Medicaid Reform

Medicaid’s open-ended financing rewards overspending and favors wealthy states, while crowding out care for the most vulnerable. The ACA worsened the problem by giving higher reimbursements for able-bodied adults. Reform is needed to restore fairness, improve efficiency, and refocus Medicaid on truly low-income patients.

Medicaid Reform

Medicaid’s open-ended financing rewards overspending and favors wealthy states, while crowding out care for the most vulnerable. The ACA worsened the problem by giving higher reimbursements for able-bodied adults. Reform is needed to restore fairness, improve efficiency, and refocus Medicaid on truly low-income patients.

The GOP can make the strong and accurate argument that fixing this bias in federal payments is shoring up the program to better serve the vulnerable. Paragon Health Institute, a think tank, has done the intellectual leg work for the GOP and rolled out proposals to rationalize the payment treatment over time.
–The Wall Street Journal Editorial Board

Americans Want Common Sense Medicaid Reforms

Stopping Medicaid Money Laundering

Ending the Discrimination Against the Most Vulnerable

Eliminating Schemes that Put Illegal Immigrants on Medicaid

Paragon Pics

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April 15, 2026

Federal Health Program Spending Consumes 62 Percent of Relevant Federal Taxes

As this Paragon PIC shows, federal spending on health care programs consumed roughly 62 percent of all individual federal income, corporate federal income, and Medicare payroll tax revenue in 2025 — up from 29 percent 25 years ago (in 2000) and 17 percent 50 years ago (in 1975). According to the Centers for Medicare and Medicaid Services, total national health expenditures reached $5.3 trillion in 2024, or 18 percent of GDP, with federal health care spending at $1.7 trillion. Federal policies affect most of the remainder, too.

In this PIC, Medicare spending is shown net of premiums, since those premiums are paid by enrollees, not taxpayers. Medicare Part A (Hospital Insurance) payroll tax revenue is included in the revenue line because it is dedicated by law to finance Part A and represents taxes on current workers. Part A payroll taxes cover only a fraction of total Medicare costs as Parts B and D are funded primarily through general revenue. While Medicare costs continue to escalate, so do costs in other programs, particularly Medicaid and the Affordable Care Act subsidies to insurers.

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March 31, 2026

How States Use IGTs to Shift Medicaid Costs to Federal Taxpayers

This Paragon PIC illustrates how states and government-owned or affiliated providers use intergovernmental transfers (IGTs) to fund Medicaid payments without any actual state expenditure.

Medicaid is supposed to be jointly funded by the federal government and the states. The federal government reimburses each state for a share of its Medicaid expenditures based on the federal medical assistance percentage (FMAP), which ranges from 50 to about 77 percent for traditional Medicaid populations and is 90 percent for the ACA expansion population. States are responsible for the remainder (the “non-federal share”). Federal law permits states to fund a portion of that non-federal share through IGTs in which local governments or government-owned providers send funds to the state.

As the figure shows, the IGT mechanism works in three steps:

First, a government-owned or affiliated provider transfers funds to the state. In this example, the provider sends the state $30 million.
Second, the state uses those transferred funds as its nonfederal share and makes a Medicaid payment to the provider — in this case, $100 million.
Third, because the state has made a $100 million Medicaid expenditure, it draws federal matching funds. At a 70 percent FMAP, the federal government reimburses the state $70 million.

The result: the state pays the provider $100 million without spending any of its own general fund dollars. The provider receives a net gain of $70 million (accounting for the IGT), and the entire cost is borne by federal taxpayers.

These schemes distort Medicaid’s financing structure, shift costs from states to the federal government. They are also fundamentally unfair because they give public providers a significant advantage over private providers. If private providers tried to similarly transfer large sums of money, such transfers would be scrutinized as provider-related donations, and likely shut down. As a result, IGT schemes lead to much larger payments for government providers over private providers — for delivering the exact same service.

As Paragon has documented, the federal share of total Medicaid spending has risen from about 60 percent to roughly three-quarters of the total bill, driven in large part by financing gimmicks like provider taxes and IGTs. With Congress having enacted important limits to the provider tax schemes in the One Big Beautiful Bill, states may increasingly turn to IGT schemes to draw down even more federal funds.

Federal policymakers should close this loophole. As Paragon has recommended, Congress and the Centers for Medicare and Medicaid Services (CMS) should prohibit states from paying government providers more than private providers for the same services, impose upper payment limit caps to all provider types, and rigorously scrutinize state IGT proposals.

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March 31, 2026

The Medi-Cal Gold Rush: California’s Projected Medicaid Spending Growth is Twice the National Average

California was once a destination for those seeking fortunes in gold and Hollywood fame. Some are still striking it rich—this time, through medical welfare programs. Spending on Medi-Cal, California’s Medicaid program, has exploded. In nominal terms, it is projected to grow nearly four-fold since the Affordable Care Act’s Medicaid expansion took effect—twice the national average among all other states. This new spending diverges from the original purpose of Medicaid to serve the poor, the disabled, and pregnant mothers, with much of the spending increase going to the wealthy; undocumented immigrants; and able-bodied, working-age adults instead.

This rapid increase in spending was initially driven by California enrolling far more people in the Medicaid expansion than expected. By October 2016, more than 3.7 million expansion enrollees had been added. As of federal fiscal year 2023, 5.7 million able-bodied, working-age adults are enrolled in the program—representing 36 percent of total enrollees. These figures far outpace original projections of only 910,000 Californians originally projected to enroll in expansion.

Beyond Medicaid expansion-driven costs, California recently implemented new programs covering undocumented immigrants with Medicaid and eliminating the program’s asset test for long-term care. These initiatives were supported through a legalized money-laundering scheme involving taxes on managed care organizations (MCOs) to draw down $9.5 billion in federal funds without any state contributions. Such schemes fueled spending growth, as both the elimination of the asset test and coverage for undocumented immigrants are projected to cost twice initial estimates. With the passage of the One Big Beautiful Bill last year, the MCO tax scheme was prohibited.

Managed care organizations are among those benefitting from the excess. One analysis notes that California’s MCOs collected $5.4 billion between 2014 and 2016. These corporations benefit even more by participating in the MCO tax scheme above as they get a cut of the looted federal dollars.

California continues to pursue other strategies that shift more costs onto federal taxpayers. The state is leveraging intergovernmental transfers (IGTs) with state-owned ambulance systems to increase Medicaid spending and pull in additional federal matching funds. This scheme, if approved, would set the rates for government ambulance providers five times higher than the rates for private providers for the exact same services. The result will be inflated costs for patients and for federal taxpayers.

This combination of elevated spending and a reduced state share of the cost creates a huge and ongoing incentive for waste, fraud, and abuse. A 2018 audit by the Health and Human Services Office of Inspector General found that half of the 125 non-expansion enrollees they sampled had improper eligibility determinations. They estimate that California made $959 million in payments on behalf of 803,000 ineligible enrollees between 2014 and 2015.

Medi-Cal’s focus on collecting federal funds over cost containment, and enrollment over program integrity drove its significant growth over the last 13 years. Ultimately, taxpayers and the truly vulnerable are the ones who bear the cost.

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March 11, 2026

New York’s Medicaid Spending Per Resident is $4,800—85 Percent Higher Than the National Average in the Rest of the Country, 2024

The Trump administration has begun scrutinizing New York’s Medicaid program—an overdue step given the state’s long history of excessive spending, weak oversight, and fraud. CMS Administrator Dr. Mehmet Oz recently sent a letter to Governor Kathy Hochul raising concerns about program integrity in several high-risk service areas, including personal care services, home health, adult day care, non-emergency medical transportation, and behavioral health services. These services are particularly vulnerable because they are delivered outside traditional clinical settings, where verification is difficult and billing for services that were never delivered is a persistent risk. A recent policy brief I coauthored with Chris Medrano identified four areas of Medicaid particularly vulnerable to fraud and abuse and recommended stronger CMS enforcement.

Medicaid is a joint federal-state program in which the federal government reimburses states for a large share of their spending. Because federal funding is open-ended—states receive additional federal dollars whenever spending increases—the program is highly vulnerable to waste, fraud, and abuse. CMS therefore has a critical responsibility to safeguard the program both for the vulnerable individuals who rely on Medicaid and for the taxpayers who finance it.

New York’s Medicaid program is disproportionately large, even for the state’s size. As the figure below shows, New York’s Medicaid spending per resident is nearly $4,800—a staggering 85 percent higher than the national average of roughly $2,600 excluding New York. New York’s per-resident Medicaid spending is 23 percent higher than that of the next highest state, Kentucky.

Medicaid waste, fraud, and abuse are rampant in New York—and have been for almost the entire 60-year history of the program. In March 2013, the House Oversight and Government Reform Committee released a bipartisan report following a year-long investigation into New York’s Medicaid program. The report documented extensive problems, including weak eligibility controls, poor oversight of long-term care services, excessive administrative costs, and political corruption. The investigation also highlighted how Medicaid had become deeply embedded in the state’s fiscal and political structure—so much so that officials referred to the practice of “Medicaiding it,” referring to the state tactic of shifting as many services and costs as possible into the Medicaid program to maximize federal funding.

The Local Loop: How States Turn Medicaid into a Government Provider Payday Scheme

August 5, 2025

Myth: The OBBB will harm the most vulnerable Medicaid enrollees

July 28, 2025

Myth: Rural hospitals will close because of the OBBB

July 25, 2025

Myth: States will not be able to cope with the limits on Medicaid money-laundering mechanisms

July 15, 2025

Featured

Will Congress’ Reforms to Medicaid Financing Hurt Rural Health Care? No: Debunking the Myth that Provider Taxes Support Rural Hospitals

July 14, 2025

Featured

Paragon submits comment on proposed rule: “Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations-Closing a Health Care-Related Tax Loophole Proposed Rule”

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June 29, 2025

Featured

Consequences of Medicaid’s Discrimination Against the Most Vulnerable

June 3, 2025

Improving the One Big Beautiful Bill: Further Reducing State Medicaid Money Laundering

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May 28, 2025

Featured

Health Care Provisions in the One Big Beautiful Bill: Reducing Waste, Fraud, and Abuse While Empowering American Patients

May 15, 2025

Brian Blase on CEI’s Free the Economy Podcast

May 13, 2025

The Rest of the Story on Medicaid Money Laundering

May 12, 2025

Medicaid Money Laundering Apparatus is Driving Medicaid Rates Way Above Medicare

Related Glossary Terms

Supplemental Payments

A Medicaid supplemental payment is a lump sum payment paid by the Medicaid program to a health care provider in addition to Medicaid payments for specific health care services that have been rendered. These payments are largely received by hospitals and include DSH payments, upper payment limit (UPL) payments, uncompensated care pool (UCP) payments, and delivery system reform incentive (DSRIP) payments. By 2019, these payments grew to 17.5 percent of total Medicaid spending and 27 percent of Medicaid spending on hospitals. The growth in supplemental payments increases lobbying with government officials having discretion to award large Medicaid payments, payments consisting mostly or entirely…

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…

Federal Medical Assistance Percentage

The Federal Medical Assistance Percentage (FMAP) is the statutory percentage of Medicaid expenditures paid by the federal government. For traditional Medicaid enrollees (low-income pregnant women, children, seniors, and individuals with disabilities), the FMAP is largely a function of state per capita income as states with lower per capita income receive a higher FMAP. No state receives an FMAP below 50 percent. For Medicaid expansion enrollees, the FMAP is equal to 90 percent. The actual percentage of Medicaid expenditures paid by the federal government is substantially higher than the FMAP since states employ numerous accounting gimmicks and financial schemes to minimize…

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…

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.

Gary Alexander

Director Medicaid and Health Safety Net Reform Initiative at Paragon Health Institute

A nationally recognized health services expert and government reformer, Gary D. Alexander was head of the Medicaid and Health Safety Net Initiative at the Paragon Health Institute from October 2021 to October 2025.

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Americans Want Common Sense Medicaid Reforms

Stopping Medicaid Money Laundering

Stopping Medicaid Money Laundering

Ending the Discrimination Against the Most Vulnerable

Eliminating Schemes that Put Illegal Immigrants on Medicaid

Paragon Pics

Federal Health Program Spending Consumes 62 Percent of Relevant Federal Taxes

How States Use IGTs to Shift Medicaid Costs to Federal Taxpayers

The Medi-Cal Gold Rush: California’s Projected Medicaid Spending Growth is Twice the National Average

New York’s Medicaid Spending Per Resident is $4,800—85 Percent Higher Than the National Average in the Rest of the Country, 2024

Other Related Content

The Local Loop: How States Turn Medicaid into a Government Provider Payday Scheme

Will Congress’ Reforms to Medicaid Financing Hurt Rural Health Care? No: Debunking the Myth that Provider Taxes Support Rural Hospitals

Paragon submits comment on proposed rule: “Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations-Closing a Health Care-Related Tax Loophole Proposed Rule”

Consequences of Medicaid’s Discrimination Against the Most Vulnerable

Health Care Provisions in the One Big Beautiful Bill: Reducing Waste, Fraud, and Abuse While Empowering American Patients

Brian Blase on CEI’s Free the Economy Podcast

The Rest of the Story on Medicaid Money Laundering

Medicaid Money Laundering Apparatus is Driving Medicaid Rates Way Above Medicare

Related Glossary Terms

Supplemental Payments

Medicaid Expansion

Federal Medical Assistance Percentage

Average Commercial Rate

Issue Experts

Brian Blase

Gary Alexander

Reforming Government. Empowering Patients.