Historical and Projected Trends in Medicaid. III. Background


Medicaid is a program that pays for medical assistance for certain individuals and families with low incomes and resources. The program became law in 1965 and is jointly funded by the Federal and state governments (including the District of Columbia and the Territories) to assist states in providing medical acute and long-term care assistance to people who meet certain eligibility criteria.2 Medicaid is the largest source of funding for medical and health-related services for people with limited income.

The following is a brief description of the eligibility, benefits, and financing requirements for Medicaid. A more detailed description of each can be found in Appendix B.

a. Eligibility

To qualify for Medicaid, two tests must be met: an income and assets test and a ‘categorical test.’ Individuals must be low-income and have low assets, but they must also fall into one of the population categories that Medicaid covers. Medicaid categorical eligibility can be classified into four broad coverage groups: children, adults (specifically parents of dependent children and pregnant women), aged and disabled. Within these groups certain requirements must be met, including income, resources, and citizenship status. While operating within federal parameters, the rules for counting income and resources vary from state to state and from group to group.

Therefore, Medicaid does not provide medical assistance for all poor persons. Indeed, it is very unlikely that any non-elderly, non-disabled adult who does not have a dependent child living at home can qualify for Medicaid (unless the adult is a pregnant woman). Medicaid only provides health care services for low-income persons in one of the designated groups and low income is only one test for Medicaid eligibility for those within these groups.

The Medicaid statute requires states to cover certain groups, known as “mandatory populations,” and they have the discretion to cover additional groups, known as “optional populations.” States have substantial flexibility to cover optional populations by submitting State Plan Amendments (SPAs) to CMS and having them approved with whatever conditions are imposed by CMS. Similarly, states have total flexibility to discontinue coverage for optional populations through SPAs.3 Individuals in any eligibility group that a state chooses to cover who meet the eligibility criteria for that group are eligible for Medicaid if they apply for benefits.

b. Benefits

Mirroring eligibility provisions, Medicaid also requires states to cover certain benefits for the categorically needy, known as “mandatory services,” and it permits states to cover additional benefits, known as “optional services.” In addition, both mandatory and optional benefits are governed by the requirement that the “amount, duration, and scope” of all services must be state-wide and comparable, which means that all Medicaid benefits must be equally available to all categorically eligible enrollees within each state.4‚5

Some of the mandatory services include inpatient hospital services; outpatient hospital services; physician services; medical and surgical dental services; and nursing facility services for individuals aged 21 or older.

Several of the more commonly covered optional services include clinic services; nursing facility services for the under age 21; intermediate care facility/mentally retarded services; optometrist services and eyeglasses; and prescription drugs.

c. Financing

Medicaid is financed jointly by the federal and state governments. The portion of the Medicaid program that 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.6 By law, the FMAP cannot be lower than 50 percent nor greater than 83 percent. The wealthier states, as measured by per capita income, have a smaller share of their costs reimbursed. The federal government also shares in the state's expenditures for administration of the Medicaid program at generally 50 percent. Due to the entitlement nature of Medicaid, the amount of total federal outlays for Medicaid has no statutory limit.

States must establish reimbursement rates sufficient to enlist enough providers so that medical care and services are available 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. Each state is limited by an overall State-specific disproportionate share hospital (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. However, 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.7

2 Public Law 89-97

3 In order for a state to receive federal matching payments, it must have in effect a state Medicaid plan approved by the Secretary. A state that wants to change the way it administers its program—for example, by adding an optional service, dropping an optional eligibility group, or changing a provider reimbursement methodology—must submit a state plan amendment (SPA) to CMS for a determination as to whether the proposed change complies with Medicaid requirements.
4 Persons who qualify for coverage under the optional category of “medically needy” generally do so because of high medical expenses. These individuals meet Medicaid’s categorical requirements— e.g., they are children or parents or aged or individuals with disabilities—but their income is too high to enable them to qualify for “categorically needy” coverage. Instead, they may qualify for coverage by “spending down”— i.e., reducing their income by their medical expenses.
5 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.
6 1905(b) of the Social Security Act
7 One such federal parameter is the imposition of upper payment limits, or UPLs, on state Medicaid payments for hospital services. These limits are imposed in aggregate on state Medicaid payments to all hospitals based on reasonable estimates of the amount that would be paid for the services furnished by the group of facilities under Medicare payment principles. Payments in excess of the UPLs do not qualify for federal Medicaid matching funds.


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