Medicaid Financing: The Basics

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 needs of their low-income residents. Medicaid is administered by states within broad federal rules and jointly funded by states and the federal government. President-elect Trump and other GOP proposals have put forth fundamental changes in Medicaid financing. This brief examines the following 3 key Medicaid financing questions:

• How does Medicaid financing work now? States design their Medicaid programs within broad federal rules; in return, Medicaid provides a guarantee of federal matching payments with no pre-set limit.  There are special match rates for the ACA, administration and other services. Medicaid also provides “disproportionate share hospital” payments to hospitals serving many Medicaid and uninsured patients.
• How much does Medicaid cost and how are funds spent? Payment to private managed care organizations (MCOs) account for 43% of Medicaid spending. Almost two-thirds of all Medicaid spending is for the elderly and persons with disabilities, who make up just one-quarter of all Medicaid enrollees. Medicaid enrollment and spending increases during recessions. Medicaid growth per enrollee has been lower than private health spending. The ACA has provided a significant amount of federal dollars to states.
• What is the role of Medicaid in federal and state budgets? Medicaid is the third largest domestic program in the federal budget following Medicare and Social Security. Medicaid is a spending item but also the largest source of federal revenues for state budgets. In responding to two major recessions in the last 15 years, states have adopted an array of policies to control Medicaid spending growth. Research shows that the influx of federal dollars from Medicaid spending has positive effects for state economies.

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WHAT IS MEDICAID?

Medicaid is the nation’s public health insurance program for people with low income. The Medicaid program covers more than 70 million Americans, or 1 in 5, including many with complex and costly needs for care. The vast majority of Medicaid enrollees lack access to other affordable health insurance. Medicaid covers a broad array of health services and limits enrollee out-of-pocket costs. The program is also the principal source of long-term care coverage for Americans. As the nation’s single largest insurer, Medicaid provides significant financing for hospitals, community health centers, physicians, and nursing homes, and jobs in the health care sector. The Medicaid program finances over 16% of all personal health care spending in the U.S.

HOW IS THE MEDICAID PROGRAM STRUCTURED? 

Medicaid is a federal-state program. Subject to federal standards, states design and administer their own Medicaid programs. Beyond the federal requirements, states have extensive flexibility to determine covered populations, covered services, health care delivery models, methods for paying physicians and hospitals, and many other aspects of their Medicaid programs. States can also get Section 1115 waivers to test and implement approaches that diverge from federal Medicaid rules but that the Secretary of Department of Health and Human Services (HHS) determines advance program objectives. All Americans who meet Medicaid eligibility requirements are guaranteed coverage.

The federal government matches state Medicaid spending on an open-ended basis. The guarantee of federal matching funds increases state resources for coverage of their low-income residents and also permits state Medicaid programs to respond to demographic and economic shifts, changing coverage needs, technological innovations, public health emergencies such as the opioid addiction crisis, and disasters and other events beyond states’ control. Medicaid is a complex program because it has evolved over time to serve diverse populations with a wide range of needs, including many individuals who are very poor and very frail, and because of wide variation across state Medicaid programs. The Centers for Medicare and Medicaid Services (CMS) within HHS is the federal agency responsible for Medicaid. Title XIX of the Social Security Act and a large body of federal regulations govern the program, defining federal Medicaid requirements and state options and authorities.