At a White House press conference last Wednesday, Vice President J.D. Vance, newly tasked with leading a war on fraud, announced that “we have decided to temporarily halt” $259 million in federal matching payments to the state of Minnesota due to fraud against its Medicaid program. He emphasized: “…we don’t want to do this. We don’t want to be in a situation where the state of Minnesota is being so careless with federal tax dollars that we have to turn the screws on them a little bit so that they take this fraud seriously.” The Vice President may not want to be in this situation—although he didn’t look all that uncomfortable—but his announcement launched a second turning of the screws, and not by just a little bit. To understand what’s coming at Minnesota, you’ll have to go into the Medicaid procedural weeds.
The First Turning: A Compliance Action
On January 6, the CMS Administrator Dr. Mehmet Oz notified Governor Tim Walz that CMS had determined that Minnesota was in “significant noncompliance with” federal requirements because it “fails to adequately identify, prevent, and address fraud in its Medicaid program.” As a result, Dr. Oz wrote, CMS would be withholding $515 million in federal Medicaid matching payments each quarter going forward—over $2 billion per year—with the caveat that “this amount may increase based on additional findings of fraud or insufficient progress towards mitigating fraud.” CMS would end its withholding “when the Minnesota Medicaid agency fully and satisfactorily implements a comprehensive [Corrective Action Plan] that addresses [fraud, waste, and abuse] in the 14 high-risk service areas to bring the program into compliance with federal requirements.”
Before CMS can start withholding funds, it is required to give the state an opportunity for an administrative hearing to challenge its finding of noncompliance. On January 13, the state requested a hearing. Under its regulations, CMS has until March 7 (60 days after January 6) to schedule the hearing; it has not yet done so. CMS also directed the state to submit, by January 30, a revised “comprehensive CAP” that includes a timeframe for implementation and performance metrics; the state has submitted a revised CAP.
A compliance action by CMS against a state—i.e., withholding of federal Medicaid matching funds going forward in order to bring a state into compliance with federal requirements—has rarely, if ever, occurred. And a compliance action to enforce the statutory requirement that a state compile information about fraud against the program has certainly never occurred. Nor has one ever withheld an amount of federal funding of this magnitude. My colleague Edwin Park estimates that $2.06 billion per year would equal roughly 18 percent of what Minnesota received in federal Medicaid funding in FY 2025.
The Second Turning: A Deferral
In Medicaid parlance, the “temporary halt” in federal matching payments announced by the Vice President is a deferral. It is a standard tool used by CMS in its oversight of state claiming of federal matching funds. Very briefly, every calendar quarter states submit their Medicaid expenditures to CMS and request federal matching funds. CMS reviews each state’s submission to determine whether the expenditures are allowable under federal law and regulation. If CMS has questions about whether particular expenditures are allowable, it can defer paying the state federal matching funds for those expenditures until the state provides documentation that the expenditures are allowable. If CMS decides the state has documented allowability, it pays the matching funds; if not, it takes a disallowance—i.e., notifies the state that the expenditures are not allowable and won’t be matched. The state has the right to challenge the disallowance (and related deferrals) before the Departmental Appeals Board, and if the DAB rules against it, in federal district court. (CMS may also take a disallowance based on the findings of an Office of Inspector General audit).
In this case, CMS says that in its review of Minnesota’s Medicaid expenditures for the quarter ending September 30, 2025 it identified $243.8 million in “unsupported or potentially fraudulent Medicaid claims” and $15.4 million in claims “involving individuals lacking a satisfactory immigration status.” The total amount in federal matching funds that CMS deferred for Q4 2025 is $259.5 million. Under established deferral procedures, the state now has an opportunity to demonstrate that the expenditures in question are allowable. If the state, which has the burden of proof, fails to do so, CMS warns it “may defer more than $1 billion in federal funds over the next year.” CMS doesn’t explain how it knows what expenditures are not allowable in calendar quarters for which the state has not yet submitted its expenditures which CMS therefore can’t review to determine allowability. (My colleague Edwin Park estimates that $1.04 billion per year would equal roughly 9 percent of what Minnesota received in federal Medicaid funding in fiscal year 2025).
The Two Turnings: A Double Whammy
In announcing the $259 million deferral, the Vice President did not indicate that CMS would withdraw its compliance action. Nor has the agency done so. At this point, both stand. As rare as compliance withholds are, and as relatively common as deferrals are, for CMS to initiate both at the same time against the same state is unprecedented. It’s also overkill. If your objective as CMS is to increase Medicaid program integrity protections in Minnesota (or any other state), there’s simply no logic to initiating not one but two different procedural remedies. It seems more like an attack than a federal-state collaboration.
Similarly, the amounts of federal funds at issue—more than $2 billion per year for the compliance action, more than $1 billion per year for the deferral—are way, way beyond the norm. There’s no public database of deferrals, but a deferral of $259 million in one quarter is unheard of. Research by our colleagues at the Center on Budget and Policy Priorities found that over the past 10 years, the largest disallowance upheld by the DAB was $195.7 million (the case involved payments to disproportionate share hospitals). In the DAB decisions over that period, the deferral amounts leading to disallowances ranged from $2.4 million to $43.7 million, amounts that at most were slightly over 1 percent of the federal matching funds received by the states in the years they were in effect. (Most of the decisions involved disallowances based on OIG audits, not deferrals).
Given the amounts involved, this double whammy has the potential to destabilize Minnesota’s Medicaid program, if not its General Fund overall. Taking CMS data for FY 2024 for federal Medicaid spending in Minnesota, and adjusting for annual growth using CBO baseline estimates of actual Medicaid spending, more than $3 billion per year would represent over a quarter of the state’s estimated federal matching payments in FY 2025. That is a budget hole that no state could fill over the course of a year, much less a small state like Minnesota (Minnesota accounted for less than 2 percent federal Medicaid spending across all states in FY 2024).
Also, fiscal context matters. Minnesota, like all expansion states, was targeted for large Medicaid cuts in H.R. 1; researchers at RAND estimate that these cuts will reduce Minnesota’s Medicaid spending (combined federal and state) by a total of $9.1 billion between 2025 and 2034. The double whammy will only add to this fiscal disruption.
Coming Attractions
There’s no dispute that there has been fraud against Minnesota’s Medicaid program. Governor Walz has acknowledged this, and the state Medicaid agency has taken a number of dramatic actions over the past ten months to limit the program’s exposure going forward. Neither the CMS January 6 compliance action nor its February 25 deferral notice include any mention of these efforts, however. To the contrary, at the White House press conference CMS Administrator Oz went out of his way to ignore them (as well as the January 6 compliance action): “This quarter-billion dollar deferment [sic] is hopefully going to get on the radar screen of the state of Minnesota and make sure they are responsive to our requests.”
CMS has the responsibility to ensure that states follow federal rules in administering their Medicaid programs, that their claims for federal matching payments are allowable, and that they protect their programs against fraud. That said, it’s hard to avoid the conclusion that this double turning of the screws against Minnesota is less about fraud than it is about using oversight authority in unprecedented ways in order to punish the state and its political leadership.
While Minnesota has no recourse against cheap shots from the White House podium, it does have administrative (and ultimately judicial) forums to protect its Medicaid program from massive, arbitrary reductions in federal funding, whether by deferral/disallowance of expenditures already made or by a compliance withhold against expenditures in the future. This will all take months if not years to play out. In the meantime, the screws are likely to be turned more than just a bit on other states. Here was Dr. Oz’s parting shot: “[Minnesota is] not the only state that’s foundering. We have more announcements from [sic] other states coming soon.” The betting here is that California is next in line.
