Understanding Medicaid: A Primer for State Legislators


This page summarizes key elements of the Medicaid program, including basic answers to questions about the design and cost of the Medicaid program, why legislators should care about it, who and what it covers, why the program is costly for states, and what strategies can help improve quality while controlling Medicaid costs.

Medicaid has undergone many changes and innovations over its 50-year history. This resource is intended to provide lawmakers with information about the program, so they can make informed decisions.

This primer concludes with information about the challenges of getting reliable data on Medicaid programs from around the country, Top Ten Medicaid Questions listed belowand offers resources and tools that can help state policymakers develop evidence-based, cost-effective policies to support their Medicaid programs.

In the list below, click on a question to expand with the answer.



What is Medicaid?

Medicaid is a publicly financed program that provides health insurance for millions of low-income Americans, including eligible low-income adults, children, pregnant women, elderly adults and people with disabilities. As of May 2019, the Medicaid program covered close to 65.7 million people, or about 20 percent of the population. Many Medicaid beneficiaries have complex and costly needs for health care. Medicaid is a shared program between the federal government and the states. This federal-state partnership program was created by Congress in 1965 (in Title XIX of the Social Security Act). Although Medicaid is an optional program, all states, the District of Columbia, and the commonwealths and territories participate.

The Children’s Health Insurance Program (CHIP), funded jointly by states and the federal government, provides health coverage to additional lower-income children whose family income is higher than Medicaid’s eligibility threshold. States can choose to operate CHIP as a component of their Medicaid program or administer a separate CHIP program. When operating CHIP as a component of Medicaid, generally federal Medicaid rules apply.  When CHIP is administered as a separate program, it generally operates under a set of rules different from Medicaid and allows states to design CHIP programs that look more like commercial insurance.

Medicaid is sometimes confused with Medicare, a separate program that is managed and funded exclusively by the federal government—Medicare covers almost all U.S. citizens age 65 and over (61 million enrollees in June 2019). Medicare relies on Medicaid to cover certain services for low-income older adults, such as long-term services and supports and community-based services. Approximately 10 million people qualified for both programs in 2013 (also known as dual eligible coverage).

While the federal government provides substantial funding and oversight for Medicaid through the Centers for Medicare & Medicaid Services (CMS), each state manages its own Medicaid program. Federal statute establishes the fundamental program parameters. Within the federal parameters, states then determine who is eligible for enrollment, which services are covered, and how services are reimbursed.  The State Plan and any amendments must be approved by CMS in order for states to access federal Medicaid funds.

Illustration of the requirements for making changes to the Medicaid program.FEDERALMEDICAIDAGENCY (CMS)STATE MEDICAL AGENCYSTATE LAWMAKERSSTATE LAWOR REGULATIONMEDICAID STATE PLANAuthorizationand appropriationsState plan amendment (SPA)or Section 1115 Waiver

Why should legislators care about Medicaid?

Medicaid provides health insurance for low-income people who may have complex needs and require expensive care. States bear substantial costs of providing health care for indigent patients. When low-income people have access to care through Medicaid the costs are shared with the federal government rather than being shifted elsewhere, such as to other tax-funded programs, to emergency rooms, or to private insurance plans in the form of higher premiums. Medicaid helps states pay for “uncompensated care” for indigent patients, those who are uninsured and cannot pay for their health care. When people have access to care, chronic conditions can be managed more effectively—possibly preventing a crisis or emergency care, and ultimately reducing costs.

States face difficult choices about their Medicaid programs. State policymakers balance resources between providing health care services to low-income citizens and other programs such as education, transportation, corrections and other public assistance programs. Medicaid costs have grown over time as a percent of state budgets, and this impacts other state programs—as shown in this graph of state expenditures over the past 20 years:

Shares of Total State Spending: FYs 1995 to 2016


What portion of the state budget goes to Medicaid?

Medicaid’s share of state budgets varies across states and differs depending on how it is calculated. In 2018, Medicaid accounted for approximately 30 percent of total state expenditures (this includes the federal matching funds that are sent to the states for Medicaid). Spending from state funds alone is a lower percentage of the total—the portion of state funds that supported Medicaid was 20.2 percent in 2018. States receive funding from the federal government to support a variety of programs.  Approximately 58.3 percent of all the federal dollars going to the states supports the cost of Medicaid.

As health care costs rise faster than other sectors of the economy, states struggle to keep costs down while preserving other programs and safety-net services for their citizens. Current federal statute requires that state Medicaid programs must cover all people who meet eligibility requirements. The federal government reimburses states a certain percentage of Medicaid costs (which varies by state) for serving all people who qualify. The matching federal funding for state Medicaid costs is called the Federal Medical Assistance Percentage (FMAP).

Donut pie chart displaying the percentage by categoryTotal state expenditures are all federal and state funds.All other28.3%Higher ed.10.1%Trans.8.0%3.1%Public assistance1.3%Medicaid29.7%K-1219.6%Higher ed.9.7%Trans.0.7%6.8%Public assistance1.0%Medicaid20.2%K-1235.8%All other25.8%TOTAL STATE EXPENDITURESSTATE GENERAL FUND EXPENDITURESExpenditures by Budget CategorySource: National Association of State Budget OfficersCorrectionsCorrections

Who receives health coverage through the Medicaid program?

To qualify for Medicaid, individuals must first meet two basic criteria: they must be U.S. citizens (or certain qualified non-citizens such as lawful permanent residents), and they must be residents of the states where they are applying. Federal law requires state Medicaid programs to cover certain populations and allows states the option of covering others. Medicaid is considered an “entitlement program” because states must provide coverage to certain groups or “categories” of people and federal funding is guaranteed for these groups.

The following groups are entitled to services through the Medicaid program (they are sometimes referred to as “categorically eligible”):

  • Low-income infants and children who qualify for Medicaid and/or the CHIP program based on income or other guidelines.
  • Low-income pregnant women and certain parents of qualified children.
  • Low-income individuals of all ages with disabilities.
  • Low-income seniors, most of whom are also covered by Medicare (“dually eligible” for both programs). 

The Affordable Care Act (Public Law 111-148) allows states to expand their Medicaid programs to provide coverage to additional low-income adults who would not otherwise qualify under a “categorical group.” There are different requirements for this population and they are considered a special “expansion population.”

Information on each state’s eligibility levels is available on the website for the Centers for Medicare & Medicaid Services.

eligible groups chart medicaid


Median Medicaid/CHIP Income Eligibility Thresholds, January 2017
Based on federal poverty level

Column charts regarding adopting or not the Medicaid Expansion.ChildrenPregnant WomenParentsChildless Adults297%($59,875)214%($43,142)213%($42,940)201%($40,521)138%($27,820)44%($8,870)138%($16,394)0%($0)Adopting Medicaid expansionNot adopting at this time
Source: Based on results from a national survey conducted by the Kaiser Commission on Medicaid on the Uninsured and the Georgetown University Center for Children and Families, 2017.

Which states have expanded Medicaid?

As of May 2019, approximately 72.2 million people were enrolled in Medicaid (and/or CHIP); this is an increase from 56 million in 2014, when some states expanded their Medicaid programs with significant initial support from the federal government under provisions of the Affordable Care Act. The expansion population primarily includes eligible low-income adults under the age of 65 with incomes up to 138 percent of the federal poverty level. Thirty-six states including D.C. decided to proceed with the expansion and two states partially expanded eligibility to 100 percent of the federal poverty level.  As of August 2019, 11 states have chosen not to expand and eight states expanded using waivers—“waiver applications” request permission from the federal government to design alternative expansion opportunities. 

Medicaid Expansion Map 2019

What services does Medicaid cover?

Federal Medicaid law requires states to cover certain services and allows states to select from a menu of other optional services. Because Medicaid covers so many low-income elderly people and people with disabilities who cannot obtain private sector coverage, its benefits package reflects these special needs.  For example, Medicaid covers some services that most private insurance plans do not cover, such as nursing facilities and other long-term services and supports.

Mandatory Benefits/ Services Optional Benefits/ Services
Inpatient hospital services Prescription Drugs
Outpatient hospital services Clinic services
EPSDT: Early and Periodic Screening, Diagnostic, and Treatment Services (for individuals under 21) Physical therapy
Nursing Facility Services Occupational therapy
Home health services Speech, hearing and language disorder services
Physician services Respiratory care services
Rural health clinic services Other diagnostic, screening, preventive and rehabilitative services
Federally qualified health center services Podiatry services
Laboratory and X-ray services Optometry services
Family planning services Dental Services
Nurse Midwife services Dentures
Certified Pediatric and Family Nurse Practitioner services Prosthetics
Freestanding Birth Center services (when licensed or otherwise recognized by the state) Eyeglasses
Transportation to medical care Chiropractic services
Tobacco cessation counseling for pregnant women Other practitioner services
  Private duty nursing services
  Personal Care
  Case management
  Services for Individuals Age 65 or Older in an Institution for Mental Disease (IMD)
  Services in an intermediate care facility for Individuals with Intellectual Disability
  State Plan Home and Community Based Services- 1915(i)
  Self-Directed Personal Assistance Services- 1915(j)
  Community First Choice Option- 1915(k)
  Tuberculosis Related Services
  Inpatient psychiatric services for individuals under age 21
  Other services approved by the Secretary*
  Health Homes for Enrollees with Chronic Conditions – Section 1945

What is a Medicaid waiver?

States seeking additional flexibility to design their Medicaid programs may apply for formal waivers of some of the statutory requirements from the secretary of the U.S. Department of Health and Human Services (HHS).

A Medicaid waiver is written approval from the federal government (reviewed and determined by the Centers for Medicare & Medicaid Services) that allows states to differ from the rules of the standard federal program. In other words, the state is allowed to “waive” some requirements of the federal program. States have long used waivers for increased flexibility in how they deliver services in a way that meets their unique needs. 

For example, certain eligibility and benefit provisions of the Medicaid statute may be waived in order to explore new approaches to the delivery of and payment for acute care and long-term services and supports. States can use waivers to offer a specialized benefit package to a subset of Medicaid beneficiaries, to restrict enrollees to a specific network of providers, or to extend coverage to groups beyond those defined in Medicaid law.

All states operate one or more Medicaid waivers, which are generally referred to by the section of Social Security Act granting the waiver authority and are categorized either as program waivers or demonstration projects. All waivers must be budget neutral to the federal government – meaning, federal expenditures for the waiver program would not exceed federal expenditures without the waiver.  Approval of states’ waiver applications is at the discretion of the secretary of Health and Human Services.

Medicaid waivers include the following types:

  • Section 1115 waivers allow for experimental, pilot  and demonstration projects to test and evaluate new concepts for improving care, increasing efficiency and reducing costs without increasing federal Medicaid expenditures.
  • Section 1915(b) waivers allow states to implement Medicaid managed care delivery systems. Currently, a large majority of Medicaid beneficiaries receive services through managed care organizations (MCOs). While the MCOs can also be established through a state plan amendment, a waiver is needed for mandatory enrollment of beneficiaries in MCOs. State Medicaid agencies can contract with MCOs to help manage quality, utilization and costs, while also working to improve patient outcomes. 
  • Section 1915(c) Home and Community-Based Services (HCBS) waivers allow beneficiaries to receive long-term services and supports at home or in community settings as an alternative to institutional settings, such as nursing facilities.
  • Combined or concurrent Section 1915(b) and 1915(c) waivers allow a state to contract with MCOs to provide home and community-based services authorized under 1915(c) of the Social Security Act.

What about the cost of Medicaid?

Medicaid accounts for about 17 percent of total state spending, according to The Pew Charitable Trusts.  As health care costs rise faster than other sectors of the economy, states struggle to keep costs down while preserving other programs and safety-net services for their citizens. According to the Medicaid and CHIP Payment and Access Commission (MACPAC), Medicaid spending per person is growing at a comparable or slower rate than private insurance but increasing Medicaid enrollment continues to drive overall increases in state expenditures for Medicaid. 

Outside of enrollment increases, one of the key cost drivers in Medicaid is providing coverage for people with complex health care needs such as multiple chronic conditions and serious disabilities as well as being the primary payer for high-cost services like long term services and supports, including nursing facilities.

Even though people with disabilities and the elderly comprise only about one-fourth of the Medicaid population, they account for nearly two-thirds of all Medicaid spending. In contrast, children, younger adults and pregnant women account for 75 percent of Medicaid enrollment, but only 36 percent of all Medicaid spending, according to a 2014 report from the Kaiser Family Foundation, the most recent aggregate data available. 

medicaid spending by enrollment group

medicaid per person spending


Costs for care per beneficiary vary widely across states, influenced by a number of factors, including what benefits are available and the cost of that care. For example, according to the Kaiser Family Foundation, average annual spending for individuals with disabilities can range from approximately $7,000 to over $30,000. Legislators can influence costs by emphasizing health care management in their state; options include implementing managed care and reforming payment strategies. 

How can states manage Medicaid costs and improve quality?

As Medicaid costs consume a larger share of state budgets, policymakers seek ways to make sure their state’s program is managed as efficiently and effectively as possible. It is important to remember that health care costs have risen in response to several factors, including the rising cost of health services in a fee-for-service payment system, growing numbers of people with complex needs for care and expensive services, and the choice by states to expand their programs to cover more people who would otherwise not have health coverage.

The quickest ways for states to trim Medicaid costs involve changing program eligibility, services, or payments to service providers, which states typically turn to during a budget crisis. Each of these options has its drawbacks.

  • Changing or restricting eligibility shifts costs elsewhere, such as to other state or locally funded programs, to emergency rooms, to private insurance plans in the form of higher premiums, and to providers in the form of debt or charity care.
  • Imposing stringent restrictions on services such as prescription drugs may result in higher costs associated with high-needs patients, including expensive hospital stays or long-term care.
  • Reducing provider payments can result in fewer providers participating in Medicaid, making it difficult to ensure that patients receive needed care.

In the longer term, states have undertaken innovations to help control Medicaid costs, and many are related to increasing value and improving quality. Some states have experimented with value-based purchasing and bundled payments, providing alternatives to the traditional fee-for-service model. Other innovations focus on reducing hospital visits (such as unnecessary trips to emergency rooms or avoidable readmissions after leaving the hospital) by providing coordinated care with care managers who help complex patients navigate the health care system. Other innovations focus on preventing costly medical errors. Some states provide care for Medicaid clients through Accountable Care Organizations, which are designed to help states get the most value for their Medicaid dollars.

Increase Value Improve Quality and Reduce Costs Value-Based Purchasing Reduce Readmissions Bundled Payments Prevent MedicalErrors Accountable CareOrganizations Health Care Internet Technologies

Taking the longest view, states are also considering the programs that address health disparities. Living in poverty is one of the things that predisposes many people to illness and poor health. State Medicaid programs are working to reduce the cost of care for high-needs high-cost patients by considering the cross-sectoral programs that support these families and individuals. For example, some states provide supportive housing services to individuals with disabilities, and others refer Medicaid beneficiaries to programs that help them find and maintain employment in their community. 

Digging Deeper

Why are Medicaid data so important?

States need fast, reliable data in order to make decisions about their Medicaid programs. Capturing information on enrollment and service delivery is difficult because each state Medicaid program has varying capacity for producing timely data through its Medicaid Statistical Information System (MSIS). This makes it difficult to collect (aggregate) data from across the country. A new generation of data systems in the states called the T-MSIS (Transformed Medicaid Statistical Information System) has the potential to improve the completeness, accuracy, and timeliness of state data available to CMS and policymakers. Implementation has been delayed for several years due to the complexity of establishing large database systems that collect information from different states, according to the Governmental Accountability Office.

Many states have improved their data information systems by establishing All Payer Claims Databases (APCDs). Most APCDs gather claims and eligibility data from medical, pharmacy and dental payers to create a comprehensive collection of information on things like cost of care, utilization, patient demographics and quality of health care. The public and private payers that submit information to APCDs vary by state, but often include voluntary and mandated submissions from Medicaid, state employee health benefits programs, some commercial insurers and self-insured employer plans. This gives state lawmakers the cross-cutting information they need to compare Medicaid to the private sector, and discover inefficiencies. Please click here to visit the APCD Council’s webpage tracking state efforts related to APCDs.


Medicaid Online Tools and Resources

Additional resources on the topics and questions covered on this page are listed below in the order in which they were described in this document. In addition, NCSL staff members are available to provide customized research support and provide or arrange for technical assistance for legislators and legislative staff. Email NCSL’s health program staff for assistance or call at 303-364-7700.

Medicaid-Overviews and Primers

Medicaid Costs

Medicaid Enrollment and Outreach

Medicaid Expansion

1115 Waivers: State Summaries

Federal Actions and Reform

Medicaid Data

Best Practices and State Innovations to Improve Quality and Reduce Costs in Medicaid

State Resources and Technical Assistance