It harmonizes the schema and process across States. Sharing it with the Federal government is optional since the Federal government doesn’t have the authority to force compliance. Many States opted out of sharing their databases with the Federal government last I checked.

Which states?

Or: How does one even begin looking into this kind of [non] arrangement?

(AFAIK, I'm not necessarily privy to the details of the dealings my state has with the federal government. I'd love to know where to look to see that kind of thing.)

I imagine the more services are provided by an organization, the more that organization has to worry about who is receiving them.