Minnesota's Department of Human Services says it is preparing for the federal government to turn $550 million in withheld Medicaid money into a disallowance, a step that could require recovering funds from Minnesota Medicaid providers. A department spokesperson said the agency is "bracing for a disallowance," the Pioneer Press reported on Oct. 6, 2026. Days earlier, on Oct. 2, Temporary Commissioner and State Medicaid Director John Connolly sent CMS Administrator Mehmet Oz a five-page letter asking for the evidence behind the deferrals; KSTP first reported the letter on Oct. 5.
A deferral holds back federal matching money while CMS questions claims. A disallowance is a more lasting rejection, which the state can still appeal, according to the Pioneer Press. The paper reported that the state did not know when a disallowance might come or how much it would cover.
How the $550 million built up
| Deferral | Amount reported |
|---|---|
| February 2026 | About $260 million |
| April 2026 | $91 million |
| July 2026 (second-quarter claims) | About $199 million |
| Total frozen, per DHS | $550 million |
Connolly's letter puts the total at $550 million across three deferrals and says CMS has also threatened a $2 billion cut. For the July deferral, the letter says CMS deferred $195,704,735 in claims from specific providers it flagged as high risk. Of that, the state understands $153,170,947.42 involved providers who were enrolled when they billed but later got termination notices during revalidation, and $42,533,787.17 came from 870 providers CMS flagged through its own analytics. CMS separately identified $3,328,872 in spending tied to 14 high-risk service types.
What Minnesota is asking CMS
- Why paperwork counts as fraud risk. The state asks why claims from providers disenrolled for incomplete revalidation documents are treated as a fraud risk, when more than half of those providers have since been revalidated.
- How the 870 were picked. It asks what criteria, data analytics, machine learning or AI tools CMS used to flag providers as high risk.
- Evidence the state can act on. Only DHS can impose payment withholds on a provider's future claims, the letter says, and CMS has not shared evidence supporting its fraud claims or asked DHS to withhold payment from any provider.
- Clearer public statements. It asks CMS to clearly separate deferral amounts and disenrollments from proven fraud when it talks about Minnesota.
Connolly asked for answers by Oct. 15. The letter lists the state's own steps: naming 14 high-risk services, pre-payment review of fee-for-service claims, audits of autism service providers with on-site visits, ending the Housing Stabilization Services benefit, revalidating more than 5,000 providers in the 13 remaining high-risk services, a moratorium on new providers in those services, and funding for more than 400 new program integrity positions over two years. Neither outlet had received a response from CMS to its request for comment as of its report.
Why this matters for providers and DSPs
The Pioneer Press reported that the high-risk programs include autism services and a home care support program for people with disabilities. For agencies in those programs, a disallowance would be different from a slow payment: the state has warned it could try to recover money already paid. That lands on providers with thin reserves; in ANCOR's 2026 survey, 46% of I/DD providers said they would have to discontinue programs or services within three months if Medicaid payments were paused or delayed. Agencies that went through revalidation should keep their enrollment and claim records for the period CMS is questioning close at hand.