Over the holiday season, millions of Americans learned about widespread welfare fraud in
Minnesota. The Trump Administration is
investigating and prosecuting instances of welfare abuse and Congress will be ramping up
oversight activities as well.
Punishing those who illegally defraud the government is vital for maintaining a healthy democracy. While necessary, prosecutions alone will not address the root of the problem. Poorly designed federal programs invite fraud through both legal (violating the stated intention of a program) and illegal (violating the rules of a program) means while also abusing tax dollars for ideological crusades and boondoggles.
Federal spending on aid-to-state programs, now
more than $1 trillion per year, facilitates a truly staggering amount of waste. Handouts to state and local governments are
unaffordable at a time when the federal government is careening towards
$40 trillion in gross debt. When state bureaucrats are given huge sums of money by the federal government, they have little incentive to ensure that the funds are administered carefully, leading to
waste, fraud, and abuse.
Congress should build on
historic welfare reforms, narrow the scope of what state and local activities qualify for federal support, and eliminate unnecessary programs that exist solely to enable
pork barrel politics.
Medicaid
The
lion’s share of federal handouts to states flow through Medicaid, which provides states with flexibility to set up their own programs using federal dollars. It should come as no surprise that several of the
Minnesota fraud scandals involve groups taking advantage of state-operated Medicaid initiatives. Federal
prosecutors say that “Half or more of the roughly $18 billion in federal funds that supported 14 Minnesota-run programs since 2018 may have been stolen.” In fiscal year (FY) 2024, Medicaid reported $29.4 billion in
improper overpayments nationwide out of $619.8 billion in total spending. As a
joint EPIC and Paragon Institute report noted, the true figure for 2024 was likely closer to $153 billion.
The Department of Justice’s 2025
National Health Care Fraud Takedown highlights staggering examples of Medicaid fraud:
- A Pakistani man was charged with a $650 million scheme related to Medicaid substance abuse treatments in Arizona.
- A California man was charged with $269 million in Medicaid pharmacy fraud.
- Another California man was charged with $68 million in fraudulent Medicaid medical office visits.
The One Big Beautiful Bill Act (OBBB) included much-needed
reforms to Medicaid focused on reducing fraudulent and
improper enrollments. This was necessary because the high federal share of Medicaid spending reduces the incentive for states to safeguard their programs. Some states defrauded Medicaid directly, with California using a
convoluted scheme to fund benefits for illegal immigrants with federal dollars.
An aspect of Medicaid dysfunction that the OBBB did not address is Obamacare’s 90% subsidization of the “expansion” population of able-bodied working age adults. This considerably higher than the subsidy rate for
vulnerable populations such as children, pregnant women, and the disabled. With states receiving $9 from Washington for every $1 they spend on the expansion population (compared to
$1.33 for every $1 they spend on vulnerable populations), they are incentivized to
maximize this spending with support from powerful special interests. Congress should create parity in its Medicaid payments, bringing the amount it pays for able-bodied individuals down to the level it pays for vulnerable populations. Correcting the subsidy imbalance would make states more cost-conscious and inclined to stop Medicaid fraud.
Food Stamps
The Supplemental Nutrition Assistance Program (SNAP, aka. Food Stamps) is funded by the federal government and operated by states. As with Medicaid, states have some flexibility regarding who is deemed eligible. Unfortunately, another similarity with Medicaid is that states often prioritize maximizing spending rather than being judicious with tax dollars. In FY 2024, Food Stamps reported $9 billion in improper overpayments out of $107 billion in total spending.
In May 2025, the Department of Justice
charged six people (including a federal employee who worked on the Food Stamp fraud division) with a $66 million Food Stamp scheme.
While the OBBB did include
reforms to reduce Food Stamp improper payments, there are still important policies that Congress should implement to tighten eligibility and block fraudulent payments.
First, legislators should close the
broad-based categorical eligibility loophole, which allows millions of households with substantial assets and incomes far above the statutory limit to receive food stamps. Based on the flawed notion that receipt of other government benefits is sufficient proof of poverty, states will use flimsy standards such as someone calling a hotline or receiving a pamphlet as being a “beneficiary” and thus eligible for Food Stamps. This can enable
millionaires to get handouts.
Second, Congress should eliminate the “
quality control tolerance threshold,” under which Food Stamp improper payments of up to $58 are tolerated rather than reported or investigated. Since a substantial amount of Food Stamp purchases are for $57 or less, this means the Food Stamp improper payment rate is significantly underestimated.
Housing, Childcare, Community Development
Housing programs are also administered by state and local authorities, with the federal government covering more than 90% of the cost. As with other forms of welfare, this discourages states from properly monitoring housing benefits against fraud and abuse.
The U.S. Department of Housing and Urban Development (HUD)’s
financial report for FY 2025 revealed that there were $5.8 billion in questionable payments to more than 200,000 tenants (some of whom were
deceased), out of roughly $50 billion in rental support spending. While HUD is undertaking efforts to address this, history demonstrates that without accountability, agency actions consistently fail. Congress should implement its own reforms to ensure that states and local authorities are held responsible (including financially) for enabling housing benefit fraud.
Federal benefits for childcare flow through states, which is why the scandal of
phony childcare centers in Minnesota has national implications. The Biden Administration issued a
rule in 2024 that weakened attendance verification for childcare providers, making programs easier to defraud. The Trump Administration is
reversing the Biden rule and Congress should codify stronger guidelines to prevent future administrations from following in Biden’s footsteps.
The Community Development Fund, part of HUD, was initially justified as assisting high-poverty areas with basic local services. Over time it has become a slush fund for political pork and is heavily used by Congress for dubious
earmark projects, including handouts to
left-wing activist groups. Congress should eliminate the fund or at the very least narrow the scope of what projects qualify for funding.
Infrastructure & Transportation
Legislators have jammed an increasing amount of non-highway spending into the
Highway Trust Fund, watering down the original focus on the interstate system.
The most significant non-highway
spending detour is for mass transit. Not only is transit a purely local concern, but it receives a disproportionate share of transportation spending compared to its usage. Rather than being primarily a public good, transit systems are functionally a jobs program for
overcompensated government workers. This political patronage represents a corruption of the federal government’s constitutional role. Congress should brake transit spending in the upcoming Highway Bill.
Other Highway Trust Fund programs such as Transportation Alternatives, Congestion Mitigation, and the Surface Transportation Block Grant de facto slush funds, providing “free” money for
local projects such as sidewalks and intersection crossings, and boondoggles such as bike lanes and streetcars. An increasingly bankrupt federal government has no business being involved with these projects and should refocus “surface transportation” spending on highways and bridges.
Remove the Incentive
Notorious thief Willie Sutton is credited with saying that he robbed banks “because that’s where the money is.” While the OBBB’s reforms were a big step in the right direction, the federal government will continue to be a prime target for fraud so long as it disburses trillions of dollars per year through thousands of programs. Ultimately, the best anti-fraud policy is streamlining the federal government.
