California Faces $867.5 Million Medicaid Deferral as IHSS Review Reaches Deadline

California is due to provide supporting documentation by July 31 for a federal review holding back $867,465,287 in Medicaid matching funds, including $646,373,682 tied to in-home-care claims associated with the state’s In-Home Supportive Services system.

The Centers for Medicare & Medicaid Services issued the deferral on July 21 after reviewing California’s quarterly Medicaid spending report for the quarter ended March 31. The action means federal funds remain withheld while CMS reviews whether the claims meet federal requirements. It is not, by itself, a permanent funding cut or a final disallowance, according to the U.S. Department of Health and Human Services.

What CMS deferred

The CMS deferral letter divides the total into two broad categories: $709,311,454 in Medicaid program costs and $158,153,833 in administrative costs.

The largest single item is the $646,373,682 deferral for Community First Choice and Personal Care Services, or CFC-PCS. Those federal categories cover services associated with California’s in-home care system, which the state describes through its IHSS program.

The administrative portion is separate from caregiver payments and IHSS services. It includes a $131,665,229 deferral tied to a 15% reduction in administrative claims and a $26,488,604 deferral for overstated costs, according to CMS. The letter also lists separate program-cost deferrals involving items such as drug rebates, eligibility mismatches, emergency claims and unsupported fee-for-service claims.

Why CMS is reviewing the claims

CMS said California’s CFC-PCS spending grew faster than comparable spending in other states. Between federal fiscal years 2023 and 2025, the growth rate exceeded the average for all other states by 11.23%.

For a separate portion of the CFC-PCS calculation, CMS applied program-integrity metrics to data supplied by California. The letter identified $19,178,403 in federal matching funds tied to claims adjudicated more than a year after the service dates, $237,549,233 involving statistical outliers and $25,149,396 involving providers who billed for four or more beneficiaries.

Those figures identify claims and patterns for further review; they do not establish that California committed fraud or that the claims are ultimately unallowable. CMS selected a statistically valid sample to test the allowability of CFC-PCS claims and requested supporting records for that sample by July 31.

The letter separately says California generally has 60 days after receiving a deferral notice to provide documentation supporting the deferred claims or face a possible disallowance. The state may request an extension of up to 60 additional days if it needs more time. The July 31 deadline identified in the letter is the specific deadline for the requested CFC-PCS sample documentation.

California says IHSS growth reflects policy choices

The California Department of Health Care Services disputes CMS’s characterization of the program’s growth. In a July 23 statement, DHCS said higher IHSS spending reflects a larger caseload, higher caregiver wages and more hours for recipients with greater care needs.

DHCS reported that the number of IHSS recipients eligible for federal Medi-Cal funding rose from 613,764 in state fiscal year 2022-23 to 720,988 in state fiscal year 2024-25, an increase of 17.5%. The average hourly cost rose from $19 to $21.03 during the same period, or 10.7%. The agency attributed the wage increase primarily to statewide minimum-wage changes and county-negotiated wage rates.

California also says IHSS serves more than 900,000 older adults, people with disabilities and children statewide. In its July 23 statement, DHCS said services remain uninterrupted while the state responds to CMS.

What the deferral means for California

For the state, the immediate issue is access to federal matching money and the administrative work needed to support the claims. California must manage that documentation pressure while the federal share remains on hold.

The deferral does not mean IHSS recipients have lost eligibility or that caregiver services have been cut based on this action. California’s statement says care continues, although the dispute could affect Medi-Cal finances if CMS later determines that some claims cannot be supported.

The financial outcome remains unresolved. CMS could release some or all of the deferred federal share after reviewing California’s records, require adjustments to future Medicaid reports, or issue a later disallowance for claims that do not meet federal rules.

What happens next

July 31, 2026, is the immediate documentation deadline for the CFC-PCS sample claims identified by CMS. The next significant steps are California’s response, CMS’s review of the records and any later decision to release, adjust or disallow the federal funds.

Residents who receive IHSS and the caregivers who provide it should not treat the July 21 action as a service termination notice. The current dispute is over federal reimbursement documentation and program claims, while DHCS says in-home care continues during the review.

Sources

• CMS Deferral Letter Quarter 2 2026
• HHS payment-deferral announcement
• Associated Press report on Medicaid payment delays

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