Premium subsidy programs can be financed through state funds, federal funds, participant contributions and sometimes employer contributions. Many programs are financed through state-only funds, based on legislative authority and appropriations. Some state-only programs, such as the one in Pennsylvania, are funded in part with tobacco settlement funds, while others use general fund dollars or other appropriations.
Some states have utilized Medicaid 1115 waivers to draw down federal funding as a portion of the subsidy. These states must receive CMS approval for their program after demonstrating how savings from their Medicaid program will be achieved to pay for the subsidy program and how the implementation of the program will be budget neutral to the federal government (i.e., federal spending will not exceed what it would have been in the absence of the waiver). These programs are financed the same way the state’s Medicaid state plan is, using the annual Federal Medical Assistance Percentage (FMAP) to calculate the state share and federal share of expenditures. States pursue this option largely because it provides an additional funding stream that allows them to enroll more participants than would have been possible using state-only funds. States that already have a state-funded premium subsidy program have used the Medicaid 1115 waiver program to expand their program, particularly if they have a long wait list for their state-funded program.
As mentioned earlier, some programs utilize ESI, alone or as one option, as both a coverage and a financing mechanism. By requiring employer participation, states can make their dollars go further, and in some cases will also require an employee share to reduce the amount of the state subsidy. A premium subsidy program that is authorized under a Medicaid 1115 waiver could, therefore, have four funding sources overall: state, federal, employer, and employee. The more sources of payment, the further the money goes and the more individuals a program can cover.