Each year, CMS, the agency that operates Medicaid and Medicare releases an Improper Payment Report, which uses statistics, data analyses, and information learned from government enforcement actions, to estimate the amounts of payments that do not meet CMS program requirement. These include estimated money lost to fraud, but also to negligence, mistake, or other more innocent explanations. The most recent report, for Fiscal Year 2025, suggests that $90 billion was spent on improper payments last year, of that, roughly $38 billion came from the Medicaid program, or 6.12% of the money spent on Medicaid.

New Analysis Suggests Payment Errors Are Significantly Underestimated

While losing tens of billions to fraud, waste, and abuse is already not ideal for the Medicaid program, a new report by the think tank, Paragon Health Institute, suggests that the improper payment rate is incorrectly measured, and what’s reported is artificially low.

The Paragon report focuses on a metric called PERM, or the Payment Error Rate Measurement, which is a key input into the finding of the improper payment rate. It’s derived from a random sample of roughly 50,000 Medicaid claims and focuses on documentation and claims processing compliance (it does not purport to evaluate intent, which would be a key element of any fraud allegation). According to Paragon, PERM has a two key drawbacks that result in underestimating improper payments:

• PERM fails to account for beneficiary eligibility in several years of measurement (the goal was to allow for flexibility around first the ACA’s Medicaid expansion and second around COVID). In the two years PERM did account for beneficiary eligibility (2019 and 2020), Paragon found the improper-payment rate rose to roughly 20%.

• PERM fails to account for Managed Care Claims properly. In Medicaid, there are basically two main systems of payment, fee for service, which pays providers for each service they perform (e.g., $X for a physical and $Y for open heart surgery), and managed care, which pays a premium on the beneficiaries’ behalf to cover all of their Medicaid coverage, with an intermediary insurer taking on risk. More than 60% of Medicaid beneficiaries are covered under a managed care system.

PERM only reviews whether the payments to the intermediary insurers are proper and does not evaluate whether the payments from those insurers to providers are proper. As a result, the error rate for this portion of Medicaid is usually near zero.

However, improper payments to providers by managed care plans is a key driver of the cost of managed care and should be accounted for in any calculation of payment error in the Medicaid program.

The report suggests that CMS should change how it conducts these reviews to better reflect the true scope of payment errors.

As Paragon notes, fraud against the Medicaid program is likely rampant but can also be complicated, hard to detect, and tough to understand. That’s what makes whistleblowers key to enforcement.

If you have information about fraud in Medicaid or other health care fraud involving public funds, contact our whistleblower attorneys for a confidential review.