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Policy Basics: Introduction to Medicaid

May 8, 2013

What Is Medicaid?

Created by Congress in 1965, Medicaid is a public insurance program that provides health coverage to low-income families and individuals, including children, parents, pregnant women, seniors, and people with disabilities. Medicaid is funded jointly by the federal government and the states.

Each state operates its own Medicaid program within federal guidelines. Because the federal guidelines are broad, states have a great deal of flexibility in designing and administering their programs. As a result, Medicaid eligibility and benefits can and often do vary widely from state to state.

In 2012, Medicaid provided health coverage for 67 million low-income Americans over the course of the year, including 32 million children, 19 million adults (mostly low-income working parents), 6 million seniors, and 11 million persons with disabilities, according to Congressional Budget Office estimates.

Children account for nearly half of all Medicaid enrollees but just one-fifth of Medicaid spending. Only one-quarter of Medicaid enrollees are seniors or persons with disabilities, but because these beneficiaries need more (and more costly) health care services, they account for nearly two-thirds of all Medicaid spending.


Medicaid is sometimes confused with Medicare, the federally administered, federally funded health insurance program for people over 65 and some people with disabilities. Unlike Medicaid, Medicare is not limited to those with low incomes and resources. More than 9 million low-income seniors and people with disabilities -- so-called "dual eligibles" -- are enrolled in both Medicare and Medicaid.

Health reform will change some aspects of Medicaid eligibility, coverage, and financing. For more details, see "How Will Health Reform Affect Medicaid?" below.

Who Is Eligible for Medicaid?

Medicaid is an "entitlement" program, which means that anyone who meets eligibility rules has a right to enroll in Medicaid coverage. It also means that states have guaranteed federal financial support for part of the cost of their Medicaid programs.

In order to receive federal funding, states must cover certain "mandatory" populations:

  • children under age 6 in families with income below 133 percent of the federal poverty line ($25,975 for a family of three in 2013);
  • children aged 6-18 in families with income below the poverty line;
  • pregnant women with income below 133 percent of the poverty line;
  • parents whose income is within the state's eligibility limit for cash assistance that was in place prior to welfare reform; and
  • most seniors and persons with disabilities who receive cash assistance through the Supplemental Security Income (SSI) program.

States may also receive federal Medicaid funds for the costs of covering additional, "optional" populations, including: pregnant women, children, and parents with income above "mandatory" coverage income limits; seniors and persons with disabilities with income below the poverty line; and "medically needy" people -- those whose income exceeds the state's regular Medicaid eligibility limit but who have high medical expenses (such as for nursing home care) that reduce their disposable income below the eligibility limit. Because states have broad flexibility to determine which of these groups they will cover and at what income levels, Medicaid eligibility currently varies significantly from state to state. While states have the option to expand coverage for parents, eligibility levels remain low. In the typical state, Medicaid eligibility is now limited to working parents with incomes at 61 percent of the poverty line and unemployed parents at 37 percent of the poverty line.

Not all low-income Americans are eligible for Medicaid. In particular, in most states, childless adults -- that is, those over 21 who are not disabled, not pregnant, and not elderly -- are generally not eligible for Medicaid, no matter how poor they are. In addition, legal immigrants are barred from Medicaid for their first five years in this country, even if they meet all of the program's eligibility requirements.

Medicaid is a counter-cyclical program. In other words, its enrollment expands to meet rising needs during an economic downturn, when people lose their jobs and their job-based health coverage. During the Great Recession and its aftermath, more than 10 million additional people enrolled in Medicaid; more than half were children.

What Services Does Medicaid Cover?

Medicaid does not provide health care directly. Instead, it pays hospitals, physicians, nursing homes, managed care plans, and other health care providers for covered services that they deliver to eligible patients. (Hospitals, physicians, and other health care providers are not required to participate in Medicaid, and not all do.)

About two-thirds of all Medicaid spending on services pays for acute-care services such as hospital care, physician services, and prescription drugs; another 30 percent pays for nursing home and other long-term care services and supports. Medicaid covers more than 60 percent of all nursing home residents, and it pays 40 percent of the nation's total costs for long-term care services and supports.

Medicaid also reimburses certain hospitals for the uncompensated costs they incur when they care for low-income uninsured patients. These payments, known as Disproportionate Share Hospital (DSH) payments, account for about 4 percent of Medicaid services spending. These figures do not include administrative costs, which equal less than 5 percent of total Medicaid spending.

Federal rules require state Medicaid programs to cover certain "mandatory" services, such as: physician, midwife, and certified nurse practitioner services; inpatient and outpatient hospital services; laboratory and x-ray services; family planning services and supplies; rural health clinic/federally qualified health center services; nursing facility and home health care for adults over age 21; and Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services for children under age 21. EPSDT guarantees that enrollees under age 21 have access to medically necessary services, regardless of whether the state's Medicaid program otherwise covers these services.

States can -- and all do -- cover certain additional services as well. Common examples include prescription drugs, dental care, vision services, hearing aids, and personal care services for the frail elderly and people with disabilities. These services, though listed as "optional" because states are not required to provide them, are critical to meeting the health needs of Medicaid beneficiaries.

States have flexibility to determine the amount, duration, and scope of the services they provide under Medicaid (though the services must be sufficient to achieve the purposes of the Medicaid program). For example, states must cover hospital and physician services, but they can limit the number of hospital days or physician visits they pay for. As a result of this flexibility, Medicaid benefits packages vary substantially from state to state.

How Much Does Medicaid Cost? How Is It Financed?

Together, states and the federal government spent about $414 billion on Medicaid services in fiscal year 2011. State policies have a large impact on the amount the federal government spends on Medicaid, not only because states are guaranteed federal Medicaid matching funds for the costs of covered services furnished to eligible individuals, but also because states have broad discretion to determine who is eligible, what services they will cover, and what they will pay for covered services.

Under Medicaid, the federal government contributes at least $1 in matching funds for every $1 a state spends on its Medicaid program, whatever those costs may be. The fixed percentage the federal government pays, known as the "FMAP," varies from state to state, with poorer states receiving larger federal amounts for each dollar they spend than wealthier states. In the poorest states, the federal government pays 73 percent of all Medicaid service costs; the national average is about 57 percent.

Medicaid is a lean program. It costs Medicaid substantially less than private insurance to cover people of similar health status. This is due primarily to Medicaid's lower payment rates to providers and lower administrative costs. And over the past decade, costs per beneficiary grew much more slowly for Medicaid than for employer-sponsored insurance. The Office of the Actuary at the Centers for Medicare and Medicaid Services projects that Medicaid spending per beneficiary (excluding the effects of the Medicaid expansion) will grow no more rapidly through 2021 than spending per beneficiary with private insurance.

Moreover, because Medicaid costs are projected to rise more slowly than it estimated in August 2010, the Congressional Budget Office (CBO) in February 2013 lowered its estimate of projected federal spending on the program between 2011 and 2020 by $218 billion, or 6.4 percent.

How Effective Is Medicaid?

policybasics-medicaid-f2.jpgMedicaid has greatly reduced the number of Americans without health insurance. If Medicaid did not exist, most of the tens of millions of Americans whose health coverage comes solely through Medicaid would join the ranks of the 49 million Americans who are uninsured. This is because private health insurance is generally not an option for Medicaid beneficiaries: many low-income workers do not have access to coverage through their jobs, and they cannot afford to purchase coverage in the individual insurance market.

Medicaid coverage provides low-income Americans with access to needed preventive services and medical care. For example, studies have shown that Medicaid helps patients with chronic diseases such as heart disease, diabetes, and asthma receive medical care that can prevent their conditions from worsening. People who have lost Medicaid coverage are two to three times more likely than Medicaid beneficiaries to report going without medical care because they cannot afford it.

Numerous studies show that Medicaid has helped make millions of Americans healthier by improving access to preventive and primary care and by protecting against (and providing care for) serious diseases (see chart). For example, expansions of Medicaid eligibility for low-income children in the late 1980s and early 1990s led to a 5.1 percent reduction in childhood deaths. Also, expansions of Medicaid coverage for low-income pregnant women led to an 8.5 percent reduction in infant mortality and a 7.8 percent reduction in the incidence of low birth weight.

Notably, a landmark study of Oregon's Medicaid program found that, compared to similar people without coverage, people with Medicaid were more likely to use preventive care, to have a regular office or clinic where they could receive primary care, and to receive diagnosis of and treatment for depression and diabetes, and far less likely to experience catastrophic out-of-pocket medical expenses.

How Does Health Reform Affect Medicaid?

Medicaid will play an even more integral role in insuring low-income Americans as the health reform law is fully implemented over the coming years.

As explained above, in most states, Medicaid coverage of poor adults is extremely limited, and poor non-disabled adults without children aren't eligible for Medicaid at all. The Affordable Care Act provides coverage for poor and low-income adults by expanding Medicaid to 138 percent of the poverty line ($26,951 for a family of three). The 2012 Supreme Court decision upholding health reform (the Affordable Care Act, or ACA) gave states the choice of whether to expand their programs.

policybasics-medicaid-f3.jpgThe expansion is a very good financial deal for states. The federal government will pay nearly all of the expansion costs -- 93 percent over the first nine years (2014-2022) -- according to CBO estimates. That's because the federal government will pick up 100 percent of the cost of the expansion to newly eligible individuals for the first three years and no less than 90 percent of the cost on a permanent basis. And by greatly reducing the number of uninsured, the expansion will enable states and localities to save substantial sums on uncompensated care for the uninsured. States will spend just 2.8 percent more on Medicaid with the expansion than they would have without health reform.

CBO now estimates that by 2023, 12 million more adults and children will enroll in Medicaid and gain access to affordable coverage as a result. If all states adopt the Medicaid expansion, however, up to 17 million more low-income people will enroll in Medicaid coverage.

Even before full implementation of the health reform law, it has already had a positive effect on coverage. Under the ACA, states must keep their current Medicaid eligibility rules for adults until 2014. States must also maintain their Medicaid and Children's Health Insurance Program (CHIP) eligibility rules for children until 2019. As a result, Medicaid and CHIP have remained an increasing source of coverage for children and adults. The percentage of children under age 18 with publicly funded health insurance coverage rose by 1.2 percentage points in 2011, to 41 percent. That offset declines in employer-based coverage among children, allowing the uninsured rate to stay steady at 9.4 percent.