Latest case for more limited government: Medicaid money laundering

The swindle works like this: A state overpays state-run health-care providers, such as county hospitals or nursing homes, for Medicaid benefits far in excess of its typical rates. Then the federal government reimburses the state for "half" of the inflated bills. Once the state bags the extra matching funds, the hospital is required to rebate the extra money it received at the scam's outset. Cash thus makes a round trip from states to providers and back to the states – all to dupe Washington.

The Government Accountability Office and other federal inspectors have copiously documented these "creative financing schemes" going back to the Clinton Administration. New York deposited its proceeds in a Medicaid account, recycling federal dollars to decrease its overall contribution. So did Michigan. States like Wisconsin and Pennsylvania fattened their political priorities. Oregon funded K-12 education during a budget shortfall.

The right word for this is fraud. A corporation caught in this kind of self-dealing – faking payments to extract billions, then laundering the money – would be indicted. In fact, a new industry of contingency-fee consultants has sprung up to help states find and exploit the "ambiguities" in Medicaid's regulatory wasteland. All the feds can do is notice loopholes when they get too expensive and close them, whereupon the cycle starts over.