Why and How States and Territories are Addressing Fraud, Waste and Abuse

Medicaid celebrated its 60th anniversary in 2025 and continues to be the subject of considerable constructive tension: demonstrably viewed positively by the American public and the people whom it serves, but also a program whose expanded footprint, cost trends and increasing share of state general fund budgets has explicably attracted considerable attention. And while the proportion of federal funding for the program has been reduced from the enhanced levels that were authorized by Congress during the pandemic, overall federal spending remains significant.

Among other notable indicators, the National Association of State Budget Officers recently reported that Medicaid reflects an average of 30.7% of total state expenditures – the largest total spending category – and 20.0% of general fund expenditures – the second highest category. Further, while national health expenditure data continues to show that Medicaid grew at a lower rate (6.6%) in 2024 than either Medicare (7.8%) or private insurance (8.8%), those increased costs remain significant. In a landscape in which many states are facing serious budget constraints, Medicaid cost trends and scope are a necessary, perennial area of focus.

In addition to the proportion of state and territory budgets attributed to Medicaid spending, state and territory Medicaid programs share the federal government’s interest and urgency around reduction of fraud, waste and abuse (FWA) because:

• they want to ensure that federal and state/territory funds support needed benefits that improve health outcomes for eligible people, as opposed to lining the pockets of bad actors who are defrauding the program;
• many across the country have, over the last ten years, implemented new, gap-filling services for two historically underserved populations – Applied Behavioral Analysis (ABA) for people with ASD and supportive housing services for people with mental health (MH) conditions or substance use disorder (SUD) – that were well intended and much needed but, because of exponential growth, now need careful attention to ensure that needs assessment standards and utilization management guardrails safeguard against overuse, abuse or outright fraud by unscrupulous providers; and
• many states and territories are facing serious budget constraints.

Medicaid agencies use a robust set of program integrity tools today to prevent, reduce and address fraud and abuse in their programs, including:

• Audits and ongoing reviews of eligibility processes. Federal law and regulations establish detailed requirements that states must follow for how and when eligibility is determined and regularly verified through redetermination of coverage. This involves criteria that include, but are not limited to, citizenship, state residency, income, assets (for some coverage groups), and household composition. Applicants and those renewing eligibility are also required to 1) provide information on changes of status in these criteria; and 2) assign to the state their rights to support and payment by a third party for medical care (the “third-party liability” or TPL process). Strategies that support compliance with these requirements include:
  • hotlines through which potential fraud can be reported;
  • state inspectors’ general;
  • reviews by state auditors of compliance with federal standards;
  • state CAPs arising out of findings from CMS’ Payment Error Rate Measurement Program (PERM) audits, which assess and make findings on adherence to standards;
  • robust federal and state examination of the accuracy and efficiency of state systems that support eligibility and renewal processes, and related systems updates and fixes, during the “unwinding” of COVID-19 public health emergency continuous coverage requirements; and
  • lean process reviews of renewal processes through partnerships between the United States DOGE Service (USDS) and states.
• State oversight of Medicaid managed care organization (MCO) contracts. Contracts under which Medicaid programs make capitation payments to private MCOs are the predominant delivery model in the country, with almost 80% of beneficiaries enrolled in managed care arrangements. Medicaid programs use numerous tools including procurement standards, public transparency, and contract accountability features to ensure that MCOs are performing consistent with contract standards, delivering value for taxpayers’ dollars and preventing and remedying fraud. These tools include requirements for plans to have internal program integrity units, corrective action plans, liquidated damages, withholds, monetary penalties, and, as needed, debarment and suspension. Note that MCOs themselves use numerous strategies to combat fraud, including use of compliance teams; monitoring and auditing using analysis of claims and encounter data, chart reviews, billing assessments and provider site visits; enhanced provider screening; and referrals to state MFCUs.
• Provider credentialing, enrollment and re-enrollment processes. Medicaid programs are required to use a range of tools to ensure that providers are properly credentialed and eligible to enroll as Medicaid performing providers. This includes the federal Data Exchange System, which provides access to the Social Security Administration’s Death Master File and the Medicare Exclusion Database. These databases help Medicaid agencies verify that they are not covering services for deceased individuals and are not paying providers who have been excluded from other federally funded health care programs. OBBBA will strengthen these existing processes. Programs must also periodically re-enroll providers and focus particular attention on those that are identified as being at high risk for fraud.
• Utilization management standards. All Medicaid programs implement an array of utilization management (UM) standards, including prior authorization, diagnostic criteria, and caps on type or frequency of services. An applied example of this is adoption of provider credentialing and UM standards for behavioral health services as well as use of American Society for Addiction Medicine (ASAM) guidelines for substance use disorder (SUD) services. Medicaid agencies implement such standards through publication of provider guidelines and system edits that intercept non-compliant claims prior to payment.
• Documentation of services delivered. Programs also use a range of tools through which services that are delivered outside of traditional health care settings must be documented. An important recent example of this is implementation of Electronic Visit Verification (EVV) for home health and personal care services received by older adults and people with disabilities, to help ensure that the services that are ordered through care plans are provided as billed.
• Systemic review and individual post-payment audits. Medicaid programs analyze their claims patterns to identify patterns and outliers that signal potential areas of provider fraud and abuse. They also use post-payment audits that yield findings of inadequate documentation as well as improper billing, and result in recoupment of claims paid. Many states also contract with recovery audit contractors that are incentivized on a contingency basis for identifying fraud.
• Medicaid Fraud Control Units (MFCUs). MFCUs are responsible for investigating referrals related to fraud and patient abuse or neglect by Medicaid-enrolled providers and assessing which of those should be pursued for criminal prosecution and/or civil penalties. In its Medicaid Fraud Control Unit Fiscal Year 2024 Annual Report, the Office of the Inspector General (OIG) detailed that MFCUs reported 1,151 convictions and $1.4 billion in total recoveries in the latest publicly reported period, FY 2024.
• PARIS matches. Since 2009, states have been required to participate in the Public Assistance Reporting Information System (PARIS) as a condition of receiving enhanced federal support for their Medicaid systems. PARIS data checks allow states to identify whether an individual is receiving Medicaid or other public assistance in other state programs, thereby reducing potential duplication of benefits. OBBBA will also enhance this process.
• Staff training on program integrity. Medicaid agency program integrity staff receive training from the Medicaid Integrity Institute to continuously enhance their strategy and operations.

Medicaid programs also use diverse strategies to reduce waste in the program, with a focus on leading cost drivers (hospital services, nursing home care and prescription drugs) as well as administrative expenses. Several important examples of this are:

• Medicaid managed care accountability strategies including Medical Loss Ratios and quality withholds as well as review of claims patterns and use of systems controls to prevent improper payments;
• value-based payment arrangements, ranging from pay-for-performance approaches that link Medicaid reimbursement to outcomes on identified quality and cost measures to models under which providers are held accountable for the total cost of care;
• initiatives to control and reduce Medicaid spending on prescription drugs, including managed care carve-outs and/or carve-outs of one or more drug classes (e.g. hemophilia products, spinal muscular atrophy agents, other cell and gene therapies and/or high-cost specialty drugs) from MCO capitation, new or preferred drugs lists, and value-based arrangements (VBAs); and
• automation of eligibility redeterminations using ex parte processes that have preserved accountability while reducing staff time and the need to request supporting documentation from Medicaid members.

Continue reading the third part in this series, “What CMS Can Do to be of Additional Help with Fraud, Waste and Abuse.”