Niklas Kleinworth is the Director of the State Health Reform Initiative and a Policy Analyst at the Paragon Health Institute, focusing on Medicaid and state policy initiatives. He has served in state and federal policy roles since 2021.
Emma Gallutia is a former research assistant for Paragon Health Institute.
States are more reliant than ever on the federal government to pay for Medicaid. Federal taxpayers now cover nearly three-quarters of total Medicaid spending on a program originally designed to be a federal-state partnership with about a 60 percent federal share.
This imbalance is not accidental. States have exploited financing gimmicks such as provider taxes and intergovernmental transfers (IGTs) to inflate their reported expenditures and draw down more federal funds without any commensurate state cost. These schemes allow states to recycle dollars: health providers are “taxed” (with taxes they lobby in support of), and then those funds are funneled back to providers through higher Medicaid payments. This money laundering scheme effectively pads state budgets while shifting costs to the federal taxpayer.
In today’s Paragon Pic, we isolate Medicaid expenditures funded with laundered money using financial shell games from those funded with actual state dollars. The Pic also shows the proportion of Medicaid expenditures funded by the federal government.
The proportion of total federal spending on states’ Medicaid programs doubled in the last 30 years. Meanwhile, the state share of this spending with actual state dollars, meaning those not sourced through money laundering schemes, is flat over time. Today, money laundered funds from provider taxes and IGTs account for roughly 3 percent of all state spending. This amounts to a three-fold increase over the last three decades.
Paragon’s research finds that half of all states financed more than 30 percent of their share of Medicaid through provider tax revenue alone. These financing schemes distort Medicaid’s intent and erode fiscal accountability. Fortunately, in the One Big Beautiful Bill, Congress limited these financing gimmicks through critical reforms—which the Congressional Budget Office estimates will save $366 billion over the next decade. These provisions help restore integrity to the federal-state partnership and shield taxpayers from exploitation by these means.
States are more reliant than ever on the federal government to pay for Medicaid. Federal taxpayers now cover nearly three-quarters of total Medicaid spending on a program originally designed to be a federal-state partnership with about a 60 percent federal share.
This imbalance is not accidental. States have exploited financing gimmicks such as provider taxes and intergovernmental transfers (IGTs) to inflate their reported expenditures and draw down more federal funds without any commensurate state cost. These schemes allow states to recycle dollars: health providers are “taxed” (with taxes they lobby in support of), and then those funds are funneled back to providers through higher Medicaid payments. This money laundering scheme effectively pads state budgets while shifting costs to the federal taxpayer.
In today’s Paragon Pic, we isolate Medicaid expenditures funded with laundered money using financial shell games from those funded with actual state dollars. The Pic also shows the proportion of Medicaid expenditures funded by the federal government.
The proportion of total federal spending on states’ Medicaid programs doubled in the last 30 years. Meanwhile, the state share of this spending with actual state dollars, meaning those not sourced through money laundering schemes, is flat over time. Today, money laundered funds from provider taxes and IGTs account for roughly 3 percent of all state spending. This amounts to a three-fold increase over the last three decades.
Paragon’s research finds that half of all states financed more than 30 percent of their share of Medicaid through provider tax revenue alone. These financing schemes distort Medicaid’s intent and erode fiscal accountability. Fortunately, in the One Big Beautiful Bill, Congress limited these financing gimmicks through critical reforms—which the Congressional Budget Office estimates will save $366 billion over the next decade. These provisions help restore integrity to the federal-state partnership and shield taxpayers from exploitation by these means.
Niklas Kleinworth is the Director of the State Health Reform Initiative and a Policy Analyst at the Paragon Health Institute, focusing on Medicaid and state policy initiatives. He has served in state and federal policy roles since 2021.
Emma Gallutia is a former research assistant for Paragon Health Institute.
