Medicaid is a major source of federal financing for costs that might otherwise be borne by states and local governments solely from their own revenues, individuals paying out of pocket, and providers supplying care at free or reduced rates.

Financing is a shared responsibility of the federal government and the states. Historically, the federal share of Medicaid spending has averaged about 57 percent although that share has begun to increase due to the higher matching rate for adults under 65 who were newly eligible as a result of the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended).

States that operate their Medicaid programs within federal guidelines are entitled to federal reimbursement for a share of their total program costs. States incur these costs by making payments to health care providers and managed care plans and by performing administrative tasks such as making eligibility determinations, enrolling and monitoring providers, and paying claims. States receive federal matching dollars based on their reports of Medicaid expenditures to the federal government.

The federal share for most Medicaid service costs is determined by the federal medical assistance percentage (FMAP), which is based on a formula that provides higher reimbursement to states with lower per capita incomes relative to the national average (and vice versa). The formula is intended to reflect states’ differing abilities to fund Medicaid from their own revenues. Although alternative measures have been suggested, the use of per capita income reflects the information available at the time the funding formula was designed (GAO 2003).

FMAPs have a statutory minimum of 50 percent and maximum of 83 percent. Certain exceptions apply, however, for the territories and the District of Columbia (whose FMAPs are set in statute); special situations such as temporary state fiscal relief; and certain populations, providers, and services (e.g. newly eligible adult expansion enrollees). (Click here for state-level information on FMAPs.)

For individuals who meet the definition of newly eligible under the Medicaid expansion for non-elderly adults, there is an increased FMAP (100 percent for 2014–2016, phasing down to 90 percent in 2020 and subsequent years). This matching rate covers those who would not have been eligible for Medicaid in the state as of December 1, 2009, or who were eligible under a waiver but not enrolled because of limits or caps on waiver enrollment. An increased FMAP is also available to certain states that expanded eligibility prior to the ACA.

The federal share for Medicaid administrative costs is generally 50 percent but certain administrative functions receive a higher federal share. For example, upgrades to computer and data systems may be eligible for a 75 percent or 90 percent federal match if certain criteria are met.

Unlike Medicare, for which a substantial portion of spending is financed by dedicated revenue sources, federal spending for Medicaid is financed by general revenues. Funding for the nonfederal, or state, share of Medicaid comes from a variety of sources; at least 40 percent must be financed by the state, and up to 60 percent may come from local governments. In state fiscal year 2012, 69 percent of funds came from state general revenues, 16 percent from local governments (including intergovernmental transfers and certified public expenditures), 10 percent from health care related taxes, and 5 percent from other sources (GAO 2014).