Health Policy Series:
Medicaid
The Heritage Foundation
October 11, 2011
James C. Capretta
Visiting Fellow
email: jcapretta@eppc.org
Federal Medicaid Spending
2.0
1.8
1.6
% of GDP
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1971
1976
1981
1986
1991
1996
2001
2006
Source: CBO Historical Tables
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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.
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Some Selected FMAPs
2011
CA
50%
NY
50%
MO
63%
AZ
66%
KY
71%
MS
75%
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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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