Medicaid Money Laundering Apparatus is Driving Medicaid Rates Way Above Medicare

The Medicaid Money Laundering Scheme

More than 80% of voters support capping Medicaid payment rates at no more than Medicare rates.

States impose provider taxes to generate revenue that they use to fund the state share of Medicaid spending. By leveraging these funds, states inflate payments to providers, drawing down additional federal dollars. While some of these federal funds flow back to providers, states often retain a portion for unrelated budget items.

Providers, particularly hospitals, frequently help develop these schemes because states guarantee them higher payment rates. Over the past few years, Medicaid payments to hospitals through managed care plans have soared. In many states, these payments now approach or even equal average commercial rates.

On average, commercial rates for hospital services are more than 2.5 times higher than Medicare rates. This payment disparity incentivizes providers to prioritize Medicaid patients over Medicare recipients, which not only undermines seniors’ access to care but also drives up federal taxpayer costs.

A state-directed payment (SDP) is a mechanism through which states instruct managed care organizations to make targeted payments to providers for specific services or outcomes. These payments are frequently funded through mechanisms like provider taxes. This Medicaid money laundering cycle not only undermines federal budget integrity but also distorts provider incentives, causing providers to prioritize higher-paying Medicaid patients over Medicare recipients.

Currently, Medicaid fee-for-service is subject to an upper payment limit (UPL) that caps federal reimbursement at Medicare rates. However, no such limit exists in Medicaid managed care, where state-directed payments can significantly exceed Medicare rates. To correct this imbalance, Congress should establish a parallel UPL for managed care services. This reform would align Medicaid payments with Medicare rates, eliminating financial incentives that prioritize Medicaid patients over Medicare beneficiaries. States could still choose to pay providers higher rates using state-only funds but would not receive federal matching dollars for payments exceeding the UPL.

For more information on the Medicaid money laundering schemes and Paragon’s recommendations to curb them, see our recent report, Addressing Medicaid Money Laundering: The Lack of Integrity with Medicaid Financing and the Need for Reform.