The federal government is making life less comfortable for state Medicaid directors, cracking down hard on state financing methods.

The Centers for Medicare and Medicaid Services, which oversees the program, has invested heavily in new auditors. There will be at least a pair of new eyeshades infiltrating each capital, looking for instances of financial abuse. Every state transfers money back and forth with its localities. As the money shifts around, the feds sometimes end up paying more than their fair share of reimbursement-- or so they claim. CMS estimates that nearly three dozen states take advantage of such schemes to bilk the feds.

States insist that the intergovernmental transfers now under attack are legal, and that if the feds have a problem, they should change the rules the right way--by actually changing the rules. Instead, CMS is negotiating separately with each state, challenging countless numbers of expenses and sometimes holding unrelated waivers and program changes hostage in the process. "It's not clear that each state is being treated equally," says Mary Kennedy, Minnesota's Medicaid director. "Because there's no prospective regulatory change, it doesn't really give states guidance for how to structure the budget for coming years."

Kennedy says CMS seems to be taking more of a "gotcha" approach, trying to embarrass states rather than coming up with mutually understood solutions. Some observers of the accounting crackdown, such as Chuck Milligan, a former state Medicaid director now at the University of Maryland, say that the feds are trying to make each dollar harder to justify in order to make states look more favorably on the capped block grant approach proposed last year by the Bush administration but shot down by governors.

The lack of clear guidelines is making life tougher not only for state Medicaid directors but budget and revenue officers as well. CMS wants to insert itself into the state budget process, signing off on programs rather than simply picking up the tab later. Its model is the Missouri Partnership Plan. But even having CMS at the table during budget negotiations has not kept the agency from tearing apart state expense sheets later, according to Christine Rackers, director of the Missouri Division of Medical Services. "It didn't give us any relief from any of the reviews or audits or look-behinds," she says.

To state officials, CMS seems to be questioning the whole federal- state financial arrangement. The atmosphere of increased distrust is extending itself downward into states' arrangements with localities and providers, who are sometimes seeing their money held up through no fault of their own. "There's the presumption by a lot of folks in Congress and the administration that we're somehow out to screw the federal government and that's simply not the case," says Charles Duarte, Nevada's director of Health Care Financing and Policy. "It slows things up and I think, in rural counties especially, they're going to be a lot more tentative about using Medicaid dollars for new initiatives."