With Medicaid now consuming 10 percent of the federal budget and covering more than one-quarter of Americans, taming its spending growth is a top priority for fiscal conservatives. But efforts to right-size the program need to focus on improving states’ incentives.
Since its inception in 1965, Medicaid’s spending has grown from $1 billion annually to over $835 billion in 2024, driven by an open-ended federal financing structure. While states administer Medicaid, the federal government covers about 65 percent of its costs, with no upper limit on what Washington is willing to pay. As a result, state policymakers have little reason to run the program efficiently.
One reform proposal gaining traction among congressional Republicans is to impose a limit on how much Washington reimburses states per Medicaid enrollee, potentially cutting federal expenditures by hundreds of billions of dollars over the next decade.
States would be on the hook for any spending above the per-enrollee cap, which would increase annually based on a pre-specified growth rate. By keeping the cap’s growth rate below projected Medicaid spending under current law, the federal government could reap savings.
