The Health Law Resource

Overview of The Medicaid Program

Provided by the Health Care Financing Administration ("HCFA")

Brief Summary of TITLE XIX

of the Social Security Act

as of 6/24/95 (with 1994 data)

NOTE: These summaries are very brief, simple versions of complex subjects. They should be used only as general overviews and guides to the Medicare and Medicaid programs.


Medicaid: A Brief Summary


Title XIX of the Social Security Act is a Federal-State matching entitlement program which provides medical assistance for certain individuals and families with low incomes and resources. This program, known as Medicaid, became law in 1965 as a jointly funded cooperative venture between the Federal and State governments to assist States in the provision of more adequate medical care to eligible needy persons. Medicaid is the largest program providing medical and health-related services to America's poorest people.

Within broad national guidelines which the Federal government provides, each of the States: (1) establishes its own eligibility standards; (2) determines the type, amount, duration, and scope of services; (3) sets the rate of payment for services; and (4) administers its own program. Thus, Medicaid programs vary considerably from State to State, and within each State over time.

Basis of eligibility and maintenance assistance status

Medicaid does not provide medical assistance for all poor persons. Even under the broadest provisions of the Federal statute, Medicaid does not provide health care services even for very poor persons unless they are in one of the groups designated below. And low income is only one test for Medicaid eligibility for those within these groups; their resources and assets also are tested against established thresholds (as determined by each State, within Federal guidelines).

States generally have broad discretion in determining which groups their Medicaid programs will cover and the financial criteria for Medicaid eligibility. However, to be eligible for Federal funds, States are required to provide Medicaid coverage for most individ-uals who receive Federally assisted income-maintenance payments, as well as for related groups not receiving cash payments.

Sates also have the option to provide Medicaid coverage for other "categorically needy" groups. These optional groups share the characteristics of the mandatory groups, but the eligibility criteria are somewhat more liberally defined. The broadest optional groups that States will receive Federal matching funds for coverage under the Medicaid program include:

The option to have a "medically needy" (MN) programallows States to extend Medicaid eligibility to additional qualified persons with significant health care expenses who have income in excess of the mandatory or optional categorically needy levels. Such persons may "spend down" to Medicaid eligibility by incurring medical and/or remedial care expenses to offset their "excess" income, -- thereby reducing it to a level below the maximum income allowed by that State's Medicaid plan. States may also allow families to establish eligibility for MN coverage by paying monthly premiums to the State in an amount equal to the difference between the threshold allowance for income eligibility, and a family's income (reduced by any unpaid expenses incurred for medical care in previous months).

The "medically needy" Medicaid program does not have to be as extensive as the "categorically needy" program in a State, but there are certain requirements. If a State has any MN program, certain services must be provided as a minimum (the State may also choose to include additional services); and in any MN program, a State is required to provide coverage to certain children under age 18 and pregnant women who are MN. A State may elect to provide eligibility to certain other MN persons also: aged, blind, and/or disabled persons; caretaker relatives of children deprived of parental support and care; and certain other financially eligible children up to age 21. In 1994, there were 40 MN program which provided at least some services for at least some recipient groups.

The Medicare Catastrophic Coverage Act (MCCA) of 1988 made some significant changes which affected Medicaid. Although much of the MCCA was repealed, the Medicaid portions remain in effect. For Medicaid nursing facility recipients, the MCCA protects enough of the institutionalized spouse's income and resources to assure a moderate level of support for the spouse in the community. As a result, less income and resources remain available to contribute to the cost of the nursing facility care. Thus, the institutionalized spouse qualifies for Medicaid earlier than would have been true previously.

Once eligibility for Medicaid is determined, coverage generally is retroactive to the third month prior to application. Medicaid coverage generally stops at the end of the month in which a person no longer meets the criteria of any Medicaid eligibility group. In addition to the Medicaid program, most States have additional "State-only" programs to provide medical assistance for specified poor persons who do not qualify for Medicaid. Federal matching funds are not provided for these State-only programs.

Scope of Medicaid services

Title XIX of the Social Security Act requires that, in order to receive Federal matching funds, a State must offer certain basic services to the categorically needy populations:

States may also receive Federal assistance for funding if they elect to provide other approved optional services. A few of the optional services under the Medicaid program include:

States may provide home and community-based care to certain persons with chronic impairments. Another option allowed eight States (as a demonstration project) to establish and provide community-supported living arrangement services for persons with mental retardation or a related condition.

Amount and duration of Medicaid services

Within broad Federal guidelines, States determine the amount and duration of services offered under their Medicaid programs. They may limit, for example, the number of days of hospital care or the number of physician visits covered. However, States are prohibited from limiting the duration of coverage for medically necessary inpatient hospital services provided to Medicaid-eligible children under age six who are in "disproportionate share hospitals" (defined below) and to infants in all hospitals.

With certain exceptions, a State's Medicaid Plan must allow recipients to have freedom of choice among participating providers of health care. States may provide and pay for Medicaid services through various pre-payment arrangements, such as health maintenance organizations (HMOs).

In general, States are required to provide comparable amounts, duration and scope of services to all categorically-needy eligiblepersons. But there are two important exceptions:

  1. 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 (i.e., only these specific children might receive those specific service); and
  2. States may request "waivers" for home and community-based services (HCBS) under which they offer an alternative health care package for persons who might otherwise be institutionalized under Medicaid (i.e., only those persons so designated might receive HCBS). States are not limited in the scope of services they can provide under such waivers as 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).

Payment for Medicaid services

Medicaid operates as a vendor payment program, with States paying providers directly. Providers participating in Medicaid must accept the Medicaid reimbursement level as payment in full. With a few specific exceptions, each State has broad discretion in determining (within Federally-imposed upper limits and specific restrictions) the reimbursement methodology and resulting rate for services.

States may impose nominal deductibles, coinsurance or copayments on some Medicaid recipients for certain services. However, certain Medicaid recipients must be excluded from cost sharing: pregnant women, children under age 18, hospital or nursing home patients who are expected to contribute most of their income to institutional care, and categorically needy enrollees in HMOs. In addition, emergency services and family planning services must be exempt from co-payments for all recipients.

The portion of each State's Medicaid program which is paid by the Federal government, known as the Federal Medical Assistance Percentage (FMAP), is determined annually by a formula that compares the State's average per capita income level with the national income average. By law, the FMAP cannot be lower than 50 percent nor higher than 83 percent. The wealthier States have a smaller share of their costs reimbursed. In 1994, the FMAPs varied from 50 percent (paid to 11 States and D.C.) to 78.9 percent (to Mississippi), with the average Federal share among all States being 57.5 percent.

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, depending on the complexities and the need for incentives for a particular service, higher matching rates are authorized for certain functions and activities.

Federal Medicaid payments to States have no set limit (cap); rather, the Federal government matches (at FMAP rates) the State payments for the mandatory services plus the optional services that the individual State decides to provide for eligible recipients. Reimbursement rates must be sufficient to enlist enough providers so that Medicaid care and services are available under the State Plan at least to the extent that comparable care and services are available to the general population within that geographic area.

States also must augment payment to qualified hospitals that provide inpatient services to a disproportionate number of Medicaid recipients and/or to other low-income persons under what is known as the "disproportionate share hospital" (DSH) program. Under this program -- which was coupled with refundable donations and provider taxes -- some States made large DSH payments in order to get higher Federal matching monies with little or no increase in the State's share. However, under legislation passed in 1991, these DSH payments are now limited.

Medicaid Trends and Summary

Medicaid was initially formulated as a medical care extension of Federally funded income maintenance programs for the poor, with an emphasis on dependent children and their mothers. Over the years, however, Medicaid has been diverging from a firm tie to eligibility for cash programs. Recent legislation assures Medicaid coverage to an expanded number of low-income pregnant women, poor children and to some Medicare beneficiaries who are not eligible for any cash assistance program. Such persons would not have been eligible for Medicaid under earlier legislation. Legislative changes also focused on increased access, better quality of care, continuation of specific benefits, enhanced outreach programs, and fewer limits on services.

Medicaid policies for eligibility and services are complex, and vary considerably even among similar-sized and/or adjacent States. A person who is eligible for Medicaid in one State might not be eligible in another State. Services provided by one State may differ considerably in amount, duration, or scope from services provided in a similar or neighboring State. And Medicaid eligibility and/or services within a State can change during the year.

The Managed Care concept, which is growing rapidly within the Medicaid program, seeks to enhance access to quality care in a cost effective manner. As of June 30, 1994, 7.8 million Medicaid recipients had enrolled in Medicaid Managed Care programs, and the number of participants is increasing rapidly.

The biggest change from the original Medicaid program has been the growth of Medicaid's substantial role in long-term care. An average of almost 45 percent of care for persons using nursing facility or home health services in the U.S. in recent years was paid for by the Medicaid program. A much larger percentage is paid by Medicaid for those persons who used more than four months of such long-term health care. Medicaid payments for institutional and community-based long term care in 1994 totaled almost $46 billion.

Since its inception, increases in expenditures for the Medicaid program have exceeded the consumer price index, and have exceeded the increase in total numbers of persons served and the increase in services provided. This continually increasing growth in Medicaid expenditures seems primarily due to four factors:

  1. the increase in rates of payments to providers of medical and health care services, when compared to general inflation;
  2. the results of technological advances to keep more very low birth-weight babies and other critically ill or severely injured persons alive, but in need of continued extensive and very expensive care;
  3. the increase in the numbers of very old and disabled persons requiring extensive acute and/or long term health care and various related services; and
  4. the increase in the size of the Medicaid-covered populations (a result of the economic recession and Federal mandates).

Most Medicaid recipients require relatively small expenditures per person, per year. For example, the data for 1994 indicate that Medicaid vendor payments for over 17 million children under age 21 averaged only $1,006 per child. Other groups, comprised of far fewer persons, have much larger per-person expenditures; e.g., the 158,800 recipients of ICFs/MR care in 1994 who averaged $55,300 per person in Medicaid payments to ICFs/MR (plus the cost of acute care and other services they received outside of the ICF/MR facility). And at least 40 percent of persons with AIDS have their health care (estimated in 1992 to be about $40,000 per person per year) paid for by Medicaid.

Although the recipient numbers are relatively very small, some individual patients (e.g., severely burned patients, accident or violence victims with multiple severe head and brain injuries, medically fragile very premature babies, organ transplant patients, and others requiring very specialized, extensive and intensive medical care) can cost over $4,000 per day/per person. And a few persons require continuing extensive and very complex health care for many years, costing several hundreds of thousands of dollars per person, year after year.

Data indicate that over 40 million persons were enrolled in Medicaid in 1994. Of these, 35.5 million received at least some health care service in 1994 through the Medicaid program. Total 1994 outlays for the Medicaid program include: vendor payments of $109 billion, payments for various premiums (for HMOs, Medicare, etc.) of almost $11 billion, payments to disproportionate share hospitals of nearly $17 billion, plus administrative costs. Total increase was from $126 billion for 1993 to $137 billion for 1994 ($79 billion in Federal and $58 billion in State monies). This meant an average 1994 Medicaid payment to vendors of $3,070 per Medicaid recipient.

Medicaid's compound rate of growth for the existing program is now projected to be nine percent per year between the years 1994 and the year 2000. Thus, if current expenditure trends continue, and there are no significant changes to the Medicaid program, then payments for the total (Federal and State) Medicaid programs may exceed $230 billion by the year 2000.

The U.S. Congress, the Department of Health and Human Services and the individual States continually seek to make improvements in the Medicaid programs' quality, effectiveness and extent of health care services. The need for expanded eligibility and more extensive and enduring services is obvious. However, the Medicaid programs must function within the various Federal and State constraints of economic, social, and political factors. As a balance for these factors is sought, revisions continue to occur in Federal laws, in HCFA regulations, and in the States' Medicaid Plans. Thus, the Medicaid programs are continually changing.

Acknowledgements: The written portions, including the summaries of the Medicaid and Medicare programs, were prepared by Mary Onnis Waid in the Office of the Actuary, Health Care Financing Administration, N3-01-23, 7500 Security Blvd. Baltimore, MD 21244-1851. Phone (410)-786-6921. The national health expenditures data and estimates were prepared by the Office of National Health Statistics, also in the Office of the Actuary, HCFA. Historical information was extracted from the Vol. 56, No. 4, Winter, 1993 edition of the Social Security Bulletin.

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