Medicaid formula flawed; produces funding inequities

Some states get twice as much federal money to spend on each Medicaid patient as others, GAO reports.

By Joel B. Finkelstein, AMNews staff. Sept. 8, 2003.

Washington -- The Medicaid formula shortchanges states with large numbers of poor people and fails to take into account the variations in the cost of providing medical services, according to a new government report. But change is unlikely because improvements for some states would hurt others, and governors have set their sights on another Medicaid priority.

The Medicaid formula, based on state per-capita income, is used to decide how much the federal government kicks in for the program.

States receive federal matching funds of between 50% and 75% of their program costs. Congress recently gave states a 2.95% temporary boost in their matching funds.

The formula was meant to fairly distribute Medicaid funds based on state need. However, it fails to account for a number of complexities, according to a General Accounting Office report.

"Per capita income is an inadequate measure of states' funding ability because it is an incomplete measure of states' resources, it is a poor proxy for the size of a state's population in poverty, and it does not take into account differences in the cost of providing health care services to people in poverty," the report states.

Another reason for the inequity is the requirement that the federal government match no less than 50% of a state's Medicaid costs (exceptions are Alaska and the District of Columbia, which can get no less than 57.38% and 70%, respectively). This helps states that already have above-average resources to fund health care, the report says.