#payment integrity

As states begin developing fiscal year (FY) 2027 budgets, Medicaid programs are operating in a more constrained financial environment. Revenue growth has slowed, healthcare costs continue to rise, and federal policy changes enacted through the 2025 budget reconciliation law have added new uncertainty around future funding. Even with enrollment leveling off, spending pressures remain intense, driven by higher-need populations, increased utilization of long-term services and supports, rising pharmacy costs, and expanding behavioral health demand.

In response, many states are revisiting traditional cost-containment options. Discussions around provider rate adjustments, limits on optional benefits, and other short-term budget controls are becoming more common. While these approaches can deliver immediate relief, they often carry unintended consequences—restricted access to care, provider instability, and outcomes that conflict with CMS’s broader goals of coverage continuity and population health. As fiscal pressures mount, states and Medicaid managed care organizations (MCOs) are being forced to rethink how savings are generated and whether benefit reductions are a sustainable solution.

Heightened Consequences for Payment Errors

At the same time, Medicaid payment accuracy has become a focus of federal oversight. Improper payments exceeding the 3 percent federal benchmark now result in direct financial consequences, regardless of whether those dollars are eventually recovered. States that exceed the threshold face reductions in federal funding, with far fewer opportunities for exemptions than in the past.

This policy shift represents a fundamental change in risk management. Under the current framework, recovering funds after payment no longer protects states from financial exposure. A payment made incorrectly remains improper even if it is later recouped, requiring states to prioritize prevention rather than post-payment recovery.

Preventing Errors Before They Occur

A significant portion of Medicaid improper payments stem from claims that should have been covered by another insurer. Traditional recovery-based strategies address these issues only after the fact, offering limited impact on improper payment rates and no protection against future penalties.

Prospective cost avoidance addresses the issue upstream. Real-time identification of other health insurance and third-party liability ensures Medicaid consistently pays only when it is truly responsible. Each prevented improper payment helps states remain below the 3 percent threshold and protects federal funding for essential services.

Efficiency as a Cost-Containment Strategy

Administrative inefficiencies often magnify budget challenges. Manual workflows, fragmented eligibility systems, and delayed coverage verification increase error rates while adding operational expense.

Automating eligibility checks, claims review, and coverage validation reduces both administrative burden and financial risk. These efficiencies allow Medicaid agencies and MCOs to meet federal accuracy standards without shifting costs onto providers or members.

Program Integrity as Budget Protection

Program integrity has evolved into a critical fiscal safeguard. Proactive oversight, continuous monitoring, and advanced analytics allow states to identify vulnerabilities earlier and prevent recurring payment errors.

When integrated with real-time cost avoidance, program integrity efforts reduce financial leakage, strengthen audit preparedness, and support long-term budget stability—even during periods of economic uncertainty.

A Sustainable Alternative to Benefit Cuts

As Medicaid budgets face increasing strain, reducing benefits should not be the default response. The best way to manage fiscal pressure is to ensure claims are paid correctly the first time.

By preventing improper payments, maintaining compliance with the 3 percent federal standard, and modernizing operational infrastructure, states and Medicaid plans can preserve access to care while protecting limited program resources. In today’s environment, effective cost avoidance is not optional—it is foundational to Medicaid’s financial sustainability.

Improper payments and fraud continue to be chronic and costly hurdles for Medicaid and other government-funded programs. The GAO defines improper payments as payments that should not have been made or that were made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. According to the GAO, the federal government loses between $233 billion and $521 billion annually to fraud alone.

Since FY 2003, executive branch agencies have reported increasing improper payment estimates totaling approximately $2.7 trillion. In fiscal year 2023 alone, federal agencies reported $236 billion in improper payments across 71 programs. While the 2023 estimate represents an $11 billion decrease from the prior year, this reduction is associated with temporary flexibilities granted during the COVID-19 public health emergency. These measures, such as relaxed eligibility requirements for Medicaid beneficiaries and providers, reduced instances of improper payments under the adjusted criteria.

Medicaid's High-Risk Status

Medicaid has been on the GAO's High-Risk List since 2003 due to vulnerabilities in payment integrity. In FY 2023 alone, HHS estimated that Medicaid improper payments totaled $50 billion. According to HHS, the leading factors for these payments are missing or insufficient documentation, particularly in validating beneficiary eligibility and payments to ineligible beneficiaries or ineligible services.

Actions and Legislative Initiatives to Reduce Improper Payments:

CMS has made some progress in identifying these vulnerabilities. For instance, CMS collaborated with states and audit contractors to bolster oversight of healthcare companies contracted to manage healthcare services for Medicaid beneficiaries. Investigations rose from 16 between 2016 and 2018 to 893 between 2019 and 2021, uncovering significant overpayments.

Over time, several legislative efforts have been aimed at curbing fraud, waste, and abuse. Despite these bills, Medicaid continues to lose billions of dollars because of payments made in error. The measures directed by the legislation are costly and primarily revolve around compliance and reporting instead of reducing improper payments.

Remaining Challenges:

The GAO identified several areas for improvement, including:

Provider Screening and Enrollment Requirements

The GAO suggested that CMS review state compliance with screening and enrollment requirements and monitor noncompliance on a yearly basis. While CMS has provided technical assistance, further action is needed to assess and address all states' compliance.

Medical Reviews for Improper Payments

The GAO advised CMS to strengthen Medicaid's medical review processes to identify the root causes of improper payments and carry out corrective actions. As of March 2024, HHS disagreed with this recommendation and does not plan to implement it.

Compliance with Payment Integrity Information Act of 2019

In FY 2023, Medicaid was deemed compliant with PIIA criteria. However, Medicaid was not fully compliant in fiscal years 2021 and 2022.

Substantial gaps remain in addressing improper payments and fraud. Federal agencies and programs like Medicaid can better safeguard taxpayer dollars, reduce waste, and improve operational efficiency by fully implementing GAO recommendations and enhancing oversight. Nevertheless, to stop improper payment rates from rising even more, agencies should look to innovate data solutions to identify and prevent fraud, waste, and abuse.

Payment integrity programs are developed to provide correct claims processing, adherence to contractual rates, and compliance with payment rules. These initiatives are important for maintaining the financial stability of healthcare systems and ensuring that patients receive proper care. That being said, they can produce friction between payers and providers, originating from disputes over claim disapprovals, reduced reimbursements, and the administrative burden associated with claims adjudication.

Healthcare providers are under considerable pressure, with inflation at 3.3% driving up hospital costs. Furthermore, cuts to Medicare physician payment rates are making it more and more challenging for physicians to sustain their practices, contributing to a rise in hospital-employed physicians, now at 77.6%, a 25.8% increase from a decade ago.

Compounding these difficulties, 7% of physicians have left the workforce, mainly from internal medicine and family practice. Healthcare organizations must find ways to compensate for these shortages, with increased billing on claims being one potential method to recoup costs. However, this can increase tensions between payers and providers.

As payment integrity becomes more important due to increasing healthcare spending and complex billing processes, it must focus on reducing provider abrasion to improve billing practices and relationships between health plans and providers.

One core method to reduce provider abrasion is improving communication around claim denials and payment policies. Readily available policies can reduce the chances of surprises by helping providers know what to expect when processing claims.

The next key strategy is communication coupled with the human component. While the role of artificial intelligence (AI) in healthcare is a hot topic at the moment, it will take some time for technology to fully understand the complexity of medicine and coding. Codes and rules are regularly changing and being added. Payment integrity requires human expertise and interactions to effectively address provider abrasion. AI is not able to explain complex payment integrity decisions like clinicians with extensive coding knowledge and coders with deep clinical knowledge.

Tailoring payment integrity solutions to meet the special needs of various providers and patient populations is another effective approach. Sometimes, a payer might permit claims from a specific provider offering cutting-edge treatment considered investigational, which might not be allowed from another provider. It is very important for payer organizations to handle these situations in a custom manner.

One more key component of payment integrity programs is the adoption of modern technology solutions that utilize accurate and usable eligibility data in coordinating benefits. For example, when Medicaid payers do not have access to clean eligibility data, it can cause abrasion at the pharmacy for program beneficiaries and lead to improper payments. Accurate eligibility data significantly helps to properly adjudicate claims, saves valuable program resources, and, most importantly, ensures that members receive the care and medications they need.

Clear communication, human expertise, and specialized solutions are key to enhancing the relationship between healthcare providers and payer organizations. The adoption of modern technology solutions with clean, actionable data is another key tool for reducing abrasion and honing payment integrity. As the healthcare industry evolves, these strategies and data solutions will ensure efficient payment integrity efforts, ultimately leading to better patient outcomes.