Stateline Story

Federal Government Shrinks Medicaid Matching Grants

States are struggling to cover record numbers of people on Medicaid, but they will have to cope with a $1.1 billion drop in federal help in paying the health care bills of the needy for the next two years.

The federal government's contribution to Medicaid is shrinking -- the biggest two-year drop in the program's history -- because of the formula used to calculate the federal share of costs under Medicaid and a related program for needy children called the State Children's Health Insurance Program (SCHIP). Every year the federal government tinkers with the formula, affecting each state's share of Medicaid expenses differently.

While Congress debates cuts as deep as $25 billion to $45 billion over 10 years in the $330-billion-a-year Medicaid program, the formula cuts are a sure-fire hit that will only add to the budget troubles of states already facing spiraling Medicaid costs. New Mexico stands to lose $81 million in fiscal 2006, Alaska ($80 million) and Louisiana ($69 million), according to the Federal Funds Information for States (FFIS). (Click here for a list of matching rates for fiscal 2006 that the federal government published in late 2005.)

Even Mississippi, which traditionally gets the highest percentage of federal matching dollars in the country, is getting less. In the late 1960s, Mississippi got 83 cents from the federal government for each $1 in Medicaid expenses the state paid. Mississippi's rate will dip to 76 percent in fiscal 2006 and 75 percent in fiscal 2007, the state's lowest-ever rates.

Generally speaking, the richer the state, the less money it gets from the federal government to pay for Medicaid, which helps cover the medical bills of 53 million Americans.

The formula is based largely on each state's average personal income. So, while the rebound in the national economy may be putting more money in individual's pockets, it lowers the percentage of a state's Medicaid bills that are covered by federal dollars.

The changes for fiscal 2006 mean states will collect $500 million less in federal matching funds, according to Vic Miller, senior fellow at FFIS, a subscription service for the National Conference of State Legislatures (NCSL) and the National Governors Association that tracks budget issues affecting states.

"Simply providing sufficient funds for the high rate of growth in Medicaid is troublesome enough as it is," said Arturo Perez, a fiscal expert at the NCSL. Enrollment in Medicaid has jumped 40 percent in the past five years and, in many states, Medicaid has surpassed elementary and secondary education as the largest single piece of state budgets.

"For those states that are going to have to pay more (under the new formula calculations), this simply adds additional burdens to budgets that have been stretched in recent years," Perez said.

The calculation is technically called the Federal Medical Assistance Percentage (FMAP) and is based on a three-year average of state per-capita personal income. That level is then compared to the national average. For a wealthy state such as Connecticut, the federal government will contribute 50 cents of every $1 the state pays out. The highest federal contribution rate allowed is 83 percent.

For fiscal 2006, 29 states will get fewer matching Medicaid dollars from the federal government. Preliminary figures for fiscal 2007 show that 30 states are poised to collect less federal matching money, according to FFIS. The preliminary information is important to states that are working on their budgets, particularly for the 21 states that have two-year budgets. Fiscal 2006 begins July 1 for all but four states.

In dollar terms, the largest projected drops for fiscal 2007 would hit Pennsylvania, which stands to lose $198 million, Ohio ($100 million), Missouri ($87 million), Tennessee ($85 million), Louisiana ($67 million), Kentucky ($54 million), Alabama ($52 million) and Arizona ($46 million).

Sujit M. CanagaRetna, who specializes in state budgets for the Council of State Governments, called the cuts in federal Medicaid funds "an additional blow that is going to pummel state finances" after four years of tight budgets.

The federal matching rate is affected not just by a rise or fall in state residents' paychecks, but by "state income" from somewhat unusual sources. For example, the $16 billion that General Motors Corp. put in its pension funds in 2003 is recorded as income in states where GM workers and retirees live, such as Michigan. Microsoft Corp.'s dividend payments of $25 billion in 2004 affected a number of states but especially Washington state, where the company is headquartered.

For most states, the most pressing issue is that many simply are running out of money in their Medicaid budgets. Maine, for example, was notified last November that the state Medicaid rate would decrease about 2 percent so that it must pay more of the cost of the program, punching an estimated $75 million hole in the state budget over the next two years, according to the Bangor Daily News.

Through the first eight months of the current fiscal 2005, Medicaid and other health care spending is outstripping appropriations in 23 states, according to recent figures from NCSL. And if a state cuts it Medicaid program, it gets less federal matching funds.