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The Heritage Foundation October 11, 2011

Health Policy Series: Medicaid. The Heritage Foundation October 11, 2011. James C. Capretta Visiting Fellow email: jcapretta@eppc.org. Federal Medicaid Spending. Source: CBO Historical Tables. The Matching System. Medicaid is financed with a federal-state matching formula.

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The Heritage Foundation October 11, 2011

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  1. Health Policy Series:Medicaid The Heritage Foundation October 11, 2011 James C. CaprettaVisiting Fellow email: jcapretta@eppc.org

  2. Federal Medicaid Spending Source: CBO Historical Tables

  3. The Matching System • Medicaid is financed with a federal-state matching formula. • The federal government pays a fixed percentage (Federal Medical Assistance Percentage, or FMAP) of every dollar spent by a state on Medicaid. • The FMAP differs by state but ranges from 50 percent to nearly 80 percent. • The formula for determining the FMAP is as follows: FMAP = 1 – (.45 x (PCI2state/PCI2U.S.)) • The effect of this formula is to pay a higher FMAP to states with relatively lower per capita income. • There’s a hold harmless preventing any state from getting less than a 50 percent FMAP.

  4. Some Selected FMAPs

  5. The FMAP Budget Trap • Assume a state has a 60% FMAP. • That means when the state spends $1 on Medicaid, the federal government is spending $1.50, and total Medicaid spending is $2.50 (Federal share of $2.50 = 60%). • What happens if a state needs to cut their budget, though? The state needs to cut $2.50 out of Medicaid to save $1 in the state budget, because the first $1.50 goes to the federal treasury, not the state. • This sets up a terrible incentive for state governors and legislators. • The result is that they spend their energy maximizing the federal share, and minimizing the “real” state share.

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