I'm not arguing it is per-se bad (It is impossible to run programs at that scale without some fraud rate. Medicare's fraud rate is 8-10%)

i'm arguing all you would do by forcing them to give the money out is increase the fraud rate - they will do less investigation of claims because they don't have to.

Worse, claims that look better on their face will be approved even if they push aside claims that aren't fraudulent.

This happens in medicare/medicaid all the time, see https://en.wikipedia.org/wiki/Medicare_fraud

You can also see this happened in pigford vs glickman, etc.