Stop the Next Medicaid Money Laundering Scheme

Washington just shut down one Medicaid gimmick. States are already building the next one.

An important piece in The Federalist by Brian Blase of the Paragon Health Institute warns that intergovernmental transfers, known as IGTs, are becoming the next major Medicaid taxpayer rip off scheme. If Congress and the Trump administration do not act quickly, this maneuver could explode federal spending all over again.

How the IGT Scheme Actually Works

Medicaid is jointly funded by states and the federal government. The federal government matches state spending based on a formula. The more a state spends, the more federal money it can claim.

States have long used provider taxes to inflate their “state share” and pull down extra federal dollars. As scrutiny increases on those tactics, some states are pivoting to intergovernmental transfers.

Here is how it works in practice.

States set particularly high supplemental Medicaid payments for certain government owned providers, such as county operated nursing homes or public ambulance services. Because these providers are government owned, they can transfer money to the state through IGTs.

The state then uses those same transferred funds to finance the higher Medicaid payments it just approved. Once those payments are made, the state claims federal matching dollars on top of them. The federal government sends its share. The original funds, plus a large portion of federal money, flow right back to the same government entities that supplied the funds in the first place.

The result is a closed loop. The state appears to increase Medicaid spending. In reality, much of the “state share” originated with government providers and returns to them, now padded with federal taxpayer dollars.

This leads to massive disparities. In California, public ambulance services receive payments three times higher than private counterparts for identical Medicaid transport. The service is the same. The difference is the ownership structure and the financing maneuver behind it.

These schemes prioritize maximizing federal dollars over delivering real care.

Why This Matters

Medicaid is already one of the largest and fastest growing items in the federal budget. Every financing gimmick that inflates its cost worsens federal deficits and weakens accountability.

IGT arrangements reduce pressure on states to control costs because federal taxpayers cover most of the bill. They reward government owned providers over private competitors. They distort markets. And they shift the program’s focus away from patients and toward revenue maximization.

The federal match was meant to reflect shared responsibility. It was never intended to serve as a revenue multiplier for state and local government entities.

A Warning for Congress and the Trump Administration

As provider tax abuses face tighter scrutiny, states are testing new strategies. IGT manipulation is the next logical step if reforms do not close the loopholes comprehensively.

Congress should ensure that any Medicaid reform package addresses not just provider taxes, but also intergovernmental transfer schemes that recycle government funds to trigger additional federal payments.

President Trump and lawmakers have an opportunity to stop this before it becomes entrenched. Waiting will only make the problem larger and more politically difficult to unwind.

CFE Takeaway

Medicaid reform must include financing integrity.

Intergovernmental transfers are shaping up to be the next major vehicle for inflating federal Medicaid spending through accounting maneuvers. The California example shows how extreme the disparities can become when federal rules are gamed.

Congress and the Trump administration should shut down this “Son of Provider Taxes” scheme now. Federal dollars should support vulnerable patients, not government paydays disguised as health care spending.