Federal health care spending is the primary driver of persistent deficits, rising debt, and escalating interest costs. The federal government now spends more on net interest payments than on national defense. Every billion dollars lost to fraud, abuse, and poorly designed incentives is financed through higher taxes, additional borrowing, or reductions in other national priorities. Every dollar lost to fraud, waste, abuse, or poorly designed incentives contributes to a fiscal trajectory that is increasingly unsustainable.
The purpose of this testimony is not to identify individual examples of fraud. It is to explain the core reasons why waste, fraud, and abuse are so prevalent and what policymakers can do to reduce them. Across the Affordable Care Act exchanges, Medicaid, and Medicare, a common pattern emerges. Policymakers create open-ended federal commitments. States, insurers, providers, brokers, and enrollees respond to the incentives created from these programs. Spending increases rapidly. Fraud and abuse follow. Enforcement agencies attempt to catch up after the fact. The cycle repeats itself.
The best solution begins with better program design with incentives that focus on value and accountability rather than just maximizing expenditures. While Congress needs to change program design, federal agencies can take actions to minimize waste, fraud, and abuse. The main principle for legislative reform should be to ensure that federal subsidy programs do not reward inflationary expenditures and instead incorporate incentives for cost-conscious behavior.
On Medicaid, the Centers for Medicare and Medicaid Services (CMS) can withhold funds from states—and make disallowances—when fraud and abuse results from negligent state actions. CMS should also ensure that it recovers funds from states that have excessive improper payment rates. Over the past few months, CMS has taken appropriate steps in Minnesota and California in response to egregious Medicaid fraud in those states. Hopefully, this is just the start of the process and CMS deploys such strategies in many more states.
Congress should also strengthen financial penalties on states with persistently excessive improper payment rates. States currently bear only a fraction of the cost of improper Medicaid spending, which weakens incentives to improve eligibility verification and program integrity—a problem made worse by Medicaid money laundering schemes designed to minimize the state share of program spending. Fortunately, the One Big Beautiful Bill (OBBB) placed some limits on states’ ability to shift costs to the federal government that future Congresses could build on.
On the Affordable Care Act, the program needs significant reform to improve the quality of plans and lower the cost of plans to enrollees and taxpayers. Congress should reform the subsidy structure so that it does not incentivize higher costs, and Congress should prohibit fully-subsidized plans—which have been a driver of much of the improper and phantom enrollment. OBBB took some important steps to improve enrollment integrity, including eliminating an abused special enrollment period, requiring income verification, and requiring that enrollees who underestimate their income to receive more advanced subsidy must repay that amount back when they file their income taxes.
There are additional steps that would reduce improper and phantom enrollment. Congress or CMS should tighten automatic re-enrollment procedures and require stronger periodic eligibility re-verification, impose tighter oversight on enrollment intermediaries, and aggressively investigate and suspend unscrupulous brokers and intermediaries involved in unauthorized enrollment activity.
On Medicare, CMS should scrutinize claims for outlier providers and billing patterns that are impossible or almost certainly impossible. Paragon recommends a variety of additional reforms to reduce distortions emanating from Medicare payment policies and that lead to wasteful expenditures.
