HHS Risks Legal Pushback in Clamp Down on Emergency Medicaid

A Trump administration move to redefine how states can use federal funding to pay for emergency Medicaid coverage to immigrants could open the door to litigation, policy watchers say.

The Centers for Medicare & Medicaid Services sent a letter to state Medicaid directors this week, informing them the agency will interpret an emergency Medicaid provision of the Social Security Act to only allow payments for direct medical care.

Although ineligible for traditional Medicaid, all immigrants—regardless of legal status—are allowed federally subsidized coverage in the event of serious medical emergencies. Federal and state governments spent a total of $3.8 billion on emergency Medicaid services in fiscal year 2023, according to the Congressional Budget Office.

The program started shortly after the passage of the Emergency Medical Treatment and Labor Act in 1986, which requires hospitals to provide stabilizing treatment to all patients entering an emergency department regardless of ability to pay.

The administration raised concerns in its letter that Medicaid managed care contracts—which use private insurance plans to pay for medical services—draw federal funding for care costs beyond what is necessary to treat an emergency medical condition.

These “non-benefit costs” included expenses for “managed care plan administration, taxes, contributions to reserves, risk margin, cost of capital, and other operational costs,” the CMS said.

Complying with the letter will likely require states to adopt a fee-for-service payment model for these patients, said Kelly Whitener, an associate professor at Georgetown University’s Center for Children and Families.

“My first reaction reading it was, ‘Wow, this is going to be a tremendous amount of work for states to comply.’ Essentially, the letter states that states cannot use comprehensive risk-based managed care for emergency Medicaid services,” Whitener said.

CMS Rationale

Comprehensive risk-based managed care allows Medicaid to contract with insurers known as managed care organizations to cover a broad range of services for beneficiaries at a fixed per-member per-month payment rate.

The CMS said it was concerned these managed care contracts allow Medicaid programs to cross-subsidize “state-only programs that provide additional services to aliens ineligible for full Medicaid benefits.”

It cited a a May 2024 US Department of Health and Human Services Office of Inspector General report that found that California improperly claimed $52.7 million in federal Medicaid funding over an 18-month period from Oct. 1, 2018, through June 30, 2019, for immigrants “ineligible for full Medicaid benefits.” California agreed to return the funds following the audit.

A move to curtail such activities was welcomed by Michael F. Cannon, director of health policy studies at the Cato Institute, a libertarian public policy think tank.

“What they’re describing in that letter is a perfectly plausible way that states could be trying to skirt the law to get federal funding to provide non-emergency services to those aliens,” Cannon said. “It is laudable that the federal government is trying to prevent that type of gaming of the Medicaid matching grant system.”

The new policy will likely require states to switch emergency enrollees out of managed care and into an arrangement where providers are paid for critical care on a fee-for-service basis, Cannon said.

“Sure, it will be an administrative burden, but it’s also disproportionate on Democratic states.”

“For the Trump administration, I think that’s a feature, not a bug,” he added.

Potential Pushback

Still, facilitating such a drastic change at a time when state Medicaid programs are reeling from Medicaid cuts and work requirements could lead to legal pushback from states, Whitener said.

“I think it’s possible. You could see challenges around issuing this guidance in the form of a state Medicaid director letter and not going through more of a formal notice and comment process and giving states more time and an opportunity to weigh in,” she said.

However, the Administrative Procedure Act does give agencies like the CMS some leeway to roll out new policy statements without notice-and-comment rulemaking, said Jonathan Adler, an administrative law professor at the College of William & Mary.

“The APA does not require notice and comment for what’s called an interpretive rule or for a policy statement. This guidance document is that latter action,” he said.

If states do plan to challenge the guidance, Adler said courts would have to “consider whether this interpretation is, in fact, the best interpretation.”