Medicaid is funded federally now---program cuts create budget volatility and push the states into a billion dollar hole of debt

Medicaid is a joint federal-state program that provides health insurance targeted to lower-income recipients. The program plays a significant role in the U.S. health system, providing medical care for about 26 percent of the population. As a key part of the safety net, Medicaid is designed to be countercyclical, meaning that it expands to meet rising needs during economic downturns when people lose their jobs and job-based health coverage. It also represents a major source of both revenues and expenditures in state budgets, since states receive a portion of funding for the program from the federal government. OVERVIEW OF MEDICAID FINANCING Each state’s Medicaid expenditures for healthcare services are matched by federal funds according to various formulas. The formula that governs the majority of government funding takes into account differences in per capita income among the states and is called the federal medical assistance percentages (FMAP). For 2023, the FMAP ranges from a minimum of 50 percent in wealthier states such as California to 77 percent in Mississippi. The matching structure provides states with resources that automatically adjust for demographic and economic shifts, healthcare costs, public health emergencies, and natural disasters. States receive varying levels of assistance from the federal government for Medicaid In addition to funds governed by the FMAP, the federal government provides enhanced matching rates for select services, providers, or groups of beneficiaries. The most prominent example stems from the Affordable Care Act (ACA), which expanded the Medicaid program to cover individuals with incomes up to 138 percent of the poverty level; the federal government covers nearly all the cost of coverage for the expansion population. Remaining Medicaid expenditures are referred to as the nonfederal share, and federal law requires that states finance at least 40 percent of their share of total Medicaid expenditures through state funds. The remaining 60 percent of the nonfederal share can come from “other state funds” including funding transferred from local governments or revenue collected from provider taxes and fees. However, in practice this is not the case. According to the National Association of State Budget Officers, in fiscal year 2022 (which for most states is July 1–June 30) the program cost a total of $789 billion, about $249 billion of which was the nonfederal share. A majority of Medicaid funding comes from the federal government HOW DOES MEDICAID AFFECT STATE BUDGETS? Medicaid’s role in state budgets is unique, since the program acts as both an expenditure and the largest source of federal support in state budgets. In 2022, total Medicaid expenditures (including federal matching funds) made up 28 percent of state budgets, on average, making it the largest category of spending. When considering only nonfederal funds, it comprised 17 percent of general fund expenditures, making it the second largest category of state spending after primary and secondary education. Medicaid is typically the largest expenditure in state budgets Medicaid expenditures rose steadily from 2008 to 2018 as a percentage of total state spending, growing from 20.5 percent of state budgets to 29.3 percent. That growth reflects broader health spending trends and includes the effect of the ACA expansion in 2014. Nevertheless, Medicaid expenditures grew more slowly than other elements of state budgets — including education. Medicaid expenditures have increased as a percentage of state budgets States finance the nonfederal share of their Medicaid expenditures in large part through general revenues, which consist of revenue from sources including personal and corporate income taxes and sales taxes. States can also use funds raised from local governments and through taxes on healthcare providers to finance the nonfederal share of their Medicaid payments. Those sources of Medicaid funding have received increased attention because states have used them to create complex financing mechanisms designed to maximize the amount of federal Medicaid funds coming to the states, thereby drawing down federal Medicaid funds without expending much, if any, state general funds.