Skip Ribbon Commands
Skip to main content

Overview of Issue

Medicaid is a means-tested entitlement program jointly funded by the federal government and participating states.  States design and administer their own programs within broad federal guidelines. The variability in eligibility, benefits, and service delivery among participating state programs makes Medicaid an extraordinarily complex system.  Committee on Ways and Means, 108th Cong., 2004 Green Book: Background Material and Data on the Programs within the Jurisdiction of the Committee on Ways and Means, at 15-Medicaid-1 (Comm. Print 2004).


Medicaid is a health care financial assistance program designed to assist certain favored groups, considered the “deserving poor.”  Furrow, B. et al., Health Law: Cases, Materials and Problems (4th ed. 2001).  Medicaid was intended to “enable each State, as far as practicable under the conditions in such State, to furnish medical assistance to those persons whose income and resources are insufficient to meet the costs of necessary medical services.”  Utah Women’s Clinic, Inc. v. Graham, 892 F. Supp. 1379, 1383 (D. Utah 1995) (citing Beal v. Doe, 432 U.S. 438, 444 (1977)). 


Congress enacted Medicaid through the Social Security Amendments of 1965, Pub. L. No. 89-97, (codified as amended at 42 U.S.C. §§ 1396a-1396v (2009)), as a legislative “afterthought” to Medicare.  See alsom 42 C.F.R. §§ 430.0–430.104 (2009).  Congress has significantly altered Medicaid eligibility, benefits, and financing in the ensuing 45 years. 

The Federal Medicaid statute defines several distinct population groups as potentially eligible for state programs. If a state elects to participate in Medicaid, some groups are mandatory; others are optional.  2004 Green Book, supra, at 15-Medicaid-2.  Mandatory groups include: the “categorically needy”; individuals who met requirements of former Aid to Families with Dependent Children rules; children under 6 and pregnant women whose family income is at or below 133 percent of the federal poverty level; all Supplemental Security Income (SSI) recipients excepting those recipients in a state that exercises the “209(b)” option with at least one eligibility criteria more restrictive than current SSI standards; recipients of adoption or foster care assistance under Title IV of the Social Security Act; all children under age 19 whose families have incomes under the federal poverty level; and certain low-income individuals who are aged or disabled as defined by SSI and who are Medicare-eligible.  42 U.S.C. § 1396a(a)(10)(A)(i); see also 2004 Green Book, supra, at 15-Medicaid-2.

States have the option to extend eligibility to other groups through more liberal income and resource limitations, through groups with specific characteristics, or through permitted waivers.  For example, the Breast and Cervical Cancer Treatment and Prevention Act of 2000, Pub. L. No. 106-354 (codified at 42 U.S.C. § 1396a(a)(10)(A)(ii)(XVIII)) extends eligibility to uninsured women under 65 and not otherwise eligible for Medicaid, who have been screened for and found to have breast or cervical cancer.  Section 1115 of the Social Security Act permits a waiver of many of the federal rules for eligibility.  The Health Insurance Flexibility and Accountability Initiative was intended to encourage states to seek § 1115 waivers and expand the State Children’s Health Insurance Program, established by the Balanced Budget Act of 1997, Pub. L. No. 105-33 (codified at 42 U.S.C. § 1396a(a)(10)(A)(ii)), to targeted low-income children not otherwise eligible for Medicaid. 

Title XIX imposes two significant limitations on a participating state’s implementation of its State Medicaid plan.  First, “[a] state Medicaid pla[n] [must] establish ‘reasonable standards . . . for determining . . . the extent of medical assistance under the plan which . . . are consistent with the objectives of [Title XIX].”  42 USC § 1396a(a)(17).  Second, a state “may not arbitrarily deny or reduce the amount, duration, or scope of [such] service[s] . . . to an otherwise eligible recipient solely because of the diagnosis, type of illness, or condition.”  Hern v. Beye, 57 F.3d 906, 910 (10th Cir. 1995).  The Supreme Court held that a state’s refusal to fund unnecessary medical services was not inconsistent with the objectives of Title XIX, and stated that “serious statutory questions might be presented if a State Medicaid plan excluded necessary medical treatment from its coverage.”  Beal, 432 U.S. at 444.  As a result, several courts have adopted the term “medically necessary” to designate those services for which a state is required to provide funding under Title XIX.  Utah Women’s Clinic, 892 F. Supp. at 1383. 

Participating states must cover at least seven general categories of benefits for the mandatory groups.  Benefits include: inpatient hospital services; outpatient hospital services, rural health clinic services, and federally-qualified health center services; other laboratory and x-ray services; nursing facility services for those over age 21, early and periodic screening, diagnostic and treatment services for those under 21, and family planning services and supplies to those of child-bearing age; physicians’ services; nurse mid-wife services; and certified pediatric or family nurse practitioner services.  42 U.S.C. § 1396a(a)(10)(A). 

The federal statute contains a variety of optional benefits that states may include in their program, which is called a "State Plan."  Optional services include eyeglasses, prosthetic devices, chiropractic and podiatry services, dental care, prescription drugs, inpatient psychiatric care for individuals of certain ages, and physical therapy services.  States have significant latitude to design programs in the State Plan to meet the needs of their Medicaid populations.  Through Section 1915(c) Home and Community-Based Services Waivers, states may offer service delivery through community settings for individuals who would otherwise be institutionalized.  2004 Green Book, supra, at 15-Medicaid-20. 

Medicaid is jointly financed by the federal and state governments.  The federal share is known as the Federal Medical Assistance Percentage (FMAP).  The FMAP is determined annually through a formula comparing each participating state’s average per capita income level with the national income average.  By law, the FMAP cannot be less than 50%, or more than 83% of the state’s total program costs.  42 U.S.C. § 1396d(b). 

Participating states pay health care providers directly for services provided to Medicaid beneficiaries.  By law, states must establish payment rates sufficient to enlist enough providers so that benefits would be available to Medicaid beneficiaries at least to the same extent those benefits would be available to the general population.  States must also provide a Medicaid disproportionate share payment to hospitals serving disproportionately more low-income patients.  These payments are limited to a certain percent of total Medicaid spending.  States may also impose nominal cost-sharing obligations on Medicaid beneficiaries with certain exceptions.  States may not require cost-sharing by pregnant women, children under age 18, and hospital and nursing home patients who are expected to “spend down” their assets to receive Medicaid assistance.  2004 Green Book, supra, at 15-Medicaid-30. 

Agency Guidance

The Centers for Medicare and Medicaid Services (CMS), within the U.S. Department of Health and Human Services (HHS) is responsible for federal oversight of the program.  See  Each state is responsible for the design and administration of its own program within the federal guidelines. 

Future Direction

Congress is expected to continue legislating changes to Medicaid.  Recent legislation has supported several Medicaid initiatives.  The Deficit Reduction Act, Pub. L. No. 109-171, and the State High Risk Pool Funding Extension Act of 2006, Pub. L. No. 109-172, authorize grant funding for qualified state high risk pools for fiscal years through 2010.  CMS Fact Sheet, Overview of Public Law No: 109-172 Extension of Funding for Operations of State High Risk Health Insurance Pool Funding (Dec. 1, 2008), available at

Created through the Deficit Reduction Act of 2005, Medicaid grants have allowed states to fund local and rural initiatives redirecting non-emergent care towards community health centers, urgent care clinics, and other similar settings.  CMS Press Release, Medicaid Grants to Help Improve Access to Primary Care and Avoid Unnecessary ER Visits (Apr. 17, 2008), available at

Medicaid is the largest single payer of institutional care and has focused efforts on initiatives designed to better integrate benefits and care for individuals who may need institutional care.  For example, Medicaid’s Independence Plus initiative streamlines Section 1115 Demonstration Projects and Home and Community-Based Service Section 1915(c) waivers by the creation of templates for each program.  CMS Fact Sheet, Overview of Independence Plus Initiative (Dec. 14, 2005), available at

Medicaid’s Integrated Care Initiative is a cross-component workgroup established to address administrative barriers for those individuals dually eligible for Medicare and Medicaid.  CMS Fact Sheet, Overview of Integrated Care Initiative (Feb. 18, 2009), available at

The Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L. No. 106-170, offers states the flexibility to cover disabled workers at higher income and resource levels than otherwise permitted.  CMS Fact Sheet, Ticket to Work and Work Incentives Improvement Act of 1999, Medicaid Infrastructure Grants (Oct. 15, 2008), available at

In many states, managed care organizations administer various Medicaid programs under contracts with the states.  See, e.g., the Minnesota Senior Health Options program at

Conclusion and Common Areas of Concern

As a federal-state partnership, Medicaid is buffeted by politics at both levels.  States face requirements for annually or semiannually balanced budgets, unlike the federal government.  Medicaid is often the largest item on state governors’ budgets.  While the variability among the state-designed and administrated programs increases the complexity of Medicaid, that variability is also the source of ingenuity in Medicaid. Medicaid’s greatest challenge is the mismatch between what is asked of Medicaid and what is allocated to meet these objectives.  Medicaid is the largest health program in the country, the largest insurer for the disabled and the institutionalized, the largest financier of obstetrical services, and covers one quarter of all children.  Despite Medicaid’s role as a social insurance program, Medicaid continues to be debated as a “welfare” program and is a last priority for funding.  Thus, Medicaid proponents argue that it should be recognized as the mainstay in the American health care system that it has become.  Robert I. Field et al., The Future of Medicaid: What Will Medicaid Look Like in 2010?, 13 Managed Care Supp. 8 (2004). 


AHLA would like to thank Terri Hogan for drafting the initial content of this article.