Reduce the Floor on Federal Matching Rates for Medicaid Services

The federal government pays a share of the costs that states incur for providing health care services through the Medicaid program. For most medical services that Medicaid covers, the percentage of costs paid by the federal government is determined by the federal medical assistance percentage (FMAP). The FMAP is based on a formula that assigns a higher federal reimbursement rate to states that have lower income per capita, and vice versa. (Per capita income serves as a proxy for a state's financial resources.) By law, a state's FMAP rate can be no less than 50 percent and no more than 83 percent. On average, the federal matching rate is 57 percent, and states pay the remaining 43 percent of the cost of services. Beginning in 2009 and continuing through the third quarter of 2011, the American Recovery and Reinvestment Act of 2009 (Public Law 111-5) specified that the federal government pay a larger share of Medicaid costs, averaging between about 65 percent and 68 percent, depending on the year.

Starting in 2014, the federal government will pay a different matching rate, specified in law, for the cost of services incurred by enrollees made newly eligible for Medicaid under the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111152). The matching rates for those enrollees will vary from 90 percent to 100 percent, depending on the year, and are not affected by the FMAP rate formula. Also starting in 2014, for certain childless adults that some states made eligible for Medicaid prior to the passage of PPACA, the federal government will pay a specified percentage of the difference between the states' FMAP rates (as determined by the aforementioned formula) and the rates paid on behalf of those made newly eligible under PPACA.

Although matching rates are set through formulas specified in statute, states generally determine the amount of Medicaid's spending because they pay health care providers and then submit claims to the federal government for reimbursement at the appropriate FMAP rate. Medicaid spending is therefore driven by the choices that states make regarding payment rates for providers, the coverage of optional benefits, and the eligibility thresholds for the program.

This option would lower the 50 percent floor on federal matching rates to 45 percent starting in 2012 for all Medicaid-covered services that are reimbursed at the FMAP rate; the option would not affect the matching rates for newly eligible enrollees under PPACA. The affected states would be those with high per capita income relative to the national average that, in the absence of the floor, would have FMAP rates lower than 50 percent. Lowering the floor to 45 percent would reduce FMAP rates for 14 states such that the new rates would range from 45.0 percent to 49.6 percent. Federal matching rates would not change for the remaining 37 states and the District of Columbia.

If the federal government reduced the share of Medicaid that it reimbursed, states would be faced with a choice. At one extreme, they could substitute additional state spending for all of the lost federal funding and thereby maintain their Medicaid programs' payment rates, covered services, and enrollment levels. At the other extreme, they could provide no additional state funding and reduce the size of their Medicaid programs. For this estimate, the Congressional Budget Office assumed that states would increase their contributions to make up for some of the reduced federal funding, but not by enough to prevent a decline in the size of their Medicaid programs.

This option would reduce federal outlays by $75 billion during the 2012-2016 period, CBO estimates, and by $181 billion from 2012 through 2021.

A rationale for lowering the floor on the federal matching rate is to decrease federal spending for the Medicaid program by reducing payments to states that have the greatest financial resources available to fund their programs. The FMAP formula is designed to provide a larger federal contribution for states that have lower income per capita and a smaller federal contribution for states that have higher income per capita. However, the floor of 50 percent provides a number of states with FMAP rates above the rates they would be assigned in the absence of such a floor. Lowering the current floor would require states that have higher income per capita to pay a greater share of the cost of Medicaid services for their populations.

An argument against the option is that it would concentrate significant reductions in federal spending among a fairly small number of states. The 14 states affected by

the option would generally have several mechanisms for reducing expenditures in their Medicaid programs: They could cut their payment rates to providers; they could reduce the kinds and amounts of medical benefits they provide; or they could cover fewer people by reducing outreach efforts that encourage enrollment or by increasing administrative requirements for enrollment. States that faced significant reductions in their FMAP rates would probably respond by using a combination of those cost-cutting approaches.