How Do States Pay for Medicaid?
Last Updated April 16, 2025
Medicaid is a joint federal-state program that provides health insurance for lower-income Americans. The program plays a significant role in the U.S. health system. In 2024, it provided coverage for 21 percent of the population.
As a key part of the safety net, Medicaid is designed to be countercyclical, meaning that enrollment expands during economic downturns when people lose their jobs and employment-based health coverage. It also represents a major source of both revenues and expenditures in state budgets, since states receive a portion of funding for the program from the federal government.
Overview of Medicaid Financing
Each state’s Medicaid expenditures are matched by federal funds according to various formulas. The federal medical assistance percentage (FMAP) governs most federal funding for states and takes into account a state’s per capita income. For 2025, the FMAP ranges from a minimum of 50 percent in wealthier states such as California to 77 percent in Mississippi. The matching structure provides states with resources that automatically adjust for demographic and economic shifts, healthcare costs, public health emergencies, and natural disasters.
In addition to funds governed by the FMAP, the federal government provides enhanced matching rates for select services, providers, or groups of beneficiaries. One example occurred from the Affordable Care Act (ACA), which expanded the Medicaid program to cover otherwise ineligible individuals with incomes up to 138 percent of the poverty level. The federal government covers 90 percent of the cost of coverage for the expansion population.
Remaining Medicaid expenditures are referred to as the nonfederal share. Federal law requires that 40 percent of a state’s share of total Medicaid expenditures be paid through state funds such as general funds and health care provider taxes levied by the state. The remaining 60 percent of the nonfederal share can come from “other state funds”, which includes funding transferred from local governments.
Of the total funding for Medicaid, most comes from federal sources. According to the National Association of State Budget Officers, in fiscal year 2024 (which for most states is July 1–June 30) the program cost a total of $914 billion, about $326 billion (36 percent) of which was the nonfederal share.
How Does Medicaid Affect State Budgets?
Medicaid's role in state budgets is unique since the program acts as both an expenditure and the largest source of federal support. In 2024, total Medicaid expenditures (including federal matching funds) made up 30 percent of state budgets, on average, making it the largest category of spending. When considering only nonfederal funds, Medicaid spending comprised 19 percent of general fund expenditures, making it the second largest category of state spending after primary and secondary education.
Medicaid expenditures have generally risen as a percentage of total state spending over the past several years, with the exception of a temporary dip in 2019 and 2020. Medicaid spending grew from 20.5 percent of state budgets in 2008 to 29.8 percent in 2024. That growth reflects broader health spending trends and includes the effect of the ACA expansion in 2014.
States finance the nonfederal share of their Medicaid expenditures in large part through general revenues, which consist of revenues from sources including personal and corporate income taxes and sales taxes. States can also use funds raised from local governments and through taxes on healthcare providers to finance the nonfederal share of their Medicaid payments.
Those sources of Medicaid funding have received increased attention because states have used them to create complex financing mechanisms designed to maximize the amount of federal Medicaid funds coming to the states, thereby drawing down federal Medicaid funds without expending much, if any, state general funds.
What Impact Did the ACA Medicaid Expansion Have on State Finances and Enrollment?
Prior to enactment of the ACA, few state Medicaid programs covered non-disabled, non-pregnant adults without dependent children. In addition, the income limits for parents to be Medicaid eligible were significantly lower. Since the ACA, states can choose whether to expand Medicaid coverage to this “expansion” population. As of 2025, 10 states have chosen not to adopt it. In those states, the median income eligibility for parents is 34 percent of the poverty level (rather than 138 percent) and the only state that extends Medicaid to adults without children is Wisconsin.
Under the ACA expansion of Medicaid, the federal government paid 100 percent of the cost of Medicaid expansion coverage from 2014 to 2016. The federal share dropped in subsequent years before settling at 90 percent in 2020 and each year thereafter. By comparison, the federal government pays between 50 and 77 percent of the cost of other Medicaid enrollees, depending on the state. As of 2025, the uninsured rate in the 10 states that have not expanded Medicaid coverage is nearly twice as high as states that have implemented the expansion (14.1 and 7.6 percent, respectively).
How Did COVID-19 Impact State Medicaid Spending and Enrollment?
Unsurprisingly, Medicaid enrollment increased during the pandemic, alongside job losses. To help support states’ Medicaid programs and provide fiscal relief, the Families First Coronavirus Response Act enacted a temporary 6.2 percentage point increase in the FMAP (not applied to the expansion population) if states met certain requirements like ensuring continuous coverage for those enrolled as of March 18, 2020. The FMAP increase remained in effect through March 31, 2023. In April 2023, states started redetermining eligibility for Medicaid enrollees and began removing individuals from the program who were no longer eligible.
Conclusion
Medicaid insures more than 70 million people in the United States, and plays a significant role in state and federal budgets. As federal lawmakers consider potential reforms to Medicaid, it is critically important to understand the program’s complex financing, its effect on uninsured and low-income populations, and the impact on state and federal fiscal sustainability.
Further Reading
How Does Government Healthcare Spending Differ From Private Insurance?
Government insurance programs, such as Medicare and Medicaid, made up 45 percent, or $1.9 trillion, of national healthcare spending.
7 Key Facts About Rising Healthcare Spending in the U.S.
Healthcare spending in the United States is a key driver of the nation’s fiscal imbalance and has risen notably over the past few decades.
Infographic: U.S. Healthcare Spending
Improving our healthcare system to deliver better quality care at lower cost is critically important to our nation’s long-term economic and fiscal well-being.