New Research on Medicaid IGT Scams and State Health Reform

Last night, the House of Representatives passed the Lower Health Care Premiums for All Americans Act in a 216-211 near-party-line vote. I start today’s newsletter with a Prognosis that analyzes how the legislation lowers premiums. I then discuss two new Paragon research pieces—a brief on the Medicaid intergovernmental transfer (IGT) scam and a report on how states can implement Medicaid reforms to better protect the most vulnerable and taxpayers following the One Big Beautiful Bill (OBBB).

House Passes Legislation to Lower Premiums and Federal Spending

In a new Prognosis, Ryan Long assessed how the Lower Health Care Premiums for All Americans Act addresses some of the flaws in the Affordable Care Act (ACA). Most importantly, the House bill does not extend the damaging COVID-era subsidy boosts set to expire in December. The ACA is already massively oversubsidized, and pouring new subsidies on this market will accelerate cost increases, exacerbate waste and fraud in the program, harm people who receive coverage through an employer, and lead more employers to drop coverage. Key provisions of the House legislation include:

• Appropriation of cost-sharing reduction (CSR) subsidies which would address “silver loading,” lower silver plan premiums by about 12 percent, and reduce federal spending by over $30 billion over 10 years.
• Expansion of employers’ ability to offer coverage through association health plans (AHPs) so small businesses can obtain regulatory savings and economies of scale that large employers obtain, with potential savings of nearly 30 percent.
• Codification and improvement of individual coverage health reimbursement arrangements (ICHRAs) to boost employee choice and portability, with temporary tax credits for small employers that offer them.
• Requirements for pharmacy benefit manager (PBM) transparency to curb opaque practices.
• Protection of self-insured employer plans by preempting state regulation of stop-loss insurance to maintain cost controls.

Another Medicaid Money Laundering Scam: Intergovernmental Transfers

Our new policy brief, The Local Loop: How States Turn Medicaid into a Government Provider Payday Scheme, which I coauthored with Chris Medrano and Kip Piper, documents how states exploit intergovernmental transfers as a Medicaid financing scheme that maximizes federal payments while minimizing—or entirely avoiding—real state spending. Although IGTs were originally intended to allow legitimate cost-sharing between states and local governments, many states now use them to launder funds through Medicaid in ways that are fiscally reckless, distort competition, and reward politically favored government providers at the expense of private providers delivering identical services.

At the core of the abuse is Medicaid’s open-ended federal matching structure. As we documented earlier this year in Addressing Medicaid Money Laundering, this creates a powerful incentive for states to adopt accounting schemes that generate federal funds without any real state expenditures. Using IGT arrangements, government-owned or government-operated providers—such as county hospitals, public ambulance services, or nursing facilities—transfer funds to the state. The state then uses those transfers as the nonfederal share to make large supplemental Medicaid payments back to those same providers. These payments result in federal matching funds, producing windfalls for the states and government providers. The losers from this financial scam are federal taxpayers and private providers that are excluded from these arrangements and paid far lower rates for the same services.

The brief highlights how upper payment limits (UPLs), intended to restrain Medicaid payments to no more than Medicare rates, are helpful but insufficient on their own to prevent abuse. Because UPLs apply only in the aggregate, states can dramatically overpay government providers while suppressing rates for private providers, maintaining technical compliance while creating massive inequities. For many services—such as ambulance transport—no effective UPL exists at all, allowing unchecked payment inflation.

California’s Ground Emergency Medical Transportation (GEMT) program typifies the IGT scam. Through an IGT-financed scheme, California pays public ambulance providers more than three times what it pays private providers for identical Medicaid transports. If approved, the state’s proposed State Plan Amendments (SPAs) would push the disparity toward five-to-one. State documents explicitly acknowledge that the program is designed to avoid any general-fund spending, revealing the true purpose: maximizing federal dollars rather than reflecting service costs or patient needs.

The brief concludes that restoring Medicaid integrity requires addressing the IGT scam. Federal policymakers should enforce payment parity for identical services between government providers and private providers and extend the UPL cap to all provider types, and the Centers for Medicare and Medicaid Services (CMS) should reject outrageous scams like California’s GEMT program. Without such action, Medicaid will continue to reward political favoritism, disadvantage private providers, and divert federal resources away from the truly vulnerable.

Preserve and Improve Medicaid

This morning, Paragon released a new report, Preserve and Improve Medicaid: State Action to Protect the Most Vulnerable and Taxpayers, which I coauthored with Niklas Kleinworth. This timely report shifts the focus from federal reforms to state action, outlining the challenges facing Medicaid, how the OBBB addresses them, and the opportunities for states to implement these reforms effectively. We recommend that states focus on four core areas:

• Strengthening program integrity
• Implementing community engagement requirements effectively
• Holding managed care organizations accountable
• Maximizing the impact of the Rural Health Transformation Program

Perverse incentives in the Medicaid program encourage improper enrollment, weak oversight, and distortionary financing that disadvantages traditional enrollees—including low-income children, pregnant women, people with disabilities, and the elderly. The reforms in the OBBB offer a generational opportunity to strengthen program integrity, prioritize vulnerable enrollees, bolster managed care accountability, and expand access—especially in rural communities—but their durability and impact depend on state implementation.

Weak eligibility verification drives widespread improper enrollment and rising improper payments. The OBBB requires states to implement more rigorous verification processes and eligibility data checks. We recommend that states limit self-attestation of critical eligibility information, verify eligibility using available data, and ensure accountability in presumptive eligibility determinations.

Another important reform in OBBB is the introduction of work and community-engagement requirements for able-bodied, working-age adults without dependents under the age of 14. To be effective, states should implement these provisions with clear compliance standards and avoid introducing additional exemptions. States should pursue a soft rollout ahead of the required start date to ensure systems are effective, as announced by Nebraska yesterday.

Half of all states cover at least 80 percent of Medicaid enrollees with managed care organizations (MCOs), yet weak oversight and inconsistent reporting mean we do not have a good handle on where all this money is going. To ensure MCOs deliver value to both enrollees and taxpayers, states should require stronger financial reporting standards and ensure that MCO contracts avoid conflicts of interest that risk driving up costs.

We also provide recommendations for how states can most effectively utilize the funding from the Rural Health Transformation Program by breaking down regulatory barriers that have long hindered rural health care. States can obtain more federal funds through the program by expanding access to more low-cost coverage options like short-term, limited-duration insurance plans (STLDIs), repealing certificate of need laws, allowing non-physicians to practice at the top of their training, and stopping the subsidization of junk food through SNAP.