In the ever-evolving healthcare landscape, one critical challenge looms large: the mounting cost of care amid billions of dollars lost annually to fraud, waste, and abuse (FWA). With a conservative estimate indicating FWA financial losses make up 3% of U.S. healthcare expenditures—and other estimates reaching as high as 10%, or more than $300 billion annually—many experts argue there is a pressing need to address this issue.¹ Effective claims auditing can help detect instances of FWA, thereby saving payers money, lowering overall healthcare costs, and potentially improving patient outcomes.

What is fraud, waste, and abuse in healthcare?

FWA occurs when medically necessary services fail to meet professionally recognized standards of care.

• Fraud, as a primary component of FWA, manifests when individuals or groups deliberately submit false claims or misrepresentations to deceive entities such as Medicare, Medicaid, or health insurance companies, leading to illicit financial gains.
• Waste describes excessive or unnecessary utilization of health services, resulting in squandered resources and inflated costs.
• Abuse occurs when healthcare providers deliver unnecessary treatments or services that deviate from established medical best practices, thereby compromising patient care and exacerbating inefficiencies within the system.

To protect against FWA and ensure the financial stability of healthcare organizations, effective management of provider billing and coding practices is vital. Accurate billing ensures timely reimbursement necessary for sustaining provider operations and upholds the integrity of the organization's financial framework. Instances of fraudulent claims disrupt this balance and can pose significant financial risks to the healthcare industry.

But the financial ramifications of FWA are only part of a broader story. Typically, these losses result in higher premiums and out-of-pocket costs for policyholders, alongside reductions in coverage and benefits. Beyond the financial costs, patients who are victims of healthcare FWA may endure unnecessary or unsafe medical procedures, compromised medical records, or medical identity theft, where bad actors use their information to submit falsified claims.

Examples of healthcare fraud, waste, and abuse

Expanding on the significance of this problem, here are some FWA trends reported by the U.S. Department of Justice’s (DOJ’s) Health Care Fraud Unit:

• The owner of a laboratory in Houston was indicted for a $356 million kickback-induced scheme that billed Medicare for unnecessary genetic tests.²
• Arizona’s Medicaid agency was defrauded by a network of outpatient treatment centers in a $69 million fraud and money-laundering scheme involving addiction treatment services provided to Native Americans.³
• A Tennessee podiatrist was sentenced to four years in prison on a $4 million indictment for foot bath fraud involving prescriptions based on anticipated reimbursement rather than medical necessity.⁴
• A pharmacy owner and associate in California were sentenced for defrauding Medi-Cal by writing false prescriptions for expensive drugs they acquired to sell on the black market.⁵

Since 2007, the DOJ’s Health Care Fraud Unit has indicted more than 5,400 medical professionals and their associates with fraudulently billing Medicare, Medicaid, and private health insurers for more than $27 billion. Advanced data analytics and automated detection methods make it easier to identify instances of FWA and assess their financial impact.⁶

Common causes of healthcare fraud, waste, and abuse

Uncovering FWA within the healthcare industry presents a multifaceted challenge, and the following factors often contribute to the overall problem.

• Unbundling: This practice entails healthcare providers billing separately for components of a procedure that should be billed together. For example, in a laboratory setting, rather than billing for a comprehensive metabolic panel that includes multiple tests, such as glucose, electrolytes, and kidney function tests, the provider bills for each test individually, or, during a surgical procedure, the provider might bill separately for items such as anesthesia, surgical supplies, and postoperative care, which are usually included in the global fee for the operation.
• Upcoding: In this case, providers bill for services at a higher level than what was actually performed. This deceptive practice occurs when providers deliberately select higher-level billing codes to charge the patient’s insurance company for more services with higher reimbursement. To justify this overcharging, providers may exaggerate elements of the visit, such as the extent of the examination or the patient's medical history, in the medical record.
• Duplicates: This practice, in which providers receive two payments for a procedure that was only performed once, presents another significant challenge. Duplicates can occur due to administrative errors, system glitches, or deliberate fraudulent activities. Sometimes, providers inadvertently submit duplicate claims due to coding errors or issues with billing systems. In other cases, duplicate claims may result from intentional actions by unscrupulous individuals seeking financial gain. Additionally, complexities within the billing and reimbursement processes can contribute to the occurrence of duplicates, especially in cases involving coordination of benefits or multiple insurance coverages.

Our own auditing work has exposed additional, less-common forms of FWA:

• Billing discrepancies: Inaccuracies in claims submissions for healthcare services, which potentially result in claim denials, delayed payments, and financial losses for providers.
• Claim review issues: Instances of errors, fraud, or overutilization of services.
• Coordination of benefits (COB) and subrogation errors: COB entails determining primary and secondary payers when a patient has multiple insurance coverages, while subrogation involves recovering costs from liable third parties, posing challenges in identifying the correct order of payment and ensuring timely coordination and in avoiding or recouping duplicate payments or over-payments.
• Coding inaccuracies: Errors in assigning diagnosis and procedure codes, which can affect reimbursement, quality reporting, and patient care.
• Eligibility verification issues: Challenges in verifying a patient’s coverage and benefits, leading to claim denials and billing disputes.
• Data discrepancies: Incomplete, inaccurate, or inconsistent information hindering claims processing, analytics, and decision-making.
• Reimbursement discrepancies: Discrepancies between expected and actual payments, stemming from underpayment, overpayment, or delayed reimbursement.

Legal and financial consequences of fraudulent healthcare claims

When healthcare providers submit false claims or engage in deceptive billing practices, the consequences can be extensive. The prevalence of fraudulent claims within the healthcare industry has led to a surge in lawsuits resulting in penalties, fines, and even criminal charges. For example, in 2023 one national health insurance carrier agreed to pay $172 million to settle allegations related to inaccurate diagnostic codes submitted for its Medicare Advantage Plan enrollees.⁷

In another significant 2023 legal development, a large employer filed a lawsuit against its health insurance carrier alleging mismanagement of its self-funded health and dental plans. The accusations included the undisclosed retention of fees and the approval of millions of dollars in ineligible claims. The employer claimed its carrier, acting as the third-party claims administrator for its plans, authorized false, fraudulent, and inappropriate claims. These included thousands of duplicative claims, which were approved through an automated process without human review. Despite the employer’s request for claims data in 2021, the carrier only provided "self-selected" and incomplete data, which led to the legal dispute.⁸

The core of the dispute centered around the carrier’s purported failure to comply with the provisions outlined in the Consolidated Appropriations Act of 2021. This legislation aims to grant employers enhanced access to claims data for the purpose of promoting transparency and accountability within the healthcare sector. The employer argued that the carrier's failure to provide comprehensive data obstructed its ability to assess payment integrity and fulfill fiduciary obligations as an employer.

This legal dispute between this employer and its carrier establishes a notable legal precedent with far-reaching implications for plan sponsors and insurers alike. It underscores the crucial importance of transparency regarding claims data and the necessity of adhering to regulatory mandates, such as the Consolidated Appropriations Act of 2021. Consequently, insurers might now be compelled to increase their vigilance in ensuring access to medical claims data, recognizing the pivotal role of this function for maintaining payment integrity and fulfilling fiduciary duties responsibly.

In these legal disputes, healthcare organizations must defend their practices while plaintiffs seek restitution for damages incurred due to fraudulent billing. The prolonged legal proceedings not only strain financial resources but also tarnish the reputations of healthcare entities. Safeguarding against FWA is therefore paramount for preserving the financial stability and operational integrity of healthcare providers.

Software can help optimize healthcare claims auditing

Comprehensive healthcare claims auditing can help to identify, rectify, and prevent instances of FWA. While the healthcare industry sometimes views the auditing process as insignificant or a hassle, for organizations managing large member populations it holds tremendous potential for uncovering wasteful spending and thereby saving time and money while potentially enhancing patient outcomes by mitigating instances of unnecessary medical services.

Software can help healthcare auditors review claims for accuracy, medical necessity, and compliance with established policies. However, medical auditing trends indicate a significant deficiency in feedback systems designed to rectify billing errors.⁹ Key software features can help address this:

• Severity scores for certain coding-type errors, such as unbundling, upcoding, or mutually exclusive services, are essential because they enable auditors to prioritize potential issues within a list of results based on their level of severity or impact. By filtering out less-critical concerns and assigning severity scores to claims, auditors can focus on those claims that pose the greatest risk or potential for financial loss to the healthcare organization. This prioritization ensures that resources are allocated effectively, allowing auditors to address high-risk claims promptly and help mitigate potential losses. Additionally, severity scores help auditors identify patterns or trends in claims data, enabling them to target areas of concern more efficiently. Overall, severity scores are key to streamlining the claims auditing process and enhancing the effectiveness of fraud detection and prevention efforts within the healthcare industry.
• Repayment rates provide insights into the potential recoverable amounts of erroneous claims. By estimating how much of an erroneous claim is recoverable, auditors can assess the financial impact of billing errors and prioritize their efforts accordingly. Repayment rates help healthcare organizations determine the feasibility of recovering funds from improperly billed claims, allowing them to pursue reimbursement more effectively. Additionally, repayment rates serve as a valuable metric for evaluating the effectiveness of claims auditing processes and identifying opportunities for improvement. By leveraging repayment rates, healthcare organizations can enhance their revenue recovery efforts, mitigate financial losses, and promote fiscal responsibility within the organization.

Optimal claims auditing can help reduce healthcare costs

The escalating cost of healthcare, coupled with the pervasive nature of FWA, necessitates comprehensive auditing practices to help mitigate billing errors and control costs. Legal disputes exemplify the repercussions of fraudulent claims on the healthcare industry, emphasizing the importance of transparency and compliance with regulatory mandates.

Through effective claims auditing, healthcare organizations can help detect and deny improperly billed claims, implement targeted interventions to reduce the number of claims that are submitted erroneously, and flag inefficiencies. By evaluating and detecting instances of wasteful spending, potential cost savings can be realized, and litigation avoided, thereby reducing healthcare expenses, which can have a direct impact on insurance premiums.

¹ National Health Care Anti-Fraud Association (NHCAA). (2025). The Challenge of Health Care Fraud. Retrieved March 28, 2025, from https://www.nhcaa.org/tools-insights/about-health-care-fraud/the-challenge-of-health-care-fraud/.

² Argentieri, N.M. (January 20, 2025). Combating Health Care Fraud: 2024 National Enforcement Action. U.S. Department of Justice (DOJ). Retrieved March 28, 2025, from https://www.justice.gov/archives/opa/blog/combating-health-care-fraud-2024-national-enforcement-action.

³ Argentieri, N.M. (January 20, 2025). Combating Health Care Fraud: 2024 National Enforcement Action. U.S. Department of Justice (DOJ), ibid.

⁴ U.S. Attorney's Office, Western District of Tennessee. (June 27, 2024). Podiatrist Sentenced for $4M Foot Bath Fraud Scheme [Press release]. Retrieved March 28, 2025, from https://www.justice.gov/usao-wdtn/pr/podiatrist-sentenced-4m-foot-bath-fraud-scheme.

⁵ U.S. Department of Justice (DOJ), Office of Public Affairs. (February 6, 2025). Pharmacy Owner and Associate Sentenced for Health Care Fraud and Black Market Prescription Drug Diversion Scheme [Press release]. Retrieved March 28, 2025, from https://www.justice.gov/archives/opa/pr/pharmacy-owner-and-associate-sentenced-health-care-fraud-and-black-market-prescription-drug.

⁶ Argentieri, N.M. (January 20, 2025). Combating Health Care Fraud: 2024 National Enforcement Action. U.S. Department of Justice (DOJ), op. cit.

⁷ U.S. Department of Justice (DOJ), Office of Public Affairs. (February 6, 2025). Cigna Group to Pay $172 Million to Resolve False Claims Allegations [Press release]. Retrieved March 28, 2025, from https://www.justice.gov/archives/opa/pr/cigna-group-pay-172-million-resolve-false-claims-act-allegations.

⁸ Wille, J. (July 3, 2023). Kraft Panel Sues Aetna for Health Plan Missteps, Claims Data. Bloomberg Law. Retrieved March 28, 2025, from https://news.bloomberglaw.com/employee-benefits/kraft-panel-sues-aetna-for-health-plan-missteps-claims-data.

⁹ Burks, K., Evans, J., Flesher, S., Gerlach, J., Plumley, J., & Shields, J. (May 2022). A systematic review of outpatient billing practices. SAGE Open Medicine, 10. Retrieved March 28, 2025, from https://doaj.org/article/1302a6f1c4014a9d811c8d6121611fd3.