California provides a striking example.

According to data released by Paragon Health Institute, the state’s payments to public ambulance providers exploded from $339 per transport in 2022 to $1,168 in 2024. This was after California created a new IGT for public ambulances. 

Those payments were supposed to increase to $1,597 for 2025 and $1,637 for 2026 but are currently in flux as CMS considers new rules on Medicaid spending. 

Meanwhile, private ambulance providers are still reimbursed at $339.

It’s no wonder Paragon Health Institute likened IGT use for Medicaid reimbursement to money laundering. 

Here’s how the Paragon Health Institute and Cato Institute describe IGTs: state governments use IGTs to borrow money from government-owned or affiliated healthcare providers. The state government uses that money — plus money from the state budget‚ as its nonfederal share of Medicaid payments. The federal government then reimburses the state for part of the money.

Exactly how much that reimbursement is depends on the state. For traditional Medicaid populations, it’s between 50 and around 77%. For states that adopted Obamacare Medicaid expansion, it’s 90%.

Critics have suggested that state governments and providers are “colluding” to take money from federal taxpayers.

“These schemes distort Medicaid’s financing structure, shift costs from states to the federal government,” wrote Mark Howell and Chris Medrano from Paragon Health Institute. “They are also fundamentally unfair because they give public providers a significant advantage over private providers.”

The problems stretch back decades.

Federal regulators expressed concerns in the 1980s that state governments figured out ways to reduce their share of Medicaid spending. It wasn’t until 1994 that the U.S. General Accounting Office revealed that the Michigan, Tennessee, and Texas governments received $800 million in federal Medicaid funds without matching them.

During the George W. Bush administration, the U.S. General Accounting Office studied IGT usage by states from 1993 to 2004. Analysts found that states used payments to local government-owned nursing homes to obtain Medicaid reimbursement payments larger than the established rate. Other schemes involved local governments taking out bank loans, wiring the funds to the state, and then receiving the cash back as Medicaid payments. They would then repay the bank loans while the state received Medicaid reimbursement.

“The Medicaid program should not allow states to benefit from arrangements where federal funds purported to benefit providers are given to providers with one hand, only to be taken back with the other,” wrote GAO analysts.

They endorsed a Bush-era proposal that capped reimbursement payments to the actual cost of treating Medicaid patients at public hospitals and county-owned nursing homes. That cap was never implemented due to bipartisan pushback in Congress and several court decisions.

As Medicaid expanded during the Obama administration, so did states’ use of IGTs. 

In 2014, the GAO reported it accounted for $18.7 billion of the nonfederal share of Medicaid. That figure comes with a warning: federal officials do not have complete information on how states financed their portion of Medicaid. 

Analysts criticized the Centers for Medicare & Medicaid Services for failing to document how it finances its nonfederal share of Medicaid funding. It was noted that financing information does not always include provider-specific basic details. CMS also failed to collect and document information from states if it made changes to its nonfederal share sourcing. 

Today’s Trump administration and CMS are taking steps to end this gravy train. It withheld $1.3 billion in Medicaid payments to California in May due to questions about billing, home health services, and allegations it provided coverage to undocumented immigrants.

But reformers have urged the federal government to change the Medicaid incentive.

WE’RE BEING DEFRAUDED OUT OF $1 MILLION EVERY SINGLE MINUTE. IT’S TIME TO STOP THE BLEEDING

Some of the proposals to fix Medicaid include block grants to states, which would then fund Health Savings Accounts. Supporters have said it would force states to get the best deals for Medicaid services. Proponents have also argued it would give Medicaid recipients more control over their healthcare.

More than that, it would stop states from exploiting loopholes that allow them to take more federal tax dollars.

Taylor Millard (@TaylorMillard) is a freelance journalist who lives in Virginia.