The House of Medicaid Rests on Five Pillars: Financing

As the U.S. House of Representatives returns from its District Work Period, its top priority will be to assemble its budget reconciliation package. The House Budget Resolution has charged the Committee on Energy and Commerce to produce $880 billion in savings over the next 10 years. The Congressional Budget Office (CBO), the nonpartisan scorekeeper for Congress, has informed leadership and members this level of savings cannot be achieved without reductions in spending levels to the Medicaid program.

The Five Pillars

Medicaid, along with all forms of health-insurance products, can be organized and visualized according to the following five pillars:

The challenge for Brett Guthrie (KY-02), Chairman of the House Energy and Commerce Committee, will be to find savings among the pillars without causing the House of Medicaid to collapse. The $880 billion target is equal to the total Medicaid expenditures in FY 2023. This series will examine each of the five, focusing on 2030, the mid-point in the 10-year budget window.

Where Does the Money Go?

According to the National Association of State Budget Officers (NASBO), state expenditures in 2024 surpassed $3 trillion. Medicaid accounted for nearly 30% of total state expenditures.[1]

According to the CBO June 2024 Baseline Projections, the federal outlays for Medicaid in 2030 will be $756 billion distributed among the components in Table 1.

Table 1. Components of the Medicaid Program 2030[2]

Notably, the CBO estimates that in 2030, nearly half (49.7%) of benefits expenditures will be delivered through managed care.

Financing

Employers share the cost of coverage with their employees. Medicare is financed through payroll taxes, general revenues of the federal government, and beneficiary contributions. Medicaid is unique among the purchasers of health care as it relies on a complex set of relationships to provide funding. Federal law allows states to share up to 60% of the state cost of Medicaid with other state and local government entities through intergovernmental transfers and certified public expenditures. State funds can also impose taxes on health care providers and taxes on health insurance premiums. According to NASBO, Federal funds accounted for 64.3% of Medicaid spending in 2024; state general revenue funds accounted for 24.2%; and other state funds accounted for 11.5% of expenditures.[3]

Under Section 1902(30)(A), states must “provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan (including but not limited to utilization review plans as provided for in section 1903(i)(4)) as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that 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 the geographic area;” (emphasis added). This multi-purpose responsibility imposed upon the states can be a source of tension between the federal government and the states. In particular, it adds layers of complexity in developing payment rates.

Payments to many providers, particularly institutional providers, frequently include “base payments” and “supplemental payments.” Base payments are made to providers for specific services provided to specific individuals that can be traced as adjudicated claims. In contrast, supplemental payments are made in the aggregate across a class of providers (such as hospitals) that approximate what Medicare would have paid for the services (Medicare “upper limit”) but are not specific to any individual.

It is also important to bear in mind that all these different financing arrangements were started as a result of an action taken by Congress or through the regulatory authority of the Executive branch. Over the years, states and providers have become dependent upon them to expand services to various indigent populations or just to be able to keep their doors open. To “unwind” these relationships will require precise legislative language and patience in order to provide a smooth glidepath and soft landing for states.

FMAP and FFP

The federal government and the states share the cost of Medicaid through a funding formula called the Federal Medical Assistance Percentage (FMAP). Federal law prescribes the formula for determining the split between the federal government and the states. Currently, each state receives at least a 50% match from the federal government. No state can receive a match greater than 83%.  The formula is based on a state’s per capita income in comparison to the national per capita income.[4] Thus, a state with a lower per capita income receives a higher match rate.

Federal dollars follow state dollars and are adjusted quarterly based on state estimates, which are ultimately reconciled to actual payments. When the federal government agrees to provide the “match” for an expenditure, it is referred to as “Federal Financial Participation” (FFP).

Intergovernmental Transfers

An Intergovernmental Transfer (IGT) occurs when a governmental entity other than the state Medicaid agency provides the nonfederal share of funding. This transfer of funds authority includes not only municipalities, but also other governmental entities such as state university-based hospital systems, as well as nursing facilities and children’s hospitals that are funded at least partially through a local tax. While many counties and cities turned over the ownership and operational responsibilities of a health care facility to the private sector decades ago, it is still common for a local election to include a referendum on whether to increase the “mill tax” to support a specific facility. The relationship between a facility and its community is perhaps a matter of lesser degree, unfortunately.

Certified Public Expenditures

A state and a local government entity may agree to use Certified Public Expenditures (CPE) as the source of the nonfederal share. Under this arrangement, the local entity or other state agency does not transfer money to the Medicaid agency, but rather certifies that money was spent on permissible Medicaid services. When the federal government pays its share to the state, the state may retain some or all of the federal funds prior to sending any balance to the original entity.

Provider Taxes and Donations

Provider taxes are used particularly to finance increases in reimbursement rates to providers. Every state except Alaska uses at least one type of provider tax. Taxes on hospitals and nursing homes are the most widely used (often called “quality fees”). The table below illustrates the number of states that use each type of tax.

Table 2. Provider Taxes by Type, State Fiscal Year 2025 [5]

A “permissible” tax must be applied at a rate of less than 6% of the net patient service revenues received by the payer of the tax and is: 1) “broad based”; 2) uniform; and 3) no “hold harmless.”  Congress has not updated the provider tax provisions in Section 1903(w) since 1991.

Supplemental Payments

IGTs, CPEs, provider taxes, and premium taxes on health plans are revenue sources for states. How they are used to leverage federal dollars to make supplemental payments to providers has been a source of controversy in every administration since President George H.W. Bush (1989-1993). “Supplemental payments” is a broad term that covers several different types of payments to providers.

The newest type of supplemental payment, put into effect during the Trump Administration, is a “directed payment,” in which a state makes a “pass-through” payment to a managed care plan, which then makes a directed payment to a provider. It is important to note that federal law requires that rates paid to managed care plans be certified as “actuarially sound.” However, this establishes a floor for payments, not a ceiling.

In an April 2024 Issue Brief, “Medicaid Base and Supplemental Payments to Hospitals,” the Medicaid and CHIP Payment and Access Commission (MACPAC) reported that:

Medicaid spent $262.6 billion on hospital care in 2022. Hospital spending accounted for 33 percent of total Medicaid spending, and Medicaid payments to hospitals accounted for 19 percent of all payments to hospitals in 2022 (OACT 2023).

 

In fiscal year (FY) 2022, 61 percent of Medicaid payments to hospitals were made through managed care delivery systems, and the remainder were made on an FFS basis. About half of FFS payments to hospitals are made through supplemental payments, and in managed care, about one third of payments to hospitals are made through directed payments.

Supplemental payments to hospitals in FY 2022 are illustrated in Table 3 below:

Table 3. Supplemental Payments to Hospitals, FY 2022[6]

It is important to reiterate that all these supplemental payments are presumed to be permissible:

House Likely to Focus on Financing

It is widely anticipated that the Financing Pillar of Medicaid will be the central focus of any congressional action in budget reconciliation by putting limitations on one or more of these components. While the “watchdog” agencies have warned Congress about the potential for states to effectively raise their federal match rate, these financing and payment methodologies are deeply embedded across the country and cannot be easily separated without real consequences to delivering services to the most vulnerable among us.

As a practical matter, savings over the 10-year budget period will likely be reduced to an eight or even seven-year period, after accounting for the time needed for CMS to produce final regulations in conformance with the Administrative Procedures Act (APA). In 2026, there will be gubernatorial elections in 36 states. Whether the state delegation supported or opposed what happens this year in budget reconciliation, every governor will bear the responsibility of governing under a new set of rules. Nearly every state is required to have a balanced budget. Many state legislatures convene only on a partial basis. Thus, Congress and the Administration must be cautious in setting dates when states must come into compliance. This means phasing in changes over time for a smooth landing.

Legislating in the New Era of Loper Bright Enterprises

This will be the first time Congress has attempted to pass a budget reconciliation act since the U.S. Supreme Court dissolved the Chevron deference less than a year ago in the landmark decision Loper Bright Enterprises et. Al v. Raimondo.[7] To achieve the desired budget score from CBO and to be unambiguous for future judicial review, Congress will need to be precise about its goals and objectives. This may include strengthened rules for the ”watchdog agencies” and their abilities to protect program integrity.

Citations

• [1] Medicaid Expenditures
• [2] CBO
• [3] NASBO. p. 51
• [4] Federal Register
• [5] Congress
• [6] MACPAC
• [7] Supreme Court