Medicare’s Skin-Substitute Fraud Is No Aberration

This op-ed was originally published in The Well News.

Not much news comes out of the skin-substitute industry. Skin substitutes — products made from donated tissue or lab-engineered materials to be placed over chronic wounds to help them heal — are a routine, low-profile slice of the health care industry. Serving the needs of seniors with diabetic foot ulcers or venous leg ulcers, this treatment might have remained obscure if it wasn’t for the fraud associated with skin substitutes. 

Enter “Operation Skin Scam,” the Department of Justice’s recent undertaking to uncover the Medicare fraud schemes metastasizing within this niche market. The DOJ uncovered a $4 billion allograft grift, which occurred over a period of two-and-a-half years and was halted only after more than $2 billion had been paid. 

In 2026, the DOJ brought numerous charges and other enforcement actions involving more than $1.5 billion in skin-substitute fraud claims. One of the providers charged by the DOJ, who “used his Medicare earnings to finance a lavish lifestyle that included the commissioning of multiple multimillion-dollar yachts,” was featured in The New York Times. “It’s lucrative, and it’s low risk,” was his description of his business model.

The familiar defense of Medicare — that its government-set reimbursement rates ensure more affordable care than would market-set prices — misunderstands the respective forces that motivate human behavior in markets and entitlement programs. The incentives inherent in Medicare often unleash the very self-serving impulses that market discipline restrains.

Until this year, Medicare’s payment formula reimbursed providers for skin substitutes at 106% of their reported average sales price, ostensibly to prevent excessive payments. However, Medicare administrators did not and could not police properly whether the reported ASP reflected the prices providers actually paid for the product or how many square centimeters of skin-substitute graft were necessary for a given wound, if medically necessary at all. And they didn’t determine reliably which graft product was appropriate or how often it should be applied.

With no incentive for restraint, it is not perplexing that prices of graft products spiked and the use of rebate arrangements — not to mention outright kickbacks — emerged between manufacturers and providers seeking to capitalize on Medicare’s lax oversight. Some providers submitted inflated invoices for grafts, favored more expensive skin-substitute products, and used more of them than necessary per patient. The number of square centimeters of graft per patient soared so much that by late 2024, the average amount of graft for a beneficiary with a skin-substitute claim exceeded 80 square centimeters in a quarter, many times the area often occupied by the diabetic foot ulcers treated with these products.

Advocates of government-run health care invoke the avarice of the health care industry, yet overlook how, without market discipline, Medicare’s integrity depends on the integrity of providers, the most unscrupulous of whom earned fortunes exploiting it.

Were the patient (and not Medicare itself) to directly bear the cost of care or private care plans, this sort of excessive or fraudulent billing could not stand. It is not from the benevolence of the provider, the drug manufacturer or the insurance company — to adapt the wisdom of Adam Smith — that we expect high-quality health care to be made available at a low cost, but from their regard for their own interest. 

Market forces condemn bloat and waste; the structure of Medicare promotes them. To succeed, private actors must economize and compete, and failure to do so leads to the failure of one’s business; the beneficiaries of entitlement programs face the opposite incentives.

Not only is it “a fundamental flaw in [Medicare’s] design” that “fraud is not meaningfully distinct from ordinary billing,” as David Goldhill argues in The Washington Post, but Medicare promises “to pay for essentially all health care that a senior needs,” with “no administrator empowered to say enough.”

Ultimately, federal administrators of a massive trillion-dollar entitlement who process a billion fee-for-service claims a year effectively face an either-or proposition: to credulously administer claims at scale or to scrutinize each one and prioritize integrity, slowing or suspending payments across entire segments of Medicare, and overhauling those segments in which abuse becomes systemic. They have largely defaulted to the former. 

Thus, dysfunctions have been allowed to persist. From a couple hundred million dollars annually, Medicare spending on skin substitutes exploded by 7,100% in six years, reaching $14.4 billion in 2025 — and the number of beneficiaries receiving the products only doubled.

Yet the astonishing spending spike, alongside other evidence of mismanagement, provoked no urgency for reform.

Without it, Medicare will continue to pay absurd claims — as it did with $14 million billed by one skin-substitute provider supposedly for a single beneficiary in one year. Skin substitutes are one example of Medicare’s oversight failure, but scarcely the only one. 

A thoroughgoing restructuring — a project that can be undertaken only by Congress — is necessary to bring an end to the saga of Medicare profligacy.