Buffalo isn't the only government insuring dead people.

So is New York State.

And the dead are just one small part of an even bigger problem -- 27,000 people, maybe more, who received taxpayer-funded health care coverage they didn't deserve.

Even worse, a third of those people received health insurance because they cheated the system.

The elimination of those benefits, revealed in an audit scheduled for release today, is expected to save the state $25 million a year.

"It's an enormous savings," said Assemblyman Sam Hoyt, D-Buffalo, who was instrumental in getting the audit done. "At a time when we have budget deficts approaching $10 billion, identifying a $25 million [recurring] savings is great news."

The audit, nearly two years in the making, shows that fraud and simple error can cost employers, public and private, millions of dollars in health care costs.

And insuring dead people -- auditors could not specify a number -- is just one piece of a larger puzzle.

The other more expensive piece is living people -- almost all of them dependents of state and local employees -- who receive health care coverage they don't qualify for.

So far, the number is 27,000 and climbing.

How much higher it goes will depend on the 45,000 other dependents still under review by the state.

One of the more extreme examples found in the audit are the 85 employees who had between seven and 12 dependents apiece, each one of those dependents receiving benefits they didn't deserve.

The average annual cost of health care for a dependent can range from $2,000 to $4,000 a year.

"The potential for savings is enormous," said David Chojnacki, executive vice president of Budco Health Service Solutions, the Michigan-based firm that completed the audit. "We know the public sector lacks the resources to devote to this."

Budco, which has done similar work for large private employers such as Ford and Chrysler, was asked to analyze the eligibility of the 1.2 million people enrolled in New York's health insurance program.

The $6 billion program is funded with tax money and contributions from state and local employees.

Budco, as part of its 2008 agreement with the state Civil Service Department, guaranteed a 3-to-1 return on its $3.4 million contract.

The result, in fact, was much more -- at least $25 million in annual savings.

"It was a worthwhile project," said David Ernst, a spokesman for the state Civil Service Department. "It proved to be highly productive, and we're glad we did it."

The results send a strong message to state and local governments, said Hoyt, who began pushing for the hiring of Budco seven years ago.

"It's not an indictment of state government," he said of the audit. "Even the best-managed private-sector companies are finding that mistakes can be made, and, yes, there may be fraud and abuse."

The City of Buffalo is among those that found out the hard way.

A city audit earlier this year discovered $2 million had been spent on health insurance for 170 deceased employees. Several of those employees, according to the audit, have been dead for four years.

The revelation has led to city lawmakers calling for the ouster of Buffalo Human Resources Commissioner Karla L. Thomas.

Hoyt noted that the city audit came more than six years after he and two city lawmakers brought Budco to Buffalo's attention. He said the idea never went anywhere.

"I'd like to revisit this," said Lovejoy Council Member Richard Fontana, one of the two lawmakers who pushed for Budco's hiring in 2004. "I think we should be doing this type of audit."

Another Council member, Joseph Golombek Jr. of the North District, a Democrat who is running for Hoyt's Assembly seat, said he plans to co-sponsor Fontana's resolution.

Budco also may be gaining an ally in Mayor Byron W. Brown. Brown spokesman Peter Cutler said the administration is interested in Budco's audit of the state and may be open to hiring the firm.

Could Budco have prevented the loss of $2 million in taxpayer money?

Chojnacki says yes and believes his company can save the city even more money. He believes 12 to 15 percent of the dependents covered by Buffalo's health care program are ineligible.

"We think the timing is right for them to do something," he said of City Hall. "All of the bigger cities should be doing this type of audit."

During its audit of New York's health insurance program, Budco discovered about two-thirds of the ineligible dependents it identified were children or stepchildren who didn't qualify for coverage anymore.

Chojnacki said most of those children were covered because their parents didn't understand the rules.

In short, they were simple mistakes.

In other cases, there was blatant fraud. Chojnacki estimates about a third of all the ineligible dependents Budco found involved employees who cheated the system, and many of those cases focused on former spouses.

The most common scenario is a state employee who is responsible for an ex-spouse's health insurance and defrauds the government by keeping him or her as a dependent, he said.

In those cases, the state is free to seek repayment.

"If you're fraudulently doing something to gain benefits, the state has every right to seek restitution," Chojnacki said.

One way to avoid paying restitution was to take advantage of New York's amnesty period. During that period, employees could voluntarily identify ineligible dependents without penalty or discipline.

The result in that phase alone was 18,678 dependents removed from the state's health rolls.

"It's not a witch hunt," Chojnacki said. "That's their opportunity, once they know the rules, to voluntarily remove ineligible dependents."

After years of working with large private companies such as AT&T and Boeing, Budco is eager to make inroads among public-sector employers. New York is its largest government client so far.

"If I were Budco," Hoyt said, "I would be trumpeting my success to the other 49 states and, for that matter, to every school district and municipality in the country."

Of course, not everyone has been thrilled with the company's work.

Public employee union leaders don't quibble with Budco's results, but they do question the company's responsiveness in dealing with employees and dependents who had questions or complaints.

"We're not questioning the integrity of the process," said Steve Madarasz, a spokesman for the Civil Service Employees Association in Albany, "but it was chaotic, it was messy at times."

Chojnacki acknowledged some problems with its review and chalked them up to the huge amount of letters and calls it received from employees and dependents.

pfairbanks@buffnews.comnull