Description of the Medicaid Program
Federal law provides that a State may qualify for
Federal Medicaid matching funds only if it designs
its program within specific Federal requirements.
These include eligibility for specific population
groups, coverage for certain medical services and
medical providers, and adherence to specific rules
relating to payment methodologies, payment amounts,
and cost-sharing for Medicaid beneficiaries.
To qualify for Federal Medicaid matching funds, a State
must obtain the U.S. Department of Health and Human
Services, Centers for Medicare and Medicaid Services
(CMS) approval of its Medicaid State Plan. The State
Plan is the contract between the Federal government
and the State, which spells out the terms and conditions
under which the State will receive Federal Medicaid
matching funds. Every change in eligibility for beneficiaries,
change in coverage of services or change in methodology
of reimbursement in a State's Medicaid program requires
a State Plan Amendment that must be approved by CMS.
Waivers of Federal Requirements
Federal law requires that Medicaid beneficiaries
have freedom of choice of providers, that the program
is statewide, and that services are available in an
amount, duration and scope sufficient to achieve their
The Federal law provides flexibility to States to cover
optional services and eligibility groups. Some options
are specifically described in the Federal law. Other
options may be available through "waivers."
CMS has authority to "waive" certain statutory
requirements so a State can, for example, cover certain
benefits or eligibility groups that could not otherwise
be covered under Medicaid.
CMS may grant "program waivers" or "research
and demonstration waivers". The most common program
waiver is under Section 1915(b), which waives the freedom
of choice requirement so a State can implement a managed
care program. Recently, the Balanced Budget Act of 1997
provided that a State has a choice of a managed care
waiver or a State Plan Amendment. Either approach will
be approved with a set of specific terms and conditions.
Section 1915(c) waivers provide for Home and Community
Based Services waivers. Research and demonstration waivers
are granted under Section 1115 for more comprehensive
programs of health reform. Section 1115 waivers may
involve restructuring the State's Medicaid program,
as well as the terms and conditions of Federal funding.
The Impact of Medicaid Managed Care
Increasingly, Medicaid programs have moved
toward the use of managed care arrangements as delivery
systems for Medicaid beneficiaries. Medicaid managed
care may involve enrollment with health maintenance
organizations (HMOs) and managed care organizations
(MCOs) which are paid on a capitated basis, or a Primary
Care Case Management (PCCM) system, which is a fee-for-service
program that the state develops and manages itself.
Some states have found that a PCCM works well in rural
areas that may be served by few or no HMOs.
An HMO, a MCO or a PCCM system will require the Medicaid
beneficiary to enroll with a specific primary care
provider, who by contract with the Medicaid agency
accepts certain responsibilities for providing and
authorizing needed medical care. Providers not in
the HMO network, or not referred by the primary care
provider in a PCCM system, may not be able to be reimbursed
for services provided to Medicaid beneficiaries.
The use of managed care can raise significant issues
for Medicaid reimbursement of services delivered by
public health agencies, mental health agencies, health
centers or other publicly assisted agencies. This
is particularly true for care provided through capitated
HMOs and MCOs. Public providers may need to negotiate
participation and reimbursement arrangements with
an HMO instead of with the Medicaid agency. Public
providers would be well served to monitor the development
of State Medicaid policy to be sure their interests
are taken into account as managed care policy is developed.
It is sometimes possible and advantageous to the State
agency and the State budget to arrange for certain
services to be "carved out" of capitated
managed care contracts and directly reimbursed by
Medicaid. Services often considered for a carve-out
include: family planning; prenatal care and other
pregnancy services; selected Early and Periodic Screening,
Diagnostic and Treatment (EPSDT) services; immunizations;
or mental health services.
Qualifying for Federal Medicaid Matching Funds
Medicaid is a program that provides open-ended Federal
contributions according to a statutory formula to participating
States with approved plans. CMS reimburses the State
Medicaid Agency for a portion of actual expenditures
made under the provisions of the State Plan. Federal
reimbursements (Federal financial participation, or
"FFP") are based on qualifying expenditures
for either "medical assistance" (i.e., medical
services) or for program administration.
The amount of Federal payments to a State for medical
services depends on two factors. The first is the
actual amount spent that qualifies as matchable under
Medicaid. In general, this means that:
- The expenditure is for a covered service;
- Provided by a qualified provider enrolled with
the Medicaid program; and
- To a person eligible for and enrolled in Medicaid
at the time of service.
The second factor is the Federal Medical Assistance
Percentage (FMAP) for each State. The FMAP percentage
is computed from a formula that takes into account
the average per capita income for each State relative
to the national average. By law, the FMAP cannot be
less than 50%. States with per capita personal incomes
below the national average have a FMAP rate as high
as 77% in fiscal year 2000. This means, for example,
for every $1 in qualifying Medicaid expenditures made
by a State, the State is able to claim and receive
at least $0.50 and as much as $0.77, depending on
the State FMAP.
Expenditures for Medicaid-related administrative
activities also qualify for Federal matching funds.
For administrative expenditures to qualify, the activities
must be related to the administration of the State
Medicaid program. Unlike the FMAP for medical services,
which is different for each State, the administrative
matching rates are the same for all States. Expenditures
necessary for the administration of the program generally
are reimbursed at 50%. Certain administrative expenditures
qualify for higher Federal matching rates. For example,
certain activities requiring skilled medical professionals
qualify for 75% Federal matching. Some expenditures
relating to the development of new information technology
systems may qualify for Federal matching rates of
75% or 90%.
Medicaid allows State and local agencies that provide
or arrange for covered services to Medicaid enrollees
to receive Federal payments toward the cost of such
services. For these expenditures to qualify for Federal
Medicaid payments, service delivery and administrative
activities must be carried out under the terms of
an inter-agency agreement with the Medicaid agency.
The agreement is a contract that spells out the medical
and administrative services that will be treated by
the Medicaid agency as Medicaid expenditures; and
thus, will qualify for Federal funds. The Medicaid
agency will include those qualifying expenditures
identified in the agreement in its claim for Federal
funds. The agreement usually holds the service delivery
agency responsible for any potential future recoveries
if an audit should find the claim for Federal matching
funds included non-qualifying expenditures.
Opportunities to Use Medicaid
Federal Medicaid matching funds have proven
to be a rich source of financing for many State and
local health programs. Federal Medicaid funds may
help finance a new program or coverage, or the expansion
of an existing program. In some cases, where an existing
health program was previously financed entirely from
State or local funds, the availability of Federal
Medicaid matching funds may reduce the cost of general
fund dollars borne by State or local government.
The opportunity to use Medicaid as a source of financing
for State or local health programs depends on the
ability of policymakers to design programs (or redefine
on-going programs) that meet the Medicaid requirements.
How to Increase Medicaid Funding for State
and Local Health Services
Policy changes that will permit a State program
to qualify its expenditures for Medicaid matching
funds can be classified as follows:
I. Increase the Number of Persons Who Qualify
for Medicaid Coverage: Expenditures cannot
qualify for Federal Medicaid matching funds when services
are provided to persons who are not enrolled in Medicaid.
Thus, one avenue for increasing Medicaid support for
a program is for eligibility to be expanded so a greater
number of persons served by a program may qualify.
Many persons who are eligible for Medicaid do not
apply because they do not know they are eligible,
or they regard the application process as difficult.
State residency requirements are not allowed under
Medicaid. This means, for example, that migrant workers
and their children are able to qualify on the same
terms as any other person in a specific State.
Medicaid eligibility is determined in general by
two key factors. First, persons must be in a qualifying
category. Second, persons must meet State-defined
income and asset criteria. (Other requirements also
apply, such as being a legal U.S. resident.) Each
Medicaid program must cover certain groups of persons,
but has the opportunity to offer coverage to other
optional eligibility categories.
Medicaid eligibility rules are complex. The following
is a general description of Medicaid eligibility categories
Mandatory Eligibility Groups: Federal law
specifies that States must cover certain eligibility
- Low-income families with children who would have
qualified for Aid to Families with Dependent Children
(AFDC) cash assistance in July 1996. These persons
may or may not be receiving Temporary Assistance
to Needy Families (TANF) cash assistance now.
- Children under age 6 in families with incomes
below 133% of the federal poverty level (FPL).
- Children ages 6 to 17 in families with incomes
below 100% of the FPL (to age 18 in 2001).
- Pregnant women with family income below 133% of
- Elderly, blind or disabled adults and children
receiving Supplemental Security Income (SSI) payments.
- Children receiving foster care or adoption assistance
under Title IV of the Social Security Act.
- Persons who lose eligibility for AFDC/TANF due
to earnings (i.e., leave welfare for work) may continue
on Medicaid for up to a year; those who leave due
to increases in child support payments, may continue
on Medicaid up to four months.
- Certain Medicare beneficiaries, with benefits
depending upon income up to 175% of FPL are also
eligible for Medicaid. "Dual Eligibles"
are a group enrolled in both Medicaid and Medicare.
Depending on the individual's income, these persons
qualify for various levels of Medicaid coverage
and support. Persons who qualify under SSI income
standards qualify for full Medicaid coverage. Persons
above this level may not receive full Medicaid benefits.
Medicaid pays for all or a portion of Medicare premiums,
deductibles, and coinsurance, depending on the income
level of the beneficiary. (An asset test also applies
such that countable assets cannot exceed $4,000
for an individual, or $6,000 for a couple.)
- Qualified Medicare Beneficiaries (QMBs): Income
up to 100% of the FPL. Medicaid pays Medicare
part A and B premiums, deductibles and cost sharing
related to Medicare covered benefits.
- Specified Low-Income Medicare Beneficiaries
(SLIMBs): Income between 100% and 120% of the
FPL. Medicaid pays only for the Medicare Part
- Qualified Individuals (QIs): Medicaid pays all
or part of the Medicare Part B premium for persons
who would be eligible to be a QMB except their
income is between 120% and 135%, or at state option
up to 175% of the FPL.
- Qualified Disabled and Working Individuals (QDWIs):
Persons who are disabled, but who lost their Medicare
Part A benefit due to increased earnings, and
whose income is between 100% and 200% of the FPL.
Medicaid pays the only the Part A premium.
Optional Eligibility Groups: Federal law specifies
that States may, at the option of the State, cover
low-income persons in a number of specified eligibility
groups. These include (but are not limited to) the
- Pregnant women, infants, children and parents
of any Medicaid-eligible child, including parents
in two-parent families with income and assets at
or below state-defined levels.
- Disabled children who would be eligible under
criteria in effect in July 1996.
- Persons in institutions with incomes less than
300% of the SSI Federal benefit level.
- Recipients of SSI payments, and disabled or elderly
persons with incomes below100% of the FPL.
- Certain working disabled persons who would qualify
for SSI if they were not working, up to 250% of
- Children under a "Medicaid Expansion"
State Child Health Insurance Program.
- Persons who are "Medically Needy".
|In 1999, 42 states had a Medically
The "Medically Needy" category provides
for a different method of determining eligibility,
based on actual medical expenses incurred by an individual.
Medically needy persons are individuals who fall within
one of the mandatory or optional eligibility groups,
but have income and resources that would make them
ineligible, except when the cost of their medical
care is taken into account. When they incur medical
expenses they "spend down" their income,
and become eligible for the balance of the eligibility
period from the point in time they spend down their
income to the eligibility level. The process begins
again at the beginning of the next state-defined eligibility
Income Eligibility Levels: States have considerable
flexibility in setting permissible income levels.
Income eligibility levels can be set separately for
specific groups, such as children, families, pregnant
women, the disabled and the elderly.
States can increase effective eligibility levels
for pregnant women, children, families with children,
elderly and disabled persons by "disregarding"
a certain amount of income. In this way, eligibility
for children could be extended above 185% of the FPL
(technically the upper limit for pregnant women and
infants), by setting the disregarded amount to a level
that would bring countable income down to 185% of
the FPL. To extend the eligibility level to 285% of
the FPL, for example, a State would set the disregarded
amount at 100% of the FPL.
The income disregard provisions can also be used
to effectively increase the income limits for Qualified
Medicare Beneficiaries (who receive Medicaid assistance
with their Medicare premiums, deductibles, and coinsurance),
and some aged, blind and disabled Medicaid groups.
This flexibility over countable income is found in
Section 1902 (r)(2) and Section 1931 of the Social
State Children's Health Insurance Program (SCHIP):
A State can implement its SCHIP program as a Medicaid
expansion, or as a separate health insurance program.
Another option is for a State to have both a Medicaid
expansion and a separate program operating at the
same time with each one targeted at health coverage
for different groups of children. SCHIP has an enhanced
Federal matching rate, ranging from 65 percent to
about 85 percent. Because the matching rate is higher,
a State can extend coverage to children at a lower
State cost through SCHIP than through regular Medicaid.
A key feature of SCHIP is its focus on finding children
who are eligible, but not yet enrolled in either Medicaid
or a separate SCHIP program. Matching funds are available
specifically for the purpose of marketing, outreach
and determining eligibility.
II. Increase Services Covered by Medicaid:
Each State determines what medical services will be
covered under Medicaid. By defining services appropriately,
a State can be sure services provided by other State
agencies qualify for Medicaid reimbursement. Typically,
medical services provided through public health, mental
health, disability, substance abuse treatment, aging,
or education agencies can qualify for Federal Medicaid
matching funds. Federal Medicaid matching funds can
help finance capacity expansion in these programs
or reduce the net cost to the State for these services,
if they are specifically covered in the State Plan.
Mandatory coverage includes the following services:
- Hospital services, inpatient and outpatient
- Physician services
- Lab and X-ray
- Immunizations and other well-child services listed
under the Early and Periodic Screening, Diagnostic
and Treatment requirements, including any medically
necessary diagnostic and treatment services, plus
vision, dental and hearing services for children.
- Family planning services
- Nurse midwife, pediatric and family nurse practitioner
- Federally-qualified health center (FQHC) and rural
health clinic (RHC) services
- Home health care services
- Nursing home services
- Transportation for medical services
Optional coverages include 34 specific services,
including the following:
- Prescription drugs
- Clinic series
- Rehabilitation and physical therapy services
- Prosthetic and orthotic devices
- Optometrist services and eyeglasses
- Hearing services
- Dental Services
- Home and community based care for persons with
|The number of optional services
covered by states
range from 13 to 33. The median is 24.
III. Set Medicaid Reimbursement Rates at Appropriate
Levels: State Medicaid programs are required
by Federal law to set their payment rates at a levels
sufficient to achieve access to needed care. Medicaid
may want to set rates to achieve specific public policy
objectives, such as access to primary care, well-child
care, prenatal care or deliveries.
Rates for safety net providers, including FQHCs and
RHCs, can be set to assure their financial viability.
Federal law specifies cost-related reimbursement methods
for FQHCs, but meeting the minimum legal requirement
may not assure full reimbursement of costs for Medicaid
patients. Medicaid has the option under the law to
provide full-cost reimbursement for these providers.
The maximum amount that the State Medicaid Programs
are allowed to pay is defined by the Upper Payment
Limit, which is generally the amount Medicare would
have paid for the same services and patients. If a
Medicaid program were to pay an amount greater than
the upper payment limit, the amount above the limit
would not qualify for Federal Medicaid matching funds.
Special "Disproportionate Share Hospital"
(DSH) payments can be made to hospitals that qualify
on the basis of their service to Medicaid and the
uninsured. Each State is able to define the specific
criteria these hospitals must meet to qualify. Funds
are distributed based on a state-defined formula.
DSH payments are limited to inpatient and outpatient
IV. Find and Enroll Potential Eligibles: Medicaid,
Title V Maternal and Child Health Program or Temporary
Assistance to Needy Families (TANF) funding can support
administrative activities that are directed at case-finding,
education and outreach initiatives that help locate
and enroll persons who are eligible for Medicaid.
Medicaid funding also is available to create the systems
needed to determine eligibility and to enroll individuals
into Medicaid. Federal Medicaid funds can be used
to support outstationed enrollment services of FQHCs,
DSH payment hospitals, health departments and other
Medicaid can also reimburse for case management as
an administrative activity. Case management may apply
in situations where enrolled persons have complex
medical conditions; and it is beneficial to set up
a process to systematically manage their medical care.