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Last Updated: 2017

Medicaid is a means-tested entitlement program, which was enacted in the shadow of the Medicare program in 1965. Since its conception, states had some flexibility to determine eligibility levels and the scope of the program, but federal oversight and programmatic regulations were considerable. States must comply with federal Medicaid rules in order to receive federal money to offset a portion of program costs. Medicaid serves more than 20 percent of Americans including many of the most vulnerable. . In 2016, Medicaid served 74 million people at a cost of over $550 billion. In comparison, Medicare served 57 million people at a cost of over $588 billion. Medicaid expenditures account for 10 percent of the federal budget in 2016. Medicaid is the second-largest state budget item, second only to elementary and secondary education, and is the fastest growing.

Medicaid is the primary source of coverage for low-income families, people with disabilities, and the elderly. While there is considerable state variation, the program provides a comprehensive set of benefits to a vulnerable population. Medicaid covers 24 million children, 13 million elderly and disabled people, and 10 million adults in low-income families. It insures over 30 percent of children in the United States and is the largest purchaser of maternity services in the country, covering 40 percent of all births. Medicaid covers almost 70 percent of nursing home costs. It covers an estimated 40 percent of people with AIDS and 90 percent of children with AIDS.

The Medicaid program is jointly financed and administered by the federal government and the states similar to welfare assistance programs. The federal government matches state expenditures at a rate of between 50 and 79 percent, with poorer states receiving higher reimbursement. States are required to cover certain groups (women, children, the aged, and the blind and disabled receiving cash assistance) and provide certain benefits (very comprehensive, especially for children), and have the option of covering additional groups and providing additional benefits. States also have the option of instituting a “medically needy program.” This enables people who would otherwise be eligible for one of the categories, except for having too much income or resources, to “spend down” to the eligibility level and qualify for Medicaid.

The Medicaid program largely covers people with low income and/or with disabilities. However, it does not cover all the poor, only people who belong to certain eligibility groups and meet certain criteria, and this varies by state. Low-income pregnant woman and children and low-income elders receiving cash assistance from the government are the largest mandatory coverage groups. Women and children constitute the largest group of Medicaid recipients (near 70 percent), but account for only 30 percent of cost. The elderly and people with disabilities account for just 30 percent of Medicaid recipients but 70 percent of the costs. This is because of larger hospital costs and payments for long-term care and nursing home coverage.

Each state Medicaid program is different. The federal government and the states maintain a state plan, which identifies benefits and eligibility criteria. While there is a core benefits package that is fairly comprehensive, states can opt to provide coverage for other services such as prescriptions, optometrist services, clinical services, rehabilitation, and home- and community-based services for people with chronic illness. States decide how care is provided directly through providers on fee-for-service bases or through contract with managed care organizations. There was a major shift to Medicaid managed care throughout the 1990’s. In 1993 just 14 percent of recipients were in managed care plans, but by 2014 this number grew to over 70 percent. In addition to state flexibility in benefits and eligibility, states also have considerable latitude in setting payment rates for providers and health plans.

Changes to the program require state plan amendments to be submitted and approved by the federal government. The Centers for Medicare and Medicaid Services (CMS) is responsible for federal oversight. States may also obtain federal waivers to make more wholesale changes to their Medicaid program. This flexibility is still subject to federal approval and oversight. Under the Clinton administration, waivers were required to expand coverage. Under the George W. Bush administration, states have more flexibility through waivers to change and limit available benefits, to increase recipient out-of-pocket costs, and in efforts to expand coverage and reduce costs. Due to complexities in financing, eligibility, benefit levels, provider payment levels, administrative oversight and opportunities for waiver, the Medicaid program is the most complex of intergovernmental relationships.

The Affordable Care Act (ACA) made significant changes to the Medicaid including increasing eligibility for all low-income people up to 138 percent of the federal poverty level. The federal government would pay 100 percent of the cost for newly eligible scaling back payments to 90 percent in 2020. However, the ;Supreme Court ruled that states had the option not to expand coverage. In 2017, 29 states and the District of Columbia expanded Medicaid and 21 did not.

According to the Kaiser Family Foundation, Medicaid grew at over 5 percent per year over the last decade. This is at a time when inflation was often under 2 percent. The results are that health care costs eat up ever larger chunks of state budgets. States are faced with a number of bad options. They can increase taxes or cut funding for other priorities like education, transportation, safety or environmental protection. Alternatively states could cut back on optional services or eligibility groups. The downside here is that this will increase the number of uninsured or under-insured. States may also look to improve the efficiency of the program or reduce payments to providers and hospitals. Many states have already moved towards managed care, and Medicaid provider payments are already below what Medicare and the private sector pay. While Medicaid provides good value and costs far below the private sector, legislators and governors are faced with a range of difficult decisions.

SEE ALSO: Health Care PolicyMedicarePatient Protection and Affordable Care Act


State Health Facts: Total Medicaid Spending (Kaiser Family Foundation 2017); Andy Schneider, The Medicaid Fact Sheet (Kaiser Family Foundation 2017); Jocelyn Guyer, “The Role of Medicaid in State Budgets,” Policy Brief, October (Washington, DC: Kaiser Commission on Medicaid and the Uninsured, 2001); “Medicaid, ‘Mandatory’ and ‘Optional’ Eligibility and Benefits,” Policy Brief, July (Washington, DC: Kaiser Commission on Medicaid and the Uninsured, 2001).