Bad forecast

How fraud distorts budget decisions

There is no doubt that Minnesota has a fraud problem, which is disturbing in itself. However, in the backdrop of a persistent and widening structural budget deficit, the consequences of that fraud are even more significant. As legislators look to address the state’s worsening fiscal outlook during the ongoing 2026 legislative session, the role of fraud in budget troubles will likely be under scrutiny.

So, how much has fraud contributed to the state’s upcoming budget deficit? Short answer: it’s hard to say.

Law enforcement “prosecutes backwards,” as former First Assistant U.S. Attorney Joe Thompson explained at a press conference last December. Accordingly, fraud can only be detected after it has occurred. This creates a double impact: Fraud overstates demand for welfare services and distorts budget decisions.

Consider Medicaid, Minnesota’s single largest welfare program and the primary driver of state budget growth. To predict future Medicaid spending, Minnesota Management and Budget (MMB) relies on past spending, which is, in turn, influenced mainly by (1) the number of enrollees, (2) the services and how much of each service enrollees use (or service utilization), (3) the cost of services, and (4) administrative costs.

Assuming current laws remain unchanged, MMB uses historical trends and future expectations to estimate each of the above variables and total costs. Enrollment, for example, depends on the state’s eligibility standards and the economy. When the economy is doing well, MMB expects fewer people to qualify for Medicaid, and vice versa. Compared to many states, Minnesota has relatively generous eligibility standards, which means the system captures individuals who would otherwise not qualify for welfare in other states, raising spending.

Service utilization varies among enrollees chiefly due to differences in health care needs. Elderly enrollees and people with disabilities require more frequent and costly medical services, so they exert a heavier influence on Medicaid spending compared to other groups. According to the most recent estimates by the Minnesota Department of Human Services (DHS), basic care (the health care insurance side of Medicaid) could cost $2,240 per aged or disabled enrollee in 2029 — over three times the cost per person for families with children ($657). The elderly and individuals with disabilities are also the primary beneficiaries of long-term care services — the costliest portion of Medicaid. The DHS expects nursing home care to reach $9,712 per month per enrollee by 2029, making it a significant driver of future budget growth. For beneficiaries who receive long-term care services in their homes and communities, costs could reach $7,130 per enrollee per month.

Fraud specifically affects the budget by artificially inflating enrollment, utilization, and service costs. If people who are ineligible for Medicaid deceitfully enroll in the program, baseline enrollment rises. Consequently, MMB will estimate higher future enrollment.

In some cases, fraudsters can bill for services they never provided — as was commonly found to be the case with the now-suspended Housing Stabilization Services (HSS) program — overstating utilization rates. Fraudsters can also bill Medicaid for pricier services than those provided to enrollees, a practice known as upcoding. The high demand for expensive services is reflected in future estimates.

This ratchet effect is why, when asked about the role that fraud played in the November 2025 budget forecast, MMB Commissioner Erin Campbell explained that “to the extent that it is driving spending increases, it would show up in the increased spending in forecasts.”

In the 2026-27 biennium, Minnesota has a $2.2 billion structural deficit. This gap grows into over $4 billion in the 2028-29 biennium. Fraudulent spending, even if it is part of this deficit, won’t show up as a line item for legislators to cut. As lawmakers ponder which programs to slash to align revenues with spending, fraud threatens to undermine the process by casting doubt on the integrity of programs that serve vulnerable Minnesotans.

Unless legislators take efforts, as Thompson explained, to “shut off the faucet of funds that are flowing out to these fraudulent entities,” the legitimacy of budget estimates, especially for Medicaid’s home and community-based services, will remain in question, making it difficult to plan accurately for the future.