September 22, 2026

Fraud, Waste and Abuse: What Payers Must Know

What Payers Need to Know About Fraud, Waste and Abuse in Healthcare

Healthcare fraud, waste and abuse (FWA) costs the U.S. healthcare system billions of dollars every year. For payers, it’s one of the most significant — and most preventable — sources of improper payments. Here’s what FWA means, how to spot it and how a strong payment integrity program cuts financial leakage without straining provider relationships.

Key Takeaways

  • Fraud, waste and abuse are three different problems and they need three different responses.
  • Most improper payments come from waste and abuse, not outright fraud.
  • Pre-pay review saves more money than post-pay recovery.
  • Claims editing, clinical review and bill auditing each catch different risks.
  • AI handles volume. Human experts handle complexity.
  • Provider abrasion is a real cost of FWA programs, so manage it deliberately.

What’s the Difference Between Fraud, Waste and Abuse?

The Centers for Medicare and Medicaid Services (CMS) draws clear lines between fraud, waste and abuse. Your program should too.

Fraud is intentional misrepresentation: billing for services never delivered or falsifying diagnosis codes. It calls for investigation, regulatory referral and possible legal action.

Waste looks different. It’s unintentional overuse of resources, like unnecessary tests or redundant procedures, and it responds better to utilization management and clinical review than to punitive controls.

Abuse sits in between: billing patterns that don’t match accepted clinical or coding standards, regardless of intent. Here, education, claim adjustments and prepayment controls do the real work.

Treat abuse like fraud and you waste investigative resources. Treat fraud like waste and you let bad actors off the hook. Getting this distinction right shapes everything you do next.

How Much Do Improper Payments Cost Payers?

FWA isn’t just a compliance checkbox. It’s a direct hit to your financial performance.

In FY2025, CMS estimated $28.83 billion in improper Medicare Fee-for-Service payments (6.55%) and $37.39 billion in improper Medicaid payments (6.12%). More than 77% of Medicaid improper payments were caused by missing or incomplete documentation—not fraud.

Medicare Advantage (Part C) recorded $23.67 billion in improper payments (6.09%), with most tied to diagnosis codes that were not fully supported by medical records.

These findings highlight how complex claims and documentation requirements can lead to costly payment errors. Strong payment integrity programs help improve coding accuracy, strengthen documentation, reduce administrative costs, and build better provider relationships.

CMS Fiscal Year 2025 Improper Payments Fact Sheet (January 2026): https://www.cms.gov/newsroom/fact-sheets/fiscal-year-2025-improper-payments-fact-sheet

What Are the Warning Signs of Fraud, Waste and Abuse in Claims?

Once you understand the stakes, the next step is knowing which billing patterns to flag.

Watch for these common indicators:

  • Upcoding — billing a higher-complexity service than what was actually delivered.
  • Unbundling — breaking bundled procedures into separate codes to inflate reimbursement.
  • Duplicate billing — submitting the same claim more than once.
  • Medically unnecessary services — billing without clinical justification for the diagnosis on record.
  • Incorrect modifiers — misusing modifier codes to bypass bundling edits or boost payment.
  • DRG validation issues — unsupported inpatient diagnosis codes that shift claims into higher payment tiers.
  • High-cost outliers — claims that fall well outside the norm for a given service, specialty or population.

These indicators show up across professional, facility and pharmacy claims, and each one needs its own detection method.

Should Payers Use Pre-Pay or Post-Pay Claims Review?

Knowing what to flag is only half the equation. When you review a claim shapes what you can actually do about it.

Pre-pay review flags and holds claims before payment goes out. It stops overpayments before they happen, so there’s no recovery effort needed. It works best for high-confidence edits where a brief claim hold makes clinical sense.

Post-pay review audits claims after payment, identifies overpayments and starts the recovery process. It’s the better fit for complex or retrospective FWA patterns that need deeper investigation.

The strongest programs use both: pre-pay for predictable, high-volume errors and post-pay for cases too nuanced to catch in real time. The right mix depends on your claims volume, risk profile and internal capacity.

What Review Capabilities Catch the Most FWA?

Claims editing, itemized bill review and clinical review aren’t interchangeable. Each one closes a different gap.

What Does Claims Editing Catch?

Claims editing applies automated rules to catch coding errors, duplicate submissions, bundling violations and modifier misuse before payment goes out. It’s built for speed and volume.

What Does Itemized Bill Review Catch?

Itemized bill review examines high-cost inpatient or facility claims line by line, cross-referencing charges against clinical documentation and accepted norms. It regularly surfaces overcharges for drugs, supplies and duplicated line items that automated edits miss.

What Does Clinical and Medical Necessity Review Catch?

Clinical and medical necessity review checks whether billed services match the documented diagnosis. Clinical validation goes a step further, confirming the diagnoses themselves are supported by the medical record — critical in DRG-based reimbursement environments.

Together, these three capabilities cover the full claims lifecycle.

Can AI Alone Detect Healthcare Fraud, Waste and Abuse?

With three review layers in place, the next question is how to scale them. AI has expanded what’s possible here. Machine learning can scan large claim volumes at once, surfacing statistical outliers and unusual billing patterns faster than any manual process could.

The practical value shows up in intelligent triage: routing low-risk claims for fast payment, sending medium-risk claims to automated edits and escalating high-risk claims to human reviewers. This puts expert attention exactly where it’s needed most.

But AI alone can’t close complex cases. Clinical reviewers, coding specialists and medical directors bring the judgment and defensibility automated systems can’t replicate. Scale requires AI. Accuracy requires people. Put the two together and you get a program that’s both efficient and sustainable.

How Do Payers Reduce Provider Abrasion From FWA Controls?

A wide net catches more than fraud — it catches collateral damage too. Unnecessary denials, excessive documentation requests and broad claim holds create administrative burden that strains network relationships.

Precise, well-calibrated controls reduce that friction by targeting real risk instead of flagging everything that looks unusual. Transparent payment rationales cut down on disputes and speed up resolution. Intelligent routing keeps straightforward claims moving so review time goes toward genuinely complex cases.

What Makes an FWA Program Defensible?

Every payment decision should hold up under scrutiny — from regulators, auditors and your own leadership. Auditability isn’t optional. It’s the foundation a defensible program stands on.

What Should Payers Look for in an FWA Partner?

The right partner does more than hand you a savings report. Look for:

What Core Capabilities Should an FWA Partner Offer?

  • Broad review capabilities across claims editing, clinical review, itemized bill auditing and analytics.
  • Pre-pay and post-pay coverage across the full claims lifecycle.
  • Integrated AI-enabled detection with clear escalation to human experts.

What Operational and Compliance Standards Should an FWA Partner Meet?

  • Qualified coding and clinical staff who produce defensible determinations.
  • Provider-aware workflows that minimize unnecessary disruption.
  • Transaction-level reporting and independently verifiable ROI.
  • Compatibility with your existing claims systems, so you skip the full tech overhaul.

Zelis® Payment Integrity brings these capabilities together in one approach built for payers managing FWA at scale.

Frequently Asked Questions

Start with pre-pay claims editing. It catches high-volume coding and bundling errors before payment goes out, with no recovery needed and no core system replacement required. Most programs see measurable results within the first 30 to 90 days.

Track denial rates alongside dispute and appeal volumes. A high denial rate paired with high provider disputes often signals overly broad controls. Well-calibrated programs show targeted denials, low appeal rates and steady provider satisfaction scores.

No, and it shouldn’t try to. AI excels at surfacing patterns across large claim volumes. Clinical reviewers add the medical judgment that holds up in audits and disputes. The strongest programs use both together.

Watch your improper payment rate, overpayment recovery rate, pre-pay edit accuracy, provider dispute volume and time-to-resolution on flagged claims. ROI should be verifiable at the transaction level, independent of internal reporting.

Claims editing applies automated rules at the code level. Itemized bill review examines high-cost facility claims line by line, matching individual charges against clinical documentation. It catches overcharges for drugs, supplies and duplicated items that automated edits typically miss.

CMS and state regulators evaluate FWA program effectiveness as part of plan oversight. Weak controls raise your exposure to audits, penalty findings and overpayment demands. Plans in Medicare Advantage or Medicaid face especially close scrutiny.

Pharmacy FWA — including duplicate dispensing, early refills and formulary manipulation — needs pharmacy-specific editing logic and data. Medical claims FWA centers on coding accuracy and medical necessity. Both need dedicated detection tools, though the review methods differ.

Lead with transparency. Give clear, specific rationales for every claim hold or denial. Use intelligent routing to keep low-risk claims moving. Invest in provider communication workflows that explain decisions fast and cut down on back-and-forth.