How Unfair Is Medicaid Funding?

On the average, the federal government pays about two-thirds of the costs of Medicaid, and it makes funds available to the states on a matching basis. In theory, the federal funding formula is designed to redistribute money from wealthier states to poorer states by giving poorer states a higher match for every dollar they spend. However, there is no cap on the amount the federal government matches. The more a state spends, the more it receives. In practice, states with above-average per capita incomes tend to adopt more liberal eligibility requirements and cover more people. They also tend to spend more per recipient.

For example, the average total expenditure per Medicaid enrollee in 2007 was $5,163. However, New York, a high-income state, spent twice as much as low-income Alabama ($8,450 versus $3,945).[1]

As a result, the distribution of federal dollars under the program is more consistent with a policy of taking from the poor and giving to the rich:[2]

  • In 2009, Texas had 9.9 percent of the nation’s total poverty population, but received only 6.7 percent of federal Medicaid funds.
  • New York, on the other hand, had about 6.6 percent of the national poverty population, but received 12.1 percent of federal Medicaid dollars.

A much fairer way to distribute funds would be to give each state a percent of federal Medicaid spending, based on its percent of the nation’s poverty population. We will save the topic of Medicaid reform for future posts. Until then, the curious reader may wish to consult my Independent Institute book, Priceless: Curing the Healthcare Crisis.

  1. Pamela Villarreal and Michael Barba, “Update on Federal Medicaid Funding,” National Center for Policy Analysis, Brief Analysis No. 744, May 10, 2011.
  2. Villarreal and Barba, “Update on Federal Medicaid Funding.”

[Cross-posted at Psychology Today]

John C. Goodman is a Research Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the Independent books, Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America.
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