Order Code RL32277
CRS Report for Congress
Received through the CRS Web
How Medicaid Works: Program Basics
Updated February 7, 2004
Elicia Herz (Coordinator),
Jean Hearne, Julie Stone, Karen Tritz,
Evelyne Baumrucker, Christine Scott,
Chris Peterson, and Richard Rimkunas
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

How Medicaid Works: Program Basics
Summary
Medicaid is a means-tested entitlement program that has been in existence for
over 35 years. It provides primary and acute care as well as long-term care to over
40 million Americans at a cost to federal and state governments of approximately
$258.2 billion in FY2002. Of all federally supported social programs, only Medicare
comes close to this level of spending, and only Social Security costs more.
Medicaid is jointly financed by the federal and state governments, but each state
designs and administers its own version of the program under broad federal
guidelines. The complexity of Medicaid presents an enormous challenge for anyone
attempting to generalize about the program. State variability in eligibility, covered
services and how those services are reimbursed and delivered is the rule, rather than
the exception. Furthermore, Medicaid is targeted at individuals with low income, but
not all of the poor are eligible, and not all those covered are poor.
This report summarizes the basic elements of Medicaid. Specifically, it
describes federal Medicaid rules governing: (1) who is eligible, (2) what services are
covered and how they are delivered, (3) how the program is financed and
administered, (4) key provider reimbursement issues, and (5) the significant role of
waivers in expanding eligibility and modifying services and health care delivery
systems. It concludes with a brief history of Medicaid legislation enacted since 1996.
This report will be updated periodically.

Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Families, Pregnant Women, and Children . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1931: Persons Qualifying under the Former AFDC
Program Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Poverty-related Pregnant Women and Children . . . . . . . . . . . . . . . . . . 3
Transitional Medical Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Other AFDC-Related Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Targeted Low-income Children . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Aged and Persons with Disabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Persons Who Qualify for Supplemental Security Income (SSI) . . . . . . 5
Recipients of State Supplemental Payment (SSP) Benefits . . . . . . . . . . 6
Poverty-related Group for the Aged and Disabled . . . . . . . . . . . . . . . . . 6
Coverage for Institutionalized Individuals and Related Groups
Under the Special Income Rule . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Working Individuals with Disabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Qualified Medicare Beneficiaries and Related Groups . . . . . . . . . . . . . 8
Medically Needy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Individuals Qualifying under Demonstration Waivers . . . . . . . . . . . . 10
Women with Breast and Cervical Cancer . . . . . . . . . . . . . . . . . . . . . . 11
Persons with Tuberculosis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Immigrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Medicaid and the Poor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Reimbursement Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Reimbursement for Prescription Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Disproportionate Share Hospital Payments . . . . . . . . . . . . . . . . . . . . . . . . . 32
Upper Payment Limits for Certain Institutional Providers . . . . . . . . . . . . . 33
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Delivery Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Fee-for-service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Types of Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Trends in Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Long-Term Care Delivery System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Medicaid Waiver Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 1115 Waiver Demonstration Programs . . . . . . . . . . . . . . . . . . . . . . 43
Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Program Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 1915(c) Home and Community-based Waiver Programs . . . . . . . . 46
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
List of Figures
Figure 1. Medicaid Enrollees by Basis of Eligibility, FY2000 . . . . . . . . . . . . . . 13
Figure 2. Medicaid Enrollees by Major Enrollment Group, FY2000 . . . . . . . . 13
Figure 3. Medicaid Expenditures per Recipient by Acute and Long-Term
Care and Basis of Eligibility, FY2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Figure 4. Medicaid HCBS Waiver Expenditures by Target Population, 2002 . . 48
List of Tables
Table 1. Federal Share and Total Medicaid Spending for Last Five Years,
1998-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Table 2. Unduplicated Number of Medicaid Recipients by Eligibility
Category for Selected Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 3. Medicaid Eligibles by Basis of Eligibility by State, FY2000 . . . . . . . . 15
Table 4. Medicaid Coverage by Age and Family Income, Calendar Year 2002 . 18
Table 5. Optional Medicaid Services and Number of States Offering Each
Service, November 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Table 6. Medicaid Recipients by Service Category, Fiscal Year 2000 . . . . . . . . 25
Table 7. Total State and Federal Medicaid Payments by Basis of Eligibility,
Type of Service, and as a Percentage of Total Payments, FY2000 . . . . . . . 26
Table 8. Federal Medical Assistance Percentages by State for Fiscal Years
2003 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Table 9. Medicaid Recipients Served Through MCO And/or PHP Plans
by Basis of Eligibility, Fiscal Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Table 10. Total Medicaid Payments for MCO and PHP Recipients by
Basis of Eligibility, Fiscal Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

How Medicaid Works: Program Basics
Overview
Medicaid was enacted in 1965, in the same legislation that created the Medicare
program, the Social Security Amendments of 1965 (P.L. 89-97). It grew out of and
replaced two earlier programs of federal grants to states that provided medical care
to welfare recipients and the aged.
Medicaid is a means-tested entitlement program. It is jointly financed by federal
and state funds. Federal contributions to each state are based on a state’s willingness
to finance covered medical services and a matching formula. Each state designs and
administers its own program under broad federal rules. The Centers for Medicare
and Medicaid Services (CMS), within the U.S. Department of Health and Human
Services (HHS), is responsible for federal oversight of the program. In FY2002, total
(preliminary) federal and state spending on Medicaid reached $258.2 billion (see
Table 1), slightly exceeding total outlays for Medicare. No other means-tested cash
or noncash program comes close to approaching this spending level. In fact, of all
federally supported social programs, only Social Security costs more.
Table 1. Federal Share and Total Medicaid Spending
for Last Five Years, 1998-2002
($ in billions)
Percentage change
Year
Total Medicaid spending
Federal share
in federal share
1998
$177.3
$100.1
6.6%
1999
$189.9
$107.4
7.3%
2000
$206.1
$116.9
8.8%
2001
$228.0
$129.8
11.0%
2002
$258.2
$146.2
13.0%
Sources: CRS tabulations of preliminary CMS Form 64 data, 1998-2001, CMS summary programdata
at [http://www.cms.hhs.gov/medicaid/mbes/sttotal.pdf].
To many, Medicaid is an enigma. The program’s complexity surrounding who
is eligible, what services are paid for, and how those services are reimbursed and
delivered is one source of this confusion. Variability across state Medicaid programs
is the rule, not the exception, and adds to the confusion. Income eligibility levels
vary, services covered vary, and the method for and amount of reimbursement for
services differ from state to state. In addition, more and more states in recent years
have implemented a variety of major program changes using special waiver authority.

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Furthermore, Medicaid is a program that is targeted at individuals with low-income,
but not all of the poor are eligible, and not all those covered are poor. For
populations like children and families, primary and acute care are often delivered
through managed care, while the elderly and disabled typically obtain such care on
a fee-for-service basis. Nationwide, Medicaid finances the majority of long-term care
services. Such services include, for example, nursing home care and community-
based services designed to support the elderly and disabled in their homes. Recently,
some states have begun to integrate Medicare and Medicaid financing and/or
coverage of acute and long-term care services for these populations.
The complexity of Medicaid presents an enormous challenge for anyone
attempting to make generalizations about the program. This report describes federal
Medicaid rules that govern: (1) who is eligible, (2) what services are covered and
how they are delivered, (3) how the program is financed and administered, (4) key
provider reimbursement issues, and (5) the significant role of waivers in expanding
eligibility and modifying services. It concludes with a brief legislative history of
major laws affecting Medicaid enacted since 1996.
Eligibility
Federal Medicaid statute defines over 50 distinct population groups as being
potentially eligible for states’ programs. Some groups are mandatory, meaning that
all states that participate in the Medicaid program must cover them; others are
optional. Prior to the 1980s, Medicaid eligibility was limited to very low-income
families with dependent children, poor elderly and disabled individuals, and the
“medically needy.” Beginning in the 1980s, additional eligibility pathways were
added to the Medicaid statute to allow for the coverage of higher income children and
pregnant women as well as other elderly and disabled individuals. Most recently,
states were given the option to provide Medicaid to other groups with specific
characteristics including certain women with breast or cervical cancer, to uninsured
individuals with tuberculosis, and to additional working individuals with disabilities.
Not all groups of Medicaid beneficiaries receive the same set of benefits. To
understand the different benefits offered to each group, see “Benefits.”
Medicaid is a means-tested program. To qualify, applicants’ income and
resources must be within certain limits. The specific income and resource limitations
that apply to each eligibility group are set through a combination of federal
parameters and state definitions. Consequently, those standards vary considerably
among states, and different standards apply to different population groups within a
state. For many of those groups, moreover, states have permission under a special
provision, Section 1902(r)(2), to use more liberal standards for computing income
and resources than are specified within each of the groups’ definitions. Most states
use Section 1902(r)(2) to ignore or disregard certain types or amounts of income or
assets, thereby extending Medicaid to individuals with earnings or assets too high to
otherwise qualify under the specified rules for that eligibility pathway.

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Families, Pregnant Women, and Children
The two primary pathways to Medicaid for low-income family members,
pregnant women, and children are through (1) Section 1931 of Medicaid statute, for
those families who would have been eligible for cash welfare payments under former
Aid to Families with Dependent Children (AFDC) program rules, and (2) a series of
targeted Medicaid expansions for poor pregnant women and children begun in the
1980s. Other important pathways for low-income family members, including
transitional medical assistance, other AFDC-related groups, and children qualifying
for the State Children’s Health Insurance Program (SCHIP) who are receiving their
health coverage under the Medicaid program, are explained below.
Section 1931: Persons Qualifying under the Former AFDC Program
Rules. Families who are eligible for Temporary Assistance for Needy Families
(TANF), the welfare program enacted in 1996 to replace AFDC, are not
automatically eligible for Medicaid. Medicaid’s Section 1931, however, preserves
Medicaid entitlement for individuals who meet the requirements of the former AFDC
programs in effect in their states on July 16, 1996. This categorical group was
created when TANF replaced AFDC to ensure that low-income families do not lose
Medicaid as a result of welfare reform. States have significant flexibility in defining
the income and resource standards for those families qualifying for Medicaid under
Section 1931: (1) income standards may be reduced below those in effect in 1996,
but they cannot be lower than those used on May 1, 1988; (2) income and resource
standards may be increased for any period after 1996, but by no more than the
percentage increase in the Consumer Price Index (CPI) for the same period; and (3)
states may use less restrictive methods for counting income and resources than those
in effect on July 16, 1996.
Certain individuals qualifying under the Section 1931 pathway may be denied
Medicaid coverage if they refuse to cooperate with states’ TANF work requirements.
States are permitted to deny Medicaid benefits to nonpregnant adults and heads of
households who lose TANF benefits because of refusal to work, but must continue
to provide Medicaid coverage to their children.
In 2002, 39 states had taken advantage of the flexibility of Section 1931 to
expand eligibility for working families by disregarding some earned income, thereby
allowing families with higher total income to qualify for the program. Other states
eliminated various income and assets rules, again for low-income working families,
thus expanding their access to Medicaid.1
Poverty-related Pregnant Women and Children. Between 1986 and
1991, Congress gradually extended Medicaid to new groups of pregnant women and
children. Under these provisions, states are required to cover pregnant women and
children under age 6 with family incomes below 133% of the federal poverty income
1 K.A. Maloy , K.A. Kenney, J. Darnell, S. Cyprien, Can Medicaid Work for Low-Income
Working Families?
, Kaiser Commission on the Future of Medicaid and the Uninsured, Apr.
2002.

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guidelines.2 Coverage for pregnant women qualifying through this pathway is limited
to services related to the pregnancy or complications of the pregnancy and extends
to 60 days after termination of the pregnancy. Children receive full Medicaid
coverage.
States are required to cover all children over the age of five and under 19 who
are in families with income below 100% of the federal poverty level. This
requirement has been phased-in since July 1, 1991, and was fully implemented in
2002.
States have the option to go beyond the above mandatory groups to include
pregnant women and infants under one year of age whose family income is over 133
and up to 185% of the FPL. In 2002, 36 states and the District of Columbia extended
coverage to some or all pregnant women and infants in this category.
Transitional Medical Assistance. Transitional medical assistance (TMA)
was established prior to the 1996 welfare reform to address the concern that
individuals receiving AFDC payments would not seek work or would turn down
work opportunities for fear of losing Medicaid. TMA requires states to continue
providing Medicaid for six months to families that were receiving Medicaid under
Section 1931 in at least three of the last six months. The extended Medicaid
coverage is available to individuals (and their families) who would otherwise have
lost such assistance due to increased work hours, increased earnings of the caretaker
relative, or the loss of one of the time-limited earned income disregards. In addition,
states are required to extend Medicaid coverage for a second six months to families
that were covered during the entire first six-month TMA period, and whose earnings
are below 185% of poverty. The provisions authorizing TMA are due to sunset at the
end of March, 2004, although this date has been repeatedly extended. A small
additional group of mandatory TMA-eligible persons are those who would otherwise
lose Medicaid coverage under Section 1931 because of increased child or spousal
support. Families eligible for this four-month extension must have been receiving
Medicaid under Section 1931 in at least three of the preceding six months.
Other AFDC-Related Groups. While the AFDC program no longer exists,
a number of Medicaid eligibility groups tied to states’ former AFDC rules remain.
States must provide Medicaid to recipients of adoption assistance and foster care
(who are under age 18) under Title IV — E of the Social Security Act. In 1999 states
were given the option to extend Medicaid to former foster care recipients who are
aged 18, 19, or 20.
Ribicoff children, a pathway named for the former Senator who sponsored
legislation authorizing this group, are those under age 21 who meet income and
resource requirements for the former AFDC Program but who do not meet other
categorical requirements for AFDC. States have the option to cover Ribicoff children
and have a great deal of flexibility in defining the specific group of children to be
covered under this category. Often states use this authority to cover children in state-
2 100% of FPL is equal to $15,260 and 133% of FPL is equal to $20,256 for a family of
three in 2003.

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sponsored foster care, children who are institutionalized, or who are inpatients in
psychiatric facilities. Although many of the children who have traditionally been
covered under Ribicoff are now eligible under other poverty-related groups, Ribicoff
remains an important pathway to eligibility for some small groups of older
adolescents in foster care and children in two-parent families.
Targeted Low-income Children. Section 4911 of the Balanced Budget
Act of 1997 (BBA 1997, P.L. 105-33) established an additional coverage group for
low-income children. This provision establishes a Medicaid coverage group that is
parallel to the group of children eligible for health coverage under another provision
of BBA 97, the State Children’s Health Insurance Program (Section 4901). The two
provisions allowed states to choose, after the passage of BBA 97, to either extend
Medicaid for targeted low-income children, to create a new SCHIP program for those
children, or coordinate both programs to cover the target population.
Targeted low-income children are those who are not otherwise eligible for
Medicaid, are not covered under a group health plan or other insurance, and are living
in families with income that is either: (1) above the state’s Medicaid financial
eligibility standard in effect in June 1997 but less than 200% of the FPL; or (2) in
states with Medicaid income levels for children already at or above 200% of the
poverty level as of June 1997, within 50 percentage points over this income standard.
States can either establish a specific coverage group for targeted low-income children
or they can build upon other existing Medicaid coverage groups for children. As of
February 2003, 37 states cover targeted low-income children under Medicaid.
The Aged and Persons with Disabilities
Persons Who Qualify for Supplemental Security Income (SSI). With
one important exception, states are required to provide Medicaid coverage to
recipients of SSI. SSI, authorized under Title XVI of the Social Security Act, is a
means-tested cash assistance program for aged, blind, and disabled individuals whose
income falls below the federal maximum monthly SSI benefit and whose resources
are limited. To qualify for SSI, a person must satisfy the program criteria for age or
disability and meet certain citizenship or United States residency requirements.
Eligibility for SSI is restricted to otherwise qualified individuals whose resources do
not exceed $2,000 for an individual and $3,000 for a couple; certain resources, such
as a person’s home, are exempt. Income cannot exceed the maximum federal SSI
benefit of $552 per month in 2003 for an individual living independently, and $829
for a couple living independently. The SSI benefit level of $552 per month for an
individual is 74% of the FPL.
The major exception to Medicaid coverage of SSI recipients is in states that
exercise the so-called “209(b)” option described in Section 209(b) of the Social
Security Amendments of 1972 (P.L. 92-603). Such states may use income, resource
and disability standards that are no more restrictive than those in place on January 1,
1972. As of 2001, there were 11 Section 209(b) states: Connecticut, Illinois, Hawaii,
Indiana, Minnesota, Missouri, New Hampshire, North Dakota, Ohio, Oklahoma and
Virginia. Each of these has at least one eligibility standard that is more restrictive
than current SSI standards and some have certain standards that are more liberal.
States that use more restrictive eligibility rules under Section 209(b) must also allow

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applicants to deduct medical expenses from their income when determining financial
eligibility for Medicaid. This process is sometimes referred to as “spend-down.”3
Recipients of State Supplemental Payment (SSP) Benefits. Many
states provide SSP benefits with state-only dollars on a monthly basis. These
payments are intended to cover such items as food, shelter, clothing, utilities, and
other daily necessities. The amount of the benefit is determined by the individual
states. States may provide supplemental payments to all persons who receive SSI,
and/or to individuals who meet all SSI criteria, other than income. States may also
choose to provide SSP benefits only to particular groups, such as elderly persons
living independently in the community without special needs, or elderly individuals
who require in-home personal care assistance or home-delivered meals. In all of
these cases, states decide whether to extend Medicaid coverage to all SSP recipients,
to only some of these recipients, or to none at all. When a state provides Medicaid
eligibility to persons receiving only SSP — and not SSI — then the maximum
income eligibility standard for Medicaid is an amount equivalent to the combined
federal SSI payment and the SSP benefit. For 209(b) states, however, the effective
maximum financial eligibility standard for these individuals is the 209(b) categorical
eligibility standard plus the SSP payment.
Poverty-related Group for the Aged and Disabled. The enactment of
the Omnibus Budget Reconciliation Act of 1986 (OBRA 86) offered states an option
for covering persons whose income exceeds SSI or 209(b) levels. This option allows
states to cover aged and disabled individuals with incomes up to 100% of FPL. In
2001, there were 21 states using this option.4
Coverage for Institutionalized Individuals and Related Groups
Under the Special Income Rule. States may extend Medicaid to certain
individuals with incomes too high to qualify for SSI, and who are eligible for nursing
facility or other institutional care. Under the special income rule, also referred to as
“the 300% rule,” such persons must (1) require care provided by a nursing home or
other medical institution for no fewer than 30 consecutive days, (2) meet the resource
standard determined by the state, and (3) have income that does not exceed a
specified level — no greater than 300% of the maximum SSI payment applicable to
a person living at home. For 2003, this limit is $1,656 per month (3 times the
3 An example of spend-down is as follows: if an applicant has a monthly income of $700
(not including any SSI or State Supplemental Payments (SSP)) and the state’s maximum
allowable income standard for spend-down eligibility is $600, the applicant would qualify
for Medicaid after incurring $100 in medical expenses in that month.
4 A survey by the American Public Human Services Association reported that the District
of Columbia (up to 100%) and the following states had implemented this option as of
October 2001: California (up to 100%), Florida (90%), Georgia (100%), Illinois (85%),
Maine (100%), Massachusetts (100%), Michigan (100%), Minnesota (95%), Mississippi
(100%), Nebraska (100%), New Jersey (100%), North Carolina (100%), Pennsylvania
(100%), Rhode Island (100%), South Carolina (100%), Utah (100%), Vermont (100%),
Virginia (80%). In a separate survey, CRS determined that Oklahoma (100%) and Hawaii
(100%) also used this option in 2001.

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monthly SSI payment of $552). States may use a level that is lower than the
maximum of 300% of SSI, if they wish.
Since 1993 (OBRA 93), states that use only the special income rule for
institutional eligibility, and do not use the medically needy option (described below),
must allow applicants to place income in excess of the special income level in a
special trust, often called a Miller Trust, and receive Medicaid coverage for their
care.5 Following the individual’s death, the state becomes the beneficiary of amounts
in the trust.
Working Individuals with Disabilities. Concern that many workers with
disabilities would lose eligibility for Medicaid as a result of increased earnings and
yet not have access to affordable or adequate health insurance through their jobs,
prompted Congress to establish a variety of special rules that would protect working
individuals with disabilities from losing their Medicaid benefits. One rule does so
by changing SSI program rules for working persons with disabilities. In order for
disabled persons to qualify for SSI and, thus become eligible for Medicaid, applicants
must establish disability status under the criteria determined by the Secretary of the
Department of Health and Human Services (DHHS). These criteria are linked to an
individual’s ability to work or earn income from work, commonly referred to as an
individual’s ability to “engage in substantial gainful activity” (SGA). Current
regulations provide that an individual is able to engage in SGA if his or her earnings
exceed $800 per month, as of January 2003. For persons who are blind, SGA is
$1,330 per month for 2003. SGA is defined in federal regulations as paid work
involving significant and productive physical or mental duties.6 Section 1619(a) of
SSI law permits those states that extend Medicaid to SSI recipients to allow certain
persons with a disability who had been eligible for an SSI payment for at least one
month and who meet all other eligibility rules, to continue receiving Medicaid even
when they are working at the SGA level. The amount of their SSI special cash
benefits is gradually reduced as their earnings increase under an income disregard
formula7 until their countable earnings reach the SSI benefit standard or what is
known as the breakeven point ($552 per month in 2003).
5 OBRA 1993 codified a 1990 ruling from the United States District Court for the District
of Colorado which first coined the term “Miller Trust.” See Miller v. Ybarra, 746 F.Supp.
79 (E. Colo 1990).
6 The inability to engage in SGA must be a result of a medically determined physical or
mental impairment expected to result in death or that has lasted, or can be expected to last,
for a continuous period of at least 12 months. A child under age 18 may qualify as disabled
if he or she has an impairment that results in “marked and severe” functional limitations.
7 Not all income is counted for SSI purposes. Different exemptions, or disregards, apply for
the different types of income. Earned income that is exempt from being counted includes
the first $65 per month in wages; one-half of all wages over $65; impairment-related
expenses necessary for blind and disabled workers; and income used for a plan for achieving
self support (PASS). Unearned income exclusions include the first $20 per month of non-
needs tested benefits and all of the following: Food Stamps; housing and energy assistance;
state and local needs-based assistance; in-kind support and maintenance payments from non-
profit organizations; and student grants and scholarships.

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In addition, individuals who are blind or have a disability can continue to be
eligible for Medicaid even if their earnings exceed the SSI income disregard
breakeven point under a special group referred to as “qualified severely impaired
individuals.” Special eligibility status granted by Section 1619(b)(1) and 1905(q),
under which the individual is considered an SSI recipient for purposes of Medicaid
eligibility (although he or she is not actually receiving a SSI cash benefit) applies as
long as the individual: (1) continues to be blind or have a disabling impairment; (2)
continues to meet all the other requirements, except for earnings, for SSI eligibility;
(3) would be seriously inhibited from continuing to work by the termination of
eligibility for Medicaid services; and (4) has earnings that are not sufficient to
provide a reasonable equivalent to the benefits that would have been available if he
or she did not have SSI, state supplementary payments, Medicaid and publicly funded
personal care.
Other provisions give states even more flexibility to cover working persons with
disabilities. The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) allows states
to provide Medicaid coverage to working individuals with disabilities whose family’s
net income does not exceed 250% of the FPL. Two other provisions were added
under the Ticket to Work and Work Incentives Improvement Act of 1999 (TWWIIA,
P.L. 106-170). The first allows states to further expand Medicaid coverage to
working individuals with disabilities, between the ages of 16 and 64, with incomes
and resources as defined by the state and allows states to impose premiums and other
cost-sharing on individuals who qualify. The second allows states, under certain
circumstances, to provide coverage to persons whose medical conditions have
improved and who have therefore become ineligible for SSI on the basis of disability.
Qualified Medicare Beneficiaries and Related Groups. Certain low-
income individuals who are aged or have disabilities as defined under SSI and who
are eligible for Medicare are also eligible to have some of their Medicare cost-sharing
expenses paid for by Medicaid. There are four categories of such persons8:
! Qualified Medicare Beneficiaries (QMB). Qualified Medicare
beneficiaries are aged or disabled Medicare beneficiaries with
incomes no greater than 100% of the federal poverty level and assets
no greater than $4,000 for an individual and $6,000 for a couple.
States are required to cover, under their Medicaid programs, the
costs of Medicare premiums, deductibles, and coinsurance for
Medicare covered benefits for such persons. Other Medicaid
covered services, such as nursing facility care, prescription drugs
and primary and acute care services, are not covered for these
individuals unless they qualify for Medicaid through other eligibility
pathways (e.g., via SSI, medically needy or the special income rule).
! Specified Low-Income Medicare Beneficiaries (SLMB). Specified
low-income Medicare beneficiaries meet QMB criteria, except that
their income is greater than 100% of FPL but does not exceed 120%
FPL. Under this Medicaid pathway, states are required to cover only
the monthly Medicare Part B premium. Other Medicaid covered
8 The program known as Qualifying Individuals-2 (QI-2) terminated on Sept. 30, 2002.

CRS-9
services are not covered for these individuals unless they qualify for
Medicaid through other eligibility pathways.
! Qualifying Individuals (QI-1). The QI-1 eligibility pathway applies
to aged and disabled Medicare beneficiaries whose income is
between 120 and 135% FPL. For these individuals, states are
required to pay the monthly Medicare Part B premium, only until the
federal allotment for this purpose is depleted.9 These individuals are
not otherwise eligible for Medicaid.
! Qualified Disabled and Working Individuals (QDWIs). States are
required to pay the Medicare Part A premiums for persons who were
previously entitled to Medicare on the basis of a disability, who lost
their entitlement based on earnings from work, but who continue to
have a disabling condition. Such persons may only qualify if their
incomes are below 200% of FPL, their resources are below 200% of
the SSI limit ($4,000), and they are not otherwise eligible for
Medicaid.
In December 2003, the President signed the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA 2003, P.L. 108-173). This act
provides that, beginning in 2006, Medicaid eligibles who are also eligible for
Medicare will receive outpatient prescription drug coverage through the new
Medicare prescription drug benefit instead of through Medicaid. While this act does
not change Medicaid eligibility rules, it does affect the benefits that the Medicaid
program will be allowed to cover.10 Under MMA 2003, state Medicaid programs will
no longer be able to cover any drugs that are to be provided through the Medicare
benefit, or pay the cost sharing amounts for those drugs.
Medically Needy
States may extend Medicaid coverage to persons who are members of one of the
broad categories of Medicaid covered groups (i.e., are aged, have a disability or are
in families with children), but do not meet the applicable income requirements and,
in some instances, resources requirements for other eligibility pathways. Under this
option, states may set their medically needy monthly income limits for a family of a
given size at any level up to 133 1/3% of the maximum payment for a similar family
under the state’s AFDC program in place on July 16, 1996. For families of one, the
9 In general, Medicaid payments are shared between the federal government and the states
according to a matching formula (see the section on financing). However, expenditures
under the QI-1 program are paid 100% by the federal government (from the Part B trust
fund) up to the state’s allocation level. A state is only required to cover the number of
persons which would bring its spending on these population groups in a year up to its
allocation level. This temporary program, originally slated to end Sept. 30, 2002, has been
extended through Sept. 30, 2004, by P.L. 108-173.
10 Medicaid eligibility for individuals who now qualify as medically needy by “spending
down” their income on medical expenses (see next section), may be affected. Those
individuals may experience delayed Medicaid eligibility or no longer qualify at all because
Medicare Part D will pay some portion of the drug expenses that were formally counted
toward their spend down amounts.

CRS-10
statute gives certain states some flexibility to set these limits to amounts that are
reasonably related to the AFDC payment amounts for two or more persons. While
133a% of the former AFDC program standard is generally higher than the nominal
income standard for other Medicaid pathways for families, it is generally lower than
the income standard for elderly or disabled SSI recipients.
For all groups, states are required to allow individuals to spend down to the
medically needy income standard by incurring medical expenses, in the same way
that SSI recipients in Section 209(b) states may spend down to Medicaid eligibility.
For elderly and disabled recipients living in the community who must spend down
to qualify for Medicaid, the medically needy income standard leaves individuals with
less money for their living expenses than simply qualifying for Medicaid through
SSI.
Under the statute, states may limit the categories of individuals who can qualify
as medically needy. If a state provides any medically needy program, however, it
must include all children under 18 who would qualify under one of the welfare-
related groups, and all pregnant women who would qualify under either a mandatory
or optional group, if their income or resources were lower. In 2002, 35 states11 and
the District of Columbia covered the medically needy.
Others
In recent years, new groups have been added to Medicaid that move the program
further away from its traditional links to cash assistance programs. Demonstration
waivers have given states the flexibility to target enrollment and benefits to various
groups, and two new pathways were added to Medicaid for individuals with specific
medical diagnoses. With specific restrictions, Medicaid is also available to certain
immigrants.
Individuals Qualifying under Demonstration Waivers. Demonstration
waivers available under the authority of Section 1115 (of the Social Security Act)
enable states to experiment with new approaches for providing health care coverage
that promote the objectives of the Medicaid program. Section 1115 allows the
Secretary of HHS to waive a number of Medicaid rules — including many of the
federal rules relating to Medicaid eligibility.12 The Health Insurance Flexibility and
Accountability (HIFA) Initiative is an explicit effort of HHS to encourage states to
seek Section 1115 waivers to extend Medicaid and SCHIP to the uninsured, with a
particular emphasis on statewide approaches that maximize private health insurance
coverage options and target populations with incomes below 200% FPL. A number
of states have used such waivers to enact broad-based and sometimes statewide
11 These include Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Iowa,
Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North
Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont,
Virginia, Washington, West Virginia, and Wisconsin. All states except Texas cover aged
and disabled medically needy groups.
12 See also the discussion of Section 1115 waivers below.

CRS-11
health reforms although demonstrations under Section 1115 need not be statewide.
A number of the demonstrations extend comprehensive health insurance coverage to
low-income children and families who would not otherwise be eligible for Medicaid.
Women with Breast and Cervical Cancer. Woman who are eligible for
Medicaid under this optional coverage group are those who have been screened for
and found to have breast or cervical cancer (including precancerous conditions)
through the National Breast and Cervical Cancer Early Detection Program
(NBCCEDP). Women who qualify must be under age 65, uninsured, and otherwise
not eligible for Medicaid. Benefits are limited to the period in which the beneficiary
requires breast or cervical cancer treatment. In 2002, 42 states13 chose to cover
women who meet these requirements.
Persons with Tuberculosis. States may choose to offer Medicaid to people
with tuberculosis (TB) who are uninsured. Individuals qualifying under this pathway
are entitled only to those services related to the treatment of tuberculosis. In 2002,
8 states14 and the District of Columbia covered such persons with TB.
Immigrants. Legal immigrants arriving in the United States after August 22,
1996 are ineligible for Medicaid benefits for their first five years here. Coverage of
such persons after the five-year ban is a state option.15 States may provide Medicaid
coverage to legal immigrants who resided in the country and were receiving benefits
on August 22, 1996, and for those residing in the country as of that date who become
disabled in the future. States are also required to provide coverage to:
! refugees for the first seven years after entry into the United States;
! asylees for the first seven years after asylum is granted;
! certain individuals whose deportation is being withheld by the
Immigration and Naturalization Service for seven years after the
deportation is first withheld;
! lawful permanent aliens after they have been credited with 40
quarters of coverage under Social Security;
! and immigrants who are honorably discharged U.S. military
veterans, active duty military personnel, and their spouses and
unmarried dependent children who otherwise meet the state’s
financial eligibility criteria.
13 These include Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware,
Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New
Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Oregon,
Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia,
Washington, West Virginia, Wisconsin, and Wyoming.
14 These include California, Florida, Louisiana, Minnesota, New York, Oklahoma, Utah, and
Wyoming.
15 All states except for Colorado and Utah have opted to cover such persons. Colorado’s
coverage for this group was repealed in May of 2003, and the repeal was later upheld after
a legal challenge was mounted by the American Civil Liberties Union of Colorado.

CRS-12
In addition, states are required to provide emergency Medicaid services to all
legal and undocumented non-citizens who meet the financial and categorical
eligibility requirements for Medicaid, without regard to time in this country.
Enrollment
In 2000, there were 44.3 million people enrolled in Medicaid. Over one-half
(51%) of those enrolled were under age 19,16 about 37% were ages 19 through 64,
and almost 10% were 65 or over. Figures 1 and 2 show 2000 Medicaid enrollment
by basis of eligibility (BOE) and by major enrollment group, respectively. State
reported data are not available in a format that allows for examining enrollment by
the pathways as described above.
Figure 1 shows that Medicaid enrollment is predominantly non-disabled adults
(e.g., parents) under age 65 and children (about 73%). Figure 2 shows that almost
half of Medicaid enrollment in 2000 is through traditional pathways: 39% of
enrollees are SSI recipients, SSI-related enrollees, and members of families that
would have been eligible for former AFDC programs and now qualify through
section 1931, and an additional 8% are the medically needy. Over one-third of 2000
enrollment is through relatively new pathways: 28% of individuals on the program
are enrolled through the poverty-level pathways added to Medicaid since the mid-
1980's and 8% through demonstration waivers. Finally, about 17% of Medicaid
enrollees are in the “other” group; including foster care children, certain elderly
individuals in institutions, families receiving transitional medical assistance, and
persons receiving state supplementary SSI payments. This “other” grouping includes
over 60 specific eligibility pathways.
16 Figure 1 shows 49% of Medicaid enrollment in 2000 was children (47% children plus 2%
foster care children). There were additional children on the program in 2000 who qualified
on the basis of blindness or disability. Those children are included in the blind/disabled
category.

CRS-13
Figure 1. Medicaid Enrollees by Basis of Eligibility, FY2000
Aged
A dults
10%
24%
Blind/Dis abled
17%
Fos ter Care
Children
2%
Children
47%
44.3 million enrollees
Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical
Information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not report MSIS data
for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.
Note: Medicaid enrollees include all persons enrolled in Medicaid during the year whether or not any
payments for services have been made on their behalf. Total enrollees in this figure include those in
50 states and the District of Columbia.
Figure 2. Medicaid Enrollees by Major Enrollment Group, FY2000
En ro lled th ro u g h
Demo n s tratio n W aiv er
8%
En ro lled
th ro u g h SSI o r
Oth ers
A FDC- Rela ted
17%
Gro u p
39%
Po v erty Relate d
28%
M ed ica lly
Need y
44.3 millio n en ro llee s
8%
Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical
Information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not report MSIS data
for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.
Note: Medicaid enrollees include all persons enrolled in Medicaid during the year whether or not any
payments for services have been made on their behalf. Total enrollees in this figure include those in
50 states and the District of Columbia.

CRS-14
Table 2 presents Medicaid recipients by basis of eligibility for selected years
from 1975 through 2000. Since the mid-1970s, the number of individuals receiving
at least one Medicaid service during the year has more than doubled, and during the
1990s, Medicaid enrollment growth quickened. Rates of growth varied by basis of
eligibility. Enrollment among the aged was fairly stable over this period, while the
number of adults and children more than doubled. The biggest increase in enrollment
occurred among the blind/disabled, whose numbers tripled between 1975 and 2000.
Table 2. Unduplicated Number of Medicaid Recipients by
Eligibility Category for Selected Years
(in thousands)
Foster
Average
Total
Blind/
care
annual
Year
recipients
Aged
disabled
Children Adults children growth
1975
20,320
3,577
2,442
9,121
4,271
n/a
1980
20,660
3,439
2,874
8,921
4,585
n/a
0.0%
1985
20,973
3,060
2,947
9,214
5,034
n/a
0.0%
1990
23,964
3,201
3,661
10,783
5,618
n/a
3.7%
1995
35,210
3,938
5,768
16,572
7,376
n/a
9.4%
2000
42,763
3,731
6,889
18,962
8,750
761
4.3%
Source: CRS tabulations of HCFA 2082 data (for 1975 — 1995) and MSIS person-level summary
records (for 1999 and 2000). Hawaii did not report MSIS data for 2000. CRS estimated Hawaii’s
enrollment for FY2000 using data from 1999.
Notes: For 1975-1995, recipients are those individuals for whom a fee-for-service claim was paid
during the year. For 2000, recipients include both those individuals for whom a fee-for-service claim
was paid during the year AND those for whom a capitation payment was made during the year.
Capitation payments are fixed payment amounts made to managed care organizations, usually monthly,
for each person enrolled. The amounts are prepaid and do not vary by the frequency or type of
services provided during the period over which the payments apply. Capitated service delivery
systems became more prominent under Medicaid starting in 1995, primarily enrolling non-disabled
adults and children. Due to data limitations, about 5.3 million people enrolled in such capitated
arrangements during 1995 (and fewer in earlier years) are not included in this table. See subsection
on managed care for more detailed information on capitated beneficiaries and expenditures.
Totals do not sum because this table does not include recipients of services for whom basis of
eligibility is unknown.
Total recipients in this table include recipients in 50 states and the District of Columbia.
Table 3 shows all Medicaid enrollees in fiscal year 2000 by state. Individuals
counted in this table include all recipients plus all other individuals enrolled in the
program in any month whether or not services were paid on their behalf. States are
ranked by the total number of enrollees. California, the state with the highest
Medicaid enrollment, had 8.1 million individuals in the program in 2000. The
second highest enrollment was in New York with 3.4 million enrollees. The top 10
states, in terms of enrollment, accounted for over one-half of the program’s total
enrollment.

CRS-15
Table 3. Medicaid Eligibles by Basis of Eligibility by State,
FY2000
(in thousands of people)
Foster
Total
Blind/
care
State
eligibles
Rank
Aged
disabled
Children
children
Adults
Others
Alabama
665.8
23
86.2
177.1
346.6
5.4
50.4
0.0
Alaska
109.5
47
6.2
10.7
65.5
1.6
25.5
0.0
Arizona
683.2
21
33.1
94.8
391.0

164.3
0.0
Arkansas
504.3
29
54.0
100.9
233.8
5.6
109.9
13.0
California
8,063.6
1
592.1
925.3
3,042.2
145.1
3,358.9
5.0
Colorado
377.7
32
45.9
65.5
181.0
17.1
68.2
80.0
Connecticut
417.7
30
55.5
56.9
225.2
9.3
70.8
0.0
Delaware
124.3
45
9.1
15.9
56.1
2.0
41.2
0.0
District of
Columbia
150.8
43
10.0
30.5
71.4
4.3
34.6
35.0
Florida
2,237.6
4
226.1
460.2
1,071.8
39.1
440.4
0.0
Georgia
1,238.8
10
110.4
224.3
679.6
18.7
205.8
0.0
Hawaii
202.9
39
18.8
21.6
85.1
4.1
73.3
0.0
Idaho
150.8
42
11.6
23.9
90.4
2.0
23.0
0.0
Illinois
1,736.2
6
118.1
290.2
880.8
83.7
363.3
0.0
Indiana
756.2
18
76.5
106.6
439.3
11.2
122.6
0.0
Iowa
316.4
34
41.0
55.5
147.7
9.3
63.0
0.0
Kansas
267.8
35
32.8
51.1
135.9
11.0
37.0
0.0
Kentucky
724.5
19
71.4
199.5
347.3
8.4
97.9
0.0
Louisiana
827.4
16
99.1
173.0
444.6
9.9
100.8
0.0
Maine
214.1
37
24.5
48.8
93.5
3.3
44.0
0.0
Maryland
721.8
20
54.9
114.8
382.7
16.0
153.3
0.0
Massachusetts
1,103.7
12
111.4
226.6
452.2
0.7
312.8
0.0
Michigan
1,360.7
9
100.0
282.1
697.2
41.1
240.2
113.0
Minnesota
596.7
25
64.0
83.5
298.4
9.4
141.4
0.0
Mississippi
595.8
26
69.6
152.1
306.8
3.4
63.9
1.0
Missouri
991.4
13
100.6
136.5
519.2
21.6
213.5
0.0
Montana
97.1
49
9.9
17.3
46.5
4.0
19.3
2.0
Nebraska
238.1
36
23.1
29.0
131.1
9.5
44.7
721.0
Nevada
158.5
41
17.1
28.6
77.2
5.2
30.4
0.0
New
Hampshire
110.2
46
13.0
13.8
64.6
2.6
16.1
0.0
New Jersey
855.7
15
107.3
163.6
430.7
18.7
135.4
0.0
New Mexico
398.5
31
22.1
49.0
252.4
3.4
71.5
0.0
New York
3,401.4
2
386.9
674.0
1,416.4
84.2
840.0
0.0
North
Carolina
1,228.1
11
176.5
219.1
609.0
15.0
208.6
0.0
North Dakota
62.2
50
9.7
9.3
29.4
1.7
12.1
0.0
Ohio
1,420.4
8
146.4
262.4
730.6
39.1
241.6
156.0
Oklahoma
584.6
27
63.1
73.8
354.6
7.6
85.5
0.0
Oregon
560.7
28
41.7
61.6
224.2
14.0
219.2
35.0

CRS-16
Foster
Total
Blind/
care
State
eligibles
Rank
Aged
disabled
Children
children
Adults
Others
Pennsylvania
1,767.8
5
204.9
391.4
739.9
45.6
386.1
0.0
Rhode Island
182.1
40
18.7
34.0
78.8
5.3
45.4
0.0
South
Carolina
775.4
17
78.0
117.3
391.6
7.1
181.3
32.0
South Dakota
98.7
48
10.0
15.8
55.8
1.7
15.4
0.0
Tennessee
1,535.1
7
89.1
318.9
653.5
12.7
461.0
0.0
Texas
2,707.0
3
361.0
346.5
1,520.1
28.6
450.8
0.0
Utah
203.8
38
11.7
25.3
113.6
6.5
46.7
0.0
Vermont
147.8
44
18.6
18.2
63.5
2.3
45.2
49.0
Virginia
681.3
22
95.4
131.5
348.7
13.7
92.0
1.0
Washington
916.8
14
69.1
121.7
520.3
13.9
191.9
1.0
West Virginia
354.3
33
31.9
84.5
171.1
6.2
60.6
0.0
Wisconsin
619.1
24
61.8
132.0
267.6
18.8
138.8
1.0
Wyoming
52.5
51
4.9
8.2
27.8
1.5
10.0
0.0
U.S. Total
44,297.3
4,295.0
7,474.8
21,004.3
852.1 10,669.8 1,245.0
Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical
Information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not report MSIS data
for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.
Note: Medicaid eligibles include all persons enrolled in Medicaid during the year whether or not any
payments for services were made on their behalf. Totals do not sum because this table excludes
individuals whose basis of eligibility was unknown.

CRS-17
Medicaid and the Poor
In calendar year 2002, Medicaid covered 11.6% of the total U.S. population
(excluding institutionalized persons) and 40.5% of those with incomes below the
federal poverty level (FPL), according to data from the March 2003 Current
Population Survey (CPS) conducted by the U.S. Census Bureau. Because categorical
eligibility requirements for children are less restrictive than those for adults, poor
children are much more likely to receive coverage. Table 4 shows Medicaid
coverage by age and income status in calendar year 2002. The estimates of those
with Medicaid coverage include those covered by the State Children’s Health
Insurance Program (SCHIP). Note that persons shown as receiving Medicaid may
have had other health coverage as well. Nearly all the elderly, for example, had
Medicare. Of persons with family incomes below poverty, more than two-thirds of
children under age six are covered by Medicaid, compared to less than a third of
those 19 and older.
Many individuals, even below the poverty level, are not eligible for Medicaid
due to categorical restrictions. Nondisabled, childless, nonaged adults are never
eligible for Medicaid, regardless of their income, unless their state obtains a special
waiver to cover such individuals. In addition, even those who are eligible may not
enroll. For example, all children under six years old in families with income below
133% of FPL are a mandatory coverage group. However, more than two million of
these children are not enrolled in Medicaid. This may be for several reasons,
including that these children have another source of health insurance, their families
are unaware that Medicaid is available, or they do not perceive that coverage is
needed.

CRS-18
Table 4. Medicaid Coverage by Age and Family Income,
Calendar Year 2002
(in thousands)
Age
Covered by Medicaid
Persons in age group
Percent with Medicaid
In poverty:
0-5
3,040
4,395
69.2
6-10
2,173
3,512
61.9
11-18
2,599
4,798
54.2
19-44
3,452
12,727
27.1
45-64
1,720
5,565
30.9
65 and older
1,028
3,586
28.7
Total
14,013
34,582
40.5
Family income
between 100 and
132% of poverty:
0-5
980
1,866
52.5
6-10
654
1,469
44.5
11-18
1,005
2,318
43.4
19-44
1,018
5,849
17.4
45-64
547
2,675
20.5
65 and older
553
3,047
18.1
Total
4,757
17,224
27.6
Family income
between 133 and
184% of poverty:
0-5
1,089
2,716
40.1
6-10
790
2,272
34.8
11-18
1,051
3,413
30.8
19-44
1,067
9,809
10.9
45-64
523
4,166
12.6
65 and older
508
5,245
9.7
Total
5,028
27,621
18.2
Family income of
185% of poverty
and greater:
0-5
1,670
14,452
11.6
6-10
1,108
12,596
8.8
11-18
1,711
22,855
7.5
19-44
2,295
78,406
2.9
45-64
1,209
55,227
2.2
65 and older
1,194
22,355
5.3
Total
9,187
205,891
4.5
All persons:
0-5
6,779
23,429
28.9
6-10
4,726
19,848
23.8
11-18
6,366
33,384
19.1
19-44
7,832
106,790
7.3
45-64
3,999
67,633
5.9
65 and older
3,283
34,234
9.6
Total
32,985
285,317
11.6
Source: Congressional Research Service tabulations from the March 2003 Current Population Survey
(CPS).
Note: Number of Medicaid enrollees on the CPS is lower than the number on administrative records.
CPS counts exclude approximately 600,000 children who did not live with a family member (generally
children in foster care), for whom income data are not available. In 2002, the poverty threshold for
a family with two adults and two children was $18,244.

CRS-19
Estimates of the number of people with Medicaid based on the CPS and other
national surveys tend to differ from official numbers published by the Centers for
Medicare and Medicaid Services (CMS), based on data provided by states. The most
recent administrative data for Medicaid are from FY2000, which reports more than
44 million Americans as enrolled in Medicaid, including those in institutions. The
CPS estimates that in calendar year 2000, enrollment in Medicaid was approximately
30 million. The CPS is a survey of only the noninstitutionalized population, while
the Medicaid administrative data include approximately two million institutionalized
persons. Even so, the difference between the CPS estimates and the CMS
administrative data is substantial. While not all of the reasons for this difference are
understood, the following may be plausible explanations for at least part of the
disparity:
! double counting and classification errors in the administrative data;
! imprecise imputation of Medicaid status on the CPS based on receipt
of cash assistance; and
! inaccurate survey response by those respondents who did not want
to report being covered by a public assistance program or who
reported their current insurance coverage rather than their coverage
for the entire previous year, as is requested for the CPS.
It is also questionable whether the CPS as a survey of the nation as a whole can
accurately count Medicaid recipients given the great variability in eligibility rules
across states. In states where the CPS sample size is small, the estimates of Medicaid
participation are particularly subject to error.
Benefits
Medicaid’s basic benefits rules require all states to provide certain “mandatory”
services as listed in Medicaid statute. The statute lists additional services that are
considered optional — that is, federal matching payments are available for optional
services if states choose to include them in their Medicaid plans. States define the
specific features of each mandatory and optional service to be provided under that
plan within broad federal guidelines. Those four basic guidelines include:
! Amount, duration, and scope. Each covered service must be
sufficient in amount, duration, and scope to reasonably achieve its
purpose. The state may not arbitrarily deny or reduce the amount,
duration, or scope of services solely because of the type of illness or
condition. The state may place appropriate limits on a service based
on such criteria as medical necessity.
! Comparability. With certain exceptions defined in regulations,
services available to any categorically needy17 beneficiary in a state
17 To be eligible for federal matching funds, states must provide Medicaid coverage for most
individuals who receive federally assisted income maintenance payments, as well as related
groups not receiving cash payments. These groups are generally referred to as the
(continued...)

CRS-20
must be equal in amount, duration, and scope to those available to
any other categorically needy beneficiary in the state. Similarly,
services available to any medically needy beneficiary in a state must
be equal in amount, duration, and scope to those available to any
other medically needy beneficiary in the state.
! Statewideness. Generally, a state plan must be in effect throughout
an entire state; that is, the amount, duration, and scope of coverage
must be the same statewide.
! Freedom-of-Choice. With certain exceptions, a state’s Medicaid
plan must allow recipients freedom of choice among health care
providers or managed care entities participating in Medicaid.
The Secretary may waive applicability of these requirements under certain
circumstances (see the following discussion of waivers).
The following services are mandatory for most groups of Medicaid recipients:
! inpatient hospital services (excluding inpatient hospital services for
mental disease);
! outpatient hospital care, Federally Qualified Health Center (FQHC)
services and, if permitted under state law, rural health clinic (RHC)
services;
! laboratory and x-ray services;
! certified pediatric and family nurse practitioners;
! nursing facility services for those age 21 and over;
! early and periodic screening, diagnosis, and treatment for children
under the age 21 (EPSDT, defined further below);
! physicians’ services;
! family planning services and supplies;
! medical supplies and surgical services of a dentist;
! home health services for those entitled to nursing facility care;
! nurse-midwife services;
! pregnancy-related services (including treatment for conditions that
may complicate pregnancy); and
! 60 days of postpartum-related services.
The statute lists a wide variety of optional benefits that can be covered. Some
of the optional benefits are specific items, such as eyeglasses and prosthetic devices,
that states may include as a Medicaid benefit. Others are types of medical providers,
such as chiropractors and podiatrists, whose services can be considered Medicaid
covered benefits. States have a great deal of flexibility in choosing among the listed
items, in defining the scope of selected optional benefits, and in developing programs
that meet the needs of their Medicaid populations. Other optional services include
such items as prescription drugs, and inpatient psychiatric care for individuals under
age 21 or over 65, dental care, physical therapy, case management, and many other
17 (...continued)
categorically needy. States also have the option to provide Medicaid coverage to other
categorically needy groups for whom the eligibility criteria are somewhat more liberal.

CRS-21
services. Table 5 identifies the major optional benefits provided under state
Medicaid plans in 2002.
Table 5. Optional Medicaid Services and Number of States
Offering Each Service, November 2002
Number of statesa offering services to:
Both
Populations
categorically
added
Categorically
Medically
and medically
through
needy only
needy only
needy
1115 waivers
Chiropractors
2

30

Dental
4

45

Dentures
4

34

Diagnostic services
4

31

Emergency hospital services in
non-Medicare participating
hospital
3

34

Eyeglasses
4

44

Home health therapies:


- Physical
6

44

- Speech and language
6

43

- Occupational
5

44

- Audiology services
5

40

Hospice
7

35
1
Inpatient hospital & nursing
facility services for 65 and older
in IMDb
10

33

Intermediate care services for
the mentally disabled
10

41
1
Inpatient psychiatric
under age 21
10

34
1
Mental health rehabilitation and
stabilization
4

40

Nurse anesthetists
2

26

Occupational therapy
2

37
1
Optometrists
5

48

Other rehabilitative services
2

20

Personal care
8

28

Physical therapy
3

42
1
Physician directed clinic services
5

45

Podiatrists
5

43

Prescribed drugs
6

47

Preventive services
3
1
31

Private duty nursing
3
1
25
1
Prosthetic devices
6

45
1
Psychologists
2

30

Religious (non-medical) health
care institution
2

11

Respiratory care services for

ventilator dependent
3

13


CRS-22
Number of statesa offering services to:
Both
Populations
categorically
added
Categorically
Medically
and medically
through
needy only
needy only
needy
1115 waivers
Screening services
3

29

Skilled nursing facility for
under age 21
9

41

Targeted case management
10

40

Therapies for speech, hearing and
language disorders
4

40
1
Transportation
4

46

Source: Medicaid At-a-Glance 2002, Publication No. CMS-11024-02. Centers for Medicare and
Medicaid Services, U.S. Department of Health and Human Services.
Notes: Row totals do not sum because a state may appear more than once.
a. Includes all states, the District of Columbia, Puerto Rico and Virgin Islands.
b. In Delaware, Indiana, New York, North Dakota, and Wyoming, only inpatient hospital services are
provided to inpatients in institutions for mental disease (IMDs). In South Dakota and Idaho,
only skilled nursing facility services are provided to inpatients in IMDs.
In addition to the above general rules regarding mandatory and optional benefits,
Medicaid statute specifies special benefits or special rules regarding certain benefits
for targeted groups of individuals. These special categories of benefits include:
! EPSDT. Children under the age of 21 are entitled to the program of
preventive child care referred to as EPSDT. EPSDT is comprised of
screening services including a comprehensive health and
developmental history, comprehensive physical exams, appropriate
immunizations according to the schedule established by the
Advisory Committee on Immunization Practices, laboratory tests
and lead toxicity screening, health education, vision services
including eyeglasses, dental services, hearing services, and other
necessary health care to correct or ameliorate defects, physical and
mental illnesses, and conditions identified through the screening
services. Under EPSDT, if an optional service is determined to be a
necessary treatment to correct or ameliorate a condition identified
through screening, states are required to provide that service, even
if they have not chosen to cover that optional service under the
general benefits rules described above.
! Pregnancy-related services. While all women who qualify for
Medicaid are eligible for pregnancy-related services, women who
qualify under one of the pregnancy-related eligibility groups are
eligible for only pregnancy-related services (including treatment of
conditions that may complicate pregnancy). Eligibility for these
individuals extends through the pregnancy and for a period of 60
days postpartum.
! Benefits for the medically needy. Special benefits rules apply if
states choose to cover medically needy populations. States may
offer a more restricted benefit package for those enrollees but are
required, at a minimum, to offer the following: prenatal and delivery

CRS-23
services for pregnant women; ambulatory services for individuals
under 18 and those entitled to institutional services; and home health
services for individuals entitled to nursing facility services. Broader
requirements apply if a state has chosen to provide coverage for
medically needy persons in institutions for mental disease and
intermediate care facilities for the mentally retarded. If so, the state
is required to cover either all of the mandatory services, or
alternatively, the optional services listed in any seven of the
categories of care and services in Medicaid law defining covered
benefits.
! Tuberculosis (TB)-related services. States are given the option of
providing TB-related services to individuals infected with
tuberculosis who meet certain income and resource requirements but
are not otherwise eligible for Medicaid. TB-related services include
prescription drugs, physicians’ services, outpatient hospital services,
clinic services, FQHC services, RHC services, laboratory and x-ray
services, case management, and services designed to encourage
completion of regimens of prescribed drugs.
! Prescription Drug Coverage for Medicare/Medicaid Enrollees.
MMA of 2003 provides that, beginning in 2006, Medicaid eligibles
who are also eligible for Medicare will receive outpatient
prescription drug coverage through the new Medicare prescription
drug benefit instead of through Medicaid. State Medicaid programs
will be prohibited from covering any drugs that are to be provided
through the Medicare benefit, and from paying the cost sharing
amounts for those drugs. The precise impact of this bill on the
Medicaid drug coverage for dual eligibles is difficult to predict at
this time because the scope of the new Medicare benefit is not
defined in statute. (The statute includes general guidelines that
private insurers and plan sponsors, who will offer and administer
the Medicare benefit, must follow. Under these general guidelines,
specific plan benefits may vary.) Nonetheless, prescription drug
coverage offered by state Medicaid plans to dually eligible
beneficiaries will be considerably reduced.18
In addition, states are able to waive many of the basic benefits rules to provide
special home- and community-based services for persons who are in need of long-
term care and to conduct demonstration projects that test alternative methods of
meeting the overall purpose of the Medicaid statute. These waivers include:
! Home and Community-Based Services (HCBS). Under the HCBS
waiver authority, states can provide special benefits tailored to meet
the long-term care needs of targeted populations. Among the
benefits offered under these programs are case management;
homemaker; home health aide; personal care; adult day health;
18 For a more thorough description of the provisions in MMA of 2003, see CRS Report
RL32005, Medicare Fee-for-Service Modifications and Medicaid Provisions of H.R. 1 as
Enacted
, and CRS Report RL31966, Overview of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003
.

CRS-24
habilitation; respite care; day treatment or other partial
hospitalization services; and psychosocial rehabilitation and clinic
services for individuals with chronic mental illness. States can also
cover a wide range of other medical, non-medical, social and
supportive services that allow persons who need long-term care to
remain in the community. (For more information on HCBS waivers,
see the “Medicaid Waiver Programs” subsection below).
! Section 1115 Research and Demonstration Waivers. States have a
great deal of flexibility to define benefits under Section 1115
waivers. Many of the rules outlined above regarding benefits may
be waived. Under comprehensive 1115 demonstrations, states
generally provide a broad range of services statewide. The Bush
Administration has encouraged states to pursue targeted policies
under three waiver initiatives, all using Section 1115 authority.
Under Pharmacy Plus waivers, states are encouraged to provide only
pharmacy benefits to low-income seniors and individuals with
disabilities. Under Family Planning waivers, states are encouraged
to provide only family planning services to certain individuals of
childbearing age. Under Specialty Services and Populations
Demonstrations
, states provide pharmacy benefits to those with
HIV/AIDS and conduct cash & counseling projects that provide cash
to enrollees who may then arrange and purchase certain services on
their own. (For more information on research and demonstration
waivers, see the “Medicaid Waiver Programs” subsection below.)
Tables 6 and 7 show recipients and expenditures19 by type of service for fiscal
year 2000. The single benefit used by the largest number of Medicaid recipients was
prescription drugs, for 20.5 million recipients, followed by physician services, used
by 19.1 million recipients.20 Nursing facility services accounted for the largest share
of Medicaid spending (23.9%), followed closely by inpatient hospital services
(16.9%). Prescription drugs and physician services, while accounting for the largest
number of users, accounted for 13.9% and 4.7% of all spending on services,
respectively.
19 Expenditures shown in Table 7 are those reported by states through the Medicaid
Statistical Information System (MSIS) for FY 2000. These data do not match FY 2000
expenditures reported above in Table 1 (based on CMS-64 reports). Data reported on form
CMS-64 have always varied from the MSIS reported totals. Because the CMS-64 reports
are filed for financial accounting purposes, they are generally considered to be a more
accurate accounting of total outlays, and are preferred when examining state and/or federal
totals. Those data, however, do not allow for analysis of spending patterns and use of
services for individuals or among groups of individuals (for example, by basis of eligibility).
For such analyses, data from the MSIS are used. Figure 3 also uses MSIS data for this
reason.
20 Capitated payment systems accounted for a larger number of recipients than prescription
drugs (almost 21.3 million recipients). Capitated payment services, however, despite being
included alongside such services as prescription drugs and inpatient hospital services, are
not considered a single benefit. The term refers to a managed care delivery system that
provides a specified set of Medicaid benefits to a specified group of enrollees. (For more
information on Medicaid managed care, see “Delivery Systems” subsection.)

CRS-25
Table 6. Medicaid Recipients by Service Category,
Fiscal Year 2000
(in thousands of people, in order of descending number of recipients)
Service category
Number of recipients
Acute care
Capitated payment services
21,261
Prescribed drugs
20,517
Physician services
19,104
Outpatient hospital services
13,226
Lab & x-ray services
11,396
Other care and services
9,037
Clinic services
7,667
Dental services
5,892
PCCM services*
556
Inpatient hospital services
4,933
Other practitioner services
4,735
Sterilization services
137
Mental health facility services
102
Long-term care
Personal support services
4,549
Nursing facility services
1,703
Home health services
995
Unknown
176
Unduplicated total
42,763
Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical
information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not report MSIS data
for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.
Note: Recipients in this table include all individuals for whom a fee-for-service claim was paid during
the year AND those for whom a capitation payment was made during the year.
* PCCM denotes primary care case management, under which primary care providers are provided
with a small fee, usually paid on a monthly basis, for each enrollee for whom they coordinate primary
care services.

CRS-26
Table 7. Total State and Federal Medicaid Payments by Basis of Eligibility, Type of Service, and
as a Percentage of Total Payments, FY2000
(in order of descending total payments)
Total service
Blind/
Foster
Service type
payments
Aged
disabled
Children
Adults
care
Unknown
in millions of dollars
Acute care
Capitated payment services
$24,413
$1,721
$6,878
$9,459
$5,777
$323
$255
Inpatient hospital services
24,266
1,630
10,409
4,537
4,767
360
2,562
Prescribed drugs
20,014
5,355
11,591
1,338
1,444
224
62
Other care and services
14,680
2,448
9,874
848
593
554
363
Outpatient hospital services
7,053
667
3,174
1,310
1,443
123
336
Physician services
6,806
633
2,316
1,765
1,697
166
229
Clinic services
6,174
267
2,638
1,063
823
272
1,112
Mental health facility services
1,768
312
515
402
24
339
175
Dental services
1,404
80
286
764
208
40
28
Lab & x-ray services
1,288
90
538
180
423
17
39
Other practitioner services
658
79
257
192
75
49
6
PCCM services
165
3
32
108
18
2
2
Sterilization services
128
0
9
2
109
0
9
Subtotal
108,817
13,285
48,517
21,968
17,401
2,469
5,178
Long term care
Nursing facility services
34,432
27,058
6,967
34
33
22
318
Personal support services
11,567
2,688
6,415
1,340
232
740
152

CRS-27
Total service
Blind/
Foster
Service type
payments
Aged
disabled
Children
Adults
care
Unknown
ICF/MR services
9,375
708
8,611
15
5
18
17
Home health services
3,119
718
2,175
90
65
60
12
Subtotal
58,493
31,172
24,168
1,479
335
840
499







Unknown
997
45
57
18
27
1
850
Total
168,307
44,503
72,742
23,466
17,763
3,309
6,525
percentage of total payments by BOE
Acute care
Capitated payment services
14.5%
3.9%
9.5%
40.3%
32.5%
9.8%
3.9%
Inpatient hospital services
14.4%
3.7%
14.3%
19.3%
26.8%
10.9%
39.3%
Prescribed drugs
11.9%
12.0%
15.9%
5.7%
8.1%
6.8%
1.0%
Other care and services
8.7%
5.5%
13.6%
3.6%
3.3%
16.7%
5.6%
Outpatient hospital services
4.2%
1.5%
4.4%
5.6%
8.1%
3.7%
5.1%
Physician services
4.0%
1.4%
3.2%
7.5%
9.6%
5.0%
3.5%
Clinic services
3.7%
0.6%
3.6%
4.5%
4.6%
8.2%
17.0%
Mental health facility services
1.1%
0.7%
0.7%
1.7%
0.1%
10.2%
2.7%
Dental services
0.8%
0.2%
0.4%
3.3%
1.2%
1.2%
0.4%
Lab & x-ray services
0.8%
0.2%
0.7%
0.8%
2.4%
0.5%
0.6%
Other practitioner services
0.4%
0.2%
0.4%
0.8%
0.4%
1.5%
0.1%
PCCM services
0.1%
0.0%
0.0%
0.5%
0.1%
0.1%
0.0%
Sterilization services
0.1%
0.0%
0.0%
0.0%
0.6%
0.0%
0.1%
Subtotal
64.7%
29.9%
66.7%
93.6%
98.0%
74.6%
79.4%

CRS-28
Total service
Blind/
Foster
Service type
payments
Aged
disabled
Children
Adults
care
Unknown
Long
Term
Care

Nursing Facility Services
20.5%
60.8%
9.6%
0.1%
0.2%
0.7%
4.9%
Personal Support Services
6.9%
6.0%
8.8%
5.7%
1.3%
22.4%
2.3%
ICF/MR Services
5.6%
1.6%
11.8%
0.1%
0.0%
0.5%
0.3%
Home Health Services
1.9%
1.6%
3.0%
0.4%
0.4%
1.8%
0.2%
Subtotal
34.8%
70.0%
33.2%
6.3%
1.9%
25.4%
7.6%
Unknown
0.6%
0.1%
0.1%
0.1%
0.2%
0.0%
13.0%
Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical Information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not
report MSIS data for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.

CRS-29
Figure 3 shows average per recipient Medicaid spending by basis of eligibility
for fiscal year 2000. The figure points out the relatively low cost of non-disabled
children and adults to the Medicaid program. While these groups comprise the
majority of Medicaid enrollment, their costs are relatively small ($2,030 per adult and
$1,237 per child) when compared with the per recipient cost of the elderly ($11,928),
and blind and disabled ($10,559) recipients. This figure, on the other hand,
underestimates the average cost of long-term care services for the comparatively few
users of those services (see Table 6). Because these averages were calculated for all
program recipients (of any service), they are below the average cost of services for
only those individuals actually using the specific service. This difference is
especially pronounced for long-term care services because relatively few users of
those services account for a small number of very expensive claims.
Figure 3. Medicaid Expenditures per Recipient by Acute
and Long-Term Care and Basis of Eligibility, FY2000
1 4 ,0 0 0
$ 1 1 ,9 2 8
L o n g Te r m Ca r e
1 2 ,0 0 0
A c u te Ca r e
1 0 ,5 5 9
1 0 ,0 0 0
8 ,0 0 0
6 ,0 0 0
4 ,3 4 8
4 ,0 0 0
2 ,0 3 0
2 ,0 0 0
1 ,2 3 7
-
ed
ts
ged
ren
wn
A
sabl
dul
no
A
ild
Ch
d/Di
in
Bl
ldren and Unk
hi
ster C
Fo
Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical
Information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not report MSIS data
for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.
Notes: Medicaid recipients include all individuals for whom ANY claim was paid during the year
AND for whom a capitation payment was made during the year.
In these calculations, total expenditures for long term care and acute care services were divided by the
TOTAL number of program recipients of any service in each eligibility group, whether or not all of
those individuals were users of long-term care services and acute care services. This results in
averages for all recipients that can diverge from the averages among only those individuals who used
that particular type of service. This is especially true for long-term care where relatively few users
account for a small number of large and costly claims.
For a list of which services were classified as long term care and acute care, see Table 6.

CRS-30
Financing
The federal government helps states pay for Medicaid services by means of a
variable matching formula, called the federal medical assistance percentage (FMAP),
which is adjusted annually.21 With specific exceptions (described below), the federal
matching rate, which is inversely related to a state’s per capita income, can range
from 50 to 83%. Beginning in fiscal year 1998, the federal matching rate for the
District of Columbia increased to 70% and Alaska’s matching percentage is
calculated using the three-year average per capita income for the state divided by
1.05. Federal matching for five territories is 50% with a maximum dollar limit placed
on the amount each territory can receive.
To provide fiscal relief to states, federal matching rates for benefits were
changed temporarily by the Jobs and Growth Tax Relief Reconciliation Act
(JGTRRA, P.L. 108-27), which altered the rates for qualifying states22 for the last two
quarters of fiscal year 2003 and the first three quarters of fiscal year 2004. For these
quarters, the federal matching percentage for each state is held harmless for declines
from the prior fiscal year, and then is increased by 2.95 percentage points. The
federal matching percentages for all states and jurisdictions for fiscal years 2003 and
2004 are shown in Table 8.
MMA 2003 includes provisions intended to continue, after 2005, some state
financing of outpatient prescription drugs for individuals dually eligible for Medicare
and Medicaid even though Medicare will be their primary source of drug coverage.
Beginning in 2006, each state will be required to make a monthly payment to the
Secretary of HHS equal to the product of the state’s share of 2003 Medicaid per
capita spending for drugs for all full-benefit dual eligibles23 trended forward to the
current year, multiplied by the total number of such dual eligibles for such state for
the month, and multiplied again by the “factor” for the month. The “factor” is 90%
in 2006, and will phase down to 75% over 10 years. The formula ensures that states
continue to fund a significant share of the cost of the new Medicare drug benefit for
those individuals who would have otherwise been eligible for Medicaid prescription
drugs. A state’s failure to make the required payments will result in interest charges
and in an offset to amounts otherwise payable under Medicaid.
21 FMAP is a measure of the average per capita income in each state, squared, compared to
that of the nation as a whole.
22 For further information on the state eligibility criteria for the higher FMAP, see the
Legislative History subsection.
23 Including the estimated actuarial value of prescription drug benefits provided under
capitated care.

CRS-31
Table 8. Federal Medical Assistance Percentages by State for
Fiscal Years 2003 and 2004
FY2003
FY2004
FY2003
FY2004
First 2 Last 2 First Last
First Last 2 First
Last
State
qtrs
qtrs 3 qtrs
qtr
State
2 qtrs qtrs 3 qtrs
qtr
Alabama
70.60
73.55
73.70 70.75
Nevada
52.39
55.34
57.88 54.93
New
Alaska
58.27
61.22
61.34 58.39
Hampshire
50.00
52.95
52.95 50.00
Arizona
67.25
70.20
70.21 67.26
New Jersey
50.00
52.95
52.95 50.00
Arkansas
74.28
77.23
77.62 74.67
New Mexico
74.56
77.51
77.80 74.85
California
50.00
54.35
52.95 50.00
New York
50.00
52.95
52.95 50.00
Colorado
50.00
52.95
52.95 50.00
North Carolina
62.56
65.51
65.80 62.85
Connecticut
50.00
52.95
52.95 50.00
North Dakota
68.36
72.82
71.31 68.31
Delaware
50.00
52.95
52.95 50.00
Ohio
58.83
61.78
62.18 59.23
District of
Columbia
70.00
72.95
72.95 70.00
Oklahoma
70.56
73.51
73.51 70.24
Florida
58.83
61.78
61.88 58.93
Oregon
60.16
63.11
63.76 60.81
Georgia
59.60
62.55
62.55 59.58
Pennsylvania
54.69
57.64
57.71 54.76
Hawaii
58.77
61.72
61.85 58.90
Rhode Island
55.40
58.35
58.98 56.03
Idaho
70.96
73.97
73.91 70.46
South Carolina
69.81
72.76
72.81 69.86
Illinois
50.00
52.95
52.95 50.00
South Dakota
65.29
68.88
68.62 65.67
Indiana
61.97
64.99
65.27 62.32
Tennessee
64.59
67.54
67.54 64.40
Iowa
63.50
66.45
66.88 63.93
Texas
59.99
63.12
63.17 60.22
Kansas
60.15
63.15
63.77 60.82
Utah
71.24
74.19
74.67 71.72
Kentucky
69.89
72.89
73.04 70.09
Vermont
62.41
66.01
65.36 61.34
Louisiana
71.28
74.23
74.58 71.63
Virginia
50.53
54.40
53.48 50.00
Maine
66.22
69.53
69.17 66.01
Washington
50.00
53.32
52.95 50.00
Maryland
50.00
52.95
52.95 50.00
West Virginia
75.04
78.22
78.14 75.19
Massachusetts
50.00
52.95
52.95 50.00
Wisconsin
58.43
61.52
61.38 58.41
Michigan
55.42
59.31
58.84 55.89
Wyoming
61.32
64.92
64.27 59.77
America
Minnesota
50.00
52.95
52.95 50.00
Samoa
50.00
52.95
52.95 50.00
Mississippi
76.62
79.57
80.03 77.08
Guam
50.00
52.95
52.95 50.00
N. Marina
Missouri
61.23
64.18
64.42 61.47
Islands
50.00
52.95
52.95 50.00
Montana
72.96
75.91
75.91 72.85
Puerto Rico
50.00
52.95
52.95 50.00
Nebraska
59.52
62.50
62.84 59.89
Virgin Islands
50.00
52.95
52.95 50.00
Sources: The FMAPs displayed for the first two quarters of fiscal year 2003 and the last quarter of
fiscal year 2004 were published in the Federal Register (Nov. 30, 2001, vol. 66, no. 231, and Nov.
15, 2002, vol. 67, no. 221, respectively.)
The FMAPs displayed for the last two quarters of fiscal year 2003 were taken from the Centers for
Medicare and Medicaid Services Memorandum of Jun. 13, 2003 (MDL #03-005) to State Medicaid
Directors on the impact of P.L. 108-27. Finally, the FMAPs displayed for the first three quarters of
fiscal year 2004 were estimated by the Congressional Research Service.

CRS-32
Reimbursement Policy
For the most part, states establish their own rates to pay Medicaid providers for
services. By regulation these rates must be sufficient to enlist enough providers so
that covered services will be available to Medicaid beneficiaries at least to the extent
they are available to the general population in a geographic area. The Balanced
Budget Act of 1997 (BBA 97, P.L. 105-33) required that beginning October 1, 1997,
states must provide public notice of the proposed rates for hospitals, nursing
facilities, and intermediate care facilities for the mentally retarded and the methods
used to establish those rates.

All providers are required to accept payments under the program as payment in
full for covered services except where states require nominal cost-sharing by
beneficiaries. States may generally impose such charges with certain exceptions.
They are precluded from imposing cost sharing on services for children under 18,
services related to pregnancy, family planning or emergency services, and services
provided to nursing facility residents who are required to spend all of their income
for medical care except for a personal needs allowance. Effective August 5, 1997,
states are permitted to pay Medicaid rates, instead of Medicare rates, to providers for
services to dual eligibles (those Medicare beneficiaries who are also eligible for full
Medicaid benefits) and qualified Medicare beneficiaries (QMBs; see “Eligibility”
subsection). Effective in 2006, Medicaid programs are prohibited from paying the
cost sharing charges for Medicare covered drugs under the MMA 2003 prescription
drug benefit.
Certain types of providers are subject to special rules. Three such circumstances
are discussed in detail below.
Reimbursement for Prescription Drugs
The Omnibus Budget Reconciliation Act of 1990 (OBRA 90, P.L. 101-508)
established rules for Medicaid reimbursement of prescription drugs. Medicaid
payments for drugs are subject to upper payment limits. For drugs with generic
versions available from three or more manufacturers, the upper payment limit is
150% of the average wholesale price. For other drugs, the upper payment limit is
either the estimated price paid by the provider for the drug plus a dispensing fee or
the provider’s usual charge for the drug to the general public.
In addition, drug manufacturers participating in the Medicaid program must
provide rebates to states. Rebates, intended to ensure that states pay the “best price”
for Medicaid pharmaceuticals, vary depending upon whether the drug is available
from multiple sources (a generic version of the drug is available) or available from
a single source (a generic version of the drug is not available). The rebate for drugs
ranges from 11% to 15.1% of the average manufacturer price.
Disproportionate Share Hospital Payments
States must provide for additional payments to hospitals serving a
disproportionate share of low-income patients. Medicaid disproportionate share

CRS-33
hospital (DSH) payments must follow a formula that considers a hospital’s charity
patients as well as its Medicaid caseload. Beginning in fiscal year 1992, state DSH
payments were limited as part of an effort to rein in fast growth. DSH payments were
limited to 12% of total Medicaid spending. The 12% figure was phased in through
the use of state-specific DSH allotments (caps on federal matching payments) for
each federal fiscal year. BBA 97 lowered the DSH allotments by imposing a freeze
and making graduated proportional reductions for 1998-2002. MMA 2003 included
a special rule for calculating DSH allotments for certain years. Under the new law,
DSH allotments to states for FY2004 and for certain subsequent fiscal years are
increased by 16% over the amounts authorized under prior law. Thereafter, annual
DSH allotments for a state equal the allotment for the preceding fiscal year increased
by the percentage change in the medical care component of the Consumer Price Index
for All Urban Consumers.
Other ceilings as well as a floor are imposed on DSH allotments. They include:
a cap on DSH payments to institutions for mental disease and other mental health
facilities; and a cap on DSH payments to specific hospitals equal to a percentage of
each hospital’s uncompensated care costs. This “hospital specific” cap for all public
hospitals in the nation for a two-year period beginning in state fiscal year 2003 is
equal to 175% of uncompensated care costs. For private hospitals, the ceiling is at
100% of uncompensated care costs. Finally, certain low DSH states are guaranteed
a floor on their DSH allotments. Under MMA 2003, states in which total DSH
payments for FY2000 are less than 3% of the state’s total Medicaid spending on
benefits, allotments for FY2004 through FY2008 will be equal to 16% above the
prior year amounts. For FY2009 forward, as for all other states, the allotment for low
DSH states for each year equals the prior year amount increased by inflation.
Upper Payment Limits for Certain Institutional Providers
In 1987, the Secretary of HHS issued regulations establishing separate upper
payment limits for inpatient and outpatient services provided by different types of
facilities. An aggregate upper payment limit was established for each type of
institutional provider of Medicaid services by ownership (state versus other) that
would not exceed what would have been paid for those services under Medicare
payment principles. In 2000, the Secretary determined that some states made
arrangements with city or county facilities to pay these facilities at inflated rates. The
city or county facilities then transferred some or all of the enhanced payments back
to the state. BIPA 2000 addressed these funding methods by requiring regulations
to provide separate upper payment limits for private and non-state public facilities
up to 100% of the Medicare rate for such services. Later, through regulation, the
Clinton Administration allowed payments to city and county public hospitals up to
150% of the Medicare rate for their services. In January 2002, the Bush
Administration changed the special rule for city and county hospitals to 100% of the
Medicare rate.

CRS-34
Administration
Medicaid is a state-administered program. At the federal level, the Centers for
Medicare and Medicaid Services (CMS) of the U.S. Department of Health and
Human Services (DHHS) is responsible for overseeing state operations.
Federal law requires that a single state agency be charged with administration
of the Medicaid program. Generally, that agency is either the state welfare agency,
the state health agency, or an umbrella human resources agency. The single state
agency may contract with other state entities to conduct some program functions.
Further, states may process claims for reimbursement themselves or contract with
fiscal agents or health insuring agencies to process these claims. The federal share
of administrative costs is 50% for all states, except for certain items for which the
authorized rate is higher.
Delivery Systems
There are two systems for delivering services under Medicaid: fee-for-service
and managed care. These systems differ in how the state pays for the services it
covers, and how the individual accesses service providers. Most states use a
combination of both of these systems to deliver Medicaid services. The primary
elements of these systems and initiatives to deliver long-term care services are
discussed below.
Fee-for-service
The fee-for-service (FFS) system has been the primary method of paying for and
delivering Medicaid services since the program’s enactment in 1965. Under fee-for-
service, a Medicaid beneficiary determines, in consultation with a physician, the type
of services needed and can receive those services from any Medicaid participating
provider. States may limit the amount of services or require prior approval of
services, but the individual retains significant flexibility. The provider receives
payment from the state Medicaid agency for that particular service based on rates
established by the state. States have significant flexibility in developing how
payment rates are calculated and there is significant variation by state and by service.
For example, the rate may be related to the actual cost of the service for an individual
provider or could be a fixed, pre-determined amount for a particular procedure.
Although enrollment in managed care has increased over the last decade, the
fee-for-service system continues to be a widespread and important service delivery
mechanism. The fee-for-service system is used for individuals whose Medicaid
eligibility group or geographic location is not served through managed care, or for
persons who opt out when managed care is voluntary. The fee-for-service system is
also used for those Medicaid services not covered by a managed care contract.
For individuals who live in rural areas and individuals who are elderly or have
a disability, fee-for-service continues to be the dominant delivery system. States
have tended to exclude these groups from managed care programs. Individuals in
rural areas often have limited choice of managed care plans and service providers.

CRS-35
Individuals who are elderly or who have a disability, often have complex medical
conditions which can be costly and require specialty care, and their health status can
be unpredictable. Though individuals who are elderly or who have a disability tend
to be excluded, states have started to develop managed care approaches for these
groups to contain cost and test alternative delivery systems as discussed below.
Under a primarily fee-for-service system, state Medicaid expenditures and the
number of enrollees has increased significantly. Over the 10-year period between
1985 and 1995, state Medicaid expenditures increased from $18.2 billion to $67.3
billion, an average growth rate of 14% annually. This increase primarily reflected
increases in medical costs and increases in the number of Medicaid enrollees, among
other causes. Between 1985 and 1995, the number of Medicaid enrollees increased
66% from 21.8 million to 36.2 million. During that period, states also lacked a
coordinated system for delivering services. No one was designated to assist the
individual in sorting through his or her health care options or ensuring timely access
to appropriate services. In an effort to slow the growth of expenditures and improve
service delivery, many states turned to managed care for many of their enrollees.
Managed Care
The number of Medicaid beneficiaries enrolled in a managed care plan of any
type increased from 9.5% of the Medicaid population in 1991 to 57.6% in 2002. As
of June 30, 2002, 21.3 million individuals receiving Medicaid were enrolled in some
form of managed care. Alaska, Mississippi and Wyoming were the only states that
did not use managed care to deliver services to Medicaid beneficiaries.
Under managed care, the state contracts with a plan(s) to provide an agreed upon
set of benefits. The contract could include a comprehensive set of services or include
only one service, for example, case management. For each managed care contract,
the state establishes fixed, prospective, monthly, per person payment rates referred
to as a “capitation” payment for the covered services. The capitation rate is based on
the average cost of services for a defined group. After determining the average cost,
states may use a variety of actuarial methods to adjust the average cost for specific
individuals by age, geographic location, and/or diagnosis. For example, a state may
establish different rates for men and women, and different rates for specific age
brackets. The plan would receive the rate associated with the individual enrolled
based on that person’s gender and age. The capitation payment does not vary on a
monthly basis if the volume of services actually used by the individual differs from
that assumed in the capitation payment. The plan also negotiates payment rates with
participating providers. In contrast, under fee-for-service, the state establishes the
provider payment rates as described earlier. The goal of managed care is to reduce
unnecessary service use, improve access to quality health care by having a central
point of contact, and increase care coordination thereby reducing expenditures.
Types of Managed Care. Managed care plans vary in the financial
responsibility or “risk” the plan assumes and the services they provide. In a risk-
based managed care contract, the plan is fiscally responsible for the provision of all
services agreed upon in the contract regardless of actual use by beneficiaries. Under
a non-risk based contract, states either implement processes to share the financial
burden with the plan or the state assumes full financial responsibility for the services

CRS-36
provided. For example, in a non-risk based contract, at the end of the fiscal period,
a state may modify the payments to a managed care plan if actual service use differs
from projected use (upon which the original capitation payment was based).
There is also significant variation in the amount and types of services that each
state includes in its Medicaid managed care contracts. Some states contract with a
plan for a limited benefit package such as case management, dental, or mental health
services. Other states have included a comprehensive24 set of services.
The primary types of Medicaid managed care arrangements are described below:
! Managed care organization (MCO). Under a managed care
organization (such as a health maintenance organization or HMO),
the entity has a comprehensive, risk-based contract with the state.
The state pays the organization a fixed, prospective, per person per
month rate for providing medical care for all plan enrollees.
! Pre-paid health plan (PHP). Pre-paid health plans refer to risk-
based contracts that include less than a comprehensive set of
services (such as only behavioral health services), or non-risk based
contracts for any package of services. Essentially, such plans do not
have a risk-based contract with the state for a comprehensive set of
services.
! Primary care case management (PCCM). Under a PCCM model,
providers receive a per person, monthly fee for coordinating each
enrollee’s care. The provider is not fiscally responsible for the
services used by the individual. All services are provided through
the fee-for-service delivery system. The PCCM must be a physician
or licensed health care professional; this provider acts as a care
coordinator and/or gatekeeper to the services specified under the
PCCM contract.
There are also several hybrids of the MCO, PHP and PCCM models. Most
states have implemented multiple models. For example, a state may have an MCO
for children and families enrolled in Medicaid and a PHP for mental health services
for individuals with a relevant disability. As of June 30, 2002, 47 states and the
District of Columbia were using some form of Medicaid managed care, 44 states had
risk-based plans25 and 30 states had non-risk PCCM plans.26
24 The law considers a service package to be “comprehensive” if it includes inpatient
hospital services and any of the following services, or any three or more of the following
services 1) outpatient hospital services, 2) rural health clinic services, 3) federally qualified
health center (FQHC) services, 4) other laboratory and x-ray services, 5) nursing facility
service, 6) early and periodic screening, diagnostic, and treatment (EPSDT) services, 7)
family planning services, 8) physician services, or 9) home health services.
25 Includes PHPs and hybrid managed care models.
26 CMS, 2002 Medicaid Managed Care Enrollment Report, Plan Type Breakout Enrollment
by State,
See [http://www.cms.hhs.gov/medicaid/managedcare/mctype02.pdf].

CRS-37
As discussed earlier, managed care has primarily included low-income adults
and children, as shown in Table 9. Of the 21.3 million Medicaid recipients enrolled
in a managed care organization or pre-paid health plan in fiscal year 2000, 78% were
low-income adults and children, 18% were individuals with disabilities and the
elderly, and 5% had an unknown basis of eligibility.27
Table 9. Medicaid Recipients Served Through MCO And/or PHP
Plans by Basis of Eligibility, Fiscal Year 2000
(in thousands of people)
Blind
and
Foster
State Totala
Aged
disabled
Children
Adults
care
Unknown
Alabama







Alaska







Arizona
650
29
90
379
137
8
6
Arkansas







California
5,778
501
863
2,409
1,152
125
728
Colorado
343
39
58
162
50
16
17
Connecticut
291

1
213
64
7
5
Delaware
100

10
51
36
2

Dist. of Columbia
101

3
66
30

1
Florida
769
19
116
480
126
9
19
Georgia
22

4
15
4


Hawaii
167

5
84
71
4
3
Idaho







Illinois
237

1
173
55
1
7
Indiana
178

6
131
36
1
4
Iowa
252
2
46
133
56
9
6
Kansas
57


43
11

2
Kentucky
700
49
184
346
97
8
16
Louisiana







Maine
3


2
1


Maryland
507
7
71
335
77
15
2
Massachusetts
779
2
117
385
255
1
19
Michigan
1,055
10
185
596
181
24
59
Minnesota
375
35
4
229
105
1
1
Mississippi
9

3
5
1

1
Missouri
395

1
277
99
13
4
Montana
3



2


Nebraska
172
1
13
116
35
8

Nevada
71


47
17

7
New Hampshire
7


6
1


New Jersey
560
33
19
403
95
1
8
27 Does not total to 100% due to rounding. This does not include individuals only receiving
PCCM services.

CRS-38
Blind
and
Foster
State Totala
Aged
disabled
Children
Adults
care
Unknown
New Mexico
297
1
28
217
44
3
4
New York
1,082
9
90
570
304
4
104
North Carolina
62

6
39
11
1
4
North Dakota
1


1



Ohio
362

6
273
82

1
Oklahoma
382

37
274
69
1
1
Oregon
508
35
53
207
198
12
3
Pennsylvania
1,015
66
215
510
180
26
18
Rhode Island
123

1
76
44
1
1
South Carolina
43

3
36
3


South Dakota
99
10
16
56
15
2

Tennessee
1,552
87
315
637
452
12
49
Texas
727
40
64
504
114
3
1
Utah
195
9
21
103
35
6
21
Vermont
66

1
35
29
2

Virginia
213
2
30
144
37


Washington
613
3
3
466
126
1
14
West Virginia







Wisconsin
342
1
10
221
106
3
1
Wyoming







U.S. Total
21,263
992
2,700
11,456
4,647
330
1,137
Percentage of
Total

5%
13%
54%
22%
2%
5%
Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical
Information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not report MSIS data
for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.
a. Does not include individuals who only received primary care case management services (PCCM).
— Denotes no managed care program, except in some cases states reported capitation payments as
part of other services and did not report these payments in the MCO or PHP categories. This was most
likely to occur when there was only one service provided under that managed care program (e.g.,
transportation). Alternate data sources from the Centers for Medicare and Medicaid Services website
[cms.hhs.gov/medicaid/managedcare/mmcns600.asp] show that Alabama, Arkansas, and West
Virginia had capitated MCO or PHP programs during FY2000.
Medicaid expenditures in fiscal year 2000 for services provided in managed care
or a pre-paid health plan followed a similar pattern, as shown in Table 10.28 Of the
$24.4 billion in Medicaid expenditures for individuals in a managed care
organization or pre-paid health plan, 64% were for low-income adults and children,
35% were for individuals with disabilities and the elderly, and 1% were for
individuals whose basis of eligibility was unknown.
28 Expenditures shown in Table 10 are those reported by states through the MSIS database
for FY 2000. See footnote 19 for further information.

CRS-39
Table 10. Total Medicaid Payments for MCO and PHP Recipients
by Basis of Eligibility, Fiscal Year 2000
(in millions of dollars)
Blind
and
Foster
State
Totala
Aged
disabled
Children
Adults
care
Unknown
Alabama
--
--
--
--
--
--
--
Alaska
--
--
--
--
--
--
--
Arizona
$1,709
$330
$690
$395
$257
$9
$29
Arkansas
--
--
--
--
--
--
--
California
$3,846
$347
$650
$1,828
$837
$41
$142
Colorado
$372
$49
$156
$82
$32
$52
--
Connecticut
$411
--
$1
$284
$116
$8
$1
Delaware
$169
$2
$51
$45
$70
$1
--
Dist. of Columbia
$136
--
$27
$63
$46
--
--
Florida
$743
$78
$297
$247
$104
$6
$10
Georgia
$7
--
$3
$2
$1
--
--
Hawaii
$235
--
$5
$120
$101
$7
$1
Idaho
--
--
--
--
--
--
--
Illinois
$213
$1
$1
$133
$76
--
$1
Indiana
$143
--
$5
$96
$41
$1
$1
Iowa
$139
$1
$36
$60
$40
$2
--
Kansas
$43
--
--
$23
$14
--
$5
Kentucky
$467
$21
$214
$190
$38
$4
--
Louisiana
--
--
--
--
--
--
--
Maine
$2
--
--
$1
$1
--
--
Maryland
$911
$30
$395
$301
$174
$15
($3)
Massachusetts
$525
$25
$178
$178
$142
--
$2
Michigan
$1,274
$15
$658
$347
$235
$10
$8
Minnesota
$660
$135
$8
$329
$190
$1
($2)
Mississippi
($3)
--
--
($2)
--
--
($1)
Missouri
$383
--
$1
$277
$91
$13
--
Montana
$3
--
--
--
$2
--
--
Nebraska
$110
$2
$24
$40
$15
$29
--
Nevada
$72
--
--
$33
$32
--
$7
New Hampshire
$4
--
--
$4
$1
--
--
New Jersey
$648
$8
$49
$422
$168
$1
--
New Mexico
$526
$2
$173
$243
$84
$18
$5
New York
$1,469
$142
$263
$558
$492
$3
$11
North Carolina
$55
--
$17
$23
$14
$1
--
North Dakota
$1
--
--
$1
--
--
--
Ohio
$385
--
$4
$248
$132
--
--
Oklahoma
$221
$1
$63
$130
$26
--
--
Oregon
$763
$74
$212
$164
$288
$24
$1
Pennsylvania
$2,523
$253
$1,144
$734
$349
$42
$1
Rhode Island
$140
--
$1
$64
$74
--
--
South Carolina
$28
$9
$5
$11
$2
--
--

CRS-40
Blind
and
Foster
State
Totala
Aged
disabled
Children
Adults
care
Unknown
South Dakota
$6
$1
$1
$4
$1
--
--
Tennessee
$2,948
$105
$1,106
$733
$974
$20
$9
Texas
$634
$68
$188
$297
$81
$1
--
Utah
$131
$5
$52
$39
$16
$2
$16
Vermont
$25
--
--
$11
$13
$1
--
Virginia
$322
$5
$139
$124
$54
--
--
Washington
$658
$2
$1
$387
$261
--
$7
West Virginia
--
--
--
--
--
--
--
Wisconsin
$358
$11
$59
$190
$91
$7
--
Wyoming
--
--
--
--
--
--
--
U.S. Total
$24,413
$1,721
$6,878
$9,459
$5,777
$323
$255
Percentage of
Total

7%
28%
39%
24%
1%
1%
Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical
Information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not report MSIS data
for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.
a Does not include individuals receiving only primary care case management services (PCCM).
- - Denotes no managed care program, except in some cases states reported capitation payments as
part of other services and did not report these payments in the MCO or PHP categories. This was most
likely to occur when there was only one service provided under that managed care program (e.g.,
transportation). Alternate data sources from the Centers for Medicare and Medicaid Services website
[cms.hhs.gov/medicaid/managedcare/mmcns600.asp] show that Alabama, Arkansas, and West
Virginia had capitated MCO or PHP programs during FY2000.
Trends in Managed Care. In the early and mid-1990's, states significantly
expanded enrollment in Medicaid managed care programs, but this growth is
slowing. In fiscal year 2001 and fiscal year 2002, the number of individuals enrolled
in a managed care plan as a percentage of all Medicaid eligible individuals increased
1.9% and 1.3% respectively. This is a significant decrease over the 61.1% and 38.4%
annual growth rates of fiscal year 1994 and fiscal year 1995, respectively. The
expansion of Medicaid managed care in the early and mid-1990's should be viewed
in the context of a general trend toward managed care across many sectors of the U.S.
health care system. Despite the significant growth of managed care both in Medicaid
and the overall health care system, the extent to which it has accomplished the goal
of controlling health care expenditures and increasing quality has been inconclusive.
Finally, in both Medicaid and the U.S. health care system in general, managed
care continues to evolve. Some of these changes include plans entering and exiting
certain geographic locations, and company consolidations and bankruptcies. There
has been a significant number of risk-based managed care plans that have entered and
left the Medicaid program. In a survey of all states that had risk-based programs in
1998 conducted by the National Academy for State Health Policy (May 2001), 82%
of these states had turnover in plans between 1998 and 2000. While plan turnover
occurred in a majority of managed care programs, plan exits affected a minority of
Medicaid enrollees (8.4% of managed care enrollees in 2000 and 4.6% of all
Medicaid beneficiaries). State agencies most commonly cited financial reasons (e.g.,

CRS-41
insufficient capitation payments, inadequate risk-sharing methodology) for managed
care plans leaving the Medicaid program. Five states reported that this turnover in
plans resulted in moving solely to a PCCM model of service delivery. The turnover
is not necessarily negative if it strengthens the overall delivery system, but it may
result in decreased continuity of services and additional administrative costs if
beneficiaries must switch providers or re-enroll in a different plan.
Long-Term Care Delivery System
Long-term care refers to a wide range of supportive and health services for
persons who have lost the capacity for self-care due to illness, frailty, or a disabling
condition. It differs from acute care in that the goal of long-term care is not to cure
an illness that is generally of short duration, but to allow an individual to attain and
maintain an optimal level of functioning over the long-term.
Since the establishment of the Medicaid program in 1965, long-term care
services (i.e., nursing home and home care) have been delivered largely through the
fee-for-service delivery system. A 1981 amendment to the Medicaid statute
established Section 1915(c) waivers, giving states the option of providing home and
community-based services to individuals who would otherwise be eligible for
institutional care. Many states arrange for these services to be delivered on a fee-for-
service basis, often using case managers to determine service needs and authorize
delivery. Concerns about uncoordinated long-term and acute care, inefficiencies in
disease management for persons with multiple chronic conditions, and growing costs,
however, have encouraged federal and some state governments to develop alternative
systems to pay for and deliver long-term care services.
In recent years, many of the alternative delivery systems that states and the
federal government have developed coordinate long-term care services for dual
eligibles — persons who are eligible for both Medicaid and Medicare — through
managed care programs. One example is the Program for All-Inclusive Care for the
Elderly (PACE), originally modeled after the On Lok Senior Health Services pilot
project in San Francisco. PACE makes available all services covered under both
programs without amount, duration or scope limitations, and without application of
any deductibles, copayments or other cost sharing. Under the program, certain low-
income individuals age 55 and older, who would otherwise require nursing home
care, receive all health, medical, and social services they need. An interdisciplinary
team of physicians, nurses, physical therapists, social workers, and other
professionals develop and monitor care plans for enrollees. Monthly capitated
payments are made to providers from both the Medicare and Medicaid programs. As
specified in Medicare and Medicaid statutes, the amount of these payments from both
programs must be less than what would have otherwise been paid for a comparable
frail population not enrolled in the PACE program. Payments are also adjusted to
account for the comparative frailty of PACE enrollees. PACE providers assume the
risk for expenditures that exceed the revenue from the capitation payments. The
Balanced Budget Act of 1997 made PACE a permanent benefit category under
Medicare and a state plan optional benefit under Medicaid. As of February 2003,
there were 28 PACE sites across the country.

CRS-42
Other examples of state initiatives to provide coordinated long-term care
services include the Minnesota Senior Health Options (MSHO), the Wisconsin
Partnership Program, and the Continuing Care Network (CCN) demonstration of
Monroe County, New York. The MSHO program combines Medicare and Medicaid
financing to integrate acute and long-term care services for dually eligible seniors
residing in seven counties in Minnesota. The program consolidates all Medicare and
Medicaid managed care requirements into a single contract overseen by the state,
allowing MSHO to reduce duplication and resolve important differences across
Medicare and Medicaid delivery systems. Like PACE, the Wisconsin Partnership
Program pays capitated payments to providers to coordinate acute and long-term care
services for persons who would otherwise qualify for nursing home care. It also
places a strong emphasis on services provided in home and community settings. This
program, however, was designed specifically to serve rural areas. New York’s CCN
project enrolls at least 10,000 elderly beneficiaries, including 1,500 who had been
certified for care in a nursing facility. To participate, enrollees must be age 65 or
over, eligible for Medicare and/or Medicaid, and reside in the program’s service area.
Capitation payments made to CCN are intended to cover all of Medicare’s acute care
services for this population and most of Medicaid’s long-term care services.
Medicaid prescription drug coverage, for example, is paid separately on a fee-for-
service basis.
States have also experimented with other initiatives that capitate payments for
acute and long-term care services under the Medicaid program only. Examples of
these demonstrations include the nation’s only statewide mandatory Medicaid
managed care program — the Arizona Long-Term Care System (ALTCS) — and
small, voluntary programs such as Florida’s Community-Based Diversion Pilot
Project. Florida’s Diversion program serves selected metropolitan areas and counties.
Case managers employed through both of these programs arrange Medicaid long-
term care services and coordinate with Medicare providers to deliver acute care
services.
All of these programs were designed with the expectation that they would
control costs and reduce administrative complexity. They also intend to delay
institutionalization, and thus incur savings for Medicaid through the provision of
expanded home and community-based care options and, in some cases, greater
beneficiary control over services. Those programs that also capitate Medicare are
intended to reduce hospitalization and skilled nursing facility expenditures as well
as other acute care costs associated with institutional care. While these initiatives
exist in a number of states, they account for a relatively small share of total Medicaid
spending for long-term care.
Medicaid Waiver Programs
Under current law, states have the flexibility to waive certain Medicaid program
requirements to provide services to individuals not traditionally eligible for
Medicaid, limit benefit packages for certain groups, and provide home and
community-based services to people with long-term care needs, among other
purposes. States must submit proposals outlining terms and conditions for proposed

CRS-43
waivers to CMS for approval before implementing these programs. The two primary
provisions of the Social Security Act used today that authorize states to implement
waiver programs are Section 1115 and Section 1915(c).
In recent years, there has been increased interest among states in demonstration
programs as a means to restructure Medicaid coverage, control costs, and increase
flexibility. Whether large or small reforms, the waiver programs have resulted in
significant changes for Medicaid beneficiaries nationwide.
Section 1115 Waiver Demonstration Programs
Section 1115 of the Social Security Act provides the Secretary of Health and
Human Services (HHS) with broad authority to waive certain statutory requirements
in the Medicaid program allowing states to conduct research and demonstration
programs to further the goals of Title XIX.29 Under Section 1115, the Secretary may
waive Medicaid requirements contained in Section 1902, known as freedom of
choice of provider, comparability, and statewideness (see “Benefits” subsection for
a discussion of these requirements).
States often use Section 1115 waivers to offer different service packages or a
combination of services in different parts of the state, test new reimbursement
methods, change eligibility criteria in order to offer coverage to new or expanded
groups, cover non-Medicaid services (e.g., cash and counseling demonstrations),30
or contract with a greater variety of managed care plans. Demonstration programs
are generally approved for a five-year period, however CMS has granted program
extensions for many of the comprehensive waiver programs (i.e., programs that
generally offer a state-wide comprehensive service package to populations
traditionally eligible for Medicaid as well as expansion populations). Some of these
extensions have allowed Section 1115 waiver programs to remain in operation for 10
or more years. For example, Arizona’s entire Medicaid program operates under the
Section 1115 waiver authority, and this program is in its 20th year.
While Section 1115 is explicit about provisions in Medicaid law that may be
waived in conducting research and demonstration projects, a number of other
provisions in Medicaid law and regulations specify limitations or restrictions on how
29 Section 1115 also authorizes the Secretary to conduct research and demonstration
projects under several other programs authorized in the Social Security Act, including
TANF, SSI and SCHIP.
30 Cash and counseling demonstrations are designed to test a consumer-directed approach
to the financing and delivery of personal attendant services (e.g., assistance with activities
of daily living such as eating, bathing, toileting, transport from bed to chair, etc.) for elderly
and disabled individuals. These demonstrations provide cash payments to enrollees so that
they may directly arrange and purchase services that best meet their needs. States must
submit a Section 1115 waiver for a Cash and Counseling demonstration if: cash is provided
directly to an individual; cash is used to pay a legally responsible relative (e.g., spouses or
parents); the state intends to change Medicaid eligibility requirements; and/or the state
intends to waive the requirement to pay only those agencies that have provider agreements
with the state.

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a state may operate a waiver program. For example, one provision restricts states
from establishing waivers that fail to provide all mandatory services to the mandatory
poverty-related groups of pregnant women and children; another provision specifies
restrictions on cost-sharing imposed under demonstration waivers.
Financing. Approved Section 1115 waivers are deemed to be part of a
Medicaid state plan and are financed through federal and state matching funds at the
regular FMAP rate. However unlike regular Medicaid, costs associated with waiver
programs must be budget neutral to the federal government over the life of the
waiver program. To meet the budget neutrality test, estimated spending under the
waiver cannot exceed the estimated cost of the state’s existing Medicaid program.
For example, costs associated with an expanded population (e.g., those not already
covered under the state’s Medicaid program), must be offset by reductions elsewhere
within the Medicaid program. Several methods used by states to generate cost
savings for the waiver component include: (1) moving part of the Medicaid
population into managed care; (2) limiting benefit packages for certain eligibility
groups; (3) providing targeted services to certain individuals so as to divert them
from full Medicaid coverage; and (4) using enrollment caps and cost-sharing to
reduce the amounts states must pay.
Program Types. CMS classifies Section 1115 waiver programs into five
distinct categories. They are:
! Comprehensive demonstrations. These demonstrations provide a
broad range of services that are generally offered statewide. In fiscal
year 2002, there were 20 approved Medicaid comprehensive state
reform waivers,31 with two pending implementation. Fiscal year
2002 state-reported enrollment estimates for the comprehensive
demonstration waivers totaled approximately 7.2 million,32 and
federal expenditures for these programs were approximately $15.8
billion.33
! Family planning demonstrations. These demonstrations provide
family planning services for certain individuals of childbearing age
31 States with comprehensive demonstration waivers include Arizona, Arkansas, California
(Los Angeles county), Delaware, District of Columbia, Hawaii, Kentucky, Maryland,
Massachusetts, Minnesota, Missouri, New Jersey, New York, Oklahoma, Oregon, Rhode
Island, Tennessee, Utah, Vermont, and Wisconsin.
32 California’s Section 1115 waiver program (i.e., Los Angeles county) uses demonstration
authority to provide financial support to continue county delivery system restructuring
efforts. Because of the nature of the demonstration project, California does not submit
enrollment estimates to CMS. Several states cover SCHIP targeted low-income children in
their Medicaid Section 1115 waiver programs. Because expenditures associated with these
children are not captured in the Medicaid Section 1115 expenditure reports, when possible,
counts of targeted low-income children (as identified on CMS’ SYMS data system) have
been removed from the Medicaid Section 1115 state-reported enrollment totals.
33 The fiscal year 2002 state-reported expenditure estimate for Utah is not available. New
York’s fiscal year 2002 state-reported estimate was based on historical spending.

CRS-45
in 16 states.34 For the family planning demonstrations, fiscal year
2002 enrollment counts totaled 1.8 million, and federal expenditures
were approximately $327 million.35
! Specialty services and population demonstrations. These
demonstrations generally include programs that provide cash to
enrollees so that they may directly arrange and purchase services that
best meet their needs. In addition, they also include waivers to
provide pharmacy benefits to persons with specific conditions, such
as HIV/AIDS. In fiscal year 2002, there were 10 such programs in
eight states.36 These demonstrations covered just under 7,000
individuals at a federal cost of approximately $41.6 million.37
! The Health Insurance Flexibility and Accountability Initiative
(HIFA). These demonstrations are designed to encourage states to
extend Medicaid and SCHIP to the uninsured, with a particular
emphasis on statewide approaches that maximize private health
insurance coverage options and target populations with incomes
below 200% FPL. As of January 2003, there were six Medicaid
Section 1115 waivers approved under the HIFA initiative in five
states.38 Four of the six HIFA programs (Illinois, New Jersey, New
Mexico, and Oregon) are Medicaid/SCHIP combined waivers. A
combined HIFA waiver generally means that the state will finance
changes to its Medicaid program using unspent SCHIP funds. No
enrollment or expenditure data were available for fiscal year 2002 as
these programs were new at that time.
! Pharmacy plus demonstrations. These demonstrations provide
comprehensive pharmacy benefits for low-income seniors and
individuals with disabilities with income at or below 200% FPL.
The demonstrations may provide pharmaceutical products, assist
individuals who have private pharmacy coverage with high
premiums and cost sharing, or provide wraparound pharmaceutical
coverage to bring private sources of pharmacy coverage up to the
level of desired demonstration benefit coverage. Enrollees will not
be eligible for the comprehensive Medicaid benefits available under
34 States with family planning demonstration waivers include Alabama, Arizona, Arkansas,
California, Delaware, Florida, Maryland, Missouri, New Mexico, New York, Oregon, Rhode
Island, South Carolina, and Washington.
35 Arizona, Delaware, Missouri, New York, and Rhode Island report their family planning
demonstration expenditures as a part of their comprehensive demonstration waivers. Fiscal
year 2002 state-reported expenditures for Maryland were not available.
36 States with specialty service and population demonstration waivers include Arkansas (2
waivers), Colorado (2 waivers), District of Columbia, Florida, Maine, New Jersey, New
Hampshire, and Oregon.
37 Fiscal year 2002 state-reported enrollment and expenditure data were not available for
Arkansas and New Hampshire.
38 States with approved Medicaid or Medicaid/SCHIP combined waivers include Illinois,
Maine, New Jersey, New Mexico (2 waivers), and Oregon. HIFA waivers authorized solely
under the SCHIP program are not included.

CRS-46
the state’s Medicaid plan. In fiscal year 2002, there were four
approved Pharmacy Plus waivers in four states.39 Two states
reported waiver data in fiscal year 2002. In these states, enrollment
counts totaled 193,574 at a federal cost of approximately $169
million.
Section 1915(c) Home and Community-based Waiver
Programs

In 1981, Congress added Section 1915(c) to the Medicaid statute. Section
1915(c) authorizes the Secretary of HHS to waive certain requirements40 of Medicaid
law to allow states to cover a range of home and community-based services for
persons who would otherwise be eligible for Medicaid-funded institutional care. The
1915(c) waivers, often referred to as home and community-based services (HCBS)
waivers, were designed to reduce the institutional bias in the Medicaid program that
made it easier for persons to qualify for Medicaid coverage of institutional care than
for care in the home or in the community.
The waivers allow states to cover a broad range of medical and non-medical
social services to enable people with chronic long-term care needs to remain in the
community. Unlike the budget neutrality test required for Section 1115 waivers
(where estimated spending under the waiver cannot exceed the estimated costs of the
state’s existing Medicaid program), the cost-effectiveness test under 1915(c)
prohibits expenditures from exceeding the cost of institutional care that would have
been provided to waiver recipients absent the waiver.41 To assist states in containing
costs, Section 1915(c) allows states to place caps on the total number of individuals
that may be covered under each waiver and/or set expenditure restrictions on a per
capita basis (e.g., not to exceed $20,000 per year per waiver recipient) or on an
aggregate basis (e.g., a cost cap applied to all persons under a waiver in the state).
Medicaid regulations require that waiver participants fall into one of the
following target groups: the aged, persons with physical disabilities, persons with
mental retardation or developmental disabilities (MR/DD), and persons with mental
illness. Generally, states must apply for separate waivers to serve these different
groups. Section 1915(c) also gives states the flexibility to define the categories of
individuals within these broader target groups who may be eligible for certain
waivers and the services they will receive. For example, states may cover only the
elderly for case management services, or only individuals with physical disabilities
for personal attendant care. States may also limit eligibility for services to
individuals who have certain conditions, such as HIV/AIDS.
39 States with approved Pharmacy Plus waivers include Florida, Illinois, Wisconsin, and
South Carolina.
40 States can waive statewideness and comparability, and may apply certain institutional
eligibility rules to persons in home and community-based waivers.
41 Section 1915(c) waivers are prohibited from covering expenses for room and board, while
such costs would be covered by Medicaid in an institutional setting.

CRS-47
Further, eligibility is limited to individuals who would otherwise be eligible for
institutional care provided in a hospital, nursing facility or intermediate care facility
for the mentally retarded (ICF/MR). There are no federal requirements that describe
the level and or severity of functional limitations that individuals must have to be
admitted to an institutional setting and thus be eligible for a 1915(c) waiver, although
states generally determine eligibility for long-term care services based on a test of
applicants’ functional limitations for most waiver programs. The design of these
tests varies across states, but often includes tests to determine an applicant’s
limitations in ability to carry out activities of daily living (ADLs) and instrumental
activities of daily living (IADLs).42
Although these programs are optional, all states provide some HCBS waiver
services to certain Medicaid enrollees with long-term care needs. As of June 2003,
CMS reported that 246 programs were in operation across the country. In 1999, the
most recent year for which data are available, 1915(c) waivers served 707,132
individuals. CMS estimates that about 875,000 people were served in 2000.43 The
most recent expenditure data from fiscal year 2002 showed that total Medicaid
spending on 1915(c) waivers reached $16.3 billion versus $11.2 billion in 1999.
The cost of providing waiver services to recipients varies across target
populations (see Figure 4). Spending on waivers for persons with MR/DD, for
example, totaled $12 billion in fiscal year 2002, accounting for 73.6% of total HCBS
waiver spending. Waiver spending on elderly individuals and persons with physical
disabilities totaled $4 billion in fiscal year 2002, accounting for 24.5% of total
spending on HCBS waivers. Waivers for AIDS or AIDS-related conditions (ARC)
totaled $66.2 million (0.4%), for technology dependent individuals totaled $88.8
million (0.5%), and for persons with brain injuries totaled $104.7 million (0.6%). In
addition, three small waiver programs serving individuals with a primary diagnosis
of mental illness totaled $32.4 million and accounted for about 0.2% of all HCBS
waiver expenditures.
42 ADLs refer to activities necessary to carry out basic human functions, and include the
following: bathing, dressing, eating, mobility inside the home, toileting, and transferring
from a bed to a chair. IADLs refer to tasks necessary for independent community living, and
include the following: shopping, light housework, telephoning, money management, and
meal preparation.
43 States are required to report enrollment data for 1915(c) waivers to CMS through the
submission of Forms 372. The most recent year for which all states have submitted these
forms is 1999.

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Figure 4. Medicaid HCBS Waiver Expenditures by Target
Population, 2002
Technology
Dependent*
Persons w ith
.5%
AIDS
Persons w ith
.4%
Brain Injury
.6%
Elderly w ith
Disabilities
24.5%
MR/DD**
73.6%
Source: Eiken, S. and Burwell, B. Medicaid HCBS Waiver Expenditures, FY1997 through FY2002,
The MEDSTAT Group, May 15, 2003.
* Persons who are technology dependent or medically fragile.
** MR/DD = Persons with mental retardation and/or developmental disabilities.
Data are provided to CMS through Form 64 reports by States. Eiken and Burwell report that FY2002
waiver expenditures may be understated by about $400 million (2-3%) since they do not include all
prior period adjustments or corrections submitted by States to CMS. CMS Form 64 data are by date
of payment, not by date of service. CMS 64 data on HCBS waiver spending represent only Medicaid
fee-for-service spending, not spending through capitated managed care programs. Arizona, Florida,
Wisconsin, Texas, and Minnesota are examples of states that pay for at least some HCBS waiver
services through capitated long-term care programs. Totals may not sum to 100% due to rounding.

CRS-49
Legislative History
Below is a summary of major Medicaid changes enacted in public laws passed
during 1996 forward. (For legislative history prior to 1996, see the 1996 edition and
earlier editions of the Green Book: Background Material and Data on Programs
Within the Jurisdiction of the Committee on Ways and Means.
)
Contract with America Advancement Act of 1996, P.L. 104-121:
! Alcoholics and drug addicts. SSI benefits are terminated for
individuals receiving disability cash assistance based on a finding of
alcoholism and drug addiction. Persons who lose SSI eligibility may
still be eligible for Medicaid if they meet other Medicaid eligibility
criteria. States are required to perform a redetermination of
Medicaid eligibility in any case in which an individual loses SSI.
Personal Responsibility and Work Opportunity Reconciliation Act of 1996, P.L. 104-
193:
! Eligibility. A new cash welfare block grant to states, Temporary
Assistance for Needy Families (TANF), is established. The
automatic link between AFDC and Medicaid is severed. Families
who meet AFDC eligibility criteria as of July 16, 1996 are eligible
for Medicaid, even if they do not qualify for TANF. States must use
the same income and resource standards and other rules previously
used to determine eligibility, including the prereform AFDC family
composition requirement. A state may lower its income standard,
but not below the standard it applied on May 1, 1988. A state may
increase its income and resource standards up to the percentage
increase in the Consumer Price Index (CPI) subsequent to July 16,
1996. States may use less restrictive methods for counting income
and resources than were required by law as in effect on July 16,
1996. States are permitted to deny Medicaid benefits to adults and
heads of households who lose TANF benefits because of refusal to
work; states may not apply this requirement to poverty-related
pregnant women and children.
! Disabled children. The definition of disability used to establish the
eligibility of children for SSI is narrowed. Children who lose SSI
eligibility may still be eligible for Medicaid if they meet other
Medicaid eligibility criteria. States are required to perform a
redetermination of Medicaid eligibility in any case in which an
individual loses SSI and that determination affects his or her
Medicaid eligibility.
! Aliens. Legal resident aliens and other qualified aliens who entered
the United States on or after August 22, 1996 are barred from
Medicaid for five years. Significant exceptions are made for such
aliens with a substantial U.S. work history or a military connection.
Except for emergency services, Medicaid coverage for such aliens

CRS-50
entering before August 22, 1996 and coverage after the five-year ban
are state options.
! Administration. A state may use the same application form for
Medicaid as they use for TANF. A state may choose to administer
the Medicaid program through the same agency that administers
TANF or through a separate Medicaid agency. A special fund of
$500 million is provided for enhanced federal matching for states’
expenditures attributable to the administrative costs of Medicaid
eligibility determinations due to the law.
Balanced Budget Act of 1997, P.L. 105-33:
! Eligibility. The Balanced Budget Act restores Medicaid eligibility
and SSI coverage for legal immigrants who entered the country prior
to August 22, 1996 and later become disabled; guarantees continued
Medicaid eligibility for children with disabilities who are expected
to lose their SSI eligibility as the result of restrictions enacted in
1996; and extends the period that states must provide coverage to
refugees, asylees, and individuals whose deportation has been
withheld from five to seven years. States are permitted to provide
continuous Medicaid coverage for 12 months to all children,
regardless of whether they continue to meet income eligibility tests.
States are permitted to create a new Medicaid eligibility category for
working persons with disabilities with income up to 250% of
poverty and who would, but for income, be eligible for SSI. Such
individuals can “buy into” Medicaid by paying a sliding scale
premium based on the individuals’ income as determined by the
state.
! Payment methodology. The law repeals the Boren amendment,
which directed that payment rates to institutional providers be
“reasonable and adequate” to cover the cost of “efficiently and
economically operated” facilities, and repeals the law requiring
states to assure adequate payment levels for services provided by
obstetricians and pediatricians. The requirement to pay federally
qualified health centers and rural health clinics 100% of reasonable
costs is phased out over six fiscal years, with special payment rules
in place during fiscal years 1998 — 2002 to ease the transition.
! Payments for disproportionate share hospitals. This law includes
several provisions affecting disproportionate share hospital (DSH)
payments provided to hospitals that treat a disproportionate share of
the uninsured and Medicaid beneficiaries. It reduces state DSH
allotments by imposing freezes and making graduated proportionate
reductions. Limitations are placed on payments to institutions for
mental disease. The Act establishes additional caps on the state
DSH allotments for fiscal years beginning in 1998 and specifies
those caps for 1998 — 2002. States are required to report annually
on the method used to target DSH funds and to describe the
payments made to each hospital.
! Managed care. The law eliminates the need for 1915(b) waivers to
enroll most Medicaid populations in managed care. States can

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require the majority of Medicaid recipients to enroll in managed care
simply by amending their state plan. Waivers are still required to
mandate that children with special health care needs and certain
dually eligible Medicaid-Medicare beneficiaries enroll with managed
care entities. The law establishes a statutory definition of primary
care case management (PCCM), adds it as a covered service, and
sets contractual requirements for both PCCM and Medicaid
managed care organizations. The Act also includes managed care
provisions that establish standards for quality and solvency, and
provide protections for beneficiaries. The law repeals the provision
that requires managed care organizations to have no more than 75%
of their enrollment be Medicaid and Medicare beneficiaries, and the
prohibition on cost sharing for services furnished by health
maintenance organizations.
Nursing Home Resident Protection Amendments of 1999, P.L. 106-004:
! Transfer or discharge of nursing facility residents. This law
prohibits the transfer or discharge of nursing facility residents, both
those covered and not covered by Medicaid, as a sole result of a
nursing home’s voluntary withdrawal from participation in the
Medicaid program, except under certain circumstances.
! Information for new residents. For new residents, meaning those
entering a facility subsequent to the effective date of the facility’s
withdrawal from Medicaid, the following information must be
provided orally and in writing: (a) notice that the facility does not
participate in Medicaid, and (b) the facility may transfer or discharge
such a new resident when that resident is no longer able to pay for
his/her care, even if such a new resident is covered by Medicaid.
! Facility requirements. Facilities that voluntarily withdraw from
Medicaid are still subject to all applicable requirements of Title
XIX, including the nursing facility survey, certification and
enforcement authority, as long as patients covered under Medicaid
prior to the facility’s withdrawal continue to reside in the facility.
1999 Emergency Supplemental Appropriations Act, P.L. 106-31:
! Tobacco settlement payments to states. Amounts recovered or paid
to states by manufacturers of tobacco products as part of the
comprehensive tobacco settlement of November 1998 or to any
individual state based on a separate settlement or litigation shall be
retained in full by such states. That is, such states do not have to pay
the federal government a portion of these amounts equal to the
applicable (state-specific) federal medical assistance percentage.
! Restriction on use of tobacco settlement funds. States receiving
these sums are not permitted to use these funds to pay for
administrative expenses incurred in pursuing such tobacco litigation.

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Medicare, Medicaid, and State Children’s Health Insurance Program (SCHIP)
Balanced Budget Refinement Act of 1999, incorporated by reference in the
Consolidated Appropriations Act for Fiscal Year 2000, P.L. 106-113:
! Increase in DSH allotments for selected States. The law increases
the federal share of DSH payments to Minnesota, New Mexico,
Wyoming, and the District of Columbia for each of fiscal years 2000
— 2002.
! Administration. The law extends beyond fiscal year 2000 the
availability of a $500 million fund created to assist with the
transitional costs of new Medicaid eligibility activities resulting
from welfare reform, and allows these funds to be used for costs
incurred beyond the first three years following welfare reform.
! Federally qualified health center (FQHC) services and rural health
clinics (RHCs). The law slows the phase-out of the cost-based
system of reimbursement for services provided by FQHCs and
RHCs, and authorizes a study of the impact of reducing or modifying
payments to such providers.
! Payments for monitoring services and external review requirements.
The law provides that states will receive enhanced matching
payments for medical and utilization reviews for Medicaid fee-for-
service, and quality reviews for Medicaid managed care, when
conducted by certain entities similar to peer review organizations.
It also eliminates duplicative requirements for external review, and
requires the DHHS Secretary to certify to Congress that the external
review requirements for Medicaid managed care are fully
implemented.
! Federal matching for disproportionate share hospital payments.
The law clarifies that Medicaid disproportionate share hospital
payments are matched at the Medicaid federal medical assistance
percentage and not at the enhanced Federal medical assistance
percentage authorized under title XXI (SCHIP).
! Outpatient drugs. The law allows rebate agreements entered into
after the date of enactment of this Act to become effective on the
date on which the agreement is entered into, or at state option, any
date before or after the date on which the agreement is entered into.
! Disproportionate share hospital transition rule. The law extends a
provision included in the Balanced Budget Act of 1997 related to
allocation of DSH funds among California’s hospitals.
Foster Care Independence Act of 1999, P.L. 106-169:
! Former foster care children. States are given the option to extend
Medicaid coverage to former foster care recipients ages 18, 19, and
20, and states may limit coverage to those who were eligible for
assistance under Title IV — E before turning 18 years of age. The
law also includes a “sense of Congress” statement indicating that
states should provide health insurance coverage to all former foster
care recipients ages 18, 19, and 20.

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Ticket to Work and Work Incentives Improvement Act of 1999, P.L. 106-170:
! Employed, disabled individuals. States can opt to cover working
persons with disabilities at higher income and resource levels than
otherwise permitted (i.e., income over 250% of the federal poverty
level and resources over $2,000 for an individual or $3,000 for a
couple). States may also cover financially eligible working
individuals whose medical condition has improved such that they no
longer meet the Social Security definition of disability. States can
require these individuals to “buy in” to Medicaid coverage. These
individuals pay premiums or other cost-sharing charges on a sliding
fee scale based on income, as established by the state.
Agriculture Risk Protection Act of 2000, P.L. 106-224:
! Information sharing. This law allows schools operating federally
subsidized school meal programs to take a more active role in
identifying children eligible for, and enrolling such children in, the
Medicaid and SCHIP programs. It permits schools to share income
and other relevant information collected when determining eligibility
for free and reduced-price school meals with state Medicaid and
SCHIP agencies, as long as there is a written agreement that limits
use of the information and parents are notified and given a chance to
“opt out.”
! Demonstration project. The law also establishes a demonstration
project in one state in which administrative funds under the Special
Supplemental Nutrition Program for Women, Infants and Children
(WIC) may be used to help identify children eligible for, and enroll
such children in, the Medicaid and SCHIP programs.
Children’s Health Act of 2000, P.L. 106-310:
! Rights of institutionalized children. The law requires that general
hospitals, nursing facilities, intermediate care facilities and other
health care facilities receiving federal funds, including Medicaid,
protect the rights of each resident, including the right to be free from
physical or mental abuse, corporal punishment, and any restraints or
involuntary seclusions imposed for the purposes of discipline or
convenience. Restraints and seclusion may be imposed in such
facilities only to ensure the physical safety of the resident, a staff
member or others. Additional requirements govern reporting of
resident deaths, promulgation of regulations regarding staff training,
and enforcement. (Other Medicaid requirements regarding restraints
and seclusion for inpatient psychiatric services for persons under age
21 are specified in federal regulations.)
! Children’s rights in community-based settings. The law also
includes requirements for protecting the rights of residents of certain
non-medical, community-based facilities for children and
adolescents, when that facility receives funding under this Act or
under Medicaid. For such individuals and facilities, restraints and

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seclusion may only be imposed in emergency circumstances and
only to ensure the physical safety of the resident, a staff member or
others, and less restrictive interventions have been determined to be
ineffective. Use of a drug or medication that is not a standard
treatment for a resident’s medical or psychiatric condition is
prohibited. Likewise, use of mechanical restraints is prohibited.
Seclusion may only be used when a staff member is providing
continuous face-to-face monitoring and when strong
licensing/accreditation and internal controls are in place. (Time out
is not considered to be seclusion.) Additional requirements govern
reporting of resident deaths, promulgation of regulations regarding
staff training, and enforcement.
Breast and Cervical Cancer Prevention and Treatment (BCCPT) Act of 2000, P.L.
106-354:
! Eligibility. The law establishes a new optional coverage group
under Medicaid for uninsured women who are under age 65, have
been screened under the Centers for Disease Control and
Prevention’s Breast and Cervical Cancer Early Detection Program
and need treatment for breast or cervical cancer, and who are not
otherwise eligible for Medicaid under a mandatory coverage group.
States have the option of extending presumptive eligibility to these
women; presumptive eligibility allows individuals whose family
income appears to meet applicable financial standards to enroll
temporarily in Medicaid, until a final formal determination of
eligibility is made. Medicaid providers are the only entities qualified
to determine presumptive eligibility for these women.
! Benefits. Medicaid coverage is limited to medical assistance
provided during the period in which the individual requires breast or
cervical cancer treatment.
! Financing. The federal share of Medicaid payments for this group
uses the enhanced matching rate structure under the State Children’s
Health Insurance Program, which ranges from 65 to 85%.
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000,
incorporated by reference in P.L. 106-554:
! Disproportionate share hospitals. State DSH allotments for 2001
and 2002 are increased. It also extends a special DSH payment rule
for hospitals in California to qualifying facilities in all states, and
provides additional funds to certain public hospitals not receiving
DSH payments.
! Federally qualified health centers (FQHCs) and rural health clinics
(RHCs). The law replaces cost-based reimbursement with a
prospective payment system for FQHCs and RHCs.
! Upper payment limit rules. It also modifies proposed rules
governing upper payment limits on inpatient and outpatient services
provided by certain types of facilities, and requires that the final
regulations be issued by the end of 2000.

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! Other provisions. Additional changes affect extensions of Section
1115 Medicaid waivers, Medicaid county-organized health systems,
the federal medical assistance percentage for Alaska, transitional
medical assistance for welfare-to-work families, determination of
presumptive eligibility for children, outreach to and enrollment of
certain Medicare beneficiaries eligible for Medicaid cost-sharing
assistance, PACE waivers, and posting of information on nursing
facility services.
Native American Breast and Cervical Cancer Treatment Technical Amendment Act
of 2001, P.L. 107-121:
! Eligibility. This law allows states to include in the optional
Medicaid eligibility category created by the Breast and Cervical
Cancer Prevention and Treatment (BCCPT) Act of 2000, American
Indian and Alaskan Native women with breast or cervical cancer
who are eligible for health services provided under a medical
program of the Indian Health Service or a tribal organization. All
provisions under the BCCPT Act of 2000 apply to such women.
Public Health Security and Bioterrorism Preparedness and Response Act of 2002,
P.L. 107-188:
! Waiver of provider requirements and Medicare+Choice payment
limits. The law authorizes the Secretary to temporarily waive
conditions of participation and other certification requirements for
any entity that furnishes health care items or services to Medicare,
Medicaid, or SCHIP beneficiaries in an emergency area during a
declared disaster or public health emergency. During such an
emergency, the Secretary may waive: (a) participation, State
licensing (as long as an equivalent license from another state is held
and there is no exclusion from practicing in that state or any state in
the emergency area), and pre-approval requirements for physicians
and other practitioners; (b) sanctions for failing to meet requirements
for emergency transfers between hospitals; (c) sanctions for
physician self-referral; and (d) limitations on payments for health
care and services furnished to individuals enrolled in
Medicare+Choice (M+C) plans when services are provided outside
the plan. To the extent possible, the Secretary must ensure that M+C
enrollees do not pay more than would have been required had they
received care within their plan network.
! Notification to Congress. The law also requires the Secretary to
provide Congress with certification and written notice at least two
days prior to exercising this waiver authority. It also provides for
this waiver authority to continue for 60 days, and permits the
Secretary to extend the waiver period.
! Evaluation. The Secretary is further required, within one year after
the end of the emergency, to provide Congress with an evaluation of
this approach and recommendations for improvements under this
waiver authority.

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Health Care Safety Net Amendments of 2002, P.L. 107-251:
! Study of migrant farm workers. This law requires the Secretary to
conduct a study of the problems experienced by farm workers and
their families under Medicaid and SCHIP, specifically, barriers to
enrollment, and lack of portability of Medicaid and SCHIP coverage
for farm workers eligible in one state who move to other states on a
periodic basis. The Secretary must also identify possible strategies
to increase enrollment and access to benefits for these families.
Strategies to be examined must include: (a) use of interstate
compacts to establish portability and reciprocity, (b) multi-state
demonstration projects, (c) use of current law flexibility for coverage
of residents and out-of-state coverage, (d) development of programs
of national migrant family coverage, (e) use of incentives to private
coverage alternatives, and (f) other solutions as deemed appropriate.
In conducting the study, the Secretary must consult with several
groups. The Secretary must submit a report on this study to the
President and Congress in October, 2003. This report shall address
findings and conclusions and provide recommendations for
appropriate legislative and administrative action.
Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27:
! Temporary increase in the federal medical assistance percentage
(FMAP). With respect to expenditures for Medicaid benefits, this
law increases FMAP for all 50 states, the District of Columbia and
5 commonwealths and territories for a period of five calendar
quarters, including the last two quarters of fiscal year 2003 and the
first three quarters of fiscal year 2004. There is a two-step process
for determining the increase. First, each state’s fiscal year 2003
FMAP, as would otherwise be calculated, must be at least equal to
the state’s fiscal year 2002 FMAP, and second, the FMAP
determined under this step is increased by 2.95 percentage points.
For the fiscal year 2004 FMAP change, the same calculations
(substituting fiscal year 2003 for fiscal year 2002) are applied to
determine the temporary increase. The law also increases the
limitation on payments for the commonwealths and territories.
! State eligibility for increased FMAP. To qualify for the increased
FMAP payments, a state cannot have a Medicaid plan with more
restrictive eligibility rules than the plan in effect on September 2,
2003. If a state restores the program eligibility to the levels in effect
on September 2, 2003, then the state would qualify for increased
matching payments for the entire quarter in which eligibility is
reinstated. If a state expands eligibility rules after the beginning of
the higher payments (April 1, 2003) and before September 2, 2003,
the state is not eligible for the higher payments for the period
beginning on April 1, 2003 to the date that eligibility was expanded.

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SCHIP Financing Act of 2003, P.L. 108-74:
! State eligibility for increased FMAP. This law modifies the
requirements regarding state eligibility for the temporary increase in
FMAP payments authorized under P.L. 108-27 (see above).
Specifically, P.L. 108-74 provides that if a state reduces eligibility
after September 2, 2003, and later restores eligibility to the
September 2, 2003 levels, the state would qualify for the higher
payments from the date of the eligibility restoration rather than for
the entire calendar quarter. In addition, if a state expands eligibility
rules after the beginning of the higher payments (April 1, 2003) and
before September 2, 2003, the state is eligible for the higher
payments for the period beginning on April 1, 2003 to the date that
eligibility was expanded.
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L.
108-173:
! Disproportionate share hospital payments. This law establishes a
temporary 16% increase in DSH allotments to states for FY2004 and
for certain subsequent fiscal years. Allotments for subsequent years
will be equal to FY2004 amounts unless the Secretary of HHS
determines that the allotments as would have been calculated under
prior law equal or exceed the FY2004 amounts. For such fiscal
years, allotments will be equal to allotments for the prior fiscal year
increased by the percentage change in the CPI-U for the previous
fiscal year. The law also changes the definition of a low DSH state
to those states in which total DSH payments for FY2000 are less
than 3% (rather than 1% as under prior law) of the state’s total
Medicaid spending on benefits. In addition, P.L. 108-173 increases
the floor allotment amount for low DSH states for FY2004 through
FY2008 by 16% each year (over the prior year amount). For
FY2009 forward, as for all other states, the allotment for low DSH
states for each year equals the prior year amount increased by
inflation. Finally, as a condition of receiving federal Medicaid
payments for FY2004 and beyond, states are required to submit a
detailed annual report and an independent certified audit on their
DSH payments to hospitals.
! Clarification regarding non-regulation of transfers. In accordance
with certain specified criteria, and on a temporary basis (through
December 31, 2005), the law clarifies that the non-federal share of
Medicaid funds transferred to the state from a specific public,
regional medical center may be used by the state as the non-federal
share of Medicaid expenditures. This provision targets, but is not
limited to, a medical center located in Memphis, Tennessee.
! Exempt prices of drugs provided to certain safety net hospitals from
the Medicaid best price drug program. The law modifies the
definition of “best price” for the purpose of calculating Medicaid
drug rebates to also exclude the discounted inpatient drug prices
charged to certain public safety net hospitals. Such hospitals must

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also comply with the auditing and record keeping requirements
applicable to other providers with similar exemptions from
Medicaid’s “best price” determinations.
! Extend special treatment for a specific Medicaid provider. The
moratorium on the determination of Saginaw Community Hospital
in Michigan as an institution for mental disease (IMD) is
permanently extended. That is, this facility is not to be designated
as an IMD for Medicaid purposes.