Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services as well as long-term care. Medicaid is jointly funded by the federal government and the states. Participation in Medicaid is voluntary for states, though all states, the District of Columbia, and the territories choose to participate. Each state designs and administers its own version of Medicaid under broad federal rules. While states that choose to participate in Medicaid must comply with all federal mandated requirements, state variability is the rule rather than the exception in terms of eligibility levels, covered services, and how those services are reimbursed and delivered. Historically, eligibility was generally limited to low-income children, pregnant women, parents of dependent children, the elderly, and people with disabilities; however, recent changes will soon add coverage for individuals under the age of 65 with income up to 133% of the federal poverty level. The federal government pays a share of each state's Medicaid costs; states must contribute the remaining portion in order to qualify for federal funds. This report describes the federal medical assistance percentage (FMAP) calculation used to reimburse states for most Medicaid expenditures, and it lists the statutory exceptions to the regular FMAP rate. In addition, this report discusses other FMAP-related issues, including FMAP changes in the Patient Protection and Affordable Care Act (ACA, P.L. 111-148 as amended), federal deficit reduction proposals that would amend the FMAP rate, and the disaster-recovery FMAP adjustment. The federal government's share of most Medicaid service costs is determined by the FMAP rate, which varies by state and is determined by a formula set in statute. 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, situations, populations, providers, and services. An enhanced FMAP (E-FMAP) rate is provided for both services and administration under the State Children's Health Insurance Program (CHIP), subject to the availability of funds from a state's federal allotment for CHIP. When a state expands its Medicaid program using CHIP funds (rather than Medicaid funds), the E-FMAP rate applies and is paid out of the state's federal allotment. The E-FMAP rate is calculated by reducing the state share under the regular FMAP rate by 30%. The FMAP rate is also used in determining the phased-down state contribution ("clawback") for Medicare Part D, the federal share of certain child support enforcement collections, Temporary Assistance for Needy Families (TANF) contingency funds, a portion of the Child Care and Development Fund (CCDF), and foster care and adoption assistance under Title IV-E of the Social Security Act. The FMAP formula compares each state's per capita income relative to U.S. per capita income. The formula provides higher reimbursement to states with lower incomes (with a statutory maximum of 83%) and lower reimbursement to states with higher incomes (with a statutory minimum of 50%). The formula for a given state is: FMAP state = 1 - ( (Per capita income state ) 2 /(Per capita income U.S. ) 2 * 0.45) The use of the 0.45 factor in the formula is designed to ensure that a state with per capita income equal to the U.S. average receives an FMAP rate of 55% (i.e., state share of 45%). In addition, the formula's squaring of income provides higher FMAP rates to states with below-average incomes (and vice versa, subject to the 50% minimum). The Department of Health & Human Services (HHS) usually publishes FMAP rates for an upcoming fiscal year in the Federal Register during the preceding November. This time lag between announcement and implementation provides an opportunity for states to adjust to FMAP rate changes, but it also means that the per capita income amounts used to calculate FMAP rates for a given fiscal year are several years old by the time the FMAP rates take effect. In the Appendix to this report, Table A-1 shows regular FMAP rates for each of the 50 states and the District of Columbia from FY2006-FY2014. As specified in Section 1905(b) of the Social Security Act, the per capita income amounts used in the FMAP formula are equal to the average of the three most recent calendar years of data available from the Department of Commerce. In its FY2014 FMAP calculations, HHS used state per capita personal income data for 2009, 2010, and 2011 that became available from the Department of Commerce's Bureau of Economic Analysis (BEA) in September 2012. The use of a three-year average helps to moderate fluctuations in a state's FMAP rate over time. BEA revises its most recent estimates of state per capita personal income on an annual basis to incorporate revised and newly available source data on population and income. It also undertakes a comprehensive data revision--reflecting methodological and other changes--every few years that may result in upward and downward revisions to each of the component parts of personal income (as defined in BEA's national income and product accounts, or NIPA). These components include: earnings (wages and salaries, employer contributions for employee pension and insurance funds, and proprietors' income); dividends, interest, and rent; and personal current transfer receipts (e.g., government social benefits such as Social Security, Medicare, Medicaid, state unemployment insurance). As a result of these annual and comprehensive revisions, it is often the case that the value of a state's per capita personal income for a given year will change over time. For example, the 2009 state per capita personal income data published by BEA in September 2011 (used in the calculation of FY2013 FMAP rates) differed from the 2009 state per capita personal income data published in September 2012 (used in the calculation of FY2014 FMAP rates). It should be noted that the NIPA definition of personal income used by BEA is not the same as the definition used for personal income tax purposes. Among other differences, NIPA personal income excludes capital gains (or losses) and includes transfer receipts (e.g., government social benefits), while income for tax purposes includes capital gains (or losses) and excludes most of these transfers. Several factors affect states' FMAP rates. The first is the nature of the state economy and, to the extent possible, a state's ability to respond to economic changes (i.e., downturns or upturns). The impact on a particular state of a national economic downturn or upturn will be related to the structure of the state economy and its business sectors. For example, a national decline in automobile sales, while having an impact on all state economies, will have a larger impact in states that manufacture automobiles as production is reduced and workers are laid off. Second, the FMAP formula relies on per capita personal income in relation to the U.S. average per capita personal income . The national economy is basically the sum of all state economies. As a result, the national response to an economic change is the sum of the state responses to economic change. If more states (or larger states) experience an economic decline, the national economy reflects this decline to some extent. However, the national decline will be lower than some states' declines because the total decline has been offset by states with small decreases or even increases (i.e., states with growing economies). The U.S. per capita personal income, because of this balancing of positive and negative, has only a small percentage change each year. Since the FMAP formula compares state changes in per capita personal income (which can have large changes each year) to the U.S. per capita personal income, this comparison can result in significant state FMAP rate changes. In addition to annual revisions of per capita personal income data, comprehensive NIPA revisions undertaken every four to five years may also influence regular FMAP rates (e.g., because of changes in the definition of personal income). The impact on FMAP rates will depend on whether the changes are broad (affecting all states) or more selective (affecting only certain states or industries). Regular FMAP rates for FY2014 (the federal fiscal year that begins on October 1, 2013) were calculated and published November 30, 2012, in the Federal Register . In the Appendix to this report, Table A-1 shows regular FMAP rates for each of the 50 states and the District of Columbia for FY2006 through FY2014. Figure 1 shows the state distribution of regular FMAP rates for FY2014. Fifteen states will have the statutory minimum FMAP rate of 50.00% (Rhode Island is very close at 50.11%), and Mississippi will have the highest FMAP rate of 73.05%. As shown in Figure 1 , from FY2013 to FY2014, the regular FMAP rates for 36 states will change, while the regular FMAP rates for the remaining 15 states (including the District of Columbia) will remain the same. For most of the states experiencing an FMAP rate change from FY2013 to FY2014, the change will be less than one percentage point. The regular FMAP rate for 12 states will increase by as much as one percentage point, and the FMAP rate for 16 states will decrease by as much as one percentage point. For states that will experience an FMAP rate change greater than one percentage point from FY2013 to FY2014, two states will experience an FMAP rate increase of greater than one percentage point, and six states will experience an FMAP rate decrease of greater than one percentage point. Nevada will have the largest FMAP rate increase with a 3.36 percentage point increase, and South Dakota will have the largest FMAP rate decrease with a 2.65 percentage point decrease. Two states will have FY2014 FMAP rates that are not calculated according to the regular FMAP formula: the District of Columbia and Louisiana. The FMAP rate for the District of Columbia has been set in statute at 70% since 1998, and Louisiana will receive a disaster-recovery FMAP adjustment (discussed in further detail below) increase over its FY2014 regular FMAP rate. Although FMAP rates are generally determined by the formula described above, Table 1 lists exceptions that have been added to the Medicaid statute over the years. Table 1 identifies whether the exception is a current (i.e., the exception currently applies), future (i.e., the exception will apply beginning at the specified date), or past (i.e., the exception no longer applies) FMAP rate exception. Some recent issues related to the FMAP rate include FMAP changes in the ACA, federal deficit reduction proposals impacting the FMAP rate, and the disaster-related FMAP adjustment. The Medicaid provisions in ACA represent the most considerable reform to Medicaid since its enactment in 1965. The most noteworthy change begins in 2014, or sooner at state option, when the ACA expands Medicaid to include a new mandatory eligibility group: all adults under age 65 with income up to 133% of the federal poverty level (FPL) (effectively 138% FPL with the Modified Adjusted Gross Income or MAGI 5% FPL income disregard). Originally, it was assumed that all states would implement the ACA Medicaid expansion in 2014 as required by statute because implementing the ACA Medicaid expansion was required in order for states to receive any federal Medicaid funding. However, on June 28, 2012, the United States Supreme Court issued its decision in National Federation of Independent Business (NFIB) v. Sebelius finding that the federal government cannot terminate the federal Medicaid funding a state receives for its current Medicaid program if a state refuses to implement the ACA Medicaid expansion. If a state accepts the new ACA Medicaid expansion funds, it must abide by the new expansion coverage rules. However, based on the Court's opinion, it appears that a state can refuse to participate in the ACA Medicaid expansion without losing any of its current federal Medicaid matching funds. While not all states are expected to implement the ACA Medicaid expansion, the Congressional Budget Office (CBO) estimates the Medicaid expansion will increase Medicaid enrollment by 7 million in FY2014, which is a 20% increase over the Medicaid enrollment estimated for FY2014 without the ACA Medicaid expansion. As a result, the expansion will significantly increase Medicaid expenditures, and the federal government will cover a vast majority of the costs for individuals who are "newly eligible" due to ACA. ACA contains a number of provisions that affect FMAP rates, such as the "newly eligible" FMAP rates, the "expansion state" FMAP rates, and other FMAP rate changes discussed below. "Newly Eligible" FMAP Rates . An increased FMAP rate will be provided for "newly eligible" individuals who will gain Medicaid eligibility due to the ACA Medicaid expansion. The "newly eligible" are defined as nonelderly, nonpregnant adults with family income below 133% FPL who would not have been eligible for Medicaid in the state as of December 1, 2009, or were eligible under a waiver but not enrolled because of limits or caps on waiver enrollment. States will receive 100% FMAP rate for the cost of providing benchmark or benchmark-equivalent coverage to "newly eligible" individuals, from 2014 through 2016. For "newly eligible" individuals, the FMAP rate will phase down to 95% in 2017, 94% in 2018, 93% in 2019, and 90% afterward (See Table 2 ). "Expansion State" FMAP Rates. Although Medicaid eligibility has generally been limited to certain categories of individuals, some states provide health coverage for all low-income individuals using Medicaid waivers. As a result, they have few or no individuals who will qualify for the "newly eligible" FMAP rate. As of CY2014, these states will receive an increased FMAP rate, which is referred to as the "expansion states" FMAP rate. "Expansion states" are defined as those that, as of March 23, 2010 (ACA's enactment date), provided health benefits coverage meeting certain criteria statewide to parents and nonpregnant childless adults at least through 100% FPL. Although HHS will make the official determination, one source suggests that 11 states (Arizona, Delaware, Hawaii, Maine, Massachusetts, Minnesota, New York, Pennsylvania, Vermont, Washington, and Wisconsin) and the District of Columbia might meet the definition of an "expansion state." The "expansion state" FMAP rate will be available for individuals in "expansion states" who were eligible for Medicaid on March 23, 2010 and are in the new eligibility group for nonelderly, nonpregnant adults at or below 133% FPL. The formula used to calculate the "expansion state" FMAP rates is based on a state's regular FMAP rate, so the "expansion state" FMAP rates will vary from state to state until CY2019, at which point the "newly eligible" FMAP rates and the "expansion state" FMAP rates will both be equal (see Table 2 ). "Expansion states" are not excluded from receiving the "newly eligible" FMAP rates. Populations in an "expansion state" that meet the definition for the "newly eligible" FMAP rate will receive the "newly eligible" FMAP rate. For example, an "expansion state" that currently provides Medicaid coverage to childless adults and parents up to 100% FPL that chooses to implement the ACA Medicaid expansion will receive the higher "newly eligible" FMAP rate for individuals between 100% and 133% FPL. Also, "expansion states" will receive the "newly eligible" FMAP rate for individuals who received limited Medicaid benefits. In addition, "expansion states" that provided state-funded health benefits coverage will receive the "newly eligible" FMAP rate for individuals previously covered by the state-only program. Additional FMAP Increase for Certain "Expansion States." During CY2014 and CY2015, an FMAP rate increase of 2.2 percentage points is available for "expansion states" that (1) the Secretary of HHS determines will not receive any FMAP rate increase for "newly eligible" individuals and (2) have not been approved to divert Medicaid disproportionate share hospital funds to pay for the cost of health coverage under a waiver in effect as of July 2009. The FMAP rate increase applies to those who are not "newly eligible" individuals as described in relation to the new eligibility group for nonelderly, nonpregnant adults at or below 133% FPL. It appears that Vermont meets the criteria for this increase. Additional Medicaid Changes . As noted in Table 1 , ACA also provides--subject to various requirements--an increased FMAP rate for certain disaster-affected states, primary care payment rate increases, specified preventive services and immunizations, smoking cessation services for pregnant women, specified home and community-based services, health home services for certain people with chronic conditions, home and community-based attendant services and supports, and state balancing incentive payments. Three of these FMAP provisions went into effect on January 1, 2013: primary care payment rate increases, specified preventive services and immunizations, smoking cessation services for pregnant women. The other provisions have been in place for the past few years. CHIP. Prior to ACA, federal CHIP allotments were provided through FY2013 and states received reimbursement for CHIP expenditures based on the E-FMAP rate described at the beginning of this report. Under ACA, the E-FMAP rate for CHIP expenditures in FY2016-FY2019 will be increased by 23 percentage points, up to 100%. ACA also provides new federal CHIP allotments for FY2014 and FY2015. However, no federal CHIP allotments are provided during the period in which the 23 percentage point increase in the E-FMAP rate is slated to be in effect. In a typical year, the federal government funds roughly 57% of the total cost for Medicaid, and federal Medicaid expenditures account for almost 8% of all federal spending. In FY2013, federal Medicaid payments to states are estimated to amount to $276 billion. Federal Medicaid payments are anticipated to grow significantly beginning in FY2014 due to the expansion of Medicaid eligibility provided in the ACA. As a percentage of gross domestic product (GDP), federal Medicaid expenditures are expected to increase from about 1.7% of GDP in FY2013 to 2.4% of GDP in FY2022. As a result, controlling federal Medicaid spending has been a focus of federal deficit reduction proposals, and amending the FMAP structure has been identified as a way to reduce federal Medicaid spending by a reduction to the statutory FMAP floor. As mentioned above, the FMAP has a statutory maximum of 83% and a statutory minimum of 50%. In its Choices for Deficit Reduction report, CBO provided estimates for a series of options that Congress may choose to examine as it considers deficit reduction. One such option would reduce federal Medicaid spending by reducing the statutory FMAP floor, and CBO estimates this option would save $20 billion in federal Medicaid expenditures in FY2020. Regular FMAP rates for FY2014 range from 50% (15 states) to 73% (Mississippi). If this option were in place for FY2014, it would impact the 15 states that have FMAP rates of 50%. The other 35 states and the District of Columbia would not be impacted by this option. The ACA added a disaster-recovery FMAP adjustment for states that have experienced a major, statewide disaster. This adjustment was available to states beginning the fourth quarter of FY2011. There are two criteria for states to qualify for the disaster-recovery FMAP adjustment. First, during the preceding seven years, the President must have declared a major disaster under the Stafford Act in the state where every county in the state was eligible for public assistance from the federal government. Second, the state's regular FMAP rate must have declined at least three percentage points from the prior year's FMAP rate. In the first year a state qualifies for the disaster-recovery adjusted FMAP rate, the FMAP rate shall be equal to the regular FMAP rate as determined for the fiscal year, plus 50% of the difference between the current year's regular FMAP rate and the preceding year's FMAP rate. For the second and subsequent years a state qualifies for the adjustment, the FMAP rate shall be equal to the state's regular FMAP rate for that year plus 25% of the difference between the current year's regular FMAP rate and the preceding year's disaster-recovery adjusted FMAP rate. Originally (i.e., as enacted by the ACA), for the second and subsequent years, the FMAP increase was applied to the prior year's disaster-recovery adjusted FMAP. However, this caused the state's FMAP rate to increase, rather than phase down as intended, each year a state qualifies for the adjustment. As a result, Section 3204 of the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ) revised the formula so that for the second and subsequent years the increase will be applied to the regular FMAP as determined for the fiscal year. This provision had an effective date of October 1, 2013. The effective date was later amended by Section 100123 of the Moving Ahead for Progress in the 21 st Century Act (MAP-21, P.L. 112-141 ) to October 1, 2012. In addition, MAP-21 amended the formula for FY2013 by changing the adjustment factor from 25% to 50% for only FY2013. Louisiana was the only state that met both requirements for FY2011, FY2012, FY2013, and FY2014. Table 3 shows the calculation for Louisiana's disaster-recovery adjusted FMAP rate for each of those years. In the fourth quarter of FY2011, Louisiana met the Stafford Act criteria (due to Hurricane Katrina and Hurricane Gustav), and its regular FY2011 FMAP rate (63.61%) was at least three percentage points less than its regular FY2010 FMAP rate plus hold harmless from the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ) temporary FMAP rate increase (72.47%). As shown in Table 3 , Louisiana's regular FMAP rate was adjusted 4.43 percentage points for a total FMAP rate of 68.04% for the fourth quarter of FY2011. For FY2012, Louisiana met the Stafford Act criteria (due to Hurricane Katrina and Hurricane Gustav), and its regular FY2012 FMAP rate (61.09%) is at least three percentage points less than its FY2011 disaster-recovery adjusted FMAP rate (68.04%). As shown in Table 3 , Louisiana's FY2012 disaster-recovery FMAP adjustment is 3.48 percentage points, which was applied to the FY2011 disaster-recovery adjusted FMAP rate for a total FMAP rate of 69.78%. For FY2013, Louisiana meets the Stafford Act criteria (due to Hurricane Gustav), and Louisiana's regular FMAP rate for FY2013 (61.24%) is more than three percentage points lower than Louisiana's disaster-recovery adjusted FMAP rate for FY2012 (69.78%). As shown in Table 3 , Louisiana's FY2013 regular FMAP rate is increased by 4.27 percentage points for a total FMAP rate of 65.51%. For FY2014, Louisiana will meet the Stafford Act criteria (due to Hurricane Gustav), and Louisiana's regular FMAP rate for FY2014 (60.98%) is more than three percentage points lower than Louisiana's disaster-recovery adjusted FMAP rate for FY2012 (65.51%). As shown in Table 3 , Louisiana's FY2014 regular FMAP rate will be increased by 1.13 percentage points for a total FMAP rate of 62.11%. The FMAP rate is used to reimburse states for the federal share of most Medicaid expenditures. In FY2014, 15 states will have the statutory minimum FMAP rate of 50%, and Mississippi will have the highest FMAP rate of 73.05%. From FY2013 to FY2014, the regular FMAP rates for 36 states will change, while the regular FMAP rates for the remaining 15 states (including the District of Columbia) will remain the same. Exceptions to the regular FMAP rate have been made for certain states, situations, populations, providers, and services. The ACA added a number of exceptions to the FMAP for "newly eligible" individuals, "expansion states," disaster-affected states, primary care payment rate increases, specified preventive services and immunizations, smoking cessation services for pregnant women, specified home and community-based services, health home services for certain people with chronic conditions, home and community-based attendant services and supports, and state balancing incentive payments. Since federal Medicaid expenditures are a large and growing portion of the federal budget, controlling federal Medicaid spending has been a focus of federal deficit reduction proposals. Amending the FMAP structure has been identified as a way to reduce federal Medicaid spending by reducing the statutory FMAP floor. Table A-1 shows regular FY2006-FY2014 FMAP rates calculated according to the formula described in the text of the report (see " How FMAP Rates Are Calculated "). In FY2014, FMAP rates range from 50% (15 states) to 73% (Mississippi). From FY2013 to FY2014, regular FMAP rates will decrease for 22 states, increase for 14 states, and remain the same for 14 states and the District of Columbia. All of the 14 states for which the FMAP rates do not change have the statutory minimum FMAP rate of 50%, and the FMAP rate for the District of Columbia is statutorily set at 70%.

Summary:
Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services as well as long-term care. Medicaid is jointly funded by the federal government and the states. The federal government's share of a state's expenditures is called the federal medical assistance percentage (FMAP) rate. The remainder is referred to as the nonfederal share, or state share. Generally determined annually, the FMAP formula is designed so that the federal government pays a larger portion of Medicaid costs in states with lower per capita incomes relative to the national average (and vice versa for states with higher per capita incomes). FMAP rates have a statutory minimum of 50% and a statutory maximum of 83%. For FY2014, regular FMAP rates range from 50.00% to 73.05%. 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, situations, populations, providers, and services. Some recent issues related to FMAP include FMAP changes in the Patient Protection and Affordable Care Act (ACA, P.L. 111-148 as amended), federal deficit reduction proposals that would amend the FMAP rate, and the disaster-related FMAP adjustment. The ACA contains a number of provisions affecting FMAP rates. Most notably, the ACA provides initial FMAP rates of up to 100% for certain "newly eligible" individuals. Also, under the ACA, "expansion states" receive an enhanced FMAP rate for certain individuals. In addition, ACA provides increased FMAP rates for certain disaster-affected states, primary care payment rate increases, specified preventive services and immunizations, smoking cessation services for pregnant women, specified home and community-based services, health home services for certain people with chronic conditions, home and community-based attendant services and supports, and state balancing incentive payments. Since federal Medicaid expenditures are a large and growing portion of the federal budget, controlling federal Medicaid spending has been included in some federal deficit reduction proposals. Some of the federal deficit reduction proposals include provisions that would amend the current FMAP structure through either a blended FMAP or a reduction to the statutory FMAP floor. The ACA included a provision providing a disaster-recovery FMAP adjustment for states that have experienced a major, statewide disaster. Louisiana is the only state that has been eligible for the disaster-recovery adjusted FMAP since the fourth quarter of FY2011 (when the adjustment was first available). Both the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96) and the Moving Ahead for Progress in the 21st Century Act (MAP-21, P.L. 112-141) amended the formula for the disaster-recovery adjusted FMAP. This report describes the FMAP calculation used to reimburse states for most Medicaid expenditures, and it lists the statutory exceptions to the regular FMAP rate. In addition, this report discusses other FMAP-related issues, including FMAP changes in ACA, federal deficit reduction proposals affecting the FMAP rate, and the disaster-recovery FMAP adjustment.