and the outright criminals, the people who billed dead patients or deceased doctors. While the latter category received the most attention, Sheehan hasn't been shy about expecting all providers to comply with the letter of the law.

When errors show up, Sheehan's office is aggressive in seeking recovery. One controversial tactic is extrapolation: If his auditors find errors in a random sample of Medicaid claims, they assume the mistake occurred a similar number of times across other relevant areas of operation and they bill for the full amount.

Sheehan's tactics have attracted critics. At a recent hearing called by legislators close to the health-care industry, Sheehan was accused of relying on "gangster-style" tactics. Some private providers say state agencies now are treating mistakes that private insurers would handle as a technical error as "abuse" and make huge fines from small ones.

For Sheehan, the answer to that charge is straightforward: "A number of providers had not been audited in 15 or 20 years," he says. "When you tell people they got money and they have to give it back, it's never a pleasant moment."

Pleasant or not, New York's tactics have worked. In 2007, Sheehan's first year as Medicaid inspector general, New York recovered $130 million dollars. In fiscal 2008-2009, the Office of the Medicaid Inspector General's recoveries jumped to $304 million, while the state MFCU brought in another $227 million, bringing the total funds recovered by the state to more than $550 million--approximately 1.2 percent of New York Medicaid's total expenditures, the highest recovery rate in the nation. In contrast, CMS figures show that the average state recovers a mere 0.09 percent of state Medicaid spending. Not surprisingly, other states are now taking a hard look at the Medicaid Inspector model. A few--Texas, Kansas and most recently Michigan--have gone as far as creating Medicaid inspector general offices.

New York also has invested in staffing. Sheehan took over an office with a 300-person staff and doubled it. That's difficult to do, especially since the payoff for spending more on fraud prevention isn't immediate. Criminal cases typically take about three years to prepare and prosecute. Given states' fiscal straits, spending more money now, even with a virtually guaranteed payoff down the road, is even harder to do.

But there are lessons states can and should draw from New York's experiences. One is that states must move beyond isolated enforcement and toward constructing systems that encourage all providers to comply. "The biggest weakness with Medicare and Medicaid," Sheehan says, "is not stealing, but cheating."

It is important, he says, to nudge the great majority of providers toward strict compliance, which also is where the biggest savings will be found. While New York brought in $550 million in fiscal 2008-2009 recoveries from fraud, the savings from crackdowns on cheaters along with the state's other vigorous anti-fraud activities have been even bigger--about $2 billion. That's a figure any government official should be excited about.

State officials interested in federally funded fraud training should visit the new CMS-funded Medicaid Integrity Institute website.