Medicaid’s Structure Actually Invites Waste and Fraud

Medicaid’s size and complexity create endless opportunities for gaming the rules. Incentives are skewed and accountability is weak, and the taxpayer always foots the bill.

By Thomas Savidge AIER. Excerpt:

"The Bad News: Medicaid’s Design Makes It Susceptible to Error (Including Fraud)

Medicaid is a joint federal-state program that funds health insurance coverage for America’s poor. The federal government transfers funds to states, which then administer Medicaid programs, with some variations from state to state. 

This income threshold to be eligible for Medicaid increased under the expansion of The Affordable Care Act (also known as the ACA or Obamacare). Because ACA enrollees receive more federal dollars than traditional Medicaid, state policymakers are incentivized to prioritize serving more Medicaid expansion enrollees (the slightly less poor) over those in traditional Medicaid (the poorest Americans). 

The Centers for Medicare & Medicaid Services (CMS) estimates Medicaid’s improper payments within three categories:

1. Managed care: Measured errors in payments states make to private insurance companies that are contracted to deliver Medicaid benefits (known as managed care organizations).
2. Fee-for-service: Measured errors in payments states make directly to providers on behalf of fee-for-service beneficiaries, including payments made to ineligible providers.
3. Eligibility: Measured errors in state eligibility determinations for both types of Medicaid beneficiaries.

In fiscal year 2024, improper payments in Medicaid were estimated at $31.1 billion — equal to five percent of total Medicaid spending. This highlights a major weakness in the program, whose size and complexity lead to clerical errors and procedural mistakes. Additionally, when states fail to collect the necessary documentation (such as up-to-date income verification), improper payments (including fraud) are more likely to occur.

Saul Zimet recently wrote in The Daily Economy:

The government bureaucrats who kept sending hundreds of millions of dollars to the fraudsters year after year had every indication of what they were enabling, but their incentives were to enable rather than prevent the theft.

Unfortunately, Medicaid’s design encourages state policymakers to maximize transfers. In some instances, that may mean lax oversight of where the money goes and who is eligible to enroll in Medicaid. COVID-19 stimulus funding required states to relax eligibility requirements and accelerate approvals to receive Medicaid: the environment was ripe for accidental improper payments as well as waste and fraud.

Since Medicaid’s inception, state policymakers have taken advantage of accounting gimmicks (such as provider taxes) to maximize the amount federal taxpayers shell out into state programs. The motivation for state officials is clear: increase your spending and have federal taxpayers in other states pay for it. Transfers to state and local governments often come with strings attached — the terms and conditions of receiving the transfers — allowing federal policymakers more influence over state and local spending. Whether or not the use of a provider tax loophole represents a misuse of Medicaid’s framework is the subject of debate. Research from the Paragon Institute highlights areas that, at the very least, require substantial investigation and reform to prevent states from shifting costs to federal taxpayers.

The Worse News: Medicaid’s Errors May Be Worse Than Official Government Estimates

From 2015-2024, the GAO reported $543 billion in improper Medicaid payments. Unfortunately, that may be lower than the actual total. Research from economists Brian Blase and Rachel Greszler found that improper payments during that period are estimated to actually be $1.1 trillion, more than double the GAO’s estimates.

The discrepancy comes from Blase and Greszler’s inclusion of eligibility checks in the audits of improper Medicaid payments, which both the Obama and Biden administrations excluded. The halting of Medicaid enrollment audits is especially concerning because during this same period, many states expanded Medicaid under the ACA and Medicaid saw a record number of enrollees during the pandemic. Blase and Greszler comment, “Eligibility errors of this nature are particularly concerning as it can indicate that individuals are allowed to remain enrolled in the program during times in which they do not qualify, potentially diverting limited resources that could otherwise be invested in better serving vulnerable populations.”

Blase and Greszler’s research raises serious concerns about Minnesota. Is the fraud being investigated just the tip of the iceberg?"