Federal Court Upholds CMS Medicaid Funding Deferral — Key Takeaways

By Scott Driggs and Bill Ojile

Re: State of Minnesota v. Oz, Case No. 26-cv-1701 (D. Minn. Apr. 6, 2026)

On April 6, 2026, the U.S. District Court for the District of Minnesota denied the State of Minnesota’s motion for a preliminary injunction seeking to block the Centers for Medicare & Medicaid Services (“CMS”) from deferring over $259 million in federal Medicaid matching funds. The decision — the first federal court ruling on a mid-stream challenge to a CMS Medicaid deferral — has significant implications for all states as the federal government expands its Medicaid fraud enforcement posture.

In February 2026, CMS notified Minnesota that it was deferring over $259 million in Federal Financial Participation (“FFP”), citing concerns about the allowability of expenditures across 14 high-risk Medicaid service areas, including personal care, home and community-based services, and claims from providers identified as high-risk for fraud or aberrant billing practices. The deferral — which Minnesota asserted was more than 15 times larger than any prior deferral the state had received — was announced at a press conference by CMS Administrator Dr. Mehmet Oz and Vice President J.D. Vance. Minnesota filed suit, raising claims under the Fifth Amendment, the Administrative Procedure Act (“APA”), the Spending Clause, and an ultra vires theory, and moved for a preliminary injunction to restore the deferred funds.

The court denied the preliminary injunction on three primary grounds:

The deferral is not final agency action. The court held that a deferral notice under 42 C.F.R. § 430.40 initiates an investigative process — not a consummation of agency decision-making — because multiple outcomes remain possible, including payment, disallowance, or further requests for information. The court analogized the deferral to an audit, finding it comparable to other investigative measures that courts have consistently deemed nonfinal.

Minnesota’s legal theories were not likely to succeed on the merits. The court independently addressed and denied each of Minnesota’s five claims, holding:

Irreparable harm was not established. The court found that much of Minnesota’s evidence demonstrated possible future harm rather than likely imminent harm, noting that the deferred amount represented approximately 1.8% of projected federal Medicaid funding. The court also observed that some service disruptions were attributable to Minnesota’s own aggressive anti-fraud actions rather than solely to the deferral.

While the court emphasized that its ruling reflected the record “at this stage” and did not foreclose the possibility that Minnesota could prevail on the merits as the record develops, the decision provides a significant early indicator of how federal courts may treat CMS deferral actions going forward. Deferrals will exacerbate state budget issues caused by reductions in Medicaid funding and likely cause downstream issues for Medicaid providers. Moreover, concerns about waste, fraud, and abuse could prompt state enforcement actions against providers in high-risk Medicaid service areas, including personal care, home and community-based services.

Deferrals face a high bar for judicial intervention. The court’s treatment of the deferral as a nonfinal, investigative action means that states seeking emergency relief from deferrals will face substantial procedural hurdles, particularly at the preliminary injunction stage. States should not assume that courts will intervene to block a deferral before CMS completes its review.

There are no regulatory limits on deferral size. The court found that the governing regulations impose no cap on the amount of funds CMS may defer and do not prohibit CMS from pursuing a deferral and a withholding concurrently against the same state. States should prepare for the possibility of large-scale deferrals covering broad categories of expenditures.

Documentation and compliance readiness are critical. Under the deferral framework, the burden is on the state to establish the allowability of deferred claims. CMS has broad latitude to request additional documentation and can effectively extend the 90-day review period by requesting further materials without an explicit limit on the number of such requests. States should ensure they have robust systems in place to respond promptly and thoroughly to documentation requests.

Political statements alone will not establish pretext. The court applied the Department of Commerce v. New York framework and concluded that public statements by senior officials — even those that appear to conflate regulatory mechanisms or reference political motivations — are insufficient on their own to demonstrate that an agency action was pretextual. States raising pretext arguments will need to develop a more substantial evidentiary record.

Corrective action plans may not prevent deferrals. Despite Minnesota’s submission and CMS’s eventual approval of a corrective action plan, the deferral remained in place. States should not rely solely on corrective action plans as a shield against deferral actions and should anticipate that compliance with a plan may not result in prompt release of deferred funds.

We will continue to monitor developments in this case and related Medicaid enforcement actions. States should consult with counsel to assess their exposure and develop proactive compliance strategies in light of the federal government’s intensified enforcement posture.