Many news reports are swirling around asking whether Congress may consider another reconciliation package and what may be in it. Regardless of whether Congress chooses to advance such a package, one area that needs immediate attention is stopping fraud in the welfare system. The fraud the country has witnessed in Minnesota recently shows how vulnerable the U.S. welfare system is.
There are plenty of welfare programs to tackle. The government operates at least 90 such programs, costing the government nearly $1.7 trillion annually. The field is ripe for reform.
But one place to start is by reversing the changes made by the Biden Administration to child care funding for low-income families. In 2024, the Biden Administration implemented a rule that made the program more vulnerable to industrial-scale fraud by giving greater control of the program to third-party “middlemen,” and by easing the criteria by which these third parties can receive government money.
In the Child Care and Development Fund, families can either receive a voucher for child care to be used at a provider of their choice, or states can opt to pay providers directly based on the number of low-income children they serve. The voucher choice is by far the more popular. It gives parents a great deal of flexibility in choosing the child care they prefer.
The voucher method is also less prone to industrial-scale fraud. An individual is more likely to want to get value from their benefit, and it takes many more bad actors to achieve major levels of exploitation.
On the other hand, a third-party model is more vulnerable to large-scale fraud. A few bad-actors can steal a lot of money, whether by claiming to serve a large number of people that were never served or by claiming to provide services that were never provided. The provider gets reimbursement from the government for their “services” and pockets the cash.
The 2024 Biden rule changed the Child Care and Development Fund to require that states allocate a portion of funding for third-party providers, rather than allowing states to do an all-voucher approach. Most states had been allocating all of their child care funding through vouchers, likely because families prefer this flexible model.
The Biden rule also said that child care providers receiving funding from the Child Care and Development Fund have to be paid prior to providing services rather than afterwards. And the rule also required that reimbursement to third parties be based on the number of children enrolled, rather than on actual attendance.
All of these changes make the Child Care and Development Fund more open to fraud: more third parties and less strict criteria for getting reimbursed from the taxpayer coffers.
The Trump Administration introduced a rule to reverse what the Biden Administration did. But Congress should put these changes into statute to protect the program permanently.
Doing so wouldn’t make the program impermeable to fraud, of course. What happened in Minnesota to child care funds was sophisticated. But Congress should plug the obvious holes created by the Biden Administration as a first step to better protect the program.
Congress should also consider how to apply similar principles in other means-tested welfare programs, eliminating vulnerability to industrial scale fraud by removing unnecessary third-party providers and shifting to a market-based approach when feasible.
The U.S. welfare system is enormous, with dozens of programs and massive amounts of taxpayer dollars flowing through it. Putting in place common-sense barriers to make sure that one child care program is less vulnerable to fraud is a step forward.
