State And Federal Officials Contend With Rising Medicaid Costs

Medicaid remains the fastest growing spending item for most states, even those where budgets are currently in the black.

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Lawmakers in New York, California, and Illinois have been contending with budget deficits this year, but that’s not the case in most states. Yet, even in states with budget surpluses, governors and legislators are worried about rising costs, particularly for Medicaid.

Such concerns are warranted, considering how Medicaid – the taxpayer-funded health insurance program for low-income people jointly run by the federal and state government – is the largest spending category in most state budgets. Furthermore, Medicaid is also the fastest growing spending item for most states, even those where budgets are currently in the black.

The schemes and practices that state officials have used to draw down more federal money through the Medicaid system are getting more attention in Washington. Some are well known, such as the use of hospital provider tax hikes as a way to trigger greater federal Medicaid matching funds in order to facilitate higher levels of overall spending. The One Big Beautiful Bill Act (OBBBA) that President Donald Trump signed on July 4 includes a provision that cracks down on that practice as a cost-saving mechanism.

Other Medicaid cost-increasing practices are more obscure, such as local officials’ use of public ambulance agencies to drain more taxpayer dollars from federal coffers through EMS reimbursement rates up to five times higher than what private providers get, with the difference facilitating an expansion of local government spending. Whereas hospital bed tax hikes have been used to increase the amount of federal dollars that states can access to subsidize overall state spending, local government-run ambulance agencies have been using inflated EMS reimbursement rates as a way for local governments to backfill deficits and subsidize increased local spending with federal tax dollars.

Local officials, particularly in California, have found they can use the disparity in Medicaid reimbursement rates between public and private EMS providers draw more money from a federal government that is more than $37 trillion in debt. As previously reported in this space, the Centers for Medicare and Medicaid Services (CMS) approved a request from California’s Department of Health Care Services (DHC) in 2022 that tripled the federal reimbursement rate for Ground Emergency Medical Transport (GEMT), increasing the Medicaid reimbursement rate for ambulance services by more than $800, but only for public providers. Emboldened by CMS’s approval, California has continued to hike its GEMT Medicaid reimbursement rate year after year, and is now seeking to push it to $1,600 per ride—retroactive to January 2025—while private providers have maintained a steady rate of $339.

“Sonoma County, which awarded a five-year contract for ambulance services to the Sonoma County Fire District in 2023, demonstrates how GEMTs are used to inflate the draw down of federal tax dollars with no corresponding improvement in service,” this author reported last year. “The increased Medicaid reimbursement rate authorized by CMS has resulted in federal taxpayers subsidizing a near doubling of local government spending in Sonoma County over a short period of time.”

As reported last September, public spending figures document how Sonoma County gamed the Medicaid EMS reimbursement system in order to boost local spending with additional federal dollars:

“Of the $6.7 million budget that Sonoma County allocated for fire services in FY 2020-2021, $570,000 in revenue was derived from internal county reimbursements and transfers. In FY 2023-2024, aided by the federal Medicaid reimbursement rate increase, Sonoma County’s fire services budget shot up to $11 million, with nearly half of that revenue coming from transfers and reimbursements within the county. That marked a near tenfold increase in such transfers over the past three years.”

Some would like to see Congress prevent practices like those documented in Sonoma before officials in other counties across America discover they can shake down Medicaid for more funding. In fact, word is already spreading about the opportunity to pull down more federal tax dollars by taking this approach. The Illinois Fire Chiefs Association, for example, states on its website that the use of publicly-run GEMTs “allows municipalities an opportunity to collect an additional Medicaid reimbursement for ambulance services, above and beyond what the State reimburses for Medicaid claims for Emergency Transportation,” adding that “the payback has been an important source of revenue.”

President Donald Trump and the GOP-led Congress included safeguards in OBBBA that will restrict state lawmakers’ ability to use hospital provider tax hikes as a mechanism to draw down more federal tax dollars for the purposes of subsidizing general spending. The Committee for a Responsible Federal Budget (CRFB) is encouraging Congress to “also look to enact additional Medicaid reforms on top of the significant savings enacted under the OBBBA.”

Preventing states and localities from using inflated EMS reimbursements as a way to subsidize growing local budgets is seen by many as a logical next step for Congress. CRFB notes that Congress could “save another $50 billion by restricting schemes related to intragovernmental transfers (IGTs) that allow states to pay higher rates to state and publicly-owned providers.” Aside from saving $50 billion by blocking Sonoma-style EMS reimbursement schemes, CRFB also highlights that Congress could save another $50 billion “by building on OBBBA’s provider tax limits by ending exemptions for non-expansion states and nursing home taxes that could open new loopholes.”

Sonoma County Supervisor David Rabbitt says it “would be a mistake” for Congress to change Medicaid EMS reimbursement rates in a way that ends the disparity between public and private providers. He says it’s already the case with Medicaid that “reimbursement rates don’t keep up with healthcare costs.” Still, many are not convinced that is a good reason for Medicaid to continue paying up to a five-fold premium for public ambulance service providers relative to private competitors.

Other Medicaid cost-saving recommendations proposed by CRFB include “reducing the federal matching rates for administrative activities ($80 billion)” and enacting pharmacy benefit manager (PBM) reforms in Medicaid ($20 billion). Paragon Health Institute has also endorsed such structural Medicaid reforms, demonstrating bipartisan agreement over the need for more cost reduction in Medicaid.

Congress and the White House are already discussing the next tax bill, which would once again need to be done through the budget reconciliation process. As part of that effort, Speaker Mike Johnson (R-La.), Senate Majority Leader John Thune (R-S.D.) and their colleagues will be looking for spending cuts that can offset, for example, the cost of indexing capital gains for inflation. Fixing public-private EMS reimbursement rate disparities in Medicaid is one of a number of reforms that will likely be considered on Capitol Hill as a way to free up resources for debt reduction and further tax relief.