How the Federal Government Funds Medicaid

States Cannot Afford Medicaid without Federal Support

Doctor with money in pocket.
Richard Wareham Fotografie/Getty Images

Should the federal government put limits on Medicaid spending? As it stands, two-thirds of all federal grants go to Medicaid. The GOP is trying to change that. The 2020 Fiscal Year budget proposes cutting Medicaid by $1.5 trillion over the next decade.

Before we get into a debate about how to reform Medicaid, we need to understand how the federal government currently funds the program. There are differences in funding based on whether or not a state participates in Medicaid expansion under the Affordable Care Act, aka Obamacare.

The federal government provided additional funds to states undergoing Medicaid expansion, paying 100 percent of Medicaid expansion costs through 2016 and 90 percent of those costs through 2020. All states, whether or not they participate in Medicaid expansion, continued to receive federal funding ​from these three sources: Disproportionate Share Hospital (DSH) Payments, Federal Medical Assistance Percentages (FMAP), and Enhanced Matching Rates.

Disproportionate Share Hospital Payments

Medicaid is not exactly known for being generous when it comes to paying for health care. According to the American Hospital Association, hospitals are paid only 87 cents for every dollar spent by the hospital to treat people on Medicaid. The National Investment Center (NIC) reported that, on average, Medicaid pays only half of what traditional Medicare and Medicare Advantage plans pay for stays in a skilled nursing facility.

Hospitals that care for more people on Medicaid or for people that are uninsured, in the end, are reimbursed far less than facilities that operate in areas where there are more people covered by private insurance. Between 2000 and 2018, at least 85 rural hospitals closed their doors to inpatient care due to low reimbursement rates and other financial concerns.

To even out the playing field, Disproportionate Share Hospital (DSH) payments came into effect. Additional federal funds are given to the states to divide amongst eligible hospitals that see a disproportionate number of people with little to no insurance. The idea was to decrease the financial burden to those facilities so that they could continue to provide care to individuals with low incomes.

Different formulas are used to calculate federal DSH funding for each state. These formulas take into account the prior year's DSH allotment, inflation, and the number of inpatient hospitalizations for people on Medicaid or who are uninsured. DSH payments cannot exceed 12 percent of the state's total Medicaid medical assistance expenditures for any given year.

Federal Medical Assistance Percentages

Federal Medical Assistance Percentages (FMAP) remain the primary source of federal Medicaid funding. The concept is simple. For every $1 a state pays for Medicaid, the federal government matches it at least 100 percent, i.e., dollar for dollar. The more generous a state is in covering people, the more generous the federal government is required to be. There is no defined cap, and federal expenditures increase based on a state's needs.

When you think about it, FMAP is generous but it may not exactly be fair to states that tend to have a lower average income when compared to states with higher incomes. Specifically, there may be an increased burden put on states with higher concentrations of poor people, and FMAP may give a disproportionately low reimbursement despite a state's economic needs.

To address this issue, the Social Security Act devised a formula to calculate FMAP rates based on a state's average income relative to the national average. While every state receives at least an FMAP of 50 percent (the federal government pays 50 percent of Medicaid costs, i.e. $1 for every $1 spent by the state), other states will receive higher percentages.

Alaska, California, Colorado, Connecticut, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, North Dakota, Virginia, Washington, and Wyoming are the only states to have an FMAP of 50 percent for Fiscal Year 2020 (October 1, 2019 through September 30, 2020). All other states receive a higher percentage of Medicaid funds from the federal government.

Notably, Mississippi has the lowest per capita income level with a 2020 FMAP of 76.98 percent. This means the federal government pays for 76.98 percent of the state's Medicaid costs, contributing $3.34 for every $1 the state spends.

Enhanced Matching Rates

Enhanced matching rates are similar to FMAP but are taken one step further. They increase the percentage of costs paid by the federal government for certain services. The minimum enhanced FMAP for Fiscal Year 2020 is 76.50. The services covered by enhanced matching rates include but are not limited to:

The Affordable Care Act increased the enhanced FMAP for states from October 1, 2015 through September 30, 2019. It did so by 23 percentage points but did not allow any state to exceed 100 percent. For Fiscal Year 2020, the enhanced matching rates will be lower. The Healthy Kids Act will allow an increase in the enhanced FMAP by 11.5 percent, again not to exceed 100 percent total.

The services covered by enhanced matching rates are seen as valuable because they may help to decrease the burden of healthcare costs in the future. In that way, paying more money upfront is seen as a worthy investment.

A Word from VeryWell

Let's not forget that state governments also contribute dollars to Medicaid. How they do this varies from state to state, but how much they contribute affects how much help they get from the federal government. The fact is that neither the federal or state governments can afford to pay for Medicaid on its own. Only together can they pool enough resources to care for the millions of people in need. If the GOP cuts to Medicaid are approved, whether by block grants or per capita limits, a large segment of the population may not be able to afford the health care they need.

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