NCPA - National Center for Policy Analysis


July 31, 2006

The states spent about $112 billion on Medicaid in 2004; of the total cost, more than half ($176 billion) was paid from federal coffers.  Federal funds are distributed based on a matching formula that takes into account each state's personal income per capita relative to the national average.  Using this method, many states receive far more or far fewer Medicaid dollars than they would if funds were allocated based on a state's poverty population, says Pamela Villarreal, a graduate student fellow with the National Center for Policy Analysis.

In 2004, for example:

  • New York, with 7.9 percent of the nation's poverty population, received almost 13 percent of federal Medicaid dollars.
  • In contrast, Texas had 10.3 percent of the nation's poverty population, but received only 6 percent of federal Medicaid dollars.
  • Vermont, Alaska and Maine received twice as much as they would if funds were allocated based on their poverty distribution, while Nevada received half as much. 

Overall, 23 states received less than their share of the poverty population would merit, while 27 states received more.  In fact, one-in-four federal Medicaid dollars (roughly $44 billion) would have been allocated to different states if funding was based on the poverty distribution alone, says Villarreal. 

In theory, the federal funding formula is designed to narrow the disparities in the ability of states to fund Medicaid by giving poorer states a higher matching rate for every dollar they spend.  However, there is no cap on the amount that the federal government matches.  Therefore, the more a state spends, the more it receives.  In practice, states with above-average per capita incomes are likely to spend more on Medicaid and receive more federal dollars, explains Villarreal.

Source: Pamela Villarreal, "Federal Medicaid Funding Reform," National Center for Policy Analysis, Brief Analysis No. 566, July 31, 2006.

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