Improper Medicaid Payments Have Soared since Obamacare

Americans are conditioned to expect inefficiency and waste in government programs. We make jokes about long lines at the DMV and the Bridge to Nowhere as if slow-moving bureaucracy and fiscal profligacy are features of the system. But a recent report from the Centers for Medicare and Medicaid Services (CMS) puts government mismanagement on a different plane and should alarm all Americans. The report reveals astronomical improper spending in Medicaid, our nation’s third-largest government program.

The true Medicaid improper-payment rate now exceeds 25 percent, meaning that more than one in every four dollars spent in the Medicaid program — or more than $100 billion in federal spending each year — is in violation of program rules. It turns out that millions of Medicaid enrollees are ineligible for the program — in most cases because they earn too much income, but in others because they are not lawful residents. The media, to date, have virtually ignored the issue; but taxpayers are being fleeced, and we can’t fix the problem until people know and understand what’s happening.

The CMS report finds that much of this is due to states not properly verifying that recipients are eligible for Medicaid. In many instances, they ignore federal requirements and do not check applicants’ incomes, nor do they conduct regular reviews to ensure that those on the program continue to meet eligibility rules. People qualify for Medicaid largely on the basis of income, and so failing to verify a Medicaid applicant’s income is like failing to check a Medicare applicant’s age. Past audits confirm that eligibility errors account for more than six in ten improper payments.

How did we get here? A key component of the Affordable Care Act (ACA) was expanding Medicaid to cover a new category of citizens — mostly childless, working-age, non-disabled adults. As states began this process in 2014, the Obama administration focused on getting as many people enrolled in the program as possible in an effort to build political support for the ACA. This was done, however, at the expense of program integrity. The administration irresponsibly canceled audits of whether new enrollees met eligibility guidelines or whether eligibility was properly determined. The consequences are now clearly visible; Medicaid’s improper-payment rate prior to the ACA’s Medicaid expansion was only 6 percent, less than one-fourth of what the true rate is today.

The ACA reimburses states for nearly the full cost of expanding Medicaid to this new category of enrollees, so states had strong incentives to misclassify enrollees as newly eligible under the expansion. In many states, insurers and providers also had these incentives since the state government made higher payments on behalf of expansion enrollees than traditional enrollees, such as low-income children, pregnant women, and individuals with disabilities.

Importantly, the government audit of Medicaid expenditures consisted of entirely pre–COVID-19 data. Unfortunately, a provision of one of the initial coronavirus relief bills locks in the high improper-payment rates in Medicaid. In essence, Congress has handcuffed states from removing any Medicaid enrollees from the program, even those who are ineligible.

That the media have paid scant attention to the Medicaid improper-payment rate is concerning, as is the charge from some on the left that large and growing improper payments aren’t a problem. One such argument is that this spike in improper payments doesn’t signal fraud and abuse and that most eligibility errors reflect minor “procedural” issues.

This take is false and damaging. More than one in four dollars flowing out of one of the government’s largest program violate program rules. We should all be able to agree that program rules should be followed and only those eligible to receive benefits should be enrolled in the program. Unfortunately, over the last several years, CMS has focused on structural reforms to the program — most of which have floundered — rather than enforcing the law and ensuring taxpayer dollars were lawfully spent.

When income isn’t verified or eligibility isn’t properly redetermined, it can’t be dismissed as just a procedural hang-up. Enrolling the right people is one of the most important and basic roles of government management of programs.

Some groups on the left oppose reforms that would clamp down on mismanagement of Medicaid and improve program integrity. These groups measure the success of programs, even welfare programs such as Medicaid, by their size — and the bigger, the better. But, executive agencies such as CMS are supposed to be enforcing the law. They have failed to do so, making a mockery out of the program’s basic rules. This in turn has harmed both the truly eligible by crowding out resources and services for them, as well as taxpayers who are forced to finance the massive amount of improper spending. It’s past time for reform.

Technical Note: CMS’s Medicaid improper-payment reports are lagged as CMS audits one-third of states each year. The most recent report (the 2020 report) was an average of the audits completed in 2017, 2018, and 2019. CMS’s eligibility audits restarted in 2018 (for the 2019 report). Even with the eligibility audit for only a third of states, last year’s report showed a soaring improper-payment rate — from 8 percent ($36 billion) to 15 percent ($57 billion) over the previous year. The 2020 report includes the results from the 2017 audit where eligibility was not reviewed and the 2018 and 2019 audits where eligibility was reviewed. Adding another year when eligibility was reviewed caused the improper payment rate to soar again — up to 21 percent ($86 billion).  However, more than 40 percent of states that expanded Medicaid and had the highest suspected improper-payment rates have not yet been audited. An audit of these states will be included in next year’s report. Next year, once all the states Medicaid programs have had their eligibility audit completed, the published Medicaid improper payment rate will soar above 25 percent ($100 billion a year).

Brian Blase is a visiting fellow at the Foundation for Government Accountability. He served as a special assistant to President Trump at the National Economic Council and is CEO of Blase Policy Strategies. Hayden Dublois is a research analyst at the Foundation for Government Accountability.