As my colleague Edwin Park has explained, capping federal Medicaid payments to states will likely be a key objective for the incoming administration.  To lay the groundwork for this radical cost shift, the administration and its allies can be expected to argue that the Medicaid program is riddled with fraud.  A leading proponent is Brian Blase, head of the Paragon Health Institute, who is not a fan of Medicaid.  Here’s his view, as reported in Stat:

“States are abusing federal Medicaid policy. There is an enormous amount of waste, fraud and abuse in the program.”

This narrative is simply false.  What follows are the facts about fraud against Medicaid.  

There is fraud against Medicaid, as there is against Medicare and private health insurers.   Health care fraud is intentionally submitting false information in order to receive payment; for example, billing for services not furnished.  Defrauding Medicaid (or Medicare or private health insurance) is despicable, but it happens.  There are bad actors out there, and if given the chance, they will steal as much as they can.  When they do, they divert funds intended for patient care, harming beneficiaries who need services, honest providers that actually serve beneficiaries, and state and federal taxpayers.  They also give opponents of Medicaid an opportunity to attack the nation’s largest health insurer of children for lacking program integrity.  Despicable.

Fraud against Medicaid is mostly committed by providers – to crack down on fraud, Congress and the Administration should follow the money. Every year, DOJ and HHS publish a report on their efforts to hold to account bad actors in Medicare, Medicaid, and other Federal health care programs. The December 2024 report lists examples of the different kinds of fraud against Medicaid (and Medicare) that the agencies have identified and prosecuted.  Among those convicted are ambulance service providers, durable medical equipment suppliers, diagnostic labs, nursing homes, pain clinics, pharmacies, physical therapists, physicians, and substance use treatment providers.  No beneficiaries are in the listing and for good reason. Beneficiaries make up less than 2/10^ths of 1 percent of the reported fraud convictions.

Here’s one example:

In September 2023, a Charlotte, North Carolina, a business owner was sentenced to 200 months in prison for his role in a scheme to defraud the North Carolina Medicaid program of more than $11 million. In January 2023, a Federal jury convicted the defendant of conspiracy to commit health care fraud, multiple violations of the Anti-Kickback Statute, money laundering conspiracy, and money laundering. The defendant owned United Diagnostic Laboratories (UDL), a urine toxicology testing laboratory, and United Youth Care Services (UYCS), a company that provided mental health and substance abuse treatment services. The defendant and his co-conspirators executed a conspiracy to defraud the North Carolina Medicaid program by paying illegal kickbacks to other co-conspirators in exchange for urine samples from Medicaid-eligible beneficiaries. The beneficiaries included housing-vulnerable individuals and children eligible for housing, at-risk after-school programs, and other services. Once enrolled, the beneficiaries were required to submit urine specimens for drug testing as a condition of their participation in the programs. The specimens were provided to UDL and UYCS for medically unnecessary urine drug testing.

The HHS Office of Inspector General (OIG) also publishes an annual summary of the cases brought by State Medicaid Fraud Control Units, which are charged with protecting their state Medicaid programs against fraud.  The May 2024 report breaks down the criminal convictions and civil settlements and judgments by provider type, including inpatient and outpatient facilities, non-facility providers (such as durable medical equipment suppliers), and physicians and other licensed practitioners.  Again, beneficiary fraud is negligible (less than two-tenths of one percent of the reported convictions).

The victims of fraud against Medicaid are enrollees, honest providers, and the taxpayers.  Medicaid is a health insurance program.  It pays providers for furnishing covered services to enrollees, either directly or through managed care organizations (MCOs).  With the exception of self-directed care for certain individuals with disabilities, Medicaid does not pay enrollees.  As the example above illustrates, bad actor providers can use Medicaid beneficiaries as pawns in fraud schemes, but it is the bad actor providers who conceive and carry out the fraud.  When a bad actor provider is billing for services that they are not delivering, the enrollees who need services don’t receive them, the honest providers who would deliver the services are not being paid, and the federal and state taxpayers who fund Medicaid are being bilked.

There are many checks on fraud against Medicaid at both state and federal levels.  Medicaid is a joint venture between the states and the federal government.  The states administer the program on a day-to-day basis; the federal government pays on average two-thirds of the cost of the program and oversees the states’ administration.  Both the states and the federal government have agencies with responsibility for preventing, detecting, and prosecuting fraud against Medicaid.  These include not just the agencies whose work is described in the annual reports cited above (CMS, DOJ, FBI, OIG at the federal level and state MFCUs) but also Congressional oversight agencies (GAO) and committees as well as state Medicaid agencies, MCOs (in states that delegate program integrity responsibilities to these contractors), and state legislative oversight agencies and committees.  For a thoughtful, fact-based overview of program integrity in Medicaid see the testimony presented by MACPAC Commissioner Tim Hill at a Congressional oversight hearing last year.

Despite repeated claims to the contrary, the Payment Error Rate Measurement (PERM) program does not measure fraud. So it is not one of the checks on fraud against Medicaid.  Under the Payment Integrity Information Act (PIIA) of 2019, federal agencies are responsible for identifying, reporting, and reducing improper payments in programs they administer.  PERM is the system CMS uses for this purpose in Medicaid.  PERM is designed to identify the extent of improper payments in each state, identify the root causes of those improper payments, and to produce state-specific corrective action plans to reduce improper payments.  PERM is not designed to, and does not, measure fraud.

Each year, CMS contractors review a sample of claims in each of 17 states to determine whether the claims have been properly paid.  The contractors calculate an improper payment rate for each of the following:  eligibility determinations, fee-for-service payments, and payments to managed care plans.  CMS combines those rates into an overall improper payment rate for each state and uses those rates to estimate a national improper payment rate for that year.  CMS combines that national rate with the national rates for each of the two previous years into a “rolling” three-year rate, which is the improper payment rate for Medicaid. (PERM is also used to estimate an improper payment rate for CHIP).

Improper payments are not the same as payments lost to fraud.  They are payments that do not meet statutory, regulatory, or administrative requirements or are made in an incorrect amount.  Improper payments include payments that are lost to fraud, but not all improper payments are payments lost to fraud. The Medicaid improper payment rate is not a “fraud rate,” and estimated improper payment amounts are not amounts lost to fraud.

HHS publishes improper payment rates for Medicaid, Medicare, and other programs in the Program Integrity Report section of its Annual Financial Report. For 2024, the national Medicaid improper payment rate (covering reporting years 2022, 2023, and 2024) is estimated to be 5.09%.  That translates into $31.1 billion in federal Medicaid improper payments in 2024.  The other way to look at this is that 94.9 percent of federal Medicaid outlays, or $579.7 billion, were properly paid.

Of these improper payments, nearly four fifths were due to missing or insufficient documentation to support the payment as proper or improper (74.3 percent) or were technically improper payments (i.e., the payment was to the right provider for the correct amount, but the payment process did not comply with applicable regulations and statutes)(5.2 percent).  Thus, in a majority of the cases, Medicaid payments were classified as improper because information required for payment or eligibility determination was missing from the claim or state systems); had the information been available, the claim may have been payable (or not).

The remaining improper payments were payments that should not have been made.  These include payments made in cases where the beneficiary was ineligible for the program, or the beneficiary was eligible but received a service that was not covered (15.6 percent); payments made to providers who were not enrolled in the program (2.0 percent); and other monetary losses (2.9 percent).  All payments resulting from fraud are monetary losses, but not all monetary loss improper payments are the result of fraud.

The table below presents the Medicaid improper payment rate estimates for each state and the District of Columbia that produced this year’s national 3-year rolling rate of 5.09 percent.  CMS cautions that “[V]ariation between states and the resulting methodological differences between states’ PERM rates makes it impossible to accurately compare PERM rates between states.”  Nonetheless, it is clear that there is wide variation in estimated improper payment rates, from a low of 0.2 percent in Alabama, South Dakota, and Washington, to a high of 20.5 percent in South Carolina and 20.7 percent in Wyoming.

State-Specific Medicaid Improper Payment Rates

(Reporting Years 2021, 2022, and 2023)

State	Improper Payment Rate		State	Improper Payment Rate
AL**	0.2%		MT***	7.0%
AK***	9.7%		NE**	1.2%
AZ***	6.4%		NV***	2.9%
AR*	3.0%		NH**	3.9%
CA**	8.1%		NJ**	5.7%
CO**	5.4%		NM*	3.2%
CT*	18.8%		NY***	1.4%
DE*	19.6%		NC**	3.0%
DC***	7.6%		ND*	6.9%
FL***	7.0%		OH*	8.2%
GA**	1.8%		OK*	2.5%
HI***	1.4%		OR***	2.9%
ID*	18.7%		PA*	2.6%
IL*	10.9%		RI**	8.8%
IN***	7.6%		SC**	20.5%
IA***	1.9%		SD***	0.2%
KS*	6.9%		TN**	5.6%
KY**	2.9%		TX***	1.3%
LA***	1.9%		UT**	1.9%
ME***	2.4%		VT**	5.6%
MD**	4.5%		VA*	5.3%
MA**	7.1%		WA***	0.2%
MI*	6.1%		WV**	3.5%
MN*	2.2%		WI*	6.8%
MS***	4.7%		WY*	20.7%
MO*	4.2%

*CMS, 2022 Medicaid & CHIP Supplemental Improper Payment Data (November 2022)(pp. 50-53) https://www.cms.gov/files/document/2022-medicaid-chip-supplemental-improper-payment-data.pdf-0

**CMS, 2023 Medicaid & CHIP Supplemental Improper Payment Data (November 2023)(pp. 50-52), https://www.cms.gov/files/document/2023-medicaid-chip-supplemental-improper-payment-data.pdf

***CMS, 2024 Medicaid & CHIP Supplemental Improper Payment Data (November 2024)(pp. 49-51), https://www.cms.gov/files/document/2024-medicaid-and-chip-supplemental-improper-payment-data.pdf

Capping federal Medicaid payments is not the answer — Congress and CMS should implement recommendations from MACPAC and GAO to detect and prevent fraud

Could state and federal agencies do a better job at preventing, detecting, and prosecuting fraud against Medicaid?  Undoubtedly.  There’s always room for improvement.  The MACPAC Commissioner’s testimony cited above lays out some recommendations for improving program integrity.  Another Congressional agency, the Government Accountability Office (GAO), has also made recommendations for how CMS can reduce Medicaid improper payments.  Neither MACPAC nor GAO recommends capping federal payments to states in order to reduce fraud against Medicaid. 

There’s a reason for that.  Capping federal Medicaid payments to states will shift the costs of providing needed health and long-term care services to low-income Americans from the federal government to the states.  In doing so, a federal cap will lead to reductions in eligibility, benefits, and/or payments to providers and MCOs, and it will do so without regard to whether a state has a low or a high rate of improper payments.  It will not reduce fraud against the program. Nor will it reduce improper payments (the 2024 improper payment rate in CHIP, which is a capped program, is 6.11 percent, higher than Medicaid).   

And that’s the truth of the matter.