Introduction
Medicaid, Title XIX of the Social Security Act, is a joint federal-state program that finances health care to the poor.[1] When it was first signed into law, Medicaid eligibility was limited to low-income children, pregnant women, parents of dependent children, the elderly, and people with disabilities. In the sixty years since the program was enacted, however, it has strayed from its mission of providing healthcare for the most vulnerable and has become a steppingstone toward universal government-run health insurance.
This explainer will outline how Medicaid functions, the program’s costs, its influence on healthcare in the United States, and how the proposed policy changes in 2025 could reshape the program.
How Does Medicaid Work?
Medicaid is divided into two groups: traditional Medicaid and the Medicaid Expansion group. Before discussing the differences between the two, it’s important to understand that there are strings attached. For a state to participate in Medicaid (either traditional or expansion), the federal government requires that state to provide Medicaid coverage for certain eligibility groups, including[2]:
Certain low-income families, including parents, that meet the financial requirements of the former Aid to Families with Dependent Children (AFDC) cash assistance program;
Pregnant women with annual income at or below 133% of the Federal Poverty Level (FPL);
Children with family income at or below 133% of FP;
Aged, blind, or disabled individuals who receive cash assistance under the Supplemental Security Income (SSI) program;
Children receiving foster care, adoption assistance, or kinship guardianship assistance under the Social Security Act (SSA) Title IV–E;
Certain former foster care youth;
Individuals eligible for the Qualified Medicare Beneficiary program; and
Certain groups of legal permanent resident immigrants.
Federal law provides two primary benefit packages for state Medicaid programs: traditional benefits and alternative benefit plans (ABPs). These benefit categories (taken from the Congressional Research Service) are recreated in Table 1. States also have some flexibility through Medicaid program waivers, which allow them to be exempt from certain federal requirements. These include research and demonstration projects (Section 1115), managed care/freedom of choice programs (Section 1915(b)), and home and community-based services (Section 1915(c)). To receive a waiver, a state must meet federal financing requirements such as budget neutrality, cost-effectiveness, or cost-neutrality.[3]
It is also important to note that Medicaid spending is often lumped in with the Children’s Health Insurance Program (CHIP) and similar federal subsidies created under the Patient Protection and Affordable Care Act (Affordable Care Act or ACA). The CHIP program provides health coverage to eligible children in families with incomes above the Medicaid threshold, either through Medicaid or separate state programs. The federal subsidies created under the ACA include premium tax credits (which subsidize the cost of an insurance premium) and cost-sharing reductions (reducing out-of-pocket costs such as deductibles, copays, and coinsurance) for those who purchase health insurance through a government-created healthcare marketplace.
Traditional Medicaid
Traditional Medicaid covers both primary and acute care as well as long-term services and supports (such as care for disabled adults and individuals with chronic illnesses). Eligibility is limited to low-income children, pregnant women, parents of dependent children, the elderly, and people with disabilities. In this program, states are guaranteed federal matching dollars without a cap for qualified services, based on a formula that matches at least 50 percent of state spending. The portion of the federal government’s share of most Medicaid expenditures is known as the Federal Medical Assistance Percentage (FMAP). This matching rate increases as state per-capita income decreases.
Under traditional Medicaid, states define the specific features of each covered benefit within four broad federal guidelines:
Each service must be sufficient in amount, duration, and scope to reasonably achieve its purpose. States may place appropriate limits on a service based on such criteria as medical necessity.
Within a state, services available to the various population groups must be equal in amount, duration, and scope (the comparability rule).
With certain exceptions, the amount, duration, and scope of benefits must be the same statewide (the statewideness rule).
With certain exceptions, enrollees must have freedom of choice among health care providers.[4]
Looking ahead to FY 2026 (October 1, 2025 – September 30, 2026), the federal matching rates for state funds are expected to range from 50 percent (the mandatory minimum matching rate) to nearly 77 percent.[5] Figure 1 shows the federal Medicaid FMAP matching rate for each state.
Figure 1: Federal FMAP Percentages, FY 2026
Sources: KFF estimates of increased FY 2026 FMAPs based on Federal Register, November 29, 2024 (Vol 89, No. 230), pp 94742-94746.
Note: Estimates are rounded to the nearest whole number.
The Medicaid Expansion Group
Under the Affordable Care Act (ACA), states had the option to expand Medicaid to non-elderly adults with income up to 133 percent of the Federal Poverty Level. When states were initially allowed to expand Medicaid starting January 1, 2014, the federal government promised to cover 100 percent of Medicaid expansion costs to encourage states to participate. With this promise of a “free lunch,” many states rushed to expand Medicaid, sharply increasing enrollment. By 2020, however, the federal match rate for the expansion program was reduced to 90 percent. As a result, states had to increase their own Medicaid spending, on average, $26.7 billion from 2017 to 2022 from their own sources.
As of 2025, all but 10 states have expanded Medicaid.[6] Those states are shown in Figure 2.
Figure 2: States that Have Not Expanded Medicaid as of 2025
Sources: KFF tracking and analysis of state actions related to adoption of the ACA Medicaid expansion and Searing, Adam. “Federal Funding Cuts to Medicaid May Trigger Automatic Loss of Health Coverage for Millions of Residents of Certain States.” Say Ahhh! Georgetown Center for Children and Families, November 27, 2024
How Much Does Medicaid Cost? Who Pays?
Given that Medicaid is a joint federal and state program, it is important to examine the costs of Medicaid at the federal and state levels. At the federal level, Medicaid, the Children’s Health Insurance Program (CHIP), and other healthcare marketplace subsidies enacted by the ACA cost $759 billion in FY 2024. Put another way, for every dollar the federal government spent, eleven cents of that dollar went to Medicaid, CHIP, and the ACA subsidies.[7]
At the state level, Medicaid accounts for about 30 percent of total state spending (capital inclusive) and is the single largest expenditure in all state budgets. For every dollar the average state spends, thirty cents go to Medicaid—only ten cents come from state revenue while the remaining 20 cents come from federal transfers.[8]
Although Medicaid was designed to be a “joint” funding program, state policymakers have found ways to get the federal government to cover the lion’s share of Medicaid spending. This reflects the incentives elected officials face: using accounting gimmicks to offer more generous Medicaid spending while passing the cost to federal taxpayers can help them win reelection.
This problem was exacerbated by Medicaid expansion under the ACA. Figure 3 (recreated from the CRS report) shows the breakdown of federal and state Medicaid spending. The percentages atop each column indicate the federal share of total Medicaid spending.
Figure 3: Federal and State Shares of Medicaid Spending
Sources: Congressional Research Service “R43357: Medicaid: An Overview,” Figure 6: Federal and State Actual Medicaid expenditures CMS, Form CMS-64 Data as reported by states to the Medicaid Budget and Expenditure System, as of May 29, 2024, at https://www.medicaid.gov/medicaid/financial-management/state-expenditure-reporting-for-medicaid-chip/expenditure-reports-mbescbes. CPI-U inflation data collected from US Bureau of Labor Statistics
Notes: CMS, Form CMS-64 Data as reported by states to the Medicaid Budget and Expenditure System, as of May 29, 2024, at https://www.medicaid.gov/medicaid/financial-management/state-expenditure-reporting-for-medicaid-chip/expenditure-reports-mbescbes.
In the end, federal taxpayers are footing the bill for Medicaid. However, as the national debt continues to strain the federal budget and crowd out other priorities, policymakers in DC are desperate to cut costs. One likely area is federal Medicaid spending. If the federal government were to change the matching rates of either traditional Medicaid or Medicaid expansion, state spending on Medicaid would rapidly increase and crowd out other spending. In more fiscally distressed states, this could spur a fiscal crisis.
How Does Medicaid Impact Healthcare?
The size of Medicaid means that it shapes almost every corner of the American healthcare system, from hospital and acute care to long-term care to medical research. The program covers one in five Americans and finances 19 percent of all health spending in the United States. Here are some of the results of that influence.[9]
Increasing Coverage with Little to Show for Health Access or Outcomes
Medicaid increases healthcare coverage. Thanks to the Medicaid Expansion under the ACA and more generous federal matching programs created during the COVID-19 era and through the Biden administration’s stimulus packages, enrollment in Medicaid dramatically increased and the percentage of uninsured Americans decreased, reaching an all-time low in 2022.[10]
Additionally, while use of healthcare services increased, other negative outcomes emerged that decreased access to care, especially for those in traditional Medicaid. Cannon (2022a) notes that the Medicaid Expansion under the ACA creates an incentive for state policymakers to prioritize Medicaid expansion group recipients over traditional Medicaid recipients.[11] Blase and Gonshorowski (2025) confirmed these findings, noting that Medicaid expansion decreased access to care, crowded out private options, and shifted funds away from the poorest Medicaid recipients.[12]
In a review of the literature, Sigaud (2025) also finds depressing results[13] States that expanded Medicaid saw longer wait times and reduced access to care for traditional Medicaid enrollees. Additionally, he notes that symptoms of depression increased among near-elderly adults on Medicaid before and after expansion, especially among rural residents with extremely limited access to mental health providers. He also notes slower ambulance response times and greater delays in the emergency room.
Cementing the Relationship Between Employment and Healthcare
Medicaid expansion under the Affordable Care Act further entrenched employer-sponsored insurance (ESI) as the backbone of American healthcare. The ACA kept the ESI tax structure in place, essentially creating what Cannon (2022b) calls “an implicit penalty on workers who do not (a) surrender control of a sizable portion of their earnings to an employer; (b) enroll in a health plan that their employers choose, control, and revoke upon separation; and (c) pay the balance of the premium directly.”[14]
In an ideal world, Americans would not need to leave their jobs to change healthcare provider networks. Unfortunately, if Americans want a different health insurance package, they must “fire” their employer, pay a large tax penalty for choosing an employer-sponsored plan, or be stuck with an inferior, public option.
Increasing the Cost of Healthcare
Medicaid costs for healthcare are much greater than the costs of healthcare in the private sector. In my AIER paper “The Work vs Welfare Tradeoff Revisited,” I found that Medicaid paid more per full-year equivalent enrollee than the average annual single premium for an employer-sponsored plan in 43 states.[15] Despite the higher payments, health outcomes for Medicaid recipients are not better than those of Americans with private insurance.
The reason why Medicaid is so costly comes from the incentives created under the joint federal-state funding relationship, as discussed in the previous section. Cannon (2022a) elaborates, “Spending $1 on police buys $1 of police protection. Spending $1 on Medicaid, however, buys $2 to $10 of medical or long-term care. Medicaid rewards states for spending the marginal dollar on medical and long-term care even when spending it on police, education, or transportation would provide greater benefit.”[16]State officials have an incentive to maximize Medicaid while cutting basic public services. The open-ended federal matching system allows states to maximize federal matching dollars (especially for expansion populations) through gimmicks such as provider tax loopholes.[17]As spending on the expansion population increases, traditional Medicaid enrollees are pushed aside, leading to less access to care and worsening health outcomes.
The Government Accountability Office (GAO) regularly lists Medicaid (and its relative Medicare) among the “High-Risk” list for improper payments. The GAO notes that Medicaid program integrity must be strengthened through both legislation and “coordinated effort across multiple entities.”[18] Additionally, America is one of the most charitable nations in the world. In closing, Mueller opines,
In other words, Medicaid is rife with waste, fraud, and abuse, and fixing it is no small task.
Increased Regulatory Complexity
Medicaid also has a significant impact on the nature and shape of healthcare regulations. Federal rules dictating how states shape their Medicaid policies discourage innovation, research, and flexibility because state policymakers want to maximize those federal matching dollars. Furthermore, states will shape their own healthcare regulations to ensure compliance with federal Medicaid guidelines and maximize federal Medicaid funding. This results in states limiting access to new therapies to control costs.
What Do the 2025 Policy Changes Mean for Medicaid?
In 2025, two major policy changes have impacted Medicaid: proposed changes under the “One Big Beautiful Bill” (H.R. 1) and a Centers for Medicare and Medicaid Services proposed rule to close a provider tax loophole. These changes have the potential to provide immediate fixes to Medicaid, but much deeper reforms are needed.
The largest change comes from the legislative and CMS rule changes toward Medicaid provider taxes. The changes in H.R. 1 phase the Medicaid provider tax rate from 6 percent to 3.5 percent and freeze any new provider taxes created[19] It would also mandate waiver resubmissions and suspend existing approvals in noncompliant states. These reforms would ensure Medicaid financing aligns with federal intent, helps reduce wasteful spending, and prevents states from misusing federal Medicaid funds for other general fund programs.[20] It would also mandate waiver resubmissions and suspend existing approvals in noncompliant states. These reforms would ensure Medicaid financing aligns with federal intent, helps reduce wasteful spending, and prevents states from misusing federal Medicaid funds for other general fund programs.
Additionally, H.R. 1 also strengthens work requirements and eligibility checks, ensuring that verification standards are improved and states are allowed to remove ineligible enrollees from Medicaid.
These reforms, unfortunately, only scratch the surface. Deeper changes to Medicaid (as well as healthcare broadly) are needed. One such change is offered by economist David Rose. Rose writes,
“To put it simply, eliminate Obamacare, Medicare, and Medicaid and replace them with a national healthcare voucher system. This transformative change for American healthcare could be limited to the level paid for with a national sales tax, and our unfunded liability problems would simply disappear. While, for practical reasons, this would likely have to start at the national level, the goal could be to then spin it off to the states.”[21]
There is no shortage of ideas available for healthcare reform. The problem lies in changing the incentives that millions in the healthcare sector face (both in government and the private sector) that keep them maintaining the status quo.
Conclusion
Medicaid was designed to provide a safety net for the most vulnerable Americans. After sixty years, trillions spent, and millions of Americans enrolled, the program has little to show for it. It has strayed from its mission of helping the poor because policymakers prioritize maximizing federal matching rates. Medicaid spends more yet fails to provide better health care access or health outcomes, increases costs, and discourages choice and innovation in healthcare.
The United States—the wealthiest nation in history—and its people deserve health care that delivers access, valuable health outcomes, affordability, and choice. Market-driven solutions can provide such a system.
Footnotes
[1] Social Security Administration. Medicaid. In Annual Statistical Supplement to the Social Security Bulletin, 2015. https://www.ssa.gov/policy/docs/statcomps/supplement/2015/medicaid.html.
[2] Congressional Research Service. Medicaid: An Overview. R43357. Washington, DC: Library of Congress, 2023. https://www.congress.gov/crs-product/R43357.
[3] Ibid.
[4] Ibid.
[5] KFF. “Federal Matching Rate and Multiplier.” KFF State Health Facts. Accessed July 9, 2025. https://www.kff.org/medicaid/state-indicator/federal-matching-rate-and-multiplier.
[6] KFF. “Status of State Medicaid Expansion Decisions.” KFF. Accessed July 9, 2025. https://www.kff.org/status-of-state-medicaid-expansion-decisions.
[9] Office of the Assistant Secretary for Planning and Evaluation. The Benefits of Expanding Medicaid Eligibility to Low-Income Adults: Evidence from State Expansions. U.S. Department of Health and Human Services, March 28, 2022. https://aspe.hhs.gov/reports/benefits-expanding-medicaid-eligibility.
[10] Office of the Assistant Secretary for Planning and Evaluation. 2022 Uninsurance Rate at an All-Time Low: New Estimates Highlight the Role of the ACA and Medicaid Expansion. U.S. Department of Health and Human Services, September 2022. https://aspe.hhs.gov/reports/2022-uninsurance-at-all-time-low.
[11] Cannon, Michael F. Cato Institute. “Medicaid and the Children’s Health Insurance Program.” In Cato Handbook for Policymakers, 9th ed., 2022. https://www.cato.org/cato-handbook-policymakers/cato-handbook-policymakers-9th-edition-2022/medicaid-childrens-health-insurance-program#perverse-incentives.
[12] Blase, Brian and Gonshorowski, Drew. “Resisting the Wave of Medicaid Expansion: Why Florida Is Right.” Paragon Institute. May 1, 2024. https://paragoninstitute.org/medicaid/resisting-the-wave-of-medicaid-expansion-why-florida-is-right.
[13] Sigaud, Liam. “Losing Focus: How the ACA’s Medicaid Expansion Left Traditional Enrollees Behind.” Paragon Prognosis, February 10, 2025. https://paragoninstitute.org/paragon-prognosis/losing-focus-how-the-acas-medicaid-expansion-left-traditional-enrollees-behind/#:~:text=A%202021%20analysis%20in%20Health,adverse%20outcomes%2C%20including%20higher%20mortality.e.
[14] Cannon, Michael F. Cato Institute. “The Tax Treatment of Health Care.” In Cato Handbook for Policymakers, 9th ed., 2022. https://www.cato.org/cato-handbook-policymakers/cato-handbook-policymakers-9th-edition-2022/tax-treatment-health-care#the-tax-exclusion-for-employer-sponsored-health-insurance.
[15] Savidge, Thomas. “The Work vs. Welfare Tradeoff Revisited.” American Institute for Economic Research, June 17, 2022. https://aier.org/article/the-work-vs-welfare-tradeoff-revisited/#medicaid.
[16] Cannon (2022a). supra note 11.
[17] Blase, Brian. Medicaid Provider Taxes: A Gimmick that Exposes the Flaws in Medicaid’s Financing. Arlington, VA: Mercatus Center at George Mason University, June 20, 2023. https://www.mercatus.org/research/research-papers/medicaid-provider-taxes-gimmick-exposes-flaws-medicaids-financing.
[18] U.S. Government Accountability Office. Medicaid Financing: Actions Needed to Ensure Provider Taxes Do Not Undermine Federal Oversight. GAO-25-107743, May 2025. https://www.gao.gov/products/gao-25-107743.
[19] U.S. Congress. H.R. 1: “One Big Beautiful Reconciliation Act of 2025,” 119th Cong., 1st sess., § 71115, “Provider Taxes” (2025). https://www.congress.gov/bill/119th-congress/house-bill/1/text
[20] Centers for Medicare & Medicaid Services. Preserving Medicaid Funding for Vulnerable Populations by Closing Health Care-Related Tax Loophole: Proposed Rule. Fact Sheet. Washington, DC: U.S. Department of Health and Human Services, May 2, 2024. https://www.cms.gov/newsroom/fact-sheets/preserving-medicaid-funding-vulnerable-populations-closing-health-care-related-tax-loophole-proposed#_ftn2.
[21] Rose, David C. “Want to Fix Medicaid? Look to Milton Friedman.” The Daily Economy, June 6, 2025. https://thedailyeconomy.org/article/want-to-fix-medicaid-look-to-milton-friedman.
