Medicaid Financing: The Basics

News release from the Kaiser Family Foundation:

Medicaid represents $1 out of every $6 spent on health care in the US and is the major source of financing for states to provide coverage to meet the health and long-term care needs of their low-income residents. Medicaid is administered by states within broad federal rules and jointly funded by states and the federal government. This brief examines the following three key Medicaid financing questions:

How does Medicaid financing work? Medicaid provides a guarantee of federal matching payments with no pre-set limit. The statute sets a formula to determine the share paid by the federal government (that varies based on states’ relative per capita income) and also provides special match rates for the ACA Medicaid expansion, administration, and other services. The matching structure provides states with resources that automatically adjust for demographic and economic shifts, health care costs, public health emergencies, natural disasters and changing state priorities. Medicaid also provides “disproportionate share hospital” (DSH) payments to hospitals serving many Medicaid and uninsured patients.

How much does Medicaid cost and how are funds spent? In terms of services, payments to private managed care organizations (MCOs) account for 46% of Medicaid spending. Almost two-thirds of all Medicaid spending is for the elderly and persons with disabilities, who make up just one in four enrollees. The Medicaid expansion, financed primarily with federal dollars, accounts for a relatively small share (14%) of total Medicaid spending. Recessions, rising costs of prescription drugs, and increasing needs for long-term care and behavioral health services are factors that put upward pressure on Medicaid spending growth. However, over time, Medicaid growth per enrollee has been lower than private health spending.

What is the role of Medicaid in federal and state budgets? Medicaid is the third largest mandatory program in the federal budget. For states, Medicaid is a spending item but also the largest source of federal revenues. Research shows federal dollars from Medicaid, including additional federal dollars for the ACA Medicaid expansion, has positive effects for state economies. Expansion states have greater fiscal capacity and spend more on Medicaid and education than non-expansion states.

Because Medicaid plays a large role in both federal and state budgets and is the primary source of coverage for low-income Americans, it is a constant source of debate. Efforts to repeal and replace the ACA and cap federal funding through a block grant or per capita cap were narrowly defeated in 2017, but were included in President Trump’s proposed budget for FY 2020. States continue to focus on efforts to constrain Medicaid costs while federal administrative efforts may focus on providing states additional flexibility to administer their programs through waivers. These state and federal policy priorities and actions could have implications for Medicaid costs and coverage.

Issue Brief