Haris Ashley
Medicaid is a government-sponsored health insurance plan that operates at the state level and covers low-income families and some single adults. It is funded by the federal government and each state through a federal matching program with no cap. Taxpayer dollars fund Medicaid, with every taxpayer contributing to the program. Financial eligibility for Medicaid is determined using a tax-based measure of income called modified adjusted gross income (MAGI). MAGI is calculated by adding tax-exempt interest, non-taxable Social Security benefits, and excluded foreign income to adjusted gross income (AGI).
| Characteristics | Values |
|---|---|
| Type of Insurance | Government-sponsored health insurance plan |
| Administered by | States within broad federal rules |
| Coverage | Health and long-term care for low-income families and some single adults |
| Funding | Jointly funded by states and the federal government through a federal matching program with no cap |
| Spending | Totalled $880 billion in FFY 2023 with the federal government paying 69% ($606 billion) and states paying 31% ($274 billion) |
| Eligibility | Determined using a tax-based measure of income called modified adjusted gross income (MAGI) |
| Role of Taxpayers | Required to pay their share to fund Medicaid |
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What You'll Learn
Medicaid is funded by federal and state governments
Medicaid is a government-sponsored health insurance plan that operates at the state level and covers low-income families and some single adults. It is jointly funded by the federal government and each state. In the 2023 federal fiscal year, Medicaid spending totalled around $880–890 billion, with the federal government paying 69% and states paying 31%. The federal share of Medicaid funding, typically called the federal match or the federal medical assistance percentage (FMAP), is expressed as the percentage of state spending matched by the federal government. The FMAP varies by state, ranging from 50% to 77% in the 2023 federal fiscal year. The exact rate is determined by a formula that uses state per capita income relative to national per capita income; states with lower per capita income receive a higher share of federal funding.
The federal government sometimes increases funding when states face increased financial pressures. For example, during the COVID-19 pandemic, the Families First Coronavirus Response Act increased the base FMAP as an incentive for states to maintain coverage until the end of the public health emergency. States must balance their budgets and estimate how much they will spend on Medicaid each budget cycle. States primarily pay their share of the Medicaid program through general revenue, including taxes and other monies collected by the state. Counties and local governments may also contribute, but states must pay at least 40% of the non-federal share of Medicaid expenditures. Local government funding can involve intergovernmental transfers or direct spending on Medicaid services or program administration, known as certified public expenditures.
Medicaid is the largest source of federal funding and is the second-largest state expense behind K–12 education. It is a major source of financing for states to provide coverage of health and long-term care for low-income residents. Every taxpayer is required to pay their share to fund Medicaid.
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Taxpayers fund Medicaid
Medicaid is a government-sponsored health insurance plan that operates at the state level and covers low-income families and some single adults. It is funded by the federal government and each state. The federal government provides most of Medicaid's funding through the Federal Medical Assistance Percentage (FMAP), which determines the share of each state's Medicaid costs covered by federal dollars. The FMAP rate varies based on a state's per capita income. For instance, in 2024, Mississippi had an FMAP of 77.99%, while wealthier states like California had the minimum FMAP of 50%.
States finance their share of Medicaid costs through general tax revenue, provider assessments, and other dedicated funding mechanisms. General state tax revenue—primarily from income, sales, and corporate taxes—covers much of Medicaid’s state share. The specific mix depends on a state’s tax structure. States without an income tax, such as Texas and Florida, rely more on sales and business taxes. Local governments contribute to Medicaid funding in some states, particularly for long-term care services. Counties or municipalities may be required to provide a portion of Medicaid costs, often through property taxes or healthcare levies. This arrangement is common in states like New York, where local governments help finance Medicaid expenditures.
Medicaid funding operates through a structured cost-sharing system between federal and state governments. In addition to funds governed by the FMAP, the federal government provides enhanced matching rates for select services, providers, or groups of beneficiaries. For example, under the Affordable Care Act (ACA), the federal government covers 90% of the cost of coverage for newly eligible enrollees with incomes up to 138% of the poverty level. Federal law requires that 40% of a state’s share of total Medicaid expenditures be paid through state funds such as general funds and health care provider taxes levied by the state. The remaining 60% of the nonfederal share can come from “other state funds”, which includes funding transferred from local governments.
In recent years, there have been concerns about states exploiting Medicaid tax loopholes to take money from federal taxpayers. For instance, certain states have imposed taxes solely on Medicaid business within managed care organizations (MCOs) while structuring the tax so that it only affects those MCOs that will benefit from the federal match in the form of payments from the state. This has led to efforts by the Centers for Medicare & Medicaid Services (CMS) to close these loopholes and protect federal taxpayer dollars.
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Eligibility is determined by modified adjusted gross income (MAGI)
Medicaid is a government-sponsored health insurance plan that operates at the state level. It provides coverage of health and long-term care for low-income families and some single adults. Every taxpayer is required to pay their share to fund the program.
Eligibility for Medicaid is determined by modified adjusted gross income (MAGI). MAGI is a tax-based measure of income that includes your adjusted gross income (AGI) plus tax-exempt interest, Social Security benefits not included in gross income, and excluded foreign income. MAGI is used to determine financial eligibility for the premium tax credit, most categories of Medicaid, and the Children's Health Insurance Program (CHIP).
When calculating MAGI, certain expenses can be subtracted, such as scholarships and grants used for education, and certain American Indian/Native American income. Lump sum income is counted as income only in the month it is received when determining eligibility for Medicaid. It's important to note that MAGI differs from AGI, which is the total taxable income before any deductions or exemptions are made. Your AGI can be found on line 11 of IRS Form 1040.
MAGI is also used to determine eligibility for tax credits and health insurance subsidies. These tax credits can help eligible individuals and families purchase affordable individual health insurance coverage through the Health Insurance Marketplace. By knowing your MAGI and household size, you can shop for health insurance plans and calculate any tax credits you may qualify for.
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MAGI is adjusted gross income (AGI) plus tax-exempt interest
Medicaid is a government-sponsored health insurance plan that operates at the state level. It covers low-income families and some single adults. Funding for Medicaid comes from the federal government, each state, and every taxpayer.
Financial eligibility for Medicaid is determined using a tax-based measure of income called modified adjusted gross income (MAGI). MAGI is calculated by taking your adjusted gross income (AGI) and adding back certain deductions, such as tax-exempt interest, foreign income, and student loan interest. These deductions can vary depending on the specific tax credit or government program being considered. For example, when calculating eligibility for the premium tax credit, MAGI includes AGI, tax-exempt interest, excluded foreign income, and the tax-free portion of Social Security benefits.
It is important to note that MAGI is not the same as AGI. While AGI is the total taxable income calculated before itemized or standard deductions, exemptions, and credits are taken into account, MAGI includes additional items such as tax-exempt interest, foreign income, and certain deductions. By taking these into account, MAGI helps determine eligibility for specific programs and tax benefits, such as qualified retirement account contributions, student loan interest deductions, and health insurance subsidies.
Understanding MAGI is crucial for tax planning and ensuring compliance with tax regulations. It allows individuals to assess their eligibility for various tax credits, deductions, and benefits, such as contributing to a Roth individual retirement account (IRA) or deducting traditional IRA contributions. Additionally, MAGI helps in determining financial eligibility for Medicaid coverage, making it a vital consideration for individuals seeking access to healthcare through government-sponsored programs.
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Medicaid spending is slower than Medicare and private insurance
Medicaid is a government-sponsored health insurance plan that operates at the state level and covers low-income families and some single adults. It is funded by the federal government and each state. Medicare, on the other hand, is federally administered and covers older or disabled Americans. It is funded by payroll taxes and premiums paid by recipients. Both programs are sponsored by the federal government, which accounted for 32% of total health spending in 2023.
Medicaid spending grew 7.9% to $871.7 billion in 2023, or 18% of total national health expenditure (NHE). In comparison, Medicare spending grew 8.1% to $1,029.8 billion in 2023, or 21% of total NHE. Private health insurance spending grew even faster at 11.5% to $1,464.6 billion in 2023, or 30% of total NHE. This data shows that Medicaid spending is slower than both Medicare and private insurance spending.
There are several factors that account for the slower spending growth in Medicaid. Firstly, Medicaid is administered at the state level, and each state has different eligibility requirements and coverage levels. This can lead to variations in spending across states. Additionally, Medicaid is means-tested, which means that eligibility is based on income and assets. As a result, economic downturns or changes in income thresholds can impact the number of people eligible for Medicaid, potentially leading to slower spending growth.
In contrast, Medicare spending has been a target of budget cuts and legislative changes, such as the Budget Act of 2011, which forced Medicare to trim 2% from its payments for all services. Additionally, the use of Medicare services hasn't grown as quickly as some predicted, despite a growing proportion of elderly individuals in the US. These factors may have contributed to slower spending growth in Medicare relative to private insurance but still faster than Medicaid.
It is worth noting that the share of national health spending attributed to private insurance has been increasing over time, rising from 20.4% in 1970 to 30.1% in 2023. This growth in private insurance spending may be influenced by factors such as rising healthcare prices, increased utilization of healthcare services, and population growth.
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Frequently asked questions
Medicaid is a government-sponsored health insurance plan that operates at the state level. It is funded by the federal government and each state through a federal matching program with no cap. Every taxpayer is required to pay their share to fund Medicaid.
Medicaid is funded by taxpayer dollars, with the federal government paying 69% and states paying 31%. It is administered by states within broad federal rules to provide health coverage and long-term care for low-income residents.
Total spending per full-benefit enrollee ranged from $3,563 in Tennessee to $12,008 in the District of Columbia in 2021. Overall, Medicaid spending totaled $880 billion in FFY 2023.
Financial eligibility for most categories of Medicaid is determined using a tax-based measure of income called modified adjusted gross income (MAGI). MAGI is adjusted gross income (AGI) plus tax-exempt interest, Social Security benefits not included in gross income, and excluded foreign income.
