WASHINGTON—The Trump administration said it was withdrawing a plan to tighten federal oversight of how states pay for their share of Medicaid after some states and medical groups said the new rule would have deprived them of billions of dollars in funding in the throes of the pandemic.

“We’ve listened closely to concerns that have been raised by our state and provider partners about potential unintended consequences of the proposed rule, which require further study,” Seema Verma, administrator at the Centers for Medicare and Medicaid Services tweeted on Monday. “Therefore, CMS is withdrawing the rule from the regulatory agenda.”

The decision is being celebrated by hospitals, governors and other health organizations that had fiercely lobbied for the idea to be shelved. The move to scrap the proposal for now followed weeks of debate within Health and Human Services, according to people familiar with the decision. White House advisers had been pushing for tightening oversight, according to people familiar with the decision, but some top HHS leaders, including HHS Deputy Secretary Eric Hargan, had been opposed.

An HHS spokeswoman said the agency doesn’t comment on internal deliberations.

A senior administration official said Ms. Verma advocated for the change but was overruled. CMS spokesman Johnathan Monroe called that “a blatantly false statement,” adding that Ms. Verma “is the one who suggested more time be dedicated to addressing the concerns of stakeholders and avoiding any unattended consequences of the proposed rule.”

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Trump Administration Shelves Plan to Sharpen Scrutiny of State Medicaid Arrangements – The Wall Street Journal