$1.1 Trillion of Federal Medicaid Improper Payments Over Last Decade

Paragon and the Economic Policy Innovation Center (EPIC) published a new policy brief this week on the nearly $1.1 trillion of federal Medicaid improper payments from 2015 through 2024. In today’s newsletter, I summarize our findings and recommendations.

Last week, The Wall Street Journal also published a very strong editorial well worth your time to read on various problems with Medicaid, including massive funding disparities across states, with a call for reform. The bottom line: federal policymakers need to restructure Medicaid so that states have incentives to get value through the program rather than view Medicaid as a way to get more federal funding for general purposes.

Arriving at $1.1 Trillion of Federal Improper Medicaid Spending

The Centers for Medicare and Medicaid Services (CMS) published annual reports of Medicaid improper payments that collectively show $543 billion of federal Medicaid improper payments from 2015 through 2024. That figure is bad enough, but as Rachel Greszler and I show in the policy brief, the official government reports drastically undercount actual improper payments.

The main reason that the official numbers do not reflect true improper payments in Medicaid is that the Obama administration and the Biden administration did not do complete audits of state Medicaid programs when they were in charge. The policy brief has more detail, but the essence is that their audits excluded reviews of whether states were properly conducting eligibility reviews prior to placing people onto Medicaid. In the two years where full audits were conducted (the 2019 and 2020 cycles), the federal improper payment rates averaged 27 percent. Rachel and I applied a 25 percent improper payment rate to total federal Medicaid expenditures over this period to arrive at the $1.1 trillion in improper expenditures. This is probably a lower bound on Medicaid improper payments during this period.

Why Did We Have $1.1 Trillion of Federal Medicaid Improper Payments?

The main reason improper payment rates in Medicaid are so high is because states fail to ensure that eligibility is properly verified prior to enrollment. The root cause: bad incentives facing states due to the open-ended federal reimbursement of state Medicaid expenditures. If states were to reduce $1,000,000 of improper expenditures, they would need to return most of that to the federal government.
 
The basic bad incentives in the program are amplified by the terms of the Medicaid expansion in the Affordable Care Act (ACA). As a result of the ACA, the federal government reimburses a much higher percentage of state costs for providing Medicaid to able-bodied, working-age, generally childless adults than for traditional enrollees, such as low-income children, pregnant women, seniors, and the disabled. Rachel and I wrote, “This higher reimbursement rate for expansion enrollees creates an incentive for states to improperly classify traditional enrollees, as well as ineligible applicants, as expansion enrollees.” In other words, states make money when they classify a traditional enrollee as an expansion enrollee, and they are generally held harmless when they enroll someone not eligible for Medicaid as an expansion enrollee.

How Can We Drastically Reduce the $1.1 Trillion of Federal Medicaid Improper Payments?

The main reason I cite to support Paragon’s Medicaid reform proposal, which would phase down the 90 percent expansion reimbursement rate and expand eligibility for ACA premium tax credits, is to end Medicaid’s current discrimination against traditional enrollees that harms their access to services. An important secondary reason is to reduce wasteful state expenditures and improper spending. Phasing down the 90 percent expansion reimbursement rate would provide states with much greater incentives to ensure proper eligibility and reduce their incentive to enroll ineligible applicants into the expansion—both those eligible for Medicaid before the terms of the expansion and those ineligible for the program entirely.

In the new policy brief, Rachel and I endorse several other policies that would increase states’ incentives to reduce improper payments and would improve Medicaid program integrity. Here are two key steps:

1. Federal policymakers should require states to conduct more frequent reviews of eligibility and conduct complete audits of state programs, including reviews of their eligibility determinations. We write that “As the number one reason for improper Medicaid payments is eligibility errors, federal policymakers should require states to conduct more frequent eligibility redeterminations for existing Medicaid enrollees, assessing eligibility for most enrollees every six months.”
2. Federal policymakers should hold states accountable for high Medicaid error rates. This can include enforcing penalties against states that have large error rates or docking future federal Medicaid funds by lowering the reimbursement rate in states that have extremely high error rates.

As I have discussed quite a bit recently, there has been a massive Medicaid cost shift from the states to the federal government over the past 15 years with the federal government bearing the entire economic burden for the tremendous growth of Medicaid over this period. This is because of the high federal reimbursement for the expansion population and increased states’ use of money laundering techniques to maximize federal funds without actual state contributions (the subject of a forthcoming Paragon report). Federal policymakers should reform Medicaid by tackling both problems this year