What to do about $1.1 trillion in improper Medicaid payments

As the 119th Congress seeks to reduce government spending through reconciliation, talk of Medicaid reductions has raised concerns about vulnerable populations losing Medicaid coverage. But simply following the law and paying only for what Medicaid allows would save hundreds of billions of dollars without ending coverage for any of Medicaid’s intended recipients.

According to official reports, the government issued $543 billion in improper Medicaid payments from 2015 to 2024. But that’s only what the government measured.

Based on the few years that the government performed full audits, I coauthored a report with Paragon Health Institute President Brian Blase that estimated that the true amount of improper payments is twice that, totaling roughly $1.1 trillion over the last decade. That’s a whopping $8,200 per U.S. household.

The primary reason for the discrepancy is that the Obama and Biden administrations excluded eligibility checks in their audits of improper payments in Medicaid. But eligibility errors and failures to properly assess eligibility prior to enrollment are the biggest sources of improper payments.

Since Medicaid is a means-tested welfare program and includes different federal reimbursement rates based on enrollees’ eligibility status, checking eligibility is crucial. In many cases, individuals who are not eligible for the program are enrolled in it, and in other instances, those enrolled are wrongly classified.

The federal government reimburses states for between 50 percent and 75 percent of Medicaid costs for their traditional Medicaid enrollees — which includes children, pregnant women, seniors and individuals with disabilities — with lower rates in wealthier states. The Affordable Care Act expanded Medicaid to able-bodied, working-age and generally childless individuals, which crowded out access to care for traditional enrollees.

Because expansion enrollees receive a much higher 90 percent federal reimbursement, states have the incentive to wrongly classify traditional enrollees as expansion enrollees.

Moreover, hospitals can use presumptive eligibility, which is an expedited Medicaid enrollment process that permits hospitals to essentially enroll people into Medicaid based on only a few questions about income and household size and without verification. People receive temporary Medicaid coverage pending a review.

The Foundation for Government Accountability found that in 2018, 70 percent of people deemed eligible by hospitals were eventually determined ineligible or did not complete the application and have their information verified.

Measures taken during the COVID-19 pandemic — including increasing federal support of Medicaid so long as states did not update their eligibility requirements or remove ineligible people from the program — led to an estimated 20 million ineligible enrollees on Medicaid by the time President Biden finally declared an end to the public health emergency.

Failing to even check for these eligibility errors in state Medicaid audits causes massive underreporting of improper payments. In 2019 and 2020 when the government conducted full audits that included eligibility determinations, the improper payment rates averaged 27 percent.

When we apply a 25 percent improper payment rate for all years between 2014 and 2023, we estimate roughly $1.1 trillion in improper Medicaid payments.

Much of this is money that should not have been spent if the federal and state governments were following the law. Congress enacted legislation directing the Health and Human Services secretary to push the cost of excessive improper payments back onto states by withholding federal funds for improper payments over three percent. Despite states routinely issuing improper payments many times that level, HHS has never withheld funds under that requirement.

To automatically incorporate accountability into improper payment rates, Congress should require CMS to reduce future federal Medicaid reimbursements to high-offender states so those states, which are responsible for managing the programs, bear the cost of their failures instead of federal taxpayers.

Moreover, to prevent underreporting of improper payments, federal policymakers should require states to conduct more frequent eligibility redeterminations, improve hospitals' presumptive eligibility enrollment and require full audits of improper payments including eligibility checks.

Many changes are necessary to improve Medicaid and protect the integrity of federal taxpayers’ spending on it. Following the law and cracking down on improper payments is a common sense first step that could provide hundreds of billions of dollars in Medicaid savings.

Rachel Greszler is a visiting fellow in workforce at the Economic Policy Innovation Center and co-author with Brian Blase of the report, “Medicaid’s True Improper Payments Double Those Reported by CMS.”

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