Billions in Minnesota state funding on the line in fraud dispute

The big picture: Since late November, Trump officials have issued dozens of letters and social posts outlining probes, data requests and funding pauses in response to concerns about widespread fraud in state programs.

• Last week, the president vowed to stop all federal payments to states and cities with "sanctuary" policies that go against his illegal immigration crackdown starting Feb. 1.

Threat level: While similarly sweeping attempts to halt spending have been stopped by the courts, budget officials say such a move could have devastating effects, given that one in three dollars Minnesota spends comes from the federal government.

• Schools, transportation projects, housing and health care all rely heavily on federal government aid.

Driving the news: State officials announced last week that they're appealing a separate Centers for Medicare and Medicaid Services (CMS) decision to withhold payments for 14 Medicaid programs deemed at "high-risk" for fraud.

Zoom in: Federal officials say they plan to "defer payments" for those health and social services benefits until officials can determine which reimbursement requests are "legitimate."

• While it remained unclear last week when that pause could start or how long it could last, state officials say a full, prolonged freeze could cost the state $2 billion annually.

What they're saying: Such a cut would have "catastrophic consequences" for the over 1 million Minnesotans who rely on the programs for health care and other services, Shireen Gandhi, temporary commissioner of the Minnesota Department of Human Services, said last week.

Friction point: CMS administrator Mehmet Oz recently called Minnesota's proposed plan for tackling fraud "deeply insufficient," arguing it's short on "urgency" and enforceable timelines.

• Minnesota Medicaid director John Connolly pushed back on that claim, pointing out that the state agreed to CMS' request to pause new provider enrollments.
• Connolly expressed frustration that a corrective action plan drafted by the state was "summarily rejected in an unprecedented way," without guidance on how to resolve the rift.

What we're hearing: Oz and Health and Human Services Deputy Secretary Jim O'Neill came to the Twin Cities last week for a "fact-finding mission" and private meetings with state officials.

• Connolly called the meeting "productive."

Between the lines: The state also temporarily halted funding for providers enrolled in the 14 Medicaid programs, while a new independent payment review process got off the ground, drawing ire from providers who said their legitimate services were hit by the move.

• Connolly said last week that payments had resumed after a two-week pause and that a very small number of claims reviewed so far set off alarms.
• But he expects those numbers to grow as the review process ramps up.

Zoom out: Billions of dollars for child care and grocery assistance for low-income families have also been caught up in the political and legal tug-of-war between the Trump administration and Democratic-led states.

• As of last week, state budget officials had tracked an additional $500 million in temporary disruptions to federal grants for initiatives ranging from clean energy and animal health.

Reality check: Several of the proposed funding pauses — including those targeting child care and SNAP — have already been temporarily blocked by the courts.

• Other buckets of money, including the Medicaid funds, could be retroactively restored.

Still, state officials say the threats are causing confusion and uncertainty.

• And the sheer amount of money in flux could put deep funding cuts on the table if lawmakers need to shift funds from other areas to keep paying for services that are currently federally funded.

What we're watching: A small surplus and over $3 billion in the state's budget reserve could, in theory, help absorb some cuts.

• But tapping the rainy day fund for that purpose would require approval from the divided Legislature.