Healthcare fraud and abuse add an estimated 3% to 10% to total U.S. healthcare spending each year, translating to roughly $100 billion or more in annual losses. Those costs don’t just disappear into the system. They flow directly into higher insurance premiums, larger out-of-pocket bills, and strained public programs funded by taxpayers.
The Scale of the Problem
The U.S. General Accounting Office estimates that fraud, waste, and abuse account for as much as 10% of all healthcare expenditures. With national health spending now well above $4 trillion annually, even conservative estimates put losses in the hundreds of billions. The National Health Care Anti-Fraud Association uses a lower bound of 3%, which still amounts to tens of billions of dollars each year. The true number is difficult to pin down because much of it goes undetected, and the insurance industry has no standardized system for measuring fraud across all payers.
To put that in perspective: the losses estimated at 10% in 2007 alone would have been enough to cover every uninsured person in the country at the time.
How Medicare and Medicaid Are Affected
Public insurance programs are among the biggest targets. In fiscal year 2025, the Centers for Medicare and Medicaid Services reported improper payment rates across its major programs that totaled tens of billions of dollars:
- Medicare Fee-for-Service: 6.55% improper payment rate, or $28.83 billion
- Medicare Advantage (Part C): 6.09%, or $23.67 billion
- Medicare Part D (prescriptions): 4.00%, or $4.23 billion
- Medicaid: 6.12%, or $37.39 billion
Not every improper payment is outright fraud. Some result from billing errors or incomplete documentation. But the sheer volume creates fertile ground for intentional abuse, and the financial drain is the same regardless of intent. Combined, these improper payments exceeded $94 billion in a single year across just these four programs. That money comes from federal and state budgets, meaning taxpayers absorb the cost whether or not they personally use these programs.
Common Fraud Schemes That Drive Up Costs
Healthcare fraud takes many forms, but a few patterns account for an outsized share of the financial damage. Upcoding happens when a provider bills for a more expensive service than what was actually performed, such as charging for a complex office visit when the patient had a routine checkup. Unbundling is similar: instead of billing for a group of related services under one code (at a lower combined rate), a provider bills each component separately to inflate the total. Phantom billing goes further, charging for services, tests, or equipment that were never provided at all.
Kickback schemes are another major driver. Providers or facilities receive payments in exchange for referring patients to specific labs, pharmacies, or specialists, regardless of whether those referrals serve the patient’s best interest. These arrangements inflate the volume of services billed to insurers, and the cost of those kickbacks gets baked into the prices everyone pays.
How Drug Pricing Gets Inflated
The prescription drug supply chain has its own layer of cost inflation tied to abusive practices. A complex web of middlemen, including pharmacy benefit managers (PBMs), negotiates discounts and rebates from drug manufacturers. These rebates can reach up to 50% of a drug’s list price. But patients rarely see those savings. Instead, cost sharing for Medicare patients is typically calculated based on the higher list price, not the discounted price the insurer actually pays.
The Department of Health and Human Services Office of Inspector General found that Medicare Part D patients in the catastrophic coverage phase saw their monthly out-of-pocket costs for high-price drugs jump 47% between 2010 and 2015, rising from $175 to $257 per month. Federal regulators have described these rebate arrangements as functionally equivalent to kickbacks, because they incentivize higher list prices rather than lower costs for patients.
What It Costs You Personally
Fraud losses don’t stay abstract. Insurers pass those costs along through higher premiums. According to estimates cited by the North Carolina Department of Insurance, insurance fraud adds roughly 20% to the average insurance bill. That works out to about $933 per person per year, or nearly $3,800 for a family of four.
These aren’t optional surcharges you can see on your bill. They’re embedded in the baseline cost of coverage. When fraudulent claims drain an insurer’s funds, the insurer raises premiums across its entire customer base the following year to compensate. You pay more even if you never filed a questionable claim, never visited a fraudulent provider, and never took a drug with an inflated price. The cost is spread invisibly across the entire risk pool.
The Patient Safety Side
The financial harm is only part of the picture. Fraud and abuse also put patients at physical risk. When financial incentives drive providers to order unnecessary tests or perform unneeded procedures, patients face real complications. A case in Maryland involving unnecessary cardiac stents affected nearly 600 people. Those patients underwent invasive procedures they didn’t need, exposing them to risks of infection, bleeding, and other surgical complications for no medical benefit.
Researchers at the Agency for Healthcare Research and Quality have described a “perfect storm of overutilization” created by a physician culture that rewards thoroughness, a fee-for-service payment system that encourages more services, and direct-to-consumer drug advertising that increases patient demand. Overtreatment causes harm directly through complications and indirectly by generating excess diagnoses that lead to even more treatments, creating a cascade where each unnecessary step increases the chance of mistakes and adverse outcomes. The physical and emotional toll of this cycle compounds the financial one.
Recovery Efforts and Their Limits
Federal enforcement does recover a portion of fraudulent payments. In fiscal year 2024, settlements and judgments under the False Claims Act exceeded $2.9 billion total, with over $1.67 billion of that coming from healthcare-related cases. That sounds significant, and it is. But compared to the estimated $100 billion or more lost annually, recoveries represent a small fraction of the damage.
The gap between what’s lost and what’s recovered illustrates a core challenge: fraud prevention in healthcare is largely reactive. Schemes are often discovered months or years after the money has been paid out, and not every case results in a successful prosecution or settlement. The system relies heavily on whistleblowers, audits, and data analysis to flag suspicious billing patterns, but the sheer volume of claims processed daily (Medicare alone handles over a billion claims per year) means that many fraudulent charges slip through undetected.
For consumers, the practical reality is straightforward. Every fraudulent dollar that enters the system raises the baseline cost of care for everyone. It inflates premiums, increases copays, strains public budgets, and in the worst cases, puts patients through medical procedures they never needed. The estimated losses represent money that could otherwise expand coverage, reduce out-of-pocket costs, or fund care for underserved populations.