The Trump administration has discovered the crisis of Medicare and Medicaid fraud. In the words of Centers for Medicare and Medicaid Services Administrator Mehmet Oz, “the full weight of the federal government is going after healthcare fraudsters—protecting American families and patients.” Oz has estimated $100 billion in annual fraud in Medicaid alone. His agency recently shut down 800 Los Angeles-based hospices that were paid $1.4 billion for alleged sham services last year.
Unfortunately, medical-payment fraud is not new. The Trump administration joins every other presidential administration since Medicare and Medicaid were created in announcing a crackdown. Congress has been equally constant: the Government Accountability Office has designated both programs as being high-risk for fraud for 23 consecutive years.
Finally, a reason to check your email.
Sign up for our free newsletter today.
No matter how successful Oz proves at catching fraudsters, he will discover what his predecessors learned: Medicare and Medicaid fraud don’t disappear. Instead, they shift—to a new billing code, specialty, or geography—and resume at roughly the same scale. That’s because there is a fundamental flaw in the programs’ design: fraud is not meaningfully distinct from ordinary billing. The fraud, in other words, is baked in.
That flaw is clearest in Medicare, which attempts something that no other major health system in the world tries: it promises to pay for essentially all health care that a senior needs—an open-ended guarantee with no defined limit. And it does so through an entitlement rather than a budget: spending is determined entirely by the volume of claims submitted and approved. There is no annual appropriation that constrains spending once exhausted, and no administrator empowered to say enough.
Other publicly funded health systems—in Europe, Canada, and elsewhere—make tradeoffs explicitly. They operate within budgets, tolerate waiting lists, and make collective decisions about which treatments are cost-effective. But when there is no budget, there is no pressure on spending. And when there is no pressure on spending, incentives flow in only one direction: more care, more billing, and more cost.
Because of the program’s unique design, Medicare fraud does not exist in a separate universe from normal Medicare billing; it exists on a continuum. At one end is essential care—the hip replacement, chemotherapy, or cardiac stent that clearly needed to happen. Further along is care that is probably reasonable but not strictly necessary. Then comes unnecessary but harmless care; then unnecessary care that harms the patient. At the far end is fraud: services never rendered, diagnoses inflated to justify more expensive treatment, or equipment shipped to patients who never requested it.
Fraud is expensive for taxpayers, but Medicare’s lack of limits also generates excess care that harms patients directly. Medicare itself reports tens of billions spent each year on unnecessary—and often harmful—back surgeries, stents, knee arthroscopies, skin grafts, and diagnostic tests.
Medicaid fraud is somewhat different. The program is administered by states, but while individual patients often face limits on services, the federal commitment to states is itself an uncapped entitlement. The more spending a state can attribute to Medicaid, the more federal matching funds it receives. This makes state governments, unwittingly or not, partners in fraud.
Policymakers and politicians have tried nearly every conceivable reform to address this. Today’s “new” ideas—value-based care, capitation, managed care—are variations of earlier efforts that failed to move the needle. Combining a commitment to all “needed” care with unlimited spending capacity creates pressures toward waste and fraud so powerful that no regulation or penalty can meaningfully contain them.
An open-ended entitlement promising comprehensive health care commands enormous political support. No politician wants to tell a 75-year-old voter that coverage has limits, or that a treatment is not worth the cost. And because so much Medicaid funding is diverted toward low-value services, any attempt to discipline spending is vulnerable to being portrayed as cutting essential benefits.
Consequently, Medicare and Medicaid fraud become the political gifts that keep on giving. Politicians can appear serious about health-care costs without confronting the hard decisions. They can chase bad actors while avoiding the thornier task of explaining that a promise originating in good faith 60 years ago can no longer be sustained.
Of course, Oz should pursue “fraudsters”—without an enforcement effort, the effects of fraud on patients and taxpayers would be worse. But the persistence of Medicare and Medicaid fraud is the product of a structural flaw protected by powerful political forces. Our best hope is to focus on building a health-care system for everyone else that is more affordable, transparent, navigable, and effective—and then let Medicare and Medicaid beneficiaries demand to join it.