Order Code RL33202
Medicaid: A Primer
Updated January 24, 2007
Elicia J. Herz
Specialist in Social Legislation
Domestic Social Policy Division

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Medicaid: A Primer
Summary
In existence for 41 years, Medicaid is a means-tested entitlement program that
finances the delivery of primary and acute medical services as well as long-term care
to more than 63 million people at an estimated cost to the federal and state
governments of roughly $317 billion. Of all federally supported programs, only
Medicare comes close to this level of spending, and only Social Security costs more.
Each state designs and administers its own version of Medicaid under broad
federal rules. State variability in eligibility, covered services, and how those services
are reimbursed and delivered is the rule rather than the exception.
This report describes the basic elements of Medicaid, focusing on federal rules
governing who is eligible, what services are covered, how the program is financed
and how beneficiaries share in the cost, how providers are paid, and the role of
special waivers in expanding eligibility and modifying benefits. The recently passed
Deficit Reduction Act of 2005 or DRA (P.L. 109-171), as amended by the Tax Relief
and Health Care Act of 2006 (P.L. 109-432), included many provisions affecting
Medicaid. DRA provides states with opportunities to make fundamental changes in
Medicaid program design, including covered benefits and beneficiary cost-sharing.
These and other major DRA changes are summarized here. Lastly, basic program
statistics and citations to in-depth CRS reports on specific topics are provided. This
report will be updated as legislative activity warrants.

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Contents
Who is Eligible for Medicaid? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
What Benefits Does Medicaid Cover? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
How Is Medicaid Financed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Do Beneficiaries Pay for Medicaid Services? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Service-Based Cost-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Participation-Related Cost-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
How are Providers Paid Under Medicaid? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
How Do Medicaid Research and Demonstration Waivers Work? . . . . . . . . . . . 11
Some Medicaid Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Where is Medicaid Headed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CRS Medicaid Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Provider Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Policy Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

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Medicaid: A Primer
Medicaid was enacted in 1965 in the same legislation that created the Medicare
program (i.e., 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 elderly. It has expanded in additional directions
since that time.
In the federal budget, Medicaid is an entitlement program that constitutes a large
share of mandatory spending. Two other federally supported health programs —
Medicare and the State Children’s Health Insurance Program (SCHIP) — are also
entitlements,1 and are also components of mandatory spending in the federal budget.
All three programs finance the delivery of certain health care services to specific
populations. While Medicare is financed exclusively by the federal government, both
Medicaid and SCHIP are jointly financed by the federal and state governments.
Federal Medicaid spending is open-ended, with total outlays dependent on the
generosity of state Medicaid programs. In contrast, SCHIP is a capped federal grant
to states.
Even though Medicaid is an entitlement program in federal budget terms, states
may choose to participate, and all 50 states do so. If they choose to participate, states
must follow federal rules in order to receive federal reimbursement to offset a portion
of their Medicaid costs.
Who is Eligible for Medicaid?
The federal Medicaid statute (Title XIX of the Social Security Act) defines more
than 50 distinct population groups as being potentially eligible. To qualify for
Medicaid coverage, applicants’ income (e.g., wages, Social Security benefits) and
often their resources or assets (e.g., value of a car, savings accounts) must meet
program financial requirements. These requirements vary considerably among states,
and different rules apply to different population groups within a state. Medicaid
eligibility is also subject to categorical restrictions — generally, it is available only
to the elderly, persons with disabilities (as generally defined under the federal
Supplemental Security Income Program, or SSI2), members of families with
1 The term “entitlement” has two meanings in this context. Individuals who meet state
eligibility requirements are entitled to Medicaid. Similarly, individuals who meet federal
eligibility requirements are entitled to Medicare. In contrast, states that meet certain federal
requirements are entitled, or have access to, federal SCHIP grants. All states have qualified
for SCHIP. There is no individual entitlement under SCHIP.
2 SSI provides cash assistance to the elderly and adults with certain disabilities that
(continued...)

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dependent children, and certain other pregnant women and children. In recent years,
Medicaid has been extended to additional groups with specific characteristics,
including certain women with breast or cervical cancer and uninsured individuals
with tuberculosis.
In general, while Medicaid is targeted at individuals with low income, not all
of the poor are eligible, and not all those covered are poor. For example, adults
without a qualifying disability and no dependent children are not eligible for
Medicaid, no matter how poor they are (unless a state has a special waiver; see the
subsection on waivers below). And, the income standards applicable to some
Medicaid eligibility groups exceed the poverty level, as described below. Moreover,
from state to state, applicants with substantial differences in gross income may
qualify for Medicaid under the same eligibility group, depending on the income
methodology used (i.e., what types of income are counted, and how much, if any,
income of a given type is disregarded or ignored).
Some eligibility groups are mandatory, meaning that all states must cover them;
others are optional. Examples of groups that states must provide Medicaid to
include:
! poor families that meet the financial requirements (based on family
size) of the former Aid to Families with Dependent Children
(AFDC) cash assistance program,3
! families transitioning from welfare to work who receive up to 12
months of Medicaid coverage (reinstated and extended under DRA
and P.L. 109-432),
! pregnant women and children under age six with family income
below 133% of the federal poverty level (FPL),4
! children ages six through 18 with family income below 100% FPL,
! poor individuals with disabilities or poor individuals over age 64
who qualify for cash assistance under the SSI program,5 and
! certain groups of legal permanent resident immigrants (e.g., refugees
for the first seven years after entry into the U.S.; asylees for the first
seven years after asylum is granted; lawful permanent aliens with 40
2 (...continued)
significantly restrict their ability to be gainfully employed. In the case of children,
disabilities must result in marked and severe functional limitations.
3 AFDC income standards are well below the federal poverty level, but states can modify
(liberalize or further restrict) these criteria. Under the 1996 welfare reform law, AFDC was
replaced with the Temporary Assistance for Needy Families (TANF) program. Although
TANF recipients are not automatically eligible for Medicaid, some states have aligned
income rules for TANF and Medicaid, thus facilitating Medicaid coverage for some TANF
recipients.
4 For example, in 2006, the FPL for a family of four is $20,000 — 133% of FPL for such a
family would equal $26,600.
5 Some states use income, resource and disability standards that differ from current SSI
standards.

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quarters of creditable coverage under Social Security; immigrants
who are honorably discharged U.S. military veterans).
Examples of groups that states may choose to cover under Medicaid:

! pregnant women and infants with family income exceeding 133%
FPL up to 185% FPL,
! individuals with disabilities and people over age 64 whose income
exceeds the SSI level (about 75% FPL nationwide) up to 100% FPL,
! children with disabilities whose family income is above the financial
standards for SSI but below 300% FPL (added under DRA),
! individuals who require institutional care (in a nursing facility or
other medical institution) whose income exceeds the SSI level up to
300% of the applicable SSI payment standard (based on family size)
or roughly 221% FPL,
! “medically needy” individuals who meet categorical requirements
(e.g., are over 64 or under 19, have a disability, are pregnant, or are
members of families with dependent children) with income up to
133a% of the maximum payment amount applicable under states’
former AFDC programs based on family size.6 Unlike most other
eligibility groups, medical expenses (if any) may be subtracted from
income in determining financial eligibility for medically needy
coverage, which is often referred to as “spend down,” and
! legal immigrants after their first five years in this country.
DRA made significant changes to asset transfer rules that potentially affect
eligibility for Medicaid’s long-term care services (both institutional care and services
provided in homes or the community, described below). In general, states must delay
the start date for Medicaid enrollment for individuals who transfer assets for less than
the fair market value on or after a “look-back date” of five years prior to application
(rather than the three years typically applicable under prior law). Under DRA, the
penalty period begins on the later of: (1) the first month following the date of the
improper transfer (as under prior law), or (2) the date the person is Medicaid-eligible
and would qualify for an institutional level of care. In sum, these DRA changes
could lengthen the period of ineligibility for some individuals.
6 This limit can be raised or lowered based on specific provisions in the 1996 welfare reform
legislation.

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What Benefits Does Medicaid Cover?
Like eligibility, federal rules require states to cover certain benefits under the
traditional Medicaid program. Certain other services may also be offered at state
option. States define the specific features of each covered benefit within four broad
federal guidelines:
! Each service must be sufficient in amount, duration, and scope to
reasonably achieve its purpose. States may place appropriate limits
on a service based on such criteria as medical necessity.
! Within a state, services available to categorically needy groups7 must
be equal in amount, duration, and scope. Likewise, services
available to medically needy groups8 must be equal in amount,
duration, and scope. These requirements are called the
“comparability rule.”
! With certain exceptions, the amount, duration, and scope of benefits
must be the same statewide, also referred to as the “statewideness
rule.”
! With certain exceptions, beneficiaries must have freedom of choice
among health care providers or managed care entities participating
in Medicaid.
Standard benefits identified in the federal statute and regulations include a wide
range of medical care and services. Some benefits are specific items, such as
eyeglasses and prosthetic devices. Other benefits are defined in terms of specific
types of providers (e.g., physicians, hospitals) whose array of services are designated
as coverable under Medicaid. Still other benefits define specific types of service
(e.g., family planning services and supplies, pregnancy-related services) that may be
delivered by any qualified medical provider that participates in Medicaid.
Examples of benefits that are mandatory for most Medicaid groups:
! inpatient hospital services (excluding services for mental disease),
! services provided by federally qualified health centers,
! laboratory and x-ray services,
! physician services,
! pregnancy-related services,
! nursing facility services for individuals age 21 and over, and
! home health care for those entitled to nursing home care.
Examples of optional benefits for most Medicaid groups that are offered by
many states:
7 Categorically needy groups include families with children, the elderly, persons with
disabilities, and certain other pregnant women and children who meet former AFDC- and
SSI-related financial standards, or have income below specified percentages of the FPL.
8 Medically needy groups include individuals meeting the same categorical restrictions, but
different (typically somewhat higher) financial standards apply.

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! prescribed drugs (covered by all states),
! routine dental care,
! physician-directed clinic services,
! other licensed practitioners (e.g., optometrists, podiatrists,
psychologists),
! inpatient psychiatric care for the elderly and for individuals under
age 21,
! nursing facility services for individuals under age 21,
! physical therapy,
! prosthetic devices, and
! transportation.
The optional, traditional benefits offered vary across states. In addition, the
breadth of coverage for a given benefit can and does vary from state to state, even for
mandatory services. For example, states may place different limits on the amount of
inpatient hospital services a beneficiary can receive in a year (e.g., up to 15 inpatient
days per year in one state versus unlimited inpatient days in another state).
Exceptions to stated limits may be permitted under circumstances defined by the
state.
The federal Medicaid statute also specifies special benefits or special rules
regarding certain benefits for targeted populations. For example:
! Most children under age 21 are entitled to Early and Periodic
Screening, Diagnostic and Treatment (EPSDT) services. Under
EPSDT, children receive well-child visits, immunizations,
laboratory tests, and other screening services at regular intervals. In
addition, medical care that is necessary to correct or ameliorate
identified defects, physical and mental illness, and other conditions
must be provided, including optional services that states do not
otherwise cover in their Medicaid programs.
! 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) through a period of 60 days postpartum.
! Special benefit rules apply to optional medically needy populations.
States may offer a more restrictive benefit package than is provided
to categorically needy populations, but at a minimum, must offer (1)
prenatal and delivery services for pregnant women, (2) ambulatory
services for individuals under 18 and those entitled to institutional
services, and (3) home health services for individuals entitled to
nursing facility care.9
! State Medicaid programs must pay Medicare cost-sharing expenses
(e.g., Medicare premiums and, in some cases, deductibles and co-
9 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.

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insurance) for certain low-income individuals eligible for both
programs, often called “dual eligibles.”
Another example of special long-term care benefits for targeted populations is
home and community based services. Under Section 1915(c) of the federal Medicaid
statute, the Secretary of Health and Human Services (HHS) may waive certain
Medicaid requirements allowing states to cover a broad range of home and
community-based services (HCBS) for persons who would otherwise be eligible for
Medicaid-funded institutional care. Waiver participants must be members of targeted
groups (as designated by the state), including the aged, persons with physical
disabilities, persons with mental retardation or developmental disabilities (MR/DD),
and persons with mental illness. Benefits may include, for example, personal care
(e.g., assistance with eating/drinking, toileting, medication management); habilitation
services (e.g., assistance with socialization and adaptive skills) for individuals with
MR/DD; transportation; case management; psychosocial rehabilitation and clinic
services for persons with chronic mental illness. A cost-effectiveness test requires
that expenditures for HCBS not exceed the cost of institutional care that would have
otherwise been provided to waiver participants. Thus, states may cap enrollment
and/or set expenditure limits on a per capita or aggregate basis to meet this
requirement.
DRA allows states to establish HCBS under a new optional benefit category;
thus, under specific circumstances, certain services no longer require a Section
1915(c) waiver. States have long complained that waiver requirements and processes
are burdensome. To add this new HCBS benefit, states will instead submit a
Medicaid state plan amendment to the federal government for approval. This new
benefit is available to certain individuals with income below 150% FPL who are not
required to need an institutional level of care to qualify. Unlike other state plan
benefits, states offering this new HCBS benefit will be allowed to cap the number of
enrollees and establish waiting lists as they did under Section 1915(c) waivers.
Finally, as an alternative to providing all of the mandatory and selected optional
benefits under traditional Medicaid, DRA gives states the option to enroll state-
specified groups in new benchmark and benchmark-equivalent benefit plans. These
plans are nearly identical to the benefit packages offered through the State Children’s
Health Insurance Program (SCHIP). The benchmark options include
! the Blue Cross/Blue Shield preferred provider plan under the Federal
Employees Health Benefits Program (FEHBP),
! a plan offered to state employees,
! the largest commercial HMO in the state, and
! other Secretary-approved coverage appropriate for the targeted
population.
Benchmark-equivalent coverage must have the same actuarial value as one of
the benchmark plans identified above. Such coverage includes (1) inpatient and
outpatient hospital services, (2) physician services, (3) lab and X-ray services, (4)
well-child care, including immunizations, and (5) other appropriate preventive care
(designated by the Secretary). Such coverage must also include at least 75% of the

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actuarial value of coverage under the benchmark plan for (1) prescribed drugs, (2)
mental health services, (3) vision care, and (4) hearing services.
For any child under age 19 in one of the major mandatory and optional Medicaid
eligibility groups, wrap-around benefits must include EPSDT. States may choose to
provide other wrap-around and additional benefits. Wrap-around typically refers to
situations in which the state provides a specific service (e.g., rehabilitation services,
nursing home care) to beneficiaries enrolled in a plan that does not cover that service.
For a given group of beneficiaries, ensuring coordination of care between two (or
more) entities responsible for managing different benefits (e.g., the state Medicaid
agency and a managed care plan) is always an issue, and one that is not unique to
these DRA provisions.
These benchmark benefit options are significantly different from what is
currently available under traditional Medicaid in most states. In its cost estimates for
DRA, the Congressional Budget Office (CBO) assumed that most of the benefit
reductions under the new benchmark plans would be for dental, vision, mental health,
and certain therapies.10 These and other benefit limitations could be important for
some individuals with special health care needs. DRA provides exemptions from
mandatory enrollment in these plans for many such individuals. CBO expects states
that implement these Medicaid benchmark plans to primarily enroll certain adults
without disabilities. Experience under SCHIP indicates that when the special needs
of some children could not be met sufficiently with the standard benchmark and
benchmark-equivalent packages, some states provided wrap-around services or
supplemental service packages to accommodate these circumstances. Ultimately,
these are state choices under DRA.
How Is Medicaid Financed?
The federal and state governments share the cost of Medicaid. States are
reimbursed by the federal government for a portion (the “federal share”) of a state’s
Medicaid program costs. Because Medicaid is an open-ended entitlement, there is
no upper limit or cap on the amount of federal funds a state may receive. Medicaid
costs in a given state and year are primarily determined by the expansiveness of
eligibility rules and beneficiary participation rates, the breadth of benefits offered, the
generosity of provider reimbursement rates, and other supplemental payments.11
The state-specific federal share for benefit costs is determined by a formula set
in law that establishes higher federal shares for states with per capita personal income
levels lower than the national average (and vice versa for states with per capita
10 Letters to the Honorable John M. Spratt and John D. Dingell from Donald B. Marron,
Acting Director of CBO, January 27, 2006.
11 Key supplemental payments are described in CRS Report 97-483, Medicaid
Disproportionate Share Payments, and in CRS Report RL31021, Medicaid Upper Payment
Limits and Intergovernmental Transfers: Current Issues and Recent Regulatory and
Legislative Action. P.L. 109-432 made some technical changes to certain supplemental
payments (e.g., disproportionate share hospital payments).

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personal income levels that are higher than the national average).12 The federal share,
called the federal medical assistance percentage (FMAP), is at least 50% of state
Medicaid benefit costs, and can be as high as 83% (statutory maximum). For
FY2007, the federal share for benefit costs ranges from 50% (in 12 states) up to
nearly 76% (in one state).
The federal match for administrative expenditures does not vary by state and is
generally 50%, but certain administrative functions have a higher federal matching
rate. Functions with a 75% federal match include, for example, survey and
certification of nursing facilities, operation of a state Medicaid fraud control unit
(MFCU), and operation of an approved Medicaid management information system
(MMIS) for claims and information processing. The implementation and operation
of immigration status verification systems by each state is fully financed by the
federal government. Overall, administrative costs represent about 5% of total
Medicaid spending in a given year.
For Hurricane Katrina fiscal relief, DRA appropriated $2 billion to cover the
state share of Medicaid expenditures for certain states that provided care to affected
individuals or evacuees under approved multi-state Section 1115 waiver projects and
under existing Medicaid (and SCHIP) state plans, for certain administrative expenses,
and to restore access to health care in impacted communities (as approved by the
Secretary of HHS).
Do Beneficiaries Pay for Medicaid Services?
Under traditional Medicaid, states are allowed to require certain beneficiaries
to share in the cost of Medicaid services, although there are limits on (1) the amounts
that states can impose, (2) the beneficiary groups that can be required to pay, and (3)
the services for which cost-sharing can be charged. The rules for service-based cost-
sharing (e.g., copayments paid to a provider at the time of service delivery) are
different from those for participation-related cost-sharing (e.g., premiums paid by
beneficiaries typically on a monthly basis independent of any services rendered).
Service-Based Cost-Sharing
For some groups of beneficiaries, all service related cost-sharing is prohibited
unless the prohibitions are lifted under a special waiver (see the subsection on
waivers below). All service related cost-sharing is prohibited for children under 18
years of age. Service related cost-sharing is prohibited for pregnant women for any
services that relate to the pregnancy or to any other medical condition which may
complicate pregnancy. In addition, such cost-sharing cannot be charged for:
12 For one benefit, family planning services and supplies, the federal share is 90% for all
states. In addition, the federal share is 100% for Medicaid services provided by an Indian
Health Service facility (whether operated by the IHS or certain Indian tribes or tribal
organizations) to Medicaid beneficiaries.

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! services furnished to individuals who are inpatients in a hospital, or
are residing in a long term care facility or in another medical
institution if the individual is required to spend most of their income
for medical care;
! services furnished to individuals receiving hospice care;
! emergency services; and
! family planning services and supplies.
For most other beneficiaries and services, Medicaid programs are allowed to
establish “nominal” service related cost-sharing requirements. Nominal amounts are
defined in regulations and are generally between $0.50 and $3, depending on the cost
of the service provided. For working individuals with disabilities who qualify for
Medicaid under eligibility pathways established by the Balanced Budget Act of 1997
(BBA97) and the Ticket to Work and Work Incentives Improvement Act of 1999
(TWWIIA), service related cost-sharing charges may be required that exceed nominal
amounts as long as they are set on a sliding scale based on income. The DRA (as
amended by P.L. 109-432) made some changes to these traditional service-related
cost-sharing rules; see below for more details.
Participation-Related Cost-Sharing
Premiums and enrollment fees are prohibited under traditional Medicaid, except
for the following groups:
! For certain families transitioning from welfare to work, states may
charge premiums but only for the final six months of receiving
transitional Medicaid coverage.
! For pregnant women and infants with family income that exceeds
150% of the FPL, states are allowed to implement nominal
premiums or enrollment fees between $1 and $19 per month
depending on family income.
! For individuals who qualify for Medicaid through the medically
needy pathway, states may implement a monthly fee as an alternative
to meeting the financial eligibility thresholds by deducting medical
expenses from income (i.e., the “spend down” method).
! For individuals who qualify under pathways for working individuals
with disabilities, states may charge premiums or enrollment fees.
Those fees are not capped when charged to individuals with a
disability qualifying under the provisions of BBA97 whose family
income does not exceed 250% FPL. Premiums charged to those
who qualify under TWWIIA, whose income is between 250% and
450% FPL, cannot exceed 7.5% of income. (When a state covers
both groups, the same cost-sharing rules must apply.)
As an alternative to traditional Medicaid, DRA (as modified by P.L. 109-432)
provides states with a new option for premiums and service-related cost-sharing.
Under this option, states may impose premiums and cost-sharing for any group of
individuals for any type of service, through Medicaid state plan amendments rather
than through waiver authority, subject to specific restrictions.

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In general, for individuals with income under 100% FPL:
! no premiums may be imposed,
! service-related cost-sharing cannot exceed nominal amounts, and
! the total aggregate amount of all cost-sharing cannot exceed 5% of
monthly or quarterly family income.
For individuals in families with income between 100 and 150% FPL:
! no premiums may be imposed,
! service-related cost-sharing cannot exceed 10% of the cost of the
item or service rendered, and
! the total aggregate amount of all cost-sharing cannot exceed 5% of
monthly or quarterly family income.
For individuals in families with income above 150% FPL:
! service-related cost-sharing cannot exceed 20% of the cost of the
item or service rendered, and
! the total aggregate amount of all cost-sharing cannot exceed 5% of
monthly or quarterly family income.
Certain groups (e.g., some children, pregnant women, individuals with special
needs) are exempt from paying premiums under this new DRA option. Also, certain
groups and services (e.g., preventive care for children, emergency care, family
planning services) are exempt from the service-related cost-sharing provisions.
Nominal cost-sharing amounts in regulations will be indexed (increased) by medical
inflation over time. Special rules apply to cost-sharing for non-preferred prescription
drugs, and for emergency room copayments for non-emergency care. DRA also
allows states to condition continuing Medicaid eligibility on the payment of
premiums. Providers may also deny care for failure to pay service-related cost-
sharing.
Finally, DRA provides an opportunity to test an alternative to traditional
Medicaid that covers certain benefits combined with a new beneficiary cost-sharing
structure, similar to health savings accounts in the private sector. In general, the
Secretary is required to establish a demonstration for health opportunity accounts
(HOAs) for which participants would have an HOA to pay for state-specified
services, and, after an annual deductible is met (set at 100%, but no more than 110%,
of the annual state contribution to the HOA), would also provide coverage for
Medicaid items and services otherwise available in the state. HOA contributions
could be made by the state or by other persons or entities, including charitable
organizations as permitted under current law. Including federal shares, the state
contributions generally may not exceed $2,500 for each adult and $1,000 for each
child.

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How are Providers Paid Under Medicaid?
For the most part, states establish their own payment rates for Medicaid
providers. Federal regulations require that these rates be sufficient to enlist enough
providers so that covered benefits will be available to Medicaid beneficiaries at least
to the same extent they are available to the general population in the same geographic
area.
Prior to DRA, providers could not deny care or services based on an individual’s
ability to pay Medicaid cost-sharing amounts. However, this requirement did not
eliminate the liability of a Medicaid beneficiary for payment of such amounts. In
practice, some states have allowed providers to refuse to provide services to
Medicaid beneficiaries who have failed to make copayments in the past, but most
states do not have specific policies on this issue.13 As noted above, DRA permits
providers to deny care for failure to pay service-related cost-sharing.
Medicaid regulations place restrictions on how Medicaid cost-sharing may be
used in determining provider reimbursement. States are prohibited from increasing
the payments they make to providers to offset uncollected amounts for deductibles,
co-insurance, co-payments or similar charges that the provider has waived or are
uncollectable (with the exception of providers reimbursed by the state under
Medicare reasonable cost reimbursement principles14). In addition, if a state
contracts with certain managed care organizations that do not impose the state’s
Medicaid cost-sharing requirements on their Medicaid members, the state must
calculate payments to such organizations as if those cost-sharing amounts were
collected.
How Do Medicaid Research
and Demonstration Waivers Work?
Section 1115 of the Social Security Act provides the Secretary of HHS with
broad authority to conduct research and demonstration projects that further the goals
of the Medicaid program (as well as other programs, such as SCHIP). Some policy
makers at both the federal and state level view Section 1115 authority as a means to
restructure Medicaid coverage, control costs, and increase state flexibility in a variety
of ways. To obtain such a waiver, a state must submit proposals outlining the terms
and conditions of its waiver for approval by the federal agency that oversees and
13 U.S. Department of Health and Human Services, Office of Inspector General, Medicaid
Cost Sharing, OEI-03-91-01800 (July 1993), available at [http://oig.hhs.gov/oei/reports/
oei-03-91-01800.pdf].
14 For providers reimbursed under such principles, the state may increase its payment to
offset uncollected Medicaid cost-sharing amounts that are bad debts for such providers. See
Medicare Payment Advisory Commission, Report to the Congress: Selected Medicare
Issues (June 2000), pp. 112-113, available at [http://www.medpac.gov/publications/
congressional_reports/Jun00%20Entire%20report.pdf].

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CRS-12
administers the Medicaid program — the Centers for Medicare and Medicaid
Services (CMS).
Under this authority, the Secretary may waive any Medicaid requirements
contained in Section 1902 of the federal Medicaid statute, including but not limited
to, freedom of choice of provider, and comparability and statewideness of benefits
(as described above in the benefits section). For example, states may obtain waivers
that allow them to provide services to individuals who would not otherwise meet
Medicaid eligibility rules (e.g., childless adults without a disability), cover non-
Medicaid services, limit benefit packages for certain groups, adapt programs to the
special needs of particular geographic areas or groups of recipients, or accomplish
a policy goal such as to temporarily extend Medicaid in the aftermath of a disaster
(as was done in New York City after the September 11 terrorist attacks and in Gulf
Coast states after Hurricane Katrina).
Approved waivers are deemed to be part of a state’s Medicaid plan, and thus,
the federal share of the costs for such waivers is determined by the FMAP formula
(described earlier). Unlike traditional Medicaid, waiver guidance15 specifies that the
costs of 1115 waivers must be budget neutral over the life of the program. To meet
this requirement, estimated spending under the waiver cannot exceed the estimated
cost of the state’s existing Medicaid program under current law requirements. For
example, states may move certain existing Medicaid populations into managed care
arrangements and use the savings accrued from that action to finance coverage of
otherwise ineligible individuals under an approved waiver.
There are specific limits and restrictions on how a state may operate a waiver
program. For example, such waivers must not limit mandatory services for the
mandatory pregnant women and children eligibility groups. Another provision
specifies restrictions on cost-sharing that may be imposed under waivers.
Some Medicaid Statistics
In FY2006, a total of 63.2 million people were enrolled in Medicaid at some
time during the year. Nearly one-half of these beneficiaries (31.1 million) were
children, and 16.2 million were adults in families with dependent children. There
were also 9.7 million individuals with disabilities and 6.1 million people over the age
of 65 enrolled in Medicaid that year.16 The latest published estimate of total
Medicaid spending available from CMS, including the costs of benefits and program
15 Medicaid Program; Demonstration Proposals Pursuant to Section 1115(a) of the Social
Security Act; Policies and Procedures, 59 Federal Register 49249, Sept. 27, 1994.
16 Beneficiary statistics for FY2006 were taken from Table 11, 2006 CMS Statistics, U.S.
Department of Health and Human Services [http://cms.hhs.gov/CapMarketUpdates/
Downloads/2006CMSstat.pdf].

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CRS-13
administration for the federal and state governments combined, was $317.2 billion
for FY2005.17
Across the nation, traditional Medicaid covers a very diverse population, and
compared to both Medicare and employer-sponsored health care plans, offers the
broadest array of medical care and related services available in the United States
today. Different groups under Medicaid have very different service utilization
patterns. These patterns result in large differences in the proportion of total benefit
expenditures by group. For example, based on the latest detailed data available for
FY2003:
! While the majority of enrollees were children without disabilities
(roughly 49%), such children accounted for only about 17% of
Medicaid’s total expenditures on benefits. Most of the expenditures
for these children were for primary and acute care in the fee-for-
service setting, excluding outpatient prescription drugs (about 45%),
and for managed care premiums (about 36%).18
! The next-largest beneficiary group — adults without disabilities in
families with dependent children — accounted for about 26% of all
enrollees, but only about 12% of benefit expenditures. Like
children, primary and acute fee-for-service care (about 54%) and
managed care premiums (about 33%) accounted for the majority of
these costs.
! In contrast, individuals with disabilities represented about 15% of
Medicaid enrollees, but this group accounted for the largest share of
Medicaid expenditures for benefits (about 44%) of all groups. Most
of the costs for persons with disabilities were for institutional and
non-institutional long-term care services (41%), primary and acute
fee-for-service care (29%), and outpatient prescription drugs (19%).
! Finally, the elderly represented about 9% of Medicaid enrollees, but
about 24% of all expenditures for benefits. For the aged, the vast
majority of costs were for long-term care (70%) and outpatient
prescription drugs (15%).
While these statistics vary somewhat from year to year and state to state, the
patterns described above generally hold true.
Beginning in 2006, Medicaid beneficiaries who are also eligible for Medicare
(i.e., the elderly and certain individuals with disabilities) receive their outpatient
prescription drugs through the new Medicare prescription drug benefit (known as
Medicare Part D) instead of through Medicaid. While the precise impact of the Part
D program on Medicaid is unclear at this point in time, Medicaid’s drug costs for
these populations have been considerably reduced.
17 Total Medicaid spending for FY2005 was taken from Table 26, 2006 CMS Statistics, U.S.
Department of Health and Human Services.
18 See CRS Report RL33711, Medicaid Managed Care: An Overview and Key Issues for
Congress, by Elicia J. Herz, for additional FY2003 data on expenditure patterns by service
delivery system (managed care versus fee-for-service), basis of eligibility, and state.

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CRS-14
Where is Medicaid Headed?
Medicaid’s role in providing access to health care for millions of Americans has
been regularly scrutinized by Congress, resulting in important legislative changes,
most recently under DRA. For example, in the 1980s, eligibility expansions for
pregnant women and children were adopted. In the mid-1990s, welfare reform
restricted access to Medicaid for new immigrants, and removed the automatic link
between receipt of cash assistance and Medicaid for low-income families. In the
1990s, managed care was expanded significantly as was coverage for workers with
disabilities. Largely because of concerns about questionable financing practices at
the state level, on several occasions, Congress has restricted supplemental Medicaid
payments made to hospitals serving a disproportionate share of Medicaid and
uninsured patients (also called DSH payments). Similarly, in 2000, Congress also
required new, more restrictive upper payment limit rules for institutional providers
under Medicaid.
In February every year, the President submits a federal budget proposal to the
Congress. In the President’s FY2007 budget proposal, a number of changes to
Medicaid were outlined with an estimated net savings of about $14 billion over five
years. Some of changes would require legislative action by Congress, while others
would be implemented administratively (e.g., via regulatory changes, issuance of
program guidance, etc.).19 Among several administrative proposals, two have
received widespread attention — limiting the extent to which states may tax certain
providers to obtain additional federal Medicaid dollars, and a plan to cap Medicaid
payments to government providers to no more than the cost of furnishing services —
for a combined savings of nearly $6 billion over five years. In May and June of
2006, respectively, several members of the House and Senate sent separate letters to
HHS Secretary Leavitt urging him to not implement changes to Medicaid via
administrative action. Both letters cited the importance of review and input from
Congress in modifying Medicaid.20
Recent administrative and congressional action has addressed these two issues.
P.L. 109-432 prevents the President’s provider tax proposal from being implemented
via administrative action. This law also sets the provider tax ceiling to 6% of
revenues, except for the period of January 1, 2008-September 30, 2011, during which
the rate is fixed at 5.5% (compared to 3% in the President’s proposal). A recent
proposed rule21 from the Administration would implement payment caps for
government providers and would also restrict the use of certain intergovernmental
19 See CRS Report RL33272, Medicaid and SCHIP: FY2007 Budget Issues.
20 See CQ HealthBeat News, GOP Lawmakers Warn Leavitt of Medicaid Cuts in President’s
Budget Proposal, May 18, 2006, and CQ HealthBeat News, Senators Warn Administration
Against Cutting Medicaid Payments on Its Own, June 30, 2006.
21 Centers for Medicare and Medicaid Services, “Medicaid Program; Cost Limit for
Providers Operated by Units of Government and Provisions to Ensure the Integrity of
Federal-State Financial Partnership,” 72 Federal Register 2236, January 18, 2007.

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CRS-15
transfers and certified public expenditures to finance the non-federal share of
Medicaid costs.
At the start of the new 110th Congress, it is difficult to predict what, if any,
changes to Medicaid may be in the offing. The upcoming budget resolution process
may provide a blueprint for such action.
CRS Medicaid Resources
General
CRS Report RL32277, How Medicaid Works: Program Basics, by Elicia Herz,
coordinator, et al.
CRS Report RL33711, Medicaid Managed Care: An Overview and Key Issues for
Congress, by Elicia J. Herz.
Eligibility
CRS Report RL31413, Medicaid-Eligibility for the Aged and Disabled, by Julie M.
Stone.
CRS Report RL33593, Medicaid Coverage for Long-Term Care: Eligibility, Asset
Transfers, and Estate Recovery, as Modified by the Deficit Reduction Act of 2005,
by Julie Stone.
CRS Report RL32610, Medicaid’s Long-Term Care Insurance Partnership Program,
by Julie Stone.
CRS Report RL33019, Medicaid Eligibility for Adults and Children, by Jean Hearne.
CRS Report RL31698, Transitional Medical Assistance (TMA) Under Medicaid, by
April Grady.
Benefits
CRS Report RL33495, Integrating Medicare and Medicaid Services Through
Managed Care, by Karen Tritz.
CRS Report RL32977, Dual Eligibles: A Review of Medicaid’s Role in Providing
Services and Assistance, by Karen Tritz.
CRS Report RL33268, Medicare Prescription Drug Benefit: An Overview of
Implementation for Dual Eligibles, by Jennifer O’Sullivan and Karen Tritz.
CRS Report RS21837, Implications of the Medicare Prescription Drug Benefit for
Dual Eligibles and State Medicaid Programs, by Karen Tritz.

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CRS-16
CRS Report RL32362, Key Benefits Under Medicaid and SCHIP for Children with
Mental Health and Substance Abuse Problems, by Elicia J. Herz.
CRS Report RL33357, Long-Term Care: Trends in Public and Private Spending, by
Karen Tritz.
CRS Report RL32219, Long-Term Care: Consumer-Directed Services Under
Medicaid, by Karen Tritz.
CRS Report RS22448, Medicaid’s Home and Community-Based Services State Plan
Option: Section 6086 of the Deficit Reduction Act of 2005, by Karen Tritz.
CRS Report RL30726, Prescription Drug Coverage Under Medicaid, by Jean
Hearne and April Grady.
Financing
CRS Report RL32950, Medicaid: The Federal Medical Assistance Percentage
(FMAP), by April Grady.
CRS Report RS22333, Budget Reconciliation FY2006: Provisions Affecting the
Medicaid Federal Medical Assistance Percentage (FMAP), by April Grady.
CRS Report RL31773, Medicaid and the State Fiscal Crisis of 2000-2003, by
Christine Scott.
CRS Report 97-483, Medicaid Disproportionate Share Payments, by Jean Hearne.
CRS Report RL31021, Medicaid Upper Payment Limits and Intergovernmental
Transfers: Current Issues and Recent Regulatory and Legislative Action, by Elicia
J. Herz.
CRS Report RS22101, State Medicaid Program Administration: A Brief Overview,
by April Grady.
Provider Reimbursement
CRS Report RL32644, Medicaid Reimbursement Policy, by Mark Merlis.
Waivers
CRS Report RS21054, Medicaid and SCHIP Section 1115 Research and
Demonstration Waivers, by Evelyne P. Baumrucker.
CRS Report RL33083, Hurricane Katrina: Medicaid Issues, by Evelyne
Baumrucker, et al.

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CRS-17
Statistics
CRS Report 97-975, Health Insurance Coverage of Children, 2005, by Chris L.
Peterson.
CRS Report RL32555, Medicaid/SCHIP as Primary Source of Health Insurance
During the Year, by Chris L. Peterson.
CRS Report RS21071, Medicaid Expenditures, FY2003 and FY2004, by Karen L.
Tritz.
Policy Considerations
CRS Report RL33121, Medicaid Issues for the 109th Congress, by Jean Hearne.
CRS Report RL33272, Medicaid and SCHIP: FY2007 Budget Issues, by April
Grady, et al.
CRS Report RL33131, Budget Reconciliation FY2006: Medicaid, Medicare and
State Children’s Health Insurance Program (SCHIP) Provisions, by Evelyne
Baumrucker, et al.
CRS Report RL33251, Side-by-Side Comparison of Medicare, Medicaid and SCHIP
Provisions in the Deficit Reduction Act of 2005, by Karen Tritz, et al.

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