Rewarding Reform, Punishing Neglect: How Annual Improper Payment Reviews Can Fix Medicaid Accountability
Key Findings
- Waste, fraud, and abuse in Medicaid have skyrocketed.
- Medicaid improper payment rates have exceeded 25 percent in each of the most recent years with complete data.
- Under the One, Big, Beautiful Bill, states will soon be on the hook for their excessive improper payment rates.
- The Centers for Medicare & Medicaid Services (CMS) reviews improper payments on a rolling, three-year cycle, meaning most of these important data points are out of date.
- CMS should conduct improper payment reviews annually for every state.
Overview
Medicaid was designed to provide a safety net for the truly needy, such as individuals with disabilities, low-income children, and the elderly.1 But the program has been on an unsustainable growth path as both enrollment and spending have soared.2
Much of the program’s spending is caused by waste, fraud, and abuse. Concerningly, a large portion of improper payments is caused by eligibility errors.3 These errors allow ineligible individuals to enroll and stay on Medicaid, draining taxpayer resources from the truly needy.
The One, Big, Beautiful Bill addresses this by requiring states to pay for their excessive improper payment rates.4
Unfortunately, CMS performs these improper payment reviews on a three-year cycle for each state. This means the reviews are not as up to date as they should be. As a result, positive actions taken by states will not be immediately rewarded, and federal taxpayers will continue to pay the price for states that further turn a blind eye to waste, fraud, and abuse in Medicaid.
CMS already has the authority to perform these reviews each year for every state. Other welfare programs, like food stamps, already do annual reviews, and CMS should do the same. This is a commonsense reform that will help maximize the positive effects of the One, Big, Beautiful Bill, reward states for implementing program integrity measures in Medicaid, and protect federal taxpayers from any increasing wasteful spending in other states.
Waste, fraud, and abuse in Medicaid create skyrocketing costs
Medicaid spending has increased from $206 billion in 2000 to $964 billion in 2024.5 The primary driver of the growth in spending has been increased enrollment.6 In 2000, there were 35 million people enrolled in the program, but enrollment has since peaked above 100 million.7
This growth has driven up federal deficits and debt and has crowded out spending on other state programs.8-9 When interest on deficit spending is included, the true cost is higher still.10
An alarming amount of Medicaid spending is fraudulent and has been allowed to occur because of poor program integrity measures.11 More than one in five taxpayer dollars spent on Medicaid is improper, and roughly four in five improper payments are the result of an eligibility error.12-13 This all adds up to an estimated $2 trillion in improper payments over the next decade.14
Where performed, state audits have revealed major problems and large-scale enrollment of ineligible individuals in Medicaid. A federal audit in California found that the state made Medicaid payments on behalf of roughly four million ineligible or potentially ineligible enrollees.15 Fewer than half of the payments went to actual eligible enrollees.16
An Ohio audit showed that more than three in five enrollees in the state’s expansion population were ineligible or potentially ineligible.17 Additional audits across the country have revealed millions more Medicaid enrollees who are ineligible or potentially ineligible.18
The enrollment and payment of services for ineligible individuals diverts taxpayer money away from Medicaid’s targeted recipients. But the One, Big, Beautiful Bill introduced a significant financial incentive to encourage states to address waste, fraud, and abuse in their Medicaid programs and bring down their improper payment rates.
States will soon pay for their excessive improper payment rates
True Medicaid improper payment rates have been clouded in secrecy by actions taken by the Obama and Biden administrations. Both suspended reviews of eligibility errors, which account for most improper payments, meaning there is limited accurate data for improper payments since Medicaid was expanded.19
But the years with full, accurate data are downright scary for those opposed to the waste of taxpayer resources. In each of the two most recent years with complete data, more than one-quarter of Medicaid payments were improper.20 This is as stunning as it is unacceptable.
These improper payments were not minor issues that did little to affect the bottom line. Roughly four in five were the result of eligibility errors; individuals were able to enroll and remain in Medicaid despite not being eligible.21
States have technically been required to pay for eligibility-related improper payments that exceed three percent.22 However, states have always received good-faith waivers that removed the requirement that they repay the federal government for improper payments.23 These waivers have been universally sought and granted, meaning states have not faced penalties even when their rates have approached 15 times the allowable rate.24-25
But this is about to change with the One, Big, Beautiful Bill. The law removes the good-faith waiver in all but limited circumstances.26 This means that states will no longer receive reimbursement from the federal government for Medicaid spending that exceeds the three percent improper payment standard.
This encourages states to implement program integrity measures to root out waste, fraud, and abuse in Medicaid. But to maximize the impact, CMS must act to ensure that improper payment data is up to date to effectuate positive state reforms.
CMS’s improper payment review cycle is untenable
While states must now fix their Medicaid improper payment rates or face fiscal consequences, CMS should also fix the improper payment review process.
Currently, CMS divides the states into three separate review cycles. This means each state has a full review only once every three years. The Obama and Biden administrations exacerbated this data lag issue by suspending the review of eligibility errors.
The result is that the most accurate improper payment data for most states is at least a half-decade old, and some states do not have fully accurate data post-ObamaCare expansion.
A lot changes in one year, let alone three years, as food stamp error rate reviews show. From 2022 to 2023, 2023 to 2024, and again from 2024 to 2025, more than half of states saw a double-digit percentage change in their error rates.27 Multiple states had their error rates either double or cut in half in just one year.28
In Medicaid, similar swings would mean billions of dollars in costs shifting between state and federal taxpayers. But when reviews are performed only every three years, these cost shifts will fail to happen. Instead, states would be locked into their improper payment rates and accompanying penalties until the next review.
Depending on how a state’s improper payment rate has changed since the last review, this outdated rate can cause either state or federal taxpayers to pay more for Medicaid than they should. Fortunately, the fix is straightforward.
Annual improper payment reviews are necessary
CMS conducts improper payment audits for states through the Payment Error Rate Measurement (PERM) program.29 These audits are currently conducted on a rolling, three-year cycle for each state. But federal law allows CMS to prescribe the form and frequency of PERM audits.30
Other welfare programs have annual improper payment reviews.31 This includes food stamps, which establishes annual error rates for each state, which will be used to establish new cost-sharing requirements.32-33 In fact, Medicaid itself used to require annual state reviews of statistically valid statewide samples through the Medicaid Eligibility Quality Control program.34
Annual reviews make sense when error rates can fluctuate from year to year, especially based on program integrity measures implemented by the states. Annual reviews also help shine a light on where improvements need to be made.
States have the tools necessary to reduce their improper payment rates.35 Having a rate higher than the three percent allowed before facing financial consequences can be a great motivator for states to implement some of these approaches. Being able to see how the rates change year after year would show states where they are improving, and if more actions should be taken.
With measures available to improve program integrity and reduce improper payment rates, locking states into outdated rates works against reform. States that pass reforms to lower their improper payment rates and be responsible with state taxpayers’ money might not see positive effects for three years. This is not as strong a motivator as it can or should be.
On the flip side, states that weaken existing program integrity measures or ignore existing gaps, allowing more waste, fraud, and abuse, are not properly motivated either. These states may not see their improper payment rates, and thus their cost share, increase for three years. By that point, the governors or lawmakers who ignored the problem may be out of office, avoiding the budget crunch to come. In the meantime, federal taxpayers would be footing the bill for a state’s lack of desire to prevent waste, fraud, and abuse in Medicaid.
To address this problem and encourage states to implement program integrity measures in Medicaid, CMS should conduct annual reviews for every state, just as in the food stamps program. Doing so helps to ensure the most accurate and up-to-date rates, which is important now that states will be on the hook for excessive improper payment rates. It will also more quickly reward states for acting against waste, fraud, and abuse.
The Bottom Line:
To make the most of the reforms in the One, Big, Beautiful Bill, CMS should conduct improper payment reviews for each state, every year.
Medicaid spending growth has been out of control, with taxpayers footing the bill for billions in waste, fraud, and abuse. The One, Big, Beautiful Bill is making states take financial responsibility for this wasteful spending by making them pay for excessive improper payment rates.
To make this reform even more beneficial and reward states for improving their Medicaid program integrity, CMS should perform improper payment reviews for each state every year.
Other programs like food stamps already do this, and CMS has the authority to do so. Taking this step will ensure these important figures are up to date and that states are properly motivated to take immediate action.
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