Explaining Waste, Fraud, and Abuse in Medicaid

In today’s newsletter, I explain why there is so much waste, fraud, and abuse in Medicaid and how policymakers can take steps to reduce it. Paragon has created a two-minute video to explain provider taxes, a central reason for the large amount of wasteful spending in the program. I conclude with a defense of ending passive re-enrollment in subsidized exchange plans.

Medicaid Waste, Fraud, and Abuse Results from Bad Policy Design

Yesterday, President Trump reiterated his commitment to reducing waste, fraud, and abuse in Medicaid. There are two primary drivers of the waste, fraud, and abuse that plague Medicaid—and both must be addressed to fix the program.

First, Washington allows states to establish money-laundering schemes that generate large inflows of federal funds without states making any actual contributions. Second, Obamacare created a perverse incentive that gives states $9 in federal funds for every $1 of state spending on able-bodied, working-age expansion enrollees. These two forces, when combined, make the Obamacare expansion population the most financially attractive group for states, offering a very high rate of return on states’ Medicaid financing schemes.

The negative consequences are numerous.

• State Medicaid money-laundering tactics lead states to expand their Medicaid programs in ways they never would if they were paying the bill. It’s why California was able to use federal taxpayer funds to expand Medicaid for unauthorized immigrants and make Medicaid long-term care coverage available to its wealthiest residents. Other states have used provider taxes to eliminate any state financial responsibility for the expansion population.
• There has been a massive shift in the cost of the program from states to Washington. As states now only bear one-quarter of total Medicaid costs on average, they have little incentive to ensure that spending benefits enrollees.
• Corporate welfare increasingly infects the program. In many states, Medicaid payment rates to large hospital systems have risen well above Medicare levels. The highest-paid health insurance CEO runs a company whose business is almost entirely Medicaid managed care. This CEO alone took home nearly $120 million in total compensation in 2023.
• Improper payments have reached an alarming level due to these financing incentives. We estimate that improper Medicaid payments totaled $1.1 trillion over the past decade. My colleague Liam Sigaud is out with a new data brief explaining how states face strong incentives to misclassify applicants as eligible for Obamacare’s expansion. He estimates that states have incorrectly classified at least 5 million people as expansion enrollees—costing about $30 billion annually.

A recent Paragon report, Addressing Medicaid Money Laundering, describes the Medicaid money-laundering system. (Here is a 400-word summary.) Congress can take two approaches—or a combination of both—to curb the money-laundering system: cut the fuel (i.e., the provider taxes) or cap the kickback payments, which are increasingly routed through state-directed payments (SDPs).

In 2011, then Vice President Joe Biden recommended eliminating provider taxes, calling them a “scam.” A similar proposal was touted by President Obama and praised by The Washington Post editorial board as a “much-needed Medicaid reform.” Reforming and improving protections against provider-tax schemes is not a benefit cut, but rather a historically bipartisan reform that protects Medicaid and its expenditures for the future.

The Trump administration has already taken initial steps to rein in some of the worst abuses of provider taxes. It has issued a proposed rule that would curtail schemes developed by California, New York, and other states to obtain federal Medicaid funds without any real state contributions. The rule would prohibit states from imposing taxes solely on Medicaid providers or insurers and then recycling that money into increased Medicaid payments for those same entities.

Building on the E&C Legislation to Further Reduce Medicaid Waste, Fraud, and Abuse

Energy and Commerce Republicans deserve credit for recognizing the financial unsustainability of Medicaid and taking important steps toward reform, including prioritizing work over welfare for able-bodied, working-age adults and requiring more frequent reviews of eligibility. Committee leaders and staff worked tirelessly, facing more than 24 hours of misleading criticism from Democrats and media commentators. Critics focused on projected coverage losses, but the bulk of these losses would come from individuals not eligible for the program, including unauthorized immigrants, and able-bodied, working-age adults with no children who choose not to work, volunteer, or pursue education.

The House Energy and Commerce reconciliation bill addresses Medicaid money laundering in two important ways. It freezes states’ provider tax rates at current levels and prohibits the establishment of new provider taxes. It also limits new SDPs to no more than Medicare rates. As the process moves forward, Congress should continue to rebalance the program back to a true federal-state financial partnership by limiting states’ ability to avoid their financial responsibility through provider taxes and intergovernmental transfers (IGTs). Congress and the Trump administration should also ensure that existing SDP arrangements comply with the Medicare cap.

Fixing a Broken Part of the ACA: The Importance of Section 112201

The House’s reconciliation package includes many reforms that President Trump recently included in his administration’s Program Integrity and Marketplace Affordability proposed rule. Many of these safeguards would curb improper enrollment and significantly reduce spending. The House package rightly goes one step further.

Section 112201 of the Ways and Means reconciliation bill is a long-overdue fix to some of the most broken parts of Obamacare’s exchanges: lax eligibility verification and automatic re-enrollment. This provision would require exchanges to verify eligibility for advance premium tax credits before enrollment—restoring a basic standard of program integrity. It also encourages greater consumer involvement by requiring individuals to affirmatively confirm they want coverage each year.

Paragon has highlighted how automatic re-enrollment has enabled widespread improper and even fraudulent ACA enrollment, especially among people who report incomes between 100 and 150 percent of the federal poverty level, where coverage is now fully subsidized. The passive nature of the process discourages people from engaging in their coverage and wastes taxpayer dollars on people whose circumstances change and are no longer eligible.

Requiring existing enrollees to take a simple, affirmative step to verify they want coverage would protect program integrity by reducing enrollment among those who no longer need the coverage. Many individuals don’t re-enroll because they gained employer-sponsored insurance or moved. Automatic re-enrollment has kept many of these people in the system anyway, at significant cost to taxpayers. A case in point is Crystal Bedford, who was improperly enrolled in the ACA even though she already had employer coverage. (Watch her story here.)

By requiring exchanges to verify eligibility earlier in the process—before enrollment takes place—this provision would also help reduce the risk that individuals face unexpected charges later due to unresolved data-matching inconsistencies. That’s a better process for both consumers and taxpayers.

Section 112201 represents a serious step toward restoring integrity to the ACA and ensuring that subsidies go to those who are truly eligible. It’s the kind of reform that should unite anyone who believes federal programs should be fair, efficient, and accountable.