States Have The Tools Necessary To Reduce Their Medicaid Improper Payment Rates And Avoid Increased Costs
Key Findings
- Prior to the One, Big, Beautiful Bill, the Medicaid program was on track to surpass $2 trillion in improper payments over the next decade.
- Medicaid improper payment rates are exorbitant when full and accurate audits are performed.
- States will now be held accountable for excessive improper payment rates in medicaid.
- Fortunately, states can implement program integrity measures to bring their improper payment rates down.
Background
Medicaid enrollment and spending have skyrocketed.1 In 2000, the program had only 35 million enrollees with a cost to taxpayers of $206 billion.2 Since then, enrollment has nearly tripled, while costs have soared to $964 billion.3-5 Federal taxpayers have borne the brunt of this increased spending, with federal dollars covering almost 80 percent of the increase over the last decade.6
A major driver of these costs is the rampant waste, fraud, and abuse in the Medicaid program, often aided by bureaucrats.7 Improper payment rates have been shrouded in secrecy by past administrations, but are terrifying when viewed in full.
President Trump and Congress worked to fix this by passing the One, Big, Beautifull Bill. This legislation included measures to reduce waste, fraud, and abuse, and incentivizes states to do likewise by withholding matching funds for excessive improper payment rates.8
States are not left powerless to achieve reductions in their improper payments.There are plenty of tools for states to better manage program integrity, reduce costs, and avoid greater Medicaid payments.
Waste, fraud, and abuse are rampant in the Medicaid program
As the Medicaid program has grown, its program integrity issues, which result in waste, fraud, and abuse, have become even more costly. More than one in every five dollars spent on Medicaid is improper.9 Before the One, Big, Beautiful Bill, the program was on track to have more than $2 trillion in improper payments over the next decade.10
The vast majority of these improper payments are due to eligibility errors. For example, in California, federal auditors found 1.2 million ineligible enrollees on Medicaid, and another 3.2 million were potentially ineligible.11 Auditors determined that 62 percent of Ohio’s expansion enrollees were ineligible or potentially ineligible.12 Auditors from the Office of Inspector General estimated that one in three enrollees from a four state sample were ineligible or potentially ineligible.13
Audits have also revealed tens of thousands of individuals who enrolled multiple times in the same state and hundreds of thousands of people who were enrolled in multiple states.14 Audits have identified millions of Medicaid dollars being improperly spent on enrollees who had moved out of the state or who had never lived in the state where they enrolled.15 Astonishingly, auditors have uncovered hundreds of millions of taxpayer dollars spent on deceased individuals, including people who passed away at the beginning of the Reagan administration.16
Much of this improper spending is fraud by design, architected by bureaucrats to maximize enrollment at all costs.17 A leading culprit here is accepting self-attestation for key eligibility criteria like residency, household composition, and income.18
An audit of Louisiana’s Medicaid program found tens of thousands of ineligible individuals were allowed to enroll because the state did not verify self-attested information.19 New Jersey auditors discovered thousands of enrollees with unreported six-figure incomes, topping out at $4.2 million per year.20
Another aspect of fraud by design is presumptive eligibility determinations—a process where hospitals are allowed to make temporary eligibility determinations before being verified by state agencies.21 State agencies were only able to verify a shockingly low 30 percent of these individuals as actually eligible for the program.22 An audit by the U.S. Department of Health and Human Services (HHS) estimated that 43 percent of sampled spending on these presumptively eligible enrollees was improper.23
Improper payments from waste, fraud, and abuse are a serious problem, which previous administrations have attempted to keep in the dark.
Improper payments have been clouded in secrecy, but are downright scary when viewed in full
The vast majority of improper payments are due to eligibility errors, meaning that individuals enroll in Medicaid despite not being eligible for the program or remain on the program long after becoming ineligible.
Unfortunately, the Obama administration suspended review of eligibility errors in 2014, just as millions of expansion enrollees were joining the program.24 While the Trump administration restarted eligibility reviews, they were largely suspended again and minimized by the Biden administration.25 Through these actions, the Obama and Biden administrations were able to shield roughly half of all improper payments from scrutiny.26
Because of the timeframe that annual audits are performed, there are only two years in which there is a clear picture of what states’ true improper payment rates are. Discovering true improper payment rates is complicated further because audits are performed on a rotating basis, with each state being audited only once every three years.
But what can be gleaned from the years with a full picture should concern everyone.
Only two years have full data on eligibility errors: 2019 and 2020.27 Temporary COVID-related policies partially obscured eligibility errors in 2021 and have completely obscured them since.28-29 In 2019, Medicaid’s improper payment rate was 26.2 percent, and the rate climbed to 27.5 percent in 2020.30 In both years, roughly four in every five improper payments were caused by eligibility errors.31
The One, Big, Beautiful Bill will cut down on the waste, fraud, and abuse in Medicaid that results in improper payments by requiring more frequent eligibility checks, strengthening data cross-checks, and limiting state money laundering schemes.32-33 The legislation will also motivate states to get more serious about program integrity or face steeper payment shares.34
Congress and President Trump gave states a huge incentive to improve program integrity
Federal law requires HHS to reduce federal Medicaid dollars to states when their eligibility-related improper payments exceed three percent.35 However, the HHS was allowed to issue “good-faith” waivers to states that removed the requirement for them to repay federal funds.36
These waivers have been universally applied, meaning that states have not faced any meaningful penalties for excessive improper payment rates, even when improper payment rates have approached 45 percent.37-38 Fortunately, this will change under the One, Big, Beautiful Bill.
The new law removes the good-faith waiver in all but limited circumstances.39 States will no longer receive reimbursement from the federal government for Medicaid money spent in excess of the three percent improper payment standard.
States have always had some incentive to reduce waste, fraud, and abuse because their dollars pay for part of the Medicaid program. But this change will increase their incentive to run their programs with a greater degree of integrity.
Based on the full improper payment data from 2019 and 2020, states could be on the hook for more than $100 billion in extra Medicaid payments annually due to their excessive eligibility error rates.40-42
But states are not doomed to use more of their own taxpayers’ money to pay for Medicaid. There are a number of program integrity measures that states should enact that would help reduce their improper payment rates.
States have the tools to reduce their improper payment rates
With the potential cost increases to Medicaid looming, states have ample program integrity measures they can implement to reduce, or even avoid altogether, the money they owe for excessive improper payments. Because of the high stakes and the importance to state taxpayers, states should enact these reforms as soon as possible.
These boosts to program integrity will help reduce fraud, waste, and abuse by helping to prevent ineligible individuals from enrolling and removing those who are ineligible more quickly. This, in turn, will reduce states’ improper payment rates.
These measures will ultimately save state taxpayers billions of dollars in two ways. First, they will reduce the number of ineligible people on Medicaid, reducing the cost of the program for federal and state taxpayers alike. Second, states will reduce their improper payment rates, lowering or negating the money states owe the federal government for exceeding the standard three percent rate.
The Bottom Line: To avoid additional Medicaid costs, states must lower their improper payment rates by restoring program integrity.
Waste, fraud, and abuse add hundreds of billions of dollars to an already bloated Medicaid program. Bureaucrats within the Obama and Biden administrations attempted to hide true improper payment rates in the Medicaid program, but when full audits are performed, the rates are astonishing.
The One, Big, Beautiful Bill cracked down on waste, fraud, and abuse, slowing the unsustainable growth of the program.43 But an even bigger aspect of the law is how it incentivizes states to crack down on improper payments or face potentially steep cost increases.
States are not left empty-handed in the attempt to reduce their improper payments. There are ready-made program integrity measures they can implement that will clean up their Medicaid programs and lower the costs to their taxpayers.
Appendix: States could be on the hook for billions without improving Medicaid program integrity
