Budget Basics: Medicaid

Medicaid is a health insurance program targeted to lower-income recipients that is financed jointly by the federal government and the states. This budget explainer describes what Medicaid is, how it is financed, and who benefits from it.

In 2020, Medicaid:

• Provided health insurance for about 77 million Americans, or about 23 percent of the U.S. population
• Cost the federal government $426 billion, though spending in 2020 spiked due to the coronavirus pandemic and legislation to mitigate its impact
• Represented 16 percent of all health spending in the U.S.

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

• More than one-third of all American children are covered through Medicaid and a related program, the Children's Health Insurance Program (CHIP).
• 54 percent of Medicaid's funds were spent on elderly and disabled beneficiaries, in 2017, the most recent year for which data are available.
• Medicaid is the largest single payer of long-term care. The program funds about one-fifth of all nursing home care.

How Is Medicaid Financed?

Medicaid is financed jointly by the federal government and the states, and on average, the federal government covers 65 percent of the total cost of the program, or $423 billion in 2020. The program represents 17.8 percent of state spending, on average, and is the second- largest category in their budgets. Medicaid is administered by the states (but is subject to federal oversight) and as a result, there are actually more than 50 different Medicaid programs (including Washington, DC and U.S. territories).

The federal government matches state spending on the program using various formulas. The formula that governs a majority of government funding is called the federal medical assistance percentage (FMAP), and takes into account differences in per capita income among the states. The FMAP ranges from a minimum of 50 percent in wealthier states such as Alaska to 76 percent in Mississippi. (As part of the federal response to the COVID-19 pandemic, the FMAP was temporarily increased by 6.2 percentage points.)

In addition to funds governed by the FMAP, the federal government provides enhanced matching rates for select services, providers, or groups of people. For example, the Affordable Care Act (ACA) expanded the Medicaid program to cover individuals under the age of 65 with incomes up to 133 percent of the poverty level, with the federal government covering nearly all the cost of coverage for the expansion population. States are allowed to forego the expansion of the program; as of June 2022, 12 states have chosen not to adopt the expansion. Besides enhanced matching for certain groups of people, certain hospitals are eligible for additional financing; those Disproportionate Share Hospital payments are available to hospitals that serve a large number of low-income patients.

Finally, unlike for the states and Washington, DC, federal funding for Medicaid in the territories is subject to a cap and a fixed matching rate. Consequently, a territory no longer receives federal support for its Medicaid program once it exhausts its federal funding for a given fiscal year.

Who Receives Medicaid?

Medicaid provides health insurance for vulnerable populations. Approximately one-third of the nation’s 78 million children received their health insurance through Medicaid or 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. Persons with disabilities and the elderly make up 23 percent of the program’s enrollees. While Medicare is the primary health insurance program for most people over the age of 65, certain people are eligible for both programs. These dual- eligible beneficiaries are simultaneously eligible for both programs, and tend to experience high rates of chronic illness. For example, 49 percent of those beneficiaries receive long-term care services, while 60 percent have multiple chronic conditions.

Even though children make up about 38 percent of Medicaid beneficiaries, they account for less than 20 percent of the program’s spending. Conversely, the elderly and people with disabilities make up one-quarter of beneficiaries but account for more than half of Medicaid spending. Higher spending for those groups arises from the characteristics and health status of the beneficiaries and the scope of benefits covered. For example, Medicaid is the dominant payer for long-term services and supports (LTSS), which makes up approximately one-third of Medicaid spending. People using LTSS have high medical needs and many younger people with disabilities do not qualify for Medicare, so users of LTSS account for 49 percent of total Medicaid expenditures.

What Services Does Medicaid Cover?

Federal rules require state Medicaid programs to cover mandatory services such as hospital care and physician care, but states may also elect to cover optional services such as physical therapy and dental care. Medicaid services are designed to take into account the needs of its population of beneficiaries. For example, children receive comprehensive screening services that are particularly important for children with beneficiaries, while long-term care coverage is an important benefit for the elderly and people with disabilities.

Medicaid is the third largest mandatory program in the federal budget, accounting for 7 percent of federal spending in 2020, and represents almost one-fifth of state budgets, on average. As such an important component of government spending and one of the largest payers of healthcare coverage, it has the unique opportunity to be a driver of change and innovation in healthcare.