Medicaid Expansion and Variation

September 2011


Basics of Medicaid
Medicaid, ARRA, and the ACA
The Impact of Medicaid Expansion on the States
State-to-State Variations in Medicaid
Related HCFO Grants


Recent federal legislation and the economic downturn have brought Medicaid to the forefront of the policy arena. Significant changes are on the horizon for Medicaid as a result of the American Recovery and Reinvestment Act (ARRA) and the Patient Protection and Affordable Care Act (ACA). With these changes coming at a time of declining state revenues, state policymakers have become concerned about the impact on their ability to balance their budgets. As researchers and policymakers set their sights on potential solutions, the issue of state-to-state variation has come into play. Different states have inherently different needs from their Medicaid programs, and vary greatly in spending per beneficiary.
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Basics of Medicaid

Medicaid is a “means tested” entitlement program. Traditionally, eligibility has been determined by a combination of categorical requirements (i.e. children, pregnant women, families with dependent children, the elderly, and the disabled) and income and assets thresholds.1  It is jointly funded by federal and state governments, making its financing markedly different than that of Medicare (which is financed through federal revenues and beneficiary premiums and cost-sharing). At its roots, Medicaid is a state controlled program. Except for certain federally required minimum eligibility standards and mandated benefits, states have autonomy to tailor eligibility, covered services, cost-sharing and premiums paid by beneficiaries, and provider reimbursement rates.2  The federal government reimburses the states for a certain percentage of their incurred Medicare costs. This reimbursement rate, also know as the federal medical assistance percentage (FMAP), varies from state to state based on per capita income relative to the national average.3  States with the highest per capita incomes receive the minimum 50 percent FMAP, where as states with the lowest per capita incomes can receive FMAPs up to 83 percent of their incurred costs. Territories and the District of Columbia receive fixed FMAPs that do not fluctuate based on per capita income. States also receive reimbursements for their administrative costs at a fixed rate of 50 percent.4
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Medicaid, ARRA and the ACA

Medicaid is referred to as a “counter-cyclical” program, meaning that when the economy is in recession and states experience a generalized decrease in revenue, there is a simultaneous increase in the unemployed Medicaid-eligible population, placing additional pressure on the Medicaid program.5  In an effort to help alleviate some of the increased burden due to the 2008 recession, the ARRA temporarily increased FMAP payments to states by $87 million, effective from October 1, 2008 through December 31, 2010.6  The ACA extended this increase in FMAP reimbursement rates through June 30, 2011.7  The ARRA included a “hold harmless” provision, which prevented all states from receiving reductions in their FMAP, and increased all states’ current FMAP by 6.2 percent. ARRA funds were given to states with a disproportionate share of unemployment to cover an additional percentage of their state Medicaid spending (5.5 percent, 8.5 percent, or 11.5 percent depending on unemployment rates). However, in order to be eligible to receive these increased FMAP payments, states were prohibited from restricting their eligibility criteria.8

The ACA generally expands Medicaid eligibility and benefits. Recent estimates predict that the number of Medicaid beneficiaries could grow from 69 million now to 95 million in the next 10 years.9  The ACA will create four new categories of mandatory eligibility and two optional categories:

  • The new mandatory categories will extend coverage to all individuals previously ineligible for Medicaid or Medicare Part A under the age of 65 who have a household income up to 150 percent of the federal poverty level (FPL)(“childless adults”).10  
  • In addition, formerly categorically eligible beneficiaries (disabled adults or low-income families) will now be eligible for full Medicaid benefits with income up to 150 percent FPL. All newly eligible beneficiaries will be fully financed by the federal government (100 percent FMAP) through 2015, when rates will decrease to 91 percent.11
  • Children with family income up to 150 percent  FPL will be eligible for full Medicaid benefits, and payments will be matched with the CHIP enhanced FMAP beginning in 2014.12
  • The two optional eligibility categories include certain previously ineligible women in need of family planning services, and certain low-income individuals infected with HIV. Reimbursement for these optional categories would be based on the CHIP-enhanced FMAP as well. Similar to the stipulations in the ARRA, FMAP payments will only be made to states that maintain or expand eligibility criteria for Medicaid.13 

The ACA maintains all previously mandated services for state Medicaid programs (hospital inpatient care, hospital outpatient care, physician services, lab and x-ray services, etc.)14,  and optional services (prescription drugs, rehabilitation services, other licensed practitioners, etc.).15 New mandatory services under the ACA will include all preventive services (without any cost-sharing) for beneficiaries under 21, and family planning, podiatric, and optometric services for all beneficiaries. Although prescription drug coverage will remain optional under the ACA, if states choose to cover prescription drugs, they will be required to include coverage for tobacco cessation products.16  New optional services under the ACA will include translation and interpretation services for non-native English speakers, coverage of free standing birth centers for maternity care, therapeutic foster care for children in out-of-home placements, and adult day-health (which will be considered a rehabilitative service).17 

Medicaid will also experience some financing changes under the ACA. Currently, states are required to make adjusted payments to hospitals that serve a large portion of uninsured patients, known as disproportionate share (DSH) payments. Under the ACA, states will be required to perform an assessment of their continued need for DSH payments, as the ACA is expected to dramatically reduce the number of uninsured, and report back to the federal government.18  The ACA will also standardize payments to primary care physicians.19
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The Impact of Medicaid Expansion on the States

The success of the Medicaid program depends the program’s ability to balance both state and federal interests.20  As states continue to struggle to balance their budgets in the wake of the 2008 recession, there is growing concern about the increased costs associated with the stipulations of the ACA, as well as the end of increased FMAP payments from the ARRA.21  Prior to the ACA, states have been able to curtail their Medicaid spending by adjusting their eligibility requirements, reimbursement rates to providers, and provided benefits.22  However, the prohibition on eligibility restrictions in order to receive any federal funding has left states searching for other avenues of cost savings.23  Some areas where states are seeking cost savings include cutting payments to providers, limiting benefits or reducing the scope of services, instituting large co-payment policies, and shifting beneficiaries into managed care plans.24 

Medicaid managed care has grown in popularity since the 1990s, as more states have enlisted the services of private health plans to manage the organization, delivery, and coordination of care for some of their Medicaid beneficiaries. The Balanced Budget Act of 1997 played a key role in this increase, as it allowed states to place beneficiaries in managed care plans without a waiver. As of 2010, approximately 70 percent of Medicaid enrollees were in some way receiving care through a managed care program.25  Private health insurers that receive a lump sum per beneficiary run Medicaid managed care plans. Like other capitated insurance, the hope is that by not paying providers on a fee-for-service basis, plans will encourage providers to treat patients with cost-effective care.26  As of 2010, 20 states were utilizing Medicaid managed care plans.27  California and Louisiana have recently moved hundreds of thousands of beneficiaries into managed care plans, and New York plans to move 1.5 million into managed care this October.28  However, there are some concerns about the growing reliance on managed care plans. Providers are concerned that managed care plans will streamline the number providers in their coverage, pushing certain providers who rely on a high percentage of Medicaid patients out of business. Additionally, Medicaid managed care plans take away some autonomy of the individual patient. Plans are concerned about potential push back from beneficiaries.29
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State-to-State Variations in Medicaid

Congress created Medicaid with the intention of allowing states the flexibility to tailor the program to their specific needs.  States vary in their eligibility criteria, covered services, reimbursement rates, and FMAP rates.30  According to the Kaiser Family Foundation, densely populated states spend significantly more on their Medicaid programs than less populated areas. For example, in 2007, state Medicaid spending in Wyoming was $433 million compared to $44 billion in New York. The national average in spending per enrollee is approximately $5,100 a year, but ranges from $3,200 in California to $8,000 in Rhode Island and New York.31 

Despite more than four decades of such variations in spending, there has been very little research into the causes. In July 2011, Richard Kronick, Ph.D., and Todd Gilmer, Ph.D., published the findings of a HCFO-funded study that investigated the extent to which price and volume each explain variation in Medicaid payments and explored possible implications of those variations for cost containment. States have very different needs from their Medicaid programs and intimate working knowledge of their individual programs. However, understanding how their prices and volume of services compare to those of other states, and what drives variation from state to state, could be useful information as state policymakers evaluate the appropriateness of their rates.32  The researchers limited their analysis to disabled Medicaid beneficiaries not dually eligible for Medicare but receiving cash assistance because these federal guidelines require that all states cover this group.  They also focused on acute care services received by this group, which are federally mandated. 

Kronick and Gilmer analyzed variations at both the state and regional level.33  Generally, they found higher levels of Medicaid spending in New York, most of New England, Maryland, Minnesota, and Alaska, and lower rates of spending in the South and Washington State. They also found that a combination of variation in price per service and volume of services explain inter-state variation in total spending. The ten highest-spending states spent $1,650 per capita above the national average. Of that, 72 percent (or $1,186) was due to volume of services provided. The ten lowest-spending states spend $1,161 per capita below the national average. Of that, 58 percent (or $672) can be attributed to volume of services provided. Knowing that, in general, volume of services is the biggest driver of variation in state Medicaid spending provides states with a key insight to potentially reduce their Medicaid spending as they work to accommodate the ACA expansions to the Medicaid program.34  

There has been limited research on state variations in Medicaid spending.35  Yet, the phenomenon has received significant attention from state policymakers seeking to control program spending. Some Republican governors are currently lobbying Congress to eliminate all federally-mandated Medicaid standards and to replace the FMAP formula with agreements negotiated individually with each state.36  However, the Administration defends current law, arguing that the ACA already provides adequate flexibility for states.37  
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Medicaid will continue to be an area of interest to policymakers as full the implementation of the ACA approaches and states face on-going cost pressures. The findings from studies like that of Kronick and Gilmer study underscore the potential benefit of continued investigation of the program. Details on HCFO studies and related publications can be found at
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Related HCFO Grants

Title: The Effect of Public Insurance Coverage and Provider Reimbursement on Access to Dental Care: Evidence from the SCHIP Expansion
Grantee Institution: University of Michigan
Principal Investigator: Thomas Buchmueller, Ph.D.
Grant Period: April 1, 2009 – July 31, 2011

The researchers will examine the role that public health insurance plays in improving access to dental care for poor and near-poor children. Specifically, they will study low-income children to assess how Medicaid/SCHIP eligibility generosity affects dental care utilization. They will investigate how changes in program features and market conditions affected the supply of dental care to the publicly insured, addressing the following research questions: 1) What is the effect of public insurance on the probability a child has an annual dental visit? What is the effect on the total number of visits per year? 2) How does the effect of public insurance on dental utilization vary with key program parameters? 3) How do changes in public dental insurance programs affect provider participation? 4) What was the public dental health insurance environment in the states prior to SCHIP, and how did it change as a result of SCHIP implementation? and 5) How did states change dental provider reimbursement rates with the implementation of SCHIP? The purpose of this project is to better understand the effects of public dental coverage in order to inform related Medicaid and SCHIP policymaking.

Title: Impact of State Medicaid Policy Changes on Nursing Home Hospitalization 
Grantee Institution: Brown University
Principal Investigator: Vincent Mor, Ph.D.
Grant Period: June 1, 2008 – June 30, 2011

The researchers will examine the effect of changes in state nursing home bed hold payment policies. Bed hold policies are designed to prevent facilities from discharging low paying (i.e., Medicaid), costly, or complicated patients and to encourage continuity of residence by continuing to reimburse nursing homes if a resident is transferred to a hospital. The researchers will study the impact of these policies on the rate of hospitalization of nursing home residents, as well as on whether residents return to their originating nursing home following hospital discharge. In particular, they will: 1) describe variation in the rates of hospitalization between 1999 and 2005; 2) describe changes in the pattern of post-hospitalization discharge locations; 3) test the effect of changes in state Medicaid bed-hold payment policies between 1999 and 2005 on the rate of all hospitalizations of long stay nursing home residents; 4) test whether state bed-hold policies differentially affect the occurrence of “potentially avoidable” and “terminal” hospitalizations among nursing home residents; 5) test the effect of changes in state Medicaid bed-hold payment policies between 1999 and 2005 on the discharge location; 6) quantify the financial implications of changes in state bed hold policies; and 7) examine changes in residents’ functional status associated with hospitalization in the periods before and after changes in bed-hold policies. The objective of this study is to inform the debate about how best to address increasing hospitalizations of nursing home residents.

Title: Small Area Variation in Medicaid Utilization and Expenditures: Implications for Cost Containment and Quality of Care 
Grantee Institution: University of California, San Diego
Principal Investigator: Richard Kronick, Ph.D.
Grant Period: March 1, 2008 – December 31, 2009

The researchers investigated the variation in Medicaid services and payments and explored the implications of these variations for cost containment options. They compared the services received and cost of care for Medicaid beneficiaries across state Medicaid programs and across hospital referral regions (HRRs) within states. Specifically, the researchers determined: (1) how much variation there is across states, across HRRs within states, and in Medicaid expenditures per beneficiary; (2) the extent to which variation in expenditures per beneficiary is due to variation in the rate of use of services, and the extent to which it is a result of variation in the rate of payment per unit of service; and (3) whether variation in the use of services and in expenditures per beneficiary is related to variations in the quality of care or the outcomes of care for Medicaid beneficiaries. The objective of this study was to provide policymakers with an understanding of the impact of policy choices regarding benefit limits and payment rates on costs and utilization, and their implication for quality of care.

Title: Surviving the Perfect Storm: Impacts of Benefit Reductions and Increased Cost Sharing in a Medicaid Program
Grantee Institution: Office of Oregon Health Policy and Research
Principal Investigator: Jeanene Smith, M.D.
Grant Period: June 1, 2004 – August 31, 2006

How have benefit reductions and increased cost sharing impacted the Oregon Health Plan (OHP)? The researchers examined: (1) impacts on economic viability, including whether cost savings accrue to Medicaid or whether additional costs will be incurred as beneficiaries shift from one benefit to another; (2) impacts on access, including whether access and continuity of care will be compromised as a result of cost sharing and benefit reduction strategies; and (3) impacts on coverage, including the degree to which Medicaid beneficiaries leave the program due to these changes. The objective of this study was to inform state decision makers who continue to seek efficient cost-saving strategies and consider competing approaches for maintaining and rebuilding benefits following reductions in Medicaid and reshaping publicly financed health care.

Title: The Effects of Managed Care Organizations on Government Spending and Health Care Quality: Evidence from California’s Medicaid Mandates
Grantee Institution: University of Maryland
Principal Investigator: Mark Duggan, Ph.D.
Grant Period: October 1, 2002 – March 31, 2004

How does mandatory Medicaid managed care affect cost and outcomes?  Researchers evaluated how county-level mandates that require most Medicaid recipients to enroll in a managed care plans affect spending and health outcomes in California.  Specifically, they estimated the effect of switching recipients from fee-for-service (FFS) to managed care in twenty counties on government spending, medical care treatments, and health outcomes.  Preliminary work done by the researchers showed that the switch from FFS Medicaid to Medicaid managed care among people eligible through welfare was associated with a significant increase in Medicaid spending and a decrease in avoidable hospitalizations.  In this study, the researchers built on that work to examine differences across the three types of managed care used, estimated the effect for eligibility categories other than welfare, assessed differences in the results based on age, race, gender, ethnicity, and urban/rural location.  The objective of the study was to provide policymakers with more information about the effects of transitioning from FFS Medicaid to Medicaid managed care in terms of spending and quality.
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1. Herz E, Baumrucker E, Binder C, Stone J, Heisler E, Hoffman G. Medicaid and Children’s Health Insurance Program (CHIP) Provisions in Affordable Health Care for American Act (H.R. 3962). Washington DC – Congressional Research Service Report for Congress. Report No.: R40900. (

2. Ibid.

3. Medicaid and CHIP Payment and Access Commission. Report to the Congress on Medicaid and CHIP. Washington DC – March 2011. (

4. Herz E, op cit.

5. Rovner J, Montagne R. 15 states try to cut back on Medicaid programs. National Public Radio. June 7, 2011. Available at

6. Kaiser Commission on Medicaid Facts. American Recovery and reinvestment Act (ARRA): Medicaid and health care provisions. Washington, DC: The Henry J. Kaiser Family Foundation – March 2009. (

7. Herz E, op cit.

8. Kaiser Commission on Medicaid Facts – March 2009. op cit.

9. Associated Press, GOP governors say US fiscal fix should let states decide Medicaid rules and spending. The Washington Post. August 30, 2001.

10. Herz E, op cit.

11. Ibid.

12. Ibid.

13. Ibid.

14. Shi L, Singh D. Essentials of the US health care system. Boston: Jones and Bartlett Publishers; 2005.

15. Herz E, op cit.

16. Ibid.

17. Ibid.

18. Ibid.

19. Ibid.

20. Medicaid and CHIP Payment and Access Commission, op cit.

21. Rovner J, op cit.

22. Medicaid and CHIP Payment and Access Commission, op cit.

23. Luhby T. Shrinking Medicaid funds pummel states. CNNMoney. March 28, 2011. Available from:

24. Pear R. States to cut Medicaid benefits as federal help ends. Boston Globe. June 16, 2011. Available from:

25. Kaiser Commission on Medicaid Facts. Medicaid and managed care: key data, trends, and issues. Washington, DC: The Henry J. Kaiser Family Foundation – February 2010. (

26. Weaver C. Medicaid managed care is a growing but risky business. The Washington Post, August 27, 2011. Available from:

27. Kaiser Commission on Medicaid Facts – February 2010, op cit.

28. Weaver C, op cit.

29. Ibid.

30. Medicaid and CHIP Payment and Access Commission, op cit.

31. State Variation and Health Reform- Section 5: Medicaid Spending and Financing [Internet] Available from:

32. Gilmer T, Kronick R. Differences in the volume of services and in prices drive big variations in Medicaid spending among US states and regions. Health Affairs. 2011, July, 30 (7): 1316-1324. (

33. Ibid.

34. Ibid.

35. In a July 2011 NBER paper, HCFO grantee Mark Duggan and colleague Tamara Hayward reported on analyses suggesting that “shifting Medicaid recipients from fee-for-service into MMC did not reduce Medicaid spending in the typical state. However, the effects of the shift varied significantly across states as a function of the generosity of the state’s baseline Medicaid provider reimbursement rates. These results are consistent with recent research on managed care among the privately insured, which finds that HMOs and other forms of managed care achieve their savings largely through reduced prices rather than lower quantities.” ; see also Zuckerman, S et al, “Trends in Medicaid Physician Fees, 2003-2008” Health Affairs Vol 28, No 3 (May/June 2009), pp . w510-w519, ( which includes state-by-state comparisons of Medicare and Medicaid fees for all and selected services in 2008.  

36. Associated Press, op cit.

37. Ibid.