For the second time in the 60-year history of the Medicaid program, a CMS deferral of federal matching funds has been announced by the Vice President of the United States at a White House press conference. The first time was on February 25, when Vice President J.D. Vance told the press that CMS was delaying payment of $259 million in federal Medicaid matching funds to Minnesota because “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 second came on May 13, when the Vice President announced a deferral of $1.34 billion (with a “b”) in federal matching funds from California. He said that “the simple reason” CMS was taking this action “is because the state of California has not taken fraud very seriously.”
Until these press conferences, the deferral process had been a routine part of the operation of the Medicaid program. Every quarter, states would report their expenditures and request federal matching funds; CMS would review those expenditures and, if it had questions about particular claims, it would delay payment of federal matching funds and give the state an opportunity to provide documentation that its expenditures were in fact allowable. Sometimes, after reviewing the information provided by a state, CMS would release the funds; in other cases, it would disallow the payments, and the state would have an option to appeal. This was all accomplished without the benefit of press events at the White House.
We are clearly in a different moment now. The CMS deferral letter identifies 11 different deferrals totaling $1.34 billion in matching funds for expenditures in Q1 2026. Far and away the largest single deferral, totaling $1.133 billion, relates to spending on personal care and other home health services to enable frail elderly and individuals with disabilities to remain in the community rather than be placed in institutions. Of this amount, the letter indicates that $632 million is attributable to “significant program integrity risk” related to “statistical outliers,” while the remaining $501 million is due to “significant growth” in spending between FY 2023 and FY 2025. There’s no further specification of the reasons for the deferral.
As one might expect, the state vigorously disputed this particular deferral and demanded immediate release of these funds. The state pointed out that the growth in spending for these services has been driven by an increase in the number of individuals receiving these services, an increase in wages for the workers providing these services, and an increase in the number of hours per week that individuals need. A more extensive explanation is available in the state’s February 17 letter (pp. 3-8) responding to CMS’ January 27 request for information.
The remaining 10 deferrals, totaling $211 million, are what in a prior moment would be considered routine deferrals. The letter actually explains each of them. The state’s response makes clear that these are “long-standing administrative and technical claiming items that the state has already been working through with CMS. These items are expected, unrelated to [personal care] services or caregiver payments, and part of ongoing federal review processes.” The contrast between these 10 tailored deferrals and the massive $1.331 billion deferral could not be starker. It’s hard to avoid the inference that the $1.133 billion deferral was bundled together with the other ten in order to create a predicate for a White House press conference and a fiscal fight with another Democratic-led state.
So where is this going? What’s happened to Minnesota may be instructive. There CMS launched two separate fiscal attacks: threatening to withhold $515 million in federal matching funds each quarter going forward until CMS was satisfied the state was in compliance with an anti-fraud requirement in federal law, and deferring $259 million for expenditures during Q4 of FY 2025. This was the first time CMS had ever taken both a compliance action and a deferral against the same state citing reasons relating to fraud against Medicaid.
The withholding of future matching funds from Minnesota is now on the back burner; CMS has indicated that if Minnesota implements a corrective action plan that CMS has approved, it will consider the state in compliance and not withhold any funds going forward. CMS has not initiated a compliance action against California or any other state for that matter; instead, it has taken the largest deferral in the history of the Medicaid program against California.
The CMS deferrals against Minnesota are in negotiation. Here’s how CMS and the state got to that point. Shortly after CMS took the $259 million deferral, Minnesota went to federal court to try to block it; the District Court denied the state’s motion. Two weeks later, CMS took another deferral in the amount of $91 million for expenditures during Q1 of FY 2026. About a week after that, CMS and the state jointly asked the District Court to stay the case for 120 days while they tried to resolve the deferral, and the District Court granted their motion, instructing them to report back in early September.
There are U.S. District Courts in California, and the state’s attorney general knows where to find them. Whether the state asks a federal court to intervene, and if so how that court will rule, is at this writing an open question. Even in a state the size California—it has the largest Medicaid program in the nation—the withholding of $1.1 billion in federal funds, even temporarily, matters. And that assumes CMS imposes no additional deferrals for Q2 2026 (or subsequent quarters) on California as it did on Minnesota. On the merits, the failure to “take fraud very seriously” — even if there were evidence for that — is not a legal basis for taking a deferral, much less a disallowance.
While this deferral is personal to California, the state will also have to respond to other administration actions that affect all states. On April 23, the CMS Administrator, Dr. Mehmet Oz, sent a letter to all 50 Governors and issued a letter to all state Medicaid directors asking them to submit plans for “swiftly” revalidating Medicaid providers of services “at high risk of waste, fraud, abuse, and corruption.” And on May 13, the HHS Inspector General sent a letter to all state attorneys general notifying them that OIG will “engage in a robust review of your MFCU” and that if OIG finds that the state’s MFCU is not operating effectively it is “prepared to impose appropriate consequences.” (OIG oversees the state Medicaid Fraud Control Units which are usually located in the state attorney general’s office).
What, you might ask, has any of this got to do with reducing fraud against the Medicaid program in California? Good question. Successful Medicaid program integrity requires collaboration between federal and state agencies. Deferral by press conference, and flooding the zone with demand letters, is anything but.