Medicaid is the nation’s largest publicly financed health insurance program for low-income people. It is a means-tested program funded jointly by the federal government and the states, but managed by the states which have broad control over eligibility. The federal government matches allowable state Medicaid spending at a rate determined by the Federal Medical Assistance Percentage (FMAP) formula. The FMAP formula is based on the relationship between each state’s per capita personal income and the national average per capita personal income as calculated over three calendar years. Although we currently have better personal income data, the FMAP formula has remained largely unchanged since the program’s inception in 1965.
Medicaid financing reform proposals—Medicaid is currently financed by both the federal and state governments. Under this system, federal funding increases in response to increases in enrollment, service costs, and use. Some policymakers have recommended that federal financing be limited, either by providing states annually with a fixed amount—a “block grant”—for their Medicaid programs, or by providing a set amount per beneficiary—a “per capita cap.” (The difference between a block grant and a per capita cap is that the former does not respond to increases in enrollment.)
Any capped-funding approach to Medicaid financing creates the possibility that the program would not be adequately funded to meet beneficiaries’ needs. Under such approaches, states may be forced to consider cutting important benefits, such as long-term services and supports. Furthermore, capped-funding approaches would imperil Medicaid’s role as a crucial part of the social safety net during economic downturns. According to the Kaiser Family Foundation, during the Great Recession of 2007-2009 when millions of Americans lost their jobs, Medicaid enrollment rose by nearly 6 million, or 14 percent. (For more information about the effects of block grant funding structures on low-income support programs, see Chapter 6.)