Medicaid Financing and Expenditures
Released: 2015-12-14T00:00:00

Introduction

Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services as well as long-term services and supports. Medicaid is a federal and state partnership. The states are responsible for administering their Medicaid programs, and Medicaid is jointly financed by the federal government and the states. In FY2014, Medicaid is estimated to have provided health care services to 65 million individuals at a total cost of $494 billion (including federal and state expenditures).

Participation in Medicaid is voluntary, though all states, the District of Columbia, and the territories choose to participate. The federal government sets some basic requirements for Medicaid, and states have the flexibility to design their own version of Medicaid within the federal government's basic framework.

States incur Medicaid costs by making payments to service providers (e.g., for beneficiaries' doctor visits) and performing administrative activities (e.g., making eligibility determinations). The federal government reimburses states for a share of each dollar spent in accordance with their federally approved Medicaid state plans.

Medicaid is an entitlement for both states and individuals. The Medicaid entitlement to states ensures that, so long as states operate their programs within the federal requirements, states are entitled to federal Medicaid matching funds. Medicaid is also an individual entitlement, which means that anyone eligible for Medicaid under his or her state's eligibility standards is guaranteed Medicaid coverage.

This report provides an overview of Medicaid's financing structure, including both federal and state financing issues. The " Medicaid Expenditures " section of the report discusses Medicaid in terms of national health expenditures, trends in Medicaid expenditures, economic factors affecting Medicaid, and state variability in spending.

Medicaid Financing

The federal government and the states share the cost of Medicaid. The federal government reimburses states for a portion (i.e., the federal share or the federal financial participation ) of each state's Medicaid program costs. Federal Medicaid funding is an open-ended entitlement to states, which means there is no upper limit or cap on the amount of federal Medicaid funds a state may receive.

Federal Share

A primary goal of the federal Medicaid matching arrangement is to share the cost of providing health care services to low-income residents with the states. The Medicaid financing structure represents a fiscal commitment on the part of the federal government toward paying at least half (but not all) of the cost of Medicaid.

The federal government's open-ended financial commitment to Medicaid provides a fiscal incentive for states to extend Medicaid coverage to more low-income individuals than a state might choose to fund without the federal Medicaid funding. However, this incentive is counterbalanced by the requirement for states to share in the cost of Medicaid.

Although most federal Medicaid funding is provided on an open-ended basis, certain types of federal Medicaid funding are capped. For instance, federal disproportionate share hospital (DSH) funding to states cannot exceed a state-specific annual allotment. In addition, Medicaid programs in the territories (i.e., American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, and the Virgin Islands) are subject to annual spending caps. Another exception to open-ended federal Medicaid funding includes the Qualified Individuals program.

The Federal Medical Assistance Percentage

The federal government's share of most Medicaid expenditures is established by the federal medical assistance percentage (FMAP) rate, which generally is determined annually and varies by state according to each state's per capita income relative to the U.S. per capita income. The formula provides higher FMAP rates, or federal reimbursement rates, to states with lower per capita incomes, and it provides lower FMAP rates to states with higher per capita incomes. FMAP rates have a statutory minimum of 50% and a statutory maximum of 83%. In FY2016, FMAP rates range from 50% (13 states) to 74% (Mississippi).

The FMAP rate is used to reimburse states for the federal share of most Medicaid expenditures, but exceptions to the regular FMAP rate have been made for certain states (e.g., the District of Columbia and the territories), situations (e.g., during economic downturns), populations (e.g., certain women with breast or cervical cancer and individuals in the Qualifying Individuals program), providers (e.g., Indian Health Service facilities), and services (e.g., family planning and home health services). In addition, the federal share for most Medicaid administrative costs does not vary by state and is generally 50%.

The Patient Protection and Affordable Care Act (ACA; P.L. 111-148 , as amended) included a couple of FMAP exceptions, such as the newly eligible federal matching rates and the expansion state federal matching rates. Under the newly eligible federal matching rate, from 2014 through 2016, states receive a 100% federal matching rate for the cost of individuals who are newly eligible for Medicaid due to the ACA expansion, and this newly eligible federal matching rate phases down to 90% for 2020 and thereafter. The expansion state federal matching rate is available for coverage of individuals in expansion states who were eligible for Medicaid on March 23, 2010, and are in the new eligibility group. The expansion state federal matching rate ranged from 72% to 92% in 2014 and varies each year until 2020, when the matching rate will be 90% for 2020 and thereafter.

The federal share of Medicaid expenditures used to be about 57% in a typical year, which meant the state share was about 43%. However, with the exceptions to the FMAP added by the ACA, the federal share of Medicaid expenditures has increased. In FY2014, the federal share of Medicaid expenditures was 60% on average. It is expected to remain around 60% through at least FY2023.

Medicaid and the Federal Budget Process

As discussed above, Medicaid is a federal entitlement to states, and in federal-budget parlance entitlement spending is categorized as mandatory spending , which is also referred to as direct spending . Although most mandatory spending programs bypass the annual appropriations process and automatically receive funding each year according to either permanent or multiyear appropriations in the substantive law, Medicaid is funded in the annual appropriations acts. For this reason, Medicaid is referred to as an appropriated entitlement .

The level of spending for appropriated entitlements, similar to other entitlements, is based on the benefit and eligibility criteria established in law. The amount of budget authority provided in appropriations acts for Medicaid is based on budget projections for meeting the funding needs of the program. Although most changes to the Medicaid program are made through statute, the fact that Medicaid is subject to the annual appropriations process provides an opportunity for Congress to place funding limitations on specified activities in Medicaid, such as the circumstances under which federal funds can be used to pay for abortions.

The appropriations bill usually provides Medicaid with (1) funding for the fiscal year considered in the appropriations bill and (2) an advance appropriation for the first quarter of the following fiscal year. For instance, the Consolidated and Further Continuing Appropriations Act, 2015 ( P.L. 113-235 ), provided Medicaid with $234.6 billion for FY2015 and an advance appropriation of $113.3 billion for the first quarter of FY2016.

State Share

The federal government provides broad guidelines to states regarding allowable funding sources for the state share of Medicaid expenditures. However, to a large extent, states are free to determine how to fund their share of Medicaid expenditures. As a result, there is significant variation from state to state in funding sources.

States can use state general funds (i.e., personal-income, sales, and corporate-income taxes) and "other state funds" (i.e., provider taxes, local government funds, tobacco settlement funds, etc.) to finance the state share of Medicaid. Federal statute allows as much as 60% of the state share to come from local government funding. Federal regulations also stipulate that the state share not be funded with federal funds (Medicaid or otherwise). In state fiscal year 2013, on average, 73% of the state share of Medicaid expenditures was financed by state general funds, and the remaining 27% was financed by other state funds.

A few funding sources have received a great deal of attention over the past couple decades because states have used these funds in financing mechanisms designed to maximize the amount of federal Medicaid funds coming to the state. For example, some states have used financing mechanisms that involve the coordination of fund sources, such as provider taxes and intergovernmental transfers, and payment policies, such as DSH and supplemental payments, to draw down federal Medicaid funds without expending much, if any, state general funds.

Medicaid Expenditures21

Medicaid expenditures account for a significant and growing portion of total health expenditures in the United States. Expansions of eligibility account for much of Medicaid's expenditure growth over time, and the ACA Medicaid expansion is expected to significantly increase Medicaid expenditures over the next few years. However, Medicaid expenditures also are influenced by economic, demographic, and programmatic factors. In addition, there is considerable variation in Medicaid spending from state to state due to demographic differences, state policy choices, utilization of services, and provider payment rates.

Medicaid and National Health Expenditures

In 2014, Medicaid represented 16% of national health expenditures; in that same year, private health insurance and Medicare accounted for 33% and 20% of national health expenditures, respectively. Figure 1 shows Medicaid as a percentage of national health expenditures from 1966 (the first year Medicaid was in operation) through 2014. Since the start-up years (i.e., 1966 through 1971), Medicaid expenditures have grown as a percentage of national health expenditures with just a couple of exceptions. In the past, much of Medicaid's expenditure growth has been due to federal or state expansions of Medicaid eligibility criteria. Over time, Medicaid has become one of the largest payers in the U.S. health care system.

Medicaid is a major payer in some categories of national health expenditures and accounts for a smaller share of other categories of expenditures. Figure 2 shows that in 2014, Medicaid was a major payer in the categories of spending that include long-term services and supports, with Medicaid paying 56% of expenditures in the other residential, and personal care category; 36% of home health expenditures; and 32% of nursing facilities and continuing care retirement communities. Medicaid accounted for 17% of hospital expenditures. For the other services, in 2014, Medicaid accounted for a smaller share of the national expenditures, with Medicaid paying 13% of durable medical equipment, almost 11% of physician and clinical expenditures, 9% of prescription drugs, 9% of dental expenditures, and 7% of other professional expenditures. Medicaid did not have any expenditures for non-durable medical products in 2014.

Trend in Medicaid Expenditures

Over time, much of Medicaid's expenditure growth has been due to federal or state expansions of Medicaid eligibility criteria, and the ACA Medicaid expansion is expected to significantly increase Medicaid expenditures over the next few years. Figure 3 shows actual Medicaid expenditures from FY1997 to FY2014 and projected Medicaid expenditures from FY2015 through FY2023 broken down by state and federal expenditures. In FY2014, Medicaid spending on services and administrative activities in the 50 states, the District of Columbia, and the territories totaled $494 billion (see Table A-1 for state-by-state expenditures for FY2014). Medicaid expenditures are estimated to grow to $835 billion in FY2023.

Federal Medicaid expenditures totaled $299 billion, or 60% of total Medicaid expenditures, in FY2014, and state Medicaid expenditures were $195 billion, which was 40% of total Medicaid spending. From FY2013 to FY2014, federal Medicaid expenditures grew by almost 14% whereas state Medicaid expenditures grew by only 1% due to the enhanced federal matching rates for the ACA Medicaid expansion (discussed in the " The Federal Medical Assistance Percentage " section). Medicaid expenditures resulting from the ACA Medicaid expansion are projected to be $457 billion from FY2014 to FY2023, with the federal government paying about 93% of this amount.

Medicaid Expenditures by Service Type

Most Medicaid expenditures (i.e., 95% in FY2014) are for medical assistance (or nonadministrative) payments. In FY2014, Medicaid spending on medical assistance grew by an estimated 9.5%, which is significant relative to the annual percentage increases for FY2012 and FY2013—0.2% and 6.0%, respectively. The ACA Medicaid expansion was the main reason for the large increase in Medicaid spending, but the woodwork effect also contributed to the increase.

Figure 4 shows medical assistance payments by service type for FY2014. Managed care, which includes payments to managed care organizations, primary care case management, and non-comprehensive prepaid health plans, accounted for 37% of Medicaid expenditures. Long-term services and supports, which include nursing facility care and home- and community-based services, made up 23% of all Medicaid expenditures. Hospitals received 11% of total Medicaid expenditures in return for services provided to Medicaid fee-for-service enrollees at the payment rates set by states.

Per-Enrollee Medicaid Expenditures

In Medicaid, there are four main eligibility groups: children, adults, the aged, and individuals with disabilities. Per-enrollee Medicaid expenditures across these groups averaged $6,897 in FY2013. However, as shown in Figure 5 , per-enrollee expenditures varied significantly by eligibility group, with the per-enrollee expenditures by eligibility group ranging from $2,807 for children to $17,352 for individuals with disabilities.

One reason the aged and disabled populations have higher per-enrollee expenditures is because these populations consume most of the long-term services and supports, which comprise almost a quarter of all Medicaid expenditures (see Figure 4 ). Another reason for the difference in per-enrollee expenditures by eligibility group is that children and adults tend to be healthier and therefore tend to have lower health care costs than the aged and disabled populations, even though a significant number of nondisabled adults are pregnant women.

In FY2013, the aged and disabled populations together accounted for about 26% of Medicaid enrollment and 64% of Medicaid expenditures. In comparison, the children and adult populations accounted for about 74% of Medicaid enrollment and 36% of Medicaid expenditures.

Factors Affecting Medicaid Expenditures

Medicaid expenditures are influenced by economic, demographic, and programmatic factors. Economic factors include health care prices, unemployment rates, and individuals' wages. Demographic factors include population growth and the age distribution of the population. Programmatic factors include state decisions regarding which optional eligibility groups and services to cover and how much to pay providers. Other factors include the number of eligible individuals who enroll and their utilization of covered services.

Medicaid enrollment is affected by economic factors, which in turn impact Medicaid expenditures. Medicaid is a countercyclical program, which means Medicaid enrollment growth tends to accelerate when the economy weakens and tends to slow when the economy gains strength. During the most recent recession, researchers estimated that for every 1% increase in the national unemployment rate, Medicaid enrollment increased by 1 million individuals. People become eligible for Medicaid during economic downturns because they lose their jobs, experience reductions in income, or lose access to health benefits.

State Variability in Medicaid Spending

Figure 6 shows that total Medicaid spending is highly concentrated, with the seven most populous states (California, New York, Texas, Pennsylvania, Florida, Ohio, and Illinois) accounting for almost half of Medicaid expenditures in FY2014 (see Table A-1 for state-by-state expenditures for FY2014). State variation in Medicaid per-enrollee expenditures is significant, with per-enrollee Medicaid expenditures ranging from $4,803 in California to $13,039 in the District of Columbia for FY2012.

Some of the state variation in Medicaid per-enrollee expenditures is due to demographic differences across states. For instance, states with lower-than-average proportions of elderly and disabled Medicaid enrollees and higher-than-average proportions of Medicaid enrollees who are children and adults would be expected to have lower-than-average per-enrollee Medicaid expenditures. However, state policy choices regarding optional populations and services cause variation in Medicaid spending. Other reasons for state variation in Medicaid per-enrollee expenditures include variation in utilization and provider payment rates.

Conclusion

Medicaid is the largest source of general revenue-based spending on health services (even when compared to Medicare) because a sizable portion of Medicare spending is funded by a dedicated revenue source. Medicaid constitutes a significant portion of the federal budget, and federal Medicaid expenditures are expected to increase significantly over the next 10 years due to the ACA Medicaid expansion. As a result, Medicaid could be a focus of potential deficit reduction or other legislative proposals affecting the federal budget.

Both the House and Senate FY2016 budget resolutions included proposals to reform Medicaid financing. The House Budget Resolution for FY2016 ( H.Con.Res. 27 ) and its resolutions for the previous four years have included converting Medicaid to a block grant as an illustrative example for achieving budget savings. The FY2016 Senate Budget Resolution ( S.Con.Res. 11 ) proposes to convert Medicaid for the "low-income, working-age, able-bodied adults" and children to a capped allotment like CHIP. Also, in February 2015, Senators Richard Burr and Orrin Hatch along with Representative Fred Upton released the Patient Choice, Affordability, Responsibility, and Empowerment (CARE) Act, which is a policy proposal that would convert Medicaid to a capped allotment.

Medicaid Expenditures by State

Table A-1 provides the most recent Medicaid expenditures for each state, including both the federal and state shares of spending on benefits, administrative services, and total Medicaid expenditures. These Medicaid expenditures exclude expenditures in the territories and spending for State Medicaid Fraud Control Units, Medicaid survey and certification of nursing and intermediate care facilities, and the Vaccines for Children program.