Putting the program in context

Medicaid is best understood relative to other sources of insurance coverage and its historical origins and evolution over time. A brief history of Medicaid, CHIP, and other health coverage provides some insights on the program’s current structure and how it relates to other payers.

Early employer-sponsored insurance

The modern approach to health care coverage came about in the 1920s as health care became more sophisticated and expensive. The first Blue Cross plan began in 1929 in Texas when Baylor University Hospital agreed to provide 1,500 school teachers with up to 21 days of hospital care annually for $6 per person per year. The first Blue Shield plan designed for coverage of physician services began in 1939. The success of the Blues persuaded commercial insurers to enter the field. Private insurers accelerated these efforts in the 1940s when businesses, seeking ways to bypass wartime wage controls, began to compete for labor by offering health insurance (Starr 1982). About 12 million people were covered by private health insurance in 1940—less than 10 percent of the U.S. population. In 1950, 75 million people, about 49 percent of the population, were covered by private health insurance (Fronstin 1998). Today, about 60 percent of the population is covered by private health insurance (see MACStats).

Public funds for health care

Around the time the Blue Cross and Blue Shield programs started, health care services for low-income people were provided primarily through a patchwork of programs sponsored by state and local governments, charities, and community hospitals. Federal financial assistance to states for the costs of these services was provided through grants.

For example, Title V of the original Social Security Act of 1935 (now the Maternal and Child Health Block Grant) was designed to support state efforts to extend health and welfare services for mothers and children and to provide additional funds for children with special health care needs.  The Social Security Amendments of 1950 provided federal matching funds for state payments to medical providers on behalf of individuals receiving public assistance (welfare) payments. In 1960, the Kerr-Mills Act created a new means-tested program known as Medical Assistance for the Aged that provided federal funds to states choosing to cover health care services for seniors with incomes above levels needed to qualify for public assistance, but nonetheless in need of assistance with medical expenses.

In 1965, a combination of approaches was enacted to improve access to health care for seniors and other populations: Medicare and Medicaid. For individuals age 65 and older, the Social Security Amendments of 1965 created a national hospital insurance program (Medicare Part A) and a national voluntary supplementary medical insurance program (Medicare Part B). A new Medicaid program, largely modeled on Kerr-Mills, continued to provide low-income seniors assistance with out-of-pocket expenses such as Medicare premiums and costs for uncovered services. At the same time, Congress decided to cover additional low-income populations under Medicaid, including families with children, people with disabilities, and the blind. The new Medicaid program retained the Kerr-Mills structure of a federal-state partnership for administration and funding of health services for the indigent.

Medicaid’s evolution 

Since its inception in 1965, the Medicaid program has evolved from welfare-based coverage to a major payer in our health care system. Over the years, Congress has made significant changes in eligibility criteria, covered services, and financing of the program.The State Children’s Health Insurance Program (CHIP) was created to provide coverage to children with incomes above Medicaid eligibility levels but remains closely linked to Medicaid in some aspects of its design and administration.

In addition, states have made a variety of changes to their programs, such as covering optional populations and offering new benefits such as home- and community-based services. Another significant development has been the growth of managed care as a payment and service delivery model. States have explored various managed care approaches over the years, initially pursuing such arrangements mostly for children and non-disabled adults, but increasingly covering populations with more complex health care needs. Today more than half of Medicaid enrollees are in comprehensive managed care plans. (Click here for managed care enrollment data by state and eligibility group.)

Many of the changes to the Medicaid program have been to reduce the number of low-income individuals who are uninsured and improve access to care. Some have been made to enhance state flexibility, such as the establishment of waiver authorities. Other changes, like the addition of the prescription drug rebate program, were implemented by Congress to help control Medicaid spending.