New York State and New York City officials agreed this week to repay a record $540 million to settle allegations regarding improper Medicaid claims thereby averting a potential court battle. Federal officials said the settlement was the largest recovery of Medicaid funds in history.

Under the settlement agreement Hedy Cirrincione, a speech therapist working in Watertown, north of Syracuse will receive $10 million as the whistleblower who broke the story on the state and city billing practices.

The settlement announced Tuesday said New York City will repay about $100 million while New York State will pay about $440 million, of which it has already paid about $108 million. The balance of $332 million will be paid in 10 installments over the next five and a half years. It will also give up $107.9 million worth of Medicaid claims now owed by the federal government.

The Justice Department starting investigating after Cirrincione filed two lawsuits alleging the state filed false claims for speech therapy services that didn't qualify for reimbursement.

The lawsuits, filed under the federal False Claims Act, resulted in several audits by the Department of Health and Human Services of city and state programs that finance speech therapy and other programs for disabled children.

The audits found potential for fraud, and reported that a majority of the claims submitted did not meet federal requirements, and that in many cases there was no evidence that the services had actually been provided.

These findings were refuted by city and state officials who argued that federal health officials had failed to provide clear guidelines for keeping records of the services provided to school districts.

Providing health care to the poor, Medicaid is a program that is funded largely by the federal government but partly by state governments. Since the 1980s, Medicaid aided school districts in paying for the cost of services like speech therapy and psychological counseling for schoolchildren, including the cost of transportation to therapists’ offices.

Gov. David A. Paterson and Mayor Michael R. Bloomberg are already neck deep in tight budgets and shortfalls and the settlement will add to the state’s and city’s tight finances.

In a statement issued Tuesday, Gov. Paterson said, “While it is unfortunate that state and city funds have to be repaid to the federal government, we believe that this settlement requires payment of approximately $1 billion less than we could potentially have had to pay if the matter had gone to litigation.”

Paterson's office said the state and city have identified and corrected problems in record keeping.

Michael A. Cardozo, a lawyer for the city said, “Although the city believes that it had substantial defenses to allegations of false claims, this three-way settlement eliminates the risk of far greater payouts, which the federal government and the third-party relator would have pursued through litigation. We remain concerned about the threatened use of the False Claims Act to resolve a reimbursement dispute.