Medicaid debates over expansion and program cuts are raging throughout the states as higher healthcare costs and enrollment figures strain state budgets. California Common Sense’s new report examines whether the federal government’s current formula for determining federal funding levels per state accurately represents a state’s potential revenue and current poverty levels.

The “Federal Medical Assistance Percentage” (FMAP) is the federal government’s base share of a state’s Medicaid costs. To calculate each state’s FMAP, the federal government uses a long-standing formula, which is based on each state’s per-capita personal income (PCI) relative to the national average. We find that the current formula is flawed in that it relies too heavily on PCI to determine how much federal aid a state actually needs to serve its low-income Medicaid enrollees. Using more accurate indicators of potential revenue and poverty rates, we reworked the formula to illustrate the extent of the funding disparities among states. 

We found that the current formula routinely and systematically sends more funding to low-need states and less funding to high-need states, a major source of fiscal inefficiency. Given that the federal government tasks each state with providing effective Medicaid coverage to their lowest-income residents, misallocating funds prevents a number of high-need states from doing so.

Here is a summary of our findings:

1. Per-capita income is a poor proxy for a state’s financial resources. PCI fails to capture all potential revenue sources within a state, particularly other taxable resources. “Total taxable resources” better reflects a state’s resources, as it both includes personal income and other sources of income. Nationwide, per-capita Total Taxable Resources is 32% higher than PCI.

2. PCI is also a poor proxy for a state’s Medicaid needs. PCI fails to account for the proportion of low-income individuals in each state, as well as the costs associated with serving their health needs. PCI does not correlate with a state’s Medicaid Needs Poverty Rate, a measure derived in this report. The Medicaid Needs Poverty Rate is a state’s poverty rate adjusted for cost-of-living, health prices, and healthcare intensities among those living in poverty.

3. Replacing PCI with stronger indicators significantly alters many states’ federal assistance percentage. Under the revised formula, 32 states would receive a lower federal assistance percentage, 8 states would receive a higher percentage, and 10 states’ would remain the same. Idaho, Utah, and Oregon’s percentages would decline the most: 21, 20, and 14 percentage points, respectively. California, Hawaii, and New York’s would increase the most: 15, 12, and 9 percentage points, respectively.

4. A higher federal assistance percentage would be substantial for California. At 2013 Medicaid spending levels, a 15 percentage point increase in California’s FMAP would lower the state’s Medicaid share by roughly $9 billion, resulting in a 30% reduction in state Medicaid spending. These savings could be potentially be redirected back into the program, allowing the state to dramatically improve upon its relatively low per-enrollee spending levels and notoriously low reimbursement rates. Alternatively, it could free up spending for other areas of the budget, which have increasingly been crowded out by rising Medicaid costs.

You can view the article here.

Adam Tatum, California Common Sense Research Director was the report’s author.