• Noah Rich

Let's Take a Look at Fraud Against State Medicaid Programs

By Noah Rich of Baron & Budd, P.C.

In the last few days, we’ve been discussing the impact of fraud on the federal healthcare programs, but whistleblowers also play an important role in fighting fraud in state healthcare programs like Medicaid. Some experts estimate that fraud accounts for as much as 20 percent of government healthcare spending.[1] This means that, through Medicaid and other programs, the average state may waste as much as 6.4% of its total budget on healthcare fraud every year.[2]


Imagine if we could stop this wasteful spending. Let’s consider Texas, a state with an annual budget of more than $123 billion.[3] 6.4 percent of Texas’ 2021 budget would total nearly $7.9 billion. This sum would fund the entire state university system—including community and technical colleges—for a year, with more than $1 billion left over.[4] $7.9 billion could cover nearly 70% of the cost of the state’s annual highway development spending,[6] or it could fund the state’s direct services to veterans every year for the next 364 years.[6]


State False Claims Act enforcement efforts are an efficient use of taxpayer money: in 2019, state Medicaid Fraud Control Units recovered $6.41 for every $1 spent on enforcement. Four of the largest healthcare fraud settlements by states demonstrate some of the schemes that lawbreakers use to defraud the government, and the effectiveness of whistleblowers in fighting back:

  1. 2019 – $678 million (multiple states): In this litigation, a group of state Attorneys General alleged that many of the world’s largest drug manufacturers fraudulently inflated their prices to fool states into paying more for their drugs.

  2. 2012 – $583 million (multiple states): Five whistleblower lawsuits alleged that Johnson & Johnson targeted every level of federal and state healthcare programs with misrepresentations about the safety, superiority, efficacy, appropriate uses, and cost effectiveness of Risperdal and Invega, two powerful anti-psychotic drugs.

  3. 2011 – $241 million (California): In 2005, a whistleblower filed a lawsuit alleging that Quest Diagnostics, the largest provider of medical laboratory testing in California, systematically overcharged the state’s Medicaid program (known as Medi-Cal) for more than 15 years and gave illegal kickbacks in the form of discounted or free testing to doctors, hospitals, and clinics that referred Medi-Cal patients and other business to its laboratories. Six years later, the company paid nearly a quarter of a billion dollars to resolve these allegations.

  4. 2019 – $236 million (Texas): Xerox was responsible for reviewing and approving or denying requests by Texas Medicaid providers to deliver orthodontic services. Only those requests that meet strict Medicaid program requirements are allowable. The Texas Attorney General alleged that Xerox rubber-stamped prior authorization requests without assuring the required review of each request by qualified clinical personnel, resulting in unnecessary orthodontic treatment.

In addition, the state Attorneys General are leading the fight against the opioid epidemic, with billions of dollars in settlements pending. Many of the cases giving rise to the litigation against opioid manufacturers and distributors were triggered by whistleblowers, proving again the invaluable role these individuals play in preventing fraud against our state governments.





[1] According to recent estimates published in JAMA, Medicare fraud costs taxpayers $58.5 billion-$83.9 billion per year. This is likely a substantial underestimate, since the research separates medically unnecessary procedures into a separate category. The data are difficult to disentangle, but adding these sums likely would mean another $20-$30 billion in Medicare fraud, for a total rate of fraud of about 14 percent.

Other estimates are significantly higher. For instance, in 2012, JAMA published an article co-authored by former CMS Administrator Donald Berwick. This article estimated that fraud and abuse cost Medicare and Medicaid as much as $98 billion in 2011, and overtreatment—defined as “care that . . . cannot possibly help” patients—cost up to $87 billion. Compared to $976.1 in Medicare and Medicaid spending, this would mean a fraud rate of 18.85%. In 2009, Malcolm Sparrow, Professor of the Practice of Public Management at Harvard University, testified before Congress that as much as “20 percent could be saved from the Medicare and Medicaid budgets” through better program integrity enforcement.


This comports with the judgment of former Attorney General Eric Holder, who opined in 2013 that the amount of fraud in Medicare and Medicaid “approach[ed] 20 percent” of spending. This also comports with related statistics showing that physicians believe 20.6 percent of all medical care is unnecessary, including 22% of prescriptions, 24.9 percent of tests, and 11 percent of procedures. These informed estimates justify an estimate of the rate of fraud as high as 20 percent.


[2] According to the National Conference of State Legislatures, health expenditures account for roughly 32 percent of the average state’s budget. This includes federal matching funds, but it gets very complicated to disaggregate all federal assistance from a state’s budget, so I think this is a fair statistic to use. As explained above, fraud accounts for up to 20% of health care spending, and 32% x 20% = 6.4%.


[3] Texas Budget Data. Specifically, the budget for the fiscal year ending August 31, 2021 is $123,220,865,563. Id. at 15 (xi).


[4] Adding the budgets for all of these institutions yields a sum of $7,039,743,550. Id. at 321 (III-73)-501 (III-253).


[5] Id. at 740 (VII-16) ($11.5 billion).


[6] The state budgeted $21,644,749 for direct services to veterans in the most recent budget. Id. at 100 (I-94).