Waste, Fraud, and Abuse in Government Health Care Programs is No Joke

The scale of waste, fraud, and abuse in government health care programs is staggering. Last week, Centers for Medicare and Medicaid Services (CMS) Administrator Mehmet Oz warned at the annual CPAC conference: “We believe [fraud, waste, and abuse] is taking a hundred billion dollars out of our health care system.” He went on to note that catching fraudsters is about “more than the money” because “if you’re willing to steal someone’s cash, you’re willing to steal their health and even their life.”

Dr. Oz pointed to examples that highlight how brazen these problems have become:

• An autism program that grew from $3 million to $400 million after fraudulent diagnoses
• Los Angeles County accounting for one third of all hospices in the country
• South Florida having more durable medical equipment suppliers than McDonald’s restaurants

Health and Human Services Secretary Robert F. Kennedy Jr. said in an interview last week that under the Biden administration: “People in my agency were ordered… not to enforce against fraud… they were told we want to focus only on enrollment.” For four years, policy choices rewarded enrollment growth and spending expansion while weakening oversight and accountability.

In this week’s newsletter, I summarize our response to CMS’s CRUSH Fraud Request for Information (RFI) outlining policies to reduce waste, fraud, and abuse; highlight our new state checklist for curbing waste, fraud, and abuse; and examine California’s Medicaid spending surge in a new PIC.

CMS’s War on Fraud RFI

Our response to CMS’s CRUSH Fraud RFI makes a central point: waste, fraud, and abuse are not primarily the result of isolated bad actors but rather the direct, predictable, and inevitable consequence of flawed program design. In Medicaid, the open-ended federal matching system creates incentives for states to maximize spending because every additional dollar draws additional federal funds. In the Affordable Care Act (ACA) exchanges, weak eligibility verification and a flawed subsidy design have enabled widespread improper enrollment and retention of ineligible individuals.

One of the most significant drivers of excess spending is legalized Medicaid money laundering, which we documented in a research paper last year. States use provider taxes and intergovernmental transfers (IGTs) to recycle funds and generate federal payments without real state contributions. States then use these funds to deliver corporate welfare payments to politically favored providers, often with scant oversight and tenuous connections to patient outcomes and value. These payments are often well in excess of Medicare rates, and they distort provider incentives, encourage consolidation, and lead to higher costs. A new Paragon PIC illustrates the IGT Medicaid money laundering system.

We recommend CMS take the following actions to promote integrity within Medicaid:

• Enforce payment parity so that public providers are not paid more than private providers for identical services
• Require full transparency of IGTs, state-directed payments (SDPs), and supplemental payments, including the source of funds and federal match amounts
• Close loopholes in provider tax rules that allow states to circumvent statutory limits

We also emphasize eligibility integrity as a core reform priority. Over the past decade, improper Medicaid payments likely exceed $1 trillion, driven by permissive eligibility rules, reliance on self-attestation, and infrequent redeterminations. Many states fail to verify income, residency, and eligibility using available data, allowing ineligible individuals to enroll and remain on the program. Strengthening eligibility systems requires:

• Real-time data verification using federal and state databases
• Elimination of self-attestation for key eligibility criteria
• Frequent and automatic eligibility redeterminations

We further highlight high-risk service categories where fraud is concentrated. In home and community-based services (HCBS), weak oversight allows billing for services that are difficult to verify and often not performed. In nonemergency medical transport (NEMT), standing ride authorizations and poor documentation create opportunities for abuse. In autism and early intervention programs, weak diagnostic standards and high reimbursement rates have led to explosive spending growth and fraudulent billing. In substance use disorder (SUD) programs, inadequate documentation and oversight allow for the misuse of funds.

Finally, we recommend shifting from a “pay and chase” model to a pre-payment integrity system. This includes real-time verification, automated anomaly detection, and withholding payment on suspicious claims. Preventing improper payments before they occur is far more effective at stopping fraud than attempting to recover funds after the fact.

We included multiple recommendations to ensure that ACA subsidies only go to those truly eligible and to prevent gamesmanship and improper and phantom enrollment. We urge stronger verification controls and real-time data checks, particularly for applicants with low reported income. To curb intermediary-driven fraud in the ACA exchanges, we recommend stricter oversight of brokers and web-brokers, including banning proxy licensing, requiring multi-factor consumer consent, and disclosing commission structures.

On Medicare, we recommend that CMS not respond to fraud concerns by importing fee-for-service (FFS) micromanagement into Medicare Advantage (MA). MA plans already operate under capitated payments and have strong incentives to control costs and prevent fraud. Imposing FFS-style billing rules and regulatory micromanagement would undermine the flexibility and efficiency that make MA a valuable option for seniors.

What States Can Do Right Now

States have the authority to address waste, fraud, and abuse without waiting for federal policy changes because they manage their Medicaid programs. States can reduce reliance on federal deficit spending, improve program integrity, expand transparency, and strengthen enforcement against fraud schemes.

First, states should take steps to reduce their dependence on federal financing and align their programs with long-term fiscal sustainability. States should phase down these financing tools, eliminate payment disparities between public and private providers, and ensure that Medicaid payments do not exceed Medicare rates for comparable services.

Second, states should strengthen their eligibility measures. This includes conducting frequent eligibility redeterminations, verifying eligibility using available data sources, rejecting self-attestation, and limiting presumptive eligibility pathways that lead to significant improper enrollment and misspending. These reforms would ensure that Medicaid serves those who are truly eligible rather than those who exploit weak verification systems.

Third, states must focus on high-risk service categories where fraud is most prevalent. In HCBS programs, this includes requiring in-person assessments, electronic visit verification, and limits on excessive service hours. In NEMT, states should restrict standing ride authorizations and require verification of services provided. In autism and early intervention programs, states should require independent diagnostic confirmation, enforce documentation standards, and establish guardrails for high-intensity service utilization. In SUD programs, states should require auditable documentation of services and enforce utilization controls.

Fourth, states should improve transparency and accountability in Medicaid managed care. This includes requiring detailed encounter data, auditing medical loss ratios, disclosing related-party transactions, and ensuring that capitation rates are developed by independent actuaries. Without transparency into how funds flow through managed care organizations and their affiliates, it is difficult to identify fraud or assess value.

Finally, states should strengthen enforcement tools. This includes redesigning and expanding Medicaid Fraud Control Units, conducting regular audits, and suspending providers upon credible evidence of fraud. Early intervention is critical to preventing large-scale fraud.

States are already demonstrating that reform is possible. Indiana recently enacted legislation implementing key provisions of the OBBB, which we highlighted in a recent Bill Spotlight. Utah just enacted important Medicaid managed care transparency legislation, strengthening oversight of managed care organizations and improving visibility into financial relationships and spending patterns. These examples show that states can lead and that meaningful program integrity reforms are achievable.

California’s Medicaid Gold Rush

California provides a clear example of misaligned incentives. A new Paragon PIC shows that, in nominal terms, California Medicaid spending has grown nearly fourfold since the ACA’s Medicaid expansion—twice the national average.

This growth has been driven by enrollment expansions among able-bodied adults, coverage of unauthorized immigrants, and policy changes that extend benefits beyond the program’s original mandate to serve the most vulnerable populations.

At the same time, California has aggressively used the legalized Medicaid money-laundering apparatus—provider taxes, IGTs, and managed care financing schemes—to draw down billions in federal funds while minimizing its own financial contribution.

These financing strategies fueled rapid spending growth and created strong incentives for waste, fraud, and abuse. California serves as a cautionary tale of how programs designed to maximize federal funding — rather than deliver value —produce substantial waste.