A Medicaid Funding Freeze Hits Patients First—Here’s the Legal Protections That Apply

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On February 26, Vice President JD Vance and Centers for Medicare & Medicaid Services Administrator Mehmet Oz announced that the Trump administration would temporarily halt $259.5 million in federal Medicaid reimbursements to Minnesota. The stated reason was alleged fraud in the state’s program. Vance described the action as making sure that “before you give Medicaid funds to somebody, you’re taking seriously whether they provided the services that they say that they’re providing.”

Three questions were left unanswered: whether the administration had the legal authority to do this, what steps federal law requires before such action, and what protections apply to the approximately 1.26 million Minnesotans who depend on the program while the freeze plays out.

The freeze is not a legislative cut passed by Congress. It is an executive action, announced without prior congressional notification and without the formal corrective action plan process that federal Medicaid law typically requires before CMS changes a state’s federal funding.

Two possibilities will drive the legal challenges ahead. The administration’s action may fall within CMS’s investigative authority over Medicaid fraud, a power with real legal backing. Or it may be an impoundment subject to the Impoundment Control Act of 1974‘s procedural requirements. That is a question courts have not clearly settled for mandatory spending programs.

What the Administration Claims, and What the Law Permits

The administration’s announcement cited fraud concerns but did not clearly state the legal basis it was using to halt the funds. No formal notice was published in the Federal Register. No deferral or rescission message was filed with Congress. A corrective action plan was formally demanded: CMS Administrator Mehmet Oz announced Governor Walz had 60 days to present a comprehensive corrective action plan. Vance stated that the administration was “confident” or “quite confident” in the administration’s legal authority to withhold the funds. But what authority, precisely?

The most plausible legal basis is a federal regulation, 42 CFR Part 455, that sets up the Medicaid Integrity Program and gives CMS broad authority to address fraud, waste, and abuse. The CMS press release stated that it was “deferring those federal funds to protect taxpayer dollars while ensuring the state has the opportunity to respond and provide information and documentation during the ongoing review.” That framing describes a temporary investigative hold rather than a permanent cut.

That framing carries significant legal weight — it is the administration’s best argument that this is routine agency work rather than an impoundment subject to congressional oversight.

Part 455 describes what CMS can do in general terms, not the specific steps it must take before doing so. Federal Medicaid law establishes a formal compliance framework for exactly this situation.

Under Social Security Act Section 1116, when the Secretary of HHS believes a state is not running its Medicaid plan in line with federal requirements, the statute establishes reconsideration and formal hearing procedures a state may invoke. Whether written notice is a mandatory precondition before any funding change, and whether corrective action plan opportunities must precede a deferral rather than follow it, requires reading the full statutory sequence.

The state can appeal adverse decisions all the way to federal district court. This entire process exists to protect states’ rights before federal funding is reduced or cut off.

CMS did notify Minnesota in January 2025 that it would withhold approximately $515 million in quarterly Medicaid matching funds until the state met program integrity standards. The administration would argue this January notice is legally significant. It gave Minnesota early warning of the federal government’s concerns and a chance to respond before the February deferral took effect. That arguably meets at least the notice part of Section 1116’s requirements.

The formal process outlined in Section 1116, though, typically unfolds over months, not days. The February 26 announcement of an immediate $259.5 million deferral, presented as already in effect rather than proposed, appears to skip much of that process.

Minnesota Human Services Commissioner Shireen Gandhi stated that “the federal government chose to ignore more than a year of serious and intensive work to fight fraud in our state” and that the state had “already implemented several processes to better detect and prevent fraud.” The specific timeline Gandhi cited could not be fully verified; most documented fraud-prevention initiatives appear to date to 2025. CMS has not publicly explained why it found those cleanup efforts insufficient. That lack of openness makes it hard to fairly judge either side’s claims.

Whether the state’s efforts meet federal standards is, legally speaking, supposed to be decided through the Section 1116 process — not through a one-sided executive announcement.

The Impoundment Control Act: What It Requires and Whether It Applies

The Impoundment Control Act of 1974 was passed as a direct response to President Richard Nixon’s aggressive use of impoundment: he withheld more than a third of all domestic discretionary spending in 1973 alone. Congress responded by creating a strict framework governing when and how the president can refuse to spend appropriated funds.

Under the ICA’s deferral provisions, any proposed deferral of appropriated funds must be sent to Congress in a special message explaining the proposed action in detail. A deferral can remain in effect unless Congress acts to override it or the fiscal year ends. For rescissions, the president must request congressional approval within 45 days or the funds must be released.

No such message appears to have been filed here — that is the core of what a legal challenge would argue.

The harder question is whether the ICA applies to Medicaid at all. A careful administration lawyer would argue it does not, for several reasons worth considering before looking at the counterarguments.

The administration’s strongest legal case. First, on the ICA’s applicability to mandatory spending: Medicaid is funded through permanent appropriations in the Social Security Act, not through yearly discretionary appropriations that Congress votes on each fiscal year. Unlike, say, the defense budget, which Congress funds anew each year, Medicaid funding flows automatically under a permanent law. Congress does not vote on it annually. The ICA was enacted primarily in response to Nixon’s impoundment of discretionary program funds. The legislative history focuses on the president replacing Congress’s spending priorities with his own in annual appropriations bills. Some legal scholars argue that mandatory spending programs, which pay out automatically under permanent law, fall outside the ICA’s intended scope. The Congressional Research Service’s analysis of impoundment acknowledges this ambiguity. It notes that the statute’s text does not clearly settle whether it covers mandatory spending, and no Supreme Court decision has answered the question directly.

Second, the administration would argue that an investigative deferral pending state response is different from the policy-driven impoundments the ICA was designed to prevent. Train v. City of New York, the Supreme Court’s 1975 impoundment decision, involved a president who opposed the Clean Water Act on policy grounds and simply refused to spend funds Congress had told him to spend.

CMS is not refusing to fund Medicaid because it opposes the program. Rather, it is running a fraud investigation under legal authority: 42 CFR Part 455 and the Medicaid Integrity Program. It is temporarily holding payment while that investigation continues and while the state has a chance to respond. An agency conducting a fraud review and waiting for state documents is using routine administrative authority, not making a policy decision to override Congress.

Third, the size of the documented fraud problem gives context for why emergency action might be legally justified. Minnesota itself terminated its Housing Stabilization Services program due to what it described as widespread fraud. CMS’s review identified $243.8 million in “unsupported or potentially fraudulent Medicaid claims” in a single quarter.

If an agency with statutory fraud-fighting authority discovers evidence of fraud at that scale, the argument that it must keep paying out funds for months while a formal compliance process plays out is not a weak one. That process could mean paying out hundreds of millions more in fraudulent claims in the meantime. The Medicaid program integrity framework explicitly contemplates federal authority to protect against improper payments. The administration would argue that a temporary investigative hold is the least harmful tool available when fraud is ongoing.

Fourth, on the procedural requirements: the January 2025 written notice stated that CMS would withhold approximately $515 million in quarterly matching funds unless the state met program integrity standards. The administration would argue this notice, combined with the state’s later chance to respond and provide documentation, partly meets the procedural purposes behind Section 1116, even if CMS did not follow the formal corrective action plan sequence exactly.

Why the counterarguments are stronger. These are serious arguments, but the legal hurdles they face are significant. On the ICA’s scope: while the mandatory-spending exclusion argument has support from scholars, the statute’s text defines “budget authority” broadly to include funds made available under permanent law. The Bipartisan Policy Center’s analysis of impoundment notes that the ICA covers only discretionary spending (roughly 26% of the federal budget), with mandatory spending programs like Medicare and Medicaid explicitly excluded from ICA coverage. Courts have not created a mandatory-spending exception, and the argument has not been tested at the Supreme Court level.

On the Train v. City of New York distinction: the case’s reasoning was not limited to policy-driven impoundments. The Court’s ruling rested on the mandatory language of the appropriating statute. Congress said “shall,” and the executive cannot convert “shall” into “maybe.” Section 1903 of the Social Security Act sets out how federal Medicaid payments work. It uses identical mandatory language: the Secretary “shall” pay the federal share of qualifying expenditures. The administration’s investigative purpose does not change that legal command.

While 42 CFR Part 455 gives CMS broad fraud-fighting authority, it does not clearly allow withholding federal matching funds outside the formal compliance process. The regulation describes investigative tools, not a payment-suspension method that bypasses Section 1116.

On the January 2025 notice: giving early warning of a possible withholding is not the same as following the specific procedural steps Section 1116 requires. That sequence includes written notice of a specific deficiency, opportunity to submit a corrective action plan, and formal hearing rights before funds are reduced. Notice of a possible future action does not replace the structured process the statute requires.

Train v. City of New York established that once Congress appropriates funds, the executive’s job is to spend them for the purpose Congress intended. Medicaid’s legal language is, if anything, clearer than the Clean Water Act grants at issue in Train: Section 1903 specifies that the Secretary “shall” pay the federal share of qualifying expenditures. Not “may pay.” Not “shall pay if the Secretary determines such payment is prudent.” Shall pay.

The administration’s investigative-deferral theory asks courts to find an implied exception in that mandatory command — one that does not appear in the statute.

The administration’s partial answer is that CMS is conducting an ongoing investigation into alleged fraud, and payment is temporarily deferred pending the state’s response. If the hold is truly temporary, the administration might argue this falls within the general authority agencies have to pause payments while they investigate, rather than an impoundment subject to the ICA.

The problem is that the ICA’s definition of a deferral includes “withholding or delaying the obligation or expenditure of budget authority provided for projects or activities.” If the government is sitting on money Congress said to spend, that counts as a deferral — and the statute contains no investigative-hold exception.

The administration would counter that courts have recognized agency authority to pause payments pending review in other regulatory settings. It would also argue that purpose and procedure, not real-world effect, determine ICA applicability. As our earlier analysis of how Medicaid matching funds work explains, the financial impact on states when federal contributions are delayed is immediate and serious, regardless of whether the delay is called “temporary.”

The Procedural Steps Federal Law Required Before CMS Halted Funds

Even setting aside the constitutional question, federal law spells out what CMS must do before halting funds. The answer is found primarily in a separate federal regulation: 42 CFR Part 430. That regulation governs state Medicaid plans and the conditions under which CMS can find a state out of compliance.

The regulations set out a specific sequence. CMS must notify the state in writing of the alleged deficiency. The state then has an opportunity to explain, correct, or dispute the finding.

If CMS maintains its determination, the state gets an opportunity to submit a corrective action plan within 14 calendar days after written notice. CMS then has 21 calendar days to approve or disapprove. Only if CMS rejects the plan, or the state fails to follow an approved plan, may CMS impose more serious penalties. Those penalties can potentially include a reduction in the federal share of Medicaid funding.

This process is designed to give states a real chance to come into compliance before federal funding is disrupted — creating a paper trail, protecting due process rights, and ensuring states know what the problem is before funding cuts arrive.

Minnesota’s Department of Human Services has published details of fraud-fighting actions taken since May 2025: removing approximately 800 inactive providers from high-risk programs, contracting a third-party vendor to audit fee-for-service billing for 14 high-risk services, terminating the Housing Stabilization Services program due to widespread fraud, and pausing licenses for new home and community-based services providers for two years to allow time for monitoring and oversight.

CMS’s counter-position is that these steps were not enough given the scale of fraud it identified. That position has not been laid out publicly with the same level of detail.

The agency’s press release cited “$243.8 million for unsupported or potentially fraudulent Medicaid claims” in a single quarter. It did not say what portion of those claims came before Minnesota’s cleanup efforts, what portion came after, or what specific billing patterns or provider categories drove the figure. That lack of public detail is itself a transparency problem.

Commissioner Gandhi’s statement that CMS is not giving the state credit for its effort may be accurate. Or CMS may have evidence that the fraud continued at scale after Minnesota’s actions. Without CMS publishing its specific findings, that question cannot be fairly assessed.

Minnesota Attorney General Keith Ellison responded by threatening legal action, stating he would “pursue legal action against the administration if it is determined to be unlawfully withholding funds intended for low-income Medicaid recipients.” This is not an empty threat. Months earlier, Ellison joined attorneys general from California, Colorado, Illinois, and New York — with Minnesota as one of the five plaintiff states — to win a preliminary injunction blocking a Trump administration freeze on child care funding. As we covered in our reporting on what the federal child care funding restrictions mean for parents and states, federal judges can step in quickly when they believe a funding freeze causes irreparable harm. The open question is whether a federal judge would agree that the Medicaid freeze breaks the procedural requirements of 42 CFR Part 430. The other question is whether CMS’s investigative authority gives enough legal cover for the interim hold.

How the Freeze Affects Patients, Providers, and State Finances

While lawyers argue about legal authority, harm is already showing up on the ground. Minnesota’s Medicaid program, called Medical Assistance, serves nearly 1.3 million residents and costs approximately $19.3 billion total. The state pays $8.5 billion and federal funds cover the remaining $12 billion. For nursing homes, Medicaid is often the main payer. Approximately 12,000 residents receive Medicaid-funded long-term care services in the state, with the program covering nearly all costs.

When CMS halts federal reimbursements, the state feels the squeeze first. Minnesota providers have already been paid from state funds. Checks have already gone out to hospitals, nursing homes, managed care organizations, and individual providers for services already given. Normally, the state submits claims to CMS, and CMS reimburses the state for the federal share of costs (currently between 50 and 51 percent for Minnesota, depending on the specific program).

With the freeze in place, that reimbursement stops. The state must find the money somewhere else: tapping its rainy day fund, delaying other state spending, or asking providers to wait longer for payment. None of these options can last long.

Providers, especially safety-net hospitals and nursing homes, are now in a cash flow crisis. The median health system’s cash days on hand dropped by 28 percent, from 173 to 124 days, between January 2022 and June 2023, according to healthcare financial analysis. Cash days on hand measures how many days a hospital could operate using only its reserves — meaning the typical hospital has roughly four months.

When Medicaid reimbursements stop, that clock starts ticking — a hospital cannot stop paying staff or buying medications while waiting for federal funds to flow again. A Washington state hospital laid off approximately 101 employees following Medicaid payment delays.

The following table shows the scale of what is at stake in Minnesota’s Medicaid program, based on Minnesota Department of Human Services forecast data.