Medicaid Fraud, Waste, and Abuse
- Paul Francis
- 7 minutes ago
- 15 min read
Commentary # 27 by Paul Francis
PDF available here:
Introduction
It is becoming increasingly clear that Republicans at the national and New York State level intend to make “fraud, waste, and abuse” in Medicaid and other social programs a major issue in the 2026 elections. The most recent flare-up of this chestnut of political scoundrels was triggered by the scandal involving fraud in social services programs in Minnesota. The fact that much of this fraud was tied to members of the Somali immigrant community was exploited by the Trump administration to support its mass deportation message – and led directly to the disgraceful and calamitous ICE operation in Minnesota.
The Trump administration next expanded this on purported Medicaid fraud in California, which the Trump administration tied to the Armenian immigrant community. The headline in the New York Post blared: “Billions in healthcare fraud discovered in California, Minnesota ‘pales in comparison’: Dr Oz.” Dr. Oz claimed that there was $3.5 billion in Medicaid fraud committed by for-profit hospice operators in LA County alone. The de facto US attorney for the Central District of California piled on, claiming that “$10 billion was being spent on illegal immigrant healthcare.”[1]
Dr. Mehmet Oz has generally been fair to New York in his day job as CMS Administrator. However, he increasingly is allowing himself to be used as a political operative of President Trump, including acting as the tip of the spear alleging Medicaid fraud. In this area, Dr. Oz is emulating the standard for accuracy of his direct boss RFK Jr. and Pres. Trump himself. Dr. Oz appears to have made up the $3.5 billion amount of Medicaid fraud committed by for-profit hospice operators in LA County. He may have been thinking of an HHS-OIG audit from 2023, which cited claims of $3.44 billion, but this was a national, multi-program, multi-fraud-type figure — it has nothing to do with hospice care in California or Los Angeles specifically.[2] As is often the case, critics identify actual cases of real fraud in Medicaid, but then radically exaggerate the scale of what has been proven.
Staying on message, Dr. Oz last Sunday said that “It turns out that Maine looks a lot like Minnesota.” (A digression: Maine has a tiny Somali community of several thousand. This appears to have been a catalyst for an ICE surge in Maine – appallingly called the “Catch of the Day Operation” – until it was abruptly ended because of the political damage it was doing to Sen. Susan Collins). Oz, in his remarks last Sunday, added, “We estimate there’s 100 billion dollars of fraud coming out of the programs that administer Medicare, Medicaid, and the like.”
Not to be outdone, a member of the largely irrelevant and usually ignored Republican conference in the New York State Senate legislature made it into the New York Post by claiming: “What’s happening with Medicaid fraud in New York State makes what happened in Minnesota look like child’s play.” State Senator George Borrello added that “the fraud in Medicaid in New York State is so massive, it dwarfs anything we’re seeing anywhere else in the country.”
It is hard to overstate the corrosive impact of this tendency to vastly exaggerate the scale of real fraud. One of the reasons government over-engineers against risk is the exceptional political damage of fraud and abuse, which undermines support for government programs and faith in government as an institution. For that reason, when there is real fraud or bad-faith abuse, government in general and Democrats in particular should come down on it like a ton of bricks.
But there is another moral of the story when it comes to charges of “fraud, waste, and abuse.” That is the power of language in shaping (and often distorting) public opinion. Although the Trump administration is taking manipulation of reality to new heights by creating AI altered memes in an effort to demean its political opponents, conflating the very different concepts of “fraud, waste, and abuse” into a simple charge of “fraud” has long been a weapon in the battleground for the hearts and minds of the public. Each of these terms has a distinct meaning and describes qualitatively different actions. But they are frequently lumped together and conflated under the explosive term of “fraud” conducted by “fraudsters.”
If you think of these terms to represent a continuum of conduct, the litany would be more complete by adding the term and concept of “program integrity.” To understand the real nature of fraud, waste, and abuse (as well as program integrity) in Medicaid, it’s important to unpack the meaning of these very different terms.
Fraud
“Fraud,” by legal and regulatory definition, refers to an intentional act of deception or misrepresentation made in order to receive an unauthorized benefit or payment. Examples of intentional fraud, such as when the Medicaid recipient doesn’t exist or the provider gets paid without providing the service, are the easiest to define and for the public to understand.
By law, the New York State Department of Health (DOH) and the Office of the Medicaid Inspector General (OMIG) are required to refer cases of fraud to the New York Attorney General’s Medicaid Fraud Control Unit (MFCU, pronounced “ma-foo-coo”). In 2024, OMIG referred 195 allegations to MFCU to be reviewed for further action. Although the exact amount of MFCU fraud-related collections is not always easy to find, historically, they have been in the neighborhood of approximately $75 million annually. For 2024, the amount appears to be $59.9 million. That is a lot of money in absolute terms, but a pittance in the context of New York’s $125 billion Medicaid program.[3]
Program Integrity
Although OMIG tends to talk about its mission in terms of “fraud, waste, and abuse,” most of what they are engaged in could be best described as ensuring “program integrity.” When OMIG makes recoveries of Medicaid payments, the underlying conduct does not involve intentional fraud (which is referred to MFCU) but there is a legal basis for clawing back the Medicaid payment.
“Program integrity” is a better term certainly than fraud or abuse because most of its audit efforts serve to identify improper payments resulting from technical errors such as insufficient documentation or the availability of other third parties besides Medicaid to pay the claim. Many if not most of OMIG’s recoveries don’t necessarily involve bad actors. This is not to say that “program integrity” is not important – it is vitally important – but it generally does not involve intentional efforts to scam the public.
According to the 2024 OMIG Annual Report, the NYS Medicaid Data Warehouse in 2024 contained more than 660 million original claims, 305 million adjustment transactions of various types, and 38 million void transactions (i.e., overpayments that are self-reported by providers). Because it would be impossible to audit all of these claims, OMIG reviews a random sample of claims selected by CMS, in addition to pursuing its own audit targets. In the most recently reported cycle year 2023, CMS (relying on a Medical Review by NYS OMIG) estimated the federal “improper payment rate” was 1.43% in NYS Medicaid, compared to the national average of 5.09%.
OMIG’s policy of relying on random audits inherently requires extrapolation of results to the unaudited portions of the provider’s related activities to achieve recoveries in meaningful amounts. This can have the perverse effect of hugely inflating the amount of payment recoveries (perhaps better thought of as “penalties”) for technical errors. This has long been a point of contention between providers and the State.
The least controversial, but most impactful OMIG activity from the standpoint of reducing Medicaid spending, is its Third-Party Liability (TPL) program, which ensures that Medicaid funds are not used if other sources of payment, such as Medicare or commercial insurance, are available. In 2024, Medicaid avoided more than $3.7 billion in payments by ensuring that other forms of health care coverage were utilized, since Medicaid is the payer of last resort.
In 2024, OMIG recovered $752 million in improper Medicaid payments of various types (this includes “voids” of self-reported over-payments that are tracked by OMIG).[4] That is not a small amount – and it dwarfs the amount of criminal, intentional fraud. However, improper payments – most of which involve insufficient documentation for services that were actually provided – are not what critics have in mind when they scream that there is massive Medicaid fraud, waste, and abuse.
Abuse
As you move across the continuum from “fraud” to “program integrity” to “abuse” to “waste,” the meanings of the terms become more subjective. Moreover, whether conduct constitutes “abuse” or “waste” increasingly is in the eye of the beholder.
Federal Medicaid regulations offer a technical definition of “program abuse” as "provider practices that do not meet the definition of civil or criminal fraud under applicable State law, but nonetheless are inconsistent with sound fiscal, business, or medical practices" (42 CFR Part 1007.1).
This definition is so broad as to be largely meaningless. I think a better way of describing Medicaid “abuse” involves conduct that essentially constitutes receiving payments or benefits by gaming the system. The underlying conduct in these “gaming-the-system” situations is generally within or very close to the boundaries of legal practices.
In the same way that “program integrity” recoveries dwarf those from intentional fraud, I think it’s fair to say that the amount of Medicaid spending generated by this type of gaming-the-system abuse probably dwarfs that of program integrity recoveries.
Because both “fraud” and gaming-the-system “abuse” involve intentional conduct, the distinction might be made more clear through some hypothetical examples. If a Medicaid managed long-term care plan (MLTC) pays kickbacks to a fiscal intermediary (FI) for members the FI delivers to the plan, that is intentional fraud. If the MLTC plan uses a “Tasking Tool” that results in treatment plans that are richer in hours of personal care provided than those offered by its competitors in order to attract members, that is an example of abuse by gaming the system. As an aside, the State sought to impose a uniform Tasking Tool on MLTCs a few years ago, but this was blocked by industry opposition and threat of litigation.
Eric Linzer, the Executive Director of the New York Health Plan Association, offered some stunning examples of gaming-the-system abuse[5] in an op-ed published on Tuesday, calling on the state legislature to adopt reforms to the State’s Independent Dispute Resolution (IDR) law, which has been abused by a number of Medicaid providers.
Nevertheless, the big money in Medicaid (and Medicare) abuse is not attributable to what are pejoratively referred to as “Medicaid entrepreneurs,” but rather to some of the biggest players in the healthcare industry. One of the most notorious and consequential cases of gaming-the-system abuse of Medicare programs involves the routine manipulation of health acuity risk scores in Medicare Advantage plans by the largest companies in the country in order to increase their capitation payments.
The sicker the member appears to be (which is based on risk scores), the higher the capitation payment from the federal government. The Department of Justice has battled UnitedHealthcare for years over claims that United was engaged in business practices designed to inflate these risk scores. In 2025, the Department of Justice launched separate criminal and civil investigations into United's Medicare billing practices, focusing on diagnoses added without physician confirmation and software tools used to guide documentation toward higher risk codes. DOJ has pursued similar cases against other Medicare Advantage insurers, reaching settlements with Cigna and Independent Health, among others.
While the federal government regards these practices as abuse – and just last week, issued rules prohibiting some of them – the insurance companies contend that they were simply seeking to better manage their members’ care and that maximizing revenue was simply an ancillary benefit within established rules. In the end, even a dispassionate observer like the Wall Street Journal editorial page acknowledged that: “Critics have a valid point that insurers have sought to extract bigger risk-adjustment payments by making patients out to be sicker than they are….”
Another consequential example of gaming-the-system abuse was the practice of many states, including New York, of using MCO taxes to draw down billions of dollars in additional federal Medicaid revenue. There can be no serious argument that MCO taxes were anything other than taking advantage of a giant loophole in federal regulations. The Biden administration gave notice in 2024 that it intended to close the loophole, but they were gone before they had time to do so. When the Trump administration issued final regulations to do so in late January, CMS fairly described the action as closing down a “Medicaid financing gimmick.”[6]
Waste
“Waste” in Medicaid is an even more subjective and difficult concept to define than Medicaid abuse, and therefore leads to more disputes and harder feelings among the participants. In the context of Medicaid, I think much of what critics describe as “waste” is really just the critics’ disagreement with a duly adopted policy.
For example, when the de facto US Attorney for Central California says that California is engaged in $10 billion of fraud, waste, and abuse by covering “illegal aliens,” he is really saying that he disagrees with California’s policy of covering undocumented residents with State-only Medicaid funds.
In New York, critics like Sen. Borello imply that the CDPAP is riddled with “fraud, waste, and abuse” without being specific about what aspects of the program he would change. Similarly, the Hochul administration strives mightily to present all of the savings associated with the FI reform under the CDPAP program as having no impact on recipients or workers. Rather, as Health Commissioner James McDonald wrote in a recent op-ed, the $1.2 billion in savings in the State’s CDPAP were “being achieved by eliminating waste, reducing excessive administrative costs, and strengthening program integrity – not by reducing services for people who depend on care.”
I have written extensively about the CDPAP program and the recent FI reforms, which I strongly support. However, it’s far from clear that all the savings are being realized without negatively impacting recipients or workers. There are instances of outright fraud in the CDPAP program and other cases of abuse through gaming the system. But achieving significant savings in the program will generally require changes in the underlying policy. The recently implemented change in the eligibility standard for personal care, which requires a higher threshold of need in Activities of Daily Living, is an example of such a programmatic change. As I have written before, in the long run policymakers would be better served by an honest discussion of the trade-offs involved in providing this form of long-term care than suggesting there is an easy solution by simply eliminating fraud, waste, and abuse.
A more expansive definition of what is sometimes described as “waste” in healthcare spending is even further afield from the connotation of “waste” in the litany of “fraud, waste, and abuse.” Several studies by respected academics or healthcare think tanks have claimed that “waste” accounts for as much as 25% of all healthcare spending in the US.[7] In this context, “waste” is being used to mean “unnecessary services” or “inefficient” aspects of the healthcare delivery system. Appendix A describes how one major academic study arrived at this estimate.
Whether healthcare services are unnecessary is, of course, an even more subjective determination than what constitutes abuse and waste in the Medicaid context. Two examples of trying to prevent unnecessary services that almost everyone can relate to illustrate how subjective these conclusions are: the first example is prior authorization of medical procedures; and the second example is the “fail first” protocol of insurance plans that requires less expensive prescription drugs to be proven ineffective before the plan will authorize a more expensive prescription drug recommended by a physician. These practices may reduce unnecessary services, or they may simply reduce utilization due to administrative barriers. In any event, these policies and practices are immensely unpopular.
Similarly, what constitutes “inefficiency” in the healthcare delivery system requires subjective judgments. Examples of what many consider to be inefficiency in the healthcare delivery system include restrictive scope of practice laws whose stated purpose is patient safety but whose real purpose is income preservation for the affected guild, and clinical interventions driven by litigation avoidance that could be mitigated by changing medical malpractice laws. In these and other examples, however, there is a fierce debate about whether the activity is “inefficient” or appropriate public policy.
The current controversy about “site-neutral” reimbursement policies illustrates the complexity of these policy decisions. On the surface, a site-neutral reimbursement policy suggests a clear opportunity to reduce waste or inefficiency in the healthcare system.
“Site-neutral" refers to a situation in which the same service commands a substantially different reimbursement rate depending on where a procedure is performed. Medicare pays, on average, 2.5 times more for many identical outpatient procedures when they are performed in a hospital outpatient department than it would if the procedure were performed in a provider’s office. (The reimbursement premium in the case of commercial insurance is even greater.)
Site-neutral payment reform would eliminate or narrow this differential for a defined set of lower-complexity outpatient services — things like office visits, imaging, lab work, drug administration, and routine procedures — that can be safely performed in any ambulatory setting. The goal is for Medicare to pay the same rate for the same service, whether it is provided in a hospital outpatient department, ambulatory surgical center, or freestanding provider’s office.
For Medicare alone, the Congressional Budget Office projects that legislating Medicare site neutrality for services most commonly delivered in physician offices would reduce the federal budget deficit by $157 billion over 10 years – some estimates are even higher.
In New York State, much of the energy and rhetoric around site-neutral policy involves the Fair Pricing Act (S705/A2140), sponsored by Senator Liz Krueger and Assemblywoman Chantel Jackson. The Fair Pricing Act actually combines true site-neutral savings – i.e., the portion attributable to eliminating the hospital outpatient department markup over what physician offices charge in the commercial market and price controls that would limit reimbursement to 150% of the Medicare physician fee schedule for these routine procedures.
The hospital industry in New York argues that paying a higher reimbursement rate to hospitals is not “waste” but necessary reimbursement of hospitals for the higher fixed costs hospitals need to bear compared to non-hospital providers, such as maintaining an emergency department and providing 24-hour access.
Healthcare is no exception to the saying that “one man’s inefficiency is another man’s job.” In the context of site-neutral policies, one man’s inefficiency may be a hospital’s ability to survive.
Politicians face a dilemma. There really aren’t easy answers about what constitutes “unnecessary” services and pricing disparities, nor are there easy answers to the political obstacles posed by regulations such as scope of practice restrictions or lack of medical malpractice reform. Yet while there are no easy answers for reducing healthcare costs, politicians face growing complaints about the affordability of healthcare and growing worries about the long-term sustainability of generous programs such as CDPAP.
Confronted with this dilemma, the political system too often resorts to the argument that these problems would be solved if we just eliminated fraud, waste, and abuse. The public would be better served in evaluating these claims if there were a better understanding of what people are really referring to when they are talking about fraud, waste, and abuse.
Appendix A
A landmark study of waste in American healthcare published in the Journal of the American Medical Association in 2019 estimated total waste at approximately $760 billion to $935 billion annually (in 2019 dollars), or 25% of total healthcare spending, attributing this expense across six domains first established by the Institute of Medicine in 2010 and revised in 2012 by Don Berwick and Andrew Hackbarth:
Waste Category | Estimated Annual Cost |
Administrative Complexity | $265.6 billion |
Pricing Failures | $230.7 billion to $240.5 billion |
Failure of Care Delivery | $102.4 billion to $165.7 billion |
Overtreatment (Low-Value Care) | $75.7 billion to $101.2 billion |
Fraud and Abuse | $58.5 billion to $83.9 billion |
Failure of Care Coordination | $27.2 billion to $78.2 billion |
The authors provide a detailed table of cost estimates by specific areas within each domain, excerpted here from p. 4 of the article:
They also published a table of expected savings from relevant interventions to curb waste:
Endnotes
[1] California legally spends $9.5 billion in State-only Medicaid funds on providing coverage to undocumented residents. The Trump administration is making a strained legal argument that this is indirectly using unrelated federal funds.
[2] See, the Fall 2023 Semiannual Report to Congress (SAR), which highlights over $3.44 billion in expected recoveries resulting from HHS-OIG audits and investigations conducted during fiscal year (FY) 2023. However, as noted, this has little or nothing to do with fraud by hospice operators in California.
[3] Occasionally, there will be a conviction of Medicaid fraud with a headline grabbing number. This summer, for example, the US attorney for the Eastern District of New York announced that “Zakia Khan pleaded guilty in federal court in Brooklyn today to conspiring to defraud Medicaid of approximately $68 million through the payment of kickbacks and bribes at two Brooklyn social adult day care centers that she owned in Coney Island.” See, Brooklyn Woman Pleads Guilty to Leading a $68 Million Social Adult Day Care and Home Health Care Fraud Scheme, August 6, 2025.
[4] See p. 79. The Annual Report notes that "recovery amounts presented in this report may be associated with overpayments identified in earlier reporting periods and may be greater than the amounts identified during the reporting period." (p. 6)
[5] Some examples from the op-ed:
§ An individual needed emergency back surgery at a downstate hospital, which was performed by an out-of-network surgeon. While the Medicaid fee schedule reimbursed for the surgery at nearly $3,000, the provider disputed the amount, submitting a bill in excess of $566,000 – almost 200 times the Medicaid rate. The independent reviewer determined the surgeon should have been reimbursed over $514,000, which became the ultimate cost to the taxpayers.
§ A patient with spinal nerve compression that was causing muscle weakness was admitted to a downstate hospital and required surgery. An out-of-network orthopedic surgeon performed the procedure, charging over $563,000, well above the Medicaid fee schedule of roughly $1,300. The independent reviewer rendered a decision that the provider was owed over $507,000.
§ A downstate neurosurgery group that was out-of-network performed spinal fusion surgery on an individual at an in-network hospital. The Medicaid fee schedule set a rate of $1,757, while the group charged nearly $81,000, with the independent reviewer determining that the neurosurgery group’s requested amount to be more reasonable.
[6] States that took advantage of the MCO tax loophole, like the insurance plans defending risk adjustment payment manipulation, argued that they were just seeking to maximize revenue within the rules. It was tongue-in-cheek when I wrote about New York State's adoption of this practice, "God, I wish I thought of that," but the fact is that it would have required more strength than today's political culture allows to not take advantage of a Gift Horse like the MCO tax when it was available.
[7] See Appendix A. Shrank, William H., Teresa L. Rogstad, and Natasha Parekh. "Waste in the US health care system: estimated costs and potential for savings." Jama 322.15 (2019): 1501-1509.