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Medicaid matching rate reform has long been recognized as needed on equity grounds. But there are considerable political barriers to changing the method states have come to depend on to allocate billions of dollars every year. This year, as Congress seriously considers major health care reform, the topic of changes in federal matching rates has emerged, almost of necessity, as Congress looks for ways to reconcile the objective of expanded health insurance coverage with the limited ability of the lower income states (where many of the uninsured reside) to pay more than they currently do for their Medicaid programs.
Federal Medicaid payments to the state have long been based on a formula that calculates a Federal Medical Assistance Percentage (FMAP) for each state based on its per capita income. The formula generally provides higher percentages for lower-income states, and lower percentage for high-income states subject to a lower limit of 50 percent which ensures the federal government pays at least half the cost of Medicaid in every state.
We suggest a new approach to setting federal Medicaid matching rates--one that is relatively easy to understand and has some desirable properties of interstate equity. The objective is to determine what would it take to provide for equal benefits for the poor and equal tax burdens for state taxpayers? We simply ask what matching rates would be needed to provide each state with the ability to achieve the U.S. average level of benefits per poor person while spending a uniform average percentage of state taxpayer income on the state share of Medicaid.
Mark V. Pauly is a professor in the Health Care Management Department at the University of Pennsylvania's Wharton School and an adjunct scholar at AEI. Thomas W. Grannemann is a health economist and an associate regional administrator for the Centers for Medicare and Medicaid Services in Boston.