This Paragon PIC illustrates how states and government-owned or affiliated providers use intergovernmental transfers (IGTs) to fund Medicaid payments without any actual state expenditure.
Medicaid is supposed to be jointly funded by the federal government and the states. The federal government reimburses each state for a share of its Medicaid expenditures based on the federal medical assistance percentage (FMAP), which ranges from 50 to about 77 percent for traditional Medicaid populations and is 90 percent for the ACA expansion population. States are responsible for the remainder (the “non-federal share”). Federal law permits states to fund a portion of that non-federal share through IGTs in which local governments or government-owned providers send funds to the state.
As the figure shows, the IGT mechanism works in three steps:
- First, a government-owned or affiliated provider transfers funds to the state. In this example, the provider sends the state $30 million.
- Second, the state uses those transferred funds as its nonfederal share and makes a Medicaid payment to the provider — in this case, $100 million.
- Third, because the state has made a $100 million Medicaid expenditure, it draws federal matching funds. At a 70 percent FMAP, the federal government reimburses the state $70 million.
The result: the state pays the provider $100 million without spending any of its own general fund dollars. The provider receives a net gain of $70 million (accounting for the IGT), and the entire cost is borne by federal taxpayers.
These schemes distort Medicaid’s financing structure, shift costs from states to the federal government. They are also fundamentally unfair because they give public providers a significant advantage over private providers. If private providers tried to similarly transfer large sums of money, such transfers would be scrutinized as provider-related donations, and likely shut down. As a result, IGT schemes lead to much larger payments for government providers over private providers — for delivering the exact same service.
As Paragon has documented, the federal share of total Medicaid spending has risen from about 60 percent to roughly three-quarters of the total bill, driven in large part by financing gimmicks like provider taxes and IGTs. With Congress having enacted important limits to the provider tax schemes in the One Big Beautiful Bill, states may increasingly turn to IGT schemes to draw down even more federal funds.
Federal policymakers should close this loophole. As Paragon has recommended, Congress and the Centers for Medicare and Medicaid Services (CMS) should prohibit states from paying government providers more than private providers for the same services, impose upper payment limit caps to all provider types, and rigorously scrutinize state IGT proposals.
