End Medicaid Money Laundering

 by Sally Pipes

Earlier this month, Senator Cory Booker, D-N.J., spoke for 25 hours straight, breaking a Senate record. His goal, at least at the outset, was to "defend" Medicare and Medicaid from Republicans' proposed cuts.

"The Trump administration and Republicans in Congress are right now discussing how to cut these programs," Booker said, to fund "tax cuts for the rich."

"They're trying to gut Medicaid," he warned.

Taxpayers should be so lucky. Medicaid is rife with waste, fraud, and abuse. It's in dire need of reform.

Consider a new Paragon Health Institute study on Medicaid financing. The report exposes how state governments and healthcare providers engage in what amounts to legalized money laundering. The scheme enriches states and healthcare providers. But it does so at the expense of federal taxpayers.

Each state runs its own Medicaid program and funds it in conjunction with the federal government. The feds give each state a different amount of money, called the "federal medical assistance percentage," or FMAP.

By law, the federal government must cover at least 50% of a state's Medicaid expenditures. In most states, it covers more, up to a maximum of nearly 77% in Mississippi. Wealthy states are supposed to get less federal assistance than poorer states.

Healthcare providers have figured out how to take advantage of this system. They lobby states to impose "provider taxes." Under these schemes, states "tax" providers and then send the money right back to them as higher Medicaid reimbursement rates. The federal government counts those dollars as additional state Medicaid expenditures—and then sends more money under the terms of the FMAP.

The result, as Paragon president Brian Blase and Idaho Freedom Foundation policy analyst Niklas Kleinworth note, is that providers and states coordinate to "deliver higher payments, financed largely or entirely by the federal government, to politically powerful providers in the state."

Under the standard FMAP, $100 of financing gimmicks yields $150 in federal funds for the state.

But the states that expanded Medicaid to able-bodied adults making up to 138% of the federal poverty level under Obamacare—now 40 states and the District of Columbia—can use provider taxes to extract much more from the federal government.

The Affordable Care Act commits the feds to paying for 90% of the cost of covering this expansion population. So $100 of financing gimmicks can generate $900 in federal funds for the state.

These tactics have driven up the federal government's share of Medicaid costs from roughly 57% to 75%, according to Paragon.

In other words, states are increasingly outsourcing the cost of their Medicaid programs to taxpayers in other parts of the country.

And for what? As the Paragon authors note, this vicious cycle drives up Medicaid reimbursement rates, which encourages doctors to prioritize Medicaid beneficiaries at the expense of Medicare patients. That could reduce the ability of American seniors to access care.

Moreover, provider taxes and other financial schemes are delivering providers more than they actually need to care for Medicaid's beneficiaries. According to the Government Accountability Office, providers are using the extra funds to build new facilities and purchase non-healthcare assets.

It's no wonder then-Vice President Joe Biden called provider taxes a "scam" in 2011. Presidents Bush, Obama, and Trump all pushed to curb them. Now, the Trump administration has a chance to do so.

Blase and Kleinworth propose a number of solutions, including reducing or eliminating the "safe harbor" for provider taxes—the regulatory cover that enables states to play this game.

But the best solution is for the federal government to block-grant Medicaid funds to the states. That would allow states to tailor their Medicaid programs to meet the unique needs of their residents—and end the perverse incentives that encourage states to expand their programs.

Curtailing provider tax schemes wouldn’t just reduce waste. It would improve the integrity of Medicaid. And by reducing the incentive for states to expand their Medicaid programs, it would help preserve the program's resources for the truly needy.

https://www.forbes.com/sites/sallypipes/2025/04/14/end-medicaid-money-laundering/