Historical and Projected Trends in Medicaid. Appendix B – Medicaid Program Requirements


The Medicaid program is a joint federal/state partnership that provides health coverage to low-income families, children and pregnant women, aged, blind and disabled individuals and certain other special categories of individuals, such as Qualified Medicare Beneficiaries. In order to receive federal Medicaid funds, states must comply with federal laws and regulations. For example, to receive federal funds, states are required to provide Medicaid to individuals who fall into a mandatory eligibility group, and cover services for all Medicaid eligible individuals.


The most basic principle of Medicaid eligibility is that an individual must fit into a Medicaid eligibility group. A Medicaid eligibility group consists of people who share specific common characteristics and who meet specific eligibility requirements. There are three broad classifications of Medicaid eligibility groups:

  1. Mandatory categorically needy:
  2. Optional categorically needy: and
  3. Medically needy.

These classifications are further explained below.

To be eligible under a given group, an individual must meet both the financial and non-financial criteria for that group. Non-financial conditions of eligibility may include some or all of the following: age, disability status, state residency, U.S. citizenship or satisfactory immigration status, provision of the applicant’s Social Security Number, cooperation with paternity requirements, and mandatory assignment of rights to payments for medical support and medical care from any liable third party. Financial eligibility requires that an individual meet specified income and/or resource standards for the eligibility group in question. The non-financial conditions of eligibility generally are the same in all states. Each state, however, has the flexibility in establishing its own income and resource tests. Therefore, financial eligibility for Medicaid benefits varies from state to state.

Historically, eligibility for Medicaid was tied to receipt of cash assistance – Aid to Families with Dependent children (AFDC) for children, pregnant women, parents and caretakers; Supplemental Security Income (SSI) for aged, blind and disabled individuals. Over the years, Congress added various other coverage groups for individuals who are not receiving cash assistance – e.g., children in families whose income is too high to receive cash assistance. Then, in 1996, the historic link between eligibility for Medicaid and AFDC was broken with the passage of welfare reform (the Personal Responsibility and Work Opportunity Reconciliation Act of 1996) when Congress replaced AFDC with Temporary Assistance for Needy Families (TANF). Thus, eligibility for TANF does not automatically confer Medicaid eligibility. In establishing financial eligibility for families, children and pregnant women, however, many of the rules followed under AFDC are still used for determining Medicaid eligibility for families, children and pregnant women today. For this reason, the eligibility groups for families, children and pregnant women often are referred to as “AFDC-related groups.”

In many states, eligibility for aged, blind and disabled individuals’ remains directly linked to eligibility for SSI. A few states have adopted more restrictive Medicaid eligibility criteria for aged, blind and disabled individuals than SSI, but SSI eligibility rules serve as the starting point. Congress also has added additional eligibility groups for aged, blind and disabled individuals who are not actually receiving SSI, and many of the rules used by SSI also are used for determining eligibility for these groups. For this reason, eligibility groups for aged, blind and disabled individuals often are referred to as “SSI-related groups.”

To receive federal matching funds under Medicaid, states are required to provide coverage to individuals who meet the eligibility requirements for specified eligibility groups, referred to as the mandatory categorically needy groups. Examples of mandatory categorically needy groups include:

  • Low-income pregnant women with income below 133% FPL;
  • Low-income infants with income below 133% FPL;
  • Low-income families who meet certain pre-welfare reform AFDC eligibility requirements (e.g., income and resources);
  • Low-income children aged 1-5 with income below 133% FPL;
  • Low-income children aged 6-18 with income below 100% FPL;
  • Aged, blind and disabled individuals receiving SSI;
  • Aged, blind and disabled individuals who are deemed to be receiving SSI.

A listing of all the mandatory categorically needy eligibility groups with accompanying statutory citations can be found on page 14 of the document entitled “Medicaid Eligibility Groups and Less Restrictive Methods of Determining Countable Income and Resources” on the CMS Website.

States have the option, but are not required, to provide Medicaid coverage for certain other categorically needy eligibility groups. These optional groups generally share the “categorical” characteristics of the mandatory categorically needy groups –i.e. they cover pregnant women, children or families or aged, blind or disabled individuals – but either has less restrictive income and resource standards than those of the mandatory groups, or is less restrictive than the mandatory groups in some way.

Examples of optional eligibility groups include:

  • Individuals under age 21 who meet the income and resource requirements of the AFDC program;
  • Individuals age 65 and over who would be eligible for SSI if they were not in a medical institution;
  • Disabled individuals or individuals age 65 and over who have been in a medical institution for at least 30 consecutive days and whose gross income does not exceed 300% of the SSI income standard;
  • Disabled individuals or individuals 65 and over who are receiving a state supplement payment, or who would be receiving such a payment if they were not in a medical institution;
  • Individuals screened for breast or cervical cancer under the CDC program.

A listing of the most commonly used optional categorically needy eligibility groups with accompanying statutory citations can be found on page 18 of the document entitled “Medicaid Eligibility Groups and Less Restrictive Methods of Determining Countable Income and Resources” on the CMS Website.

States also can, but are not required to, cover “medically needy” individuals. This option allows states to provide Medicaid to individuals who meet the non-financial eligibility requirements of one of the mandatory or optional categorically needy groups, but whose income exceeds the income standard for the group in question. Under this option, an individual can meet the income standard for a medically needy eligibility group by incurring medical and/or remedial care expenses equal to the difference between their income and the relevant income standard. This process commonly is referred to as “spenddown.” States also can give individuals the option to spenddown to the medically needy income standard by making a lump sum of monthly installment payments to the state totaling the difference between their income and the income eligibility standard.

If a state elects to provide coverage to medically needy individuals, it must cover medically needy children under age 18 and pregnant women. States may also choose to provide coverage to other groups of medically needy individuals, including aged, blind and/or disabled individuals; certain specified relatives of dependent children; and children up to age 21.

It is important to note that any individual who is described in one of the mandatory or optional categorically needy groups cannot be eligible under a medically needy group. This is the case whether or not the state has elected to cover a particular optional categorically needy group in which an individual is described. For example, there is an optional categorically needy group for individuals under age 21 who meet the income and resource requirements of the former AFDC program. Therefore, a 20-year old with income and resources below the standards of the state’s former AFDC program cannot be eligible for medically needy coverage because such individual is described in this optional group, even if the state has not actually adopted this optional group.


Medicaid is a state administered program. Each state determines their program’s benefit and service provisions, subject to federal rules and guidelines. Certain services must be covered by the states in order to receive federal funds. Other services are optional and are elected by states. Title XIX of the Social Security Act requires that in order to receive Federal matching funds, certain mandatory services must be offered to the categorically needy population in any state program14:

  • Inpatient hospital services;
  • Outpatient hospital services;
  • Physician services;
  • Medical and surgical dental services performed by a dentist when under state law that service could be performed by a physician;
  • Nursing facility (NF) services for individuals aged 21 or older;
  • Home health care for persons eligible for nursing facility services;
  • Family planning services and supplies;
  • Rural health clinic services and any other ambulatory services offered by a rural health clinic that are otherwise covered under the state plan;
  • Laboratory and x-ray services;
  • Pediatric and family nurse practitioner services;
  • Federally-qualified health center services and any other ambulatory services offered by a federally-qualified health center that are otherwise covered under the state plan;
  • Nurse-midwife services (to the extent authorized under state law); and
  • Early and periodic screening, diagnosis, and treatment (EPSDT) services for individuals under age 21.

If a state chooses to include the medically needy population, the state plan must provide, as a minimum, the following services:

  • Prenatal care and delivery services for pregnant women;
  • Ambulatory services to individuals under age 18 and individuals entitled to institutional services;
  • Home health services to individuals entitled to nursing facility services; and
  • If the state plan includes services either in institutions for mental diseases or in intermediate care facilities for the mentally retarded (ICF/MRs), it must offer either of the following to each of the medically needy groups: the services contained in 42 CFR sections 440.10 through 440.50 and 440.165 (to the extent that nurse-midwives are authorized to practice under state law or regulations); or the services contained in any seven of the sections in 42 CFR 440.10 through 440.165.

States may also receive Federal funding if they elect to provide other optional services. The most commonly covered optional services under the Medicaid program include:

  • Clinic services;
  • Nursing facility services for the under age 21;
  • Intermediate care facility/mentally retarded services;
  • Optometrist services and eyeglasses;
  • Prescribed drugs;
  • TB-related services for TB infected persons;
  • Prosthetic devices; and
  • Dental services.

States may provide home and community-based care waiver services to certain individuals who are eligible for Medicaid. The services to be provided to these persons may include case management, personal care services, respite care services, adult day health services, homemaker/home health aide, habilitation, and other services requested by the state and approved by CMS.

The Breast and Cervical Cancer Prevention and Treatment Act of 2000 (BCCPT) gives states the option to provide medical services to certain women who have been found to have breast or cervical cancer or precancerous conditions. For further information, see the Medicaid BCCPT information website. States may also receive enhanced funding for this new option.

Within broad Federal guidelines, states determine the amount, duration, and scope of services offered under their Medicaid programs. The amount, duration, and scope of each service must be sufficient to reasonably achieve its purpose. States may place appropriate limits on a Medicaid service based on such criteria as medical necessity or utilization control. For example, states may place a reasonable limit on the number of covered physician visits or may require prior authorization to be obtained prior to service delivery.

Health care services identified under the EPSDT program as being "medically necessary" for eligible children must be provided by Medicaid, even if those services are not included as part of the covered services in that state's plan.

With certain exceptions, a state's Medicaid plan must allow recipients freedom of choice among health care providers participating in Medicaid. States may provide and pay for Medicaid services through various prepayment arrangements, such as a health maintenance organization (HMO). In general, states are required to provide comparable services to all categorically needy eligible persons.

There is an important exception related to home and community-based services "waivers," under which states offer an alternative health care package for persons who would otherwise be institutionalized under Medicaid. States are not limited in the scope of services they can provide under such waivers so long as they are cost effective (except that, other than as a part of respite care, they may not provide room and board for such recipients).

States may impose nominal deductibles, coinsurance, or co-payments on some Medicaid recipients for certain services. Emergency services and family planning services must be exempt from such co-payments. Certain Medicaid recipients must be excluded from this cost sharing: pregnant women, children under age 18, and hospital or nursing home patients who are expected to contribute most of their income to institutional care.


Medicaid is financed jointly by the Federal and state government. The portion of the Medicaid program which is paid by the Federal government, known as the Federal Medical Assistance Percentage (FMAP), is determined annually for each state by a formula that compares the state's average per capita income level with the national average. By law, the FMAP cannot be lower than 50 percent nor greater than 83 percent. The wealthier states have a smaller share of their costs reimbursed. The Federal government also shares in the state's expenditures for administration of the Medicaid program. Most administrative costs are matched at 50 percent for all states. However, higher matching rates (75, 90 and 100 percent) are authorized by law for certain functions and activities.

The amount of total Federal outlays for Medicaid has no set limit; rather, the Federal government must match whatever the individual state decides to provide, within the law, for its eligible recipients. However, reimbursement rates must be sufficient to enlist enough providers so that medical care and services are available under the plan at least to the extent that such care and services are available to the general population in that geographic area.

States must also augment payment to qualified hospitals that serve a disproportionate number of Medicaid and low income patients under what is known as the disproportionate share hospital (DSH) program. Each state is limited by an overall State-specific DSH allotment and the amount of DSH payment may not exceed a hospital’s uncompensated care regarding the provision of inpatient and outpatient services to Medicaid and uninsured patients. The federal government generally has little discretion over the payment rates established by states, as long as they fall within broad federal parameters to insure against excessively large or small payments, such as imposed upper payment limits or UPLs.

14 With the passage of the Deficit Reduction Act of 2005, Public Law 109-171 (DRA), states are now allowed to provide "benchmark" or "benchmark equivalent" coverage to subpopulations of Medicaid enrollees. The statewideness and comparability rules, which required uniform coverage across all categories of enrollees and throughout each state, may no longer apply to all Medicaid covered populations. In addition, states are prohibited from covering several populations with benchmark and benchmark equivalent coverage.

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