Funding Freezes and Fraud Crackdown: Federal Actions Against States

The Trump administration has initiated a series of funding freezes, deferrals, and withholding actions against multiple states, citing concerns over fraud in federal healthcare and child care assistance programs. Actions have specifically targeted California, Colorado, Illinois, Minnesota, New York, and others, affecting programs including Medicaid, the Child Care and Development Fund (CCDF), Temporary Assistance for Needy Families (TANF), and the Social Services Block Grant (SSBG).

The administration has also announced new verification requirements for all states and proposed rule changes to federal child care funding. Several states have pushed back, and Minnesota has filed a federal lawsuit challenging the administration's actions.

Federal Actions on Medicaid Funding

Deferral and Withholding for Minnesota

The Centers for Medicare and Medicaid Services (CMS) has taken two primary actions regarding Minnesota's Medicaid funding:

• Deferral: CMS delayed reimbursing approximately $250 million to $259.5 million that Minnesota spent on Medicaid. This deferral cited concerns about potential fraud and coverage for patients without legal status. CMS requested the state provide evidence that funds were lawfully spent across 14 provider categories identified as "high risk" for fraud.

• Withholding: Following Minnesota's submission of a plan to prevent future fraud, CMS announced its intent to withhold about $2 billion annually in future federal funding. CMS Administrator Dr. Mehmet Oz stated the state's plan was "deeply insufficient."

"There is no statutory or regulatory basis for withholding all of a state's federal Medicaid matching funds due to non-performance by a MFCU." — Andy Schneider, Georgetown University

Deferral for California

Vice President JD Vance and CMS Administrator Dr. Mehmet Oz announced the deferral of $1.3 billion in Medicaid reimbursements to California, citing concerns that the state is not adequately addressing fraud.

Broader Threats to Other States

CMS has communicated concerns about potential fraud to California, New York, and Maine regarding their Medicaid programs. Vice President Vance threatened that states failing to address suspected fraud could lose federal funding, including for Medicaid and Medicare. The House Committee on Energy and Commerce has also initiated investigations into Medicaid fraud in ten states.

Federal Actions on Child Care and Social Service Funding

Affected States and Programs

The U.S. Department of Health and Human Services (HHS) initiated a freeze on federal funding for the Child Care and Development Fund (CCDF), Temporary Assistance for Needy Families (TANF), and Social Services Block Grant (SSBG) in Colorado, California, Illinois, Minnesota, and New York.

• Minnesota: Approximately $185 million in child care funds were frozen in December. The administration also threatened to withhold SNAP food aid funding unless the state provided information about recipients.

• Colorado: Federal officials cited concerns regarding the "potential for extensive and systemic fraud" within Colorado's CCDF services. A letter to Governor Jared Polis indicated belief that the state was "illicitly providing illegal aliens with CCDF benefits intended for American citizens and lawful permanent residents." Colorado stands to be short $91 million for the remainder of the fiscal year if the freeze remains, affecting approximately 27,000 children.

• All States: HHS announced that all states must provide additional levels of verification and administrative data before receiving further CCDF funding. A dedicated fraud reporting portal has been launched at childcare.gov.

Policy Rule Changes

HHS announced the rescission of specific rules from the previous administration regarding the CCDF. The previous administration's rules encouraged states to calculate payments to child care providers based on enrollment figures rather than verified attendance and advocated for advance payments.

"The reforms we are enacting will make fraud harder to perpetrate." — HHS Deputy Secretary Jim O'Neill

HHS now plans to reestablish attendance-based billing practices, eliminate the requirement for advance payments, and restore the prioritization of vouchers.

Broader Federal Actions

• President Trump created a taskforce to eliminate fraud in March.
• Vice President Vance was designated as "fraud czar" and announced a "war on fraud."
• CMS announced a six-month moratorium on new Medicare enrollment for hospices and home health agencies in Arizona, California, Georgia, Ohio, Nevada, and Texas, citing fraud risks.
• Oz also announced a six-month national moratorium on federal funding for durable medical equipment, including prostheses and orthoses.

State Responses

Minnesota

• Lawsuit: Minnesota Attorney General Keith Ellison filed a federal lawsuit challenging the deferral of Medicaid funds. Ellison asserted that Minnesota has actively combated fraud and criticized the federal government's "cut first" approach.

• Corrective Action Plan: Minnesota's Deputy Health Commissioner John Connolly stated the state submitted a corrective action plan to the federal government and is awaiting feedback. He noted the state's Medicaid payment error rate in 2025 was 2%, below the national average of 6%.

• Governor Tim Walz: Criticized the administration's actions, stating the move "has nothing to do with fraud" and that it politicizes the issue.

• State Legislation: Minnesota lawmakers and Attorney General Ellison introduced legislation to increase staff in the AG office's Medicaid Fraud Control Unit and strengthen state fraud laws.

• Prior Actions: Minnesota previously shut down its Housing Stabilization Services program due to widespread fraud.

California

• Governor Gavin Newsom's office: Objected to the characterization of its programs, stating that the In-Home Supportive Services (IHSS) program saves taxpayers money.

• Attorney General Rob Bonta: Called the targeting politically motivated and said his team is reviewing the actions for potential legal challenges.

Colorado

• Governor Jared Polis: Asserted the federal actions would "hurt vulnerable Coloradans" and described the data demands as "unrealistic."

• State Officials and Advocates: Maintain that Colorado possesses robust fiscal accountability systems and internal controls designed to prevent fraud, exceeding federal minimum standards.

Background and Context on Fraud Allegations

Minnesota Fraud Cases

Federal prosecutors have confirmed large-scale social services fraud in Minnesota, leading to the conviction of dozens of individuals, many of whom are Somalis, for stealing over $1 billion in public funds intended for food, housing, and disability services. Dozens were charged with fraud in 2022 by a team of federal prosecutors who later resigned in January.

Allegations of fraud involving day care providers in Minnesota gained widespread attention in late December after a social media influencer posted a video alleging that Somali-American-run day care centers were defrauding the federal government.

Expert Perspectives on Funding Withholding

Health policy experts indicate the federal government's actions deviate from typical procedures for handling fraud. Jocelyn Guyer of Manatt Health described the withholding of funds as punitive. Experts warn that such significant financial hits could slow provider payments, delay patient enrollment, and force states to cut services or reimbursement rates.

Industry Response to Rule Changes

Child care advocacy organizations have indicated that states already implement numerous controls to prevent fraud. Susan Gale Perry, CEO of Child Care Aware of America, noted that "longstanding program integrity requirements... have been in place and are regularly updated." Melissa Boteach, chief policy officer at Zero to Three, characterized the proposed policy changes as introducing "chaos and confusion."

Potential Consequences

Vice President Vance suggested that Medicaid beneficiaries would not be directly affected, as providers have already received payments from the state. However, Minnesota Deputy Health Commissioner Connolly described the potential long-term impact as "catastrophic," foreseeing:

• Possible disruptions to provider payments
• Strain on healthcare facilities
• Jeopardized services for vulnerable populations
• Destabilization of care for over a million Minnesotans

In Colorado, the defunding of federal programs is projected to impact 120 state workers by February 15. Child care providers have expressed concerns about maintaining operations without federal reimbursements, potentially leading to facility closures or families resorting to unlicensed care.