Issues & Solutions | Peter G. Peterson Foundation | Our America. Our Future.

Medicaid — a health insurance program for low-income people that is financed jointly by the federal government and the states — has received a great deal of attention because of the Supreme Court's ruling on the constitutionality of the Affordable Care Act (ACA). Today, the Congressional Budget Office (CBO) released a report that reflects the impact of the Court's decision on the budget.

This budget explainer describes what Medicaid is, how it is financed, and who benefits from it. In summary, this explainer notes that, in 2011:

• Medicaid provided health insurance for 67 million Americans.
• Medicaid spending represents 16 percent of all health spending in the U.S.
• Medicaid cost the federal government $270 billion and the states $159 billion.

In addition, the program plays a significant role in the country's health care system:

• Nearly one-third of all American children are covered through Medicaid and a related program, the Children's Health Insurance Program (CHIP).
• 70 percent of Medicaid's funds are spent on elderly and disabled beneficiaries.
• Medicaid is the largest single payer of long-term care. The program funds about a third of all nursing home care.

Last, the Court’s ruling on the ACA is significant. According to today’s Congressional Budget Office report, the net costs of the ACA are projected to decrease by $84 billion cumulatively from 2012 to 2022. Costs decrease largely because fewer people will receive health coverage through Medicaid as a result of the decision. Compared with the original version of the law, the number of people enrolled in Medicaid and CHIP is projected to decline by six million people in 2022 as a result of the Court’s ruling; overall, three million additional Americans will be uninsured.

What does Medicaid do? How does it work? What does it cost?

Medicaid is a health insurance program for low-income people. The program is administered by the states (but is subject to federal oversight) and is financed jointly by the federal government and the states. As a result, there are actually more than 50 different Medicaid programs (including Washington, DC and the various territories) in the United States.

The federal government matches state spending on the program using a formula that takes account of differences in per capita income among the states. The federal government covers about 60 percent of the total cost of the program, but the federal share ranges from 50 percent in a number of wealthier states to 75 percent in Mississippi.

In 2011 program spending totaled $429 billion and 67 million people received benefits. Nearly 70 percent of beneficiaries were enrolled in some form of managed care (which aims to reduce unnecessary care and costs through various mechanisms and controls), which represents about 20 percent of total costs.

Medicaid exerts pressure on both federal and state budgets. Under the Affordable Care Act, the federal government will finance nearly all of the planned expansion of the program. At the state level, spending on Medicaid recently surpassed K-12 education as the largest area of state spending, according to a report of the State Budget Crisis Task Force.

Eligibility for Medicaid is determined by a number of factors, the most important of which is income. The Affordable Care Act expanded the Medicaid program to cover individuals with incomes up to 133 percent of poverty, with the federal government covering nearly all the cost of the expansion. About half of the projected increase in Americans with insurance coverage under the ACA was to come from an expanded Medicaid.

The health reform law originally allowed states to forego the expansion of the program, but doing so would result in the loss of their entire share of federal "matching funds;" that is, they would no longer receive any federal money for the program. In June 2012, the Supreme Court ruled that some of the Medicaid provisions in the ACA were unconstitutional, in particular the provision penalizing states with the complete loss of matching funds. After the Court's ruling, states choosing not to expand their Medicaid program will face no financial penalties for doing so.

Nearly one-third of American children are covered by Medicaid or the Children's Health Insurance Program (CHIP).

SOURCE: Medicaid and CHIP Payment and Access Commission, June 2012 MACStats. "Other payers" includes children covered by Medicare, military health plans, and other government programs. Compiled by PGPF.

How many children are served by Medicaid?

The government plays an important role in providing health coverage for children through Medicaid and the Children's Health Insurance Program (CHIP), which extends Medicaid benefits to children of low income families who make too much money to qualify for the traditional Medicaid program.

Approximately one-third of the nation’s 79 million children 18 and under received their health insurance through Medicaid or CHIP. The share of children covered by Medicaid/CHIP varies widely by state or jurisdiction. The highest share was 51 percent of all children in the District of Columbia, with the lowest being 17 percent in Utah. (See the table below for more detail about Medicaid coverage by state.)

Medicaid provides health insurance to low-income Americans. Children make up nearly half of the program's enrollment, but most spending is directed towards the elderly and disabled.

SOURCE: Medicaid and CHIP Payment and Access Commission, June 2012 MACStats. Compiled by PGPF.
*Enrollment total excludes approximately 4 million "unknown" beneficiaries.

In spite of the large number of children enrolled in the program, most Medicaid dollars are spent on disabled and elderly beneficiaries.

Even though children make up just over half of beneficiaries, they account for less than 20 percent of program spending.

Medicaid spends almost 70 percent of its money on elderly and disabled beneficiaries. These enrollees must meet asset and income tests to qualify for assistance. Spending for elderly beneficiaries accounts for almost 25 percent of Medicaid’s annual costs, and spending on behalf of disabled enrollees accounts for 43 percent.

Besides children, the elderly and disabled, the rest of Medicaid’s enrollees are largely low-income pregnant women and new mothers. Medicaid pays for 40 percent of all births in the U.S., covering prenatal services, delivery, and post-partum care.

Per capita spending[i] for beneficiaries under 18 was $2,900. For the elderly, it was more than $16,000, more than five times greater. For disabled beneficiaries, it was more than $18,000, more than six times greater than it was for children. Program-wide per beneficiary spending was just over $7,300.

Medicaid finances about one-third of all home health and nursing home care spending in the United States, but a smaller portion of physician services and hospital spending.

SOURCE: Centers for Medicare and Medicaid Services, Projected National Health Expenditures. Compiled by PGPF.

Medicaid plays a major role in financing health care

Medicaid pays for a wide variety of services and plays an important role in health care finance.

Medicaid is the largest single payer of nursing home services in the country, financing about one-third of the total spending. It also finances more than 35 percent of home-based health care and almost 20 percent of hospital-based services. Its shares of physician services and prescription drug spending are much smaller – it pays for less than 10 percent of total spending in both sectors. Overall, the program financed about 17 percent of total health consumption (expenditures not dedicated to research or investment) in 2011.

The elderly population also receives health care financed by the Medicare program. Medicaid and Medicare, together, fund more than half of nursing home care in the country and nearly three-fourths of home health care. The two programs also pay for about forty percent of all hospital care in the country.

Impact of Supreme Court Ruling

In today’s report, CBO notes that the expansion of Medicaid is now voluntary for states. As a result, fewer people will receive health insurance coverage through the program, and federal spending for Medicaid and CHIP will be $289 billion less than CBO previously projected for the 2012 to 2022 period. Some of the people who can't get insurance through Medicaid will purchase coverage through the health insurance exchanges established by the ACA. That will raise the cost of federal subsidies for the exchanges[ii] by $210 billion from 2012 to 2022 as compared CBO's earlier projections.

Appendix: Medicaid Enrollees by State

This appendix presents state-level data on the number of children and adults covered by Medicaid, as well as the share of the total covered by Medicaid for both segments of the population. Washington, DC has the largest share of both children and total population covered by Medicaid. Overall, Medicaid covered approximately 16 percent of the country's population.

Medicaid coverage of children and adults

Data from the Kaiser Family Foundation represents two-year coverage estimates from the Census Bureau.

[i] Data from the Medicaid and CHIP Payment and Access Commission; totals are from 2009, the most recent year for which complete data are available.

[ii] The ACA provides income-related federal subsidies to help those with low incomes purchase insurance; however, the subsidies were developed under the assumption that those with the lowest incomes would receive benefits through Medicaid. Thus some people will remain uninsured because they will have incomes too low to qualify for subsidies and live in states without an expanded Medicaid program. According to CBO, roughly two-thirds of those who would have been eligible for Medicaid will have incomes too low to qualify for subsidies. Overall, roughly 90 percent of the population will have health insurance after the ACA is fully implemented.