On March 2, the state of Minnesota filed a lawsuit against the Centers for Medicare & Medicaid Services in federal district court. The case, State of Minnesota v. Oz, is in response to two actions taken by CMS against the state for what CMS says is the state’s failure to control fraud against its Medicaid program. One is a compliance action that CMS brought against the state on January 6 to withhold over $2 billion per year in federal Medicaid matching funds in future quarters. The other is a deferral of $259 million in federal Medicaid matching funds for the last quarter of FY 2025 that the Vice President announced on February 25. In the lawsuit, Minnesota asks the court to prohibit CMS from deferring payment of most of the $259 million (it is not seeking to enjoin the compliance action in this case). A hearing on the state’s motion has been set for March 12; CMS’s reply is due March 9.
This may well be the first time a state has gone to federal court to stop CMS from deferring payment of federal matching funds in mid-stream. Deferral is the process that CMS uses to get additional information from a state showing that its expenditures meet the requirements for receipt of federal matching funds—that is, that the expenditures are allowable under federal statute and regulations. During the deferral process, CMS withholds federal matching funds while it considers the documentation the state submits. If CMS determines that the expenditures in question are allowable, it releases the funds; if it determines that they are not allowable, then it takes a formal disallowance denying the funds. The state has the right to appeal the disallowance to the Departmental Appeals Board and, if the DAB rules against it, to federal district court. While state appeals of disallowances are not uncommon, challenges to deferrals are rare if not unprecedented.
Minnesota makes the following case in support of blocking the deferral and releasing the funds. It points out that its Medicaid agency has taken a number of significant actions to control fraud and has tried to work collaboratively with CMS; that despite these efforts, CMS deferred $243.8 million in federal matching funds for Minnesota’s Medicaid expenditures in the fourth quarter of FY 2025; that CMS did not adequately explain the basis for the deferral; and that the deferral process doesn’t protect the state from lengthy delays by CMS in deciding whether or not the expenditures are allowable, while it holds onto the money and potentially taking more deferrals in subsequent quarters. (In this case, the state does not challenge $15.4 million of the $259.2 million deferral relating to claims for individuals with unsatisfactory immigration status). CMS’s actions, it contends, violate its rights under the Constitution (Fifth Amendment, Spending Clause) and the Administrative Procedure Act (APA).
Federal court litigators will have a much better sense of the strength of these Constitutional and statutory arguments. But Minnesota does make an important point about the lack of specificity in CMS’s notice of deferral, particularly in light of the amount at issue. Here’s the relevant paragraph from the February 25 deferral notice:
“CMS identified $243,790,260 FFP (MN/2025/4/E/06/MAP) attributable to CMS’s ongoing review of state expenditures, with a focus on fourteen high-risk Medicaid service areas identified as particularly vulnerable to fraud or abuse. CMS has identified $164,198,916 FFP for other practitioner, personal care, and home and community-based services lines that have questionable variances and raise concerns about allowability of the claimed expenditures. Additionally, CMS has identified $79,591,344 FFP claimed by the state associated with reimbursement claims submitted to the state by specific providers that we have identified as high-risk for fraud or aberrant billing practices based on historical billing and CMS data analytics. We are requesting Minnesota either provide additional state and provider documentation to support the allowability of these claims, including through CMS sample-based reviews, or make decreasing Line 10B adjustments on the next quarterly CMS-64 submission.” (The CMS-64 is the form states use to report their expenditures to CMS).
That’s it.
CMS regulations require that, if the agency takes a deferral, it send the state a written notice that “identifies the type and amount of the deferred claim,” “specifies the reason for the deferral,” and “requests the state make available all the documents and materials … necessary to determine the allowability of the claim.” In the case of the $164.2 million deferral, CMS identifies the type of services (other practitioner, personal care, and HCBS) and gives a total amount. But it does not explain what “questionable variances” it has found or the reason they justify a deferral of $164.2 million. In the case of the $79.6 million deferral, CMS provides a total amount and says it’s based on “specific providers that we have identified as high-risk for fraud or aberrant billing practices.” But it doesn’t identify the “specific providers”—even by type—or explain why they are identified as “high-risk” so as to warrant a deferral of $79.8 million. And in both cases, CMS does not identify what additional documentation Minnesota needs to provide to enable CMS to “determine the allowability of the claims.”
What, exactly, is Minnesota supposed to do with this? Under the regulation, the state has 60 days from the date of receipt of the notice (or 120 days if it requests and extension) to “make available to the regional office, in readily reviewable form, all requested documents and materials except any that it identifies as not being available.” But what documents and materials has CMS requested of Minnesota? Without that information, how is it supposed to comply? While the state tries to figure this out, CMS is withholding $243 million in federal matching funds. Under the regulation, there is a 90-day clock on CMS to make a determination on allowability, but only “after all documentation is available in readily reviewable form.” Since CMS hasn’t told the state what documents and materials it needs, that could take a while.
The outcome of this case will matter not just to Minnesota, but to other states as well. In announcing the deferral action against Minnesota at the White House press conference on February 25, CMS Administrator Oz promised that “We have more announcements from [sic] other states coming soon.” The Democratic Governors of three states—California (January 27), Maine (February 6) and New York (March 3) —have already received letters from Dr. Oz requesting detailed information about the extent of fraud against Medicaid in their states and the actions they are taking to address it. If Dr. Oz follows through on his promise, CMS will likely take deferrals against one or more of these states, if not others. And if those deferral notices are as unspecific as the notice that Minnesota received, those states may also find themselves at the mercy of Dr. Oz for the release of tens if not hundreds of millions of federal Medicaid matching funds for services already provided.
Of course, this doesn’t have to be a federal court case. CMS could simply follow its own regulation and explain to Minnesota the reasons for the deferrals and tell the state what documentation it needs to determine the allowability of Minnesota’s expenditures. Dr. Oz has, for whatever reason, clearly decided not to do so. Perhaps he actually believes his agency is complying with its own regulations. Or perhaps he wants to push the envelope to see how much discretion the federal courts will give him to weaponize the deferral process against disfavored states. In either case, this has almost nothing to do with controlling fraud against Medicaid in Minnesota or any other state.
