Follow the Money: How Medicaid Financing Works and What That Means for Proposals to Change it

In a recent column, KFF President and CEO Drew Altman wrote that the program most likely to be in the crosshairs if Republicans take control this November is Medicaid because Social Security and Medicare are largely off the table, leaving Medicaid as the likely source for savings needed to pay for proposed tax cuts. Of these three programs, Medicaid and the Children’s Health Insurance Program (CHIP) is the smallest in terms of federal outlays because Medicaid is jointly financed by the federal government and the states, though it covers more people than Medicare or Social Security and still represents a substantial amount of federal spending. In an effort to reduce federal Medicaid spending, Former President Trump has previously supported policies to repeal or weaken the Affordable Care Act (ACA), as well as cap and reduce Medicaid financing. These proposals stand in sharp contrast to proposals that Vice President Harris supports to protect and strengthen Medicaid and the ACA.

Because Medicaid is administered by states within broad federal rules, Medicaid programs and spending vary across states. Total Medicaid spending depends on multiple factors, including the number and mix of enrollees, their use of health care and long-term services and supports, the prices of Medicaid services, and state policy choices about benefits, provider payment rates, and other program factors. Medicaid financing is complex. States are guaranteed federal matching dollars without a cap for qualified services provided to eligible enrollees. The match rate (the share that the federal government pays, known as the federal medical assistance percentage or “FMAP”) varies across states, some services and populations, and sometimes is adjusted during economic downturns:

• FMAP variation across states: The match rate for most Medicaid enrollees is determined by a formula in the law that provides a match of at least 50% and provides a higher federal match rate for states with lower per capita income (up to a cap of 83%). For FY 2025, this ranged from 50% in a number of states to 76.9% in Mississippi. The territories and the District of Columbia have match rates that are set in statute.
• FMAP variation across some services and populations: Most notably, the ACA expansion group is financed with a 90% federal match rate, so states pay 10%. The American Rescue Plan Act included an additional temporary fiscal incentive to states that newly adopt the Medicaid expansion. Family planning services are also reimbursed at a 90% match rate; Indian Health Services (IHS) provided in an IHS facility are reimbursed at 100% match rate.
• FMAP variation during economic downturns: During economic downturns, enrollment in Medicaid grows, increasing state Medicaid costs while state tax revenues typically decline. Due to the federal match, as spending increases during economic downturns, so does federal funding. During the pandemic-induced recession and the two economic downturns prior to the pandemic, Congress enacted legislation that temporarily increased the federal match rate to provide increased support for states to help fund Medicaid and other services. During the pandemic, the enhanced match was tied to a requirement that states provide continuous enrollment for Medicaid enrollees. As a result of the enhanced match rate, state spending during the pandemic declined despite historic increases in Medicaid enrollment. This also illustrates how decreases to the federal match rate have the opposite impact and increase costs for states.

As a result of all of these factors combined, the federal government paid 71% ($573 billion) of the costs of Medicaid ($804 billion) in 2022. This share is slightly higher than historic shares due to the enhanced pandemic match rate, but there is variation across states (Figure 2). The combination of low per capita income and adopting the ACA expansion are both factors in determining the overall share of federal spending on Medicaid. While the federal share of Medicaid spending varies across states, so does the total amount of federal Medicaid dollars coming into the state. States with the largest populations (California, New York, Texas, Pennsylvania, Ohio) receive the most federal Medicaid funding.

Prominent conservative proposals to reduce federal Medicaid spending typically feature one (or a combination) of approaches:

• Converting Medicaid to a block grant, which would provide a fixed amount of federal funding to each state and greater flexibility over eligibility and benefits;
• Capping federal spending on a per enrollee basis;
• Altering the FMAP, such as by eliminating the enhanced match for the ACA expansion group, lowering the FMAP floor, or decreasing the FMAP to 50 percent for all eligibility groups, states, and services; or
• Restricting or eliminating the use of provider taxes, which states use to fund their share of Medicaid spending, and thus reducing federal matching funds.

These approaches for restricting federal Medicaid spending would not result in lower overall costs, but instead would shift costs to states. States would have to make tough choices about whether to reduce coverage, services and provider rates in Medicaid, or whether to raise revenues or cut other state spending. Notably, over half of Medicaid spending is for enrollees who qualify on the basis of age or disability. These enrollees typically use long-term services and supports that are not covered by Medicare or private insurance and extremely expensive to obtain paying out of pocket.

The effect of various Medicaid financing changes would be uneven across states. Certain states (like those that have higher shares of federal spending, adopted expansion, have higher health care costs, populations with worse health status or higher health needs, or states that rely more heavily on intergovernmental transfers or provider taxes) could face more difficulty maintaining their programs.

Significant cuts to Medicaid could also run up against public opinion. Two-thirds of adults in the U.S. say they have had some connection to the Medicaid program and three-fourths of the public have favorable views of the program (with majorities across political parties). In addition, the majority of Medicaid enrollees and the public prefer to keep Medicaid as it is today with the federal government guaranteeing coverage for low-income people, setting standards for who states cover and what benefits people get, and matching state Medicaid spending as the number of people on the program goes up or down. How the public would ultimately view changes to Medicaid would depend on how the debate is framed and what other issues, such as tax cuts, are in play. While Medicaid has not been a prominent part of the public debate during the campaign, it is likely to remain a divisive issue, and the election could have significant consequences for financing and coverage of the program.