Politicians have perfected the craft of campaigning on fiscal responsibility, only to govern as if taxpayer dollars grow on trees. Nowhere is the failure of elected officials to rein in public spending more glaring than in Medicaid, which is ballooning into an unaccountable $1 trillion-a-year entitlement. However, common sense reforms enacted in President Trump’s Working Families Tax Cuts finally put an end to budget gimmicks that states have used to inflate federal spending for decades.
Originally designed as a partnership between the federal government and the states, Medicaid has devolved into a financial shell game. States figured out they can game the system by taxing health care providers, and then immediately recycle those funds back to the same providers to artificially inflate their reported Medicaid expenditures. This increased spending on paper, in turn, allows state governments to bilk federal tax dollars by triggering higher Medicaid matching funds without making meaningful contributions of their own.
Entitlement programs are easy targets for political demagoguery, which helps explain why attempts at substantive reform often fail. Yet, President Trump’s crackdown on this long-running scheme proves elected officials can still summon the courage necessary to challenge entrenched interests while strengthening a critical safety net for those who need it most. According to the Congressional Budget Office, the legislation’s provisions dealing with provider taxes and state-directed payments alone will save taxpayers over $330 billion over the next decade.
What makes this scheme so infuriating is how long it has been allowed to fester under federal lawmakers’ noses. As early as the 1990s, the GAO was warning Congress that state legislatures were engaging in “illusory” approaches to shift the cost of Medicaid onto the federal government. Toothless legislation enacted by Congress at the time not only failed to rein in the scheme but effectively provided states with additional legal loopholes to exploit.
Democrats and Republicans alike have acknowledged that provider taxes are a real problem. President Obama’s budget framework in 2012 and 2013 proposed capping provider taxes, and, in 2011, then-Vice President Joe Biden even referred to them as a “scam” during budget negotiations with Congress. Despite being aware of this abuse, lawmakers have consistently prioritized political expediency over pushing for tough reforms that hold politically influential health care lobbies accountable.
The reforms tackle the provider tax scheme head-on by targeting the main accounting games states have exploited to siphon federal tax dollars. For years, federal rules allowed states to tax providers up to 6% of their revenue and automatically count that money toward their Medicaid share, even when those funds were funneled back to providers. This legislation immediately freezes these existing taxes and gradually lowers that limit to 3.5% in states that expanded Medicaid.
The bill also reins in the practice of state-directed payments, a loophole state governments have used to channel kickbacks to hospitals and nursing homes. In recent years, states have used these “supplemental” payments to funnel extra Medicaid funds to favored providers, in some cases paying rates similar to what private insurers pay, even though Medicaid is meant to be a low-cost safety net. The President’s reforms cap these payments at Medicare rates in most states, cutting off a major source of inflated spending.
These reforms will help turn around a program that has been mismanaged for far too long. Today, thanks to the uncontrolled growth of the provider tax scheme and new mandates enacted by Obamacare, the federal government shoulders nearly two-thirds of total Medicaid spending. Because Medicaid is structured as an open-ended entitlement, every dollar a state “spends” through provider taxes is matched by federal funds with no upper limit. Knowing that the federal government will pick up most of the tab, states have fewer incentives to root out wasteful spending and be prudent custodians of their Medicaid programs.
This lack of accountability has solidified Medicaid’s position as one of the top five federal programs for improper payments, according to the GAO. In fiscal year 2025 alone, the Centers for Medicare and Medicaid Services estimated improper payments in Medicaid totaled just over $37 billion, nearly a $6 billion increase from the previous year.
This massive amount of wasteful spending isn’t just an insult to taxpayers. Every dollar lost to fraudulent and erroneous payments is a dollar not spent on caring for pregnant mothers, people with disabilities, and low-income seniors. Allowing this abuse to continue unabated isn’t just bad public policy—it’s a betrayal of the people Medicaid was created to protect. The reforms enacted by President Trump will help make this important program more efficient, less wasteful, and more accountable to taxpayers.
Alexander Ciccone is the Policy and Government Affairs Manager at the National Taxpayers Union
