United States Government Accountability Office

GAO Report to Congressional Requesters

MEDICAID

Strategies to Help 

States Address 

Increased 

Expenditures during 

Economic Downturns 

October 2006 

 

GAO-07-97 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

October 2006

MEDICAID

Strategies to Help States Address 

Increased Expenditures during Economic 

Downturns 

Highlights of GAO-07-97, a report to 

congressional requesters 

During economic downturns, states

may struggle to finance Medicaid, a 

federal-state health financing 

program for certain low-income 

individuals. States receive federal

matching funds for their Medicaid

programs according to a statutory

formula based on each state's per

capita income (PCI) in relation to 

national PCI. The number of

individuals eligible for Medicaid

can increase during downturns as a 

result of rising unemployment.

GAO previously reported that any

federal assistance to respond to 

downturns should be well-timed 

and account for each state’s fiscal

circumstances. GAO was asked to

consider strategies to help states

offset increased Medicaid 

expenditures in the event of future

economic downturns. 

GAO analyzed policy proposals and 

federal and state strategies to cope

with downturns to identify and

develop three potential strategies. 

GAO explored (1) targeting 

assistance to states most affected

by a downturn, (2) using 2 instead

of 3 years of PCI data to compute 

federal matching rates to more 

accurately reflect states’ economic

circumstances, and (3) giving 

states the option to obtain 

assistance based on their own 

determination of need. GAO 

discussed the strategies with 

experts, identified design 

considerations, and analyzed each 

strategy’s potential effects.

The Department of Health and 

Human Services received a draft of

this report and did not comment. 

No single strategy or combination of strategies can meet the varied 

economic needs of all states at all times, but one or more of the following 

strategies GAO analyzed may be useful for Congress as it deliberates how 

to help states cope with Medicaid expenditure increases during 

economic downturns. Any potential strategy would need to be 

considered within the context of broader health care and fiscal 

challenges, including continually rising health care costs, a growing 

elderly population, and Medicaid’s increasing share of the federal budget.

Supplemental federal assistance provided to states based on changes in

states’ unemployment rates would target funds to states most affected by 

downturns. GAO used unemployment as the key variable because it 

reflects the potential for increases in Medicaid enrollment resulting from 

an economic downturn. GAO created a simulation model to illustrate this 

strategy, which also adjusts the amount of funding relative to each state’s 

per person spending on Medicaid services. The model captured about 90 

percent of states’ increases in unemployment during 2001, and all states 

would have received some federal assistance. A few states with relatively

earlier or later increases in unemployment would not have received a 

commensurate amount of funding because a portion of their downturns 

was outside the period of the simulation. 

Using 2 years of PCI data to compute federal matching rates instead of 

the 3 years required under current law did not result in matching rates 

that consistently reflected current economic circumstances, as measured 

by PCI or changes in states’ unemployment. Under certain conditions, 

reducing the number of years of data also skewed rates farther from 

current economic conditions. This strategy would also result in greater 

annual fluctuations in matching rates for most states. For these reasons, 

eliminating 1 year of PCI data is not a feasible alternative to help states 

address increased Medicaid expenditures. 

States could be given the option to decide whether and to what extent 

they need federal assistance, through a loan, either from the federal 

government or from the private capital market (subsidized and possibly 

guaranteed by the federal government), or a Medicaid-specific national

“rainy day” fund. This strategy’s viability would depend on states’ 

willingness to pay into a national fund or assume additional Medicaidspecific debt and on states’ accepting the terms of the loan or rainy day 

fund. Federal funding required for this strategy would vary depending on 

design factors such as whether federal loan subsidies or Medicaid rainy

day matching funds are included. 

www.gao.gov/cgi-bin/getrpt?GAO-07-97.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Kathryn G. 

Allen at (202) 512-7118 or Stanley J.

Czerwinski at (202) 512-6806. 
Contents 

Letter 1

Results in Brief 5 

Background 7

Targeting Supplemental Federal Assistance to States Requires

Careful Consideration to Address Differences in States’ 

Downturns 13

Using Fewer Years of Data to Compute Matching Rates Would Not 

Consistently Result in Assistance that Better Reflects States’ 

Current Economic Conditions 20 

States Could Determine Their Own Needs for Assistance with 

Medicaid-Specific Loans or a National Rainy Day Fund 23 

Concluding Observations 26 

Agency Comments 27 

Appendix I Objectives, Scope, and Methodology 29 

 

Appendix II Designing a Strategy of Targeted Supplemental 

Medicaid Assistance 32 

 

Appendix III Designing a Strategy to Better Reflect States’ 

Current Economic Conditions 55 

 

Appendix IV Information on Selected Intergovernmental Loan 

Programs and State Rainy Day Funds 65 

 

Appendix V GAO Contacts and Staff Acknowledgments 69 

 

Tables 

Table 1: Average Annual State Medicaid Expenditures per 

Beneficiary, by Population Group, 2003 11 

Page i GAO-07-97 Medicaid and Economic Downturns
Table 2: Key Design Decisions, Parameters of GAO’s Model, and 

Alternative Parameters that Could Be Applied for 

Targeting Supplemental Medicaid Assistance to States 15 

Table 3: Characteristics of Economic Downturns and Their Effect 

on States’ Receipt of Supplemental Assistance 19 

Table 4: Analysis of Three Strategies to Help States Respond to 

Increased Medicaid Costs during Economic Downturns 30 

Table 5: Simulated Supplemental Assistance for Economic 

Conditions of the 2001 Downturn 49 

Table 6: Matching Rates Used to Analyze Strategy 56 

Table 7: Comparison of States’ Year-to-Year Differences in 2-Year 

and 3-Year Matching Rates, 1990-2004 64 

Figures 

Figure 1: Medicaid Beneficiaries and Expenditures by Population 

Group, Fiscal Year 2003 8 

Figure 2: States’ Percentage Point Change in Unemployment, 

March 2001 to March 2002 10 

Figure 3: Number of States Experiencing a 10 Percent or More 

Increase in Their Unemployment Rate, 2000 to 2004 17 

Figure 4: Timing of Data Used to Calculate States’ Federal 

Matching Rates for Fiscal Year 2006 21 

Figure 5: Number of States with a 10 Percent or More Increase in 

Their Unemployment Rate Compared to the Same Quarter 

1 Year Earlier, 1979-2004 38 

Figure 6: Total of States’ Quarterly Increase in Unemployment 

Covered by Simulation Model’s Supplemental Assistance 40 

Figure 7: Effects of Alternative Threshold Parameters on the Start 

and Number of Quarters of Supplemental Assistance, 2000 

through 2005 42 

Figure 8: Simulated Supplemental Assistance for a State with an 

Early, Long, and Deep Economic Downturn 51 

Figure 9: Simulated Supplemental Assistance for a State with a 

Relatively Early, Long-Lasting, and Shallow Downturn 52 

Figure 10: Simulated Supplemental Assistance for a State with a 

Late, Short, and Shallow Downturn 53 

Figure 11: Simulated Supplemental Assistance for a State with a 

Short, Deep Downturn 54 

Figure 12: Correlations of the Changes in the 3-Year and 2-Year 

Matching Rates with Changes in PCI 58 

Page ii GAO-07-97 Medicaid and Economic Downturns
Figure 13: Correlations of the Changes in the 3-Year and 2-Year 

Matching Rates with Changes in the Unemployment Rates 59 

Figure 14: Correlations of the Changes in the Simulated Matching 

Rate with the Changes in PCI, 1990 to 2004 60 

Figure 15: Correlations of the Changes in 3-Year and 2-Year 

Matching Rates with the Changes in the Simulated 

Matching Rate 62 

Abbreviations 

BCCA Breast and Cervical Cancer Act 

BEA Bureau of Economic Analysis 

BLS Bureau of Labor Statistics 

CMS Centers for Medicare & Medicaid Services 

CWSRF Clean Water State Revolving Fund 

CDL Community Disaster Loan 

EPA Environmental Protection Agency 

FEMA Federal Emergency Management Agency 

FMAP Federal Medical Assistance Percentage 

FUA Federal Unemployment Account 

GDP gross domestic product 

JGTRRA Jobs and Growth Tax Relief Reconciliation Act of 2003 

NASBO National Association of State Budget Officers 

NBER National Bureau of Economic Research 

NCSL National Conference of State Legislatures 

PCI per capita income 

TANF Temporary Assistance for Needy Families 

UI Unemployment Insurance 

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Page iii GAO-07-97 Medicaid and Economic Downturns
United States Government Accountability Office

Washington, DC 20548 

 

October 18, 2006 

The Honorable Susan M. Collins 

Chairman, Committee on Homeland Security and Governmental Affairs 

United States Senate 

The Honorable Gordon H. Smith 

Chairman, Special Committee on Aging 

United States Senate 

The Honorable Jeff Bingaman 

The Honorable Ben Nelson 

The Honorable John D. Rockefeller, IV 

United States Senate 

The Honorable Jeff Bingaman 

The Honorable Ben Nelson 

The Honorable John D. Rockefeller, IV 

United States Senate 

During economic downturns, states can experience difficulties financing

programs such as Medicaid, a joint federal-state health financing program 

that covers medical costs for certain categories of low-income individuals. 

Economic downturns result in rising unemployment, which can lead to 

increases in the number of individuals who are eligible for Medicaid 

coverage, and in declining tax revenues, which can lead to less available 

revenue with which to fund coverage of additional enrollees. For 

example, during a period of economic downturn, Medicaid enrollment 

rose 8.6 percent between 2001 and 2002, which was largely attributed to

states’ increases in unemployment. During this same time period, state tax 

revenues fell 7.5 percent. Further complicating the challenge of 

responding to increased Medicaid expenditures during economic 

downturns is the fact that Medicaid funding consumed a growing share of 

state general fund or operating budgets, increasing from 15 percent in 1994 

to 18 percent in 2004.1

 

During economic downturns, states can experience difficulties financing

programs such as Medicaid, a joint federal-state health financing program 

that covers medical costs for certain categories of low-income individuals. 

Economic downturns result in rising unemployment, which can lead to 

increases in the number of individuals who are eligible for Medicaid 

coverage, and in declining tax revenues, which can lead to less available 

revenue with which to fund coverage of additional enrollees. For 

example, during a period of economic downturn, Medicaid enrollment 

rose 8.6 percent between 2001 and 2002, which was largely attributed to

states’ increases in unemployment. During this same time period, state tax 

revenues fell 7.5 percent. Further complicating the challenge of 

responding to increased Medicaid expenditures during economic 

downturns is the fact that Medicaid funding consumed a growing share of 

state general fund or operating budgets, increasing from 15 percent in 1994 

to 18 percent in 2004.1

 

Both the federal government and the states have responded to the 

demands of Medicaid expenditure increases related to economic 

downturns. Following the 2001 recession, Congress passed the Jobs and 

Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which provided 

$10 billion in fiscal relief through a temporary increase in federal Medicaid 

funding for all states, as well as $10 billion in general assistance divided 

Both the federal government and the states have responded to the 

demands of Medicaid expenditure increases related to economic 

downturns. Following the 2001 recession, Congress passed the Jobs and 

Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which provided 

$10 billion in fiscal relief through a temporary increase in federal Medicaid 

funding for all states, as well as $10 billion in general assistance divided 

 1

In fiscal year 2004, total expenditures for the Medicaid program (federal and state) were

about $298 billion. 

Page 1 GAO-07-97 Medicaid and Economic Downturns
among the states to be used for essential government services.

2

 States 

have responded to downturns in various ways, such as by using costcutting program modifications; budget stabilization, or “rainy day,” funds;

and borrowing. 

Problems that states face in financing Medicaid cost increases during an 

economic downturn can be exacerbated because, by design, the formula 

used to calculate the amount of federal assistance that states receive for 

Medicaid includes data that are as much as 5 years old. The federal 

government matches state Medicaid spending according to this formula, 

which is based on each state’s per capita income (PCI) in relation to 

national PCI. The amount of federal assistance states receive for Medicaid 

is determined by a statutory formula known as the Federal Medical 

Assistance Percentage (FMAP), or federal matching rate. The statute 

specifies that matching rates be calculated 1 year before the fiscal year in

which they are effective, using a 3-year average of the most recently 

available PCI data reported by the Department of Commerce. For 

example, fiscal year 2007 matching rates were calculated at the beginning 

of fiscal year 2006 using a 3-year average of PCI for 2002 through 2004.3

 

Consequently, federal matching rates reflect economic conditions that 

existed several years earlier. 

Recognizing the complex combination of factors affecting states during 

economic downturns—increased unemployment, declining state revenues,

and increased downturn-related Medicaid costs—policymakers and others 

have considered the possibility of establishing a legislative response that 

would help states better cope with Medicaid cost increases. Any potential

legislative response would need to be considered within the context of 

broader health care and fiscal challenges—including continually rising 

health care costs, a growing elderly population, and Medicare and 

Medicaid’s increasing share of the federal budget. Absent fundamental 

Medicaid reform, legislative actions and proposals have generally focused

 2

The $10 billion temporary increase in federal Medicaid funding made available through 

JGTRRA provided supplemental Medicaid funding to states for the last two calendar

quarters (April through September) of fiscal year 2003 and the first three calendar quarters

(October through June) of fiscal year 2004. 

3

The federal matching rate is intended to adjust for differences in state fiscal capacity and 

reduce program benefit disparities across states by providing more federal funds to states

with weaker tax bases. For fiscal year 2006, federal matching rates ranged from 50 to 76 

percent of state Medicaid expenditures. 

Page 2 GAO-07-97 Medicaid and Economic Downturns
on targeting assistance to states, improving the timing of the assistance 

provided, or helping states build financial reserves for Medicaid.4

 

In 2004, we reported on the assistance provided by the federal government

to the states through JGTRRA, noting that federal assistance is most 

effective when it takes into account each state’s fiscal circumstances as 

well as when and how severely states are affected by an economic 

downturn.5

 On the basis of these findings, you asked us to consider 

strategies to help states address the increased costs of Medicaid in any 

future economic downturn. An underlying assumption was that, in the 

event of any future nationwide economic downturn, Congress would act to 

appropriate additional funds, as it did following the 2001 recession. Your 

interest was in exploring strategies whereby any additional funds could be 

accurately timed and targeted to respond to a downturn but could also be

established in advance so that Congress would not have to wait to act until 

a nationwide economic downturn is clearly identified. Accordingly, we 

reviewed prior GAO reports, policy proposals, and federal and state 

strategies to cope with downturns to identify and develop three potential

strategies. In this report, we explore the design considerations and 

possible effects of three potential strategies aimed at helping states with 

their share of Medicaid expenditures during an economic downturn by (1) 

targeting supplemental funds to specific states on the basis of the relative 

depth and duration of their economic downturns (as measured by changes 

in their unemployment rates) as well as the extent to which their Medicaid 

costs are likely to increase during a downturn, (2) using 2 instead of 3 

years of PCI data to compute federal matching rates in an attempt to 

better reflect states’ current economic conditions, and (3) providing states

with options for obtaining assistance through a Medicaid-specific rainy 

day fund or loan based on their own determination of need. 

To do our work, we analyzed research, including prior GAO reports that 

examined the effects of economic downturns on Medicaid enrollment and 

expenditures, the responsiveness of federal matching rates to economic 

 4

See GAO, Federal Assistance: Temporary State Fiscal Relief, GAO-04-736R (Washington,

D.C.: May 7, 2004); GAO, Medicaid Formula: Differences in Funding Ability among 

States Often Are Widened, GAO-03-620 (Washington, D.C.: July 10, 2003); Miller and 

Schneider, The Medicaid Matching Formula: Policy Considerations and Options for

Modification, #2004-09, AARP Public Policy Institute (Washington, D.C.: September 2004); 

and GAO, Medicaid: Restructuring Approaches Leave Many Questions, GAO/HEHS-95-103 

(Washington, D.C.: Apr. 4, 1995). 

5

GAO-04-736R. 

Page 3 GAO-07-97 Medicaid and Economic Downturns
cycles, and policy proposals to help states respond to increased program 

costs during downturns. We discussed the three potential strategies with 

technical experts and representatives of key research groups and state 

associations to gain insights on the extent to which strategies could help

states cope with the Medicaid-related fiscal consequences of economic 

downturns. These discussions provided an opportunity to evaluate our 

selection of strategies and discuss their potential effects. Our analysis of 

the strategies differed depending on the strategy. For the first strategy, we 

identified factors to consider in developing the targeting strategy and 

devised a model to illustrate the extent to which different methods of 

targeting supplemental federal funds would help states with their Medicaid 

programs during economic downturns.6

 The assumptions built into our 

model were based on our analysis of data indicators from the past three 

recessions.7

 We chose unemployment as the key variable because it 

reflects the potential for increases in Medicaid enrollments as a result of 

an economic downturn. For the second strategy, which focused on using 

2 years of PCI data—instead of the 3 years currently required by statute—

to compute federal matching rates in an attempt to better reflect states’ 

economic conditions, we analyzed how closely the federal matching rates 

approximated states’ economic conditions and constructed statistical 

simulations to compare the federal assistance states would receive under 

the strategy with the assistance they would receive under current policy.8

 

To determine the potential of each of the first two strategies to help states

address increased Medicaid spending, we simulated how the 

implementation of the strategy could differ depending on the timing, 

depth, and duration of a state’s economic downturn. For the third 

strategy, which focused on providing states with options for obtaining 

assistance through a Medicaid-specific national rainy day fund or loan, we 

identified key factors that could be considered, such as the structure and 

use of existing intergovernmental loan programs and state rainy day funds. 

We determined that the unemployment, PCI, and Medicaid expenditure 

data used in this report are sufficiently reliable for describing the three 

strategies and illustrating their potential effects. (Appendixes I through IV 

 6

Throughout this report, the term state refers to the 50 states and the District of Columbia. 

7

We analyzed the past three recessions—1981 through 1983, 1991 through 1992, and 2001—

to understand differences in the timing, depth, and duration of different economic 

downturns. However, similar economic patterns may not repeat themselves in future 

economic downturns. 

8

Where we conducted simulations for the first and second strategies, we asked experts in 

Medicaid financing issues to provide suggestions regarding their construction. 

Page 4 GAO-07-97 Medicaid and Economic Downturns
provide additional detail about our methodology for assessing the three 

strategies.) We did our work from April 2005 through September 2006 in

accordance with generally accepted government auditing standards. 

No single strategy or combination of strategies can meet the varied 

economic needs of all states at all times. However, the following 

strategies may be useful starting points for Congress as it deliberates how 

to help states cope with increased Medicaid expenditures during any

future economic downturn. Having an automatic mechanism in place 

could provide a targeted and predictable response. The three strategies 

we explored are 

Results in Brief 

• target supplemental Medicaid assistance to states most affected by a 

downturn, 

• use 2 years of PCI data to compute federal matching rates in an effort 

to better reflect states’ current economic circumstances, and 

• give states the option to obtain assistance through a Medicaid-specific 

national rainy day fund or loan. 

First, a strategy that provides supplemental assistance to states based on 

changes in their unemployment rates would target funds to states most 

affected by a downturn, but the design of such a strategy would need to

address the different characteristics of states’ downturns. To illustrate 

this strategy, we constructed a simulation model that adjusts the amount 

of funding a state would receive on the basis of each state’s percentage 

increases in unemployment and per person spending on Medicaid services. 

Our simulation model captured about 90 percent of states’ increases in 

unemployment during the most recent (2001) recession. While all states 

received some amount of assistance under the model, states that 

experienced the largest percentage increases in unemployment within the 

same period in which the national downturn occurred received the largest 

proportion of supplemental assistance. A smaller number of states 

received less assistance than others in our simulation model because their 

increased unemployment occurred either earlier or later than the national 

downturn. Adjustments to the strategy design, such as extending the 

period of assistance, could be applied to ensure that states with earlier or 

later increases in unemployment also receive a commensurate amount of 

funding, but such adjustments would add to the overall cost of the 

strategy. Targeted supplemental federal assistance to states most affected 

by a downturn could assist states relative to the depth and duration of a 

Page 5 GAO-07-97 Medicaid and Economic Downturns
downturn as well as increased Medicaid expenditures while also reflecting 

congressional policy choices. 

Second, using 2 years of PCI data to compute federal matching rates 

instead of the 3 years required under current law did not result in 

matching rates that consistently reflected states’ recent economic 

circumstances as measured by PCI or changes in states’ unemployment. 

To illustrate this strategy, we analyzed matching rates that varied in the 

number of years of data used and compared them with changes in PCI and 

unemployment data. Our analysis of this strategy, however, did not result 

in federal matching rates that consistently increased during economic 

downturns. In some cases, reducing the number of years of data also 

skewed rates farther away from current economic conditions. In addition, 

this strategy would result in larger year-to-year changes in matching rates 

for most states compared to the fluctuations experienced under current 

law. For these reasons, eliminating a year of data from the current 

matching formula does not present a feasible alternative to help states 

address increased Medicaid expenditures during economic downturns. 

Third, giving states the opportunity to decide whether and to what extent 

they need federal assistance could take the form of a loan, either from the 

federal government or from the private capital market (subsidized and 

possibly guaranteed by the federal government), or a Medicaid-specific 

national rainy day fund. A federal Medicaid loan or rainy day fund could 

give states greater autonomy in determining their need for assistance, but 

utilization of either approach would depend on states’ own economic and 

political constraints as well as the program’s design. For example, 

limitations on the use of a loan may exist because of a state’s statutory or 

constitutional debt restrictions as well as federal restrictions on the 

obligation of federal funds. While a national rainy day fund could allow 

states to pool their risk and thereby spend less than they would if they 

chose to establish individual Medicaid rainy day funds at the state level, 

representatives of some public policy and research organizations we 

contacted believed that some states might be reluctant to contribute to a

national fund that other states or the federal government could draw from. 

Federal funding required for this strategy would vary depending on design

factors such as the inclusion of federal subsidies or matching funds. A 

loan or national rainy day fund strategy could help address states’ 

Medicaid funding challenges during downturns, but the feasibility and 

utility of this strategy would depend on the design of the loan or fund, 

among other possible constraints. 

Page 6 GAO-07-97 Medicaid and Economic Downturns
Background Economic downturns are characterized by reductions in output and 

income as well as increased unemployment—and an accompanying 

increase in Medicaid enrollment. Generally, as unemployment rises, the

number of households with incomes low enough to qualify for Medicaid 

coverage also rises. Across the four broad populations eligible for 

Medicaid—children; nondisabled, nonelderly adults; the elderly; and 

individuals with disabilities—increases in eligibility for Medicaid during an 

economic downturn are most concentrated among children and 

nondisabled, nonelderly adults. One analysis of the relationship between

unemployment and Medicaid enrollment found that a 1 percentage point

increase in the unemployment rate would result in a nationwide increase 

in Medicaid enrollment of more than 857,000 individuals—about 470,000 

children and 387,000 nondisabled, nonelderly adults.9

 While these two 

populations make up the largest share of Medicaid beneficiaries, they 

represent a small share of total Medicaid expenditures (see fig. 1).10 

Nondisabled, nonelderly adults and children make up 76 percent of 

beneficiaries but account for just 30 percent of expenditures.11

 9

Stan Dorn, Barbara Markham Smith, and Bowen Garrett, Medicaid Responsiveness, 

Health Coverage, and Economic Resilience: A Preliminary Analysis, Prepared for the

Health Policy Institute of the Joint Center for Political and Economic Studies (Washington,

D.C.: Joint Center for Political and Economic Studies, Sept. 27, 2005). 

10In contrast, 70 percent of Medicaid spending goes to elderly individuals and individuals

with disabilities, who are least affected by economic downturns, as reported by Dorn et al. 

11In some cases, expenditures could not be attributed to specific beneficiary populations

and thus were excluded from these calculations. 

Page 7 GAO-07-97 Medicaid and Economic Downturns
Figure 1: Medicaid Beneficiaries and Expenditures by Population Group, Fiscal 

Year 2003 

Children and nondisabled, nonelderly adults

Aged

Blind and disabled

Beneficiaries (48.2 million) Expenditures ($223.8 billion)

Source: GAO analysis of CMS data.

30%

76%

8%

16% 25%

45%

Note: Percentages are based on Centers for Medicare & Medicaid Services (CMS) beneficiary and 

expenditure data for fiscal year 2003, the most recent year for which data are available by type of 

beneficiary. Total fiscal year 2003 expenditures for Medicaid were $276 billion. Expenditures in figure 

1 do not include administrative expenses, disproportionate share hospital payments, and other 

expenses that could not be attributed to specific beneficiary populations. Beneficiaries do not include 

women covered under the Breast and Cervical Cancer Act (BCCA) or individuals whose eligibility

status is unknown. 

Additionally, increases in Medicaid enrollment and expenditures that 

occur during nationwide downturns are not distributed evenly among 

states because of differences in states’ economic conditions, Medicaid 

program design, and health care costs. Among states, downturns vary 

widely in their onset, depth, and duration. For example, in March 2001,

the United States entered a recession, as indicated by a significant decline 

in overall business activity, including an increase in unemployment, over 

Page 8 GAO-07-97 Medicaid and Economic Downturns
several months.12 During the next year, the national unemployment rate 

increased by 1.4 percentage points, from 4.3 percent to 5.7 percent. 

During this same period, the unemployment rate increased by more than 2 

percentage points in some states but actually decreased in others (see fig. 

2). 

 12The National Bureau of Economic Research (NBER) identifies recessions on the basis of 

several indicators, including employment, sales in the manufacturing and trade sectors, and 

industrial production. A recession is a significant decline in economic activity spread 

across the economy, lasting more than a few months, normally visible in real gross

domestic product (GDP), real income, employment, industrial production, and wholesaleretail sales. A recession begins just after the economy reaches a peak of activity and ends 

as the economy reaches its trough. Not all economic downturns are recessions. Economic 

downturns would include—but not be limited to—recessions identified by NBER. 

Page 9 GAO-07-97 Medicaid and Economic Downturns
Figure 2: States’ Percentage Point Change in Unemployment, March 2001 to March 2002 

MD 

UT

KY 

SD 

WY 

MA 

OR

CA

CT RI 

IL 

MT ND 

AR

AL

NV

DC 

NJ NE 

MS

LA 

IA 

MI 

OH

GA 

FL

OK 

MN 

NC

SC 

AK 

HI 

ME 

DE 

MI

TN

CO

WA 

ID 

IN 

AZ

MO

VT 

NH 

-0.5 – 0.1

0.2 – 0.8

0.9 – 1.5

1.6 – 2.2

2.3 – 2.9

Percentage point change

NM

PA 

NY

WV

VA

Source: GAO.

WI

KS

TX

Note: Percentage point unemployment changes from GAO, Health Insurance: States’ Protections 

and Programs Benefit Some Unemployed Individuals, GAO-03-191 (Washington, D.C.: Oct. 25, 

2002). 

Page 10 GAO-07-97 Medicaid and Economic Downturns
The Medicaid enrollment and expenditure increases associated with a 

given increase in unemployment also vary across states because of 

differences in the scope of states’ coverage for groups most affected by the 

downturn. For example, in 2003, average annual state expenditures for 

children and nondisabled, nonelderly adults ranged from $1,258 per 

beneficiary to $4,377, with a national average of $1,823. Table 1 shows the 

range in states’ Medicaid expenditures per beneficiary by population group 

in 2003. 

Table 1: Average Annual State Medicaid Expenditures per Beneficiary, by 

Population Group, 2003 

State Medicaid

expenditures 

Children and nondisabled, 

nonelderly adults Elderly Blind/disabled

Average $1,823 $14,540 $14,079

Minimum 1,258 6,781 6,792

Maximum 4,377 26,384 25,553

Source: GAO analysis of CMS data. 

Note: Data represent annual state expenditures per beneficiary. 

The federal matching formula for Medicaid adjusts for differences in state 

fiscal capacity and reduces program benefit disparities across states by 

providing more federal funds to states with weaker tax bases.13 The 

statutory matching formula calculates the federal matching rate for each

state on the basis of its PCI in relation to national PCI as follows. 

Federal matching rate = 1.00 – 0.45*[(State PCI) / (U.S. PCI)]2 

Relative PCI is included as a representation of states’ funding ability, as a 

combination of states’ resources and people in poverty. Squaring PCI has 

the effect of making PCI appear in the formula twice, to reflect both states’ 

resources and people in poverty. The formula uses a 3-year average of 

PCI, the effect of which is to smooth out fluctuations in state PCI so that it 

reflects longer-term trends rather than short-term fluctuations of the 

business cycle. This smoothing effect helps minimize year-to-year changes 

 13By statute, the federal share of Medicaid spending ranges from 50 to 83 percent. The 50

percent minimum federal share (“50 percent floor”) reflects a federal commitment to fund

at least half the cost of each state’s Medicaid program. For 2006, 12 states received federal

matching rates of 50 percent. 

Page 11 GAO-07-97 Medicaid and Economic Downturns
in federal matching funds, which could be disruptive to states’ budget 

planning. 

The use of PCI as a measure of states’ funding ability, however, is 

problematic. Our prior work concluded that PCI is not a comprehensive 

indicator of states’ total available resources and thus does not accurately 

represent states’ funding ability. PCI also does not account for the size 

and cost of serving states’ poverty populations, which vary considerably; 

for example, two states with low PCIs may have very different proportions 

of elderly persons potentially eligible for Medicaid and thus very different 

amounts of Medicaid spending. Moreover, concerns have been raised 

regarding the age of the data used to calculate the matching rate. In 

particular, the use of a 3-year PCI average to compute matching rates, 

combined with a 1-year lag between computation and implementation, 

means that the rates reflect economic conditions that existed several years 

earlier.14 

To cope with the difficulties of financing Medicaid and other programs 

during an economic downturn, states have, among other actions, 

borrowed from intergovernmental loan programs and drawn down state 

budget stabilization funds, which are also referred to as rainy day funds. 

Intergovernmental loan programs can generally be categorized as direct 

loans or loan guarantees. Both require federal involvement and can 

include a federal subsidy, but loan guarantees are administered by 

nonfederal lending institutions. Federal credit programs can vary in their 

design and purpose. While federal guidelines offer broad standards and 

principles for administering credit programs, specific loan terms are set in 

statute or by administering agencies based on the program’s policy goals.15 

According to the National Association of State Budget Officers (NASBO), 

budget stabilization funds exist in almost all states and allow states to set 

aside surplus revenue during periods of economic growth for use during 

downturns. States have different legislative requirements regarding the 

amount of funds that can be accumulated, the process for releasing funds, 

and the purposes for which funds can be used. 

 14See GAO-03-620. 

15OMB Circular A-129 outlines guidelines on federal government loans.

Page 12 GAO-07-97 Medicaid and Economic Downturns
Providing supplemental federal assistance to states that is based on 

changes in their unemployment rates would target additional Medicaid 

funds to states most affected by a downturn, but the design of such a 

strategy would need to address the different characteristics of states’ 

downturns. A strategy to target funds to states based on the duration and 

depth of states’ downturns assumes that, if authorized by Congress, 

supplemental assistance could begin when predetermined thresholds are 

reached. This approach is in contrast with the 2003 fiscal relief package,

JGTRRA, which provided assistance to states after the recession had 

ended. This supplemental assistance strategy would leave the existing 

Medicaid formula unchanged and add a new, separate assistance formula 

that would operate only during times of economic downturn and use 

variables and a distribution mechanism that differ from those used for 

calculating matching rates. We identified key design considerations for a 

strategy that would target funds based on states’ downturns and devised a 

model to illustrate the extent to which it could help target supplemental 

federal Medicaid funds to states experiencing economic downturns of 

different depths and durations. The design we simulated in our model 

would deliver the most assistance to the group of states that experience 

increases in unemployment within the same relative period of time. 

However, a smaller number of states with relatively earlier or later 

increases in unemployment would receive less assistance. Further 

adjustments to the strategy design, such as methods to extend the period 

of assistance, could be applied to ensure that states with earlier or later 

increases in unemployment would receive more quarters of supplemental 

assistance payments. Such extensions, however, would add to the overall

cost of the strategy. 

Targeting 

Supplemental Federal 

Assistance to States 

Requires Careful 

Consideration to 

Address Differences 

in States’ Downturns 

Design Considerations Development of a strategy to target funds based on differences in states’ 

economic downturns involves three key considerations: (1) deciding the 

starting and ending points of assistance, (2) determining the amount of 

additional federal Medicaid assistance that will be available, and (3) 

determining how this additional assistance will be distributed to the states. 

Using data from the past three recessions, we developed a model to 

simulate targeted supplemental assistance to states experiencing 

increased unemployment. The model focused on mechanisms to 

distribute supplemental federal funds depending on the extent of a state’s 

downturn and its relative Medicaid expenditures. 

To determine the amount of federal assistance that would be provided 

based on this strategy, our model incorporated a retrospective assessment, 

which would involve assessing the increase in each state’s unemployment 

Page 13 GAO-07-97 Medicaid and Economic Downturns
rate for a particular quarter compared to the same quarter of the previous

year. The economic trigger for this strategy would be when 23 or more 

states had increased unemployment of 10 percent or more compared to 

the unemployment rate that existed for the same quarter 1 year earlier 

(such as from 5 percent to 5.5 percent unemployment). This is an increase 

of 10 percent compared to the unemployment rate of the same quarter in 

the previous year and not a 10 percentage point change in unemployment 

rates (such as from 5 percent unemployment to 15 percent). We chose 

these two threshold values—23 or more states and increased 

unemployment of 10 percent or more—to work in tandem to ensure that 

the national economy had entered a downturn and that the majority of 

states were not yet in recovery from the downturn.16 Table 2 summarizes 

the key design decisions, our model’s parameters, and some alternative 

parameters. (See app. II for additional discussion of the key design 

decisions incorporated into the GAO model.) 

 16We chose both numbers based on a review of states’ unemployment rates over the past 

three recessions and determined that these levels would have provided considerable 

certainty that the economic slowdown was nationwide. 

Page 14 GAO-07-97 Medicaid and Economic Downturns
Table 2: Key Design Decisions, Parameters of GAO’s Model, and Alternative Parameters that Could Be Applied for Targeting

Supplemental Medicaid Assistance to States

Key design

decision Parameters of GAO model

a Alternative parametersb 

Starting point

• The starting point would be when 23 or more states 

show a quarterly state unemployment rate increase 

of 10 percent or more (the retrospective

assessment).c

• Once started, any state with any increase in

unemployment would be eligible to receive 

assistance. 

Starting point

• Varying numbers of states and percentage changes 

in unemployment could be applied. 

• Indicators other than unemployment—or indicators 

used in conjunction with unemployment—could be 

used to start the program. 

• Congressional action could be required to start the 

program (rather than establishing an automatic 

trigger based on threshold values). 

Establish starting 

and ending point 

Ending point 

• The ending point would be when fewer than 23 

states had quarterly unemployment increases of 

10 percent or more. 

• The number of quarters that assistance continued 

would depend on the severity and duration of the 

economic downturn. 

Ending point 

• Varying numbers of states, percentage changes in 

unemployment, and quarters of assistance could be 

applied. 

• Other indicators could be used to end the program. 

• Congressional action could be required to end the 

program (rather than establishing an automatic 

stopping point based on threshold values). 

Determine amount 

of federal 

assistance to be

available 

• The amount of federal assistance would be

determined on the basis of the relationship between 

changes in unemployment and increases in 

Medicaid expenditures. 

• Based on the depth of the 2001 recession, the 

amount of federal assistance would have been 

$4.2 billion. 

• The amount of federal assistance could be set by 

Congress based on factors other than changes in 

unemployment and increases in Medicaid 

expenditures. 

Determine 

distribution of

assistance 

• Funds would be distributed quarterly through a 

targeted supplement to states’ federal matching 

rates. 

• Distribution amount varies based on a state’s 

change in unemployment and its average cost of 

providing services to children and nondisabled, 

nonelderly adults. 

• Model could allow for a lump-sum grant distributed

on some schedule other than quarterly payments 

tied to states’ federal matching rates. 

• Retroactive rebate payments could be provided to 

the states based on their actual increased

expenditures. 

• Assistance could be determined based on an

alternative threshold (other than a 10 percent or 

more increase in unemployment). 

Source: GAO. 

a

Our model assumed that once enacted, the targeted assistance would operate without the need for 

congressional action to initiate assistance during an economic downturn. 

b

Most alternative parameters were not simulated in our model. Appendix II provides additional details 

on alternative parameters that could be used. 

Page 15 GAO-07-97 Medicaid and Economic Downturns
c

The retrospective assessment is based on a quarterly moving average of seasonally adjusted 

unemployment data for the 12 most recent months. The GAO model included these parameters 

based on quantitative analysis of prior recessions combined with subjective judgment. We chose 

these threshold values based on evidence which indicated that 23 states experiencing a 10 percent 

or more increase in unemployment provided considerable certainty that an economic slowdown had 

extended nationwide and that at least 23 states had not yet entered a recovery. These parameters 

could be adjusted up or down to tighten or loosen the threshold for providing supplemental 

assistance. The use of unemployment as an indicator also reflects research establishing a 

connection between increased unemployment and Medicaid enrollment. 

To determine the amount of supplemental federal assistance needed to

help states address increased Medicaid expenditures during a downturn, 

we relied on research that estimated a relationship between changes in 

unemployment and changes in Medicaid spending while holding constant

other factors that influence Medicaid spending.17 Using data from the 2001 

and the 1991-1992 recessions and this research, our model assumes federal 

assistance of approximately $4.2 billion, which would be less than 1 

percent of Medicaid spending for a 2-year period.18 Depending on the fund 

distribution method, budgeting sufficient amounts for the supplemental 

federal funding would require estimating the potential economic effects of 

a downturn because forecasting states’ unemployment increases is 

difficult. If the targeting strategy was designed to function as an openended grant that provides states with an incremental increase to their 

matching rates, then states’ expenditures would be matched as the 

downturn-induced growth of enrollments increased their Medicaid 

spending. However, if the program was designed to provide a lump-sum 

amount of assistance or to function as a closed-ended assistance program, 

then setting a funding level would be necessary. 

Within the key parameters that frame this strategy are many variations in

design that could be considered to achieve different policy goals. For 

example, if it was deemed important to provide states with a longer period

of assistance, the retrospective assessment of the increase in the 

unemployment rate could be extended in order to help states with longerlasting or late downturns. Additional criteria could be established to 

accomplish other policy objectives, such as controlling federal spending 

by limiting the number of quarters of payments or stopping payments after 

predetermined spending caps are reached. 

 17See Dorn et al. (Sept. 27, 2005). 

18For our model, we used Dorn et al.’s estimates to derive an average increase in Medicaid 

expenditures per additional unemployed person of $300, which could be adjusted over time 

by inflation and changes in demographics of the Medicaid population. See Dorn et al. 

(Sept. 27, 2005). 

Page 16 GAO-07-97 Medicaid and Economic Downturns
Effects Our simulation model showed that a retrospective assessment resulting in

a 10 percent or more increase in unemployment in 23 or more states would 

trigger supplemental assistance for 7 quarters, the period beginning with 

the first quarter of 2002 and continuing through the third quarter of 2003.

19 

Overall, about 90 percent of state increases in unemployment from the 

second quarter of 2000 through the fourth quarter of 2004 were captured 

by our simulation, which began the assistance in the first quarter of 2002

and continued it through the third quarter of 2003. If the simulation model 

had been in effect during the 2001 recession, this strategy’s starting point 

would have provided assistance to states a full year earlier than the 

enhanced matching rate implemented by Congress under the previous 

fiscal assistance legislation, JGTRRA, which began providing supplemental 

assistance in the third quarter of 2003. (See fig. 3.) 

Figure 3: Number of States Experiencing a 10 Percent or More Increase in Their 

Unemployment Rate, 2000 to 2004 

Payment

period

0

10

20

30

40

50

Number of states

Source: GAO analysis of Bureau of Labor Statistics (BLS) data.

Quarterc

2000 2001 2002 2003

I III IV II III IV I III IV II I II a IIIb I II IV

2004

I II III

a

The quarter in which payment begins under this strategy reflects a two-quarter lag for data to 

become available. Therefore, the count of states represents the count from the third quarter of 2001. 

 19This is an increase of 10 percent or more compared to the unemployment rate that existed 

a year earlier and not a 10 percentage point change in unemployment rates. Unless 

otherwise specified, all percentage changes are stated in terms of a percentage increase 

over a base quarter. 

Page 17 GAO-07-97 Medicaid and Economic Downturns
b

In response to the 2001 recession, our model would have had the strategy in operation from the first 

quarter of 2002 to the third quarter of 2003, the period when 23 states had a 10 percent or more 

increase in unemployment compared to the same quarter of the previous year. 

c

For comparison purposes, the enhanced matching rate under the 2003 fiscal relief package, 

JGTRRA, was implemented in the third quarter of 2003. 

Under this strategy, our model’s results show that the timing and depth of

a state’s economic downturn can affect the amount of supplemental 

assistance a state receives. In general, states with deep downturns that 

occur coincident with the period in which supplemental assistance 

payments would be made would receive the largest proportion of federal

assistance. States experiencing an earlier or later economic downturn—

meaning more than 1 year before or 1 year later than the start of the 

payments—would not receive payments to cover the full period of their 

economic downturn, regardless of the extent of the state’s increased 

unemployment. With regard to the depth of each state’s downturn, the 

results of our model simulation showed that all states would receive some 

amount of supplemental federal Medicaid assistance, with the increased 

matching rate ranging from 0 percent to 2.01 percent.20 (See table 3.) In 

contrast, the previous fiscal assistance legislation, JGTRRA, provided the 

same matching rate increase to all states. 

 20One state received a matching rate increase that was less than 0.005 percentage points. 

Page 18 GAO-07-97 Medicaid and Economic Downturns
Table 3: Characteristics of Economic Downturns and Their Effect on States’ Receipt 

of Supplemental Assistance

Downturn 

characteristic

Effect on states’ receipt of

supplemental assistance Results of GAO model

a 

Timing States with unemployment 

increases that are relatively 

earlier or later than the 

strategy’s starting point may 

not receive the maximum 

amount of supplemental 

federal assistance. 

37 states would have had increases in

unemployment commensurate with the 

start of the supplemental federal 

assistance. 

12 states would have had increases in

unemployment that began before the 

start of supplemental federal assistance. 

1 state would have had an increase in

unemployment that started after the 

supplemental federal assistance ended. 

Duration States with economic 

downturns lasting 7 or fewer 

quarters would be most likely 

to receive the maximum 

amount of supplemental 

federal assistance. 

4 states had downturns lasting 7 

quarters. 

28 states had downturns lasting fewer 

than 7 quarters.

b 

18 states had downturns lasting more 

than 7 quarters. 

Depth The supplemental federal 

assistance a state would 

receive is determined in part 

by the depth of its economic 

downturn and the amount of 

its unemployment increase. 

0.80 percent was the median increase in 

a state’s federal matching rate. 

0.00 percent was the lowest increase in 

a state’s federal matching rate.

c 

1.77 percent was the highest increase in 

a state’s federal matching rate. 

Source: GAO simulation using data from BLS and CMS. 

a

Based on the first quarter of 2002 through the third quarter of 2003. 

b

One state showed no indication of a downturn based on increases in unemployment.

. 

c

One state received a matching rate increase that was less than 0.005 percentage points. 

Additionally, assistance provided to individual states would vary 

depending on the relative size and composition of their expenditures for 

cyclically sensitive Medicaid populations. Because economic downturns 

are likely to increase Medicaid enrollment for children and nondisabled, 

nonelderly adults—but generally not for the elderly or individuals with 

disabilities—we adjusted the amount of supplemental federal Medicaid 

assistance based on the characteristics of each state’s Medicaid spending 

by beneficiary population category in order to target the amount of 

supplemental federal assistance. As a result, two states with similar 

downturns in terms of percentage change in unemployment could receive

different amounts of supplemental assistance depending on their average 

cyclically sensitive Medicaid expenditures per nonelderly person in 

Page 19 GAO-07-97 Medicaid and Economic Downturns
poverty. For example, Arizona and Wisconsin had an average quarterly 

percentage change in unemployment of 41 percent and 52 percent during 

the 2001 recession, which would have resulted in lump sum amounts of 

assistance of $86 million and $106 million, respectively. However, 

applying a Medicaid expenditure index that we developed, which takes 

into account each state’s relative Medicaid spending per nonelderly person 

in poverty, Arizona would have received $93 million in supplemental 

federal Medicaid payments compared with $45 million for Wisconsin using 

the parameters described for this strategy.21 

A second strategy uses fewer years of data by eliminating the oldest data 

from the computation of federal matching rates in an attempt to better 

reflect states’ current economic conditions. However, based on our 

analysis of a 15-year period (1990 to 2004), we found that using fewer 

years of data did not result in federal matching rates that better reflected 

states’ current economic conditions. In particular, the inherent time lag 

necessary to obtain data and calculate the matching rates limited the 

ability of this strategy to provide assistance to states that reflected more 

recent economic conditions. In some cases, reducing the number of years 

of data skewed rates farther away from current economic conditions. This 

strategy would result in larger year-to-year changes in matching rates for 

most states compared with the fluctuations experienced under current 

law.22 Based on this analysis, eliminating a year of data from the current 

matching formula would not help states address increased Medicaid 

expenditures during economic downturns. 

Using Fewer Years of 

Data to Compute 

Matching Rates Would 

Not Consistently 

Result in Assistance 

that Better Reflects 

States’ Current 

Economic Conditions 

Design Considerations This strategy would use fewer years of PCI data to compute federal 

matching rates. This strategy relies on the current matching formula, with 

the adjustment of using 2 years of PCI data instead of the 3 years required

under current law (see fig. 4). Implementation of this strategy would 

require a statutory change to the federal matching formula and could be 

made permanent. Unlike the first strategy, which would require that an 

 21Appendix II provides details on the calculation of this index and how it affects the amount 

of assistance a state would receive. We use poverty in lieu of actual enrollments because 

states vary in terms of the services provided and eligibility for those services. 

22Changes in states’ federal matching rates can have a significant effect on the amount of

federal funds available to a state. For example, a 0.25 percent increase in states’ federal 

matching rates for 2004 would have resulted in a minimum increase in federal funds of 

more than $0.9 million in Wyoming and more than $102 million in New York. 

Page 20 GAO-07-97 Medicaid and Economic Downturns
established number of states reach a certain percentage change in 

unemployment, this strategy would not require monitoring of economic 

conditions to trigger implementation. In addition, this strategy would not 

distribute the supplemental Medicaid assistance required for 

implementation of the first strategy but would instead adjust the relative

proportion of Medicaid funding distributed to the states. 

Figure 4: Timing of Data Used to Calculate States’ Federal Matching Rates for Fiscal 

Year 2006 

Average of PCI data from these 3

fiscal years included in fiscal year 

2006 matching rate

Department of Health and Human 

Services calculates and publishes

matching rates for fiscal year 2006

Fiscal year 2006 Medicaid matching 

rates become effective in October 

2005 and remain in place through 

September 2006

Source: GAO.

2001a 2002 2003 October 2004 October 2005

a

Under this strategy, 2001 data would be eliminated from the matching rate calculation. 

To analyze the effect of using fewer years of data to calculate the matching 

rates, we used three matching rates that employed the current statutory 

formula but varied in the years of data used. The first matching rate 

mirrored the current statutory construction, using 3 years of PCI data that 

are 3 to 5 years old. The second matching rate was based on the statutory 

construction, except that it eliminated the oldest year of PCI data and only 

used 2 years of data. The third matching rate used PCI data for the current 

year (the year in which the calculations are made) and for 1 year prior, 

thus showing no time lag in the data used.23 We compared the three 

matching rates with year-to-year percentage changes in PCI and year-toyear percentage changes in the unemployment rate and analyzed the 

extent to which the 3-year and 2-year matching rates fluctuated from year 

to year. (Appendix III provides additional detail regarding our 

methodology.) 

Effects Contrary to our expectations that eliminating the oldest year of data from 

the computation of matching rates would make them more sensitive to 

 23Although not feasible to implement because of lags in data publication, we devised this

simulated matching rate in order to evaluate whether changing the years of data used to 

calculate the matching rate resulted in a better approximation of states’ current economic 

circumstances. 

Page 21 GAO-07-97 Medicaid and Economic Downturns
current economic conditions, our simulation results showed that using 2 

years of PCI data instead of 3 did not consistently improve the correlation 

of the rates with state PCI—one measure of state economic conditions. In 

addition, rates based on 2 years of PCI data did not result in rates that 

more closely correlated with states’ PCI trends. We repeated the same 

analysis using unemployment data and confirmed that matching rates also 

did not correlate with state unemployment trends. These results remained 

consistent during the full period of our analysis, 1990 through 2004. 

We found that using 2 years of data would result in larger average 

fluctuations in matching rates from year to year than states currently 

experience. Our simulation of matching rates from 1990 to 2004 showed 

that when rates were computed using 2 years of PCI data instead of 3, the 

average percentage point change in rates from year to year increased to 

0.44, from 0.39 under current law. A small number of states experienced

substantially larger fluctuations (more than 0.5 percentage points larger) 

under this strategy than they currently experience. The effects of these 

fluctuations for individual states would depend on whether they 

represented a substantial increase or decrease in federal funds. 

Depending on the scope of a state’s Medicaid program, a 0.5 percentage 

point difference in the matching rate would have meant a difference of 

$1.7 million to $77.1 million in federal matching funds for a given state in

2003.

24 In 8 of 14 years, fewer than 22 states would have experienced 

larger fluctuations in their matching rates than they experienced under 

current law,25 and in 9 of 14 years, fewer than 4 states would have 

experienced fluctuations that were more than 0.5 percentage points 

larger.26 

 24These amounts represented 0.08 to 0.29 percent of state own-source revenues. Also 

referred to as general revenues from own sources, these revenues are state and local total 

receipts, excluding federal grants-in-aid. We excluded from this analysis the 14 states 

whose matching rates in 2003 were at the 50 percent floor or had been established in 

legislation. (As we have previously reported, because of the 50 percent floor, some states 

receive higher federal matching rates than they would if their rates were based only on 

their PCI.) 

25Across all of the years of our analysis (1990-2004), the number of states that would have 

experienced larger fluctuations under this strategy than under current law ranged from 17

to 27. 

26Across all years, the number of states that would have experienced fluctuations more 

than 0.5 percentage points larger under this strategy than under current law ranged from 0

to 8. 

Page 22 GAO-07-97 Medicaid and Economic Downturns
States Could 

Determine Their Own 

Needs for Assistance 

with MedicaidSpecific Loans or a 

National Rainy Day 

Fund 

Giving states the option to decide whether and to what extent they need

federal assistance could take the form of a loan, either from the federal

government or from the private capital market (subsidized and possibly 

guaranteed by the federal government), or a Medicaid-specific national

rainy day fund. We considered the features of existing intergovernmental 

loan programs and state rainy day funds to better understand how these 

programs are structured and utilized by states. Implementation of this 

strategy would require approval of legislation to authorize a Medicaidspecific loan program or national rainy day fund as well as appropriation 

of federal funds to cover any federal expenditures required for either the 

loan program or national rainy day fund. While this strategy would 

provide states with greater autonomy over their receipt of additional 

federal assistance, their ability to utilize either broad approach would 

depend on their debt restrictions, their borrowing costs, the availability of

future state revenues to repay loans, and their willingness to participate in 

a Medicaid-specific loan or national rainy day program. State participation 

also could depend on the depth and duration of states’ downturns (deep or 

shallow and short or long) and the availability of state funds to fill funding 

gaps. Federal funding required for this strategy could vary depending on 

factors such as whether federal subsidies are included in a loan program 

or whether a national rainy day fund includes federal matching funds as 

well as decisions on the overall federal budget. 

Design Considerations To identify the factors likely to be involved in designing this strategy, we 

considered the features of existing intergovernmental loan programs and 

state rainy day funds to better understand how these programs are 

structured, how they are utilized by states, and how they could contribute 

to a conceptual model of this strategy.27 This strategy draws on the 

features of existing programs to inform our understanding of ways to 

increase the states’ role in determining the timing and targeting of 

increased federal assistance to the states during economic downturns. We 

analyzed approaches to this strategy based on two broad methods of 

providing federal credit: (1) a loan, administered directly from the federal 

government or indirectly through the private capital market (subsidized 

and possibly guaranteed by the federal government); and (2) a Medicaidspecific national rainy day fund that could distribute federal fiscal 

assistance during an economic downturn. Implementation of one or more 

approaches to this strategy would require numerous decisions about the 

 27Appendix IV includes background information on selected federal programs that include

intergovernmental loan components. 

Page 23 GAO-07-97 Medicaid and Economic Downturns
use, structure, financing, and repayment of a loan or national rainy day 

fund. Any new federal loan program would have to comply with the 

Federal Credit Reform Act of 1990 requirements that budget authority 

sufficient to cover the program’s cost to the government be provided in 

advance, before new direct loan obligations could be incurred or new loan 

guarantee commitments could be made. 

Congress could authorize a new federal program so that states could 

borrow funds directly from the federal government based on a rate-setting 

and repayment process specified in law. For example, the law could 

specify that rates be determined by the Treasury based partially on 

Treasury’s borrowing costs. CMS could be designated as the 

administering agency. This approach could allow states that might 

otherwise face high interest rates in the private capital market access to 

federal funds that reflect a lower interest rate subsidy. The administering 

agency would have to develop a method to estimate any subsidy costs 

(e.g., the estimated long-term cost to the federal government on a netpresent value basis of all cash flows to and from the government, such as 

interest rate subsidies and defaults over the life of the loan) in order to 

conform with the Federal Credit Reform Act of 1990.28 The administering 

agency would have to analyze and control the risk and cost of the 

program, obtain budget authority and record outlays to cover the subsidy 

cost of the program, and could also specify loan repayment terms. States 

would have to designate funding sources to repay the loans. 

Direct Intergovernmental 

Loans 

Under this approach, instead of lending money directly to states, the 

federal government could facilitate private lending, such as through a 

guaranteed loan.29 The federal government could help offset the risk of 

lending money to states by covering all or part of the risk of loan defaults

and by providing an interest subsidy to states. This approach would 

enable the federal government to minimize direct involvement with the 

loan process by placing the burden of loan administration on third-party 

Facilitated Private Lending 

 28The Federal Credit Reform Act of 1990, P.L. 101-508, requires that credit subsidy costs be 

financed from new budget authority and be recorded as budget outlays at the time direct or 

guaranteed loans are disbursed. Agencies must have appropriations for the subsidy cost 

before they can enter into direct loan obligations or loan guarantee commitments. Subsidy 

costs include the estimated long-term cost to the federal government on a net-present value 

basis of all cash flows to and from the government, such as interest rate subsidies and 

defaults over the life of the loan. 

29Specific examples of facilitated lending include The Federal Family Education Loan 

Program and the Health Center Loan Guarantees. 

Page 24 GAO-07-97 Medicaid and Economic Downturns
nonfederal lenders. However, the administering agency would still have to 

analyze and control the risk and cost of the program and obtain budget 

authority to cover the subsidy costs. States would still have to identify 

repayment sources. State-managed capital access programs, in which 

state governments provide a fixed share of lenders’ loan loss reserves, 

provide another model for possible consideration and adaptation to 

facilitate private lending. 

Legislative approval of a Medicaid-specific national rainy day fund would 

allow states to pool their resources to help cope with the increased costs 

of Medicaid during economic downturns. We previously found that the 

adequacy of states’ own rainy day funds is unknown and that choices on 

competing priorities would have to be made in a fiscal crisis.30 

Furthermore, some states have placed caps and restrictions on the use of

these funds.31 States could capitalize a national rainy day fund in whole or 

in part, depending on whether the program design included matching 

contributions from the federal government. Determining the amount of 

money that each state should pay into a national rainy day fund would 

present an additional design challenge, given that state Medicaid programs 

vary widely in the population groups and services covered. 

National Rainy Day Fund 

Effects States’ decisions about whether to access any new federal Medicaid loans 

or a national rainy day fund could depend on the nature of the economic 

downturn in terms of when and to what extent states experience increased 

unemployment, each state’s own resources, and the design features of the

program. States generally have resources available to weather short-term 

economic downturns but may be more likely to utilize a loan or national 

rainy day fund approach when they are affected by a deeper downturn. 

States with a 50 percent federal matching rate could also view federal 

loans or a national rainy day fund as an additional tool for increasing 

funding on a short-term basis during an economic downturn, filling gaps 

created by a matching rate that does not necessarily rise when additional 

funds are needed. However, some states also face constraints on their 

ability to borrow because of statutory or constitutional debt restrictions 

 30GAO, Welfare Reform: Challenges in Saving for a “Rainy Day”, GAO-01-674T 

(Washington, D.C.: Apr. 26, 2001). 

31GAO, Budgeting for Emergencies: State Practices and Federal Implications, 

GAO/AIMD-99-250 (Washington, D.C.: Sept. 30, 1999). 

Page 25 GAO-07-97 Medicaid and Economic Downturns
and most states have some form of balanced budget requirements.32 

Consequently, states might not be able to take advantage of a loan 

program. 

The effects of either a loan or national rainy day fund approach would also 

depend on the numerous technical decisions required, including, but not 

limited to, interest rates, repayment terms, allowable uses of funds, 

borrowing limits, and any requirements governing maintenance of states’ 

efforts in providing their own funds or Medicaid eligibility. A direct or 

guaranteed loan could give states greater autonomy in determining their 

need for assistance but would also result in a requirement to repay the 

loans (an additional financial burden for states) as they try to recover from

an economic downturn. States would have to consider the availability of

future revenues to repay loans and their borrowing costs, as well as 

statutory debt restrictions that could limit their loan access. A national 

rainy day fund could allow states to pool risk and thereby spend less than 

they would if they chose to establish individual Medicaid rainy day funds 

or address economic downturn-related Medicaid cost increases on an asneeded basis. However, representatives of public policy and research 

organizations we contacted cautioned that states may be reluctant to 

contribute to a national fund that could be drawn down by other states or 

tapped by the federal government. The impact on federal outlays of this 

strategy could depend on subsidy costs as well as whether the federal 

government provided matching funds for a national rainy day fund. Unless 

mandated, state participation in a loan or national rainy day fund would 

likely depend on the terms of the program as well as state economic 

circumstances. 

Economic downturns, typically accompanied by increases in 

unemployment, can leave states with increased demand for Medicaid 

program services and spending, decreased revenues to help states finance

the increased demand, and few strategies for grappling with difficult fiscal 

circumstances that will not place them in worse financial positions in the 

future. Current federal and state approaches to help states cope with the 

increased cost of Medicaid during economic downturns present temporary 

solutions to a recurring combination of circumstances. Having an 

automatic mechanism in place to address significant downturns in the 

economy could provide for a more predictable and targeted response to 

Concluding 

Observations 

 32GAO/AIMD-99-250. 

Page 26 GAO-07-97 Medicaid and Economic Downturns
states’ situations. The targeted supplemental assistance and loan or 

national rainy day fund strategies considered in this report illustrate 

potentially more responsive measures that could help states adjust to 

economic downturns similar to the last three national recessions. 

However, each also presents challenges. 

No single strategy or combination of strategies for providing federal 

financial assistance could fully meet the varied economic needs of all 

states at all times. Any strategy also is inhibited by the lags inherent in the

collection and publication of data, thus limiting its ability to have a realtime effect. However, the first and third strategies—targeting 

supplemental assistance to states most affected by a downturn and 

allowing states to determine their own need for assistance from a national 

rainy day fund or loan—could potentially better address some of the 

difficulties faced by states during downturns in a more timely and costefficient manner than the JGTRRA, which provided assistance to all states. 

Additionally, these two strategies are not mutually exclusive and could be

used in combination. 

Any strategy to help states cope with increased Medicaid costs during 

economic downturns requires trade-offs as Congress seeks to provide 

assistance to states that have the greatest financial need and the least 

capacity to meet those needs while balancing the federal government’s 

own long-term fiscal challenges. While none of the strategies may fully 

satisfy all dimensions of targeting, timing, and increasing states’ own 

options, Congress may find one or more of these strategies useful as 

starting points in considering whether and how to provide supplemental 

Medicaid assistance during the most difficult economic times faced by

states. 

We provided the Secretary of Health and Human Services (HHS) with a 

draft of this report. HHS stated that it did not have comments. Agency Comments 

As agreed with your offices, we plan no further distribution of this report 

until 28 days from its date, unless you publicly announce its contents 

earlier. At that time, we will send copies of this report to the Secretary of 

Health and Human Services and the Administrator of the Centers for 

Medicare & Medicaid Services. We will also make copies available to 

others upon request. In addition, the report will be available at no charge 

on the GAO Web site at http://www.gao.gov. 

Page 27 GAO-07-97 Medicaid and Economic Downturns
If you or your staffs have any questions about this report, please contact 

Kathryn G. Allen at (202) 512-7118 or Stanley J. Czerwinski at (202) 512-

6806. Contact points for our Offices of Congressional Relations and Public

Affairs may be found on the last page of this report. GAO staff who made 

major contributions to this report are listed in appendix V. 

Kathryn G. Allen 

Director, Health Care 

Stanley J. Czerwinski 

Director, Strategic Issues 

Page 28 GAO-07-97 Medicaid and Economic Downturns
Appendix I: 

Methodology 

Objectives, Scope, and 

Page 29 GAO-07-97 

Appendix I: Objectives, Scope, and 

Methodology 

This appendix describes our objectives and the scope and methodology of

the work we did to address them, including how we illustrated the range 

of economic conditions affecting states during economic downturns. We

include a list of the organizations we contacted during the course of our 

work. 

We explored the design considerations and potential effects of strategies 

aimed at helping states with their share of Medicaid expenditures during 

an economic downturn by (1) targeting supplemental funds to specific 

states on the basis of the relative depth and duration of their economic 

downturns as well as the extent to which their Medicaid enrollment and 

expenditures are likely to increase during a downturn, (2) using 2 years of

per capita income (PCI) data instead of the 3 years of data required by 

statute to compute federal matching rates in an attempt to better reflect 

states’ current economic conditions, and (3) providing states with options 

for obtaining assistance from a Medicaid-specific national rainy day fund 

or loan based on their own determination of need. 

To address the objectives, we 

• analyzed research, including prior GAO reports and other policy 

proposals, that assessed the effects of economic downturns on 

Medicaid enrollment and expenditures across states, the 

responsiveness of the current Medicaid formula to the effects of 

economic downturns, and differences in Medicaid expenditures across 

states; 

Objectives and Scope 

Identifying and 

Evaluating the 

Strategies 

• simulated the potential effects of the strategies to use fewer years of 

data to compute federal matching rates and target supplemental federal 

assistance; and 

• analyzed the features of existing intergovernmental loan programs and 

state rainy day funds as potential models for providing states with 

discretion in determining the timing and targeting of assistance through 

a federal government-sponsored Medicaid-specific loan program or 

rainy day fund. 

To evaluate the strategies identified, we 

• conducted statistical simulations of the strategies by comparing the 

actual matching rates in states during recessionary times with the 

Medicaid and Economic Downturns
Appendix I: Objectives, Scope, and 

Methodology 

matching rates that could exist under the strategies to provide targeted 

supplemental Medicaid assistance and have Medicaid matching rates 

better reflect states’ current economic conditions, 

• consulted with experts in Medicaid financing issues on our targeting 

simulation in terms of its design and suggestions to refine it, and 

• discussed the strategies with key research groups and state 

associations to discern the potential utility of the strategies as well as 

the feasibility of states’ implementing different strategies. 

Table 4 summarizes the three strategies considered for this report. 

Appendixes II, III, and IV provide additional detail regarding the 

analyses of these strategies. 

Table 4: Analysis of Three Strategies to Help States Respond to Increased Medicaid Costs during Economic Downturns 

Goal of strategy Approach Analysis 

Provide targeted supplemental 

Medicaid assistance 

Target supplemental funds to states 

based on projected Medicaid spending 

increases and depth and duration of 

economic downturn. 

• Identify design considerations involved in

defining national downturns and distributing 

supplemental federal funds. 

• Estimate amounts states would receive based

on economic conditions present during three 

prior recessions. 

Have Medicaid matching rates 

better reflect states’ current 

economic conditions

Use 2 years of PCI data in the statutory 

formula used to compute federal matching 

rates. 

• Compare matching rates computed using 2 

years of PCI data to rates based on the 3 

years of PCI data required under current law. 

• Analyze extent to which existing matching 

rates and matching rates based on 2 years of 

PCI data were consistent with states’ 

economic circumstances. 

Provide states with options to 

improve timing and targeting of 

increased Medicaid assistance 

Allow states to determine whether and 

when they need increased assistance in

response to economic downturns. 

• Identify considerations involved in designing

loans or a national rainy day fund. 

• Identify potential effects based on structure 

and use of existing intergovernmental loan 

programs. 

Source: GAO.

Page 30 GAO-07-97 Medicaid and Economic Downturns
Appendix I: Objectives, Scope, and 

Methodology 

To illustrate the potential ability of each strategy to help states address 

increased expenditures during economic downturns, we analyzed how 

implementation of each strategy might differ with respect to the varied 

economic effects of downturns, including (1) early onset of a shallow 

downturn, (2) early onset of a deeper downturn, (3) later onset of a 

shallow downturn, and (4) later onset of a deeper downturn. We also 

reviewed examples of states whose matching rates generally remained at 

the lowest level allowable by federal statute. 

We contacted representatives of public policy and research organizations 

to (1) gain insights into various issues, such as the extent to which 

strategies could help states cope with the Medicaid-related fiscal 

consequences of economic downturns; (2) obtain referrals to related 

research; (3) validate our selection of strategies; and (4) obtain views 

regarding the feasibility and utility of the three strategies, as well as to 

discuss the potential effects of these strategies. The organizations we 

contacted were as follows: 

American Enterprise Institute 

Cato Institute 

Center on Budget and Policy Priorities 

Heritage Foundation 

National Association of State Budget Officers 

National Conference of State Legislatures 

National Governors Association 

In addition, we consulted with technical experts from Federal Funds 

Information for States and The Urban Institute regarding our simulations 

for the strategies to target supplemental Medicaid assistance to specific 

states based on the depth and duration of their economic downturns as 

well as their Medicaid expenditures and to use 2 instead of 3 years of PCI 

data to calculate federal matching rates. 

We obtained and analyzed data on personal income and state population 

from the Bureau of Economic Analysis, data on unemployment from the 

Bureau of Labor Statistics, and data on Medicaid expenditures from the 

Centers for Medicare & Medicaid Services. We discussed our use of these 

data with agency officials and reviewed relevant documentation. On the 

basis of these efforts and our use of the data to illustrate potential policy 

strategies and their simulated effects, we determined that the data were 

sufficiently reliable for this report. 

Illustrating the Range 

of Economic 

Conditions Affecting 

States during 

Economic Downturns 

Organizations GAO 

Contacted 

Data and Data 

Reliability 

Page 31 GAO-07-97 Medicaid and Economic Downturns
Appendix II: De

Supple

signing a Strategy of Targeted 

mental Medicaid Assistance 

Page 32 GAO-07-97 

Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

This appendix describes the design decisions and policy considerations 

involved in creating a strategy aimed at targeting supplemental funds to 

states based on the extent to which their Medicaid expenses increase 

during an economic downturn. This supplemental assistance strategy 

would leave the existing Medicaid formula unchanged and add a new, 

separate assistance formula that would operate only during times of 

economic downturn and use variables and a distribution mechanism that 

differ from those used for calculating matching rates. The strategy would 

require policy decisions on three basic steps: (1) deciding when to start 

and stop the supplemental assistance to states, (2) determining the level of

assistance provided (including defining the formula for distributing funds), 

and (3) deciding how to distribute the assistance (principally, deciding 

whether assistance should be an incremental increase in federal matching 

rates or provided as a lump-sum grant payment). To illustrate these design 

considerations, we developed a model to simulate supplemental 

assistance. The following sections describe the choices made to simulate 

and illustrate the resulting supplemental assistance as well as some 

possible alternatives. 

This section presents information about how we chose unemployment as 

the indicator for an economic downturn and how we selected the rules for 

starting and stopping the provision of supplemental assistance. We 

reviewed how these rules would have applied to the past three recessions 

(2001, 1991-1992, and 1981-1983) using our simulation model. 

Design 

Considerations for 

Starting and Stopping 

Assistance 

Choice of Unemployment 

as an Indicator

We used unemployment as the key variable because it reflects the 

potential for increases in Medicaid enrollment as a result of an economic 

downturn. Although other indicators of economic downturn are widely 

reported and important in other contexts,1

 experts consider increases in 

unemployment to be an indicator of the likely increase in Medicaid 

 1

For example, in its retrospective determination of the dates of nationwide economic peaks

and troughs, the Business Cycle Dating Committee of the National Bureau of Economic 

Research (a private, nonprofit, nonpartisan research organization) relies primarily on real 

gross domestic product (GDP), real income, employment, industrial production, and

wholesale-retail sales. The Committee views real GDP as the single best available measure. 

These data are not all available at the state level. 

Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

enrollments of adults and children.2 To simulate how supplemental 

assistance could be provided, we used Bureau of Labor Statistics (BLS) 

unemployment data by state. Monthly BLS unemployment data by state 

become available with a lag of less than one quarter.3

 

Use of Unemployment as 

an Economic Indicator 

Ideally, the indicator used should reflect the economic downturn and 

exclude other influences such as long-term trends, seasonal influences, 

and other shorter fluctuations. In order to minimize the influence of 

seasonality and the month-to-month fluctuations on the unemployment 

data used in our model simulations, we used a quarterly average of 

seasonally adjusted unemployment data for the 12 most recent months.4

 

Because the level of unemployment is driven by trends in the structure of 

a state’s economy, we used increases in unemployment during a period of 

economic downturn as our measure of the effects of the economic cycle.5

 

(The problem of deciding on a base period from which to calculate those 

increases in unemployment was a key issue that is discussed later in this 

appendix.) This is an inexact method for isolating the effects of cyclical 

downturn on unemployment, especially if the trend should change along 

with the economic downturn. For example, if an economic downturn is a 

precipitating event that leads to long-lasting declines in a state’s 

manufacturing industries, at some point the state’s increases in 

unemployment are attributable to structural change in its economy. When 

the increases in unemployment are long term rather than cyclical, this may 

be a policy consideration in deciding when to stop the supplemental 

assistance. 

 2

Centers for Medicare & Medicaid Services (CMS) data on Medicaid enrollments would not

be useful for this purpose because they reflect both changes in enrollments due to changes

in state policies affecting eligibility as well as increases in enrollment that are attributable 

to economic downturn. 

3

More specifically, we used monthly, seasonally adjusted unemployment data and

unemployment rates from BLS Local Area Unemployment Statistics by state. 

4

Month-to-month fluctuations are dampened by using a quarterly rolling average of the 12 

most recent months, though it also somewhat dampens the indicator’s sensitivity to turns 

in the economy. However, we retained some degree of sensitivity by recomputing these 12-

month averages for each quarter. For this strategy, when referring to unemployment or the 

unemployment rate, we are referring to the average of the 12 most recent months. 

5

More sophisticated statistical methods could perhaps better isolate cyclical change from 

trends and other noncyclical factors causing changes. We chose this quarterly moving 

average method because it offers greater simplicity that helps make the assistance formula 

mechanism easier to explain and understand. 

Page 33 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

Alternative Indicators of 

Downturns and Increases 

in Medicaid Enrollments 

Economists generally prefer indicators other than unemployment to signal 

economic downturns. Unemployment sometimes lags behind the cyclical 

turns in the economy; it can be both slow to increase when the downturn 

begins and slow to return to pre-downturn levels when other indicators 

show the economy is recovering. In general, other indicators show an 

earlier and briefer downturn than unemployment. 

For example, researchers at the Philadelphia Federal Reserve Bank 

developed a monthly index of four state economic indicators intended to 

coincide with the economic cycle.6,7

 Such a broad index of economic 

conditions could provide a more reliable and timely indication of a state’s 

cyclical downturn than unemployment. Furthermore, if the purpose of 

supplemental assistance was to include the provision of some

countercyclical stimulus—that is, provide incentives to increase spending

to boost macroeconomic activity—rather than to help states address the 

impacts of the downturn on increased Medicaid expenditures, then an 

alternative to unemployment as a variable for triggering funding would 

have better prospects for providing well-timed assistance. 

However, there is some leeway in providing supplemental assistance to 

compensate states for the impact of a downturn on their Medicaid 

enrollments and spending. According to experts, states have budget 

resources and financial management techniques to temporarily sustain 

them for a year or two with downturn-driven increases in Medicaid 

expenditures. To assist states with the costs of Medicaid enrollment 

increases, the relatively brief lags caused by using unemployment rates to 

trigger supplemental assistance payments would not present a problem. 

Starting and Stopping 

Supplemental Assistance 

Supplemental federal assistance could be set to begin payments to states 

when economic evidence shows a significant number of states are in an 

economic downturn. For example, when a certain number of states have 

each exceeded a specified increase in their unemployment rate, 

supplemental assistance could be authorized to begin for the next quarter. 

 6

Theodore M. Crone, “What a New Set of Indexes Tells Us About State and National 

Business Cycles,” Federal Reserve Bank of Philadelphia Business Review (2006, Q1): pp.

11-24. 

7

The National Bureau of Economic Research establishes widely used dates of the start and

end of expansions and contractions of the U.S. business cycle. These dates are determined

retrospectively and would not be available on a timely basis for use in an automatic trigger. 

Page 34 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

A similar criterion could be used to stop payments. Such a rule could be

designed to provide a high degree of certainty that the nation had entered

a downturn and that states were not all in recovery. For our simulation 

model, we chose the rule that payments to states would begin when 23 or

more had an increase in their unemployment rate of 10 percent or more 

from the comparable quarter a year earlier, and payments would stop 

when fewer than 23 states had increases of 10 percent or more.8

 We chose 

23 states and a 10 percent or more increase in unemployment on the basis 

of a review of states’ unemployment rates over past economic cycles and

made a judgment that these levels would provide considerable certainty

that an economic slowdown was nationwide. Other thresholds could be 

selected to tighten or loosen the parameters to start and stop 

supplemental federal assistance. 

Automatic Trigger Design 

Objectives and Issues 

An automatic trigger would need to specify several key parameters or 

rules that together would control when assistance payments would begin,

how long they would last, and when they would stop. Though the trigger 

would control all supplemental assistance payments, it should utilize stateby-state data rather than national aggregates because it involves assistance 

to state Medicaid programs. The trigger should distinguish between small 

up-and-down movements in unemployment, which could be associated 

with an economy that is basically stagnant, from those movements that 

clearly show a state whose economy has entered a downturn. The trigger 

must clearly identify the duration of the period of economic downturn 

because of the previously mentioned difficulty of separating a state’s trend 

in unemployment from its cyclical changes. Furthermore, the design 

decision should involve consideration of potential risks. A trigger that is 

too sensitive could provide more payments than are reasonably justified 

by the economic downturn, while a trigger with standards that are too 

rigorous would penalize states whose downturns are exceptionally longlasting, early or late. Also, an automatic trigger for supplemental 

assistance would need to be designed with some degree of simplicity and

transparency. 

 8

This 10 percent threshold is used as a criterion for beginning federal supplemental 

assistance to states. As explained later in this appendix, it does not restrict an individual 

state’s eligibility. In other words, a state with a 2 percent increase in unemployment would 

receive assistance, but its supplemental increase to its matching rate would be smaller. 

Page 35 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

For our simulation model, state payments would be triggered when 23 or

more states had an increase of 10 percent9

 or more in the state’s 

unemployment rate compared to the same quarter in the previous year, 

and payments would stop when those conditions were no longer present. 

This trigger consists of three key elements: 

An Illustrative Automatic 

Trigger 

• a threshold number of states (23), 

• a threshold percentage increase in the unemployment rate (10 percent 

or more), and 

• a “retrospective assessment” used to derive the percentage increase in 

the unemployment rate compared to the same quarter in the previous 

year. 

We chose the two threshold values of 23 states and 10 percent or more to 

work in tandem to ensure that when the program starts, the national 

economy has entered a downturn and that many states (at least 23 and 

probably more) are not yet in recovery.10 We chose both numbers based 

on a review of states’ unemployment rates over past economic cycles and

made a judgment that these levels would provide considerable certainty

that the economic slowdown was nationwide. 

To illustrate the application of this trigger, figure 5 shows the number of 

states with a 10 percent or greater increase in their unemployment rate 

from the same quarter a year earlier for the period from 1979 through the 

 9

This is an increase of 10 percent compared to the unemployment rate for the same quarter 

in the previous year and not a 10 percentage point change in unemployment rates. Unless 

otherwise specified, all percentage changes in unemployment or unemployment rates for 

this strategy are expressed in terms of a percentage increase over a base quarter, and not 

percentage points. (However, supplemental increases to states’ matching rates are 

reported in percentage points because that is the common way to present that 

information.) 

10This is the percentage increase in a state’s unemployment rate compared to the same 

quarter in the previous year (the retrospective assessment). We do not use the national 

unemployment rate as a reference point because many states usually remain well above or 

below the national unemployment rate. The use of state-by-state unemployment rates is 

also appropriate because supplemental assistance is intended for individual states, whose 

Medicaid programs vary. 

Page 36 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

third quarter of 2004.11 This period covers three recessions and offers 

supplemental assistance as follows: 

• for the 2001 recession, 7 quarters of assistance is provided beginning in 

the first quarter of 2002 and ending as of the fourth quarter of 2003; 

• for the 1991-1992 recession, 6 quarters of assistance is provided

beginning with the fourth quarter of 1991 and ending as of the second 

quarter of 1993; and 

• for the 1981-1983 recession, 11 quarters of assistance is provided in two 

phases, with the first phase beginning in the fourth quarter of 1980 and 

ending as of the second quarter of 1982, and the second phase resuming 

assistance in the fourth quarter of 1982 and ending as of the first 

quarter of 1984.

Each recessionary period has different characteristics. For example, the 

1991-1992 recessionary period shows a more gradual increase in 

unemployment compared to the other recessions—and fewer states are 

affected.12

 11Note that in all the data displays in this appendix, a 2-quarter administrative lag is 

assumed between the date of the increase in unemployment data and the date the 

supplemental assistance could be provided. Such an administrative lag would reflect time 

for data to become available, for allocations to be computed, and for other administrative 

purposes. For example, on a table or figure showing unemployment for the third quarter of

2002, those are actually unemployment data as of the first quarter of 2002, with the 

difference due to the assumed 2-quarter administrative lag. 

12If the onset of the downturn is very gradual, it is more likely that fewer states will have 

the requisite 10 percent increase over the unemployment rate from the prior year. 

Page 37 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

Figure 5: Number of States with a 10 Percent or More Increase in Their 

Unemployment Rate Compared to the Same Quarter 1 Year Earlier, 1979-

2004

0

5

10

15

20

25

30

35

40

45

50

Number of states

1979 1980

III IV IV II I III IV III I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I II

1981 1982 1983 1984 1985 1986 1987 1988

Quarter

23-state trigger

Page 38 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

I III IV II III IV I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III IV II I III II I II

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: GAO analysis of BLS data.

Performance of the 

Automatic Trigger 

A rough method of evaluating the performance of the automatic trigger is 

the degree to which the period it identifies encompasses states’ increases

in unemployment in that period.13 The trigger must delineate a period of 

payments that coincides well with most states’ increases in the number of 

unemployed, in order for the supplemental federal assistance calculated 

on the basis of those unemployment increases to also be well targeted. 

Overall, about 90 percent of the unemployment increases in the period 

from the second quarter of 2000 through the fourth quarter of 2004 are 

captured by the time period of the trigger plus the 1-year retrospective 

assessment used by the simulation model. When the trigger identifies the 

start of the first quarter of the program of supplemental federal assistance, 

then the process of computing each state’s assistance for that first quarter 

and each subsequent quarter of assistance takes place. As part of that 

process, the simulation model calculates each state’s increase in 

 13Note that this is an increase in the number of persons unemployed and not the 

unemployment rate. 

Page 39 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

unemployment, which is the increase in unemployment compared to the 

base quarter. For each state, the base quarter is whatever quarter had the 

lowest unemployment within the preceding 4 quarters. Thus, though the 

program begins in the first quarter of 2002, it could use states’ increases in 

unemployment that occurred as early as the first quarter of 2001. Figure 6 

shows the sum of states’ increases in unemployment over the previous 

quarter for the first quarter of 2000 through the fourth quarter of 2005. 

While the trigger in the first quarter of 2002 appears late relative to when 

some states actually experienced an increase in unemployment, the 

simulation model’s retrospective assessment captures much of the 

preceding unemployment. 

Figure 6: Total of States’ Quarterly Increase in Unemployment Covered by

Simulation Model’s Supplemental Assistance 

600 

500 

400 

300 

200 

100 

0 

Number of unemployed in thousands

Quarter 

2000 2001 2002 2003 2004 2005 

Payment 

calculation 

period 

Payment 

period 

Source: GAO analysis of BLS data. 

I III IV II III IV I III IV II I III IV II I III IV II I III IV II I II

Use of Alternative 

Parameters in the 

Automatic Trigger 

A lower threshold for the increase in the unemployment rate or requiring a

smaller number of states to pass that threshold could trigger supplemental

assistance somewhat sooner and provide more quarters of payments 

(especially for states that may enter a downturn much earlier or later than

Page 40 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

others). These parameters would also have potential disadvantages: 

(1) they could provide less certainty that there has been a nationwide 

downturn, and (2) with more quarters of supplemental assistance, the 

overall cost could be greater (other things remaining the same). 

To show the way in which the threshold parameters included in our 

simulation model work together, figure 7 displays the effects of choosing 

alternative combinations of these parameters for the period 2000 through

2005. For example, if we use 21 rather than 23 states, supplemental 

assistance would be triggered with the same first quarter but last for 8 

rather than 7 quarters. Many adjoining cells of the figure have the same 

first quarter and number of quarters because small changes in the 

threshold parameters may not change when supplemental assistance is 

triggered. However, over the broad ranges shown in the figure, the clear 

pattern is that lowering the percentage increase or lowering the number of 

states generally moves in the direction of an earlier first quarter and a 

greater number of quarters of payments. 

Page 41 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

Figure 7: Effects of Alternative Threshold Parameters on the Start and Number of Quarters of Supplemental Assistance, 2000 

through 2005 

Number of states

Percentage increase in unemployment rate 

9 

6 

8 

10 

12 

14 

7 

16 

2002 

Q1 

8 

2002 

Q1 

9 

2001 

Q4 

10 

2001 

Q4 

13

2001 

Q3

13

Quarter and year assistance 

would begin

Number of quarters of assistance 

provided

Combination used in 

GAO’s simulation 

2001 

Q3

7 

2002 

Q1 

7 

2002 

Q1 

8 

2001 

Q1 

9 

2001 

Q4 

11 

2001 

Q4 

12 

2001 

Q3

7 

2002 

Q1 

7 

2002 

Q1 

7 

2002 

Q1 

8 

2002 

Q1 

10 

2001 

Q4 

11 

2001 

Q4 

5 

2002 

Q2 

6 

2002 

Q2 

7 

2002 

Q1 

8 

2002 

Q1 

9 

2002 

Q1 

11 

2001 

Q4 

5 

2002 

Q2 

5 

2002 

Q2 

7 

2002 

Q1 

8 

2002 

Q1 

9 

2002 

Q1 

10 

2002 

Q1 

5 

2002 

Q2 

5 

2002 

Q2 

6 

2002 

Q2 

7 

2002 

Q1 

8 

2002 

Q1 

10 

2002 

Q1 

5 

2002 

Q2 

5 

2002 

Q2 

6 

2002 

Q2 

7 

2002 

Q1 

8 

2002 

Q1 

10 

2002 

Q1 

4 

2002 

Q3

5 

2002 

Q2 

6 

2002 

Q2 

6 

2002 

Q2 

8 

2002 

Q1 

9 

2002 

Q1 

4 

2002 

Q3

5 

2002 

Q2 

6 

2002 

Q2 

6 

2002 

Q2 

7 

2002 

Q1 

8 

2002 

Q1 

4 

2002 

Q3

4 

2002 

Q3

5 

2002 

Q2 

6 

2002 

Q2 

7 

2002 

Q2 

8 

2002 

Q1 

3

2002 

Q3

4 

2002 

Q3

5 

2002 

Q2 

6 

2002 

Q2 

6 

2002 

Q2 

7 

2002 

Q2 

3

2002 

Q3

4 

2002 

Q3

4 

2002 

Q3

5 

2002 

Q2 

6 

2002 

Q2 

6 

2002 

Q2 

2 

2002 

Q3

3

2002 

Q3

4 

2002 

Q3

5 

2002 

Q2 

6 

2002 

Q2 

6 

2002 

Q2 

12 15 18 21 23 25 27 29 31 33 35 37

Source: GAO analysis of BLS data. 

Note: Numbers in bold font are those used in GAO’s simulation. 

The trigger for our simulation is based on the increase in the

unemployment rate over the same quarter of the previous year. Depending

on congressional preferences, the period could instead be longer than 1 

year, or it could be based on the increase from the pre-downturn levels. 

Because unemployment is slower to recover than other economic 

indicators, it may be a number of years into the national recovery before 

unemployment rates return to the levels immediately preceding the 

Page 42 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

downturn. Therefore, the effect of a longer retrospective assessment 

would be to provide supplemental assistance for more quarters and also to 

provide more assistance to the states with longer-lasting or late

downturns. Using a shorter period reflects a policy judgment that the 

program should be temporary and, in particular, that after 1 year the states

should then adjust their budgets and programs to reflect changed 

economic conditions.14 

An alternative way to start and stop supplemental assistance is through 

legislation. Congress could consider other indicators and criteria to start 

or stop assistance with the intention of implementing other policy 

objectives. For example, decisions could be made regarding limiting the 

number of quarters of payments or stopping payments after spending caps 

are reached. Additionally, instead of an automatic trigger, supplemental 

assistance could begin when Congress enacted legislation. However, 

enacting appropriately funded and timely legislation under the pressure of 

worsening national and state economies presents its own challenges. 

Studies of the past performance of discretionary federal fiscal policy 

actions in response to recession have shown instances of enactment of 

belated and inappropriate levels of fiscal stimulus.15 Also, some of the 

groups we contacted for this study believed that an “automatic trigger” 

based on economic criteria would be the most likely method of 

implementing assistance in a consistent and timely manner.16 

There are three important aspects to determining the level of supplemental 

assistance. First, a level of funding must be developed. The level of

funding in our model is based on the average costs to states attributable to

increases in unemployment. Second, the estimates and allocations of 

quarterly funding must be consistent with the annual appropriations 

Alternative Ways to Start 

and Stop Supplemental 

Assistance 

Determining the Level 

of Supplemental 

Assistance 

 14The choices are not merely limited to the choice between a longer and shorter 

retrospective assessment. For example, the retrospective assessment could be a weighted 

average of long and short periods, with less weight on the long periods. 

15For example, see John Taylor, “Reassessing Discretionary Fiscal Policy,” Journal of

Economic Perspectives, v. 14, n. 3 (Summer 2000): pp. 21-36. 

16Congressional action could override any approach in place. For example, if there were 

signs of an incipient national economic downturn, supplemental assistance could be 

enacted ahead of an automatic trigger. Alternatively, supplemental assistance could be 

blocked if funding of other budget priorities was deemed more important.

Page 43 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

process. Third, assistance needs to be targeted to states on the basis of 

the impact of increases in unemployment on their Medicaid programs. 

Several studies in the economics literature have estimated a relationship 

between changes in unemployment rates and changes in Medicaid 

spending while holding constant other factors that influence Medicaid 

spending.17 While these models cannot provide state-by-state estimates of 

enrollment increases, they provide national average estimates from which 

we can calculate an average amount of additional federal Medicaid 

spending per additional unemployed person. We have chosen to use the 

estimate of $300 per additional unemployed person derived from a recent 

econometric study of the responsiveness of Medicaid enrollments and 

spending to changes in unemployment rates and other factors, such as 

states’ spending on certain Medicaid populations.

18 Based on the depth of 

the 2001 recession, the amount of federal assistance would have been $4.2 

billion. 

Level of Funding 

Funding and the 

Appropriations Process 

Given the difficulties of forecasting the depth and duration of a downturn, 

as well as the pace of the recovery, estimating the cost of supplemental 

assistance can be difficult. However, within the context of the overall

Medicaid program, the amount of supplemental assistance provided in our 

simulation ($4.2 billion) is relatively small—less than 1 percent of total 

Medicaid spending for a 2-year period. As an open-ended matching grant 

that provides states with an incremental increase to their matching rates, 

funding may need to be appropriated.19 Similarly, supplemental assistance 

designed to provide a lump-sum grant or to be closed-ended, could also 

require an appropriation amount. The funding would need to be 

 17John Holahan and Bowen Garrett, “Rising Unemployment and Medicaid,” Urban Institute

Health Policy Online (Oct. 16, 2001). This description somewhat oversimplifies the 

econometric methods of these studies. For instance, these studies rely on several 

estimating equations, and they also estimate increases in Medicaid enrollments from which 

the impact on Medicaid spending is calculated. 

18Stan Dorn, Barbara Markham Smith, and Bowen Garrett, Medicaid Responsiveness, 

Health Coverage, and Economic Resilience: A Preliminary Analysis, prepared for the

Health Policy Institute of The Joint Center for Political and Economic Studies (Washington, 

D.C.: The Joint Center for Political and Economic Studies, Sept. 27, 2005). 

19Open-ended matching grants increase the capacity of state and local governments to 

provide services, but because of difficulty in predicting expenditures, they create a degree

of fiscal uncertainty at the federal level. 

Page 44 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

apportioned across quarters of the fiscal year in order to provide 

proportionately equal treatment between the states that enter a downturn 

early and those that enter late, presuming equal treatment is defined as 

providing states with equal funding for equal increases in unemployment 

and commensurate with state Medicaid populations (all other factors 

remaining the same). Past economic data show that the middle quarters of

the supplemental assistance are certain to have much greater increases in 

unemployment than the earlier and later quarters (see fig. 5).20 Therefore, 

a policy of spending until funds are gone would seem to leave the states 

with late-starting downturns, or prolonged contractions, at risk of 

receiving little or no supplemental funding. 

Allocation Model Our simulation model targets funds to states in proportion to the product 

of two factors. The first is the state’s increase in the number of 

unemployed persons in that quarter compared to the number of 

unemployed in the base quarter.21 The second factor is a Medicaid 

spending index intended to adjust the first factor for the relative size of the 

states’ Medicaid programs for the nonelderly. The first factor is intended

to gauge the impact of the economic downturn on Medicaid enrollment in 

the state. The factor is the amount by which unemployment for the most 

recent quarter exceeds the number of unemployed in the base quarter. 

The base quarter is the quarter with the lowest number of unemployed in 

the year immediately preceding the first quarter in which assistance is 

triggered. However, if the state’s number of unemployed decreased after 

the first quarter, that lowest quarter would then become the base quarter

unemployment. If a state has a decrease in the number of unemployed 

compared to the base quarter, it would not receive funding because of a 

lack of discernible impact from the economic downturn. However, states 

with even small increases in the number of unemployed would receive

 20This variation by quarter is one reason why calculating quarterly supplemental assistance 

payments could better target funds than calculating payments on an annual basis.

21We used the number of unemployed persons rather than the unemployment rate because 

state size must be taken into account. Two states with identical unemployment rate

increases may have different increases in their numbers of unemployed persons. The state 

with a larger increase in the number of unemployed persons would have greater resulting 

Medicaid spending, assuming everything else remained the same. This increase in the

number of unemployed could be adjusted to take into account the change in the labor force 

from the base period. However, we chose not to take this approach to avoid complicating 

the simulation model. 

Page 45 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

some assistance, in proportion to the increase in unemployment.22 We 

excluded increases in the number of unemployed that predated this 

retrospective assessment. Presumably, such increases would be small and 

possibly unrelated to the nationwide economic downturn. 

The purpose of the second factor is to adjust the number of unemployed 

for the relative cost of state Medicaid programs. Two states with an equal

increase in the number of unemployed could have very different increases 

in Medicaid expenditures, depending on their rate of Medicaid spending. 

The Medicaid index is calculated for each state as its average Medicaid 

spending per nonelderly poor person relative to the national average. 

Thus, a state whose Medicaid spending per nonelderly person in poverty 

was equal to the national average would have an index value equal to one 

(1.00). CMS spending data are used to approximate each state’s Medicaid 

spending for the cyclically sensitive population. Census Bureau data 

provide an estimate of adults and children in poverty, who are the 

potential beneficiaries of such Medicaid spending. The Medicaid index 

factor would not be updated quarterly because it is intended to supply 

relative positions of the states and not quarterly impacts of the economic

cycle.

23 

The Medicaid index varies widely among the states because of differing 

Medicaid program characteristics and funding efforts. If Congress did not 

want supplemental assistance funding to reflect the full magnitude of 

variations in Medicaid spending, constraints could be designed to 

moderate this factor, or it could be eliminated from the methodology for 

allocating supplemental assistance. 

 22While states could cope with the impact of small increases in the number of unemployed, 

it could be problematic to specify a level of increase that is small enough for states to cope

without federal aid. Furthermore, because of our inability to separate trends from the 

effects of economic cycles, a fast-growing state that has a small increase in the number of 

unemployed could claim to be significantly affected by the national downturn, considering

how large its decrease in the number of unemployed might have been without the 

downturn. 

23CMS does not make these data available frequently enough to permit their use on a

quarterly basis by states. For our simulation model, we used 2003 expenditure data, which 

were the most recent data available at the time we did our work. 

Page 46 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

Assistance could be provided either as an incremental increase to states’ 

federal matching rates or as a lump-sum grant. Representatives of one 

organization we contacted preferred matching assistance on the grounds 

that it would better ensure maintenance of state contributions to the 

Medicaid program, in contrast to lump-sum grant payments that could 

more readily allow states to reduce their own Medicaid spending effort 

and thus use state funds for other purposes. Supplemental federal 

assistance as described in this appendix could be provided as a targeted 

incremental increase in each state’s matching rate or targeted lump-sum 

grant to states. Either approach could provide a state with a comparable 

amount of funding. 

Supplemental assistance could provide either a lump-sum grant to each 

state or a comparable level of funding through an incremental increase in 

the state’s matching rate. The lump-sum formula would provide funds in 

proportion to the state’s increase in the number of unemployed, with that 

increase adjusted by the index of relative Medicaid cost. The increase in 

the Medicaid matching rate is calculated by dividing the lump-sum grant 

amount by a state’s total Medicaid spending. Thus, if a state left its 

Medicaid spending unchanged, it would receive the full assistance amount. 

This section highlights results from our supplemental targeted assistance 

simulation model for the 1998 through 2004 time span.24 Individual states 

vary in different recessions in terms of unemployment levels and 

supplemental federal assistance that would result from changes in the 

Deciding How to 

Distribute 

Supplemental 

Assistance 

Matching Assistance or 

Lump-sum Grants 

Calculation of Lump-sum 

and Matching Assistance 

Amounts 

Simulation Model 

Results 

 24Similar targeting was displayed in other recessionary periods. That is, the targeted 

assistance was proportional to the increases in unemployment. In addition, a relatively 

small number of states (usually different states in each period) would receive small 

payments because their recessions began either earlier or later compared with the national 

downturn. 

Page 47 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

number of unemployed. A state with minimal unemployment increases in

one recession can experience much greater increases in the number of 

unemployed in another recession. The widely differing nature of states’ 

experiences suggests that simulated supplemental assistance is unlikely to

reflect what a particular state would receive in a future economic 

downturn. 

Table 5 shows data related to the factors used in the formula and the 

resulting supplemental assistance, by state. As shown in table 5, the 

average percentage increase in the number of unemployed ranged from 0.1 

to about 80 percent. With a few exceptions, every state would begin 

receiving assistance during the first quarter of 2002 and would receive 7 

quarters of payments. The next column shows the Medicaid index used, 

and the final two columns show the average increase in each state’s 

matching rate during the 7 quarters, with and without the Medicaid 

expenditure index factor. Because of the importance of the Medicaid 

expenditure index in determining assistance (especially to those states 

with relatively large or small indexes), we present the assistance 

computed with and without the Medicaid factor. In general, the simulated 

increases in matching rates show the targeting with respect to the 

variations in the increases in unemployment that the formula is designed 

to provide. This targeting is especially apparent for the supplemental 

matching rates that exclude the Medicaid index. For some states, the 

Medicaid index is an important determinant of the supplemental 

assistance, but much less important to those states whose index value is 

closer to the U.S. average of 1.00. For example, table 5 shows that 

Alaska’s average percentage point increase in matching rate would more 

than triple by including the Medicaid expenditure index, increasing from 

0.26 to 0.86. In contrast, Oregon’s average percentage point increase in 

matching rate experienced a minimal change by including the Medicaid 

expenditure index, increasing from 1.68 to 1.70. 

Page 48 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

Table 5: Simulated Supplemental Assistance for Economic Conditions of the 2001 Downturn 

Average percentage point

increase in matching rate 

State 

Average 

percentage

increase in

unemployment 

Initial

payment 

quarter

Number of 

quarters

Index of Medicaid

expenditures per 

nonelderly person in 

povertya (U.S.=1.000) 

Excluding

Medicaid 

expenditure

 index

Including

Medicaid 

expenditure 

index

Alabama 22.6 2002Q1 7 0.654 0.65 0.43

Alaska 9.8 2002Q1 7 3.272 0.26 0.86

Arizona 40.9 2002Q1 7 1.078 1.00 1.08

Arkansas 19.8 2002Q1 7 0.685 0.49 0.33

California 27.4 2002Q1 7 0.933 0.88 0.83

Colorado 80.3 2002Q1 7 0.682 2.36 1.61

Connecticut 68.9 2002Q1 7 1.576 1.12 1.77

Delaware 16.8 2002Q1 7 2.429 0.34 0.83

District of Columbia 12.7 2002Q1 7 1.553 0.24 0.37

Florida 40.2 2002Q1 7 0.705 1.13 0.80

Georgia 29.2 2002Q1 7 1.059 0.74 0.78

Hawaii 8.8 2002Q1 6 2.309 0.27 0.63

Idaho 15.1 2002Q1 7 0.852 0.59 0.50

Illinois 33.8 2002Q1 7 0.813 1.16 0.95

Indiana 61.0 2002Q1 7 1.075 1.37 1.48

Iowa 36.4 2002Q1 7 1.033 0.84 0.87

Kansas 29.3 2002Q1 7 0.665 1.02 0.68

Kentucky 30.5 2002Q1 7 0.908 0.74 0.67

Louisiana 18.7 2002Q1 7 0.581 0.44 0.26

Maine 28.4 2002Q1 7 2.589 0.49 1.28

Maryland 24.0 2002Q1 7 1.467 0.62 0.91

Massachusetts 67.2 2002Q1 7 1.225 0.85 1.05

Michigan 57.9 2002Q1 7 0.712 1.57 1.11

Minnesota 46.5 2002Q1 7 1.948 0.84 1.63

Mississippi 17.1 2002Q1 7 0.821 0.43 0.35

Missouri 62.4 2002Q1 7 1.192 1.11 1.32

Montana 0.1 2002Q4 4 0.675 0.00b0.00b

Nebraska 26.0 2002Q1 7 0.973 0.57 0.56

Nevada 33.5 2002Q1 7 0.703 1.78 1.25

New Hampshire 51.5 2002Q1 7 1.539 1.01 1.55

New Jersey 40.8 2002Q1 7 0.735 0.96 0.71

Page 49 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

Average percentage point

increase in matching rate 

State 

Average 

percentage

increase in

unemployment 

Initial

payment 

quarter

Number of 

quarters

Index of Medicaid

expenditures per 

nonelderly person in 

povertya

 (U.S.=1.000) 

Excluding

Medicaid 

expenditure

 index

Including

Medicaid 

expenditure 

index

New Mexico 8.9 2002Q1 7 1.286 0.20 0.26

New York 28.7 2002Q1 7 1.796 0.34 0.61

North Carolina 77.4 2002Q1 7 0.915 1.70 1.55

North Dakota 16.3 2002Q2 6 0.595 0.39 0.23

Ohio 28.5 2002Q1 7 1.041 0.69 0.72

Oklahoma 39.7 2002Q1 7 0.667 0.98 0.66

Oregon 39.1 2002Q1 7 1.011 1.68 1.70

Pennsylvania 26.3 2002Q1 7 1.035 0.57 0.59

Rhode Island 18.1 2002Q1 7 1.106 0.30 0.33

South Carolina 53.1 2002Q1 7 0.972 1.17 1.14

South Dakota 24.9 2002Q1 7 1.122 0.57 0.64

Tennessee 27.0 2002Q1 7 1.431 0.53 0.75

Texas 34.4 2002Q1 7 0.749 1.16 0.87

Utah 61.0 2002Q1 7 0.752 2.20 1.65

Vermont 41.0 2002Q1 7 1.992 0.55 1.10

Virginia 69.3 2002Q1 7 0.610 1.77 1.08

Washington 41.6 2002Q1 7 0.971 1.41 1.37

West Virginia 6.3 2002Q3 5 1.345 0.16 0.22

Wisconsin 52.3 2002Q1 7 0.422 1.38 0.58

Wyoming 8.1 2002Q1 7 1.267 0.27 0.34

Source: GAO calculations based on BLS, CMS, and Census data.

a

Expenditures for categories that would be cyclically sensitive such as spending for children and 

nondisabled, nonelderly adults. 

b

Less than 0.005.

Next are figures showing changes in states’ matching rates resulting from 

the supplemental assistance and changes in unemployment for selected 

states with widely varying economic downturns in order to illustrate 

patterns of simulated supplemental assistance in relation to changes in 

unemployment. These states provide a broader picture to illustrate the 

different economic circumstances that states can experience during the 

same economic downturn. On each of the next four figures, the trend line 

shows the percentage increase in unemployment from the base quarter 

and is plotted with respect to the percentage change in unemployment. 

The bars show supplemental matching rate increases, and relate to the 

Page 50 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

increased matching rate. Figure 8 depicts a downturn in a state that had

increasing unemployment from the first quarter of 2000 and shows an 

increase in unemployment that continues through the third quarter of 

2004. The bars show that the supplemental assistance would be 

responsive to the increase in unemployment during the 7 quarters the state 

received the assistance. 

Figure 8: Simulated Supplemental Assistance for a State with an Early, Long, and

Deep Economic Downturn 

100 

80 

60 

40 

20 

-20 

0 

4.00 

3.20 

2.40 

1.60 

0.80 

-0.80 

0.00 

Quarter 

Percentage change in unemployment Increase in matching rate

Payment 

calculation 

period 

Payment 

period 

Change in unemployment from base quarter

Supplemental assistance

Source: GAO analysis of BLS, CMS, and Census data.

Base quarter

1998 1999 2000 2001 2002 2003

III IV III IV I III IV II I III IV II I III IV II I III IV II I II

2004 

I II III

Page 51 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

In figure 9, the state experiences a “double dip” with increasing, then 

decreasing, and again increasing unemployment. The first increase in 

unemployment is 3 years before the start of simulated supplemental 

assistance in the first quarter of 2002. The second increase begins in the 

second quarter of 2002, so the state misses the first quarter of assistance 

entirely, and the assistance received in the second quarter of 2002 would 

be relatively small. The first increase in unemployment is relatively small, 

so it could be considered a transitory economic event rather than a real 

economic contraction. By the final quarter in which supplemental 

assistance would be provided, unemployment has leveled off. 

Figure 9: Simulated Supplemental Assistance for a State with a Relatively Early, 

Long-Lasting, and Shallow Downturn 

-20 -0.80 

Quarter 

Change in unemployment from base quarter

Supplemental assistance

Source: GAO analysis of BLS, CMS, and Census data.

1998 1999 2000 2001 2002 2003

III IV III IV I III IV II I III IV II I III IV II I III IV II I II

2004 

I II III

100 

80 

60 

40 

20 

0 

4.00 

3.20 

2.40 

1.60 

0.80 

0.00 

Percentage change in unemployment Increase in matching rate

Payment 

calculation 

period 

Payment 

period 

Base quarter

Page 52 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

Figure 10 shows a state with a particularly late and short economic 

downturn, in which unemployment was leveling off by the final quarter of

the supplemental assistance provided and declining thereafter. 

Nevertheless, the state would have received 5 quarters of supplemental 

assistance. 

Figure 10: Simulated Supplemental Assistance for a State with a Late, Short, and

Shallow Downturn 

100 

80 

60 

40 

20 

-20 

0 

4.00 

3.20 

2.40 

1.60 

0.80 

-0.80 

0.00 

Percentage change in unemployment Increase in matching rate

Payment 

calculation 

period 

Payment 

period 

Base quarter

Quarter 

Change in unemployment from base quarter

Supplemental assistance

Source: GAO analysis of BLS, CMS, and Census data.

1998 1999 2000 2001 2002 2003

III IV III IV I III IV II I III IV II I III IV II I III IV II I II

2004 

I II III

Page 53 GAO-07-97 Medicaid and Economic Downturns
Appendix II: Designing a Strategy of Targeted 

Supplemental Medicaid Assistance 

Figure 11 shows a state with a short and relatively deep recession. 

Supplemental assistance would have been provided through 7 quarters of 

increased unemployment and would have been phased out about the time 

when unemployment peaked. 

Figure 11: Simulated Supplemental Assistance for a State with a Short, Deep

Downturn 

100 

80 

60 

40 

20 

-20 

0 

4.00 

3.20 

2.40 

1.60 

0.80 

-0.80 

0.00 

Percentage change in unemployment Increase in matching rate

Payment 

calculation 

period 

Payment 

period 

Base quarter

Quarter 

Change in unemployment from base quarter

Supplemental assistance

Source: GAO analysis of BLS, CMS, and Census data.

1998 1999 2000 2001 2002 2003

III IV III IV I III IV II I III IV II I III IV II I III IV II I II

2004 

I II III

Page 54 GAO-07-97 Medicaid and Economic Downturns
Appendix III: D

Reflect States’ 

esigning a Strategy to Better 

Current Economic Conditions

Page 55 GAO-07-97 

Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions 

This appendix presents additional detail about the development and 

analysis of our strategy to use fewer years of per capita income (PCI) data 

to compute Medicaid matching rates. As currently constructed, the PCI 

data in the Medicaid formula reflect economic conditions that existed 

several years earlier.1

 The age of the data used to calculate the matching 

rate can result in states not receiving a matching rate consistent with their 

current economic situation because state PCI for a particular year 

becomes available nearly 2 years after the start of the calendar year for 

which the data are reported.2

 For example, the United States entered a 

recession in 2001, but matching rates for 2001 were based on PCI data 

from 1996 to 1998, when the national economy was expanding. Efforts to 

use fewer years of data to calculate the matching rate assume that 

eliminating the oldest year of data would more accurately reflect a state’s 

current economic circumstances. We tested this assumption by analyzing 

the effects of using fewer years of data to calculate states’ federal 

matching rates. To develop and analyze this strategy, we reviewed a 

similar proposal published in a 2004 AARP Public Policy Institute report3

and our previous work on the Medicaid matching formula.4

 

To analyze the effect of using fewer years of data to calculate the matching 

rates, we used three matching rates that employed the current statutory 

formula but varied in the years of data used (see table 6). The first 

matching rate (“the 3-year matching rate”) mirrors the current statutory 

construction of the Medicaid matching rate calculation, using 3 years of 

PCI data that are 3 to 5 years old. The second matching rate (“the 2-year 

matching rate”) is based on the statutory construction, except that it 

eliminates the oldest year of data and uses 2 years of PCI data. The third 

matching rate (“the simulated matching rate”) only uses PCI data for the 

Overview of Analysis 

 1

For example, the fiscal year 2006 matching rate includes a 3-year average of PCI data from

2001 to 2003. 

2

The age of the data used to calculate the matching rate results from both a data reporting

lag and an announcement lag. The reporting lag occurs because the Bureau of Economic 

Analysis reports state PCI amounts about 9 to 12 months after the end of a calendar year. 

For instance, state PCI for 2004 was reported toward the end of 2005. The announcement

lag occurs because matching rates are announced 1 year before the year in which they

become effective. This is referred to as the announcement period, because it gives states 

time to plan their budgets based on Medicaid matching rates for the upcoming fiscal year. 

3

Vic Miller and Andy Schneider, The Medicaid Matching Formula: Policy Considerations 

and Options for Modification, #2004-09, AARP Public Policy Institute (Washington, D.C.: 

September 2004). 

4

GAO, Medicaid Formula: Differences in Funding Ability among States Often Are 

Widened, GAO-03-620 (Washington, D.C.: July 10, 2003). 

Medicaid and Economic Downturns
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

current year (the year in which the calculations are made) and for 1 year 

prior, thus showing no time lag in the data used. Although not feasible to

implement because of lags in data publication, we devised the simulated 

matching rate in order to evaluate whether changing the years of data used

to calculate the matching rate resulted in a better approximation of states’ 

current economic circumstances. 

Table 6: Matching Rates Used to Analyze Strategy 

Matching 

rate Description

Years of PCI data used to

calculate matching rate 

for 2001

3-year Uses 3 years of PCI data, as outlined in

federal statute 

1996-1998

2-year Removes the oldest year of PCI data from 

the current statutory matching rate 

calculation 

1997-1998

Simulated Uses current year and 1 prior year of PCI 

data to calculate matching rate 

2000-2001

Source: GAO analysis using Bureau of Economic Analysis (BEA) PCI data. 

We calculated these matching rates for the period from 1990 through 2004, 

which covers the last two national recessions.5

 We then compared (1) the 

annual percentage point changes in the three matching rates with annual 

percentage changes in PCI and annual percentage point changes in the 

unemployment rate, (2) the simulated matching rate with changes in PCI, 

and (3) the 3-year and 2-year matching rates with the simulated matching 

rate. Finally, we analyzed the extent to which the 3-year and 2-year 

matching rates fluctuated from year to year. 

To measure the extent to which the 3-year and 2-year matching rates can

assist states throughout the economic cycle, we did a correlation analysis

that compared the annual changes in matching rates with the changes in

PCI6

 and the unemployment rate, two commonly used indicators of 

economic performance. A negative correlation coefficient would mean 

that when current PCI decreased, matching rates would increase, and vice 

versa. A positive correlation coefficient would mean that when the 

current unemployment rate increased, matching rates would increase, and 

vice versa. For example, it would indicate that the matching rates would 

increase assistance provided to the states during an economic downturn. 

Comparison of 

Changes in Matching 

Rates with Changes in 

PCI and 

Unemployment 

 5

The first recession occurred in 1990-1991. The second recession occurred in 2001. 

6

State PCIs were deflated using the price index for personal consumption expenditures 

from BEA. 

Page 56 GAO-07-97 Medicaid and Economic Downturns
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

Page 57 GAO-07-97 Medicaid and Economic Downturns 

Specifically, we examined the correlation between the annual changes in 

the 3-year matching rate and the percentage change in PCI and the annual 

changes in the 2-year matching rate and the percentage change in PCI. For 

the 3-year and 2-year matching rates, to offer states relief during an 

economic downturn, the correlation should be negative. In other words, a 

decline in PCI would be associated with an increased matching rate. 

(Similarly, in an economic upturn the matching rates would decline.) 

However, we found that the correlation between the changes in the 3-year 

and 2-year matching rates, and the changes in PCI fluctuated (see fig. 12). 

Changes in current economic conditions were essentially uncorrelated 

with changes in matching rates during this time period.7

 For example, 

while a moderate positive correlation existed in 1990 (+0.54 and +0.47 for 

the respective 3-year and 2-year matching rates), the correlation became 

negative for both the 3-year and 2-year matching rates 4 years later. For 

most years, correlations between 3-year and 2-year matching rates 

followed similar patterns, but occasionally they diverged. For example, in 

1993, the 3-year matching rate had a negative correlation (-0.25), while the 

2-year matching rate essentially showed no correlation (0.04). 

Importantly, during the recession years 1990 through 1991 and 2001, the 

correlation coefficients were positive. Therefore, this indicated a 

declining current PCI associated with a declining matching rate. 

Consequently, the 3-year and 2-year matching rates do not tend to assist 

the states during economic downturns. 

 

7

However, in fig. 12, positive correlations were more prevalent than negative correlations. 
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

Figure 12: Correlations of the Changes in the 3-Year and 2-Year Matching Rates with Changes in PCI 

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

0.60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Correlation coefficient

3-year matching rate correlation with PCI

2-year matching rate correlation with PCI

Year

Source: GAO.

We also examined the relationship between the changes in the 3-year and 

2-year matching rates and changes in the unemployment rate. If the 

matching rates assisted the states during periods of increased

unemployment, the relationship between the change in matching rates and 

the change in the unemployment rate would be positive. In other words, 

increases in the unemployment rate would be associated with increases in

the matching rates, and vice versa. Similar to the results with PCI, the 

relationship is mixed—in some years, the relationship is positive and in 

some it is negative (see fig. 13). In the 1990-1991 recession, the 

relationship was negative, indicating that increases in the unemployment 

rate were associated with decreased matching rates. In the 2001 

recession, the relationship was positive: increases in unemployment were 

associated with increased matching rates. 

Page 58 GAO-07-97 Medicaid and Economic Downturns
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

Figure 13: Correlations of the Changes in the 3-Year and 2-Year Matching Rates with Changes in the Unemployment Rates

-0.30

-0.20

-0.10

-0.50

-0.40

0.00

0.10

0.20

0.30

0.40

0.50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Correlation coefficient

3-year matching rate correlation with unemployment

2-year matching rate correlation with unemployment

Year

Source: GAO.

Note: A positive correlation coefficient would show that when unemployment increased, matching 

rates would also increase. 

Page 59 GAO-07-97 Medicaid and Economic Downturns
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

To assess whether the simulated matching rate provided a better 

approximation of states’ current economic conditions as measured by 

changes in PCI, we did a correlation analysis of the changes in PCI with 

the changes in the simulated matching rate, which is based on the current 

and prior year’s PCI. Comparing changes in PCI with the simulated 

matching rates allowed us to assess whether (1) the time lag in the data

affected the correlation between matching rates and changes in PCI or (2) 

the construction of the matching rate formula itself affected the 

correlation between matching rates and changes in PCI. The correlation 

between the changes in PCI and the changes in the simulated matching 

rate is uniformly negative during the period from 1990 through 2004 (see 

fig. 14), suggesting that the matching formula structure is not the cause of

the mixed relationship. 

Comparison of 

Changes in PCI with 

Changes in the 

Simulated Matching 

Rate 

Figure 14: Correlations of the Changes in the Simulated Matching Rate with the 

Changes in PCI, 1990 to 2004 

-0.70

-0.60

-0.50

-0.80

-0.40

-0.30

-0.20

-0.10

0.00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Correlation coefficient

Year

Source: GAO.

Overall, the changes in the simulated matching rate provided a more 

consistent link to changes in states’ PCI than did the changes in the 2-year 

and 3-year matching rates. Decreases in PCI were consistently associated

with increases in the simulated matching rates. Conversely, increases in 

PCI were associated with decreases in the matching rates. The correlation 

coefficients ranged from -0.79 to -0.31, thus indicating variations in the 

strength of the relationship during the time period. The relationship 

between matching rates and PCI reflects that the simulated matching rate

Page 60 GAO-07-97 Medicaid and Economic Downturns
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

is constrained by the 50 percent floor in some states, whereas changes in 

PCI do not reflect this constraint.8

 This reduces the correlation. For 

example, although Connecticut’s PCI fluctuated more than the majority of 

the states, its matching rate remained at the 50 percent floor during the 

entire 1990 to 2004 time period. The number of states affected by the 50 

percent floor during this time period varied from 10 to 12. In addition, the 

simulated matching rate used a 2-year average of PCI, whereas the 

changes in PCI reflected year-to-year differences in PCI. The matching 

rate formula also squares PCI, thus reducing the correlation between PCI 

and the simulated matching rate. (PCI changes are linear. The squared

PCI values in the simulated matching rate resulted in nonlinear changes.)

The 2-year PCI average in the simulated matching rate reduced the annual 

PCI fluctuations. As a result, the annual correlations between the 

simulated matching rate and PCI fluctuated depending on the underlying 

volatility of PCI across states. 

We also compared changes in the 3-year and 2-year matching rates with 

changes in the simulated matching rate to determine whether a 2-year 

matching rate better approximated states’ current economic conditions. 

Figure 15 shows the annual correlation coefficients of the 3-year and 2-

year matching rates compared with the simulated matching rate. A higher 

positive correlation coefficient for the 2-year matching rate would indicate 

that the 2-year matching rate is more sensitive to changes in current 

economic conditions than the 3-year matching rate. The generally 

negative correlation indicates that the 3-year and 2-year matching rates do

not track the current economic conditions reflected in the simulated 

matching rate. In general, the correlations of the 3-year and 2-year 

matching rates with the simulated matching rate were practically identical 

during the entire period, 1990 to 2004 (on average, -0.130 and -0.135, 

respectively). These correlations fluctuated during the period of analysis 

and ranged from -0.58 (1991) to 0.28 (1993). The correlations were 

negative during the 1990-1991 recession, indicating that the matching rates 

would not have assisted states during this economic downturn. However, 

in the 2001 recession, the correlations were essentially zero. 

Comparisons of 

Changes in the 3-Year 

and 2-Year Matching 

Rates with Changes in 

the Simulated 

Matching Rate 

 8

By statute, the federal share of Medicaid spending ranges from 50 to 83 percent. The 50

percent minimum federal share (“50 percent floor”) reflects a federal commitment to fund

at least half the cost of each state’s Medicaid program. For 2006, 12 states received federal

matching rates of 50 percent. 

Page 61 GAO-07-97 Medicaid and Economic Downturns
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

Figure 15: Correlations of the Changes in 3-Year and 2-Year Matching Rates with the Changes in the Simulated Matching

Rate 

-0.30

-0.20

-0.10

-0.50

-0.40

-0.70

-0.60

0.00

0.10

0.20

0.30

0.40

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Correlation coefficient

3-year matching rate

2-year matching rate

Year

Source: GAO.

Note: A positive correlation coefficient would mean that when PCI increased, matching rates would 

decrease. 

The lack of substantial positive correlations during either recession is of 

particular concern because it indicates that when the states are under the 

most economic stress, the matching rates for states decline or, at best, 

remain on average unchanged. These correlation results occur because 

when PCI declines, the 3-year and 2-year matching rates depend upon PCI 

data that reflect economic conditions of several years earlier.

Page 62 GAO-07-97 Medicaid and Economic Downturns
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

We analyzed the extent to which the 2-year and 3-year matching rates 

differed in year-to-year percentage point changes by comparing annual 

differences in matching rates to understand whether a reduction in the 

number of years of PCI data in the matching rate formula (from 3 years to 

2 years of PCI data) yielded changes that differed from the year-to-year 

percentage point changes resulting from the current, statutory matching 

rate. We compared year-to-year percentage point changes in matching 

rates for the 2-year matching rate and the 3-year matching rate. As 

expected, the 3-year PCI average produced a smoother time trend than a 2-

year average. In general, the 2-year matching rates showed slightly larger 

year-to-year fluctuations compared with the 3-year matching rates. 

Comparisons of 2-

Year and 3-Year 

Matching Rates in 

Year-to-Year

Fluctuations 

Specifically, from 1990 through 2004, we found that 

• 43 percent of the annual changes in 2-year matching rates exceeded the 

changes in the 3-year matching rates,

• 33 percent of the annual changes in the 3-year matching rates exceeded 

the changes in the 2-year matching rates, and 

• 24 percent of the annual changes were identical (reflecting those states 

at the 50 percent matching rate floor). 

(See table 7.) 

Page 63 GAO-07-97 Medicaid and Economic Downturns
Appendix III: Designing a Strategy to Better 

Reflect States’ Current Economic Conditions

Page 64 GAO-07-97 Medicaid and Economic Downturns 

Table 7: Comparison of States’ Year-to-Year Differences in 2-Year and 3-Year Matching Rates, 1990-2004 

Differences in the changes in 

the matching rates 

(percentage points) 

Number of instances 

2-year matching rate 

exceeded 3-year 

matching rate

Percentage of 

instances 2-year 

matching rate 

exceeded 3-year 

matching rate

Number of instances 

3-year matching rate 

exceeded 2-year 

matching rate 

Percentage of 

instances 3-year 

matching rate 

exceeded 2-year 

matching rate

1 or more 7 1.0 0 0.0

0.5 to less than 1 31 4.3 22 3.1

0.25 to less than 0.5 87 12.2 51 7.1

Greater than 0 to less than 

0.25 182 25.5 165 23.1

Source: GAO analysis of changes for current 3-year matching rate and proposed 2-year matching rate. 

Notes: Differences represent differences in the absolute-value annual changes in 3-year matching 

rates with absolute-value annual changes in 2-year matching rates. 

The second and fourth columns represent the number of instances any state experienced a variation 

within this range during 1990 to 2004. 

The third and fifth columns represent the percentage of states experiencing a variation within this 

range between 1990 and 2004. 

There were 169 instances with no state differences between the 2-year and 3-year matching rate 

changes. This lack of variation reflects states whose matching rates were at the 50 percent matching 

rate floor and thus had no annual changes. 

In those years in which the 2-year matching rate exceeded the 3-year 

matching rate, it occasionally did so by a wide margin. For example, the 2-

year matching rates in a few states—in several years—had an annual 

change 1 percentage point greater than the annual change in the 3-year 

matching rate.9

 The changes in the 3-year matching rates never exceeded 

the changes in the 2-year matching rates by more than 1 percentage point. 

 

9

The standard deviations for the annual changes in the 3-year and 2-year matching rates, 

respectively, were 0.52 and 0.60 percent. 
A

Interg

Rai

ppendix IV: Information on Selected

overnmental Loan Programs and State 

ny Day Funds 

Page 65 GAO-07-97 

Appendix IV: Information on Selected 

Intergovernmental Loan Programs and State 

Rainy Day Funds 

This appendix contains information about some of the existing programs 

we reviewed to understand the design decisions and policy considerations 

involved in a strategy to allow states to determine whether and when to 

access increased federal Medicaid assistance in response to economic 

downturns. These programs provided a conceptual framework for 

reviewing existing design alternatives that could inform consideration of a 

potential Medicaid-specific loan or national rainy day fund. We examined 

features of existing federal programs that include intergovernmental loan 

components.1

 In addition, we examined state rainy day funds as well as 

prior GAO work to inform our understanding of some of the issues likely 

to be involved in creating a Medicaid-specific national rainy day fund.2

 

The Environmental Protection Agency’s (EPA) Clean Water State 

Revolving Fund (CWSRF) program provides an independent, permanent,

low-cost source of financing for a wide range of efforts to protect or 

improve water quality.3

 Through the CWSRF, EPA provides annual grants

to the states to capitalize state-level CWSRFs. States must match these 

EPA grants with a minimum of 20 percent of their own contributions. 

States loan their CWSRF dollars to local governments and other entities 

for various water quality projects, and loan repayments are cycled back 

into the state-level programs to fund additional projects. In June 2006, we

reported that, since 1987, the 50 states as well as Puerto Rico have used 96

percent (about $50 billion) of their CWSRF dollars to build, upgrade, or 

enlarge conventional wastewater treatment facilities and conveyances. 

Although the CWSRF is primarily a low-interest loan program, states can 

also use it to refinance, purchase, or guarantee local debt and purchase 

bond insurance. States may customize their loan terms, including interest

rates (from 0 percent to market rates) and repayment periods (up to 20 

years), depending on the financial and environmental needs of potential 

Selected 

Intergovernmental 

Loan Programs

 1

Other loan programs included in our background research were the Student Loan 

Program, the Drinking Water Revolving Loan Program, and state Capital Access Programs. 

Any new federal loan program would have to comply with the Federal Credit Reform Act of 

1990 requirements that agencies have budget authority to cover the program’s cost to the 

government in advance, before new direct loan obligations are incurred and new loan 

guarantee commitments are made. 

2

GAO, Medicaid: Restructuring Approaches Leave Many Questions, GAO/HEHS-95-103 

(Washington, D.C.: Apr. 4, 1995). 

3

GAO, Clean Water: How States Allocate Revolving Loan Funds and Measure Their 

Benefits, GAO-06-579 (Washington, D.C.: June 5, 2006). 

Medicaid and Economic Downturns
Appendix IV: Information on Selected

Intergovernmental Loan Programs and State 

Rainy Day Funds 

borrowers. All programs are also subject to annual independent financial 

audits. 

The Federal Emergency Management Agency (FEMA) provides 

Community Disaster Loans (CDL) to local governments in designated 

disaster areas that have suffered a substantial loss of tax and other 

revenue. The state’s governor requests a presidential declaration of an 

emergency or disaster through the FEMA Regional Director. Once the 

president has made the declaration, loans can be provided up to a 

maximum of $5 million. Loans are not to exceed 25 percent of the local 

government’s annual operating budget for the fiscal year in which the 

major disaster occurs. The CDL program provides for loan forgiveness 

(cancellation) when it is determined that the affected government will not 

be able to repay the loan for 3 fiscal years following a disaster. A total of 

55 CDLs were made from the initiation of the program in August 1976 

through September 30, 2005. Of the 55 loans made, 36 were paid back in

part or in full.4

 

The Temporary Assistance for Needy Families (TANF) program offers 

block grants under which states receive federal funds to design and 

operate their own welfare programs within federal guidelines. TANF also 

offers a direct loan program to provide assistance to states. This program 

is funded though a permanent appropriation of $1.7 billion. States can 

access direct loan funds for any purpose for which TANF grants can be 

used, such as welfare assistance, but states must repay any loans within 3 

years. However, in 2001, we reported that the TANF loan program is likely 

the wrong mechanism to provide assistance during a fiscal crisis because 

states are eligible for better financing terms in the tax-exempt municipal 

bond market and because officials in some states had indicated that 

borrowing specifically for social welfare programs in times of fiscal stress 

would not incur popular support.5 No state had applied for a TANF loan 

prior to 2005. In 2005, Congress made a TANF loan available to three 

states affected by Hurricane Katrina—Alabama, Louisiana, and 

 4

The Community Disaster Loan Act of 2005 (CDLA), provided for up to $750 million of 

disaster funds to be used to subsidize “special” community disaster loans, up to a total of 

$1 billion, for local governments to provide essential services. For purposes of these 

special loans, the new law removed the $5 million per loan limit but prohibited their 

cancellation. As of May 3, 2006, 59 special CDL applications had been approved for local 

governments in Louisiana and 47 for those in Mississippi, for a total of 106 loans. 

5

GAO, Welfare Reform: Challenges in Saving for a “Rainy Day,” GAO-01-674T 

(Washington, D.C.: Apr. 26, 2001). 

Page 66 GAO-07-97 Medicaid and Economic Downturns
Appendix IV: Information on Selected

Intergovernmental Loan Programs and State 

Rainy Day Funds 

Mississippi—and included language stating that penalties would not be 

imposed against these states for failure to repay the loan or interest on the

loan. 

Unemployment Insurance (UI), administered by the U.S. Department of 

Labor in partnership with the states, provides temporary cash benefits to

eligible workers who become involuntarily unemployed. Eligibility for UI 

benefits, benefit amounts, and the length of time benefits are available are 

determined by state law, within broad federal guidelines. The UI system is 

funded through federal and state taxes levied on employers. States 

deposit their taxes with the U.S. Treasury, which maintains one trust fund 

with a separate account for each state. States are responsible for ensuring 

the solvency of their individual trust funds, which they use to pay benefits 

to UI claimants in their states. To ensure solvency, states may choose to 

build trust fund reserves during good economic times so that if 

unemployment rises they will have reserves sufficient for paying UI 

claims without raising taxes or borrowing money from the federal 

government. If states have insufficient reserves for paying claims, they 

may request a loan from the federal government.6

 The federal government 

maintains a loan trust fund, which is built up using a portion of the federal

UI tax. The Federal Unemployment Account (FUA) funds loans to state 

unemployment compensation programs. If states fail to repay any loans 

within the time frame specified in statute,7

 the federal taxes on employers 

in a state increase each year the debt is not paid. As of July 2006, the FUA 

had a balance of about $13 billion, and one state had an outstanding loan 

totaling about $238 million.8

 States utilize the loan program periodically. 

According to the National Association of State Budget Officers (NASBO), 

almost all states have established rainy day funds as one way to cope with

fiscal constraints that states experience. These fiscal constraints can be 

imposed either by law, such as balanced budget requirements and 

borrowing restrictions, or by bond markets, which encourage states to 

State Rainy Day 

Funds 

 6

 They may also choose to increase taxes on employers or raise funds through other means

such as municipal bonds, which potentially offer a lower interest rate. 

7

If a state has an outstanding balance on January 1 for 2 consecutive years, it has until 

November 10 of the second year to repay the loan. 

8

These data were the most recent available balances as of Aug. 2006.

Page 67 GAO-07-97 Medicaid and Economic Downturns
Appendix IV: Information on Selected

Intergovernmental Loan Programs and State 

Rainy Day Funds 

provide funding in advance for particular budgetary uncertainties.9 

Without adequate reserves available to mitigate a fiscal crisis, states 

without short-term borrowing capabilities would have little choice but to 

reduce spending, increase revenue, or make other short-term budget 

adjustments. Even if a state is permitted to borrow short-term to fund 

unanticipated needs, the practice may be viewed unfavorably by bondrating agencies that establish credit ratings for states and therefore play a

role in determining a state’s borrowing costs. 

State rainy day fund requirements vary in a number of ways.10 Some state 

rainy day funds can be used only in years of economic downturn 

(determined through formulas) or in the case of a revenue shortfall or a 

deficit. State rainy day funds also may include requirements specifying 

whether funds can be used for general purposes, agency-specific purposes, 

or in the event of natural disasters or other emergencies. States may also 

require a minimum rainy day fund balance. The National Conference of 

State Legislatures (NCSL) recommends a minimum rainy day fund balance 

of 5 percent.

 9

GAO, Budgeting for Emergencies: State Practices and Federal Implications, 

GAO/AIMD-99-250 (Washington, D.C.: Sept. 30, 1999). 

10NASBO, Budget Processes in the States (Washington, D.C.: January 2002). 

Page 68 GAO-07-97 Medicaid and Economic Downturns
A

A

ppendix V: GAO Contacts and Staff 

cknowledgments 

Page 69 GAO-07-97 

Appendix V: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts Kathryn G. Allen, (202) 512-7118 

Stanley J. Czerwinski, (202) 512-6806

Major contributors included Assistant Directors Michael Springer and 

Carolyn L. Yocom; and Meghana Acharya, Robert Dinkelmeyer, Greg 

Dybalski, Nancy Fasciano, Jerry Fastrup, Summer Lingard, Romonda 

McKinney, Donna Miller, Elizabeth T. Morrison, and Michelle Sager. 

Medicaid and Economic Downturns

Acknowledgments 

(450407) 
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