How does Medicaid funding work?

Even the experts need a refresher once in a while.
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· 4 min read

Medicaid may not be the sexiest-sounding topic, but it’s one of those words that’s always on the lips of healthcare executives. In 2024, hospital leaders are pushing their elected officials to ensure Medicaid parity for mental health services and keep Medicaid supplement payments flowing to stabilize system finances. To help keep your head on straight, Healthcare Brew put together an explainer on the state of Medicaid program funding.

Medicaid, which provides health coverage to 72.5 million lower-income individuals and families, along with those who have disabilities, is administered by each state. For every dollar a state or territory invests into its Medicaid program, the federal government matches at a rate determined by the Federal Medical Assistance Percentages, or FMAPs.

The federal government contributes anywhere from 50%–83% of a state’s spend, with wealthier states like New York and California receiving a lower rate while poorer states like Mississippi earn a higher rate, according to KFF.

Besides Alaska, every state and Washington, DC, rely on provider taxes to fund a portion of their Medicaid programs, which are eligible for the federal match. Those fees—paid by health systems, nursing homes, and other facilities—are facing greater oversight from the federal government due to hold harmless agreements between some Medicaid programs and the providers that aim to recoup the taxes—a practice the Centers for Medicare and Medicaid Services (CMS) claims is prohibited under federal law. Texas and Florida have since sued CMS and the Department of Health and Human Services (HHS), saying the agreements are between two private parties and are, therefore, permissible.

“Such private agreements among hospitals allowed Texas clinics to recuperate at least 105% of their total tax cost with federal matching funds, federal attorneys representing the CMS said in response to the Texas lawsuit,” Bloomberg Law reported.

With those coffers, the state Medicaid programs then distribute funding back to participating providers through two major types of supplemental payment programs, according to the Citizens Budget Commission (CBC), a nonpartisan think tank and budget watchdog group:

  • Disproportionate share hospital (DSH): This payment goes to hospitals that provide services to patients who don’t have insurance or can’t pay for their care. States have “considerable discretion” over how DSH payments are allocated, according to CBC. In New York, for example, DSH funding gets divided into an indigent care pool, which nearly every hospital in the state can dip into, and another pool dedicated to public hospitals. (The American Hospital Association and five other hospital associations called on the Supreme Court this month to review HHS’s interpretation of DSH.)
  • Upper payment limit (UPL): This funding, which is the difference between base fee-for-service payments and an upper payment limit, is meant to secure Medicaid payments comparable to estimated Medicare rates for the same services.
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There are also other Medicaid initiatives, such as state directed payments and state-initiated supplemental support programs, that aim to bolster hospitals and managed care plans.

DSH and UPL are often touted as lifesavers for hospitals that rely on the funding, like NYC Health + Hospitals, New York City’s municipal system that treats a large share of undocumented and indigent patients—and for years, they’ve been in jeopardy.

“DSH has been in limbo for a long time because the Affordable Care Act (ACA) was going to start reducing DSH payments. The thought was providers will have fewer uninsured and under-reimbursed claims, though the bottom lines would get better and they won’t need DSH,” Patrick Orecki, director of state studies at CBC, told Healthcare Brew.

Dozens of hospitals sued last year to keep their Medicaid funding, claiming HHS has delayed DSH payments for decades.

Is your health system dealing with Medicaid issues? Shoot Amanda an email at [email protected].

Navigate the healthcare industry

Healthcare Brew covers pharmaceutical developments, health startups, the latest tech, and how it impacts hospitals and providers to keep administrators and providers informed.