Minnesota appeals federal plan to withhold $2 billion in Medicaid funds

Jessie Van Berkel, The Minnesota Star Tribune on Jan 13, 2026

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MINNEAPOLIS — Federal officials warn they may withhold up to $515 million in quarterly Medicaid funding to Minnesota amid fraud investigations, saying the state is not complying with rules to protect taxpayer dollars.

The state announced Jan. 13 it’s appealing the funding freeze, which could amount to more than $2 billion a year, calling the action “legally baseless” and politically motivated.

Minnesota Department of Human Services leaders intend to argue at an administrative hearing that they are meeting federal requirements and the action is unwarranted. If the Centers for Medicare and Medicaid Services move forward with the payment withhold, it remains to be seen just how much money Minnesota could miss out on — and whether the dollars would be postponed or lost entirely.

The federal government’s “recent decision to withhold Medicaid funds is putting the people whom both agencies are sworn to serve at risk,” temporary Human Services Commissioner Shireen Gandhi said. “Minnesota cannot absorb the loss of more than $2 billion in annual funding for these programs without catastrophic consequences for the people we serve.”

The Trump administration has zeroed in on allegations of widespread fraud in Minnesota social services programs and condemned Democratic Gov. Tim Walz’s failure to prevent the scandal. The potential Medicaid funding freeze is one of several the administration has threatened in Minnesota, and a court battle is ramping up over a plan to suspend funding for food stamps.

Dr. Mehmet Oz, who leads the Centers for Medicare and Medicaid Services, wrote in a letter to state officials that their previously submitted plan to address Medicaid fraud is deficient in a number of areas and the state has until Jan. 30 to revise it. Among the missing pieces, he said, are enforceable timelines to implement changes and metrics to evaluate their effectiveness.

Medicaid programs are funded through a mix of state and federal dollars. The $515 million figure federal officials suggested could be withheld was based on how much the federal government spent in one quarter last year on 14 service areas the state has identified as at high risk of fraud. Alternatively, Oz said, if they get a figure from the state of quarterly fraudulent expenditures they could withhold that sum.

He said the funding freeze would end when the state “fully and satisfactorily implements a corrective action plan” to comply with federal rules for program integrity in the high-risk services.

Those 14 programs — one of which the state has shuttered over fraud concerns — use $3.75 billion in federal and state dollars, the letter says. It adds that several of those services have seen extraordinary growth in providers and payments that is not consistent with the growth in people using the programs.

“Despite warning signs that have been evident for years, the State has not implemented sufficient safeguards to prevent ongoing improper payments,” Oz stated.

Minnesota’s Medicaid Director John Connolly painted a very different picture of how Minnesota has responded to fraud.

Since October 2024, he said, the Human Services agency has been working — often in partnership with federal staff — to minimize risk and prevent fraud.

Those efforts include identifying the 14 services as high risk and starting a prepayment review process for claims in those programs, as well as putting a moratorium on new provider enrollments in the risky programs.

In a letter responding to Oz, Connolly said the state has been in close communication with federal officials on fraud-fighting efforts and thought a recent visit from Centers for Medicare and Medicaid staff was done in good faith. But he said it’s now clear that the visit was done “to attempt to bolster your case for withholding.”

“Instead of being a reliable partner to Minnesota in the joint Medicaid enterprise, it is regrettable that the federal administration has chosen to weaponize the Medicaid program against the State of Minnesota for political purposes,” Connolly wrote.

There are “no facts” to support withholding all funding from the 14 programs and withheld money must be based on specific findings, Connolly told reporters at a briefing Jan. 13.

“You can’t just choose a number when you’re talking about funding that is essential to so many people’s health and well-being and could even determine whether people live or die,” he said.

However, the Minnesota Department of Human Services has also faced pushback from providers of the services deemed high risk. They have said the state’s approach to suspending payments has been poorly coordinated and could have deadly consequences as vulnerable people lose services.

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