New Report: Addressing Medicaid Money Laundering

This morning, Paragon released a new report, Addressing Medicaid Money Laundering: The Lack of Integrity with Medicaid Financing and the Need for Reform. The basic takeaway: the federal government permits states to engage in money laundering tactics leading to massive increases in federal funding flowing into the states, much of which goes to higher Medicaid payments to providers. I provide an abridged version of the executive summary of the report below, which includes many of our recommendations to improve the integrity of Medicaid financing.

The Wall Street Journal published an op-ed from me on March 20, “Reform Medicaid’s Flawed Funding Formula.” In the op-ed, I briefly discuss policies to reduce Medicaid money laundering as well as a Paragon policy reform to end federal Medicaid policy that discriminates against the most vulnerable by reducing the percentage that the federal government pays states for able-bodied, working-age adults to equal what it pays states for children, pregnant women, seniors, and the disabled. We also commissioned a public opinion survey on these reforms and found them to be very popular with American voters.

Medicaid Money Laundering

It’s rare for taxpayers to lobby the government to take their money, but that’s a common feature of Medicaid today. In what amounts to legalized “money laundering,” health care providers send money to states via a tax “scam” (former President Biden’s term). States then use those funds to draw federal matching dollars and increase Medicaid spending. Providers—the original taxpayers—benefit from higher payments for Medicaid services. States support these schemes because they receive federal funds without true state contributions, repurposing the money for more Medicaid spending, other state uses, or tax cuts.

The federal government reimburses not only real but also artificial state spending. As a result, states, insurers, and providers have diverted hundreds of billions in federal funds over the past decade, often inflating payments far beyond what federal law calls “economical or efficient.”

This laundering undermines Medicaid’s purpose, inflates commercial health care costs, and increases the burden on federal taxpayers. As Congress considers reforms, we offer a menu of policy options to refocus Medicaid on efficient care and better outcomes, bolster program integrity, and realign state and federal cost-sharing.

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. 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 both 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.

Curbing Medicaid Laundering

Presidents Bush, Obama, and Trump all sought to curb Medicaid financing gimmicks. In 2011, then-Vice President Biden called provider taxes a “scam” that should be eliminated. Many progressive voices agreed, including The Washington Post editorial board, which backed Obama’s proposal to limit provider taxes.

We recommend the following actions to address laundering schemes:

• Eliminate provider taxes: Congress should ban these taxes as a way to finance states’ Medicaid shares. Insurer taxes are the most egregious and should be first to go.
• Lower the provider tax safe harbor: At minimum, Congress should follow the Obama-era proposal to reduce the threshold from 6 percent to 3.5 percent.
• End or cap SDPs: Congress should eliminate SDPs or at least cap total provider payments at Medicare rates.
• Fix IGT abuses: Prohibit states from paying public providers more than private ones for the same services.

 

All the best,

Brian Blase
President
Paragon Health Institute