New York leaders plan to put up a legal fight to get billions of Medicaid reimbursement dollars it was promised by the federal government after President Donald Trump's administration announced it plans to change a policy several states have used to generate additional money for health providers.

As Medicaid costs continue an unsustainable climb, state leaders decided to bank on $3.7 billion for a tax on Medicaid insurers known as Managed Care Organizations, which the federal government approved at the end of last year.

But the U.S. Center for Medicare & Medicaid Services announced this week the department is working to change the policy — putting the billions of dollars New York budgeted for in jeopardy.

"New York was expecting that it was going to game the system and it was going to get $3.7 billion out of it over a couple of years," said Bill Hammond, the Empire Center for Public Policy's senior fellow for health policy. 

The 2025-26 $254 billion budget adopted last week included $1.47 billion from the tax.

The state's MCO tax was approved to generate extra $3.7 billion to support safety net hospitals, nursing homes, assisted living and hospice care spread out over the next three fiscal years.

Other states, including California, New Jersey, Louisiana, Illinois and Michigan, have also cashed in on the policy.

Late last year, CMS wrote a letter to state leaders warning it would change the regulation that other states have used to generate extra Medicaid dollars — and that was before President Joe Biden left office.

"The federal government did not like the fact that states were doing that, and that was a bipartisan thing," Hammond said. "The Biden administration didn't like it, but they felt like their hands were tied because of how the regulations were written ... And yet in January, [New York leaders] are pretending like 'OK, we've got this money, everything's fine. Let's go full steam ahead.' "

Assemblyman Josh Jensen said the federal loophole was always a risky funding stream, and New York leaders made poor fiscal decisions to not set aside its excess tax revenue in case the tax was pulled. 

"I think a lot of people were very confident that the other team would have won on Election Day," Jensen told Spectrum News 1 on Thursday. "Obviously, that didn't happen."

It's unclear if the federal government will cancel New York's approved tax waiver after it expires, or while it's in progress.

But officials with the state Budget Division said they won't make changes based on drafted policy changes in Washington, and are ready to go to court to get the state the federal dollars it was promised under a different administration.

“Republicans in Washington have made it clear that they're hell-bent on tearing apart the social safety net that millions of New Yorkers rely on to make ends meet," Division of the Budget spokesman Tim Ruffinen said. "They're targeting critical, life-saving programs like Medicaid and food stamps — and everyday Americans are the ones who will get hurt. It's impossible for any individual state to backfill the massive cuts being proposed in Congress, but Gov. Hochul is committed to using litigation and other tools to protect New Yorkers.”

The state must decide when, or if, to stop taxing providers, but the governor won't make any budget changes until it's forced to.

"We're going to fight it, and we'll have to adjust if we have to adjust," said Sen. James Skoufis, a Democrat from Woodbury.

Skoufis, who was named to the Democratic National Committee's "People's Cabinet" this week, was one of several officials Thursday to participate in an event calling on Rep. Mike Lawler and other Republicans to reject the latest congressional spending proposal that guts $715 billion from Medicaid.

Skoufis joined CMS Administrator Chiquita Brooks-LaSure, who said over 14 million Americans stand to lose their health care coverage under the cuts.

"This is not the time, there never is a time, to enact the largest cuts to Medicaid in the history of the program just to give tax breaks to the rich," Brooks-LaSure said.

She added that the Republicans' proposal for work requirements or penalizing states for covering care for immigrants won't stop Medicaid's continued growth.

"Chiquita Brooks-LaSure and Sen. Skoufis are pathetic apologists for a status quo that is ripping off hard-working taxpayers — and cheating eligible Medicaid recipients truly in need of a safety net — in order to give a blank check in our tax dollars to illegal immigrants, able-bodied adults with no dependents who refuse to work and scam artists defrauding the ssytem by enrolling in multiple states," Lawler's spokesman Ciro Riccardi said in a statement. "Sen. Skoufis and his band of thieves in Albany have no credibility when it comes to spending taxpayer money. All they do is take, take, take and couldn't care less about the taxpayers they take from.

"Congressman Lawler has been clear: He will never support cutting critical benefits for citizens who rely on Medicaid, like our senior, single moms and the IDD community."