The Centers for Medicare and Medicaid Services may have just signaled the beginning of the end for one of California’s most aggressive Medicaid financing schemes.
In late May, CMS proposed a rule that would limit many Medicaid payment arrangements to Medicare-equivalent reimbursement levels while targeting the financing mechanisms that shift excessive costs onto federal taxpayers.
The more states spend, the more federal money they receive.
The proposal specifically highlights intergovernmental transfers and similar arrangements that have allowed states to inflate federal reimbursement claims.
This rule comes as California health officials are asking CMS to approve a set of pending state plan amendments that would further expand reimbursement arrangements built around intergovernmental transfers — the very type of financing mechanism now facing increased scrutiny from federal regulators.
For years, states have exploited these loopholes in Medicaid’s financing rules to draw down more money from Washington. CMS now appears ready to put some limits on that practice.
Vice President JD Vance and CMS Administrator Mehmet Oz deserve credit for cracking down on these kinds of abuses. Vance said the administration is withholding $1.3 billion in Medicaid reimbursements from California because the state does “not take Medicaid fraud very seriously.”
Oz warned that states have exploited “the cracks and crevices” between state and federal systems — describing California as a member of the “varsity team” of fraud alongside Massachusetts and New York.
The proposed rule makes the fate of California’s pending SPAs clear: They cannot survive. Approving them would directly contradict a rule CMS has already put forward, expanding the exact reimbursement scheme the agency has identified as a threat to Medicaid program integrity.
The only question now is whether CMS will formalize what its own rulemaking has already decided.
At the center of the IGT problem is Medicaid’s open-ended reimbursement structure. States spend money, and the federal government reimburses a percentage of those expenditures. Public entities recycle funds through multiple agencies to trigger larger federal Medicaid matching payments.
The more states spend, the more federal money they receive.
These arrangements may technically comply with federal rules, but they function as financial engineering schemes rather than legitimate health care financing. Medicaid was designed to fund health care for vulnerable Americans, not maximize revenue for governments and health care bureaucracies.
California’s ambulance reimbursement system provides a textbook example of the kind of payment arrangement CMS now appears determined to rein in.
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Under current rules, a public fire district can hold an emergency medical services franchise while subcontracting the actual ambulance operations to a private company.
Even though the private contractor performs the transport itself, the public entity can still bill Medi-Cal at the elevated IGT reimbursement rate — around $1,168 per transport in 2024, with a proposed increase to nearly $1,600.
If that same private ambulance provider billed Medi-Cal directly, that $1,600 would become roughly $339 under the standard fee schedule.
Federal taxpayers are therefore paying nearly five times the normal reimbursement rate for operationally identical services, simply because the billing structure has been routed through a government intermediary eligible for enhanced federal matching funds. For ACA expansion enrollees, a large share of Medi-Cal, Washington covers 90% of that already inflated cost.
The fire district keeps the difference between the inflated Medi-Cal reimbursement and the private contractor’s actual operating payment. Taxpayers finance the excess.
Unlike these existing payment arrangements that may eventually be required to conform to the new federal standards, California’s pending ambulance SPAs have not yet been approved. Federal regulators should not authorize an expansion of a reimbursement model they have already identified as inconsistent with Medicaid’s future direction.
CMS has now made clear that payment arrangements built around inflated reimbursement rates, intergovernmental transfers, and excessive federal matching dollars are no longer business as usual. States have been put on notice.
California’s pending ambulance SPAs should be among the first tests of whether the agency intends to enforce the principles it has now announced. If CMS truly believes Medicaid exists to fund patient care rather than reimbursement gamesmanship, these proposals should not survive review.
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