On March 19th, CMS notified Minnesota’s Medicaid Director that it has approved the state’s corrective action plan (CAP) for addressing fraud. The state submitted the CAP on January 30 in response to a CMS determination that the state was not in compliance with federal Medicaid law and that, as a result, CMS would withhold over $2 billion per year in federal Medicaid matching funds going forward until the state came into compliance. Before submitting the CAP, the state had requested the hearing, to which it is entitled, in order to contest the CMS compliance action before CMS can start withholding the funds. In its March 19 letter, CMS asked that the hearing requested by the state “be stayed pending complete implementation of the approved CAP, as successful completion would moot the appeal.”
At first blush, this seems like a routine bureaucratic back-and-forth between a state Medicaid agency and CMS: the agency submits a CAP, CMS approves it, and the agency implements the CAP. This particular approval, however, is as unusual as it was unexpected. It may signal that CMS is strategically withdrawing from one front in its two-front fiscal attack on Minnesota’s Medicaid program—what Vice President J.D. Vance described as “turn[ing] the screws on them a little bit”—using the CAP approval as a face-saving off-ramp. Here’s what we know.
What Just Happened?
On January 6, CMS notified the Governor of Minnesota that the state was operating its Medicaid program “in substantial noncompliance with federal requirements described in sections (sic) 1902(a)(64) of the Social Security Act….” That section requires state Medicaid programs to “provide a mechanism to receive reports from beneficiaries and others and compile data concerning alleged instances of waste, fraud, and abuse relating to the operation of this title.” CMS wrote the Governor it would be withholding $515 million in federal Medicaid matching funds each quarter going forward until “the Minnesota Medicaid agency fully and satisfactorily implements a comprehensive CAP that addresses FWA in the 14 high-risk service areas to bring the program into compliance with the federal requirements.”
The CMS notification explained that the withholding of funds going forward was subject to a hearing, and that the state had 10 days to request one. On January 13, the state requested a hearing, blocking CMS from withholding federal funds going forward until the conclusion of the hearing process. On January 30, the state submitted a CAP (this was a revised version of the CAP the state had submitted on December 31 at CMS request).
On March 16 President Trump issued an Executive Order establishing a Task Force to Eliminate Fraud composed of representatives of 11 federal agencies including HHS; the agencies were charged with, among other things, recommending “as appropriate, any ways that Federal funds may be withheld from jurisdictions that do not have adequate anti-fraud requirements.” As justification, the E.O. singled out Minnesota: “The staggering fraud and waste in Minnesota alone is a case in point. Federal prosecutors in the State estimate that Medicaid fraud in recent years could total in the billions.” Three days later, CMS, after over a month of not providing feedback to Minnesota on its CAP, suddenly approved it.
There’s one more piece to this puzzle. As its compliance action was unfolding, CMS launched another fiscal attack on Minnesota. This one took the form of a deferral of $259 million in federal matching funds for expenditures the state made in the last quarter of FY 2025 (ending September 30, 2025). The deferral was announced by the Vice President, who chairs the Task Force to Eliminate Fraud, at a White House press conference on February 25. On March 2, Minnesota filed suit in federal court to enjoin the deferral. On March 12, the court held a hearing on the state’s request that it direct CMS to release $243 million of the deferred funds; at the conclusion of the hearing, it took the matter under advisement.
What Does it Mean?
The compliance action is not over. CMS has not rescinded its January 6 determination that the state is out of compliance. And its March 19 letter approving the CAP makes clear that only “complete implementation” will end the CMS compliance action. Nonetheless, CMS has not scheduled the hearing, which is all that prevents it from withholding $515 million in federal matching payments every quarter going forward (under its own regulations, CMS was required to schedule the hearing within 60 days of the notice of noncompliance, or March 7). Its March 19 letter to the state gives every indication that it wants to avoid a hearing and any further proceedings.
The merits may have something to do with this. The state’s 20-page CAP includes 17 elements (revalidation of provider enrollment, use of analytics to prioritize prepayment and post payment review, etc.) and 35 specific implementation dates. It would be challenging for CMS to prevail on its determination that the state had no “mechanism…to compile data concerning alleged instances of waste, fraud, and abuse….”
Then there’s the matter of proportionality. As researchers at the Bipartisan Policy Center found, CMS over the past 15 years has initiated compliance actions against five states (it’s not clear whether any of these went beyond notification to a hearing, much less to actual withholding of funds). In all but one case, CMS set the withhold amount at a small percentage (1%, 4%, 10%) of the federal matching payments for a state’s administrative costs, which is far less disruptive than withholding the entire federal match on the 14 service categories, as CMS proposed to do in Minnesota. In those previous compliance actions, CMS did not start with a huge financial hit to the state but started with small cuts that increased by 1 or 2 percentage points each quarter until the state came into compliance. The point was to bring a state into compliance by targeting the Medicaid agency’s administrative costs for modest, slowly increasing reductions in federal support. CMS would have had to explain its radical departure from its own precedent in Minnesota, where it sought to punish the state fiscally with a withhold of all federal financial support for a broad swath of services.
Why Does It Matter?
How this CMS compliance action against Minnesota plays out has important implications for other states. First, Minnesota is not the only state of interest to the administration. CMS has also sent letters seeking information about Medicaid program integrity to California, Florida, Maine, and New York, and there may be more on the way. These letters could be the start of compliance and/or deferral actions against one or more of these states, ostensibly to improve program integrity.
Second, beginning January 1, 2027, the H.R. 1 mandate to impose work reporting requirements on Medicaid expansion adults will take effect in 41 states (including DC). These requirements are extremely complicated; compliance will be challenging, to say the least. If CMS is dissatisfied with a state’s performance—or the administration wants to send a message to a Governor—a compliance action (or threat) is one enforcement tool at its disposal.
In its March 19 letter, CMS has committed to Minnesota that “successful completion” of its approved CAP would end the compliance action. Hopefully, that’s how this particular matter will play out. And perhaps the administration will reconsider the use of compliance actions to “turn the screws” on Democratic-led states, although the March 16 E.O. does not give one much confidence. Time will tell.
