MINNEAPOLIS – Residential Services was just a few months away from opening a new respite home for children in Virginia, Minn., said Jon Nelson, the Duluth agency’s executive director.

He’d been working for months with St. Louis County to create a small haven, a place where kids with behavioral or mental health challenges could ease back into the community after hospital stays. The respite home would give beleaguered parents a chance as well to catch their breaths without sending their kids to foster care.

Then the Minnesota Department of Human Services (DHS) pulled the rug out from under him, Nelson said.

“Right now, there is no crisis respite for children in St. Louis County,” he said. “And everything has stopped, thanks to the moratorium.”

On Tuesday, in its ongoing efforts to fight fraud in state programs, DHS announced a two-year moratorium on new group homes for providers of Home and Community-Based Services that allow people with disabilities to live in the community. The ban also applies to new programs run by organizations that already have a license.

The moratorium followed a September executive order issued by Gov. Tim Walz that directed DHS to take several measures to combat fraud, including a moratorium on new licenses and programs.

Since the pandemic, state social service programs have been rocked by fraud totaling hundreds of millions of dollars, and state officials have been dogged with questions about how fraud in state programs — such as Feeding Our Future, housing support services and programs to treat autism — could have gone on for years. In October, Walz ordered an audit across 14 high-risk services to analyze Medicaid claims after federal authorities charged nine people with defrauding state housing and autism programs. DHS has also withheld payments to Medicaid providers 485 times this year, state officials said.

But the moratorium announced this week is an overcorrection, providers say, and their reaction, from Moorhead to Mankato, was swift — and angry.

“This comes completely out of the blue,” said Sue Schettle, CEO of the Association of Residential Resources in Minnesota, a group that represents providers and advocates of community-based services for disabled people.

“It’s uncertain at this instance what the overall impact of this is going to be” she said. “But it’s causing a lot of confusion, and it’s created anxiety across the state for parents and families.”

Schettle criticized Walz and DHS leaders for enacting “a sweeping, system-altering policy in complete secrecy and without any respect or consultation with disability service providers.”

State officials on Thursday, however, pushed back. A moratorium was no surprise, DHS officials said in a statement. The Legislature in July gave them the authority to do it and, in August, DHS “provided information about this new authority to all license holders and provider organizations.”

Shannon Bock, executive director of CCRI, a service provider in Moorhead, said the moratorium will hit especially hard in rural areas, which don’t have enough providers to meet client needs. One residential program for people with disabilities has a 50-person waiting list, she said. The waiting list for 24-hour services in the community is 100 people long.

“It just puts people in jeopardy of losing their support,” Bock said. “With the way the state is already ratcheting [funding for] everything, we are limited in what we can do without new programs.”

John Estrem, executive director of Hammer & NER, which provides homes and apartments with 24-hour staffing for people with a range of disabilities, echoed Bock’s lament about tightening finances already limiting what they can offer residents and staff members.

To head off possible funding cuts, as well as make needed changes to facilities and staff training to work with an aging population of people with disabilities, Hammer is in the midst of a campaign to raise $5 million.

The moratorium, he said, “is another example of [the state] deciding to do something without any consultation,” Estrem said. “And the big concern is what else might be coming.”

While the moratorium doesn’t have an immediate effect on Hammer, he said, it will limit innovation and openness to alternative ways to provide programming.

“This freezes that,” he said.

Like others, he criticized the governor and DHS officials for the heavy hand of a moratorium, instead of working with providers to find a way to crack down on fraud while still allowing new providers to do the work.

“A lot of this is if the governor and DHS had provided the proper level of oversight over there we wouldn’t be in this mess,” Estrem said.

Joel and Mary Amundson are active advocates for people with disabilities and have spoken with legislators. Their 45-year-old daughter, Sarah, lives in a Hammer apartment building.

She has a job, they said, and does art projects. But Sarah’s health is in decline, they said. She now has dementia.

Ongoing discussions about tightening human services budgets, now combined with a moratorium on new services, is keeping providers from launching new efforts to work with and enrich the lives of people with disabilities, they said.

“It puts everything up in the air. We can’t make any real plans. We don’t know where our daughter’s going to be,” Mary Amundson said. “There just aren’t a lot of options.”

Nelson, too, criticized the state’s decision to freeze new programs. While officials said there will be an as-yet undefined process to seek exceptions to the moratorium, he said he’d wished state officials had been more willing to consider other solutions.

“It looks like we have one tool, a hammer,” he said. “And every problem’s a nail.”

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