Medicaid Money Laundering

States use Medicaid financing schemes and gimmicks to significantly increase federal Medicaid funds without a commensurate increase in state costs. Medicaid money laundering tactics are largely legal, but they distort the purpose of the program and result in large payments to politically connected health care providers. There have been proposals from across the political spectrum to curb their use.

Key Research

Addressing Medicaid Money Laundering: The Lack of Integrity with Medicaid Financing and the Need for Reform

March 26, 2025

Brian Blase and Niklas Kleinworth

California’s Insurance-Tax Shuffle: How Federal Money Ends Up Paying for Medicaid for Illegal Immigrants

March 12, 2025

Paul Winfree and Brian Blase

Medicaid Financing Reform: Stopping Discrimination Against the Most Vulnerable and Reducing Bias Favoring Wealthy States

July 24, 2024

Brian Blase and Drew Gonshorowski

Paragon Pics

March 26, 2025

ACA Expansion Supercharges Medicaid Laundering

The Affordable Care Act’s (ACA) enhanced federal reimbursement for the expansion population magnifies money laundering. At a 90 percent match, $100 in gimmicks yields $900 in federal funds. For traditional Medicaid recipients, with an average 60 percent match, $100 yields just $150. Laundering for the ACA population thus delivers a sixfold higher return—and even more for wealthier states receiving lower traditional reimbursements.

States are heavily incentivized to create laundering schemes and adjust payment policies to shift spending to the expansion category. This includes skimping on eligibility reviews before enrolling people under the ACA expansion.

As state laundering schemes have expanded, states have shifted much more of Medicaid’s financial burden to the federal government. With the growth of state laundering and the ACA’s elevated match, the federal share of Medicaid rose from about 60 percent in fiscal year (FY) 1991 to about 75 percent in FY2023.

These schemes began in the mid-1980s, using provider taxes and donations—mainly from hospitals and nursing homes. States collect money from providers and return it as additional Medicaid payments. These draw federal matching funds, which states then pay to providers through state-directed payments (SDPs) and supplemental payments—often keeping a cut. SDPs are payments states instruct insurers to make to providers.

Through intergovernmental transfers (IGTs), local governments or public providers send funds to the state, which then pays those same providers much higher Medicaid rates. IGTs raise conflicts of interest and lead to favorable treatment for public providers over private ones.

Provider taxes and IGTs have expanded recently. The latest laundering tactic: taxing insurers in Medicaid managed care. This scheme always boosts state general revenue. California, for example, used such a tax to have the federal government fully fund Medicaid expansion for illegal immigrants and to remove asset tests for long-term care—letting wealthy families shield inheritances while taxpayers cover the cost.

With the ability to get federal funds with minimal state cost, some states now pay Medicaid rates that rival commercial rates—over 2.5 times Medicare rates on average. Tying Medicaid to commercial rates pressures providers and insurers to raise commercial prices, costing families through lower wages and higher taxes. Higher Medicaid payments also incentivize providers to prioritize Medicaid patients over Medicare ones, potentially harming seniors’ access to care.

SDPs exceeded $110 billion in 2024—more than double the 2022 total. Supplemental payments topped $57 billion in 2023. Both soared as provider taxes fueled the laundering that enables the large payments. These unsustainable schemes are projected to grow as more states pursue commercial-level rates in a welfare program.

With abundant federal funds, states feel little risk as they expand Medicaid. Hospital systems are now profiting handsomely—such as in North Carolina, where the Biden administration approved a plan to raise Medicaid hospital rates to commercial levels in exchange for hospitals forgiving bad debt. Universal Health Services reported a windfall from expanded SDPs. New York uses similar gimmicks to plug budget gaps. These policies not only sideline the truly needy but also benefit special interests while inflating the federal debt, fueling inflation and higher interest rates.

March 12, 2025

Biden’s Medicaid Blowout — $1.24 Trillion Surge

A loyal reader pointed out that the Biden Medicaid blowout was even worse than what I shared a few weeks ago. He pointed me to the January 2025 baseline. He was right. CBO now projects federal Medicaid spending to be $1.243 trillion higher over the next decade (2026-2035) relative to its 2021 baseline.

This clearly shows how out of whack federal Medicaid spending became during the Biden administration—a result of his policies that made it more difficult for states to remove ineligible enrollees and that exacerbated state Medicaid money laundering tactics. As a result, there has been a significant cost shift for financing Medicaid from the states to the federal government. In fact, the federal share of Medicaid increased from 60 percent in 2008 to 72 percent in 2023. And, as we showed in a recent policy brief, Medicaid improper payments were $1.1 trillion over the past decade.

The second figure illustrates an $800 billion reduction in federal Medicaid spending relative to the 2025 baseline. This figure provides important perspective on the hysteria that many are raising about large Medicaid “cuts.” If Congress were to make $800 billion in federal Medicaid savings, total federal Medicaid spending would still be $443 billion above CBO’s 2021 projections over the 2026-2035 period.

With $800 Billion in Savings, Ten-Year Federal Medicaid Expenditures Would Still be 6.5% above 2021 Projections

Congress and the Trump administration must reduce the rampant waste, fraud, and abuse in the Medicaid program; restore its primary focus to serving children, pregnant women, and the disabled and not the current structure that advantages able-bodied, working-age, childless adults; and confront states’ growing use of money laundering to maximize federal Medicaid funds.

February 26, 2025

Biden-Era Medicaid Cost Surge

Over the past 12 years, two major policy changes have led to massive Medicaid program growth. Keep in mind, the growth of Medicaid has not improved Americans’ health, as a recent Paragon research paper documented, and has worsened access to care for traditional Medicaid enrollees.

The first change is that the Affordable Care Act (ACA) significantly expanded Medicaid by granting eligibility to able-bodied, working-age adults and favoring them over traditional Medicaid enrollees (children, pregnant women, seniors, and the disabled) through significantly higher federal reimbursement rates for state spending on them. Paragon has produced a comprehensive reform that would end the ACA’s federal discrimination against traditional Medicaid enrollees and move nearly half of Medicaid expansion enrollees into the exchanges with a large premium tax credit. This is a long overdue policy reform that Congress should consider.

The second change stems from a set of Biden administration policies, along with increased state Medicaid money laundering schemes, that have significantly increased the federal Medicaid baseline as shown in the first figure below. Between the Congressional Budget Office’s 2021 and 2024 baselines, projected federal Medicaid spending increased by 8.6 percent, a sizeable $685 billion, from 2023 to 2034.

CBOs Medicaid Baseline Rose Significantly Between 2021 and 2024 Reports

Several Biden policies explain a portion of this increase. The Families First Coronavirus Response Act provided states with additional federal Medicaid money so long as they maintained Medicaid enrollment during the COVID public health emergency (PHE). The Biden administration also extended the PHE into the spring of 2023, which kept ineligible people on the Medicaid program much longer. Finally, the Biden administration took regulatory actions to keep ineligible people on the program longer and to validate state financing gimmicks that fleece federal taxpayers and raise Medicaid rates well above Medicare rates for many providers in many states. As a preview, in March, Paragon will be releasing a research paper on the growth of Medicaid money laundering and what policymakers should do about it.

The House budget resolution contains instructions for the Energy and Commerce Committee to find $880 billion in savings relative to baseline. Congress could achieve these savings through common sense, necessary Medicaid reforms. The figure below illustrates how an expected level of savings in Medicaid (assuming Medicaid reforms make up about 80 percent of the savings) compares to the 2021 and 2024 CBO baselines.

Reconciliation Would Only Reduce Medicaid Spending by 3.3% from 2027-2034 Using 2021 CBO Baseline

Crucially, the magnitude of savings relative to the 2021 baseline—before the surge of Biden-era spending—is two-thirds smaller than the 2024 baseline. In fact, spending would only be 3.1 percent lower under this level of savings relative to the 2021 baseline. In essence, Biden’s policies led to a surge of wasteful federal Medicaid expenditures and the House budget resolution would largely reverse the fiscal impact of his policies.

One more important note—this just shows the federal side of Medicaid spending. States will be able to replace all savings that result from federal reforms. As discussed in my most recent newsletters, one of the main problems that federal policymakers should address is the substantial shift in Medicaid costs from the states to Washington over the past 15 years.

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February 19, 2025

Medicaid Costs Soared for the Federal Government from 2008 to 2023 While Costs Were Flat for States

In fiscal year 2008 (the last year before President Obama was president) the federal government spent $201 billion on Medicaid and total Medicaid spending was $333 billion. In fiscal year 2023, the federal government spent $616 billion on Medicaid with total Medicaid spending of $860 billion. The federal share of total Medicaid spending increased from 60 percent to 72 percent between 2008 and 2023.

As demonstrated by this week’s Paragon Pic, in terms of real economic output, federal Medicaid spending increased from 1.36 percent of GDP to 2.28 percent of GDP—a 67 percent increase—between fiscal years 2008 and 2023. The state share of spending stayed at the same percentage of GDP over this period—at 0.90 percent. This means that the entire cost increase of Medicaid (in terms of economic resources) over this period was borne by the federal government—an indication of the large shift in costs from states to the federal government and a key consideration for Congress as it evaluates various Medicaid reform proposals

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February 5, 2025

Escalating Federal Share of Total Medicaid Spending

As Congress weighs Medicaid reform, policymakers need to recognize the significant shift in the burden of financing Medicaid from states to the federal government over the past few decades. The federal government provides an open-ended reimbursement of state Medicaid expenditures, with the reimbursement percentage dubbed the federal medical assistance percentage (FMAP). As shown by this week’s Paragon Pic, the federal government has historically reimbursed about 57 percent of the total bill. Now, the federal government reimburses about 67 percent of the total bill.

The ACA Medicaid expansion is responsible for much of the shift in costs to the federal government. The ACA created a much higher FMAP for the expansion population of able-bodied, working-age adults relative to the rate states receive for traditional Medicaid enrollees like children, pregnant women, seniors, and people with disabilities. In addition, from 2020 through 2023, states received a higher FMAP because of pandemic-era policies.

Importantly, the statutory FMAP does not represent the true ratio of Medicaid expenses borne by the federal government. The reason is that states have developed sophisticated money laundering schemes that result in the federal government reimbursing artificial state expenditures. In short, the federal government provides states with money for state accounting gimmicks that just give the appearance of expenditures. Based on previous work from the Government Accountability Office, the effective FMAP was about 5 percentage points greater than the statutory FMAP in 2018. Assuming the schemes raise the federal share by 5 percentage points, the actual historic federal share of expenses would have been about 62 percent and the current rate would be about 72 percent. The growth in financing schemes has increased substantially, meaning the federal government could be bearing about three-quarters of the overall Medicaid bill.

Issue Experts

Brian Blase

President at Paragon Health Institute

Brian Blase, Ph.D., is the President of Paragon Health Institute. Brian was Special Assistant to the President for Economic Policy at the White House’s National Economic Council (NEC) from 2017-2019, where he coordinated the development and execution of numerous health policies and advised the President, NEC director, and senior officials. After leaving the White House, Brian founded Blase Policy Strategies and served as its CEO.

Related Glossary Terms

Average Commercial Rate

The average commercial rate (ACR) refers to the mean payment amount for a medical service as determined by leading commercial insurers’ reimbursement rates for the same service. The ACR may be used to define the maximum limit of a state Medicaid program’s supplemental payments to health care providers that are in excess of the state’s Medicaid standard rates. HHS guidance on ACR payments states when provider payment “is made up to the ACR states must submit data from the top (generally five) third party payers and provide a full explanation of the data that was extracted from providers’ accounts receivable…

FMAP

FMAP stands for “Federal Medical Assistance Percentage.” Additional Resources A New Recipe for Waste in Medicaid Medicaid Reform Issue Library Page

Medicaid Expansion

Medicaid expansion is the Affordable Care Act’s change to broaden Medicaid program eligibility and increase the number of people who qualify for the program. A major component of this expanded eligibility for state Medicaid programs was eligibility for a new category of people—able-bodied, working-age, and generally childless adults. The ACA created a much higher FMAP for this category—equal to 100 percent from 2014-2016, gradually declining until it reached 90 percent in 2020, where it is scheduled to remain. This FMAP policy incentivized states to expand Medicaid because most of the budgetary costs for the population of expanded enrollees were paid…

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