Government Grants

Where Does Medicaid Money Come From

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 15 minute read

The Medicaid program might be thought of as the binding agent of the American healthcare system. People who don’t have access to employer-provided insurance, can’t afford private insurance, and don’t meet Medicare’s income and asset requirements are the focus of this public health insurance program. This is the ultimate safety net in the United States.

To make matters worse, it also happens to be prohibitively expensive. This program cost the government $597.4 billion in 2018, per the Centers for Medicare and Medicaid Services. One sixth of the country’s overall health care budget, or around three percent of GDP.

Medicaid is jointly funded by the federal government and the individual states. In 2018, Medicaid accounted for 9% of overall government spending, making it the third-largest mandatory spending program, according to a 2019 issue brief from the Kaiser Family Foundation (KFF).

In 2017, Medicaid expenditures accounted for 26.5% of total state spending, making it an even larger burden for state budgets. The expense of the program is somewhat offset by the federal matching money it brought in, which amounted to 14.2% of state revenues.

However, the Medicaid program is a major source of disagreement in the legislature. Most Republicans support cutting it because they believe it is wasteful and costly. Democrats, on the other hand, advocate for its growth so that more people can benefit from improved coverage. Examining the program’s structure, funding, and impact is essential to grasping their claims.

How Does Medicaid Work?

It wasn’t until an amendment to the Social Security Act in 1965 that the Medicaid program came into existence. The law has been revised and expanded several times over the years by Congress, most recently in 2010 with the passing of the Affordable Care Act (ACA), sometimes known as Obamacare.

Now more than ever, low-income individuals and families must rely on Medicaid to fund their medical expenses. In its absence, millions of Americans would be without health coverage.

Medicaid financing

The Medicaid system operates as a cooperative effort between the federal government and the states. The HHS is responsible for the program’s guidelines. The Medicaid programs in each state are independent, yet subject to the federal guidelines. Eligibility requirements and covered medical procedures are determined by each state’s legislature and administration. 

They also determine the methods through which medical service providers including clinics, hospitals, nursing homes, and pharmacies are compensated for their work.

Medicaid, unlike Social Security and Medicare, is not supported by payroll taxes but rather by federal and state governments. Medicaid spending is determined on a state-by-state basis, with the federal government providing matching payments to pay for a percentage of each state’s total Medicaid expenditures. The proportion of matches varies from state to state. A 2019 KFF information sheet claims that every state receives matching funds equal to at least half their spending, with the poorest states receiving approximately seventy-five percent.

People who qualify for Medicaid also contribute to its budget. States are allowed to impose premiums on residents with earnings of at least 150% of the federal poverty level in accordance with federal regulations. Copayments might be required for a variety of medical procedures. A 2017 analysis by the KFF indicated that these barriers to treatment were a major reason why people avoided medical attention when they really needed it.

Because of the adaptability of this funding system, states may modify their Medicaid expenditures in response to evolving requirements. For instance, if more or fewer individuals in the state require coverage, they might increase or decrease spending accordingly. In the event of a natural disaster or a public health emergency, such as the current opioid crisis, they can potentially raise spending. During economic downturns, when more individuals are in need of benefits, the federal government steps in with matching money so that states aren’t forced to foot the full bill alone.

This method of Medicaid funding has the drawback of not having a set federal or state cash source for the program. To the budget, it’s exactly like any other expense. That leaves legislative debate over funding on par with that of any other costly initiative.

The 2019 KFF information sheet mentions how, for instance, Republicans in Congress sought and almost approved a ceiling on federal spending for Medicaid in 2017. Many states have also experimented with different methods for controlling Medicaid costs. A select few have gotten exemptions from the federal government to operate outside the norm. To enforce job requirements, increase premiums for low-income persons, and deny coverage to those who fail to pay premiums, states have employed waivers.

In order to save money, some states are requesting Medicaid waivers. However, fewer people in need are helped by the program.

Who Is Eligible for Medicaid?

For the first few decades of the program’s existence, Medicaid exclusively covered those who were already receiving other forms of government assistance, such as SSI or child welfare. Congress has steadily increased the program’s aid allocation throughout the years. 

Moreover 68.8 million Americans had health insurance through Medicaid as of July 2020, according to About one-fifth of the population is enrolled in the program, per KFF’s estimates.

Prior to 2010, Medicaid coverage was restricted to individuals of specific demographics. All those in need, whether old or young, pregnant or not, able-bodied or not, or from families with little financial resources, fell into this category. Medicaid coverage was expanded for all non-elderly people with incomes up to 138% of the federal poverty threshold in 2010 (about $36.156 for a family of four in most of the country in 2020). It was no longer necessary for individuals to fall into a specific category in order to qualify for insurance.

A court, however, said in 2012 that states were not compelled to expand their Medicaid programs if they did not want to. reports that at this time, 14 states have chosen not to participate in the expansion. (In 2021, two of these states—Missouri and Oklahoma—will increase their programs.) People in these jurisdictions may still need to be part of a certain group in order to get medical services.

Medicaid Detractors

For all the money the government spends on it, Medicaid has been criticized for supposedly helping very few people. They also complain that the federal government places too many limitations on how states may spend Medicaid money, such as making it difficult to include commercial health insurers in covering low-income individuals, even though at least one state (Arkansas) has done so. Money could be saved and health outcomes would improve, they claim, if these limits were lifted.

But the Medicaid expansion under the ACA provided a natural experiment, letting scientists see firsthand how the program’s growth has impacted people’s health and state finances. While there has been some discrepancy in findings, the weight of evidence suggests beneficial outcomes.

Health Outcomes Under Medicaid

Medicaid has been criticized for allegedly doing little to better the health of its beneficiaries. For example, in an essay published in the Wall Street Journal in 2011, Dr. Scott Gottlieb, a resident fellow at the conservative American Enterprise Institute, said that Medicaid was “worse than having coverage at all.”

Many skeptics base their argument on a research that appeared in The New England Journal of Medicine in 2013. (NEJM). The results of Oregon’s Medicaid expansion in 2008 were analyzed in this study. Physical health indicators did not increase among individuals who had coverage during the first two years. A person’s BP, cholesterol, and (in the case of diabetics) blood sugar were all measured.

There is, however, additional nuance to the story. Medicaid coverage has been shown to enhance various health outcomes. Those who were eligible for benefits were also shown to have lower rates of melancholy, earlier detection of diabetes, and higher rates of medical care utilization in a research published in the New England Journal of Medicine in 2013. They also had a lower chance of experiencing financial hardship.

The Robert Wood Johnson Foundation found that enrolling people in Medicaid increased their utilization of health care services and preventative care, improved their self-reported health condition, and reduced the number of persons who delayed health treatment because of financial concerns.

Rates of death in newborns, children, and adults are all reduced as a result. Arizona, Maine, and New York are the three states where the death rate for people under 65 has decreased by 6 percent since they increased access to Medicaid for adults prior to the adoption of the ACA.

Health outcomes have also been shown to improve when Medicaid was extended under the ACA, according to recent studies. For instance, after the passage of the Affordable Care Act, health outcomes in three states were examined in a 2017 research published in Health Affairs. Though both Arkansas and Kentucky increased access to private insurance for low-income individuals, Texas did neither.

The number of people without health insurance decreased by 20 percentage points more in Kentucky and Arkansas than in Texas, according to the report. It also revealed that the percentage of low-income persons reporting excellent health was higher by 23 percentage points and that the percentage of people with a primary care physician was higher by 41 percentage points in these states.

In addition, that’s not an isolated discovery. A KFF meta-analysis conducted in 2020 concluded that the vast majority of research conducted on state Medicaid expansion since 2014 indicated that it had primarily beneficial effects on health outcomes. There were fewer people without health insurance, more people received and made use of medical attention, and more people felt healthier overall.

Use of Expensive Services

In 2016, the NEJM published a follow-up research to the one published in 2013. Findings showed that once eligible for Medicaid, patients sought medical attention in a variety of locations, not just ERs (ED).

They frequently visited the ER for issues that might have been handled at a cheaper doctor’s office. According to its detractors, Medicaid promotes wasteful spending on excessive medical procedures.

But this conclusion is at odds with the results of other research. Health Affairs released research in 2016 that compared emergency department (ED) visits with primary care visits before and after Medicaid expansion in Kentucky and Arkansas. Statistical analysis revealed that both values had dropped. They declined much more in Kentucky, where Medicaid was extended, than in Arkansas, where private health insurance was made more widely available.

Although fewer patients in the Health Affairs survey reported using the ED as their primary source of treatment, more patients said they did so when they couldn’t get in with a primary care physician. The authors reasoned that the reason was probably elevated customer demand. Wait times at physicians’ offices increased when Medicaid was made available to more people.

The results of an investigation of how the 2017 expansion of Medicaid in Maryland affected the number of patients presenting to emergency departments were published in the Annals of Emergency Medicine. The study discovered that while the number of Medicaid patients visiting the clinic grew, the number of uninsured individuals decreased by the same margin. That was great news for hospitals, as uninsured people typically don’t pay their expenses.

Access to Care

Paul Ryan, the former speaker of the House of Representatives, called for reductions in Medicaid spending in his 2016 white paper, “A Better Way for Health Care,” which was republished on the online publishing site Scribd. He said in it that those on Medicaid don’t have enough access to medical treatment. He cited a CDC study from 2015 that revealed physicians were less likely to accept new Medicaid patients compared to those with Medicare or private insurance.

Acceptance rates may have been lower since doctors at the time were paid less to serve Medicaid patients than those with private insurance. A report published in Health Affairs in 2013 found that, on average, clinicians made 61% as much from Medicaid patients as they did from Medicare patients.

Even still, around 69% of doctors were willing to take on new Medicaid patients, according to the same report that Ryan mentioned. In addition, the report indicated that this figure may rise in the future. Also, the ACA included a clause that mandated parity in payment rates between Medicaid and Medicare for medical services rendered. The CDC speculated that once this modification went into effect, clinicians could be more open to taking on additional Medicaid patients.

But even if you can’t get the treatment you need, it’s not a tremendous deal. A 2017 survey by the Kaiser Family Foundation (KFF) found that although just 6% of privately insured consumers have problems locating a doctor who takes their insurance, 11% of Medicaid recipients do. However, fewer than 3% of those who seek a job end up unsuccessful. That’s on par with the cost for those with private health insurance.

Medicaid recipients are equally likely as those with private insurance to obtain most types of treatment, reports the Kaiser Family Foundation for 2019. They are also pleased with the treatment they have received. Both categories have significantly higher access to care than those with no health insurance. In addition, the 2020 meta-analysis conducted by the KFF demonstrates that Medicaid expansion has greatly increased people’s access to care.

The Poverty Trap and Work Incentives

Medicaid’s opponents also claim that it discourages individuals from working since it provides benefits at no cost to them. Medicaid and other social programs, Ryan said in an interview with “CBS This Morning” in 2017 (reported on by Politico), are “trapping individuals in poverty” rather than “putting them in the labor.”

It is on the basis of this assumption that Medicaid recipients are now subject to employment restrictions. The Trump administration said in 2018 that it will begin assisting states in requesting exemptions that would allow them to force Medicaid enrollees to work. By the year 2020, 19 states will have asked for exemptions like this, according to KFF. The typical time commitment is 20 hours per week, or 80 hours per month, however there are some options that call for as much as 35 hours weekly.

However, there is scant evidence to back the claim that Medicaid makes people less motivated to work. A 2019 issue brief from the Kaiser Family Foundation reports that among Medicaid recipients, 63 percent are already in the labor force. In most cases, those who do not work are either full-time caretakers, full-time students, or people who are unable to work due to disease or disability. Those who are able to work but choose not to do so make up only 7%, and the majority of those in this group are either retired or have trouble finding employment.

Studies have also shown that eligibility for Medicaid can facilitate employment. Over half of newly enrolled Medicaid participants in Michigan who were unemployed reported that the program had made it simpler to hunt for employment. This finding was published in the Journal of Internal General Medicine in 2018. Sixty-nine percent of the employed participants claimed Medicaid improved their performance on the job, however the research didn’t inquire as to how.

In a similar vein, a 2018 research conducted by the state of Ohio found that more than 80% of working Medicaid recipients found the program to be helpful in maintaining employment, and 60% of jobless Medicaid beneficiaries found the program to be helpful in their search for employment.

As a result of Medicaid, many of the people interviewed were able to finally obtain the care they needed for the illnesses that had previously prevented them from returning to the workforce.

Medicaid, according to other research, helps people climb out of poverty rather than keeping them there. A study published in 2015 by the National Bureau of Economic Research indicated that the longer low-income children were enrolled in Medicaid, the higher their lifetime earnings (and the more they paid in income taxes).

Medicaid, according to a 2017 research published in Health Affairs, reduces poverty rates for the general population by approximately 4 percentage points, making it “among the most successful anti-poverty programs.” In terms of alleviating poverty, it was more effective than low-income health care subsidies, tax credits, and other benefits.

Constraints and a Lack of Flexibility

State Medicaid programs often complain that the federal government sets too many restrictions on how Medicaid monies may be used. “The reason why Medicaid’s health results are so dismal is that the outmoded 1965 Medicaid statute sets a laundry list of limits on the capacity of states to run their Medicaid programs,” Forbes editor Avik Roy said in an opinion piece published in 2017.

Republicans like Ryan have long advocated changing Medicaid into a block grant system. The federal government would provide a set amount to each state under this scheme. Eligibility, benefits, and payments to providers might then be left up to individual state governments. Proponents of the idea claim it will allow states greater leeway to adapt Medicaid to the needs of their citizens.

But the existing Medicaid program provides considerable leeway through exemptions of federal requirements. This allowed Arkansas to meet its Affordable Care Act coverage expansion goals without expanding Medicaid. The KFF reports that 58 exceptions have been granted to 45 states so far, with a further 26 waivers for 21 states still in the pipeline.

A more serious issue is that most block grant ideas would drastically reduce the amount of money given to states for Medicaid. One of Ryan’s plans, for instance, would have resulted in a 75% reduction in government expenditure on Medicaid, CHIP, and health care subsidies by 2050, according to an estimate conducted by the Congressional Budget Office (CBO) in 2012.

According to the CBO, states would have to increase spending from their own funds or significantly reduce programs under Ryan’s plan even if they significantly improved the efficiency of their plans.

In order to make ends meet, they may have to cut the number of individuals eligible for Medicaid, the number of treatments covered, the amount paid to providers, or the amount patients are expected to pay out of pocket. Healthcare accessibility declines in all these settings. Plus, with less money available, governments would be less able to adapt to the requirements of their constituents.

High Government Costs

The Medicaid program has been heavily criticized for being too expensive. Medicaid expenditure surpassed $597 billion in 2018 and is expected to climb to over $1 trillion by 2028, according to a paper published in Health Affairs in 2020. Medicaid expenditures are a threat to both federal and state budgets, even if they aren’t rising as quickly as total health care costs right now.

Many state leaders were concerned that Medicaid expansion would place an undue financial strain on their state budgets when the ACA was originally approved. States were concerned that even the federal government’s 90% contribution to the expense of covering new participants would be too much for them to bear. They would have to hike state taxes or slash other budget items like education as a result.

Health Affairs reported in 2017 that states’ budgets were not impacted by the Medicaid expansion. States were able to reduce other spending and the federal government was able to raise its contribution to Medicaid, so overall spending went up just little. Twenty out of twenty studies examining the effects of Medicaid expansion on state economies showed positive results, according to a 2020 report from the K Street think tank. The percentage of unpaid medical expenses decreased, and in certain situations, employment increased.

These benefits to state economies have, however, come at the federal government’s expense. Medicaid spending accounts for 9 percent of the federal budget as it is. Health Affairs predicts that number will climb over time due to rising demand for Medicaid services and associated expenses.

Ryan said in an interview that year that “we can’t truly have a handle on our future debt” unless we rein down the expenditures of entitlement programs like Medicaid. The challenge is finding a way to accomplish this without leaving millions of Americans without health insurance.

Coverage Restrictions

Finally, left-leaning critics of Medicaid are more common than right-wing ones. Individuals who disagree with the program claim it doesn’t benefit nearly enough people. A person’s eligibility for Medicaid coverage under the ACA goes up to 138% of the federal poverty threshold. Affordable Care Act subsidies were meant to make health insurance more affordable for persons making between 100% and 400% of the poverty line.

The federal poverty level is used to determine Medicaid eligibility; however, in states that did not expand their Medicaid systems, the income restriction for eligibility might fall significantly below the federal poverty level. As reported by the KFF, the typical benefit eligibility threshold for parents is just 40% of the poverty level.

So, in these states, parents with incomes between 40 and 100 percent of the poverty line aren’t eligible for Medicaid or subsidies. In addition, no matter how low their income is, people without children in these states are not eligible for coverage. Simply put, these folks cannot afford medical attention. The Kaiser Family Foundation estimates that over 2 million adult Americans presently have this “coverage gap.”

As more states decide to expand Medicaid, the coverage gap is shrinking. According to, 20 states decided not to participate in the Medicaid expansion in 2015. This will decrease to a mere 12 by the year 2021.

Some states that have expanded their Medicaid programs have also been granted waivers to include work requirements. Therefore, it becomes more challenging for residents of such states to obtain health insurance. Coverage restrictions, like as a lifetime maximum, were among the requests made by other states for waivers. But the federal government has not granted any of those petitions so far.

Bottom Line

Medicaid is a complex issue with no simple solutions, much like the whole U.S. healthcare system. The long-term viability of the program is expected to depend on a combination of cost-cutting measures and revenue enhancement strategies. That can mean more taxes, altered benefits, or a shift in how these programs approach healthcare delivery. No doubt, Republicans and Democrats in Washington and state capitals will continue to bicker about how to proceed.

While Medicaid has numerous flaws, it continues to have widespread public support despite these issues. Some 74% of Americans, including 65% of Republicans, have a positive opinion of Medicaid, according to a 2018 KFF study.

About half of Americans think the program is effective for the majority of its low-income enrollees. Those figures should be enough to persuade policymakers that Medicaid has to be saved at any costs.

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