Should We Do More to Police Medicaid Fraud? Evidence on Intended and Unintended Consequences of Expanded Enforcement

Abstract

Every year, across the country, the federal and state governments spend about $259 million on Medicaid Fraud Control Units (MFCUs); these agencies conduct investigations that recover almost $1.8 billion in inappropriate Medicaid spending, returning $7 for every $1 spent. We study the effects of increasing the size of MFCU budgets in fraud enforcement outcomes and treatment intensity in the Medicaid population. We develop a theoretical model to describe how profit-maximizing health care providers might respond to changes in MFCU budgets. The model points out that MFCU spending could have both desirable deterrence effects and undesirable defensive medicine effects. We combine data on Medicaid hospital discharge and state MFCU budgets with a difference-in-difference and triple-difference research design to empirically measure the effects of MFCU spending. We find that increases in MFCU spending substantially increase fraud enforcement actions (investigations, convictions, recoveries). MFCUs with expanded budgets do not appear to investigate less severe cases in the margin. However, MFCU spending increases do not generate substantial changes in treatment intensity. Expanded MFCU budgets seem to make sense given the financial returns and continuing pool of cases. Defensive medicine and deterrence effects do not seem to be an important consideration at current margins.