Medicaid is a federal-state matching program. States receive federal matching funds to help them pay the costs of basic health care and long-term care for their low-income residents. These matching funds are available on an open-ended basis: the more a state spends on covered benefits for eligible individuals, the more matching funds it receives from the federal government.
The federal government matches state Medicaid expenditures based upon a percentage, called the Federal Medical Assistance Percentage (or FMAP), which varies depending on the state’s per capita income. This federal funding is open-ended. If a state decides to provide services permitted under the program, the state expenditures are matched by an uncapped federal matching grant. For example, in Pennsylvania, the FMAP was 57.71 percent in 2004. This meant that for every $1.00 in state funds that Pennsylvania paid out in 2004, it received $1.36 more from the federal government.
This open-ended federal financing system encourages states to provide health care to the elderly and other covered groups, and to broaden the scope of that coverage. The federal government will absorb more than half of the additional costs when a state expands the numbers of individuals and services covered under Medicaid.
The federal matching funds system helps protect state Medicaid spending in times of budget cuts. The matching grant structure makes it less desirable for states to cut Medicaid than other programs, since when Medicaid is cut, most of the dollars saved just flow back to the federal government. And, if Medicaid is cut, health-care providers and other businesses in the state that are dependent on Medicaid revenues will be required to cut jobs. Thus, Medicaid cuts magnify as they ripple through the state’s economy.
In response to the recent "Great Recession," the 2009 American Recovery and Reinvestment Act increased the Medicaid federal matching percentages (FMAPs) received by states through Dec. 31, 2010. A separate Medicaid assistance measure (Pub. L. No. 111-226), which was signed in August 2010, extended the match through June 30, 2011. The ARRA upped every state's FMAP by at least 6.2%. It is estimated that the ARRA increase in the FMAP will have increased federal Medicaid payments to states by well over $100 billion dollars during its 11 quarter run (period October 2008 through June 30, 2011).
The ending of the increased FMAP means that Pennsylvania and other states will now have to pay a larger proportion of the costs of their Medicaid programs from state generated funds.
For more on the FMAP see Medicaid: The Federal Medical Assistance Percentage (FMAP), Congressional Research Service (September 24, 2011) http://aging.senate.gov/crs/medicaid6.pdf.
Note that more recently enacted Affordable Care Act (aka “health reform”) also contains a number of provisions that affect FMAPs. Most notably, the Affordable Care Act provides FMAPs of up to 100% for certain newly eligible individuals. It also provides increased FMAPs for primary care, specified preventive services and immunizations, smoking cessation services for pregnant women, specified home and community-based services, and health home services for certain people with chronic conditions.