The War on Fraud Reaches the States: HHS Defers Medicaid Payments and Expands Exclusion Authority

On July 21, 2026, U.S. Department of Health and Human Services (HHS) Secretary Robert F. Kennedy, Jr. and Centers for Medicare & Medicaid Services (CMS) Administrator Dr. Mehmet Oz announced that they would defer payment of roughly $867.5 million in federal Medicaid payments due to California and $199 million to Minnesota. The decisions to defer payment are part of a “proactive new approach to program integrity” that emphasizes “stopping waste and fraud before the check clears.”

These developments are the latest in a broader federal campaign against Medicaid and federal-program fraud. Over the past several months, the administration has established the U.S. Department of Justice’s (DOJ) National Fraud Enforcement Division, created the vice president-chaired Task Force to Eliminate Fraud, announced the record-setting 2026 National Health Care Fraud Takedown, and prompted the HHS Office of Inspector General (HHS-OIG) to take a more aggressive approach to annual Medicaid Fraud Control Unit (MFCU) recertifications. Together, these initiatives show the federal government working to prevent fraud before federal funds are disbursed, while expanding the administrative tools to remove providers that raise program integrity concerns. Providers, and not just state Medicaid agencies, should take note.

Payment Deferrals to California and Minnesota

HHS’ announcement unveiled two significant developments: decisions to defer substantial Medicaid payments due to California and Minnesota, and to expand federal exclusion authority.

CMS deferred approximately $867.5 million in federal Medicaid payments to California after a financial review concluded that the state needed to supply additional documentation. CMS pointed to rapid spending growth in California’s in-home care programs — an area it had already flagged because expenditures were growing at a pace that exceeds national trends.

CMS also deferred approximately $199 million in federal Medicaid payments to Minnesota. The agency reviewed claims spanning 14 high-risk service areas and identified expenditures requiring additional documentation, including claims associated with providers identified through program integrity reviews and others that raise potential eligibility or billing concerns.

HHS has consistently characterized these actions as temporary deferrals, not permanent funding cuts. Both states may obtain the deferred federal matching funds by showing that the underlying claims satisfy applicable federal requirements. Secretary Kennedy also emphasized that the funding remains available once they do. Minnesota has already begun submitting supporting documentation for CMS review. These actions likewise build on earlier funding reviews announced this year, including CMS’ May 2026 decision to withhold approximately $1.3 billion in federal Medicaid funding from California and an earlier pause of almost $260 million to Minnesota.

Federal Exclusion Authority Expansion

Exclusion under Section 1128 of the Social Security Act is an administrative authority that bars an individual or entity from participating in Medicare, Medicaid, or other federal healthcare programs. Criminal offenses involving healthcare fraud, narcotics, or patient abuse are grounds for mandatory exclusion. The statute also provides 17 permissive grounds, such as those triggered by certain medical license losses and Medicaid revocations. Historically, Secretary Kennedy delegated the exclusion authority solely to HHS-OIG, which maintains the List of Excluded Individuals/Entities.

HHS announced that it is expanding this authority by letting both CMS and HHS-OIG impose exclusions from federal healthcare programs. Previously, CMS’ main administrative remedies centered on enrollment and revocation authorities under 42 C.F.R. § 424.535, while HHS-OIG ran the federal exclusion process. By positioning CMS alongside HHS-OIG, the administration is broadening the ways it can remove providers from federal healthcare programs.

HHS framed this change as part of a broader shift away from traditional “pay-and-chase” enforcement — recovering improper payments after the money has been disbursed — toward a “prevent and detect” approach. Secretary Kennedy and Administrator Oz emphasized stopping fraudulent payments before they occur by pairing expanded exclusion authority with targeted financial reviews that catch questionable claims before federal funds are paid. As Administrator Oz explained, “CMS is done trying to chase down stolen and misused funds after they’ve already left the building.”

What This Means for Providers

The July 21 announcement confirms a significant shift in federal Medicaid fraud enforcement. Throughout 2026, the administration has moved aggressively toward front-end administrative tools, coordinated enforcement efforts, and analytics-driven reviews designed to catch improper payments before federal funds are disbursed.

Three themes stand out for providers. First, administrative remedies are becoming increasingly important, and providers should expect HHS to use them more aggressively. Second, by enabling both CMS and HHS-OIG to implement exclusions, the administration has multiplied the avenues for removing providers from federal healthcare programs. Third, the reviews behind the California and Minnesota deferrals show that data analytics, not after-the-fact audits, now identify billing anomalies and drive enforcement decisions.

Healthcare providers, particularly those in home care, behavioral health, and other service sectors already under heightened scrutiny, should treat these developments as further confirmation that the current enforcement environment is intensifying, not easing. Now is the time to ensure that compliance programs, billing practices, and documentation controls can withstand oversight that arrives earlier, cuts deeper, and leaves less room to explain after the fact.

For questions about these developments and their implications, please contact the authors or any member of Arnold & Porter’s White Collar Defense & Investigations or Life Sciences & Healthcare Regulatory practice groups.

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.