“This is not trimming fat from around the edges, it’s cutting to the bone,” said Rep. Frank Pallone of New Jersey, the top Democrat on the Energy and Commerce Committee, last week.
Pallone’s language represents the full-throated opposition by Democrats against the House-passed Republican budget bill that included modest improvements to Medicaid. This time, the Republicans’ proposed reconciliation bill would reduce Medicaid spending by a projected $715 billion over the next decade – about 10% of the program’s expected spending in the same period.
Critics call that “cutting to the bone” and abandoning the poor. I call it a reality check on a program that loses far more to fraud, waste, and abuse, and which has ballooned in cost since 2010, thanks to Medicaid expansion.
One of the most prominent abuses is the intergovernmental transfer (IGT) loophole. Blue states like California, Illinois and New Jersey siphon billions in federal Medicaid dollars by making “paper payments” through public hospitals or local government entities. These dollars are then recycled to draw higher federal matching funds (FMAP), often with little to no real increase in services.
Consider California’s State Plan Amendment request to the Centers for Medicare and Medicaid Services (CMS) in March. Normal emergency ground transport services are billed at $118. But for government providers of this service, special state-approved “add-on” fees are added for total costs per transport service exceeding $1,400.
For those keeping track at home, that’s a 13X increase for public transport entities, meaning only government providers get this extra “cash” from taxpayers’ wallets across the country. These special add-ons apply for all of 2025 – and they’re even worse than the add-ons the state used last year. In 2024, many services received “add-ons” totaling over $1,100 in costs to taxpayers for services normally reimbursed at $118.
This isn’t serving the poor. It’s manipulation that benefits the well-connected over those whom the program is meant to serve. The poor suffer in rural areas where government providers of ambulance transport receive five times the Medicaid reimbursement as their private counterparts. According to the EMS Trend Report, this funding gap is pushing private services out of the market, leaving fewer resources in rural health systems and leaving patients behind.
This is not an isolated problem. As the National Rural Health Association and Health Resources and Services Association have warned, many rural EMS agencies are on the brink of collapse. Structural Medicaid funding inequities – like those baked into the IGT transfer trick – are a reason why.
Meanwhile, the scale of waste and abuse in Medicaid continues to balloon. According to CMS, the 2019 and 2020 audit cycles of the Payment Error Rate Measurement (PERM) program showed error rates of 26.2% and 27.5%, respectively – more than double the average from 2015 to 2018. In 2019 alone, improper payments spiked from an estimated $38 billion to $60 billion. And new research from the Paragon Institute pegs the total amount of improper Medicaid payments between 2015 and 2024 at a staggering $1.1 trillion – more than double the federal government’s estimate.
This isn’t just a policy flaw – it’s a fiscal emergency. Medicaid is bankrupting the federal budget, straining state finances, and crushing taxpayers. In many states, Medicaid accounts for over a third of total budgets, crowding out tax relief and spending priorities.
And it’s not delivering. Simply having taxpayer-funded insurance does not guarantee access to timely, quality care. Many providers can’t accept Medicaid due to low reimbursement rates and red tape. As a result, too many low-income Americans have a Medicaid card, but no real care.
That’s why bigger reforms are necessary, regardless of their political popularity. Congressman Chip Roy (R-TX) put it well: “Does the bill offer ANY transformative changes on Medicaid or otherwise? Currently – NO – it ignores the policy changes that matter.”
A major improvement would be to use federal block grants to states to fund no-limit Health Savings Accounts (HSAs). These accounts are different from and have fewer restrictions than current HSAs, which would help empower Medicaid recipients to take control of their health decisions. With the flexibility of block grants, states could allow broader HSA uses and reduce administrative overhead. By pairing this with time limits and work requirements for work-capable adults on Medicaid, states can help individuals transition to self-sufficiency, smoothing the welfare cliff and encouraging employment and growth.
Of course, the ultimate goal should be to reduce Medicaid enrollment through pro-growth policies like the House provisions encouraging work. The first – and most obvious, and ideally most bipartisan – steps are reducing abuses of all types, from obvious ones like fraud to harder-to-uncover abuses like the intergovernmental transfer.
Only then can Medicaid once again serve people, not the interests of politicians and their grifting friends, unsustainable budgets, and dependency.
