by James C. Sherlock

Medicaid fraud is not a new issue, but it has exploded into the public consciousness as the Trump administration has taken action against it. Virtually every critique of Medicaid fraud, from both sides of the debate over how pervasive and costly it is and what to do about it, has been written from a Washington perspective. This article will offer a Virginia perspective. It is not a pretty one.

As of early 2025, more than 1.7 million people are enrolled in Virginia Medicaid, including over 595,000 covered under the expansion guidelines. Mental health, substance use, home care, nursing home services, and support services for the intellectually and developmentally disabled are major sources of fraud nationwide and in Virginia.

Medicaid, established in 1965, is a joint federal and state program fundamental to the health of the poor and disabled. It is rife with fraud because states that manage it have perverse incentives to police it, driven by the predominance of federal funding.

Only a fundamental change in the funding mechanism will drive significant reductions in Medicaid fraud.

Federal funding is the overarching problem

The states treat federal Medicaid dollars as found money. Yet federal Medicaid costs, unlike those of Medicare, are not paid from a federal trust fund and are not funded by a payroll tax. Instead, they are funded through annual appropriations, without a dedicated tax. As a result, funding is vulnerable to wild swings.

In fiscal year 2024, the federal government covered approximately 64.1% of Virginia’s Medicaid spending, including 90% of Medicaid expansion (ACA) costs since 2018.

Virginia, showing its disdain for program integrity, uses a common trick to avoid paying its 10% share of expansion costs from the General Fund. In a backroom deal, hospitals agreed with the General Assembly to be taxed to cover that share, with the legislature increasing Medicaid reimbursements by enough to cover the taxes. Indeed, the General Assembly increased those payments not only to cover costs but also to provide hospitals with additional profits on the deal.

Non-profits, including the same large state-sponsored and state-protected hospital-system regional monopolies, pay no federal or state taxes.

So, in the expansion, everybody won except federal and state taxpayers and state ACA rate payers.

State politicians restrain state regulators and prosecutors from addressing fraud

Virginia regulators include the Virginia Department of Health (VDH), the Virginia Department of Behavioral Health and Disability Services (DBHDS), and the Virginia Department of Medical Assistance Services (DMAS).

VDH and DBHDS conduct inspections that regularly cite multiple violations of federal (VDH) and state (DBHDS) law, but, historically constrained by state laws and program administration budgets, have made little effort to discipline those who commit them.

Virginia’s Attorney General is responsible for investigating and prosecuting Medicaid fraud. The Medicaid Fraud Control Unit does an excellent job prosecuting the cases it has the resources to pursue. A disconnect appears to be that more of the violations cited by VDH and DBHDS inspectors clearly indicate fraud than are prosecuted as fraud.

It is fraud to accept payment for services not delivered due to understaffing for the number of residents and their needs. It is fraud to misrepresent residents’ medical and activities-of-daily-living needs as more acute than they are in order to boost per diem payments. It is fraud for providers to tunnel money away from those whose care is funded by Medicaid through excessive payments to co-owned property companies, management layers, and service providers.

Fraud is readily identifiable in the business models of several out-of-state nursing facility chains operating here, as shown by inspection results. It is also evident in inspection results from many more of the thousands of DBHDS’ support services contractors. That fraud is far more widespread than appears on the AG’s 2024-25 fraud case list. This author has found only tenuous links between inspection citations and state prosecutions of Medicaid fraud at individual facilities in Virginia. There is no indication of prosecution of systemic fraud by nursing facility chains. What you tolerate, you get more of.

But this author has also found that the toleration of systemic fraud is not due to a lack of motivation on the part of any particular AG’s office. It is a resource issue.

During a meeting sponsored by former AG Jason Miyares between this author and the senior leadership of the Attorney General’s office, the office impressed. They offered what seemed sincere regret that the office was insufficiently staffed to pursue major Medicaid fraud on the scale committed by out-of-state nursing home chains operating in Virginia. They remained committed to participating in joint federal-state investigations.

Attorney General Jones’ list of sources of Medicaid fraud is a curiosity.  

It:

• Includes nursing homes but omits nursing home chains. Their inclusion would embarrass Attorney General Jones, a personal beneficiary of the largess from out-of-state nursing home chains’ contributions to his inauguration party.  
• Lacks any reference to a major campaign contributor. That would embarrass virtually every Virginia politician.  
• Omits providers of services to the intellectually and developmentally disabled. Their inclusion would embarrass and perhaps inconvenience Sen. Louise Lucas, D-Portsmouth, president pro tempore of the state Senate. 
• Omits the entire subject of co-ownership of associated businesses, tunneling funds away from the provider organization, and the resulting laundering of Medicaid money.
• Contains a discussion of Billing for Goods/Services not Provided that ignores the combined fraudulent effects of systemic understaffing and resident overpopulation, which prevent providers from delivering Medicaid-funded services.

Attorney General Jones’ list thus downplays sources of fraud. A complete list would require additional resources for his Medicaid fraud investigations and prosecutions.  

But the General Assembly, particularly its appropriations committees, has repeatedly shown it is unwilling to provide them. Indeed, some members, especially committee and subcommittee chairs, receive outsized campaign contributions from the very institutions that commit fraud. Louise Lucas’ business, as a DBHDS contractor, is entirely funded by Medicaid payments.

Managed Care fails to help

Virginia does not directly manage Medicaid delivery to enrollees. It hires insurance companies to do so. Roughly 93% of Virginia beneficiaries are enrolled in managed care plans run by CVS/Aetna, Elevance/Anthem, Sentara/Optima Health, UnitedHealthcare, and Humana. These companies are paid to protect beneficiaries from neglect, abuse, and fraud. By human nature, some individuals must do so. But in all his years of reporting on nursing homes, this author has not found a documented instance in which insurance organizations have done so through internal policies they enforced. Those same years of reporting suggest that the state provides no effective oversight of that obligation in its managed care contracts.

Assessment

As noted earlier, federal Medicaid funding is uniquely vulnerable. This author supports Medicaid enough to try to save it.

Large majorities of Americans across the political spectrum deplore fraud. Medicaid fraud, hardly unique to Virginia, is a nationwide crisis that steals tens of billions of dollars annually from the poor and disabled for whom the program is intended. Fraud has become so institutionalized within the state-level system, with so many politically powerful interests feeding on it, that small changes will not work. Instead, incentives must be realigned.

The fundamental reason Medicaid fraud is so widely tolerated is that the states, which are charged with enforcing the rules, don’t have enough of a stake in paying for it. Indeed, many state politicians have convinced themselves that Medicaid fraud is harmless to the poor, helpful to Medicaid entrepreneurs in their districts or state, and that fighting it would hurt them politically or, in a few cases, personally.

As a result, fraud is so rampant in the Medicaid system that the Gordian knot of federal funding that encourages states to avoid controlling it must be cut.

Recommendation

The only realistic way this author sees to save Medicaid for the people for whom the money is appropriated is to fund it entirely at the state level.

As tax collections for the program are gradually shifted to the states, both recipients and taxpayers would benefit as seven major objectives are met simultaneously:

1. Program sustainment. At the state level, Medicaid could be supported with trust funds to smooth economic cycles.
2. Cost reduction. Medicaid program costs would drop dramatically, driven by complete state control over program management and administration and improved state oversight of fraud.
3. Tax reduction. Federal and state taxpayers would pay less overall.
4. Improved performance. A much larger share of the money would go to support the poor and disabled for whom it was intended.
5. Program accountability. State politicians would be entirely responsible for Medicaid funding and performance.
6. Program integrity. Left to manage their own money, states would finally be incentivized to ensure it is spent well and properly.
7. Program support. In June 2025, a KFF Health Tracking Poll found that 42% of Americans held a very favorable view of Medicaid, even though 50% had either been personally covered by it or had a family member covered by it. If it were visibly stripped of most fraud, far more citizens would support it.

Supporters of Medicaid must recognize the scale of the threat and act. A federal “single-payer” solution will only address who pays. It doesn’t address program integrity and could increase fraud if enforcement efforts aren’t scaled. It’s unclear whether federal enforcement can ever happen effectively. Consider “Defund ICE.”

Those who recognize the problem and disagree with the proposed solution should propose alternatives that meet the seven linked objectives.