Medicaid is a joint federal-state program that funds health care services on a means-tested basis for eligible low-income Americans. Although states must operate within certain federal requirements, each state sets its own Medicaid regulations, including qualifications for benefits, benefits provided, and reimbursement rates. This program is different than Medicare, a federally run program that covers seniors and certain people with disabilities in the United States.
Medicaid typically provides a comprehensive set of health care services, although access to care may be challenging in areas where a lack of health care providers accepting Medicaid patients exist. Out-of-pocket costs for Medicaid beneficiaries are low, with no or very low premiums or copayments. States may operate Medicaid programs in which health care providers directly bill the state agency or may utilize managed care organizations (MCOs) that coordinate a beneficiary’s health care needs.
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Medicaid population. Medicaid provides health insurance coverage to low-income individuals, including pregnant women, children, seniors, and people with disabilities. The Affordable Care Act (ACA) provides an option for states to expand Medicaid coverage, targeting non-elderly (primarily childless) adults with incomes at or below 138 percent of the federal poverty level. The expansion provides health insurance to non-elderly adults with incomes above states’ limited eligibility levels, thus reducing the level of those uninsured, both at the state and national level. Due to a June 2012 ruling by the U.S. Supreme Court, Medicaid expansion is optional for states, rather than mandatory as originally provided for in the ACA. Currently 33 states plus the District of Columbia have opted for expansion. (An additional 3 states have adopted expansion, but it has not been implemented.)
Dual eligibles. Dual eligibles refer to individuals (older Americans and younger individuals with disabilities) who qualify for both Medicare and some level of Medicaid services. Medicare is the primary payer for dual eligibles, with Medicaid covering certain gaps in coverage not provided by Medicare (e.g., payment of Medicare premiums, deductibles, and cost-sharing). Dual eligibles often are some of the poorest, least healthy individuals in the Medicare and Medicaid programs.
Medicaid coverage. Medicaid mandatorily covers an array of services which include, but are not limited to: physician services, inpatient and outpatient hospital services, long-term care services and supports, laboratory and X-ray services, and family planning services. Almost all states cover services that are deemed optional (not mandated) by the federal government, including prescription drugs, and preventive, rehabilitative, and hospice care. In states opting for expansion of Medicaid under the ACA, newly eligible covered adults will receive Alternative Benefits Plans that might or might not match Medicaid program benefits, but which are required to include all 10 essential health benefits that are offered in the exchanges.
Over half of Medicaid beneficiaries receive care through Medicaid MCOs that contract with states and receive per-beneficiary payments to administer Medicaid services. In addition, a smaller share of Medicaid beneficiaries receive care through Primary Care Case Management (PCCM) programs, in which states continue to pay providers fee-for-service (FFS) while also paying primary care providers a small monthly fee for care coordination. Regular fee-for-service reimbursement constitutes the remainder of Medicaid provider payments.
Medicaid financing. Medicaid’s spending has been growing faster than the overall U.S. economy, and the program’s spending is expected to increase on average about 6 percent annually from 2020 through 2027, according to the Centers for Medicare & Medicaid Services (CMS). The state Medicaid share typically comprises one of the largest expenses of state budgets, and Medicaid’s growing costs continue to be a matter of intense concern during state fiscal deliberations for governors and legislatures. According to CMS, combined federal and state Medicaid spending is estimated to be over $900 billion in 2023 (double from 2013) for expected coverage of over 80 million Americans. Whereas Medicaid was approximately 1 percent of gross domestic product (GDP) in 1985, it could approach 3.4 percent of GDP in 2023.
The federal share for Medicaid—which varies by state based on a formula—ranges from 50 percent to 79 percent. A higher medical assistance percentage is provided to states with lower per capita income. For certain benefits or populations, states may receive federal matching funds at a higher percentage than through the formula calculation.
As provided under the ACA, the federal government funded 100 percent of the cost for Medicaid expansion beneficiaries in those states that opted for it through 2016; that share has declined gradually to the current 90 percent in 2020 and beyond.
Long-term care. Medicaid, which is the nation’s largest funding source of long-term care services, has historically been heavily programmed toward institutional care for long-term care services and supports (LTSS). Through changes provided in the ACA, states have been given additional flexibility and federal funds to provide services in-home, through senior centers, and via other community groups. Additionally, a dozen states are testing models to better integrate and coordinate long-term care services and supports between Medicare and Medicaid for dual eligibles.
The Long-Term Care Partnership Program is a joint state public-private program to incentivize individuals to purchase private long-term care insurance to help them pay for long-term care services. Provided for by a 2005 federal law  that expanded the partnerships beyond limited state pilot programs, the purchase of coverage was regarded as a benefit to both the policyholder and the public to help eliminate, reduce, or delay the need for those individuals to access Medicaid long-term care coverage, which has often been done by a Medicaid “spend-down” where assets have to be spent before Medicaid covers long-term care services.
Despite stringent eligibility requirements and required monthly cost-sharing when beneficiary income is available, more than half of LTSS spending is publicly funded under Medicaid. Medicaid LTSS expenditures were $167 billion during FY 2016, representing approximately one-third of Medicaid expenditures and 5 percent of total U.S. health expenditures. There is concern that Medicaid could be asked to shoulder an increasing share of the cost of LTSS across the nation due to demographic pressures, trends in longevity and morbidity, and younger Boomers lacking the levels of pension income of older Boomers. Because Medicaid is financed by federal and state government funds on a pay-as-you-go basis, it also faces fiscal uncertainty due to policy constraints and tensions at both the federal and state levels.
Medicaid is trying to control increases in LTSS costs in two primary ways (among others):
- Changing where LTSS is delivered—Over the past 20 years, Medicaid has transitioned from providing over 80 percent of LTSS in institutions (such as nursing homes) to approximately 43 percent in FY 2016. Institutional care has been replaced with a variety of supports delivered in the beneficiary’s home or community, such as attendant care, personal care, assisted living, and adult day care.
- Using managed care in the LTSS program—Managed LTSS has grown to 23 percent of Medicaid LTSS expenditures as of FY 2016. Proponents suggest private companies can be more motivated and more effective at providing efficient and high-quality LTSS, but experience is still limited.
Even with cost-mitigating approaches in place, funding of Medicaid LTSS is expected to put strains on federal and state budgets over the next several decades as the Baby Boomers reach the oldest-old ages with greatest LTSS needs.
Conclusion. The Medicaid program is vital to the health of millions of low-income Americans, including children, adults, seniors, and persons with disabilities. States are given flexibility to tailor their Medicaid programs, within certain parameters, to their own unique needs and circumstances. For example, recent efforts to implement work requirements, lifetime duration limits, and “lockouts” are being pursued by some states. The ACA has added a considerable expansion of Medicaid eligibility to a broader population, including basic, essential benefits plans for newly eligible adults. The growing cost of the Medicaid program remains an ongoing fiscal challenge for both state and federal governments, with the federal government funding most of Medicaid expansion populations going forward.
Additional resource from the American Academy of Actuaries
- Proposed Approaches to Medicaid Funding (March 2017)
- Medicaid and Long-Term Care Insurance (February 2019)
 U.S. Department of Health and Human Services; “2014 Poverty Guidelines”; Dec. 1, 2014.
 As defined in Section 1302(a) of the Patient Protection and Affordable Care Act.
 Kaiser Family Foundation, Medicaid and Long-Term Services and Supports: A Primer, December 2015.
 Medicaid Innovation Accelerator Program, Medicaid long-term services and supports expenditures in FY 2016, 2016.
 Irene Papanicolas, PhD, Liana R. Woskie, MSc, Ashish K. Jha, MD, MPH, “Health Care Spending in the United States and Other High-Income Countries,” Journal of the American Medical Association, March 13, 2018