Medicaid Financing Reform


Under the current Medicaid financing system, federal Medicaid funding increases in response to increases in enrollment, service costs, and service use. Some policymakers have sought to change the current financing by limiting federal contributions by providing states an annual fixed amount of federal funding (a block grant) or by giving states a set amount of federal funding per beneficiary group (a per capita cap).

Any capped-funding approach to Medicaid financing creates the possibility that program funding would not be adequate to meet beneficiaries’ needs. Under capped-funding approaches, states would be forced to consider cutting important optional benefits, like long-term services and supports or transportation services.

Capped-funding approaches would also threaten Medicaid’s role as a critical part of the social safety net during economic downturns. For example, according to the Kaiser Family Foundation, during the Great Recession of 2007–2009, when millions of Americans lost their jobs, federal funding allowed an additional 6 million people to enroll in Medicaid. That was an increase of 14 percent (see also Low-Income Assistance for more information about the effects of block-grant funding structures on low-income support programs).



Maintaining Medicaid’s entitlement nature

Federal and state governments should maintain the entitlement nature of Medicaid funding so all who qualify will be covered. Medicaid should not be financed in any way that threatens this, such as:

  • through block grants or caps (global or per capita); 
  • hard limitations on the availability of federal funding regardless of changes in enrollment, service costs, or service utilization; or
  • financial incentives for states to limit or eliminate access to optional services, such as long-term services and supports.

Any efforts to restructure Medicaid should maintain and improve current federal and state consumer protections and adopt financing policies and payment strategies that enhance and improve access and quality.

Federal Medicaid Funding Formulas

Congress should evaluate the federal Medicaid funding formula to determine if it distributes federal funds equitably among states, consistent with Title XIX of the Medicaid statute.

Congress should enact legislation making the Federal Medical Assistance Percentage formula responsive to state economic cycles on a permanent basis.

Medicaid Participation

To improve Medicaid participation among eligible individuals, states should:

  • conduct outreach activities to ensure that all who are potentially eligible for Medicaid, Medicare Savings Programs (discussed below), and the state Children’s Health Insurance Program are aware of the program and have the opportunity to enroll, and eliminate or refuse to adopt policies that create barriers to continued enrollment, such as frequent recertification.

In addition, states should monitor Medicaid participation rates and report enrollment rates on an ongoing basis, giving particular attention to underserved areas.


Grievance and appeal rights

States and federal governments must ensure that all Medicaid beneficiaries have meaningful opportunities to exercise their statutory grievance and appeal rights.

They must also ensure that beneficiaries receive access to needed services during appeals.

States must ensure that beneficiaries’ grievance and appeals rights are clearly explained and that beneficiaries have access to easy-to-understand materials that are culturally competent and linguistically appropriate.

Providing legal assistance

States should establish legal assistance programs for Medicaid beneficiaries who have difficulty obtaining services, paying their medical bills, are inappropriately receiving medical bills, or believe a Medicaid claim was incorrectly processed or inappropriately denied.


Access to providers

Federal and state governments should conduct annual reviews to ensure that Medicaid’s rules for paying providers and managed care organizations do not undermine health care access.

States should consider payment incentive systems that reward high quality and improvements in care.

States should ensure that beneficiaries have reasonable and adequate access to providers (including transportation providers).

States should enhance access to care and protect consumer choice by giving beneficiaries greater access to nurse practitioners and other Advanced Practice Registered Nurses (APRNs). This includes removing laws that require APRNs to enter into business contacts with physicians, as these business agreements have no impact on quality of care and unnecessarily restrain trade.

While preserving access, states should contract with cost-efficient, high-quality hospitals, physicians, and other providers to serve Medicaid beneficiaries.

Cost and medical necessity

The use of cost should not be the principal or determinative criterion in findings of medical necessity for Medicaid coverage. Where cost is a factor, whether higher initial costs result in future savings should be taken into consideration.


Continuity of coverage

The federal government should require states to have procedures ensuring continuity of coverage for beneficiaries transitioning to Medicare. The federal government should require states to have procedures, including notices to consumers, to re-evaluate modified adjusted gross income (MAGI)-related Medicaid beneficiaries for potential non-MAGI-related Medicaid coverage (see below, How the Affordable Care Act Affects Medicaid, for a definition of MAGI). Such procedures would be used when these individuals become Medicare-eligible at age 65 or when they are eligible for Social Security Disability Insurance and have completed the two-year waiting period to become Medicare-eligible (see also Health Care Coverage: Medicare). This reassessment capability should include an evaluation of eligibility for full Medicaid benefits (including long-term services and support), Medicare Savings Programs, and the Medicare Part D Low-Income Subsidy.


To improve Medicaid access for people with low incomes, Congress should:

  • ensure continuous Medicaid coverage for vulnerable people of all ages, including people with disabilities and the working poor; and
  • require all states to have a medically needy program that provides full Medicaid benefits to people of all ages when they have exhausted their financial resources for meeting their health care needs; and
  • take steps to ensure that states do not eliminate Medicaid’s optional eligibility categories or alter eligibility criteria to reduce the amount of their Medicare payments (known as a “claw-back” strategy) and thereby denying or withdrawing needy beneficiaries’ access to important health benefits.