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DHS warns of possible federal Medicaid withholdings and deferrals after CMS focused review
Summary
Deputy Medicaid director John Connelly told the House Human Services Committee that CMS has begun a focused review of 14 services and signaled a potential roughly $2 billion withholding and an initial $260 million deferral tied to claims‑validation work; lawmakers pressed DHS on timelines and budget consequences.
Deputy Commissioner John Connelly, the state Medicaid director at the Minnesota Department of Human Services, told the House Human Services Finance and Policy Committee on March 3 that the federal Centers for Medicare & Medicaid Services (CMS) has begun a focused review of 14 services and has signaled steep financial actions if the state does not satisfy documentation and corrective‑action demands.
Connelly said the department submitted a corrective action plan on Dec. 31 and a larger revision on Jan. 30, and has been meeting weekly with CMS. "We immediately agreed" to measures CMS requested, including a provider‑enrollment moratorium for 13 high‑risk services and off‑cycle revalidation, Connelly said, but CMS later found the initial plan deficient and opened a narrow audit of claims for 14 services. He described two separate federal actions under discussion: a potential roughly $2 billion withholding tied to the corrective‑action process and an initial $260 million deferral associated with the focused review of historical claims.
The federal actions, Connelly said, create a cash‑flow risk for Minnesota. ‘‘That is a deep concern…this could go on over several quarters which could result in half a billion to a billion dollars in deferred funding for the state,’’ he said, adding that the department has appealed the withholding and is still negotiating timelines and data requests with CMS.
Lawmakers pressed DHS on concrete milestones and contingency planning. Representative Hicks said the announced federal steps risk immediate harm to people who rely on Medicaid services and urged the department and Legislature to prepare to backfill funding if necessary. Representative Cantor asked whether CMS had defined a clear benchmark that, if met, would reopen funding; Connelly said the corrective action plan is the principal path to resolving the withholding, but the deferral process is more open‑ended and likely to involve multiple rounds of documentation requests and sampling of provider records.
Committee members repeatedly raised the procedural burden on DHS staff, the need for more transparency around CMS requests, and the potential for the dispute to extend for many months. Connelly said the department is expanding staff resources, providing data to CMS weekly and seeking to validate claims quickly, while emphasizing two priorities: ensuring people continue to receive required services and strengthening program integrity.
The department’s concerns led Minnesota’s Attorney General to file a complaint and a temporary‑restraining‑order request in federal court the evening before the hearing seeking to block parts of the federal action, committee members said. Connelly said the department is monitoring the legal process and that the timing and mechanics of any federal drawdown remain uncertain.
Next steps: DHS will continue to produce requested data and refine its corrective‑action work with CMS. Committee members urged DHS to provide frequent, detailed updates on federal demands, the state’s responses and the projected fiscal impact so the Legislature can plan whether to act to protect services if federal funds are deferred.
Sources: Testimony and Q&A with Deputy Commissioner John Connelly at the House Human Services Finance and Policy Committee, March 3, 2026.
