Escalating Federal Share of Total Medicaid Spending

As Congress weighs Medicaid reform, policymakers need to recognize the significant shift in the burden of financing Medicaid from states to the federal government over the past few decades. The federal government provides an open-ended reimbursement of state Medicaid expenditures, with the reimbursement percentage dubbed the federal medical assistance percentage (FMAP). As shown by this week’s Paragon Pic, the federal government has historically reimbursed about 57 percent of the total bill. Now, the federal government reimburses about 67 percent of the total bill.

The ACA Medicaid expansion is responsible for much of the shift in costs to the federal government. The ACA created a much higher FMAP for the expansion population of able-bodied, working-age adults relative to the rate states receive for traditional Medicaid enrollees like children, pregnant women, seniors, and people with disabilities. In addition, from 2020 through 2023, states received a higher FMAP because of pandemic-era policies.

Importantly, the statutory FMAP does not represent the true ratio of Medicaid expenses borne by the federal government. The reason is that states have developed sophisticated money laundering schemes that result in the federal government reimbursing artificial state expenditures. In short, the federal government provides states with money for state accounting gimmicks that just give the appearance of expenditures. Based on previous work from the Government Accountability Office, the effective FMAP was about 5 percentage points greater than the statutory FMAP in 2018. Assuming the schemes raise the federal share by 5 percentage points, the actual historic federal share of expenses would have been about 62 percent and the current rate would be about 72 percent. The growth in financing schemes has increased substantially, meaning the federal government could be bearing about three-quarters of the overall Medicaid bill.