On April 6, U.S. District Court Judge Eric Tostrud issued a decision in Minnesota v. Oz. The case was triggered by CMS’s deferral of $259 million in federal matching funds from the Minnesota Medicaid program on February 25. In response, the State filed suit on March 2 asking the court to block the CMS action and to require it to release $245 million of the funds to the State. After a hearing on March 12, Judge Tostrud denied the State’s request, leaving CMS free to continue with the deferral (and perhaps to defer additional funds). But the Judge did not dismiss the case, and the State may live to fight another day. “At least at this stage,” he concluded, “Minnesota has not shown that Defendants have failed to follow the rule of law.”
The context for this decision is complicated. There’s the compliance action that CMS took against Minnesota on January 6 to withhold half a billion dollars per quarter going forward. There’s CMS’s approval of the state’s corrective action plan (CAP) on March 19, which has put the compliance action on ice, at least for now. And there’s the deferral of $259 million that CMS took on February 25 relating to federal matching funds for state expenditures for the last quarter of FY 2025, which triggered this lawsuit. (The January 6 CMS compliance action was not at issue in this case). This blog will focus just on the decision.
The Decision
There’s a lot going on in Judge Tostrud’s 42-page opinion for the litigators to parse, but the bottom line is this: “The law ordinarily requires a federal court to wait until a federal agency’s proceedings are final before deciding whether the agency’s actions are lawful. Here, the proceedings Minnesota challenges have just started. They are not final in the sense the law requires.”
Medicaid is financed jointly by the federal government and the states. States are entitled to federal matching payments on Medicaid spending that is “allowable”—i.e., that meets federal statutory and regulatory requirements. CMS is responsible for ensuring that state expenditures are allowable. When CMS has concerns about whether some (or all) of a state’s expenditures are allowable, it can delay approval of federal matching payments for those expenditures in order to get more documentation from the state. If the state is able to document that its expenditures are allowable, CMS approves the matching funds; if not, CMS disallows them. The name for this process is deferral.
Minnesota argued that CMS’ February 25 notice of deferral was a “final” agency action, which would justify the court intervening at this point. The Judge didn’t buy it, comparing the deferral notice to “an agency’s decision to initiate an audit or similar investigative measures that courts find are not final.” A deferral notice, the Judge wrote, “marks the commencement of a back-and forth investigative process that could lead to many possible results, including disallowance or withhold of [Federal Financial Participation] implicated by the agency’s questions. A deferral notice does not mark the consummation of the agency’s decision-making process regarding how the State’s entitlement to the FFP will be determined.”
The Judge noted that the deferral was announced by the Vice President and the CMS Administrator at a White House press conference; that the Vice President stated that the federal government doesn’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;” and that the Administrator Oz said “this quarter-billion-dollar deferment is hopefully going to get on the radar screen for the State of Minnesota, and make sure they are responsive to our requests.” The Judge also noted that five months before the press conference, Governor Walz had issued an Executive Order that, among other things, directed the state’s Medicaid agency to identify high-risk providers, claims, and service patterns for targeted prepayment and post-payment review.
The state argued that this showed that it was taking fraud seriously, that the deferral was political retribution, and that CMS’ reasons for taking the deferral were “pretextual.” The Judge didn’t buy that either:
“Minnesota has identified reasonable legal concerns regarding the deferral’s nature and scope and the federal government’s motivations for initiating it. It is possible the record may support these concerns in the future. Today it does not.”
What the Decision means for Minnesota
As of this writing, it doesn’t appear that Minnesota will appeal the decision or that CMS will stop the deferral and release the $243 million to the state. Instead, all indications are that the deferral process will go forward, with CMS holding onto the funds until its conclusion. That could be awhile.
CMS has requested documentation for a sample of 330 Medicaid claims from fee-for-service data and 160 managed care encounters to determine the allowability of the state’s expenditures for Q4 2025. Minnesota has 60 days from February 25 to produce the documentation but can request an additional 60 days, which would give it to the last week in June. CMS has 90 days from the date it has documentation available “in readily reviewable form” to determine whether the expenditures are allowable. That period would expire the first week of October. If CMS decided to disallow some or all of the matching payments, the state could challenge the disallowance before the Departmental Appeals Board and, if it loses there, in U.S. District Court (potentially before Judge Tostrud).
In short, unless CMS changes course, it could be months if not a year or more before Minnesota can access some or all (if any) of the disputed $245 million. Given the pressures on the state’s budget from H.R. 1, its inability to draw down these federal matching funds for an extended period of time may well have consequences for the state’s Medicaid providers and/or the Minnesotans covered by Medicaid. And that assumes that CMS does not take another deferral against the state’s expenditures for Q1 2026 or subsequent quarters.
What the Decision means for other States
CMS has sent letters to at least four other states (CA, FL, ME, and NY) requesting detailed information about each state Medicaid program’s anti-fraud policies and procedures. (The letter to New York contains an egregious misstatement of the scope of fraud against its Medicaid program). If CMS reads the decision as a green light to use its deferral process to withhold large amounts of federal matching funds for long periods of time, these letters could be a prelude to deferrals in one or more of these states. CMS could be pushed in this direction by the recently-established White House Task Force to Eliminate Fraud, chaired by the Vice President and advised by Stephen Miller, which will be looking at ways to withhold federal funds from “jurisdictions that do not have adequate anti-fraud requirements.” It would come as no surprise if any resulting deferrals primarily targeted other Democratic-led states.
Of course, any states subjected to deferrals could follow Minnesota’s lead and seek relief from a local U.S. District Court, but the outcome of such litigation would be uncertain. While Minnesota v. Oz is not binding on other states or other courts, it is the first ruling on a mid-stream challenge to the way in which CMS is conducting a deferral, and its reasoning may be persuasive to other judges. If so, that would be unfortunate, particularly given the clear insufficiency of the CMS deferral notice to Minnesota, which did not specify the reasons for deferral or identify the documents and materials CMS needs to determine the allowability of the claim, as its own regulations require.
The Judge’s response: “If the notice violated the regulation’s content requirements—that is, if Minnesota required more information to respond—the appropriate recourse would be greater specificity from CMS, not a preliminary injunction forbidding CMS from proceeding with the deferral and restoring the deferred funds to Minnesota. Consistent with this idea, CMS has since provided Minnesota with additional information regarding the documents it seeks.” True, but CMS did not provide the additional information until two days afterthe state brought the lawsuit. Hopefully, if CMS takes more deferrals it will tell the affected states exactly what information it needs before litigation is filed, but if not, perhaps other judges will be willing to hold CMS accountable for complying with its own notice requirements.
