Fraud Is Not the Biggest Source of Health-Care Waste

A s Vice President JD Vance leads the charge against wasteful spending in federal health-care programs, his Task Force to Eliminate Fraud has racked up some impressive wins. It helped the Justice Department take down hundreds of providers accused of defrauding Medicare and Medicaid of billions of dollars and removed 760,000 allegedly fraudulent enrollees from subsidized Obamacare plans, which should save $2.2 billion.

Insofar as fraud can be uncovered, these actions are worthwhile. Yet claims of reining in spending through tighter enforcement are vastly overblown. True criminal conduct is a drop in the bucket of Medicare and Medicaid, which cost federal taxpayers a combined $2 trillion this year. Estimated improper payments in both programs amounted to just $94 billion in 2025, or less than 5 percent of total spending, and eliminating all of it would be practically impossible.

Fortunately, going after fraud isn’t the only way to save money. Far more health-care waste can be found in spending that’s perfectly legal and, in fact, based on official policy. As they currently stand, Medicare and Medicaid are structured in ways that incentivize costlier claims, reward overspending, and even incentivize consolidation in the medical industry.

One of the most abused federal programs is Medicare Advantage, the alternative to traditional Medicare that lets seniors enroll in privately administered plans. The government estimates it will pay $76 billion more in 2026 to support these seniors than if they were enrolled in traditional Medicare, or $1.3 trillion over a decade. That spending goes to the insurers that manage the plans, which then reimburse hospitals and doctors.

Medicare Advantage payments are supposed to be based on typical fee-for-service costs. Higher spending arises because base payments are adjusted for individual enrollees’ health risks, so plans receive more money to cover sicker patients. It makes sense to compensate insurers for genuinely higher medical costs. But evidence suggests that Medicare Advantage enrollees are healthier on average than those using traditional Medicare, after accounting for risk adjustments.

The discrepancy stems from insurers reporting that their enrollees have more health problems than they actually do, in a strategy known as “upcoding.” They often comb through seniors’ health records for old diagnoses and even send nurses and third-party vendors to conduct in-home “health risk assessments,” reporting conditions that don’t require active treatment. The more patients’ risk scores are juiced, the greater the revenue. Medicare’s watchdog estimates that higher coding intensity will cost the program $22 billion in 2026, but banning insurers’ most common upcoding tricks could save $124 billion over a decade.

State governments have a different trick to inflate federal Medicaid payments. Excluding the expansion population under the Affordable Care Act, states are supposed to contribute an average of 40 percent of the safety-net program’s budget, with the federal government providing the other 60 percent. But states have learned how to game the system. All but one partially fund Medicaid with taxes on hospitals and other medical services, known as “provider taxes,” and funnel the money back to those same providers through higher reimbursements. The federal government must match the states’ “spending” at one-and-a-half times, allowing states to grow their Medicaid programs without bearing the cost.

Provider taxes are already limited to 6 percent of providers’ net revenues, and last year’s reconciliation law will reduce the threshold to 3.5 percent by 2032. That provision is expected to save the federal government $183 billion over a decade. By keeping most provider taxes in place, though, the law still lets states collect hundreds of billions of dollars in misbegotten Medicaid funds.

According to economic analyst Charles Sauer of the Market Institute, the wasteful health-care policy with the most collateral damage is traditional Medicare’s reimbursement system, which pays hospitals more than independent physicians for providing virtually identical services to patients. Outpatient departments can receive two to four times more money for the same routine care than physicians’ offices, supposedly to compensate for hospitals’ higher operating expenses. As Sauer notes, however, the economies of scale in hospitals ought to drive costs lower.

This payment difference incentivizes hospitals to gobble up independent practices, as they have for years. Doctors are happy to sell, since reorganizing their offices into off-campus outpatient departments can make their incomes soar. Private reimbursements also rise with consolidation, as many insurers base their payment rates on Medicare’s fee schedule.

A policy of “site neutrality” for Medicare would reduce hospital payments to the levels already set for doctors’ offices for all services provided by both. That could reduce federal spending by up to $200 billion over ten years — and save Medicare enrollees $100 billion by lowering their Part B premiums and out-of-pocket costs. If insurers followed the government’s lead, Americans could save hundreds of billions more in commercial health-care expenses.

There are many other options to cut health-care waste, such as further reforming Medicare Advantage or consolidating and eliminating other programs, but they all require a more serious focus on deep reform than chasing down fraudsters. Preventing relatively small dollars from seeping out the back door is commendable, but policymakers would get a much better return by tying down the big dollars flying out the front door.