Reduce Federal Medicaid Matching Rates

Medicaid is a joint federal-state program that covers acute and long-term health care for groups of people with low income, chiefly families with dependent children, elderly people (those 65 or older), nonelderly people with disabilities, and—at the discretion of individual states—other nonelderly adults whose family income is up to 138 percent of the federal poverty guidelines. The federal and state governments share in the costs of the program; the federal government's share varies by type of cost (that is, costs for medical services or administrative expenses), by state, and by eligibility category.

For medical services used by Medicaid enrollees who were not made eligible by the Affordable Care Act (ACA), the share of Medicaid costs paid by the federal government is specified by the federal medical assistance percentage (FMAP) rate, which varies by state. The FMAP rate is determined by a formula that provides a higher rate of federal reimbursement for states with lower per capita income relative to the national average and relative to states with higher pre-capita income. By law, a state's FMAP rate can be no less than 50 percent and no more than 83 percent. (For medical services provided to enrollees made eligible by the ACA, the federal share of Medicaid costs is fixed at 90 percent and does not vary by state.)

By contrast, the federal government's share of administrative expenses does not vary by state. Instead, it varies by the type of cost; those costs are specified by statute. The federal government's share of general administrative expenses is 50 percent; however, for 25 specified categories of administrative costs, the federal share ranges from about 70 percent to 100 percent.

This option consists of three alternatives. Under the first alternative, the federal government's share for all categories of administrative spending would be 50 percent. Under the second alternative, the 50 percent floor on the FMAP rate that applies to medical services for enrollees not made eligible by the ACA would be removed. Under the third alternative, the federal share of medical expenditures for enrollees made eligible by the ACA would be reduced by applying the same FMAP formula that is used for all other enrollees.

The effects of this option on the deficit stem from lower federal costs per enrollee and changes in Medicaid enrollment, subsidized coverage in the nongroup market, and employment-based coverage. The Congressional Buddget Office anticipates that in response to the reduced matching rates for enrollees made eligible by the ACA under the third alternative, some states would discontinue coverage for that category of enrollees, and all states that would have adopted such coverage in the future would no longer choose to do so. As a result, some people would no longer enroll in Medicaid and would instead obtain other federally subsidized health insurance through an employer or the health insurance marketplaces established by the ACA, which would lead to both an increase in outlays and a decrease in revenues.