Dr. Oz, the Administrator at the Centers for Medicare and Medicaid (CMS), has been laser-focused on combatting Medicaid waste, fraud, and abuse. Over the past month, he has travelled to Minnesota and California to highlight egregious home health and hospice schemes. One often overlooked scheme is the abuse of intergovernmental transfers (IGTs). CMS should put a stop to how states use IGTs to favor government-operated providers at patients’ and taxpayers’ expense.
Congress created Medicaid to help America’s most vulnerable access health and long-term care services. Both the federal government and the state were always meant to share financing responsibility. But states have long taken advantage of the federal government’s open-ended Medicaid matching structure by using payment schemes to maximize federal funds and finance corporate welfare for politically favored providers. In one common Medicaid money-laundering scheme, states tax providers, send that money right back to them to trigger federal matching funds, split the proceeds with the providers, and then repeat the cycle — all without meaningfully contributing their own funds.
As an illustration of how provider taxes work, let’s say a state imposes a $1 million tax on hospitals. The state then takes that same $1 million and spends it right back on those hospitals in higher Medicaid payments. The state invoices the federal government for the $1 million payment. For a typical state with a 60 percent federal Medicaid reimbursement percentage, the provider tax scheme netted $600,000 for the state. The state can then redistribute that $600,000 back to hospitals or use it for other budgetary purposes.
No new state resources were committed. The original $1 million was circular. That is not shared financing — it is a mechanism that converts accounting maneuvers into federal windfalls.
Every president since George H.W. Bush has recognized the harms of Medicaid money laundering. Congress and CMS have periodically taken action to make it more difficult for states to use certain schemes, but states have stayed ahead, finding new ways to fleece Washington.
The One Big Beautiful Bill contained the most significant reforms to date to limit states’ ability to abuse provider taxes. However, it failed to limit state Medicaid IGT schemes. It is critical for CMS to take action before the IGT practices spread like the provider tax schemes which have cost the federal government hundreds of billions of dollars over the years.
IGTs were not originally nefarious. They were designed to allow states and local governments to share legitimate Medicaid costs. Unfortunately, IGTs are often nefarious in practice. Many states twist IGTs into their own money laundering schemes that artificially inflate federal payments to government providers without any real increase in state or local spending.
How does this work in practice? States create particularly high extra Medicaid payments for certain government-owned providers, like county-operated nursing homes. Since these providers are government-owned, they can transfer money to the states as IGTs. The states then use those same funds to make higher Medicaid payments to those same facilities, claiming federal dollars in the process. Thus, the state channels the original funds and a share of the federal dollars back to the same entities that supplied the funds.
The schemes lead to massive funding disparities for identical services. In California, public ambulance services receive payments three times higher than private counterparts for identical Medicaid transport. Such schemes prioritize maximizing federal dollars over delivering real care.
Indiana epitomizes how states exploit IGTs in ways that harm patients. What began as a financing maneuver by one county to benefit its public hospital system evolved into a brazen shell game: county-owned hospitals bought private and nonprofit nursing homes and converted them into “public” facilities. These conversions were superficial. The state simply leased the facilities from the private companies, then hired those same companies to manage them. Once these facilities became public, the state dramatically increased Medicaid payment rates to those providers, drawing down more federal matching funds. From 2000 to 2017, publicly-owned nursing homes in the state increased from five percent to 95 percent of Indiana nursing homes — reflecting the state’s reliance on IGT-funded payments.
This fiscal excess did not translate into better staffing, improved facilities, or higher-quality care. Rather, it was mostly diverted from nursing home operations and patient care to unrelated uses, including hospital construction. One recent study found these inflated payment arrangements coincided with a shift of patients into the lowest-quality nursing homes and were associated with worse outcomes, including an estimated 50 additional resident deaths per year.
Some defenders of current Medicaid financing argue that curbing IGT schemes would reduce enrollees’ access or financially harm providers. But these critiques ignore how current schemes can harm patients by putting special interests first.
CMS already has the authority to stop IGT-funded schemes. Federal law requires CMS approve Medicaid plans with payment that are “consistent with efficiency, economy and quality of care.” An IGT-funded supplemental payment scheme that pays public providers three times more for the exact same service seems far from efficient or economical. And new evidence of patient harm strongly indicates these schemes are not consistent with quality of care.
CMS should end states’ incentives to run IGT scams by enforcing payment parity for identical services. Doing so would strike at one of Medicaid’s most entrenched sources of cronyism, waste, and patient harm. It would send a clear signal that Medicaid financing should reward care, not accounting tricks.
Chris Medrano is a legal research analyst at Paragon Health Institute. Brian Blase is President of Paragon Health Institute.
