The Heritage Foundation October 11, 2011 Health Policy Series: Medicaid James C. Capretta Visiting Fellow

2 Federal Medicaid Spending Source: CBO Historical Tables

3 The Matching System Medicaid is financed with a federal-state matching formula. The federal government pays a fixed percentage (Federal Medical Assistance Percentage, or FMAP) of every dollar spent by a state on Medicaid. – The FMAP differs by state but ranges from 50 percent to nearly 80 percent. The formula for determining the FMAP is as follows: FMAP = 1 – (.45 x (PCI 2 state /PCI 2 U.S. )) The effect of this formula is to pay a higher FMAP to states with relatively lower per capita income. There’s a hold harmless preventing any state from getting less than a 50 percent FMAP.

4 Some Selected FMAPs 2011 CA50% NY50% MO63% AZ66% KY71% MS75%

5 The FMAP Budget Trap Assume a state has a 60% FMAP. That means when the state spends $1 on Medicaid, the federal government is spending $1.50, and total Medicaid spending is $2.50 (Federal share of $2.50 = 60%). What happens if a state needs to cut their budget, though? The state needs to cut $2.50 out of Medicaid to save $1 in the state budget, because the first $1.50 goes to the federal treasury, not the state. This sets up a terrible incentive for state governors and legislators. The result is that they spend their energy maximizing the federal share, and minimizing the “real” state share.