Pervasive Medicaid Fraud: HHS Crowdsourcing + A New Policy Brief

Paragon Health Institute exposes the next layer of Medicaid fraud.

My bet on Michigan's trouble spots: ABA Autism and Substance Use Disorder.

https://paragoninstitute.org/newsletter/pervasive-medicaid-fraud-hhs-crowdsourcing-a-new-policy-brief/

Pervasive Medicaid Fraud: HHS Crowdsourcing + A New Policy Brief

February 18, 2026

Medicaid waste, fraud, and abuse are back in the spotlight following the Department of Health and Human Services’ (HHS) bold decision to open source a massive amount of Medicaid data. The dataset covers roughly $1.1 trillion in Medicaid claims—slightly more than one-fifth of total Medicaid spending from 2018 through 2024.

Waste, fraud, and abuse are pervasive in Medicaid because the federal government reimburses a large share of every state’s spending—without limit. On average, the federal government pays about 70 percent of Medicaid expenditures. As a result, states—which administer Medicaid or contract the work to managed care organizations—have little incentive to ensure proper payments. Obamacare exacerbated these bad incentives. Washington finances nearly the full cost of Medicaid expansion enrollees, creating incentives for states to prioritize able-bodied adults over traditional enrollees such as children and people with disabilities and encouraging profligacy.

The Trump administration’s decision to release Medicaid data is a welcome and long overdue step toward more transparent and accountable government. Transparency is essential to exposing systemic waste and realigning incentives with accountability. Open sourcing Medicaid data will enable independent auditing and pattern detection, allow researchers to identify abnormal billing spikes, expose suspicious provider growth trends, and increase deterrence by raising the probability of detection. Enterprising and conscientious private citizens have already identified aberrant billing patterns. The volume of questionable claims suggests significant opportunities for investigation, deterrence, prosecutions, and recoveries.

Today’s newsletter builds on this transparency moment by highlighting new Paragon work on structural problems in Medicaid and particular vulnerabilities. First, I highlight a new policy brief that I coauthored with Chris Medrano, “Beyond Minnesota: Four Medicaid Services Vulnerable to Fraud and the Case for Stronger CMS Enforcement.” I also highlight an op-ed I coauthored with Chris Medrano on an emerging Medicaid money-laundering scam that the Centers for Medicare and Medicaid Services (CMS) should take steps to close. And I conclude with a new Paragon PIC analyzing the Congressional Budget Office’s (CBO) latest Medicaid projections—confirming that the One Big Beautiful Bill (OBBB) did not cut Medicaid and that federal Medicaid spending will steadily increase over the next decade.

Four Areas of Medicaid Particularly Vulnerable to Fraud
The rampant welfare fraud uncovered in Minnesota is not an anomaly. In our policy brief, Chris and I identify four service categories where structural vulnerabilities and weak oversight have consistently produced elevated fraud risk.

Home- and Community-Based Services (HCBS)

HCBS spending has grown explosively, and its decentralized delivery model and weak verification controls make it one of Medicaid’s most fraud-prone categories. Care is often delivered in people’s homes by loosely supervised aides, frequently relatives. Many states allow “self-direction,” meaning beneficiaries effectively control Medicaid dollars and hire family members as caregivers.

Medicaid HCBS spending reached $95 billion in 2019 and surged further during the pandemic. In some states, workforce growth itself raises red flags. In FY 2024, HCBS was the largest fee-for-service spending category, totaling approximately $130 billion. New York, for example, has roughly three times as many home health and personal care aides per capita as the national average.

Non-Emergency Medical Transportation

Medicaid reimburses routine transportation to medical appointments—a recipe for both unnecessary utilization and fraud. Fraud schemes have included billing for trips that never occurred and manipulating phone GPS data to falsify ride locations. Between 2015 and 2020, there were more than 200 criminal convictions, civil settlements, or judgments against transportation providers across 25 states.

Applied Behavioral Analysis (ABA) for Autism

Following CMS guidance in 2014 clarifying Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) coverage requirements, state Medicaid spending on ABA services exploded. In Indiana alone, Medicaid ABA spending reportedly increased from $21 million in 2017 to $611 million in 2023. Federal audits found at least $185 million in improper payments in Wisconsin and $56 million in Indiana. In Indiana’s audit sample, 95 of 100 enrollee months lacked required documentation. Rapid coverage expansion and diagnostic growth created ideal conditions for inflated or unsupported billing.

Substance Use Disorder (SUD) Services

Medicaid SUD coverage expanded substantially over the past decade through Section 1115 waivers. In Arizona, state officials acknowledged that fraud in sober living and treatment facilities may have cost taxpayers up to $2.5 billion.

CMS Must Consistently and Aggressively Use Its Enforcement Authorities
For decades, Medicaid oversight has relied primarily on guidance and corrective action plans rather than financial accountability. That approach has failed. Encouragingly, CMS is now signaling a shift by using its Section 1904 authority to preemptively withhold funds. Consistent use of its statutory authorities can materially change state incentives and improve program oversight.

Section 1904 of the Social Security Act allows CMS to withhold federal matching funds when a state fails to comply with basic stewardship obligations. This is a forward-looking compliance tool designed to compel systemic correction. CMS’s actions in Minnesota, including potential withholding of federal funds, represent a major shift away from tolerance toward accountability.

Not only should CMS continue to use Section 1904 authority, but it should also use complementary authority under Section 1903, which allows the agency to deny or recoup federal matching funds tied to improper expenditures. Disallowances correct past violations and ensure states do not retain misspent federal funds. Federal law already requires disallowances when improper payment rates exceed 3 percent. Historically, that mandate has not been enforced. CMS should use Payment Error Rate Measurement (PERM) findings as enforcement triggers, and CMS should bolster PERM by including managed care claims in its evaluation of proper Medicaid program spending.

Incentives drive behavior. The federal government has a responsibility to hold states accountable for how they manage the program and federal taxpayer dollars by embedding real financial consequences into Medicaid’s structure—restoring stewardship and protecting the program for those it is meant to serve.

Stop Another Major Medicaid Money-Laundering Scam Before It Spreads
In a new op-ed in The Federalist, Chris and I explain how states are exploiting intergovernmental transfers (IGTs) to inflate Medicaid payments and shift costs to federal taxpayers—often to the detriment of patient outcomes. In December, we coauthored a policy brief on IGTs.

Here is the IGT scheme: The state makes a large Medicaid payment to a government provider. Next, the state invoices the federal government, and Washington sends the state money according to the state’s reimbursement percentage. Then, the state requires the provider to transfer funds back to the state through an IGT. In sum, the state can use almost entirely federal funds to make those large payments to providers. The IGT is circular with the funds going from the state and then back to the government provider—but the federal matching funds are real.

The result is massive payment disparities for identical services. In California, public ambulance providers receive Medicaid payments three times higher than private providers for the same transport. In Indiana, IGT-driven arrangements led to the rapid conversion of nursing homes into “public” facilities, with inflated Medicaid payments tied to higher rates of nursing home deaths.

CMS has clear statutory authority to require Medicaid payments be consistent with efficiency, economy, and quality of care. CMS should enforce payment parity for identical services and prevent IGT schemes from becoming the next multibillion-dollar Medicaid loophole.

CBO’s New Baseline Confirms OBBB Did Not Cut Medicaid
In a new Paragon PIC, John R. Graham analyzes CBO’s latest forecast for federal Medicaid spending, which contains significant policy-related and technical changes. The updated baseline confirms that the OBBB did not cut Medicaid; rather, it slowed the program’s projected growth. Even so, CBO now projects that federal Medicaid spending will be higher a decade from now than it projected before President Biden took office. The PIC contrasts CBO’s projections of federal Medicaid spending from 2021 (pre-Biden), 2025 (pre-OBBB), and 2026.

Federal Medicaid Spending Will Remain Above Pre-Biden Projected Levels, Per CBO

CBO estimates that the OBBB’s reforms reduced projected Medicaid spending by roughly $1.1 trillion over the next decade. However, technical updates increased projected spending by approximately $500 billion, reflecting higher-than-expected behavioral health, home health, and prescription drug costs.

The data underscore two realities. First, Biden-era policies that ballooned enrollment and exacerbated an explosion of state-directed payments fueling Medicaid rates near average commercial rates turned Medicaid into a vehicle for money laundering, corporate welfare, and rampant waste, fraud, and abuse. Second, those policies so expanded Medicaid’s spending baseline that even after the crucial reforms in OBBB, CBO projects federal Medicaid spending will remain above the pre-Biden baseline level of spending—reinforcing the need for further reforms.

Brian Blase, Ph.D., is the President of Paragon Health Institute. Brian was Special Assistant to the President for Economic Policy at the White House’s National Economic Council (NEC) from 2017-2019, where he coordinated the development and execution of numerous health policies and advised the President, NEC director, and senior officials. After leaving the White House, Brian founded Blase Policy Strategies and served as its CEO.