CMS Tightens Scrutiny of Medicaid Funding, Focusing on Potential Fraud

The Centers for Medicare & Medicaid Services (CMS) is adopting a more assertive approach to identifying and addressing potential fraud within state Medicaid programs. This shift involves increased use of deferrals and withholds of federal funding, a departure from the historically more reactive practice of disallowing funds after fraud has been confirmed. The agency’s increased scrutiny currently focuses on Minnesota, California, Maine and New York, but extends to information requests from eleven states total.

Historical Approach: Disallowances

Traditionally, CMS has addressed Medicaid fraud through a process of disallowances. When audits, investigations, or state reports identified fraudulent activity, CMS would deny federal matching funds for the associated expenditures. This process, while effective, could take years to implement. States could request reconsideration of disallowance decisions, but the burden of proof rested with the state to demonstrate the allowability of the expenditures. Departmental Appeals Board rulings between 2020 and 2025 consistently favored CMS, with cases taking an average of 15 years to resolve. Disallowances have ranged from under $500,000 to nearly $200 million, often involving disproportionate share hospital (DSH) payments. For example, a $195.7 million disallowance was upheld in a case involving Michigan’s DSH payments from 2001-2009, and a $97 million disallowance was upheld in Florida regarding payments from 2006-2013. CMS

New Approaches: Deferrals and Withholds

CMS is now implementing two new tools: deferrals and withholds. Deferrals involve pausing payment for state Medicaid expenditures while CMS investigates their allowability. States have 60 days to provide requested documentation, with a possible 60-day extension. CMS then has 90 days to review and determine if the expenditures are allowable. Withholds, a less frequently used tool, involve halting a portion of federal Medicaid payments while an issue is resolved. CMS must provide states with an opportunity for an administrative hearing before implementing a withhold.

In January 2026, CMS announced a temporary deferral of $259 million in federal Medicaid payments to Minnesota for fiscal year 2025, an unprecedentedly large amount. Simultaneously, CMS notified Minnesota it would begin withholding $515 million in quarterly federal Medicaid payments, representing nearly 20% of the state’s annual federal Medicaid funding. Minnesota Public Radio, Georgetown University Center for Children and Families

Implications for States and Enrollees

These new approaches create uncertainty for state budgets, particularly given the time it takes to resolve disputes. States with balanced budget requirements may struggle to maintain programs during funding delays. Increased use of deferrals and withholds could also lead to states reducing Medicaid spending by decreasing provider payment rates, limiting covered services, or reducing enrollment. This could impact enrollees and providers not involved in any fraudulent activity. The National Association of Medicaid Directors (NAMD) has suggested several actions to help states address fraud, waste, and abuse, including improved data sharing and technical assistance from CMS.

Minnesota’s Response

Minnesota officials are appealing the federal decision to withhold $2 billion in Medicaid funds. On January 13, 2026, Minnesota requested a hearing regarding the withhold and submitted a revised corrective action plan to CMS on January 30, 2026. As of March 16, 2026, CMS had not scheduled a hearing. Minnesota Public Radio

Looking Ahead

CMS’s new emphasis on proactive fraud detection and its willingness to utilize deferrals and withholds represent a significant shift in Medicaid oversight. The long-term impact of these changes on state budgets, program administration, and access to care remains to be seen. Continued monitoring of CMS’s actions and the outcomes of ongoing disputes, such as Minnesota’s appeal, will be crucial for understanding the evolving landscape of Medicaid funding and program integrity.