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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.

Looking ahead, proposals to fundamentally change Medicaid financing will be debated. President-elect Trump and other Republicans have proposed to transition Medicaid to a Medicaid block grant or per capita cap financing model for Medicaid. These models would fundamentally change the current structure of the program (Figure 11). These policies are typically designed to reduce federal spending and fix rates of growth to make federal spending more predictable, but could eliminate the guarantee of coverage for all who are eligible and the guarantee to states for matching funds. These proposals could be structured in a variety of ways. States could gain additional flexibility to administer their programs but reduced federal funding could shift costs and risk to beneficiaries, states, and providers.

Issue Brief

