Conservatives push to cut extra Medicaid payments to hospitals
 By Maya Goldman
3/26/25
 
https://www.axios.com/2025/03/26/congress-medicaid-payments-hospitals-states
 
A think tank with close ties to the Trump administration is making the case for wonky changes to state Medicaid payments that could solve a big problem for Republican lawmakers: They could cut federal spending in the name of simply cracking down on waste and abuse within the program.
 
The big picture: State-directed Medicaid payments have grown rapidly, and there's been bipartisan support for reining them in.

• But slashing or getting rid of the payments would be a big financial hit for providers, and especially hospitals, who vehemently disagree that the payments are wasteful.

 Driving the news: Paragon Health Institute released a report Wednesday characterizing state-directed payments as "legalized Medicaid money laundering."

• States can tax providers or use other means to increase their state share of Medicaid funding, which allows the state to draw down additional federal Medicaid dollars. States can then use that extra money to increase payments to providers.
• "Not only do these programs sidestep the truly needy on Medicaid and favor special interests instead, but all this is financed by growing the federal debt, leading to inflation and higher interest rates," the report says.

 Zoom in: State-directed payment arrangements approved as of last August are projected to cost more than $110 billion per year, a nearly 60% increase over cost projections from early 2023.

• A small portion of these arrangements are driving most of the increase, according to independent Medicaid advisers to Congress.

 What they're saying: "All of this is fits within waste and abuse in the program," Paragon President Brian Blase, who co-authored the report, told Axios. "Congress, looking at $2 trillion budget deficits, needs to make significant reform to the federal-state partnership" in Medicaid.

• The report advocates for Congress to cap the amount of federal Medicaid funding states can receive, though it acknowledges that such a change is unlikely.
• The report also recommends other policy changes, like prohibiting states from using provider and insurer taxes to finance Medicaid payments, ending or capping state-directed payments and stopping policy consultants from being paid with Medicaid funds.

 Between the lines: The Government Accountability Office and independent Medicaid advisers have both said in recent years that state-directed payment arrangements need more oversight. Democratic lawmakers have also advocated changes to provider taxes.

• The Biden administration last year finalized a rule to increase transparency into state-directed payments. The Paragon report says the rule helped, but that it should still be repealed over fiscal concerns.

 The other side: Hospitals say patients' access to care could suffer without the supplemental payments.

• "Let's be clear: provider taxes and state directed payments provide the means to offset the crippling underpayment by Medicaid for critical care that meets the medical needs of so many kids, mothers, disabled, and seniors," Chip Kahn, president and CEO of the Federation of American Hospitals, said in a statement to Axios.
• Taking federal money out of the Medicaid system may ultimately force hospitals to cut back services or staff, affecting beneficiaries' access to care, said Megan Cundari, senior director of federal relations for the American Hospital Association.

 What we're watching: Blase said his team is having discussions with congressional offices.

• Still, lawmakers tend to be very protective over their districts' hospitals, which could make changes an uphill battle.
• "Everybody knows this is a scam, but it benefits hospitals," Blase said of his team's conversations on Capitol Hill.

 Excerpts from the Paragon Report:
“These financing schemes have been around since the mid-1980s. They started with provider taxes or donation programs, primarily through hospitals and nursing homes. States collect funds from providers, then return those funds in the form of additional Medicaid spending. These expenditures garner federal matching funds, which are subsequently paid to providers through state directed payments (SDPs) and supplemental payments, with states often keeping a portion of this additional money for other purposes. SDPs are payments that states direct insurers to make to providers.”
 
“When Congress made those schemes somewhat more difficult in the early 1990s, states turned to intergovernmental transfers (IGTs) to finance the state share of Medicaid. Through an IGT, a local government or government-owned provider transfers money to the state that the state then uses to make much higher Medicaid payments on providers, which are often the very same providers that make the IGT. IGTs raise significant conflict of interest concerns and result in government-owned providers receiving favorable treatment over private providers.”
 
“States have expanded their use of provider taxes and IGTs in recent years. The newest money laundering tactic are taxes on insurance companies that participate in Medicaid managed care.”
 
“The providers, with schemes often developed by consultants, lobby the states to engage in this legalized money laundering apparatus. Historically, states made additional supplemental payments to providers, and they are still a significant component of Medicaid, particularly through the IGT mechanism. As states have largely transitioned Medicaid from fee-for-service to managed care, states are requiring insurers to make extra payments to providers through SDPs.”
 
“States’ reduced financial share means that states are now setting very high Medicaid payment rates for certain providers. In some states, these rates are approaching average commercial rates—rates that are more than 2.5 times above Medicare rates.”
 
“SDPs exceeded $110 billion in 2024—more than double the amount from just two years earlier. These are on top of supplemental payments that exceeded $57 billion in 2023. Both provider taxes and SDPs soared in 2024, as provider taxes fuel the legalized money laundering that permits states to substantially increase SDPs.”
 
 “What We Recommend
Considering a new Congress and the Trump administration’s intent on cutting waste, fraud, and abuse throughout government, there is a real opportunity for federal policymakers to address and limit Medicaid money laundering. Addressing this issue has been bipartisan in the past. Presidents Bush, Obama, and Trump all pushed to rein in Medicaid financing gimmicks.”
 
The Paragon Report highlights a 2016 report by George Mason University, that states:
“The specified 19 classes of providers [eligible for SDPs] are those that provide inpatient hospital services, outpatient hospital services, nursing facility services, services of intermediate care facilities for the mentally retarded, physicians’ services, home health care services, outpatient prescription drugs, services of Medicaid managed care organizations, ambulatory surgical centers, dental services, podiatric services, chiropractic services, optometric/optician services, psychological services, therapist services, nursing services, laboratory and x-ray services, emergency ambulance services, and other health care items or services for which the state has enacted a licensing or certification fee.