Medicaid improper payments increase, reaching $37.39B

Medicaid paid out more potentially fraudulent, abusive and wasteful payments last year, as the federal program underwent intense scrutiny and reform to weed out inappropriate spending.

New data from CMS revealed an estimated improper payment rate of 6.12% in fiscal year (FY) 2025, totaling $37.39 billion. The rate is up from the FY 2024 reported rate of 5.09%, or $31.10 billion.

CMS clarified in a fact sheet that not all improper payments indicate healthcare fraud or abuse. In fact, the agency reported that over two-thirds of the improper payments estimated to have occurred in FY 2025 were due to insufficient documentation to determine whether a payment was proper.

Other examples of improper payments include overpayments, underpayments, and payments in which a state or contractor may have missed an administrative step that, if completed, would have resulted in a proper payment. In Medicaid and the Children's Health Insurance Program (CHIP), specifically, improper payments also occur when there is no record of the required verification of an individual's eligibility factors, including income.

CHIP also saw higher improper payments in FY 2025, with CMS estimating an improper payment rate of 7.05% and $1.37 billion in improper payments. The previous year, the reported rate was 6.11%, or $1.07 billion.

Similarly, the majority of CHIP improper payments (56.07%) were due to insufficient documentation.

The rise in improper payments comes on the heels of major reform of Medicaid and CHIP.

The Trump administration has prioritized curbing Medicaid spending through strengthening program integrity and rooting out fraud, waste and abuse. President Donald J. Trump's federal spending law in 2025, also known as the One Big Beautiful Bill, especially altered the program, mandating new eligibility restrictions, like work requirements and more frequent renewals. The law also caps state-directed payments to some providers.

CMS said in the fact sheet that the recent increase in national Medicaid and CHIP improper payment estimates stems from the unwinding of flexibilities granted to states during the COVID-19 public health emergency, such as continuous enrollment and provider revalidation.

The new data also found that the Medicare program experienced a slight decrease in its improper payment rate. CMS estimated a FY 2025 improper payment rate of 6.55% ($31.70 billion) across Medicare fee-for-service. Notably, FY 2025 marked the ninth consecutive year the rate remained below 10% -- a threshold for compliance set by federal regulations.

However, Medicare Part C, or Medicare Advantage, has an estimated rate of 6.09%, or $23.67 billion, versus the FY 2024 reported rate of 5.61%. CMS attributed this increase to Medicare Advantage Organizations submitting supporting documentation that failed to substantiate diagnoses for payment.

Meanwhile, the Medicare Part D estimated improper payment rate was 4.00%, or $4.23 billion, versus the FY 2024 reported rate of 3.70%, or $3.58 billion.

While CMS did not mention upcoding, it has been a recent issue for Medicare Advantage plans. Last week, Kaiser Permanente agreed to pay $556 million to settle allegations from the Department of Justice that it submitted invalid diagnosis codes for Medicare Advantage plan enrollees to obtain higher payments from the government. The health system admitted to no wrongdoing.

However, Kaiser is not the only Medicare Advantage sponsor facing heat over alleged upcoding. Last year, an analysis of CMS data by the Alliance of Community Health Plans also pointed to potential upcoding issues for UnitedHealthcare and Humana.

The Calendar Year 2026 Rate Announcement for the Medicare Advantage and Medicare Part D Prescription Drug Programs finalized changes to the Medicare Advantage risk adjustment model in an effort to protect beneficiaries and taxpayers from fraud, waste and abuse.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.