Posted on Wednesday, April 30, 2025

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by Mike Feuz

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Democrats are raising alarm bells with claims that DOGE cuts to Medicaid could impact up to 80 million Americans who depend on the program for healthcare coverage. But if Democrats really want to preserve Medicaid, they’ll need to show a good-faith effort to work with Republicans to reduce the waste, mistakes, and fraud that cost taxpayers tens of billions of dollars each year and have put the system in the ICU in the first place.

One of the best places to start is by closing the intergovernmental transfer (IGT) loophole that states have exploited at the expense of American taxpayers and Medicaid enrollees.

In essence, states have used IGTs to cook the books as their Medicaid programs hemorrhage taxpayer dollars. Here’s how it works.

First, a state compels a government-owned healthcare provider like county hospitals and ambulance services to temporarily transfer funds into the state’s Medicaid program. The state then returns those funds to fulfill its 50 percent reimbursement obligation to the provider. The federal government also contributes its 50 percent share of the reimbursement – which comes from American taxpayers all over the country. 

This shell game has become lucrative not only for the states, which effectively avoid having to actually pay their share, but also for these public providers as the allowable reimbursement rates have risen to over three times the cost of providing the service.

For example, unscrupulous providers use creative accounting to push the envelope on allocating operational costs like payroll, debt service, and depreciation expenses under high Medicaid utilization services. In plain English, they move costs that are tangentially related or are under the organization’s larger service provisions onto the backs of taxpayers. State Medicaid programs then report the new cost to the Centers for Medicare & Medicaid Services to get approval for higher reimbursement rates.  

IGTs have been allowed since Medicaid’s inception, with all of their inherent strengths and weaknesses. What’s really accelerated their abuse has been the Affordable Care Act’s provisions expanding Medicaid, which added 25 million people in 41 states to the program’s rolls – and increased federal matching from 50 percent to 90 percent for the expansion enrollees.

And this is where Democrats and Republicans can be on the same fiscally responsible page: Republicans want to stop abuse for taxpayers’ sake, while Democrats have a vested interest in protecting the expansion they have championed for 15 years.

The poster child for the abuse of IGTs is California, which in 2023 received CMS approval to raise the Medicaid covered reimbursement for publicly owned ambulance services by $800, tripling the previous rate. Private ambulance companies, meanwhile, have been forced to keep costs low because they haven’t received increased Medicaid base rate reimbursement since the 1990s.

Take a guess which ambulance providers California counties work with – the low-cost private companies or the expensive public ones through which they can skim profit to fill their own budget holes? And, no, Medicaid patients are not receiving three times better care even as taxpayers pay triple the cost. 

Realigning Medicaid matching policies and closing the IGT loophole will pressure states like California to adopt better budgeting practices. Those practices will likely involve allowing real competition between government and private healthcare providers. As the best providers win, so will taxpayers’ wallets and patients’ health.  

It’s too late to claw back money from states as corrupt as California without years of court battles and millions in expenses. The most expedient route to save money and improve care is to end the IGT loophole. 

Mike Feuz is an economic consultant by day and a research associate for the think tank Free the People by night.