This blog is the second in a series discussing OBBBA’s changes to Medicaid’s Payment Error Rate Measurement; the first blog was A Proper Scare: How OBBBA Changes Improper Payment Rules to Expose States to Significant Financial Liability. We also explore the issues described in both blog posts more fully in a recent NHeLP resource, OBBBA Changes to Improper Payment Penalties Pose Risks to State Medicaid Programs.
Medicaid opponents often and without evidence push the spurious assertion that the PERM rate proves 2 things: That Medicaid is rife with fraud, and that health care is being furnished to millions of ineligible people, all on the taxpayers’ dime. Putting aside that many of these claims are overstated to begin with, the reality is that the PERM rate alone does not and cannot prove either claim. Yet, OBBBA’s PERM changes will contribute to this false narrative by substantially broadening how the PERM statute defines erroneous payments. This definitional change will significantly expand states’ potential financial liability, fuel critics’ bogus claims of widespread fraud, and dilute the data that would counter those claims.
Expanding the Definition of “Erroneous Payments” Risks Conflating Administrative Issues with Fraud
For PERM purposes, improper payments and erroneous payments are currently (and until October 1, 2029) defined as follows:
- Improper payments are payments that do not meet certain requirements. For the most part, they are attributable to missing documentation. They are not necessarily payments that should not have been made.
- Erroneous payments are payments that CMS can conclude, based on the information available, should not have been made. They encompass any payments on behalf of confirmed ineligible people and overpayments on behalf of eligible people. They are not necessarily
Under their pre-OBBBA definitions, improper payments and erroneous payments are related but distinct concepts. The distinction is important in giving states an accurate sense of where they may have specific performance issues; it also makes it easier for states to identify potential fraud within a smaller, more targeted universe of payments. OBBBA’s definitional changes muddy the waters by expanding the definition of “erroneous payments” to encompass payments lacking sufficient documentation, which are traditionally categorized as improper payments. These changes are particularly dangerous because of the way they will feed critics’ narratives about Medicaid.
Common Claims Regarding Medicaid Enrollee Fraud Have Little to No Basis in Fact
As a threshold matter, Medicaid enrollee fraud is rare. This is reflected, in part, in the generally low rates of PERM-identified erroneous payments. During the most recent PERM cycle (fiscal years 2023, 2024, and 2025), most states had no erroneous payments. In states that did have them, rates were generally below 1 percent (meaning that fewer than 1 percent of all payments in those states were erroneous). OBBBA’s expansion of the definition of “erroneous payment” will artificially increase erroneous payment rates by conflating administrative processing issues with fraudulent activity.
In turn, OBBBA’s changes will fuel claims about increased fraud despite the fact that the actual amount of erroneous payments as previously defined may not have changed. Additionally, OBBBA’s increased penalties risk further perpetuating this narrative by leaving states with fewer financial resources to address this alleged rampant Medicaid fraud. To combat these fraud claims, it is useful to understand the persistent myths that undergird the broader narrative, as well as the facts that disprove those myths.
Myth: PERM is a measure of Medicaid fraud.
PERM measures improper payments in Medicaid, not the prevalence of fraud. Improper payments can occur for a number of reasons, mostly related to documentation issues or minor administrative mistakes in the eligibility determination process. Conclusions about fraud also cannot be drawn from the PERM rate alone. Identifying whether an improper payment is something more than a simple mistake requires an investigation, and fraud determinations ultimately must be made through an adjudicative process. It is true that, pre-OBBBA, PERM could be a useful indicator of “potential problem areas,” including possible fraudulent activity – but the PERM rate itself has never been conclusive proof of fraud.
Myth: The PERM rate proves that Medicaid is full of ineligible people.
PERM does capture instances where Medicaid eligibility is incorrectly conferred upon or services are furnished to ineligible people, but these are a relatively small proportion of PERM-identified improper payments. Between fiscal years 2021 and 2025, just 4 percent of all payment errors were related to payments made on behalf of confirmed ineligible people. But remember: The majority of Medicaid payments are not improper. Improper payments make up a small percentage of all Medicaid payments, so these payments on behalf of ineligible people are an even smaller percentage of that small percentage.
Myth: Making it harder to get Medicaid will reduce improper payments.
Increased administrative burden surrounding Medicaid eligibility determinations will increase the likelihood of errors. Medicaid is an intricate program with strict documentation requirements and complex eligibility determination processes. Adding to its complexity by increasing the volume of documentation and eligibility information that workers must process is likely to beget increased errors and, in turn, a higher rate of improper payments.
Myth: More data means more accurate eligibility determinations.
As more information is collected on a given data point, the likelihood of finding conflicting information on that data point increases. Eligibility workers then must determine which is the “best” data to use under the state’s verification hierarchy, which can cause confusion, be resource-intensive, and create additional opportunities for error. For instance, when eligibility redeterminations resumed following the height of the COVID-19 pandemic (“unwinding”), some states reported confusion and issues with ex parte renewals when quarterly income data diverged from information in the case record. Collecting more data on the same eligibility factor also increases the risk that eligibility workers will rely upon the “wrong” data, potentially leading to an incorrect eligibility determination. This is not a phenomenon unique to Medicaid – “information overload” more broadly is associated with decreases in productivity, efficiency, and decisional accuracy.
Myth: States with high improper payment rates are running their Medicaid programs poorly and should be punished.
Numerous factors can impact payment error rates. For example, because PERM is cyclical, error rates may be affected based solely on when a state’s PERM review comes up. Staffing issues, administrative backlogs, and technology problems can also create issues in the eligibility determination process that can lead to payment errors. The PERM rate is a useful performance metric, but a high rate of PERM-identified improper payments does not decisively show that a state is mismanaging its Medicaid enrollment. Increased penalties will not “fix” the problem, either. They will only take away valuable resources that states could use to improve their Medicaid administration.
Myth: OBBBA’s PERM crackdown is necessary because Medicaid is rife with fraud.
Medicaid is an efficient, cost-effective program with negligible rates of enrollee fraud and a variety of effective inbuilt program integrity safeguards. OBBBA’s PERM crackdown is unlikely to have any meaningful effect on actual fraud as PERM is not, in itself, an anti-fraud mechanism. What OBBBA’s PERM changes will do is hurt states’ ability to improve their Medicaid programs and provide needed services to their residents, and increase the risk of coverage loss among eligible people.
Conclusion
Medicaid is a vital lifeline for millions of people. Critics who push exaggerated reports of fraud, mismanagement, and program “bloat” often do so in an attempt to justify harmful program cuts, and to undermine and diminish support for Medicaid. These claims are largely based on a few common myths, which are easily rebutted by basic facts. It is true that OBBBA’s PERM changes will skew the data in a way that supports damaging claims about Medicaid by combining the small number of actual errors with the relatively larger number of documentation errors. At the same time, other OBBBA changes will increase administrative burdens and likely increase the number of documentation errors. Nevertheless, it is imperative that the actual facts about the rarity of enrollee fraud do not get lost in OBBBA’s numbers game.
