In the last several weeks, state directed payments (SDPs) and Medicaid fraud and abuse have been at the center of nationwide policy discussions. The Trump Administration signed an Executive Order announcing a new Anti-Fraud Taskforce, released a Request for information on how to prevent fraud and abuse, and had a CMS leader testify in a Congressional hearing regarding Medicaid fraud, waste and abuse. Florida is the latest state in the spotlight, with Dr. Oz calling the state a “hotspot for health care fraud” in a now-deleted post on social media. Congress is not far behind — on March 3rd, the House Energy and Commerce Committee sent letters to ten states, including California, Colorado, Oregon and Washington, to request information on the actions each state is taking to strengthen Medicaid program integrity. Federal oversight is also tightening around SDPs, with CMS seeking to close financial loopholes.

State-directed Payments Under Scrutiny

Recent federal actions related to Medicaid SDPs signal a shift toward tighter federal oversight and more clearly defined guardrails on how states structure supplemental payments within managed care. SDPs have become an increasingly popular financing tool for states, allowing them to direct Medicaid managed care organizations to make specific payments to providers (most commonly hospitals) to support access, offset uncompensated care, or align payments with policy priorities. Federal policymakers are growing increasingly concerned about transparency, financing arrangements, and whether these payments are consistently tied to quality or delivery system improvements. Dr. Oz, CMS’ Administrator, has referred to SDPs as “legalized money laundering.”

In February, CMS released a guidance that place new limitations on how SDPs can be financed, particularly with respect to provider taxes and other state funding mechanisms. The Agency has emphasized that SDP arrangements must comply with longstanding federal requirements around provider payment limits and the prohibition on impermissible recycling of federal funds. In practice, this means states will face greater scrutiny in demonstrating that SDP financing structures are sustainable, appropriately sourced and not reliant on arrangements that shift financial risk back to the federal government.

States will also be expected to more clearly articulate the purpose of each payment arrangement, including how it advances access and quality, reflecting CMS’ goal of making sure SDPs are tied

to measurable programmatic outcomes. For states that have historically relied on more flexible or broadly defined SDP structures, this shift may require significant redesign, along with enhanced data collection, reporting and monitoring capabilities. Managed care organizations may also face more prescriptive requirements for implementing and tracking payments.

This week, Florida’s Agency for Health Care Administration reached an agreement with CMS to approve the state’s long delayed 2025 Preprint, clearing the way for Directed Payment Program as much as $7.8 billion to offset part of provider’s Medicaid shortfall. The agreement includes more strict CMS guidelines for the program.

California is still negotiating with CMS over its Directed Payment Program funding.

More Oversight, More Medicaid Fraud and Abuse Enforcement

The Trump Administration has made fighting fraud and abuse a key priority. Since February, CMS has launched or expanded program‑integrity probes in multiple states, including New York, Minnesota, California, Maine, and Florida. In each case, CMS sent letters to governors and state Medicaid agencies requesting detailed information.

The most aggressive action to date occurred in Minnesota, where CMS temporarily withheld more than $250 million in federal Medicaid funding. In response, Minnesota policymakers have proposed a series of reforms, including expanding the state’s Medicaid Fraud Control Unit, increasing investigative authority, and strengthening penalties for fraud-related offenses. Minnesota also sued CMS for withholding the Medicaid funds, arguing that the actions are unprecedented and undermine the traditional federal–state partnership in Medicaid. Meanwhile, congressional investigations have alleged widespread fraud in the state’s social service programs.

In Florida, CMS announced a new investigation this week, marking the first time the Administration targeted a Republican-led state in its Medicaid fraud campaign. Dr. Oz described Florida as a “hotspot for health care fraud,” citing cases involving Durable Medical Equipment (DME), transportation services, and homebased care.

In a Congressional hearing on Tuesday, March 17th, Kimberly Brandt, CMS’ Deputy Administrator and Chief Operating Officer, described how the Agency is employing new tactics to identify improper payments and prevent fraud. CMS has expanded its use of data analytics and prepayment review tools to detect suspicious billing patterns before claims are paid. Since March 2025, CMS was able to stop $2.1 billion in fraudulent payments. The goal is to shift from “pay-and-chase” to preventive enforcement. “We look at real-time Medicare claims data and determine where we see big spikes,” said Mrs. Brandt.

The four areas of Medicaid fraud the Agency will be focusing on are DME, genetic testing, home health and hospice. According to Mrs. Brandt, hospice services are a major focus due to billing for patients who are not terminally ill or for services that never occurred.

CMS has also implemented targeted provider moratoria and enrolment restrictions for DME suppliers. These measures aim to stop fraudulent actors from entering the program in the first place.

Additionally, the newly established federal anti-fraud task force, led by Vice President JD Vance, is tasked with coordinating cross-agency investigations and developing a national anti-fraud strategy within 90 days.

These recent measures to address Medicaid WFA reflect a multi-pronged strategy: enhanced federal enforcement, expanded data-driven detection, increased congressional oversight, and more robust state-level investigations.