Medicaid Reform Goals + Paragon’s Latest on Reducing Medicaid and Exchange Waste

As examples of waste, fraud, and abuse in Medicaid continue to mount, Congress is preparing to debate significant changes to the program. The House Energy and Commerce Committee is expected to mark up a reconciliation bill with key Medicaid reforms on May 7.

Fundamental Medicaid reform must address two core problems:

• Discriminatory financing: The federal government reimburses states 90% for covering able-bodied, working-age adults—far more than the rate for children, pregnant women, seniors, and people with disabilities. This incentivizes states to prioritize expansion enrollees over traditional, more vulnerable populations and harms their access to care.
• Medicaid money laundering: States use creative accounting schemes to finance their share of Medicaid spending—such as fake taxes on providers or insurance companies—in ways that allow them to extract large federal payments with little or no state contribution.

These two problems mean that most states pay virtually nothing toward the cost of expansion enrollees. States face incentives to spend carelessly, which produces windfall profits for certain hospital systems, increases overall payment rates and profits to health insurers operating Medicaid managed care plans, and encourages states to inappropriately, if not fraudulently, reclassify traditional enrollees as expansion enrollees to draw higher federal payments. Largely as a result of states abandoning proper eligibility determinations, the federal government made a staggering $1.1 trillion in improper payments in Medicaid over the past decade.

To address these problems, policymakers should focus on five core goals for lasting, conservative Medicaid reform:

• End discriminatory financing that favors expansion adults over traditional enrollees.
• Transition able-bodied adults off Medicaid and into employer or individual market coverage.
• Align incentives so states care about the value of spending—not just maximizing federal matching funds.
• Curb money laundering schemes that shift state costs onto federal taxpayers.
• Get federal spending under control to ensure Medicaid’s sustainability and reduce inflationary pressure.

 As the Medicaid reform debate heats up, Paragon has a new landing page for all our Medicaid research and policy work.

WSJ Exposes Medicaid “Money Laundering” Profits

On Monday, The Wall Street Journal reported on how states use pseudo-taxes on providers—which even former President Biden called a “scam”—to obtain a federal funding windfall and significantly increase Medicaid payments to those providers. The Journal highlighted Universal Health Services (UHS), noting that:

Last year, 68% of UHS’s pretax income came from government outlays commonly known as supplemental Medicaid payment programs, including so-called state-directed payments. …

UHS netted $1 billion of these payments last year, up from $629 million a year earlier. Those payments contributed directly to pretax earnings because there was no incremental expense associated with them. [emphasis added]

The Journal cited Paragon’s recent report, Addressing Medicaid Money Laundering, quoting this line: “Congress created Medicaid to help finance health care services for the most vulnerable—not to serve as a slush fund for states and politically connected providers.” Congress should target Medicaid policies that enrich the politically powerful at taxpayer expense while doing little, if anything, to improve patient care.

A Proposed Rule to Address an Egregious Medicaid Money Laundering Scheme

Last month, Paragon and the Economic Policy Innovation Center highlighted a California Medicaid scam that brought billions in federal funds for the state to expand Medicaid to unauthorized immigrants and eliminate the asset test, allowing even wealthy residents to qualify for benefits. California taxed its Medicaid managed care plans, then returned those dollars as higher payments—allowing it to draw more federal funds without real state cost. The Biden administration approved California’s scam. This prompted other states, including New York, to seek (and receive) approval in the final days of the Biden administration.

Fortunately, the Trump administration has taken an initial step to address this egregious practice of money laundering in Medicaid. The White House Office of Management and Budget is currently reviewing a proposed rule from the Department of Health and Human Services (HHS) that would likely shut down tax scams through insurers like those in California and New York.

States Have Large Incentives to Money Launder through ACA Expansion

In a recent Inside Sources article, I wrote about the problems with Medicaid money laundering:

All these tactics let states rake in massive federal dollars without any state cost and reduce the pressure on state policymakers to responsibly govern and weigh tradeoffs between spending and tax policies.

The Affordable Care Act made Medicaid’s situation much worse. Since Washington covers 90 percent of the costs for able-bodied, working-age adults, every $1 million in fake spending generates $9 million in federal funds. That’s a much higher return on money laundering than for traditional recipients.

This dynamic is demonstrated in this week’s Paragon Pic and is a key reason why Congress must reduce the 90% federal reimbursement for expansion enrollees.

Medicaid Spending: States’ Burden Is Shrinking

Despite claims that Medicaid strains state budgets, the burden is increasingly borne by the federal government. As Paragon adjunct scholar Liam Sigaud wrote last week:

• In 2013, states spent 1.10% of GDP on Medicaid compared to 0.98% today.
• In 2013, Medicaid comprised 18.8% of average state general fund spending. Today, this is down slightly to 18.4%.
• The federal share of Medicaid costs is now nearly 75%, up from the historic 60%.
• That shift represents over $100 billion annually from states to Washington.

The 90% match for expansion enrollees and aggressive provider tax schemes are driving this cost shift. In 2004, just 12 states used hospital provider taxes. Today, 47 states use these financing schemes to shift costs to federal taxpayers.

DOJ Confirms Massive Obamacare Fraud Exposed by Paragon

Last week, the Department of Justice announced a guilty plea in a $133 million Obamacare fraud scheme involving a top executive at a Florida-based insurance brokerage. It follows a separate $161 million indictment from earlier this year involving a brokerage president and marketing firm CEO. Both schemes were enabled by poorly considered federal policy that made coverage fully subsidized for individuals who claimed income between 100% and 150% of the federal poverty line (FPL).

These brokers didn’t just falsify income; they fabricated documents and told people exactly what to claim. In return, they earned inflated commissions from insurers, who also benefited from taxpayer-funded premiums.

In our report last year, The Great Obamacare Enrollment Fraud, we exposed the scope of the problem: four to five million improper enrollees claiming income between 100% and 150% of the FPL who did not have that income, resulting in an estimated $15 to $26 billion in annual fraud. Florida—where both DOJ cases were centered—had more than four times as many enrollees in that income bracket as eligibility data supports. By falsely reporting incomes, enrollees qualified for fully subsidized coverage through Biden’s COVID credits (enhanced subsidies), generating commissions for brokers and profits for insurers.

These two cases reflect only a fraction of the abuse occurring nationwide. With more than $100 billion in federal subsidies flowing through ACA exchanges annually, more meaningful program integrity reforms are urgently needed to restore credibility to the program.

The Trump administration has proposed an important rule to reduce improper exchange enrollment, but it must also eliminate the auto-reenrollment mechanism that facilitates ongoing fraud. The most important step Congress can take is to let Biden’s COVID credits expire as scheduled at the end of this year.

To learn more about Obamacare enrollment fraud and President Trump’s proposed rule to curb it, visit Paragon’s extensive research on the subject:

• Public comment on the Marketplace Integrity and Affordability Rule, April 14, 2025.
• Trump Administration’s Affordable Care Act Program Integrity and Affordability Rule, April 1, 2025.
• Unpacking The Great Obamacare Enrollment Fraud, August 7, 2024.
• The Great Obamacare Enrollment Fraud, June 19, 2024.

All the best,

Brian Blase
President
Paragon Health Institute