The causes of national recessions, their depths, and durations vary considerably. For example, the 2001 recession lasted only 8 months, while the 2007 recession was 18 months long. The nation also experienced different declines in economic activity, as measured by gross domestic product (GDP), due to these recessions. For example, during the 2007 recession GDP decreased 4.1 percent whereas GDP decreased by 0.3 percent during the 2001 recession. Recent economic research suggests that while economic downturns within states generally occur around the same time as national recessions, their timing and duration can vary. States have different industry mixes and resources, and they may enter a downturn before the national recession begins or well after the recession has set in. The timing of a state’s economic downturn is determined by its individual economic condition and revenue structure, which can also affect a state’s capacity to fund its Medicaid program. (See fig. 1 for differences in the timing, depth, and duration of state downturns compared to the national recessions of 2001 and 2007.) Medicaid enrollment, and the state funding needed to support the program, increase during and after national recessions, when the number of people with incomes low enough to qualify for Medicaid coverage rises as economies weaken. Researchers have estimated that for every 1 percent increase in national unemployment, Medicaid enrollment increases by 1 million. Moreover, as the economy weakens, states have reduced revenues with which to fund their share of the Medicaid programs in place prior to the recession. Under the regular FMAP, the federal government pays a larger portion of Medicaid expenditures in states with low per capita income (PCI) relative to the national average, and a smaller portion for states with higher PCIs. Use of PCI was, by design, intended to adjust for differences in state funding ability. PCI also serves as an indicator for the number of people eligible for Medicaid in a given state. The Department of Health and Human Services (HHS) calculates and publishes the regular FMAP for each state for each federal fiscal year based on a statutory formula that incorporates PCI. The regular FMAP for federal fiscal year 2010 for states ranged from 50.00 percent to 75.67 percent, and was calculated using the following formula: FMAPstate = 1 - ( (PCI state)/( PCI U.S. ) PCI is a poor proxy for the size and cost of serving states’ poverty populations, which vary considerably. For example, the elderly and disabled constitute about 25 percent of the Medicaid population, but constitute approximately 67 percent of all Medicaid expenditures. As a result, 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. In addition, the regular FMAP for each state is generally published in the Federal Register a year in advance of the federal fiscal year in which it will apply. For example, regular FMAPs for fiscal year 2011 (which began October 1, 2010) were published November 27, 2009, based on a 3-year average of PCI data from 2006 through 2008. This lag time between the publication and implementation of the regular FMAP provides states with an opportunity to adjust to changing levels of federal assistance. However, it also means that the PCI amounts used to calculate FMAPs for a given fiscal year do not reflect states’ economic conditions for that year. To help states meet additional Medicaid program needs, and to provide fiscal relief, Congress established temporary FMAP increases for states in 2003, 2009, and 2010. Increased FMAPs help states maintain their Medicaid programs during downturns. They may also free up funds states would otherwise have used for Medicaid and make them available to address other state budget needs. The FMAP is a readily available mechanism for providing temporary assistance to states because assistance can be distributed quickly, with states obtaining funds on a quarterly basis through Medicaid’s existing payment system. In 2003, the increased FMAP provided states with $10 billion in assistance. When combined, the increased FMAP formulas in the Recovery Act and the 2010 extension provided states with an estimated $105.1 billion in assistance. These formulas also incorporated three components for calculating the increase: a component that protected states against decreases in FMAP, an across-the-board component, and a component based on a state’s increase in unemployment. (See table 1 for more information on these increased FMAPs for the 2001 and 2007 recessions.) The enactment of PPACA affects federal and state funding of the Medicaid program. For example, PPACA establishes an eligibility threshold for state Medicaid programs by requiring states, beginning on January 1, 2014, to cover a new eligibility group of nonelderly, nonpregnant individuals at or below 133 percent of the FPL. Consequently, the number of individuals who qualify for Medicaid is estimated to increase by 18 million, according to the CMS actuary. The federal government will pay 100 percent of the cost of covering newly eligible individuals in fiscal years 2014, 2015, and 2016, with the federal match gradually reduced to 90 percent by 2020. States will continue to receive the regular FMAP for most individuals who meet the Medicaid eligibility requirements that each state had in place prior to the enactment of PPACA. Past recessions hampered states’ ability to fund increased Medicaid enrollment and maintain existing services. Within this broad national trend, however, there was significant variation among states in terms of their increases in Medicaid enrollment and revenue losses. Further, these enrollment increases and revenue declines continued after the national recessions ended, and states made additional adjustments to their Medicaid programs. Medicaid enrollment increased during past recessions, in part due to increased unemployment, which led more individuals to become eligible for the program. During the 2001 recession—March 2001 through November 2001—the national unemployment rate increased from 4.3 to 5.5 percent, and total Medicaid enrollment increased by 5.6 percent, which added approximately 2 million enrollees to the Medicaid program. During the 2007 recession, from December 2007 through June 2009, the unemployment rate grew from 5.0 to 9.5 percent, while Medicaid enrollment rose by 9.7 percent—adding nearly 4.3 million enrollees to the program. Although Medicaid enrollment increased nationally during the 2001 and 2007 recessions, the percentage change varied considerably at the state level. All new Medicaid enrollment was not attributable to past recessions, as some states expanded eligibility or received waivers that increased the size of their programs. In 2001, changes in enrollment ranged from an increase of 12.4 percent in Mississippi’s Medicaid program to a decline of 5.6 percent in New Jersey. The 2007 recession also showed variation. From December 2007 through December 2009, Nevada experienced 32 percent enrollment growth in its Medicaid program, while Tennessee’s Medicaid program enrollment remained steady. Although the magnitude of the enrollment increases across states was largely due to the economic downturn, program expansions and enrollment outreach activities implemented in some states also contributed to enrollment growth. Figure 2 shows the changes in Medicaid enrollment among the states and the District of Columbia during the 2007 recession. As economic activity slowed during the 2001 and 2007 recessions, states’ revenues decreased, which hampered states’ ability to fund their existing Medicaid services and support new enrollment. For example, due to the 2007 recession, total state tax revenues declined by 10.2 percent from the fourth quarter of 2007 to the fourth quarter of 2009. However, the depth and duration of states’ economic downturns varied. As shown in figure 3, 44 states and the District of Columbia experienced decreases in tax revenue during the 2007 recession; for example, Iowa experienced a 1 percent revenue decrease, while revenue declined 23.1 percent in Arizona. Over this same period, North Dakota’s tax revenue increased by 6.9 percent. As a result of the revenue decreases and Medicaid enrollment increases brought on by the 2001 and 2007 recessions, states took steps to contain Medicaid costs. For example, in response to the 2001 recession, 34 states took actions to reduce costs that included freezing or reducing provider payments; capping program enrollment; eliminating coverage for optional services; and increasing premiums and copayments for prescription drugs. Revenue decreases due to the 2007 recession prompted 31 states to cut health care programs by reducing or freezing provider rates or increasing provider taxes. Other states took steps to control prescription drug costs, amend enrollment criteria for optional eligibility groups, and limit or eliminate coverage for optional services, such as mental health or dental care. After the 2001 and 2007 recessions ended, Medicaid enrollment remained high or increased in most states, even as revenues continued to decrease or remain below their prerecession levels. As the economic downturns persisted, states remained hampered by both effects in their ability to fund Medicaid and other state programs. According to NASBO, Medicaid is the largest component of state budgets. Therefore, to balance their budgets, states implemented a variety of actions to contain costs, such as modifying eligibility criteria, limiting benefits, and instituting new or higher copayments. Following the 2001 recession, which ended in November of that year, the national unemployment rate remained above prerecession levels, peaking at 6.3 percent in June 2003—19 months after the recession was declared over. In the second quarter of 2002, state tax revenue dropped by 3.2 percent, continuing a decline that started during the 2001 recession. Further, Medicaid enrollment increased by 9.5 percent in 2002, and by another 5.1 percent in 2003. As a consequence in 2002, states instituted additional Medicaid enrollment requirements, such as waiting lists, increased premiums, and changes in optional eligibility categories. In some cases, a state’s enrollment increase was due to policy changes. For example, the most significant factor driving Utah’s enrollment growth was the state’s decision to extend a limited benefit package to parents and adults without children in fiscal year 2003. In June 2009—the designated end of the 2007 recession—the national unemployment rate was 9.5 percent and rising, reaching 10.1 percent in October 2009. As a result, Medicaid enrollment continued to grow from 48.7 million in June 2009 to 49.7 million in October 2009, and to 50.7 million in February 2010. In most states, tax revenue remained below prerecession levels after the 2007 recession, resulting in continued budgeting challenges in 41 states. To balance their budgets, states implemented various Medicaid program cuts and other adjustments. For example, 28 states reduced or froze provider payment rates; 22 states reported implementing or considering restrictions on optional benefits, such as eliminating dental and vision services; 38 states implemented cost containment initiatives in the area of prescription drugs; and 18 states implemented utilization controls on long-term care services. According to NASBO, 23 states expect budget deficits for fiscal year 2012, and 17 states anticipate budget gaps for fiscal year 2013, presenting further challenges to funding Medicaid. Increased FMAP funds provided by the Recovery Act were better timed and targeted for state Medicaid needs than were funds provided following the 2001 national recession. Overall, the Recovery Act funds were timed for state Medicaid needs because assistance began during the 2007 national recession while nearly all states were experiencing Medicaid enrollment increases and revenue decreases. The funds were targeted for state Medicaid enrollment growth based on changes in state unemployment rates, but assistance was not allocated on the basis of a state’s ability to generate revenue. As a result, the increased FMAP funding did not reflect varying degrees of decreased revenue that states had for maintaining Medicaid services. In contrast, the increased FMAP funds for the 2001 recession were provided well after the recession ended and not targeted on the basis of need. The Recovery Act assistance provided to states was timed to meet state Medicaid needs resulting from Medicaid enrollment increases and revenue decreases, beginning midway through the 2007 national recession. As shown in figure 4, the initial period of assistance under the Recovery Act began approximately three quarters after the December 2007 start of the recession, and continued for six quarters beyond the June 2009 end of the recession. Although the timing of state economic downturns varied, almost all states were in an economic downturn during the period covered by the increased FMAP, beginning in October 2008, and funds continued to be available as state economies began to recover. Although Recovery Act funds were provided during the period of economic downturn in most states, states experienced their peak Medicaid needs at different times during the 2007 recession. As shown in figure 5, the period of peak unemployment occurred after the 2007 recession in most states; however, no state experienced a peak in unemployment prior to the receipt of Recovery Act funds. Almost all states experienced declining wages and salaries during or following the 2007 national recession, and the period of increased FMAP assistance included the lowest point of total wages and salaries in most states. The increased FMAP funds provided by the Recovery Act were targeted for increases in states’ unemployment, but did not target the varying degrees of state revenue decreases that occurred during the 2007 recession. Furthermore, some provisions of the Recovery Act—such as the across-the-board FMAP increase—were not targeted, and states with higher regular FMAPs received a greater increase in funding. The increased FMAP funds included a factor for changes in unemployment as a proxy for targeting changes in Medicaid enrollment. As a result, changes in state Medicaid shares based on the unemployment component of the increased FMAP formula were strongly correlated with changes in state unemployment rates. States with a greater increase in unemployment received a greater reduction in their share of Medicaid. Figure 6 reflects the three tiers of state assistance provided by the Recovery Act based on different levels of unemployment growth. However, reductions in state Medicaid shares produced by the overall increased FMAP formula—including the hold-harmless provision, which prohibited decreases in the regular FMAP, and across-the-board increases—were only slightly correlated with increased state Medicaid enrollment as represented by rising unemployment rates. As shown in figure 7, states with a greater increase in unemployment generally received a larger reduction in their state Medicaid share, but the relationship was not as strong as it was for the unemployment component only. Although Recovery Act funds were targeted for increases in state Medicaid enrollment, they were not targeted to reflect varying degrees of revenue decreases among states. Therefore, the Recovery Act did not distinguish among states with varying degrees of reduced revenue capacity in the allocation of assistance. For example, during the fourth quarter of assistance under the Recovery Act, there was no relationship between reductions in the state share of Medicaid expenditures and decreases in state revenue as indicated by declines in state wages and salaries. The largest share of total assistance under the Recovery Act—the across- the-board 6.2 percentage point FMAP increase—was not targeted for variable state Medicaid needs. As a result, state Medicaid shares were reduced more in high FMAP states than low FMAP states. For example, a 6.2 percentage point FMAP increase results in a 12.4 percent reduction in the state share of Medicaid in a state with a low FMAP of 50.00 percent. However, the same 6.2 percentage point increase produces a 24.8 percent reduction in the state share of Medicaid in a state with a high FMAP of 75.00. While there was a strong correlation between reductions in state Medicaid shares and rising unemployment among low FMAP states, there was no correlation among high FMAP states. As a result, some states with similar changes in unemployment had widely varying reductions in their state share of Medicaid. For example, during the fourth quarte assistance under the Recovery Act, West Virginia had a 4.2 percentage point increase in unemployment and a 35.5 percent decline in state share of Medicaid, while Virginia had an identical 4.2 percentage point increase The effect of in unemployment, but a 23.2 percent decline in state share. the across-the-board increase was particularly evident with respect to state revenue decreases as represented by declines in wages and salaries. As a group, during the fourth quarter of assistance under the Recovery r of Act, the low FMAP states had a greater reduction in total wages and salaries than high FMAP states, yet they received a smaller reduction in their share of Medicaid. The assistance following the 2001 recession was provided approximately six quarters after the recession ended and not targeted based on state Medicaid needs. The five-quarter period of increased FMAP assistance provided following the 2001 recession began well after the three-quarter recession and after the period of economic downturn when most states were in recovery. (See fig. 8.) Increased FMAP assistance began in April 2003, eight quarters after the March 2001 start of the national recession, and six quarters after the November 2001 end of the recession. Although the increased FMAP following the 2001 recession coincided with states’ needs due to increased Medicaid enrollment, it was not timed to assist states in responding to decreased revenues as indicated by lower total wages and salaries. As shown in figure 9, the period of increased FMAP assistance included the period of peak unemployment in most states, but it trailed states’ lowest point of total wages and salaries by at least six quarters. The increased FMAP provided following the 2001 recession was not targeted for variable state needs because it relied on an across-the-board FMAP increase for states and a hold-harmless provision. States’ experiences with past recessions offer insights for improving the responsiveness of FMAP adjustments. In particular, mechanisms that (1) improve the timing for starting assistance, (2) taper off the end of assistance, and (3) better target for state needs can provide a more responsive increased FMAP. More responsive assistance can aid states in addressing increased Medicaid enrollment resulting from a national recession, as well as addressing reductions in states’ revenues. Our 2006 report provided a prototype formula for an increased FMAP that addressed increased Medicaid enrollment, but did not address states’ revenue losses. We have revised our 2006 prototype formula in several ways to further improve its responsiveness. Table 2 summarizes and compares the design options from our 2006 report with our proposed revisions and the purpose of the changes. Although the Recovery Act assistance timing was an improvement over the assistance for the 2001 recession, an automatic trigger (a provision that would start the assistance program without the need for legislation) that would provide an increased FMAP to states close to the onset of an NBER- designated recession has additional advantages. Providing assistance earlier than that provided under the Recovery Act could have assured states of a federal response if the national economy weakened. This would particularly benefit states that begin an economic downturn before a national recession. Additionally, from a macroeconomic perspective, it is likely to be more effective to provide temporary assistance—such as that offered by an increased FMAP—when the economy is just beginning its downturn rather than later when the effects of recession are more widespread and the economy has greater downward momentum. When states face an uncertain economic outlook, their awareness that the trigger is there may forestall tax increases or cuts in services because states know that increased assistance will begin if economic conditions continue to worsen. (In other words, because states can anticipate assistance, the assistance does not need to be received or “in the pipeline” in order to produce the desired effect on state fiscal behavior.) Our 2006 report suggested a prototype formula for triggering and targeting an increased FMAP that was based on increases in unemployment. Although unemployment increases in many states typically lag behind the onset of a national recession, our prototype formula considered that states had budget resources and financial management techniques to temporarily sustain them for a year or two with downturn-driven increases in Medicaid expenditures. However, the additional objective of responding to state revenue losses makes a more timely response preferable. Other measures, such as the decrease in states’ employment-to-population ratio, could improve the timing and hasten the provision of assistance to states during a national recession. A trigger based on a change to this ratio could further mitigate the lag time by including two quarters of retroactive funds, similar to that provided in the Recovery Act. If targeted assistance was triggered earlier, the overall amount of increased FMAP assistance would initially be smaller, as most states show greater funding needs a number of quarters after the onset of a national recession, when the results of economic downturns—increases in unemployment and decreases in revenue—are more widespread. Determining when to end increased FMAP assistance to states is complicated by states’ continuing Medicaid funding needs. In our 2006 report, the increased FMAP prototype stopped assistance abruptly once a threshold of states no longer showed increases in unemployment. This approach did not allow states time to transition their Medicaid programs back to their regular federal matching rates. As we noted earlier, increased Medicaid enrollment and decreased revenue continued after both the 2001 and 2007 recessions ended. Adding several quarters of transitional assistance and gradually reducing the percentage of increased FMAP provided could help mitigate the effects of a slower recovery. Phaseout assistance such as this could be targeted to states that have weaker economies and face larger losses. However, any transitional rule for terminating assistance will be subject to complex considerations, including assessing the competing demands for federal resources and states’ ability to cope with their economic conditions without further federal aid. As a result, any transitional rule is likely to require several options for proceeding that are based on several factors, including economic circumstances and congressional decision making. States’ efforts to fund Medicaid during an economic downturn have two main challenges: (1) financing increased enrollment, and (2) replacing revenues lost as a result of the recession. In our 2006 report, the prototype formula accounted for the increases in enrollment, but did not provide for states’ revenue losses. A more responsive increased FMAP would calculate the increased funding needed on the basis of the economic conditions of each state. To consider both increased enrollment and decreased revenue, quarterly increases in each state’s unemployment and decreases in real wages and salaries could be calculated and used together as the basis for targeting funds. Such an approach would target assistance to the states with the greatest economic declines. States could then receive funding based on two formula components: each state’s increase in unemployment, as a proxy for an increase in each state’s decrease in wages and salaries, as a proxy for the loss of revenue. Improving targeting is essential to meet the goals of providing assistance to states in an efficient and effective manner. Without specific measures of states’ needs, federal funds could be distributed inequitably and run counter to the goals of providing assistance during a recession. A formula with finely graduated adjustments to assistance can be an efficient mechanism for providing support to states. States that do not yet show increases in unemployment and decreases in wages and salaries would not receive assistance until changes in these measures indicated an economic downturn. For states with rapidly improving economies that show large decreases in unemployment and increases in wages and salaries, the quarterly assistance could be phased out to ease the transition for their Medicaid programs. In commenting on a draft of this report, the Department of Health and Human Services stated that it agreed with the analysis and goals of the report while emphasizing that any changes to the FMAP formula must be authorized by statute and implemented by the Assistant Secretary for Planning and Evaluation in HHS. The department further stated its belief that it is critical to as closely as possible align changes in the FMAP formula to individual state circumstances in order to avoid unintended consequences for beneficiaries as well as provide budget planning stability for states. We agree that statutory changes would be necessary to implement any adjustments to the FMAP, but we do not make recommendations regarding particular actions in this report. The full text of HHS’s comments can be found in appendix II. HHS also provided technical comments, which we incorporated as appropriate throughout this report. We are sending copies of this report to the Secretary of HHS, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact Thomas J. McCool at (202) 512-2642 or mccoolt@gao.gov or Carolyn L. Yocom at (202) 512-7114 or yocomc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report major contributors to this report are listed in appendix III. In 1997, Congress created CHIP, a federal-state health care program providing coverage for uninsured children in families with incomes that are too high to qualify for Medicaid. States can design and operate their CHIP programs as an expansion of their Medicaid program, as a separate program, or as a combination of the two approaches. CHIP is based on federally funded allotments for each state that are subject to reauthorization by Congress. CHIP provides a strong incentive for states to participate because the federal government pays an “enhanced” federal matching rate that is derived from a state’s FMAP. Patient Protection and Affordable Care Act (PPACA) further extended federal CHIP funding through fiscal year 2015 and provided for an increase in the enhanced FMAP for CHIP beginning in fiscal year 2016. Since its inception in 1997, CHIP enrollment has steadily increased from 660,000 in 1998, to 7.7 million in 2010. (See fig. 10 for CHIP enrollment trends.) CHIP was originally known as the State Children’s Health Insurance Program or SCHIP. Subsequent legislation renamed the program CHIP. In this report, we use the acronym CHIP to refer to the program. The enhanced FMAP for CHIP in 2010 ranged from 65.00 to 82.97. In response to the 2001 recession, states made different decisions regarding their CHIP programs. For example, six states expanded their CHIP programs, while seven states froze or capped their enrollment in CHIP. Other states proposed cost-containment strategies for their CHIP programs, such as reducing payments for health care providers, eliminating benefits, and increasing the use of copayments and monthly premiums. Due to the 2007 recession, 13 states expanded eligibility for their programs, and 14 states made changes in enrollment and renewal procedures, such as accepting online applications or eliminating face-to- face interviews for renewal. However, a number of states reported reducing or freezing reimbursements to providers, or increasing copayments and monthly premiums. Decreases in tax revenues during the 2001 and 2007 recessions led most states to cut or reduce coverage for many of their health programs. For example, 14 states that operated a prescription drug program responded to the 2001 economic downturn by proposing to reduce dispensing fees, change reimbursement formulas, and implement a maximum allowable cost for generic drugs to contain costs. Other states addressed budget concerns by limiting enrollment in state-funded health programs, increasing premiums for program participants, and increasing copayments. In addition, states eliminated or reduced coverage of low- income adults in three state-funded health programs; cut services for people with chronic diseases who were rejected by private insurance companies; and discontinued services for disabled individuals. The 2007 recession also created significant budget gaps for states, which affected their health care programs. The National Conference of State Legislatures reported that for fiscal year 2011, health programs were over budget in 18 states. In November 2010, the Center on Budget and Policy Priorities reported that 31 states enacted cuts to public health services, and 29 states cut services to elderly and disabled individuals. Examples of state health program cuts included dental and vision care programs, maternal and child health programs, health insurance for legal immigrants, and prescription drug coverage to help seniors pay for drugs not covered by Medicare’s prescription drug benefit. In addition, other states eliminated funding for their state-funded health insurance programs for certain low-income parents and disabled adults. In addition to the contacts named above, major contributors included Robert Copeland, Assistant Director; Eric R. Anderson; Robert Dinkelmeyer; Greg Dybalski; Anne Hopewell; Allison Liebhaber, Drew S. Long; Victor J. Miller; Elizabeth T. Morrison; and Hemi Tewarson.

Summary: In response to the most recent U.S. recession, from December 2007 to June 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (Recovery Act). To help states maintain their Medicaid programs and provide states with general fiscal relief, the Recovery Act temporarily increased the federal share of Medicaid funding for states. The federal funding states receive for Medicaid is determined by a statutory formula--the Federal Medical Assistance Percentage (FMAP). The Recovery Act also required GAO to study options for providing a temporary increased FMAP in response to future recessions. GAO reviewed how past recessions affected states' ability to fund Medicaid, examined the responsiveness of past increased FMAP assistance to state needs, and identified options for adjusting the increased FMAP formula for use during future recessions. To conduct this work, GAO reviewed its previous reports on recessions and the increased FMAP and similar work from other organizations. GAO analyzed federal Medicaid data and enrollment data provided by state Medicaid directors. GAO also analyzed labor market data from the Bureau of Labor Statistics, state revenue data from the Census Bureau, and the Federal Reserve Bank of Philadelphia's Coincident Indexes to assess states' ability to fund Medicaid during economic downturns. GAO identifies options for Congress to consider but does not make recommendations in this report. Past recessions hampered states' ability to fund increased Medicaid enrollment and maintain existing services. Both the 2001 and 2007 recessions resulted in increased Medicaid enrollment and decreased revenues, though states' experiences varied. During the 2007 recession, total state tax revenues declined by 10.2 percent from the fourth quarter of 2007 to the second quarter of 2009, with individual state experiences varying. For example, North Dakota had a revenue increase of 6.9 percent while Arizona had a decline of 23.1 percent. In addition, the effect of increased Medicaid enrollment and decreased revenues persisted after the recessions ended, causing states to further adjust their Medicaid programs. The increased FMAP funds provided by the Recovery Act were more responsive to state Medicaid needs than were funds provided after the 2001 recession. Overall, the Recovery Act funds were timed for state Medicaid funding needs. Assistance began during the recession while nearly all states were experiencing Medicaid enrollment increases as indicated by rising unemployment and revenue decreases as indicated by declining wages and salaries. The FMAP funds were targeted for Medicaid enrollment growth, but did not distinguish among states with varying degrees of reduced revenue in the allocation of assistance. The increased FMAP following the 2001 recession was provided well after the recession ended and was not targeted for state Medicaid needs. Past recessions offer options for improving the responsiveness of temporary FMAP increases to state Medicaid program needs. More responsive assistance can aid states in addressing increased Medicaid enrollment resulting from a national recession, as well as addressing decreases in states' revenues. GAO has revised a prototype formula for temporary FMAP increases it developed in 2006. The revised formula would address the timing and targeting of funds, and further improve the responsiveness of the increased FMAP funding. In particular, these revisions (1) use an automatic trigger to start the assistance program closer to the onset of a national recession, (2) add several quarters of transitional assistance before ending the increased FMAP assistance, and (3) target assistance by calculating the increased funding needed on the basis of the economic conditions of each state. In commenting on a draft of this report, the Department of Health and Human Services (HHS) agreed with the analysis and goals of the report while emphasizing that changes to the FMAP formula must be authorized by statute. HHS also stated that it is critical to align changes in the FMAP formula to individual state circumstances in order to avoid unintended consequences for beneficiaries as well as provide budget planning stability for states. GAO agrees that statutory changes would be necessary to implement any adjustments to the FMAP, but does not make recommendations regarding particular actions in this report.