Medicaid represents practically $1 out of each $5 spent on well being care within the U.S. and is the main supply of financing for states to offer well being protection and long-term take care of low-income residents. Medicaid is run by states inside broad federal guidelines and collectively funded by states and the federal authorities by a federal matching program with no cap. With Donald Trump returning to the presidency and Republican management of the Senate and Home, discussions are ramping up about main cuts to federal spending, together with federal Medicaid spending, by a brand new authorities effectivity initiative and to assist pay for an extension of tax cuts within the 2017 Tax Cuts and Jobs Act. Limiting federal Medicaid spending might depart states with powerful selections about whether or not to offset reductions with state {dollars}, restrict Medicaid utilization or advantages, or cut back protection. Amid uncertainty for Medicaid financing on the federal stage, states have additionally reported uncertainty relating to post-unwinding Medicaid spending and enrollment traits and up to date shifts in state fiscal situations. This transient examines the next key questions forward of potential proposals to vary Medicaid financing:
How does Medicaid financing work?
How a lot does Medicaid price and the way are funds spent?
How does Medicaid relate to federal and state budgets?
What elements have an effect on Medicaid spending modifications?
How does Medicaid financing work?
Medicaid financing is shared by states and the federal authorities with a assure to states for federal matching funds with no pre-set restrict. The share of prices paid by the federal authorities (often known as the federal medical help proportion or “FMAP”) varies throughout states, for particular providers and kinds of enrollees, and relying on whether or not the prices are for medical care or program administration. The match fee has additionally been quickly adjusted throughout financial downturns and most just lately in the course of the COVID-19 pandemic.
The FMAP for providers utilized by individuals eligible by conventional Medicaid, which incorporates people who’re eligible as youngsters, low-income dad and mom, due to incapacity, or due to age (65+), is set by a components set in statute. The components is designed in order that the federal authorities offers a match fee of at the least 50% and offers the next match fee for states with decrease common per capita revenue. The ensuing FMAP varies by state and ranged from 50% (the FMAP “flooring”) in ten states (California, Colorado, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Washington, and Wyoming) to 77% in Mississippi for federal fiscal 12 months (FFY) 2026 (Determine 1).
To take part in Medicaid and obtain federal matching {dollars}, states should meet core federal necessities. States should present sure necessary advantages (e.g., hospital, doctor, and nursing dwelling providers) to core populations (e.g., low-income pregnant girls, youngsters, individuals with disabilities, and folks ages 65 and older) with out ready lists or enrollment caps. States may additionally obtain federal matching funds to cowl “non-obligatory” providers (e.g., grownup dental care and dwelling care, often known as dwelling and group based mostly providers) or “non-obligatory” teams (e.g. individuals with revenue above the bounds established for core populations). States even have discretion to find out methods to buy coated providers (e.g., by fee-for-service or capitated managed care preparations) and to ascertain supplier fee strategies and charges.
Medicaid additionally offers “disproportionate share hospital” (DSH) funds to hospitals that serve a lot of Medicaid and low-income uninsured sufferers to offset uncompensated care prices. DSH funds totaled over $17 billion in FFY 2023. Federal DSH spending is capped for every state and facility however inside these limits, states have appreciable discretion in figuring out the quantity of DSH funds to every DSH hospital. The Inexpensive Care Act (ACA) known as for a discount in federal DSH allotments beginning in FFY 2014 based mostly on the belief of diminished charges of uninsurance, however the cuts have been delayed a number of instances (most just lately delayed till April 1, 2025). DSH is one sort of a broader set of “supplemental” funds that states make to complement Medicaid “base” fee charges that always don’t totally cowl supplier prices; not like different supplemental funds, DSH funds may also be used to pay for unpaid prices of take care of the uninsured.
There are particular match charges for the ACA growth group, administration, and different providers. Whereas the normal FMAP applies to the overwhelming majority of Medicaid spending, there are a few exceptions that present greater match charges for particular providers or populations, similar to household planning and most notably individuals coated below the ACA Medicaid growth. States which have carried out the growth at the moment obtain a 90% FMAP for adults coated by the ACA Medicaid growth. States that had not adopted the growth as of 2021 when the American Rescue Plan Act was enacted are eligible for a 5% enhance within the state’s conventional FMAP for 2 years in the event that they implement the growth. Administrative prices incurred by states are often matched by the federal authorities at a 50% fee, however some features similar to eligibility and enrollment programs obtain greater match charges. Medicaid administrative prices are lower than 4% of complete Medicaid spending.
In contrast to within the 50 states and D.C., annual federal funding for Medicaid within the U.S. territories is topic to a statutory cap and stuck matching fee. As soon as a territory exhausts its capped federal funds, it now not receives federal monetary assist for its Medicaid program throughout that fiscal 12 months. Over time, Congress has supplied will increase in federal funds for the territories broadly and in response to particular emergency occasions. Varied items of laws in the course of the pandemic considerably elevated the allotments for every of the territories and in addition raised the FMAP charges from the statutory stage of 55% to 76% for Puerto Rico and 83% for the opposite territories. The 2023 Consolidated Appropriations Act prolonged the 76% FMAP for Puerto Rico by FFY 2027 and made the 83% match fee for different territories everlasting.
Each the federal authorities and states are answerable for selling program integrity. Program integrity broadly refers back to the correct administration and performance of the Medicaid program to make sure it’s offering high quality and environment friendly care whereas utilizing funds–taxpayer {dollars}–appropriately, with minimal waste. Improper fee reviews lately have highlighted program integrity points, and each the earlier Trump Administration and the Biden Administration labored to advance program integrity, although by totally different means. Improper funds, which are sometimes cited when discussing program integrity, are funds that don’t meet Facilities for Medicare and Medicaid Providers (CMS) program necessities (they are often overpayments, underpayments, or funds with inadequate data to find out whether or not the fee was correct). Improper funds will not be the identical as legal actions like fraud and abuse, which can be a subset of improper funds. CMS estimated the general Medicaid improper fee fee was about 5% in 2024, the bottom fee because the COVID-19 pandemic started due, partly, to flexibilities granted throughout that point. Most improper funds (79%) have been resulting from inadequate data (or lacking administrative steps), not essentially resulting from funds for ineligible enrollees, suppliers, or providers (i.e., since they could have been payable if the lacking data had been on the declare and/or the state had complied with necessities). The improper fee estimation course of will not be designed to detect or measure fraud. Program integrity efforts targeted on areas recognized as main contributors of improper funds, similar to monitoring supplier screening and enrollment for noncompliance, doubtless yield higher returns than specializing in decreasing errors in eligibility determinations that might make it harder for eligible individuals to acquire and keep protection.
How a lot does Medicaid price and the way are funds spent?
Capitated funds to Medicaid managed care organizations (MCOs) accounted for greater than half of Medicaid spending in FFY 2023 (Determine 2). Managed care and well being plans accounted for the biggest share (55%) of Medicaid spending, with capitated funds to complete MCOs accounting for 52% of Medicaid spending in FFY 2023 and different Medicaid managed care (e.g., main care case administration (PCCM) preparations or funds to specialty plans) accounting for one more 3%. Smaller shares of complete Medicaid spending in FFY 2023 have been for fee-for-service acute care (21%), fee-for-service long-term care (19%), Medicaid spending for Medicare premiums on behalf of enrollees who even have Medicare (3%), and DSH funds (2%).
Enrollees eligible based mostly on incapacity or age (65+) comprise 23% of all enrollees however account for over half of complete spending resulting from greater per particular person prices (Determine 3). Kids account for 34% of enrollees however solely 14% of spending. Grownup enrollees (these made eligible below the ACA Medicaid growth, in addition to low-income dad and mom) account for 43% of all enrollees and 34% of spending. The disproportionate spending on sure eligibility teams stems from variation in spending per enrollee throughout the eligibility teams, reflecting variations in well being care wants and utilization. Spending per enrollee for people eligible based mostly on age (65+) and incapacity, the 2 teams with the very best per enrollee prices, is roughly six instances greater than spending per enrollee for kids, who had the bottom spending of any eligibility group. These eligible on the idea of age or incapacity are inclined to have greater charges of continual situations, extra complicated well being care wants and usually tend to make the most of long-term care than different enrollees, contributing to greater spending.
Whole spending per full-benefit enrollee ranged from a low of $3,563 in Tennessee to $12,008 within the District of Columbia in 2021 (Determine 4). Variation in spending throughout the states displays appreciable flexibility for states to design and administer their very own packages – together with what advantages are coated and the way a lot suppliers are paid — and variation within the well being and inhabitants traits of state residents. Inside every state, there’s additionally substantial variation within the common prices for every eligibility group and inside every eligibility group, per enrollee prices could range considerably. Total, Medicaid spending has skilled slower cumulative progress since 2008 in comparison with Medicare and personal insurance coverage on a per-enrollee foundation.
Total, Medicaid spending totaled $880 billion in FFY 2023 with the federal authorities paying 69% ($606 billion) and states paying 31% ($274 billion). This share is barely greater than historic shares because of the enhanced pandemic match fee, however there’s variation throughout states (Determine 5). The mixture of low per capita revenue and adopting the ACA growth are each elements in figuring out the general share of federal spending on Medicaid. Whereas the federal share of Medicaid spending varies throughout states, so does the entire quantity of federal Medicaid {dollars} coming into the state. States with the biggest populations (California, New York, Texas, Pennsylvania, Ohio) obtain essentially the most federal Medicaid funding.
How does Medicaid relate to federal and state budgets?
Social Safety, Medicare, and Medicaid are the three most important entitlement packages and accounted for 41% of all federal outlays in FFY 2024 (Determine 6). Of those three packages, Medicaid is smallest when it comes to federal outlays, although it covers a bigger variety of individuals than Medicare or Social Safety. Total, federal spending on home and international well being packages and providers accounted for greater than one-fourth of web federal outlays in FFY 2024, together with spending on Medicare (12%), Medicaid and CHIP (8%), and different well being spending (6%). It’s anticipated that in 2025, the brand new Congress and Administration will leverage reconciliation to make main reductions in spending which might offset a number of the prices of extending the expiring tax cuts. Finances reconciliation is a particular legislative course of used to make modifications to taxes and necessary spending that enables the Senate to go laws with solely 50 votes quite than the customary 60 votes. To start the reconciliation course of, Congress should develop a finances decision, which establishes spending ranges together with any giant deficit or spending discount targets. With President-elect Trump taking substantial cuts to Medicare and Social Safety off the desk, there will likely be vital stress to cut back spending on Medicaid.
Medicaid is a spending merchandise and on the identical time the biggest supply of federal revenues for state budgets. Because of the federal matching construction, Medicaid has a novel function in state budgets as each an expenditure merchandise and a supply of federal income for states. In line with information from the Nationwide Affiliation of State Finances Officers (NASBO), in state fiscal 12 months (SFY) 2023, Medicaid accounted for 30% of complete state spending for all gadgets within the finances (Determine 7). Medicaid accounted for less than 15% of expenditures from state funds (together with state basic funds and different state funds), second to Ok-12 schooling (23%). Alternatively, Medicaid accounted for 57% of all expenditures from federal funds. States have an incentive to manage Medicaid spending as a result of they pay a share of Medicaid prices. On the identical time, analysis reveals that federal matching {dollars} from Medicaid spending have optimistic results for state economies. Plenty of research present that states which have adopted the ACA Medicaid growth have realized finances financial savings, income features, general financial progress in addition to noticed optimistic results on the funds of hospitals and different well being care suppliers.
States can use supplier taxes and IGTs (intergovernmental transfers) to assist finance the state share of Medicaid. States have flexibility in figuring out methods to finance the non-federal share of state Medicaid funds, inside sure limits. Along with state basic funds appropriated on to the Medicaid program, most states use funding from native governments or income collected from supplier taxes and costs to assist finance the state share of Medicaid. Whereas information are restricted, the Authorities Accountability Workplace (GAO) estimated that supplier taxes accounted for roughly 17% of the non-federal share of complete Medicaid funds in SFY 2018 although the share varies by state. All states (besides Alaska) have at the least one supplier tax in place and plenty of states have greater than three (Determine 8). The commonest supplier taxes are on nursing amenities (46 states) and hospitals (45 states). As of July 1, 2024, 48 states together with DC additionally reported at the least one supplier tax that’s above 3.5% of web affected person revenues, and 38 states together with DC additionally reported at the least one supplier tax that’s above 5.5%, which is near the utmost federal secure harbor or allowable threshold of 6%. Supplier taxes and funds from native governments are sometimes utilized by states to assist finance DSH funds, non-DSH supplemental funds like higher fee restrict (UPL) funds, and MCO state directed funds (uniform fee will increase by managed care which can be just like supplemental funds). New Medicaid managed care guidelines finalized in 2024 allow states to pay hospitals and nursing amenities on the common business fee fee (ACR) when utilizing directed funds, contributing to anticipated will increase in federal Medicaid spending projections.
What elements have an effect on Medicaid spending modifications?
Medicaid enrollment and spending usually enhance throughout recessions. Medicaid is a counter-cyclical program, that means that extra individuals turn out to be eligible and enroll throughout financial downturns. On the identical time, states usually could face declines in revenues that make it troublesome to finance the state share of funding for this system. As in previous financial downturns, Congress enacted laws in the course of the latest pandemic-induced recession that quickly elevated the federal share of Medicaid spending to assist states keep their Medicaid packages. In change, states have been required to maintain people constantly enrolled in Medicaid, contributing to historic progress in Medicaid enrollment. Excessive enrollment progress charges, tied first to the Nice Recession, then ACA implementation, and later the pandemic, have been the first drivers of complete Medicaid spending progress during the last decade (Determine 9). The continual enrollment provision ended on March 31, 2023, and Medicaid enrollment progress has since declined and complete spending progress has slowed.
Medicaid spending can also be pushed by different exterior elements and coverage selections. Different exterior elements can embrace state fiscal situations and the prices of offering well being providers and long-term care. In KFF’s newest annual finances survey, states reported inflation and workforce shortages have been driving greater labor prices, leading to stress to extend supplier charges. State coverage selections embrace modifications to eligibility, advantages, or supplier reimbursement in addition to supply system reforms. Current eligibility modifications embrace the adoption of the ACA Medicaid growth in seven states since 2020 in addition to different expansions for kids. KFF’s annual finances survey additionally discovered many states have been implementing profit enhancements, significantly for psychological well being and/or substance use dysfunction providers, in addition to authorizing a variety of supplier fee will increase, significantly for direct care staff in nursing amenities and people offering dwelling care to assist tackle workforce shortages.
