The Centers for Medicare and Medicaid Services (CMS) is holding back roughly $867.5 million from California and $199 million from Minnesota, HHS said in a news release. The department stressed the money is being deferred, not cut, and that both states can recover it by documenting that the claims meet federal Medicaid requirements.

"States that receive federal Medicaid funding must demonstrate that every dollar meets federal requirements," Kennedy said. "When they cannot, we will not release federal funds until they do."

At a news conference, the health secretary named Govs. Gavin Newsom and Tim Walz directly, saying all they had to do was provide basic documentation showing the services were legitimate, which he called "common sense." He added that the administration used artificial intelligence and advanced analytics to identify the suspicious spending.

CMS Administrator Dr. Mehmet Oz was blunter.

"CMS is done trying to chase down stolen and misused funds after they've already left the building," Oz said, adding that stopping fraud "before the check clears" was delivering record-high savings for taxpayers.

The department said its review flagged in-home care programs in California where spending growth far exceeded national trends, along with claims in 14 high-risk service areas in Minnesota tied to providers previously flagged through program integrity reviews. Under Kennedy's direction, HHS and its Office of Inspector General are also using exclusion authorities to remove bad actors from Medicare and Medicaid and, in many cases, permanently bar them from returning.

The deferrals follow an April takedown in which the Justice Department charged eight defendants in a $50 million health care fraud scheme dubbed "Operation Never Say Die," including operators of sham hospices that billed Medicare for beneficiaries who were not terminally ill. According to court documents, one Anaheim operator recorded a non-death discharge rate of roughly 85 percent, nearly five times the national average, while paying beneficiaries cash kickbacks delivered in envelopes.

The action also marks the second time the administration has moved against the two states, after Vice President JD Vance announced a $259 million Minnesota pause in February as part of a national "war on fraud."

Walz claimed the move amounted to political retribution, arguing the administration was punishing children, seniors, and people with disabilities rather than fraudsters.