Advancing Medicare Reform + Obamacare Enrollment and Medicaid Fraud Updates

Today’s newsletter begins with a new policy brief analyzing the Centers for Medicare and Medicaid Services’ 2027 Outpatient Prospective Payment System (OPPS) proposed rule. This rule advances important reforms that would address payment distortions that lead to wasteful spending and consolidation, strengthen program integrity, and save enrollees billions of dollars annually. Then, I discuss a new Prognosis showing that ACA exchange enrollment has declined much more in states with the greatest evidence of improper and phantom enrollment. I also highlight a new Government Accountability Office report that reinforces the need for much stronger exchange oversight.

Nick Shirley drew more attention last week with a video showing large-scale wasteful Medicaid spending in New York. I posted five short observations about the new video on X over the weekend, and address Medicaid waste and fraud in today’s newsletter as well.

Finally, if you missed yesterday’s fascinating virtual conversation with Paragon’s Medicare Reform Initiative director Demetrios Kouzoukas and former MedPAC chair and Harvard University professor Michael Chernew about his 12 years at MedPAC and various key Medicare payment issues, you can find it here.

Once Again in the Trump Administration, CMS Proposes Important Medicare Reforms

CMS’s proposed 2027 Outpatient Prospective Payment System rule spans hundreds of pages, but three reforms stand out because they address particularly perverse Medicare payment policies. Jackson Hammond has a new policy brief on the proposed rule.

First, CMS proposes to reform Medicare payment for drugs purchased through the 340B Drug Pricing Program. CMS surveyed hospitals’ acquisition costs for 340B drugs and found that many 340B hospitals purchase drugs at discounts that lead to prices far below the amounts for which Medicare currently reimburses them.

CMS now proposes paying close to actual acquisition costs. Although the policy is budget neutral within the outpatient payment system and therefore redistributes much of the Medicare savings through higher payments for other outpatient services, enrollees would still save more than $1 billion each year in lower cost sharing. The proposal would also reduce a major Medicare payment distortion that incentivizes hospitals to acquire physician practices simply to capture higher outpatient drug margins.

Second, CMS proposes additional site-neutral payment reforms in Medicare to address the problem that Medicare often pays dramatically more for identical services simply because they are furnished in a hospital outpatient department rather than a physician’s office. CMS proposes equal payments for certain imaging services regardless of setting. This policy change would improve competition, reduce incentives for consolidation, and move Medicare toward paying for value instead of ownership status. CMS also proposes to continue expanding the procedures that can be provided in ambulatory surgical centers while continuing to phase out the inpatient-only list, giving physicians and patients greater flexibility to receive care in the most appropriate setting.

Third, CMS proposes requiring prior authorization for selected botulinum toxin (better known as Botox) injections after identifying utilization growth inconsistent with clinical need. Medicare already has statutory authority to use prior authorization when services exhibit unusual volume growth, and CMS should continue applying this authority whenever the evidence supports stronger oversight.

Viewed together, these proposals reflect a broader shift toward improving Medicare’s incentives rather than simply adjusting payment rates. They also demonstrate that many reforms Paragon has recommended—including acquisition-cost-based 340B reimbursement, expanded site neutrality, and stronger program integrity—are increasingly becoming part of mainstream Medicare policymaking. CMS should finalize these reforms and continue pursuing the additional changes we have identified to improve incentives, strengthen competition, and increase value for Medicare beneficiaries.

New Prognosis: Improper Enrollment Predicts ACA Exchange Attrition

Between February 2025 and February 2026, ACA exchange enrollment fell by 2.6 million enrollees. Much of the mainstream media is attributing these enrollment declines to a loss of legitimate coverage from people who cannot afford their plans. In this Prognosis I authored with Mark Howell, we show that these declines are much greater in states with high levels of improper and phantom enrollment.

The analysis examines four separate relationships using different measures of improper and phantom enrollment. Every specification shows the same result: states with the greatest evidence of improper enrollment experienced substantially larger enrollment declines once eligibility verification was strengthened and zero-premium coverage became less common in 2026.

Figure 1 shows that states with unusually high zero-claim enrollment subsequently experienced much larger declines in effectuated enrollment.

Figure 3 is particularly compelling because it uses Paragon’s 2025 improper enrollment estimates to predict subsequent enrollment changes in 2026. Because the estimates predate the enrollment decline, they provide out-of-sample evidence that is difficult to reconcile with the view that healthy enrollees simply chose to drop coverage. Instead, the results are consistent with improper enrollment—not widespread loss of legitimate coverage—explaining much of the recent attrition.

Taken together, the evidence points to a straightforward conclusion. Stronger verification is working as intended by removing duplicate, improper, and phantom enrollment from the exchanges. Insurers and unscrupulous brokers benefited from improper and phantom enrollment for years. Restoring program integrity is long overdue and will better protect both taxpayers and legitimate enrollees.

Independent evidence reinforces the same conclusion. On Monday, the Government Accountability Office (GAO) reported that HealthCare.gov experienced widespread unauthorized enrollments and significant program integrity weaknesses in recent years. GAO’s recommendations—including multifactor authentication and stronger broker oversight—are long-overdue reforms that Paragon has advocated for years.

Nick Shirley Continues to Expose Massive Government Health Care Fraud and Abuse

Investigative journalist Nick Shirley drew more attention to large-scale Medicaid fraud and waste with a video exploring problems in New York. Shirley focused on adult daycare centers—and his on-the-ground journalism raises a host of troubling questions about the lack of integrity in New York’s Medicaid program. At one point in the video, Shirley shows how taxpayers are funding adult daycare centers in Queens where seniors essentially socialize and play games. Although such centers may provide valuable social connections and community for seniors, those services fall outside Medicaid’s purpose and should not be financed through a program intended to finance medical services for the truly vulnerable.

Shirley also visited many businesses that appear suspicious and may have billed amounts far beyond what is plausible. In the latter half of the video, Shirley was joined by CMS Administrator Dr. Mehmet Oz. The two surveyed some of the pharmacies and adult day cares that have proliferated throughout Queens and seem to be part of alleged kickback and overbilling schemes.

On a per-resident basis, New York has by far the most expansive Medicaid program in the country. These problems are longstanding and intertwined with New York’s political culture that has tolerated fraud, waste, and abuse in pursuit of additional federal Medicaid funding. In early 2013, the Committee on Oversight and Government Reform released a bipartisan report documenting tens of billions of misspending in New York’s Medicaid program, a corrupt political class that enables fraud and abuse, and a state philosophy of continually expanding Medicaid to draw down as much federal funding as possible.

Shirley’s reporting also raises questions about why obvious problems persisted for so long without meaningful scrutiny from either the mainstream media or government oversight agencies. Fraud is not merely an accounting problem; it changes behavior. Businesses become comfortable operating in ways they know are improper, while some participants begin expecting cash or other inducements to enroll. Those incentives undermine public trust and divert resources away from the vulnerable who depend on Medicaid.

The debate over so-called Medicaid cuts too often ignores these realities. Protecting program integrity is not a threat to Medicaid’s mission—it is essential to preserving it. Every dollar lost to fraud, waste, or abuse is unavailable for legitimate medical care. Restoring program integrity helps preserve Medicaid for the vulnerable patients it was designed to serve.