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How Is Medicaid Funded?

Learn how Medicaid is funded, its challenges, and why it matters to family caregivers and low-income families seeking healthcare services.
Published on
June 27, 2024
Presented by Givers
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Are you a family caregiver who depends on Medicaid to cover the cost of medical care? You're not alone. Medicaid provides a healthcare safety net and medical coverage to millions of low-income families, including children, pregnant women, older adults, and care recipients with disabilities. But have you ever wondered where the money for this program comes from and why Medicaid funding matters? 

What is Medicaid?

Medicaid is a public health insurance program in the United States that offers medical assistance to low-income individuals and families. Established in 1965 under the Social Security Act, Medicaid is funded jointly by the federal and state governments but administered by individual states, allowing for variations in eligibility and coverage across the country. The program covers a wide range of health services, including hospital care, physician services, long-term care, and preventive services, ensuring access to essential healthcare for vulnerable populations.

How is Medicaid funded?

The federal government and individual state governments jointly fund Medicaid. Both parties contribute money to keep the Medicaid program operational and able to pay healthcare providers.

The federal share of funding is determined by a calculation called the Federal Medical Assistance Percentage (FMAP). The FMAP considers each state's per capita income compared to the national average. States with lower incomes receive a higher FMAP, meaning the federal government pays a larger portion of their Medicaid costs.

For example, in 2022, the FMAP ranged from the federal government covering just 50% of Medicaid costs in the wealthiest states to 90% for the lowest-income states and territories.

Federal contributions

So, where does the federal government get the money to pay its share of Medicaid? The primary source is general taxes and revenue collected by the Internal Revenue Service (IRS). Some federal tax sources that help fund Medicaid include:

  • Individual income taxes
  • Corporate income taxes
  • Payroll taxes for Medicare and Social Security
  • Excise taxes on specific goods like gasoline

In addition to general tax revenue, the federal government provides supplemental grants and special funding allocations to states specifically earmarked for operating their Medicaid programs.

State contributions

For their part, states must generate revenue from their sources to cover their obligated share of Medicaid costs based on the FMAP calculation. Common ways that state governments raise Medicaid funds include:

  • State income taxes and sales taxes
  • Fees and taxes on healthcare providers/insurers
  • Tobacco taxes or taxes on other consumer goods
  • Lottery revenue or casino gambling taxes

States have varying flexibility in how they fund and administer their Medicaid programs. Some states also seek ways to leverage additional federal funding, such as waivers, demonstrations, or provider taxes and fees.


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Recent trends and policy changes

  1. Medicaid expansion: Under the Affordable Care Act (ACA), many states have expanded Medicaid, increasing the number of individuals covered and, subsequently, the total cost. While the federal government initially covered a significant portion of these expansion costs, states gradually took on a larger share.
  2. Innovative funding strategies: Some states are adopting innovative funding strategies, such as value-based payment models, to improve care quality and control costs. These models aim to incentivize better health outcomes rather than the volume of services provided.
  3. Federal waivers: States can apply for federal waivers to test new Medicaid financing and service delivery approaches. These waivers allow flexibility in how Medicaid funds are used and can help states address specific healthcare challenges.

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Challenges and considerations

Despite its role in providing healthcare to millions of Americans, Medicaid faces challenges that may affect its long-term sustainability and effectiveness. These challenges stem from rising healthcare costs, demographic shifts, and ever-changing policy and funding mechanisms.

Sustainability of funding

Medicaid has significant and ongoing funding challenges:

  1. Rising healthcare costs:
    • State budget strain: The increasing costs of healthcare exert pressure on state budgets, often forcing states to make hard choices about how to allocate limited resources. This strain can lead to reduced funding for other critical services, such as education and infrastructure.
    • Competing priorities: As healthcare expenses rise, states must balance Medicaid funding against other priorities. This often results in heated debates and difficult trade-offs.
  2. Demographic shifts:
    • Aging population: With the aging of the Baby Boomer generation, many Americans qualify for Medicaid, particularly for long-term services and supports (LTSS). This demographic shift increases the demand for Medicaid-funded services.
    • Workforce imbalance: Fewer younger workers can contribute to Medicaid through taxes, creating a financial imbalance. This demographic trend threatens the sustainability of funding as the ratio of contributors to beneficiaries declines.
  3. Sustainability of funding sources:
    • Growing expenses: As the cost of providing healthcare rises, there are growing concerns about whether the current funding mechanisms for Medicaid are sustainable in the long term. This includes debates on the adequacy of federal and state contributions and the efficiency of the program.
    • Innovative funding solutions: To address sustainability, some states are exploring alternative funding strategies, such as value-based care models, which aim to improve health outcomes while controlling costs.

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Impact of policy changes on funding

Policy changes at both the federal and state levels can seriously impact Medicaid funding:

Medicaid expansion

  • Partisan divide: The Affordable Care Act (ACA) allowed states to expand Medicaid eligibility, increasing access to healthcare for millions of low-income Americans. However, this expansion has been contentious, with strong partisan divides. Some states have embraced expansion, leveraging federal funds to cover more residents, while others have resisted, citing concerns over long-term costs.
  • Federal vs. state responsibilities: Policy changes can alter the balance of funding responsibilities between federal and state governments. For instance, shifts in federal matching rates can either alleviate or exacerbate state budget pressures.

Legislative changes

  • Policy revisions: Legislative changes at the federal level, such as proposed cuts or caps on Medicaid funding, can create uncertainty and instability. States must constantly adapt to these changes, which can affect their ability to plan and budget effectively.
  • Impact on beneficiaries: Changes in eligibility requirements, benefits, or funding levels can directly impact beneficiaries, potentially reducing access to necessary healthcare services for the most vulnerable populations.

Administrative flexibility

  • Waivers and demonstrations: States can apply for waivers that allow customized approaches to Medicaid. While this flexibility can lead to innovative solutions, it also introduces variability in coverage and funding stability across states.

Why Medicaid matters to family caregivers

Understanding where Medicaid's money comes from helps family caregivers know what services and benefits will help their loved one. For countless seniors, Medicaid is a significant part of their health plan. When Medicaid costs grow and funding is cut, seniors and individuals with disabilities are often the most affected. 

Funding streams directly impact the program's ability to provide essential healthcare services. By staying informed about ongoing policy debates around Medicaid funding, family caregivers can better understand how these decisions might affect the long-term viability of the benefits their loved ones rely on. This knowledge empowers caregivers to advocate for their loved ones so they continue to receive the best possible care.

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