How to Reduce Improper Payments in Medicaid

It turns out that government programs make mistakes.  Who knew? If you’re the federal government, you try to identify the mistakes your programs are making and correct them.  That’s exactly what the federal government does with its large domestic programs, including Medicare, Medicaid, and CHIP. Each year, in each of these programs, it measures and reports on “improper payments.”  The results are posted at They’re not what they first appear to be, especially in the case of Medicaid, which is jointly run by the federal government and the states.  Here’s what the improper payment numbers mean, and what they don’t.

The most recent data are based on reviews done during 2016, with results reported in 2017.  For the 19 programs designated by the Office of Management and Budget as “high priority,” the improper payments rate ranged from a low of 0.28% (Social Security) to a high of 100% (Veterans Health Administration Purchased Long-term Services and Support).  The rate of improper payments for Medicare was 8.2%, for CHIP 8.64%, and for Medicaid 10.1%.   By extrapolation, the amount of improper payments is estimated at $51.9 billion for Medicare, $1.2 billion for CHIP, and $36.7 billion for Medicaid.  (Improper payments for all 19 programs totaled $134.6 billion; Medicare accounted for 38% of this amount, Medicaid for 27%).

The $36.7 billion estimate for Medicaid improper payments – 10.1% of the $363.83 billion the federal government spent on Medicaid in FY 2016 – caught the attention of the House Committee on Oversight and Government Reform, and last week two of its Subcommittees held a hearing to understand what the Centers for Medicare & Medicaid Services (CMS) was doing about it. (I testified at the hearing.)  Since this is probably not the last time you will hear about the high rate of improper payments in Medicaid, here’s what you need to know.

First, improper payments are not the same as fraud. Let’s say that again: there is not $36.7 billion in fraud in Medicaid. Of course, there is fraud in Medicaid, and some of the $36.7 billion in Medicaid improper payments are the result of provider or managed care plan or even beneficiary fraud. But improper payments are not the same as fraud.

Here’s how the federal government defines improper payments: “any payment that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements.” In the case of Medicaid, this includes payments made in cases where the service is the right service furnished to the right patient by the right provider, but the documentation is insufficient.  For example, a payment made in the correct amount to a fee-for-service provider for a medically necessary service rendered to an eligible Medicaid beneficiary under a referral would nonetheless be considered an improper payment if the referral form lacked the National Practitioner Identifier (NPI) of the referring physician, or if the physician was not properly screened and enrolled in the program.

CMS, which measures improper payments in Medicaid (as well as Medicare and CHIP), publishes a breakdown of the reasons.  In the case of Medicaid, over half — 54% — of the improper payments were the result of states not screening or enrolling providers as they are required to do.  (State Medicaid agencies are required to screen providers before enrolling them in the program and revalidate providers enrolled in the program every 5 years; the purpose of these requirements, which also apply to Medicare and CHIP, is to keep out bad actors who put beneficiaries and program funds at risk).  In contrast, only 31% of Medicaid improper payments were attributable to eligibility errors.

This brings us to the second basic point about the $36.7 billion number.  It’s an extrapolation from a rate: 10.1% times $363.83 billion. It’s not actual money lost by the federal government to Medicaid improper payments, much less to Medicaid fraud.  Of the $36.7 billion, only $3.8 billion — just over 10% — represents known monetary loss to the federal government. The large majority — $21.5 billion, or 60% — represents improper payments where documentation was insufficient and monetary loss is unknown: “more information is needed to determine if the claims were payable or if they should be considered monetary losses to the program.” (The remaining 30% is an arbitrary placeholder for eligibility errors; we don’t know how many eligibility errors occurred or how many resulted in actual monetary loss).  

There is an inclination in some quarters to blame Medicaid improper payments on beneficiaries defrauding the program—misrepresenting their incomes in order to qualify, collaborating with providers to submit false claims, or enabling the diversion of drugs. Regrettably, some of the 74 million Americans enrolled in Medicaid behave badly. But there is simply no evidence that these behaviors account for a significant portion of Medicaid improper payments; as explained above, the data are the more than half of improper payments are attributable to state noncompliance with provider screening and enrollment requirements. And as to actual fraud, a 2017 White Paper by the National Health Care Anti-Fraud Association identifies 13 common health care fraud schemes; none of these schemes is driven by beneficiaries, although some, like organized criminal enterprises, rely on theft of beneficiary information. The evidence that “bad actor” providers harm beneficiaries with substandard care and cause monetary losses to the program is overwhelming.

Bottom line: Medicaid is a complicated program involving 51 state Medicaid agencies, tens of millions of beneficiaries, tens of thousands of providers, and hundreds of managed care plans.  Improper payments will be made. That said, the current rate of improper payments can be cut substantially by improving state compliance with provider screening and enrollment requirements. Doing so would be a trifecta: it would lower the improper payment rate, reduce program exposure to fraud by bad actor providers, and protect beneficiaries from substandard care.

One final point. Three states have already received section 1115 waivers to make their Medicaid programs even more complicated by conditioning Medicaid eligibility on meeting work documentation requirements, and 7 more states are awaiting approval.  The point of these waivers is to cut enrollment by weaponizing paperwork and red tape. If the federal courts allow these waivers to proceed, eligibility determinations in these states will be subject to measurement for improper payments. The complexity built into their work documentation requirements will inevitably lead to documentation errors, which will be counted as improper payments, which would likely increase the state’s improper payments rate and potentially drive up the national rate.

Now that would truly be improper.  

To learn more about this topic, watch Andy Schneider testify before the U.S. House of Representatives Oversight and Government Reform Committee.