Report: Medicaid structure may incentivize lax fraud prevention at state level

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(The Center Square) – Medicaid’s federal-state cost sharing system may disincentivize states from cracking down on fraudulent and improper payments, a new issue brief released by U.S. Congress Joint Economic Committee Republicans finds.

States pay at most 50 cents for each Medicaid dollar the federal government contributes to their healthcare systems.

But that also means states more economically dependent on the healthcare sector face greater economic consequences when federal Medicaid spending decreases, the issue brief, entitled Who Pays, Who Saves? How Medicaid Payment Structures Impact Fraud Enforcement, notes.

In states like California, where much of the state's job growth occurs in the healthcare system, “local changes in employment, tax revenue, or service capabilities following reductions in payments relative to the federal government…[carry] an immediate impact that is not felt as strongly at the federal level.”

“As job growth in certain states becomes increasingly dependent on healthcare and social services, states may have less incentive to rein in wasteful or unnecessary spending that may be artificially driving job growth,” Alex Schunk, JEC senior policy advisor, wrote in the brief.

“This is not to say that states are deliberately allowing fraud, but rather when the federal government is the main benefactor from reductions in state spending there may be underenforcement especially when healthcare is a significant part of a state’s economy,” Schunk added.

California, which has over 10 million residents enrolled in Medicaid, is one of roughly two dozen states that sued the federal government over the boosted work requirements enacted in Republicans’ “One Big Beautiful Bill.”

With the Congressional Budget Office and others estimating that roughly 5 million people will fail to meet the new work requirements and lose coverage, state spending on Medicaid benefits will fall and trigger a decrease in federal matching payments as well.

The OBBBA also implemented measures meant to prevent fraud and improper payments, which is estimated to additionally reduce the flow of federal dollars going into state healthcare systems.

JEC Chairman Rep. David Schweikert, R-Ariz., argued that reforms to the Medicaid payment structure are necessary, not only to stabilize Medicaid spending – which is expected to top $8 trillion over the next decade – but also incentivize states to “aggressively” pursue fraud.

“Given the amount of federal spending on healthcare services, I’ve often said the federal government is basically an insurance company with a military,” Schweikert stated in his response to the issue brief.

“As states administer these programs despite the federal government paying the majority of the bill, they should bear more of the financial risk. Moving toward block grants would give states a greater incentive to root out waste, fraud and abuse.”