Medicaid's Federal Medical Assistance Percentage (FMAP), FY2013

Contents

• Introduction
• The Federal Medical Assistance Percentage
• How FMAP Rates Are Calculated
• Data Used to Calculate State FMAP Rates
• Factors That Affect FMAP Rates
• FY2013 Regular FMAP Rates
• Exceptions
• Recent Issues
• State Fiscal Conditions
• Disaster-Recovery Adjusted FMAP Rate
• Exclusion of Certain Employer Contributions from FMAP Rate Calculations
• Legislation During the 111^th Congress
• Temporary FMAP Rate Increase in ARRA and Six-Month Extension
• FMAP Changes in the ACA
• Legislation During the 112^th Congress
• House Budget Resolution Proposed Block Grant
• Federal Deficit Reduction

Summary

Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services as well as long-term care. Medicaid is jointly funded by the federal government and the states. The federal government's share of a state's expenditures is called the federal medical assistance percentage (FMAP) rate. The remainder is referred to as the nonfederal share, or state share.

Generally determined annually, the FMAP formula is designed so that the federal government pays a larger portion of Medicaid costs in states with lower per capita incomes relative to the national average (and vice versa for states with higher per capita incomes). For FY2013, regular FMAP rates range from 50.00% to 74.43%. The FMAP rate is used to reimburse states for the federal share of most Medicaid expenditures, but exceptions to the regular FMAP rate have been made for certain states, situations, populations, providers, and services.

Some recent issues related to FMAP include state fiscal conditions, the disaster-related FMAP adjustment, and the exclusion of certain employer contributions from the FMAP calculation. While the fiscal environment for states is improving, states continue to face fiscal challenges, which makes it difficult for states to finance the state share of Medicaid expenditures. The Patient Protection and Affordable Care Act (ACA, P.L. 111-148 as amended) included a provision providing a disaster-recovery FMAP adjustment for states that have experienced a major, statewide disaster. The Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA, P.L. 111-3) included a provision allowing a state's FMAP rate to be adjusted if the state had significantly disproportionate employer pension and insurance fund contributions in any calendar year since 2003.

Legislation was enacted during the 111^th Congress that impacts the FMAP rate. First, the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) provided assistance to states through a temporary FMAP rate increase that was later extended by P.L. 111-226. Also, ACA contains a number of provisions affecting FMAP rates. Most notably, ACA provides initial FMAP rates of up to 100% for certain "newly eligible" individuals.

During the 112^th Congress, there has been a focus on reducing the federal deficit; controlling federal Medicaid spending is often discussed as a means to reduce federal expenditures. For this reason, the FY2012 House budget resolution proposed restructuring Medicaid from an entitlement program to a block grant, and most federal deficit reduction proposals include Medicaid provisions.

This report describes the FMAP calculation used to reimburse states for most Medicaid expenditures, and it lists the statutory exceptions to the regular FMAP rate. In addition, this report discusses other FMAP-related issues, including state fiscal conditions, the temporary FMAP rate increase, the exclusion of certain employer contributions, FMAP changes in ACA, the Medicaid proposal included in the House budget resolution, and other federal deficit reduction proposals.

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Medicaid's Federal Medical Assistance Percentage (FMAP), FY2013

Introduction

Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services as well as long-term care.¹ Medicaid is jointly funded by the federal government and the states. Participation in Medicaid is voluntary for states, though all states, the District of Columbia, and the territories choose to participate. Each state designs and administers its own version of Medicaid under broad federal rules. While states that choose to participate in Medicaid must comply with all federal mandated requirements, state variability is the rule rather than the exception in terms of eligibility levels, covered services, and how those services are reimbursed and delivered. Historically, eligibility was generally limited to low-income children, pregnant women, parents of dependent children, the elderly, and people with disabilities; however, recent changes will soon require coverage for individuals under the age of 65 with income up to 133% of the federal poverty level.² The federal government pays a share of each state's Medicaid costs; states must contribute the remaining portion in order to qualify for federal funds.³

This report describes the federal medical assistance percentage (FMAP) calculation used to reimburse states for most Medicaid expenditures, and it lists the statutory exceptions to the regular FMAP rate. In addition, this report discusses other FMAP-related issues, including state fiscal conditions, the temporary FMAP rate increase, the exclusion of certain employer contributions, FMAP changes in the Patient Protection and Affordable Care Act (ACA, P.L. 111-148 as amended), the Medicaid proposal included in the House budget resolution, and other federal deficit reduction proposals.

The Federal Medical Assistance Percentage

The federal government's share of most Medicaid service costs is determined by the FMAP rate, which varies by state and is determined by a formula set in statute. The FMAP rate is used to reimburse states for the federal share of most Medicaid expenditures, but exceptions to the regular FMAP rate have been made for certain states, situations, populations, providers, and services.⁴

An enhanced FMAP (E-FMAP) rate is provided for both services and administration under the State Children's Health Insurance Program (CHIP), subject to the availability of funds from a state's federal allotment for CHIP. When a state expands its Medicaid program using CHIP funds (rather than Medicaid funds), the enhanced FMAP rate applies and is paid out of the state's federal allotment. The E-FMAP rate is calculated by reducing the state share under the regular FMAP rate by 30%.⁵

The FMAP rate is also used in determining the phased-down state contribution ("clawback") for Medicare Part D, the federal share of certain child support enforcement collections, Temporary Assistance for Needy Families (TANF) contingency funds, a portion of the Child Care and Development Fund (CCDF), and foster care and adoption assistance under Title IV-E of the Social Security Act.

How FMAP Rates Are Calculated

The FMAP formula compares each state's per capita income relative to U.S. per capita income. The formula provides higher reimbursement to states with lower incomes (with a statutory maximum of 83%) and lower reimbursement to states with higher incomes (with a statutory minimum of 50%). The formula⁶ for a given state is:

FMAP_state = 1 - ( (Per capita income_state)²/(Per capita income_U.S.)² * 0.45)

The use of the 0.45 factor in the formula is designed to ensure that a state with per capita income equal to the U.S. average receives an FMAP rate of 55% (i.e., state share of 45%). In addition, the formula's squaring of income provides higher FMAP rates to states with below-average incomes than they would otherwise receive (and vice versa, subject to the 50% minimum).⁷

The Department of Health & Human Services (HHS) usually publishes FMAP rates for an upcoming fiscal year in the Federal Register during the preceding November. This time lag between announcement and implementation provides an opportunity for states to adjust to FMAP rate changes, but it also means that the per capita income amounts used to calculate FMAP rates for a given fiscal year are several years old by the time the FMAP rates take effect.

In the Appendix to this report, Table A-1 shows regular FMAP rates for each of the 50 states and the District of Columbia from FY2005-FY2013.

Data Used to Calculate State FMAP Rates

As specified in Section 1905(b) of the Social Security Act, the per capita income amounts used in the FMAP formula are equal to the average of the three most recent calendar years of data available from the Department of Commerce. In its FY2013 FMAP calculations, HHS used state per capita personal income data for 2008, 2009, and 2010 that became available from the Department of Commerce's Bureau of Economic Analysis (BEA) in September 2011. The use of a three-year average helps to moderate fluctuations in a state's FMAP rate over time.

BEA revises its most recent estimates of state per capita personal income on an annual basis to incorporate revised and newly available source data on population and income.⁸ It also undertakes a comprehensive data revision—reflecting methodological and other changes—every few years that may result in upward and downward revisions to each of the component parts of personal income (as defined in BEA's national income and product accounts, or NIPA). These components include

• earnings (wages and salaries, employer contributions for employee pension and insurance funds, and proprietors' income);
• dividends, interest, and rent; and
• personal current transfer receipts (e.g., government social benefits such as Social Security, Medicare, Medicaid, state unemployment insurance).⁹

As a result of these annual and comprehensive revisions, it is often the case that the value of a state's per capita personal income for a given year will change over time. For example, the 2008 state per capita personal income data published by BEA in September 2010 (used in the calculation of FY2012 FMAP rates) differed from the 2008 state per capita personal income data published in September 2011 (used in the calculation of FY2013 FMAP rates).

It should be noted that the NIPA definition of personal income used by BEA is not the same as the definition used for personal income tax purposes. Among other differences, NIPA personal income excludes capital gains (or losses) and includes transfer receipts (e.g., government social benefits), while income for tax purposes includes capital gains (or losses) and excludes most of these transfers.

Factors That Affect FMAP Rates

Several factors affect states' FMAP rates. The first is the nature of the state economy and, to the extent possible, a state's ability to respond to economic changes (i.e., downturns or upturns). The impact on a particular state of a national economic downturn or upturn will be related to the structure of the state economy and its business sectors. For example, a national decline in automobile sales, while having an impact on all state economies, will have a larger impact in states that manufacture automobiles as production is reduced and workers are laid off.

Second, the FMAP formula relies on per capita personal income in relation to the U.S. average per capita personal income. The national economy is basically the sum of all state economies. As a result, the national response to an economic change is the sum of the state responses to economic change. If more states (or larger states) experience an economic decline, the national economy reflects this decline to some extent. However, the national decline will be lower than some states' declines because the total decline has been offset by states with small decreases or even increases (i.e., states with growing economies). The U.S. per capita personal income, because of this balancing of positive and negative, has only a small percentage change each year. Since the FMAP formula compares state changes in per capita personal income (which can have large changes each year) to the U.S. per capita personal income, this comparison can result in significant state FMAP rate changes.

In addition to annual revisions of per capita personal income data, comprehensive NIPA revisions undertaken every four to five years may also influence regular FMAP rates (e.g., because of changes in the definition of personal income). The impact on FMAP rates will depend on whether the changes are broad (affecting all states) or more selective (affecting only certain states or industries).

FY2013 Regular FMAP Rates

Regular FMAP rates for FY2013 (the federal fiscal year that begins on October 1, 2012) were calculated and published November 30, 2011, in the Federal Register.¹⁰ In the Appendix to this report, Table A-1 shows FY2013 regular FMAP rates for each of the 50 states and the District of Columbia. Figure 1 shows the state distribution of regular FMAP rates for FY2013. Fourteen states will have the statutory minimum FMAP rate of 50%, and Mississippi will have the highest FMAP rate of 74.43%.

Figure 1. State Distribution of FMAP Rates FY2013

Source: Prepared by CRS using FY2013 regular FMAP rates. Notes: State-by-state FY2013 regular FMAP rates are listed in Table A-1.

As shown in Figure 2, from FY2012 to FY2013, the regular FMAP rates for 36 states will change, while the regular FMAP rates for the remaining 15 states (including the District of Columbia) will remain the same.¹¹

Figure 2. FMAP Rate Changes for States from FY2012 to FY2013

Source: Prepared by CRS using FY2012 and FY2013 regular FMAP rates. Notes: Specific FMAP rate changes for each state are listed in Table A-1.

For most of the states experiencing an FMAP rate change from FY2012 to FY2013, the change will be less than one percentage point. The regular FMAP rate for seven states will increase by less than one percentage point, and the FMAP rate for 17 states will decrease by less than one percentage point.

For states that will experience an FMAP rate change greater than one percentage point from FY2012 to FY2013, five states will experience an FMAP rate increase of greater than one percentage point, and seven states will experience an FMAP rate decrease of greater than one percentage point. Nevada will have the largest FMAP rate increase with a 3.54 percentage point increase, and North Dakota will have the largest FMAP rate decrease with a 3.13 percentage point decrease.

Two states will have FY2013 FMAP rates that are not calculated according to the regular FMAP formula: the District of Columbia and Louisiana. The FMAP rate for the District of Columbia has been set in statute at 70% since 1998, and Louisiana will receive a disaster-recovery adjustment (discussed in further detail below) increase over its FY2013 regular FMAP rate.

Exceptions

Although FMAP rates are generally determined by the formula described above, Table 1 lists exceptions that have been added to the Medicaid statute over the years. Table 1 identifies whether the exception is a current (i.e., the exception current applies), future (i.e., the exception will apply beginning at the specified date), or past (i.e., the exception no longer applies) FMAP rate exception.

Recent Issues

State Fiscal Conditions

During periods of economic downturn, state Medicaid programs face dual pressures. First, program enrollment increases at a faster rate than otherwise anticipated, when job and income losses lead more people to become eligible. Second, it can be more difficult to finance the nonfederal (i.e., state) share of Medicaid costs, when state revenues fall below expected levels.

Regarding enrollment, researchers have estimated that for every 1% increase in national unemployment, Medicaid enrollment increases by 1 million individuals.¹² During the 2007 national recession period (i.e., December 2007 through June of 2009),¹³ the Bureau of Labor Statistics reported the seasonally adjusted national unemployment rate rose from 5.0% in December of 2007 to 9.5% in June of 2009, peaking at 10.1% in October 2010 (four months after the official end of the national recession).¹⁴ Over roughly the same period, the estimated number of individuals ever enrolled in Medicaid increased by 8.7%, from 58.8 million in FY2008 to an estimated 67.7 million in FY2010.¹⁵ On the revenue side, it is estimated that total state tax revenues declined by 10.2% from the fourth quarter of 2007 to the fourth quarter of 2009 due to the 2007 recession.¹⁶ To help mitigate state fiscal conditions, the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) included a temporary increase to FMAP rates to help states maintain their Medicaid programs and free up funds that states would have otherwise used for Medicaid to address other state budgetary needs.

When viewed nationally, the growth in Medicaid expenditures has caused Medicaid to become the largest or second-largest item in state budgets depending on how it is measured. Medicaid accounted for 22.3% of total state budgets (i.e., includes funds from all state and federal sources) in state fiscal year (SFY) 2010. To date, most of the increase in Medicaid expenditures has been absorbed by the federal government through the temporary increase to FMAP rates. While total Medicaid expenditures grew as a proportion of total state budgets, state Medicaid expenditures as a percent of state general fund spending (i.e., the portion that states must finance on their own through taxes and other means) fell from 16.9% in SFY2008 to 15.8% in SFY2010.¹⁷

Even with the temporary increase to FMAP rates moderating the impact of Medicaid expenditure growth on the state-funded portion of state budgets, many states faced budget deficits. A recent study from the Government Accountability Office (GAO) notes that while these fiscal tensions exist universally across all states during an economic downturn, any given state's capacity to finance the state share of Medicaid costs to support new program enrollment may differ based on variables such as the state's economic condition, revenue structure, Medicaid program design, etc. Moreover, among states, economic downturns vary widely in their onset, depth and duration, and generally do not coincide exactly with national recessions.¹⁸

Even though the national recession has officially ended and state tax revenues have shown continued consecutive quarters of growth, state revenues have not fully rebounded. State tax revenues at the national level were still 5.5% lower in the first quarter of 2011 than in the same quarter of 2008.¹⁹ As a result, nearly every state implemented at least one new Medicaid cost containment policy in SFY2010, SFY2011, and SFY2012.²⁰ Because states are prohibited from curbing the cost of Medicaid through restricting eligibility standards due to the maintenance of effort (MOE) requirements initially enacted under ARRA and later expanded and extended under ACA,²¹ over the past few years, states have focused cost containment strategies on reducing provider rates, making changes to their benefit packages, or implementing limitations on the use of benefits.²²

In compiling their SFY2012 budgets, states faced difficult decisions with respect to the Medicaid program because the temporary FMAP rate increase ended on June 30, 2011 (the last day of SFY2011 for most states). States had to make up for the loss of the enhanced federal Medicaid funding before state revenues have rebounded. Further, because of Medicaid's federal-state financing structure, for states to generate $1 of savings in the state share of Medicaid spending, they will be required to reduce their overall Medicaid spending by $2 to almost $4, depending on each state's regular FMAP rate. For example, in a state with a FMAP rate of 50%, to obtain state-share savings in the amount of $20 million would require total federal and state Medicaid spending to be reduced by approximately $40 million. In a state with a FMAP rate of 65%, to obtain state-share savings in the amount of $20 million would require total federal and state share Medicaid spending to be reduced by approximately $57 million. The degree to which a state is willing to cut the nonfederal share of its Medicaid spending might depend in part on the loss of federal dollars it would also face as a result of these deductions.

Historically, it has taken three to five years from the onset of a recession for state revenues to recover, and there is evidence that states' recovery from the most recent recession will take longer than other recent recessions.²³ Thus, while the fiscal environment for states is improving, states continue to face fiscal challenges.

Disaster-Recovery Adjusted FMAP Rate

The Patient Protection and Affordable Care Act (ACA, P.L. 111-148 as amended) added a disaster-recovery FMAP adjustment for states that have experienced a major, statewide disaster. This adjustment was available to states beginning the fourth quarter of FY2011.²⁴

There are two criteria for states to qualify for the disaster-recovery FMAP adjustment. First, during the preceding seven years, the President must have declared a major disaster in the state where every county in the state was eligible for public assistance. Second, the state's regular FMAP rate must have declined at least three percentage points from the prior year's FMAP rate.²⁵

In the first year a state qualifies for the disaster-recovery adjusted FMAP rate, the FMAP rate shall be equal to the regular FMAP rate as determined for the fiscal year, plus 50% of the difference between the current year's regular FMAP rate and the preceding year's FMAP rate. For the second and subsequent years a state qualifies for the adjustment, the FMAP rate shall be equal to the FMAP rate as determined for the preceding fiscal year, including any disaster-recovery adjustment for that year, plus 25% of the difference between the current year's regular FMAP rate and the preceding year's disaster-recovery adjusted FMAP rate.

The formula for the disaster-recovery FMAP adjustment causes the state's FMAP rate to increase, rather than phase down, each year a state qualifies for the adjustment. As a result, the assistance provided to states will be higher than initially projected.²⁶

Louisiana was the only state that meets both requirements in FY2011, FY2012, and FY2013. Table 2 shows the calculation for Louisiana's disaster-recovery adjusted FMAP rate for each of those years.

In the fourth quarter of FY2011, Louisiana met the Stafford Act criteria (due to Hurricane Katrina and Hurricane Gustav),²⁷ and its regular FY2011 FMAP rate (63.61%) was at least three percentage points less than its regular FY2010 FMAP rate plus hold harmless from the ARRA temporary FMAP rate increase (72.47%). As shown in Table 2, Louisiana's regular FMAP rate was adjusted 4.43 percentage points for a total FMAP rate of 68.04% for the fourth quarter of FY2011.

For FY2012, Louisiana meets the Stafford Act criteria (due to Hurricane Katrina and Hurricane Gustav), and its regular FY2012 FMAP rate (61.09%) is at least three percentage points less than its FY2011 disaster-recovery adjusted FMAP rate (68.04%). As shown in Table 2, Louisiana's FY2012 disaster-recovery FMAP adjustment is 3.48 percentage points for a total FMAP rate of 69.78%.

For FY2013, Louisiana will meet the Stafford Act criteria (due to Hurricane Gustav), and Louisiana's regular FMAP rate for FY2013 (61.24%) is more than three percentage points lower than Louisiana's disaster-recovery adjusted FMAP rate for FY2012 (69.78%). As shown in Table 2, Louisiana's FY2013 disaster-recovery FMAP adjustment will be 2.14 percentage points for a total FMAP rate of 71.92%.

Exclusion of Certain Employer Contributions from FMAP Rate Calculations

The Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA, P.L. 111-3) included a provision that may adjust certain states' regular FMAP rates starting in FY2006 (the provision can be applied retroactively). This provision was included in CHIPRA to reflect the annual updates of each year's state per capita personal income data conducted by BEA to incorporate revised and newly available population and income data. Due to the annual and comprehensive revisions, the value of a state's per capita personal income for a given year will often change over time.

In 2004, BEA released revised estimates of state personal income for 2002 and 2003 that contained upward revisions in employer contributions to privately administered pension and welfare funds in every state.²⁸ These revisions reflected the incorporation of more complete data.²⁹ The data for 2003 also reflected an increase in employer contributions for the auto manufacturing industry.³⁰

To accommodate these sometimes significant revisions to states' per capita personal income data, Section 614 of CHIPRA allows for a state's regular FMAP rate to be adjusted if it had a significantly disproportionate employer pension and insurance fund contribution in any calendar year since 2003. Any identifiable employer contributions towards pensions or other employee insurance funds are considered to be significantly disproportionate if the increase in the amount of employer contributions accrued to residents of a state exceeds 25% of the total increase in personal income in that state for the year involved.

The final Federal Register notice regarding the calculation for making the FMAP adjustments for states that have an increase in personal income was published in October 2010.³¹ The final notice explains that states have until the end of FY2011 to submit data on significantly disproportionate employer contributions made between 2003 and 2008. The deadline to submit data for 2009 and beyond will be the end of the second fiscal year following the employer's year end annual financial statement that includes the disproportionate share contribution. After a state submits data, HHS will verify whether the employer contribution is significantly disproportionate and adjust the state's FMAP rate. However, if HHS is unable to verify the data submitted by the state, then no FMAP adjustment will be made.

To adjust a state's FMAP rate, HHS will recalculate the state's regular FMAP rate disregarding any significantly disproportionate employer pension and insurance fund contributions in the computation of the state's per capita income, but not in the computation for the U.S. per capita income. This disregard will have the effect of reducing a state's per capita personal income relative to the national average, which in turn will increase the state's FMAP rate. A hold harmless provision was included in CHIPRA so that no state shall have its FMAP rate reduced as a result of this disregard.

For states that have a decrease in personal income, Section 614(b)(3) of CHIPRA specifies that an employer pension and insurance fund contribution shall be disregarded to the extent that the contribution exceeds 125% of the amount of employer contribution in the previous calendar year. The methodology to implement this special adjustment will be addressed in a future Federal Register notice.

The significantly disproportionate employer pension and insurance fund contribution disregard is not expected to impact many states. In fact, Michigan is thought to be the only state with a significantly disproportionate employer contribution in 2003, and HHS does not think it is likely that other states will qualify for years 2003 through 2008.³²

Legislation During the 111^th Congress

Temporary FMAP Rate Increase in ARRA and Six-Month Extension

During the 111^th Congress, a temporary FMAP rate increase was provided to states through ARRA and later extended by P.L. 111-226. ARRA provided states with a FMAP rate increase for nine quarters starting October 2008, and CBO estimates federal payments to states increased by $84 billion due to the ARRA FMAP rate increase.³³ After a number of legislative attempts,³⁴ the House and Senate agreed to extend the temporary FMAP rate increase for six months as part of P.L. 111-226. CBO estimated that the six month extension would provide states with an additional $16 billion in federal Medicaid payments.³⁵ In total, the temporary FMAP rate increase ran for 11 quarters, from the first quarter of FY2009 through the third quarter of FY2011 (i.e., October 2008 through June 2011), subject to certain requirements.

Details of the ARRA provision, as amended by P.L. 111-226, are as follows:

• For a "recession adjustment period" that began with the first quarter of FY2009 and ran through the third quarter of FY2011 (i.e., October 2008 through June 2011), the provision held all states harmless from any decline in their regular FMAP rates; provided all states with an across-the-board increase of 6.2 percentage points until the last two quarters of the period, at which point the across-the-board percentage point increase phased down to 3.2 and then 1.2; and provided qualifying states with an unemployment-related increase.³⁶ It allowed each territory to make a one-time choice between an FMAP rate increase of 6.2 percentage points along with a 15% increase in its spending cap, or its regular FMAP rate along with a 30% increase in its cap; all chose the latter.
• The full amount of the temporary ARRA FMAP rate increase applied only to Medicaid, excluding disproportionate share hospital payments and most expenditures for individuals who were eligible for Medicaid because of an increase in a state's income eligibility standards above what was in effect on July 1, 2008. There was an exception to the July 1, 2008, rule for certain childless adults.³⁷ A portion of the temporary FMAP rate increase (hold harmless plus across-the-board) applied to Title IV-E foster care and adoption assistance.
• To receive ARRA FMAP rate increases, states were required to do the following: certify that they would request and use the funds;³⁸ maintain their Medicaid "eligibility standards, methodologies, and procedures" as in effect on July 1, 2008,³⁹comply with requirements for prompt payment of health care providers under Medicaid (and report to the HHS Secretary on their compliance),⁴⁰ not deposit or credit the additional federal funds paid as a result of the increase to any reserve or rainy day fund; ensure that local governments did not pay a larger percentage of the state's nonfederal Medicaid expenditures than otherwise would have been required on September 30, 2008,⁴¹ and submit a report to the Secretary regarding how the additional federal funds paid as a result of the temporary FMAP increase were expended.⁴²

In the Appendix to this report, Table A-2 shows the state-by-state temporary increased FMAP rates for each quarter in FY2009, FY2010, and FY2011 provided under ARRA, and extended by P.L. 111-226. Also, Table A-3 shows the calculations for each state's temporary increased FMAP rates for the third quarter of FY2011, which was the last quarter the temporary FMAP rate increase was available to states.⁴³

FMAP rate increases reduced the amount of state funding required to maintain a given level of Medicaid services. For states that contemplated cuts in order to slow the growth of or reduce Medicaid spending (e.g., by eliminating coverage of certain benefits, freezing or reducing provider reimbursement rates, increasing cost-sharing or premiums for beneficiaries), increased federal funding enabled them to avoid those cuts. For others, the state savings that resulted from an FMAP rate increase were used for a variety of purposes that were not limited to Medicaid.⁴⁴

In addition to avoiding cuts to Medicaid, CBO has indicated that providing additional federal aid to states that are facing fiscal pressures would probably stimulate the economy. However, the estimated effects vary.⁴⁵ Federal aid to states whose budgets were relatively healthy might have provided little stimulus if it was used to build up rainy day funds (a prohibited use of the ARRA FMAP rate increase), rather than increase spending or reduce taxes.⁴⁶

FMAP Changes in the ACA

The Medicaid provisions in ACA represent the most considerable reform to Medicaid since its enactment in 1965. The most noteworthy change begins in 2014, or sooner at state option, when states are required to expand Medicaid eligibility to adults under age 65 with income up to 133% of the federal poverty level (FPL) (effectively 138% FPL with the Modified Adjusted Gross Income or MAGI 5% FPL income disregard).⁴⁷

CBO estimates the Medicaid expansion will increase Medicaid enrollment by 9 million in FY2014, which is more than a 20% increase over the Medicaid enrollment estimated for FY2013.⁴⁸ As a result, the expansion will significantly increase Medicaid expenditures, and the federal government will cover a vast majority of the costs for individuals who are "newly eligible" due to ACA.⁴⁹

ACA contains a number of provisions that affect FMAP rates, such as "newly eligible" beneficiary FMAP rates, "expansion state" FMAP rates, and other FMAP rate changes discussed below.

"Newly Eligible" Beneficiary FMAP Rates. An increased FMAP rate will be provided for "newly eligible" individuals who will gain Medicaid eligibility due to the ACA Medicaid expansion. The "newly eligible" are defined as nonelderly, nonpregnant adults with family income below 133% FPL who would not have been eligible for Medicaid in the state as of December 1, 2009, or were eligible under a waiver but not enrolled because of limits or caps on waiver enrollment. States will receive 100% FMAP rate for the cost of providing benchmark or benchmark-equivalent coverage⁵⁰ to "newly eligible" individuals, from 2014 through 2016. For "newly eligible" individuals, the FMAP rate will phase down to 95% in 2017, 94% in 2018, 93% in 2019, and 90% afterward (See Table 3).

"Expansion State" FMAP Rates. Although Medicaid eligibility has generally been limited to certain categories of individuals, some states provide health coverage for all low-income individuals using Medicaid waivers and/or state-only funds. As a result, they have few or no individuals who will qualify for the "newly eligible" FMAP rate. As of CY2014, an increased FMAP rate will be provided for individuals in "expansion states" who are enrolled in the new eligibility group for nonelderly, nonpregnant adults at or below 133% FPL. "Expansion states" are defined as those that, as of March 23, 2010 (ACA's enactment date), offered health benefits coverage meeting certain criteria⁵¹ statewide to parents and nonpregnant childless adults at least through 100% FPL. The formula⁵² used to calculate the "expansion state" FMAP rates is based on a state's regular FMAP rate, so the "expansion state" FMAP rates will vary from state to state until CY2019, at which point the "newly eligible" FMAP rates and the "expansion state" FMAP rates will both equal 90% (see Table 3).

Although HHS will make the official determination, one source suggests that 11 states (Arizona, Delaware, Hawaii, Maine, Massachusetts, Minnesota, New York, Pennsylvania, Vermont, Washington, Wisconsin) and the District of Columbia might meet the definition of an "expansion state."⁵³

During CY2014 and CY2015, an FMAP rate increase of 2.2 percentage points is available for "expansion states" that (1) the Secretary of HHS determines will not receive any FMAP rate increase for "newly eligible" individuals and (2) have not been approved to divert Medicaid disproportionate share hospital funds to pay for the cost of health coverage under a waiver in effect as of July 2009. The FMAP rate increase applies to those who are not "newly eligible" individuals as described in relation to the new eligibility group for nonelderly, nonpregnant adults at or below 133% FPL. It appears that Vermont meets the criteria for this increase.

Additional Medicaid Changes. As noted in Table 1, ACA also provides—subject to various requirements—an increased FMAP rate for certain disaster-affected states, primary care payment rate increases, specified preventive services and immunizations, smoking cessation services for pregnant women, specified home and community-based services, and health home services for certain people with chronic conditions.

CHIP. Prior to ACA, federal CHIP allotments were provided through FY2013 and states received reimbursement for CHIP expenditures based on the E-FMAP rate described at the beginning of this report. Under ACA, the E-FMAP rate for CHIP expenditures in FY2016-FY2019 will be increased by 23 percentage points, up to 100%.⁵⁴ ACA also provides new federal CHIP allotments for FY2014 and FY2015. However, no federal CHIP allotments are provided during the period in which the 23 percentage point increase in the E-FMAP rate is slated to be in effect.

Legislation During the 112^th Congress

House Budget Resolution Proposed Block Grant

On April 5, 2011,⁵⁵ House Budget Committee Chairman Paul Ryan released the chairman's mark⁵⁶ of the FY2012 House budget resolution together with his report entitled The Path to Prosperity: Restoring America's Promise,⁵⁷ which outlines his budgetary objectives. The House Budget Committee considered and amended the chairman's mark on April 6, 2011, and voted to report the budget resolution to the full House.⁵⁸ H.Con.Res. 34 was introduced in the House April 11, 2011, and was accompanied by the committee report (H.Rept. 112-58).⁵⁹ On April 15, 2011, the House passed H.Con.Res. 34 by a vote of 235-193.

The committee report includes illustrative examples to achieve budget savings, such as a change in the structure of the Medicare and Medicaid programs and the repeal of many of the provisions in ACA. One of the proposals would restructure the Medicaid program from an individual entitlement⁶⁰ to a block grant,⁶¹ starting in FY2013.⁶² According to CBO's long-term analysis of the proposal, when compared to long-term estimates of current law, federal spending for Medicaid would be 35% lower in FY2022 and 49% lower in FY2030.⁶³

Proponents of the block grant model suggest that this design would make federal Medicaid spending more predictable and provide states with stronger incentives to control the cost of their Medicaid programs. Additionally, this design could relieve some of the cost burden to states by removing certain federal Medicaid requirements. However, this proposal would shift the responsibility for the growth in Medicaid spending over the federal block grant amount to states. According to CBO, the magnitude of the federal Medicaid spending reductions under this proposal would make it difficult for states to maintain their current Medicaid programs. As a result, states would have to weigh the impact of maintaining current Medicaid service levels against other state priorities for spending. They could choose to constrain Medicaid expenditures by reducing provider reimbursement rates, limiting benefit packages, or restricting eligibility. These types of programmatic changes could also impact access to and the quality of medical care for Medicaid enrollees.

Federal Deficit Reduction

In a typical year, the federal government funds roughly 57% of the total cost for Medicaid,⁶⁴ and federal Medicaid expenditures account for almost 8% of all federal spending.⁶⁵ In FY2012, federal Medicaid payments to states are estimated to amount to $260 billion.⁶⁶ Federal Medicaid payments are anticipated to grow significantly beginning in FY2014 due to the expansion of Medicaid eligibility provided in the ACA.⁶⁷ As a percentage of gross domestic product (GDP), federal Medicaid expenditures are expected to increase from about 1.9% of GDP in FY2011 to 2.5% of GDP in FY2021.⁶⁸ As a result, controlling federal Medicaid spending has been a focus of federal deficit reduction proposals, such as the House Budget Resolution (discussed above) and the National Commission on Fiscal Reform.

The National Commission on Fiscal Reform final report included savings from Medicaid totaling $58 billion over 10 years. The savings came from eliminating states' ability to fund Medicaid through provider taxes, covering dual-eligibles under managed care arrangements, and giving states additional fiscal responsibility for administrative costs.⁶⁹

Additionally, in February 2012, the President's FY2013 budget was released, and the budget proposal included a number of Medicaid provisions estimated by the Administration to reduce federal Medicaid expenditures by $55.7 billion over the next 10 years.⁷⁰ The Medicaid provisions include limiting states' ability to utilize provider taxes⁷¹ in financing the state share of Medicaid expenditures; replacing the current federal Medicaid financing structure with a blended FMAP rate;⁷² limiting Medicaid reimbursement of durable medical equipment; re-basing Medicaid disproportion share hospital (DSH) payments; expanding state flexibility to provide benchmark benefit packages; extending transitional medical assistance; and establishing hold harmless for federal poverty guidelines. In addition, the President's FY2013 budget includes a number of program integrity proposals that are estimated to reduce federal Medicaid expenditures by $3.2 billion from FY2013 through FY2022.⁷³

To the extent federal Medicaid expenditures are reduced, in most cases, states would need to increase the state share of Medicaid to maintain their current Medicaid programs. This will be difficult for states that are already struggling to fund their current share of Medicaid expenditures, due to the adverse impacts of the recession on state budgets. Faced with this situation, states would have to weigh the impact of maintaining current Medicaid service levels against other state spending priorities.

Appendix. Regular and Temporary Increased FMAP Rates for Medicaid, by State

This appendix includes three tables showing the state-by-state regular and temporary increase FMAP rates for various fiscal years. Table A-1 shows regular FY2005-FY2013 FMAP rates calculated according to the formula described in the text of the report (see "How FMAP Rates Are Calculated"). Table A-2 and Table A-3 show the temporary FMAP rate increase provided under ARRA, and extended by P.L. 111-226, for FY2009, FY2010, and the first three quarters of FY2011. The temporary FMAP rate increased ended June 30, 2011, so the third quarter of FY2011 was the last quarter the temporary FMAP rate increase was available to states.

Table A-1 shows regular FMAP rates for FY2013 which range from 50% (14 states) to 73% (Mississippi). From FY2012 to FY2013, regular FMAP rates will decrease for 24 states,⁷⁴ increase for 12 states,⁷⁵ and remain the same for 14 states⁷⁶ and the District of Columbia. All of the 14 states for which the FMAP rates do not change have the statutory minimum FMAP rate of 50%, and the FMAP rate for the District of Columbia is statutorily set at 70%.

The quarterly temporary FMAP rate increases for FY2009, FY2010, and FY2011 are shown in Table A-2. In FY2009, the lowest FMAP rate any state or the District of Columbia received in any quarter was 56.20% and the highest FMAP rate was 84.24%.⁷⁷ Then, in FY2010, the lowest FMAP rate any state or the District of Columbia received in any quarter was 61.12% and the highest FMAP rate was 84.86%.⁷⁸ In total, the temporary increase in FMAP rates provided states and the District of Columbia with an additional $32.5 billion in FY2009 and $42.2 billion in FY2010.⁷⁹

In FY2011, the temporary FMAP rate increase phased down each quarter from the original ARRA levels in the first quarter to regular FMAP rates in the fourth quarter of FY2011 (the temporary FMAP rate increase ended on June 30, 2011). Mississippi received the highest FMAP rate in all four quarters of FY2011, with 84.86% in the first quarter, 82.03% in the second quarter, 80.15% in the third quarter, and 74.73% in the fourth quarter. Eleven states⁸⁰ received the lowest FMAP rates for all four quarters of FY2011, with 61.59% in the first quarter, 58.77% in the second quarter, 56.88% in the third quarter, and 50.00% in the fourth quarter.⁸¹

As shown in Table A-3, in FY2011, 27 states⁸² are held harmless from any decline in their regular FMAP rates. Also shown in the table, for the third quarter of FY2011, 43 states⁸³ and the District of Columbia were in the highest tier for the unemployment adjustment. North Dakota was the only state that did not receive an unemployment adjustment because its unemployment rate did not exceed its lowest unemployment rate (for any three month period since January 1, 2006) by at least 1.5 percentage points.