Healthcare Fraud vs. Abuse: Intent, Overlap, and Penalties

The difference between healthcare fraud and abuse comes down to intent. Healthcare fraud means someone knowingly deceived a health benefit program to get money or services they weren’t entitled to. Healthcare abuse means a provider’s billing or care practices fell outside accepted standards and generated unnecessary costs, but without that same deliberate dishonesty. Both drain federal programs, and enforcement agencies pursue both, but they sit under different statutes and carry different consequences.

How the Law Draws the Line

Federal criminal law treats fraud as a specific offense. Under 18 U.S.C. § 1347, anyone who knowingly executes a scheme to defraud a health care benefit program, or to obtain money or property from such a program through false pretenses, commits healthcare fraud.¹ The statute reaches any health benefit program, not just Medicare or Medicaid, and applies to providers, patients, and billing companies alike. The common thread in every fraud definition is knowledge: the person knew the conduct was wrong and did it anyway to get paid.

CMS describes abuse as any practice that fails to provide patients with medically necessary services or doesn’t meet professionally recognized standards of care.² Abuse usually grows out of sloppy billing habits, poor training, or a genuine misunderstanding of coverage rules rather than a plan to steal. CMS is explicit that the line “depends on specific facts, circumstances, intent, and knowledge,” which is why the same billing pattern can be characterized either way depending on what the provider knew and when.

What Fraud Looks Like

Fraud schemes share a common feature: someone deliberately misrepresented what happened, what was needed, or what it cost. The FBI identifies patterns investigators see repeatedly:³

Phantom billing, meaning claims for appointments, procedures, or supplies the patient never received.
Upcoding, meaning billing for a more expensive service than what was provided, such as charging for a comprehensive office visit after a brief check-in.
Unbundling, meaning splitting a procedure that should be billed as a single service into separate charges to inflate reimbursement.
Diagnosis misrepresentation, meaning falsifying or exaggerating a diagnosis to make unnecessary treatments appear medically justified.
Kickback arrangements, meaning paying or accepting money in exchange for patient referrals to a particular lab, pharmacy, or facility. The Anti-Kickback Statute makes this a felony whether or not the referred services were actually needed.⁴

Medical identity theft also sits on the fraud side. When someone uses a stolen patient identity to bill for services, it doesn’t only cost the insurer money. It can corrupt the victim’s medical record with false diagnoses, allergies, or procedures that are difficult to remove and could affect future treatment decisions.

What Abuse Looks Like

Abuse looks less dramatic than fraud but drains billions from the system through practices that don’t meet accepted medical or billing standards:

Medically unnecessary services, such as diagnostic tests, imaging, or treatments with no clinical justification for the patient’s condition.
Excessive charges, meaning rates significantly above what’s reasonable for the geographic area and type of service.
Routine waiver of cost-sharing, meaning regularly waiving copayments or deductibles without documented financial hardship, which can disguise inflated charges and encourage overuse.
Improper self-referrals, meaning a physician referring patients to a facility in which the physician holds a financial interest without meeting one of the Stark Law’s specific exceptions.⁵
Sloppy coding habits, meaning consistently selecting billing codes that don’t accurately reflect the service provided because the coder never learned the correct ones.

The Stark Law example matters because the statute imposes strict liability. A physician doesn’t need to intend anything improper. If a prohibited financial relationship exists and no exception applies, the referral itself violates the law regardless of the physician’s state of mind.⁶ That’s part of why the fraud/abuse boundary isn’t as clean as the definitions suggest: some laws punish conduct even when nobody meant to break them.

When Abuse Becomes Fraud

A billing pattern that starts as careless abuse becomes fraud the moment the provider gains awareness that the practice is wrong and continues anyway. This is where most enforcement action happens, because the government doesn’t need a signed confession to prove knowledge.

The False Claims Act’s definition of “knowing” includes acting in deliberate ignorance or reckless disregard of whether information is true.⁷ A practice manager who ignores repeated audit warnings about incorrect billing codes can’t hide behind “I didn’t know.” Investigators look at the pattern: how long the practice continued, whether the provider received compliance training, whether internal audits flagged the issue, and whether anyone tried to fix it. A provider who bills incorrectly once and corrects the error has an abuse problem. A provider who bills incorrectly for two years after receiving an audit report has a fraud problem.

Why the Difference Matters: Penalties

Fraud is a federal crime. Under 18 U.S.C. § 1347, healthcare fraud carries up to 10 years in prison. If a patient suffers serious bodily injury because of the fraud, the maximum jumps to 20 years. If the fraud causes a death, a life sentence is available.¹ Anti-Kickback Statute violations carry up to $100,000 in fines and up to 10 years in prison per count.⁴

The False Claims Act, the government’s primary civil tool, reaches both fraud and knowing abuse. Anyone who knowingly submits a false claim faces a penalty between $14,308 and $28,619 per claim, plus three times the government’s actual damages.⁸ Each line item on a claim counts separately, so a provider who submitted hundreds of false bills can face penalties in the millions. Because “knowingly” includes deliberate ignorance and reckless disregard, prosecutors don’t always need to prove someone plotted a scheme.⁷ The federal government recovered over $5.7 billion from healthcare-related False Claims Act cases in fiscal year 2025 alone.⁹

For many healthcare professionals, the most damaging consequence isn’t fines or prison. It’s exclusion. When the OIG places a provider on its List of Excluded Individuals and Entities, no federal healthcare program will pay for anything that person furnishes, directs, or prescribes. The payment ban extends to salary, fringe benefits, and contract payments if the excluded individual works for a provider that bills federal programs.¹⁰ In practical terms, exclusion makes it nearly impossible to work in healthcare.

Exclusion can follow either fraud convictions or serious abuse findings, which is one more reason the abuse label isn’t as forgiving as it sounds.

Reporting Suspected Fraud or Abuse

Patients, employees, competitors, and members of the public can all report suspected fraud or abuse to the OIG. The most direct route is the OIG hotline, which accepts tips online or by phone at 1-800-HHS-TIPS (1-800-447-8477).¹¹ Reports can be made anonymously, and the OIG investigates complaints involving fraud, waste, and abuse across all HHS programs.

Employees who discover fraud at their workplace have an additional option. The False Claims Act’s qui tam provision allows a private individual, called a relator, to file a lawsuit on behalf of the federal government. If the government takes over the case and recovers money, the relator receives between 15% and 25% of the proceeds. If the government declines to intervene and the relator pursues the case independently and wins, the share increases to between 25% and 30%.¹² Qui tam relators also receive statutory protections against employer retaliation, including reinstatement, back pay, and compensation for litigation costs.

1
Office of the Law Revision Counsel. 18 U.S. Code 1347 – Health Care Fraud
2
Centers for Medicare & Medicaid Services. Medicare Fraud and Abuse: Prevent, Detect, Report
3
Federal Bureau of Investigation. Health Care Fraud
4
Office of the Law Revision Counsel. 42 U.S. Code 1320a-7b – Criminal Penalties for Acts Involving Federal Health Care Programs
5
Office of the Law Revision Counsel. 42 U.S. Code 1395nn – Limitation on Certain Physician Referrals
6
U.S. Department of Health and Human Services Office of Inspector General. Fraud and Abuse Laws
7
Office of the Law Revision Counsel. 31 U.S. Code 3729 – False Claims
8
Federal Register. Civil Monetary Penalties Inflation Adjustments for 2025
9
U.S. Department of Justice. False Claims Act Settlements and Judgments Exceed $6.8B in Fiscal Year 2025
10
Office of Inspector General | U.S. Department of Health and Human Services. The Effect of Exclusion From Participation in Federal Health Care Programs
11
Office of Inspector General | U.S. Department of Health and Human Services. Submit a Hotline Complaint
12
Office of the Law Revision Counsel. 31 U.S. Code 3730 – Civil Actions for False Claims