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 require 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 state fiscal conditions, the temporary FMAP rate increase, the exclusion of certain employer contributions, FMAP changes in the Patient Protection and Affordable Care Act (ACA, P.L. 111-148 as amended), the Medicaid proposal included in the House budget resolution, and other federal deficit reduction proposals. 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 enhanced 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 than they would otherwise receive (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 FY2005-FY2013. 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 FY2013 FMAP calculations, HHS used state per capita personal income data for 2008, 2009, and 2010 that became available from the Department of Commerce's Bureau of Economic Analysis (BEA) in September 2011. 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 2008 state per capita personal income data published by BEA in September 2010 (used in the calculation of FY2012 FMAP rates) differed from the 2008 state per capita personal income data published in September 2011 (used in the calculation of FY2013 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 FY2013 (the federal fiscal year that begins on October 1, 2012) were calculated and published November 30, 2011, in the Federal Register. In the Appendix to this report, Table A-1 shows FY2013 regular FMAP rates for each of the 50 states and the District of Columbia. Figure 1 shows the state distribution of regular FMAP rates for FY2013. Fourteen states will have the statutory minimum FMAP rate of 50%, and Mississippi will have the highest FMAP rate of 74.43%. As shown in Figure 2 , from FY2012 to FY2013, 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 FY2012 to FY2013, the change will be less than one percentage point. The regular FMAP rate for seven states will increase by less than one percentage point, and the FMAP rate for 17 states will decrease by less than one percentage point. For states that will experience an FMAP rate change greater than one percentage point from FY2012 to FY2013, five states will experience an FMAP rate increase of greater than one percentage point, and seven states will experience an FMAP rate decrease of greater than one percentage point. Nevada will have the largest FMAP rate increase with a 3.54 percentage point increase, and North Dakota will have the largest FMAP rate decrease with a 3.13 percentage point decrease. Two states will have FY2013 FMAP rates that are not calculated according to the regular FMAP formula: the District of Columbia and Louisiana.