The Medicaid Fraud Referral Crisis: Why Healthcare Plans Are Failing to Report Provider Fraud 

A Critical Analysis of OIG’s 2025 Report and Its Implications for Medical Billing Integrity 

Faina Vardanyan, Billing Specialist, WCH  

In September 2025, the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG) released a damning report revealing that a significant number of Medicaid managed care plans made few or no referrals of potential provider fraud in 2022. The findings expose a critical weakness in the healthcare system’s program integrity framework, with serious implications for medical billing companies, healthcare providers, and the $611 billion Medicaid program. 

This analysis examines the OIG’s findings, explores the systemic failures enabling fraud to persist, and provides actionable insights for medical practices navigating an increasingly complex compliance landscape—particularly in the context of emerging AI-driven claims processing and denial management systems. 

The Staggering Scope of the Problem 

Key Statistics from the OIG Report 

The OIG surveyed 337 Medicaid managed care plans across multiple states in 2022 and discovered alarming gaps in fraud detection and reporting. Ten percent of plans—representing 33 managed care organizations—reported making zero referrals of potential provider fraud, waste, or abuse during the entire year. Combined, these plans covered 1.6 million enrollees and received $8 billion in payments from 13 states. 

Even more concerning, an additional 8% of plans (26 organizations) were unable to report whether they made any provider referrals at all. These 26 plans covered 6 million enrollees and received $31.6 billion in payments from 11 states. 

Among plans that did report making referrals, the numbers were surprisingly low: more than half made only two or fewer referrals per 10,000 enrollees in 2022. 

The Financial Context 

To understand the magnitude of this oversight failure, consider the broader context of healthcare fraud: 

• In fiscal year 2024, Medicaid paid an estimated 94.9% of total outlays properly, representing $579.73 billion in proper federal payments. However, improper payments totaled $31.1 billion, or 5.09% of outlays. 

• Over the last decade, Medicaid made $567 billion in improper payments, equal to $4,300 per U.S. household. 

• In fiscal year 2024, Medicaid Fraud Control Units recovered $1.4 billion, with criminal recoveries reaching $961 million—the highest amount in the past 10 years and more than double the rolling 5-year average. 

While it’s critical to note that not all improper payments represent fraud—79.11% of 2024 Medicaid improper payments resulted from insufficient documentation—the lack of fraud referrals from managed care plans suggests that billions in actual fraud may be going undetected. 

Why Managed Care Plans Fail to Report Fraud 

The OIG report identified several systemic factors contributing to low referral rates: 

1. Lack of Training and Guidance 

Only half of the plans reported receiving training from state or Medicaid Fraud Control Units on fraud referral processes. Plans with training made 60% more referrals (2.10 per 10,000 enrollees) compared to those without (1.31 per 10,000 enrollees). 

2. Inadequate Staffing and Feedback 

Seventy-eight percent of plans reported that fraud referral staff shared responsibilities across multiple programs, diluting focus on Medicaid-specific detection. Additionally, 59% of plans received no feedback from states on referral quality, preventing process improvement. Nearly half indicated that state feedback would significantly improve their referral capabilities. 

3. Insufficient Accountability 

Federal regulations require fraud referrals but mandate no minimum numbers, creating ambiguous success metrics. Both OIG and CMS have noted a lack of incentives for plans to prioritize fraud detection. 

4. The “Termination Without Notification” Problem 

Insurance companies sometimes terminate doctors for fraudulent billing but fail to inform states, allowing providers to continue fraudulent practices with other insurers—a critical gap in the fraud prevention network. 

The Intersection with AI-Driven Claims Processing 

The managed care fraud referral crisis is unfolding simultaneously with another troubling trend: the increasing use of artificial intelligence to automate claims denials—often with questionable accuracy. 

The UnitedHealth AI Controversy 

UnitedHealth Group faces a class-action lawsuit alleging that the company used a defective AI model called “nH Predict,” developed by subsidiary NaviHealth, to prematurely and in bad faith discontinue payment to elderly Medicare Advantage beneficiaries. 

When coverage denials were appealed through UnitedHealth’s internal process, over 90% of those denials were reversed, suggesting the algorithm was incorrectly denying coverage. 

According to a Senate Permanent Subcommittee on Investigations report, UnitedHealthcare’s denial rate for post-hospital care more than doubled between 2020 and 2022 after it implemented algorithms to automate its review process—jumping from 10.9% in 2020 to 22.7% in 2022. 

The Broader Industry Pattern 

Healthcare professionals have noted that UnitedHealth’s use of AI to deny claims is an industrywide practice. “I have no doubt other insurance companies are using AI to find new ways to deny claims. The reality is that insurance companies deny things to see if anyone appeals,” stated Daniel Lynch, CEO of Medical Bill Gurus. 

Insurance companies, including Cigna and Humana, have faced similar scrutiny over automated claims processing systems. 

The Dangerous Convergence 

We now face a troubling paradox: 

1. Managed care plans are failing to identify and report provider fraud to appropriate authorities, as documented by the OIG. 

2. Insurance companies are simultaneously deploying AI systems that aggressively deny legitimate claims, forcing providers and patients into lengthy appeals processes. 

This creates a compliance nightmare where: 

• Actual fraud may go unreported and unpunished 

• Legitimate claims are improperly denied through automated systems 

• Providers must invest substantial resources in fighting wrongful denials 

• The appeals process becomes a barrier to both justice and appropriate care 

OIG Recommendations and CMS Response 

The OIG made two primary recommendations to CMS: follow up with states that had plans making no fraud referrals in 2022, and encourage states to increase training for managed care plans on the fraud referral process. 

CMS concurred with both recommendations, noting it has already begun auditing plans with low referral rates and will update its November 2023 fraud referral toolkit to emphasize training requirements. However, given that similar recommendations were made in 2018, the critical question is whether these incremental steps will produce meaningful change. 

Historical Context: A Persistent Problem 

This is not the first time OIG has identified these weaknesses. A 2018 report found similar gaps in MCO fraud detection, while a 2022 evaluation revealed that Unified Program Integrity Contractors focused only 11% of their Medicaid activities on managed care, despite 83% of Medicaid beneficiaries receiving services through these plans. The persistence of these issues over seven years suggests systemic problems requiring structural reform, not merely incremental improvements. 

Implications for Medical Practices  

For Healthcare Providers 

Understand Your Exposure: 

• Even if you operate with complete integrity, you exist in an ecosystem where fraud detection is inconsistent 

• Your competitors who engage in fraudulent billing may face minimal consequences if their managed care plans fail to report 

• This creates an unlevel playing field 

Document Everything: 

• The majority of Medicaid and CHIP improper payment findings result from insufficient or missing documentation. 

• Comprehensive documentation protects you from both legitimate audits and improper AI-driven denials 

Prepare for AI-Driven Denials: 

• When insurers use AI to deny claims, overturn rates on appeal are very high—80% to 90%—but patients and providers must invest time and resources to appeal. 

• Build appeal processes and resources into your revenue cycle management 

The Regulatory Landscape: What’s Coming 

Increased Federal Scrutiny 

The Government Accountability Office has made numerous recommendations to CMS related to Medicare and Medicaid program integrity. Action on recommendations that remain unimplemented could save billions of dollars and enhance program integrity. 

Expect: 

• More frequent and intensive audits of managed care plans 

• Stricter enforcement of referral requirements 

• Potential penalties for plans that fail to identify and report fraud 

State-Level Enforcement 

State Medicaid Fraud Control Units are intensifying investigations. Criminal recoveries in FY 2024 were the highest in the past 10 years. 

AI Regulation Debates 

Legal scholars argue that the FDA has preexisting authority to regulate coverage algorithms and should take action, as recent federal efforts to reform these algorithms have been inadequate. 

The intersection of AI technology and healthcare claims processing will likely see significant regulatory development in the coming years. 

Best Practices for Navigating the Current Environment 

1. Proactive Compliance Programs 

Implement comprehensive compliance programs that exceed minimum requirements: 

• Regular internal audits 

• Staff training on fraud indicators 

• Clear protocols for identifying and addressing billing irregularities 

• Documentation standards that exceed regulatory minimums 

2. Transparent Communication 

When working with managed care plans: 

• Establish clear communication channels for compliance questions 

• Document all interactions regarding billing practices 

• Request written confirmation of coding and billing guidance 

3. Appeal Preparedness 

Develop systematic approaches to appealing improper denials: 

• Track denial patterns by payer 

• Maintain comprehensive clinical documentation 

• Build templates for common appeal scenarios 

• Monitor appeal success rates to identify systemic issues 

4. Industry Collaboration 

The OIG and CMS have consistently emphasized that managed care plans, states, MFCUs, and federal agencies form a network of entities that work to identify and prevent fraud, waste, and abuse. 

Participate in: 

• Professional associations focused on compliance 

• Information-sharing initiatives (within legal bounds) 

• Advocacy for clearer regulatory guidance 

5. Technology as Defense 

Invest in technology that: 

• Flags potential compliance issues before submission 

• Tracks denial patterns and identifies problematic payers 

• Maintains audit trails demonstrating good-faith efforts 

• Supports appeals with data and analytics 

Systemic Reform Needed 

The OIG report reveals a fundamental breakdown in the Medicaid program integrity ecosystem. The current system relies on managed care plans to self-police and report fraud, yet half of these plans receive no training, most lack dedicated staff, and the majority receive no feedback on their referrals. 

Meanwhile, insurance companies deploy sophisticated AI systems to deny claims—systems that overturn rates suggest are incorrectly denying legitimate care 80-90% of the time when appealed. 

What Needs to Change 

1. Mandatory Standards and Training Establishing risk-adjusted referral targets and mandatory standardized training across states could significantly improve detection—plans with training made 60% more referrals than those without. 

2. Feedback and Accountability Mechanisms States should be required to provide systematic feedback to plans on referral quality, creating continuous improvement loops that currently don’t exist for 59% of plans. 

3. AI Transparency and Regulation Federal courts have begun requiring health insurers to answer for AI-driven denials. Regulatory frameworks must address algorithm transparency, human oversight mandates, error rate disclosure, and appeals process reforms. 

4. Cross-Program Data Sharing Better data sharing systems could prevent providers terminated for fraud from simply moving to other plans, closing a critical gap in the current system. 

Vigilance in an Imperfect System 

The OIG’s 2025 report exposes uncomfortable truths about Medicaid managed care oversight. With 18% of plans either making no fraud referrals or being unable to report whether they made any, and 56% of plans that did report making only two or fewer referrals per 10,000 enrollees, it’s clear that billions in potential fraud may be going undetected. 

For medical billing companies and healthcare providers, this environment demands heightened vigilance. You must navigate between: 

• The risk of actual fraud going unreported by managed care plans 

• The reality of AI systems improperly denying legitimate claims 

• The burden of proving compliance in an inconsistent regulatory environment 

The most successful practices and billing companies will be those that: 

1. Maintain impeccable documentation and compliance 

2. Invest in sophisticated appeal management capabilities 

3. Proactively identify and address potential compliance issues 

4. Stay informed about evolving regulatory requirements 

5. Advocate for systemic reforms that create a more level playing field 

As the healthcare system continues to grapple with fraud, waste, and abuse—while simultaneously deploying imperfect automation—those who prioritize integrity, transparency, and proactive compliance will be best positioned to thrive. 

Sources and References 

1. U.S. Department of Health and Human Services Office of Inspector General. (September 2025). “Some Medicaid Managed Care Plans Made Few or No Referrals of Potential Provider Fraud.” Report No. OEI-03-22-00410. 

2. U.S. Department of Health and Human Services Office of Inspector General. (June 2025). “Medicaid Fraud Control Units Annual Report: Fiscal Year 2024.” 

3. Centers for Medicare & Medicaid Services. (2024). “Fiscal Year 2024 Improper Payments Fact Sheet.” 

4. Kaiser Family Foundation. (August 2025). “5 Key Facts about Medicaid Program Integrity.” 

5. U.S. Government Accountability Office. (April 2024). “Medicare and Medicaid: Additional Actions Needed to Enhance Program Integrity and Save Billions.” Report GAO-24-107487. 

6. U.S. Senate Permanent Subcommittee on Investigations. (October 2024). “How Medicare Advantage Insurers Have Denied Patients Access to Post-Acute Care.” 

7. Oliva, Jennifer D. “Algorithms Deny Humans Health Care.” The Regulatory Review (March 2025). 

8. Ross, Casey. Various reporting on UnitedHealth AI claims denials. STAT News (2023-2024). 

9. Myers and Stauffer. (September 2025). “The Case for Program Integrity in Medicaid Managed Care.” 

10. U.S. Department of Health and Human Services Office of Inspector General. (July 2018). “Weaknesses Exist in Medicaid Managed Care Organizations’ Efforts To Identify and Address Fraud and Abuse.” Report No. OEI-02-15-00260. 

Disclaimer: This article is intended for informational purposes only and does not constitute legal advice. Healthcare providers and billing companies should consult with qualified legal counsel regarding specific compliance questions and regulatory requirements.