Snapshot Balancing State Medicaid Budgets

State Medicaid budgets are driven by people, services, payments, administration and funding, specifically:  

• The total number of people enrolled. 
• The types and volume of services used.  
• Payments made to providers and managed care organizations. 
• The administration of the program.  
• The federal and state share of funding.  

The Medicaid program is countercyclical, which means that broader economic conditions can affect both the number of people enrolled and state revenue to cover program costs.  

• When state economic conditions are strong, fewer people are enrolled in the program and the state takes in more revenue to cover program costs. However, when broader economic conditions decline, more people may become eligible for Medicaid as state revenues simultaneously decrease. 

Certain populations account for a disproportionate share of program costs.  

• Older adults and people with disabilities make up approximately 23% of total Medicaid enrollees but account for over half of Medicaid spending.  
• In 2022, the national median spending per enrollee per year ranged from $3,822 for children to $25,639 for individuals with disabilities. 

In 2024, nearly half of responding states reported Medicaid budget challenges from factors like inflation, efforts to address workforce shortages, costs of prescription drugs, increased per person costs and health care needs (also referred to as acuity), benefit enhancements and increased provider payment rates.  

While state general funds account for most of the state’s share of program spending, states may currently use Medicaid-specific funding sources, like provider taxes and other state and local funding sources to pay for a portion of the state share of the Medicaid program. However, current budget proposals under consideration in Congress could curtail state use of provider taxes in the future. 

Identify cost drivers. States can use health care cost commissions, task forces or data from all-payer claims databases to identify drivers of cost growth and recommend policies to limit what they may deem as unnecessary growth in health care spending.  

• Nevada created an all-payer claims database through SB 40 in 2021. Information from the database was used to create a Medicaid Cost Driver Analysis in December 2024. 

Oversight. States can oversee spending and track revenue sources. 

• Arkansas SB 527 (2025) increased the medical-loss ratio for Medicaid managed care organizations from 80% to 85% and requires the department to establish and maintain a process for tracking pharmacy rebates. 
• Kentucky HB 695 (2025) created the Medicaid Oversight and Advisory Board and directs the state Medicaid department to monitor utilization rates and expenditures for Medicaid covered behavioral health and substance use disorder services.  

Improve outcomes. States can improve health outcomes to drive down program costs.  

• Pennsylvania HB 1677 (2018) required the state Medicaid agency to identify and analyze potentially avoidable events—such as avoidable hospital readmissions—and their costs, and report actual hospital and managed care performance against statewide norms.   
  • According to the state’s 2025 managed care outcomes program report, the department reduced capitation rates for managed care organizations by more than $1.8 billion over five years for potentially avoidable events. 

Contract program size. States can reduce Medicaid spending by reducing provider payment rates, limiting or eliminating benefits, or limiting eligibility. 

• In 2024, eight states—California, Colorado, Maine, Michigan, Oklahoma, Rhode Island, South Carolina and Washington—decreased supplemental payments for hospitals, according to KFF. 

Maximize revenue. To cover program costs, states can currently increase revenue by levying Medicaid provider taxes or leveraging other state and local funds for the federal match.  

• Michigan H 5695 (2024) directed the state Department of Health to use local funds to provide supplemental payments to ground emergency medical transportation providers owned or operated by governmental entities that provide emergency transportation to Medicaid recipients.  

This publication is supported by a grant from the Commonwealth Fund.