3.3. Overview of the statutory financing system

3.3.1. Medicare

The next three sections discuss the major sources of coverage in the United States. Table3.5 presents a summary of the sources of health care coverage, how they are financed, who is eligible, and the breadth, depth and scope of coverage as of 2017. Unlike citizens in other high-income countries, only a minority of the US population is covered by the public financing system, mainly through Medicare (seniors and disabled people) and Medicaid (poor and near-poor population); the latter is discussed in section 3.3.2. Rather, a majority of the population receives their coverage from private health insurance and most of them obtain it through an employer (section 3.5).

Table3.5

It is noteworthy, however, that the ACA expanded both the public and private sectors, both of which resulted in a decline in the number of uninsured persons (see Box3.4) More uninsured poor and near-poor individuals and families are receiving Medicaid coverage in the states that chose optional expansion, and many others who are uninsured, whose incomes are too high to qualify for Medicaid, are receiving subsidies that are used to purchase private health insurance. Before discussing these types of coverage, however, the Medicare programme is described.

Box3.4

Coverage

Breadth of coverage

The Medicare programme provides health insurance coverage to nearly all Americans aged 65 and older, as well as to many disabled Americans – those who have received federal disability payments for two or more years, as well as people with end-stage renal disease and amyotrophic lateral sclerosis (ALS) (64 million people, 18% of the total US population in 2018). Medicare is divided into four parts, labelled Parts A, B, C and D.

• Part A, Hospital Coverage includes not only hospital care, but also some post-acute nursing home, home health and hospice care. Individuals and their spouses aged 65 and older who worked for at least 10 years during which time they contributed federal payroll taxes that supported both Social Security (the US statutory retirement pension system) and Medicare are entitled to Part A coverage. In 2017, 58.5 million people were enrolled (CMS, 2018a).
• Part B, Supplemental Medical Insurance is a voluntary programme with essentially the same eligibility requirements as Part A. It covers physicians’ services (both inpatient and outpatient); outpatient care; medical equipment, tests and X-rays; home health care; some preventive care; and a variety of other medical services. Despite its voluntary nature, over 90% of those eligible enrol in it because it is heavily subsidized, as discussed in subsection Revenue collection below.
• Part C, Medicare Advantage is an alternative to Parts A and B. Enrolment is voluntary. It provides coverage for the same services and, at the discretion of the organization offering coverage, sometimes additional benefits such as vision, hearing and/or dental care. One of the main differences between Part C and the preceding two Parts, which are sometimes called “traditional Medicare”, is that Part C coverage is offered through private organizations (e.g. insurers and HMOs). Put another way, when a beneficiary receives a service under Part A or B, the Medicare programme pays the provider directly for services (though payments are processed through private organizations called Medicare Administrative Contractors (MACs)). In contrast, under Part C, Medicare pays the Medicare Advantage plan a fixed amount of money per month for each enrollee based on the characteristics (e.g. demographics, medical diagnoses) of the particular enrollees in the plan. (The formula is a complicated one that has been revised several times over the years.) Enrollees sometimes also pay a premium to the Part C health plan depending on the size of the plan’s bid for providing services; the average in 2017 was US$ 36 per month (Kaiser Family Foundation, 2017c).
• Part D, Prescription Drug Coverage began in 2006 and is also voluntary. Prior to that, Medicare did not provide coverage for prescription drugs received outside hospital. Similar to Part C, Part D benefits are provided through private organizations (usually insurers, HMOs or PPOs). In 2018 there were typically two dozen choices among Part D plans in each state – in addition to dozens of Medicare Advantage plans providing drug coverage in many urban areas. Like Part C, premiums and benefits vary by plan, with competition occurring based not only on premium differences, but also on differences in benefits and, in particular, the drugs that are included on a plan’s formulary that are listed as “preferred” drugs and which therefore are subject to lower or zero patient co-payments.

Research has shown that, historically, Part C plans have been paid more than their costs (CBO, 2007). As a result, the ACA introduced significant changes to payment rate calculations in order to reduce the gap between payment and average expenditure per enrollee. These efforts have been successful: average payments to Part C plans were 114% of traditional Medicare spending per enrollee in 2009, and by 2018 that figure had been reduced to 101% (Skopec et al., 2019). For this payment, a Part C organization is responsible for providing or paying for the service, enjoying part of the financial gain from excess revenues and being at risk of financial loss for shortfalls. A second difference from traditional Medicare is that Medicare Advantage plans tend to cover beneficiaries living in a defined geographical area, covering one or more counties (a geographical subdivision of a state). Thirdly, plans compete with one another in part on the basis of premiums. That is, rather than all beneficiaries paying the same premium, as they do under Part B, in Part C each plan sets its own premium, which will depend not only on the costs of providing required services but also whether additional benefits are offered. Premiums are paid directly to health plans. Fourthly, as noted, most Medicare Advantage plans offer coverage for some types of services not covered by Parts A and B, such as vision, hearing or dental care.

The specific benefits under Part C depend on the type of health plan in which a beneficiary enrols. HMOs are the most common, followed by PPOs and private FFS plans. The last of these is different from the others in various ways: enrollees are generally not limited to a particular network or providers; providers can charge more, meaning that OOP expenses can be higher than with other Part C plans such as HMOs; and physicians typically are paid on a FFS basis. The law allowing for private FFS plans was established by Congress in 1997 as an option for beneficiaries who did not want to be subject to utilization management techniques typically used by managed care plans (Miller, 2007).

In 2017, 34% of Medicare beneficiaries were enrolled in Medicare Advantage plans, nearly 50% higher than just five years before. The remaining 65% remained in “traditional Medicare”. While it was anticipated that cuts in payment to Medicare Advantage plans under the ACA would reduce enrolment by as much as 35%, this did not occur, with the proportion of beneficiaries joining them continuing to rise through 2017. This appears to have occurred because plans responded to payment reductions by reducing their costs, while still offering optional benefits not available through traditional Medicare (Guterman, Skopec & Zuckerman, 2018).

About 75% of Medicare beneficiaries are covered under Part D – about 60% from “stand-alone” plans that provide coverage only for prescription drugs, and the remaining 40% from the drug benefits provided through Medicare Advantage plans (Kaiser Family Foundation, 2019b). Most other beneficiaries have drug coverage from another source, such as from a former employer, but 15% do not have any drug coverage (Kaiser Family Foundation, 2019b).

Scope of coverage

In general, Medicare covers most medically necessary services as determined by providers. Unlike many private health insurance plans, pre-authorization is not required for hospitalizations. With the onset of coverage of outpatient prescription drugs in 2006, and the gradual increase in coverage for preventive services in recent years (which is being expanded through the ACA), the main services not covered are extended long-term care and dental care. There are a few other explicit exclusions: cosmetic surgery, acupuncture, hearing aids and, except in limited circumstances, glasses. Some of these services, however, are covered under selected Medicare Advantage plans.

The largest of these excluded services is extended long-term care. Precisely which services are covered by Medicare is rather complex because the programme does include some coverage for nursing home and home health care. This coverage, however, is aimed at acute-care illnesses. Skilled nursing care must be deemed medically necessary by a physician; custodial care is not covered. Moreover, nursing home care can only be covered if it follows an inpatient hospital stay of at least three days and coverage is provided for a maximum of 100 consecutive days.

Medicare is not involved in determining whether a particular service to a specific beneficiary is covered. Rather, these decisions are generally made by private organizations that contract with Medicare. This is a result of a compromise between legislators and providers to assuage provider concerns about the government making coverage decisions, dating back to the mid-1960s when the Medicare legislation was being debated in Congress. Under Parts A and B, Medicare contracts with MACs. Coverage decisions are made directly by the private health plan under Parts C and D. The Medicare programme has a formal appeals process when disputes occur (see section 2.8.4).

Depth of coverage

As implied above, Medicare coverage is both broad and wide: nearly all seniors are covered and almost all services are covered, the two major exceptions being long-term care and routine dental care. Coverage is not as deep, however. As a result, almost 90% of all beneficiaries obtain some form of supplemental insurance coverage. In 2015 Medicare paid just over half – 54% – of total medical and long-term care expenses. Another 9% was paid on behalf of beneficiaries by Medicare Advantage (Part C) managed care plans; an additional 7% was paid by private payers (including employers and Medigap insurers); 7% was paid by Medicaid on behalf of low-income beneficiaries; 6% was paid by miscellaneous sources including the VHA, and the remaining 17% constituted direct, OOP spending. Note that the above figures do not include premium payments made by beneficiaries (computations made by Kaiser Family Foundation for the authors based on 2015 Medicare Current Beneficiary Survey Data).

Coverage for hospital care under Part A contains two significant gaps. Firstly, there is a deductible for each inpatient hospital stay; in 2018 the amount was US$ 1340. Secondly, for those rare stays that exceed 60 days, there are substantial daily co-payments: US$ 335 per day for days 61–90 and US$ 670 per day for days 91–150.[5] There are no monthly premiums for Part A.

As noted, Part A’s nursing home coverage is limited because it is only for short-term skilled care following a hospital admission, rather than for long-term care. For eligible stays, up to 100 days are covered. During the first 20 days there are no co-payments, but there is a substantial daily co-payment for days 21–100 of a stay: US$ 168 in 2018. In contrast, there is no co-payment for home health care services.

Coverage for physicians’ and other medical services under Part B are also subject to patient cost-sharing. The patient is responsible for 20% of all covered expenses (with no maximum) after meeting an annual deductible of US$ 183 in 2018. The 20% coinsurance requirement is perhaps the main reason why the vast majority of Medicare beneficiaries seek some form of supplemental insurance coverage, which is discussed below. Monthly premiums vary by income; individuals with incomes below US$ 85 000 or couples with incomes below US$ 170 000 paid US$ 134 per month in 2018. Those with higher income pay considerably more. Premiums are often deducted from Social Security payments.

It is difficult to generalize about the depth of coverage under Part C because each plan has its own benefit structure. Federal minimum requirements are that coverage be at least as comprehensive as under Parts A and B. As noted, most Part C plans offer additional services, including prescription drug coverage. Those enrolling in Part C generally are required to pay the US$ 134 Part B premium, and many pay additional amounts based on the total cost of the plan they choose.

Beneficiaries obtain outpatient prescription drug coverage in one of three ways: a Part C Medicare Advantage plan (discussed above), a stand-alone drug insurance plan called a Prescription Drug Plan (PDP) under Part D of Medicare, or employer-provided job or retiree health insurance coverage. In 2018 premiums for PDPs averaged US$ 43 a month (Kaiser Family Foundation, 2019b).

Whereas Part D drug benefits vary depending on a particular plan’s benefit structure, there is a standard benefit structure that health plans are allowed to offer that in 2018 had the following benefits. The beneficiary paid a US$ 405 annual deductible for drug expenses. For annual drug spending between US$ 405 and US$ 3700, the plan paid 75% of expenses and thus the beneficiary was subject to a 25% coinsurance rate. After that, the beneficiary enters the “doughnut hole” where there is no coverage at all. After spending US$ 5000 annually in OOP costs, Medicare generally covers 95% of remaining costs. Importantly, even 5% patient cost-sharing can cause considerable financial harm for those with chronic diseases who use extremely expensive brand-name drugs. At the time of writing various Congressional legislative proposals are being considered to deal with this problem.

As noted, almost 90% of Medicare beneficiaries have some form of supplemental insurance coverage. The main sources in 2013 were as follows (Kaiser Family Foundation, 2017d).

• Former (and occasionally, current) employers: 22% of beneficiaries have such coverage. It is considered desirable because it often covers a greater share of expenses than private (“Medigap”) insurance and because premiums are usually partially subsidized by the employer.
• Medicare Advantage plans: 34% have this form of coverage. It is usually included as a form of supplemental insurance because, as noted, these plans tend to cover some expenses beyond what is paid for by Parts A and B.
• Medicaid: 15% have this coverage, which is available to Medicare beneficiaries with low incomes and assets. This group, which qualifies for both Medicaid and Medicare, is referred to as “dual eligible”. It covers most services at zero or nominal costs. Of note is the fact that Medicaid often becomes a payer of last resort when a beneficiary is institutionalized in a nursing home and “spends down” their income and assets.
• Medigap: 15% of beneficiaries purchase (unsubsidized) private health insurance. Premiums vary by health plan; to illustrate, the annual premium cost of the most popular benefit configuration in California in 2010, for a 65-year-old woman, varied from US$ 1626 (from the lowest cost insurer) to US$ 5467 (the highest cost insurer) (California Department of Insurance, 2010).

The Medigap market is unusual in two respects. Firstly, unlike most other types of insurance, in which states are responsible for insurance regulation, Medigap is subject to strong federal oversight. Secondly, Medigap policies must conform to strict benefit standardization requirements; health plans are only allowed to sell benefit configurations that exactly match federal standards. This facilitates comparison shopping; once the beneficiary chooses among the modest number of benefit designations desired, all insurance plans must provide exactly those (and no more) benefits, which means that the beneficiary mainly needs to compare premiums across the various plan choices.

Revenue collection

Revenue collection differs among the various parts of Medicare. Part A was designed to be a social insurance programme, and accordingly it is financed almost entirely (excepting beneficiary cost-sharing requirements) through a payroll tax with nearly all seniors as well as many disabled Americans automatically eligible for coverage. Parts B and D, in contrast, are voluntary and funded by a combination of general revenue and premium contributions by beneficiaries. Part C is funded by sources similar to Parts A and B.

Overview of Medicare expenditures

In 2016 total Medicare expenditures were US$ 679 billion (Boards of Trustees, 2017). It is difficult to break this down by type of service because that is only done for the 66% of beneficiaries who are not in Medicare Advantage plans. Among those in the so-called “traditional” (FFS) Medicare, 30% is spent on inpatient hospital care and 14% on physicians’ services. Other key components are outpatient prescription drugs (20%) and hospital outpatient services (10%). In spite of the fact that Medicare services seniors and the disabled populations, just 10% was spent on nursing home and home health care. This reflects the programme’s traditional orientation towards covering acute rather than long-term care (CMS, 2012a).

Revenue in the four different parts of Medicare

Workers in the United States and their employers are subject to a mandatory payroll tax that fully funds Part A of Medicare. Since 1990 the rates have not changed; they are 15.3% of payroll up to a “taxable maximum”, evenly split between the employer and employees. Self-employed individuals are responsible for paying the entire amount themselves. Of the 15.3%, 12.4% is earmarked for Social Security (the federal pension system) and 2.9% for Part A of Medicare. Because employees are often unaware of their employer’s contribution, they may think of the tax as being a total of 7.65%.

The system is somewhat regressive because the Social Security component of the tax applies only to the first US$ 128 400 of earned income in 2018. This is ameliorated somewhat, however, because since 1994 there has been no taxable maximum on the Medicare component. The ACA increased the overall progressivity of the tax system by raising the Medicare tax by 0.9% for individuals earning more than US$ 200 000, and married couples earning more than US$ 250 000. In addition, it imposes an additional 3.8% tax on unearned (mainly, investment) income for these wealthier Americans, although this is not earmarked for Medicare.

Part B is funded by two sources. Premiums, which are paid monthly by beneficiaries as deductions from their Social Security cheques, cover 25% of total revenue. The remaining amount is paid by general federal revenues. In 2018 the premium for most beneficiaries was US$ 134 per month. Those with incomes above US$ 85 000 (individual) or US$ 170 000 (family) pay more on a sliding scale.

The Supplementary Medicare Insurance (Part B) Trust Fund’s adequacy is not of great significance because each year, Part B premiums and general revenues are re-set so as to meet projected expenses. In contrast, with regard to the Hospital Insurance (Part A) Trust Fund, each year the Board of Trustees reports on the solvency of the Fund, going 75 years into the future. In their 2017 report the Trustees indicated that the Trust Fund was projected to be depleted in 2029. Nevertheless, the report noted that the future solvency of the Trust Fund will depend heavily on how successful Medicare is in controlling future expenditures (Boards of Trustees, 2017), calling on the government to “address Medicare’s remaining financial challenges”, preferably “in the near future” (p. 9). It should be recognized, however, that even if the Trust Fund becomes depleted, the amount of the deficit will be relatively small in the short run, giving Congress time to adjust benefits downwards or revenue upwards. Moreover, the projects only apply to Part A of Medicare. Parts B (physician) and Part D (prescription drugs) are covered by general federal revenues and individual premiums, and thus are not subject to solvency concerns (van de Water, 2018).

The funding sources for Part C are the same as noted earlier for Parts A and B. Some companies charge a premium in addition to the Part B premium, but others do not. On average, in 2017 the monthly premium for Part C plans covering prescription drugs was US$ 36, in addition to the Part B premium (the latter of which is usually required for Part C coverage; Kaiser Family Foundation, 2017d).

Similar to Part B, Part D is subsidized through general federal revenues, which pay for 74.5% of programme costs. Most of the remainder of the funding comes from beneficiary premiums. The federal government also contributes towards the premiums and cost-sharing requirements of low-income Medicare beneficiaries. While there is not a Trust Fund per se for Part D, there is a “Part D account” that is under the purview of the Board of Trustees.

Pooling of funds and risk in Medicare

In Medicare there are separate Trust Funds for Parts A and B to pool revenue. In considering the Trust Funds, it is necessary to understand that Medicare, in the same way as Social Security pensions, is funded on a “pay-as-you-go” basis – which is typical in social insurance programmes worldwide. That is, contributions made by workers and their employers are not earmarked for the workers themselves but instead are used to pay for the expenses associated with current retirees. It is, in essence, an intergenerational transfer. Technically, though, all contributions are directed to the trust funds and all payments are made from the trust funds.

Medicare Part A funds are pooled into the Hospital Insurance Trust Fund from the 2.9% mandatory payroll tax paid by employers and employees (1.45% each). These funds pay for hospital services for all Medicare enrollees. Part B and D funds are pooled at the level of general federal revenues in the Supplementary Medical Trust Fund programme. For Medicare Advantage (Part C), financial resources flow from the government, which is the principal collection agency, to private insurance companies that sell insurance and pool funds. Payment to Part C plans from the government is capitated and risk-adjusted based on beneficiaries’ health conditions, dual-eligible (Medicaid) status, disability eligibility status and institutional status. Pooling for Part D is similar to Part C in that general revenue funds are paid to private health plans on a capitated risk-adjusted basis.

Purchasing and purchaser–provider relations

The role of purchasing and purchaser–provider relations in Medicare depend on whether a Medicare beneficiary belongs to the traditional (FFS) Medicare system or is in a Medicare Advantage plan, most of which rely on managed care. Since the passage of the ACA, the CMS has also begun contracting with teams of providers to coordinate care in the hope of improving quality and reducing costs. These groups are called ACOs and are discussed further in Box3.3.

Box3.3

Traditional Medicare

An unusual aspect of the physician payment system regards the “assignment” of services. Physicians can choose to accept assignment for all services, or alternatively to do so on a selective basis. For assigned services, Medicare pays its share (generally, 80% of the Medicare fee after the patient meets a small annual deductible) directly to the physician, which removes the risk of default on most of the bill. In return, the physician agrees to accept the Medicare fee schedule amount as payment in full for the service. For non-assigned services, Medicare pays its share directly to the patient, and as a result the physician needs to collect their entire bill from the patient. The advantage to the physician is that they are allowed to bill the patient up to 9.25% (15% of 95% of the Medicare fee schedule) more than the amount for the service as specified by the Medicare fee schedule.

Medicare has made it advantageous to physicians to become “participating providers”, in which they agree to accept all services on assignment. Incentives to do so include 5% more in reimbursement from Medicare, being listed in a national directory of participating physicians and faster claims payments. In response to these incentives, over time, assignment rates have risen from 50% from the mid-1960s to the 1980s to almost 100%, mainly because almost all physicians have chosen to become participating physicians (MedPAC, 2011, 2016).

Medicare Advantage

Under Medicare Advantage (Part C) and Part D, the Medicare programme contracts with insurers and managed care companies to provide benefits to programme beneficiaries. For Part C, the CMS contracts with health plans to provide managed health care coverage for all Part A and Part B services, as well as other services not generally covered by traditional Medicare. Rates are not negotiated between the government and Medicare Advantage plans. Rather, the plans provide bids for counties that they wish to serve. The federal government establishes a “benchmark” that is a dollar amount. It is based on a number of factors including the cost of providing services under traditional Medicare in a specific county. For bids over the benchmark,[6] enrollees pay the difference in premiums. If the bid is lower than the benchmark, this amount is split between the plan and Medicare. The plan can either provide rebates to enrollees or, more commonly, enhance benefits. Part C plans are required by the CMS to provide additional services in an amount equal to any excess remaining in their plans for the contract year and to return any remaining funds to the Medicare Trust Fund.

3.3.2. Medicaid

Unlike Medicare, which is available to nearly all individuals aged 65 and older, Medicaid is a means-tested programme. It is designed to provide health insurance for those with the lowest income levels and fewest assets, the disabled, and to poor seniors with Medicare coverage, as well as the disabled and seniors who have exhausted their financial resources, often as a result of very high long-term care expenses. Medicaid is a key resource for some of the poorest and sickest Americans.

Medicaid programmes are state-based but they are funded jointly by the states and the federal government. In return for federal dollars, states are required to meet certain federal government standards. Participation by the states is voluntary, though historically all the states have chosen to participate. Services are largely purchased from the private sector. This section of the chapter also includes information about CHIP, a coverage programme for children in families whose incomes exceed Medicaid eligibility limits but who do not have private coverage.

Coverage[7]

Breadth of coverage

Medicaid covers several distinct population groups. The breadth of coverage varies across states according to these population groups.

The main groups covered by Medicaid are:

• low-income children
• low-income pregnant women
• low-income disabled persons
• low-income senior citizens
• low-income parents of dependent children.

For adults, in some states that have not chosen to expand eligibility under the ACA (described below), not only are there income restrictions but also asset limitations that can preclude eligibility. Even more significantly, in those states Medicaid does not generally provide coverage to low-income adults who do not care for dependent children.

Even before the ACA, Medicaid eligibility requirements had been liberalized over the years. Originally, to be eligible for Medicaid, it was necessary to also be receiving cash assistance payments (often connoted as “welfare”). This is no longer true as states have expanded eligibility to other groups and those with higher incomes, taking advantage of the federal government matching funds to provide further assistance to their residents.

Compared to Medicare, Medicaid covers roughly 15 million more Americans (a total of 74 million), including 55% of Americans with incomes below the poverty level (Kaiser Family Foundation, 2017e). As noted, the breadth of coverage varies considerably by eligibility group. Children and pregnant women have the most liberal eligibility requirements. States are required to cover pregnant women and children up to the age of 6 if their incomes are at or below 138% of the federal poverty level (FPL), and children aged 6–18 up to 100% of the FPL. (In 2018 the federal poverty level was US$ 12 140 for a single individual and US$ 25 100 for a family of four.) Many states employ even higher thresholds. When combined with CHIP coverage, the typical state provides coverage to children aged 0–5 up to 216% of the FPL, children aged 6–18 to 155%, and pregnant women up to 258%. Thus, coverage of pregnant women and children is quite broad. To illustrate the critical role that Medicaid plays for pregnant women, the programme pays for half of all births in the United States (Kaiser Family Foundation, 2017f).

Coverage is somewhat narrower for seniors and the disabled, however, with the typical state providing coverage up to 73% of the FPL (Kaiser Family Foundation, 2017g). It should be considered, however, that most of these people have Medicare coverage as well, so Medicaid is providing them with supplementary insurance that covers Medicare’s co-payments and some uncovered services, especially long-term care. Nevertheless, lower-income Medicare beneficiaries who are not eligible for Medicaid coverage usually do not have access to other forms of supplemental insurance coverage, and therefore are at financial risk associated with Medicare’s co-payments as well as services not covered by the programme.

With respect to one particular disabled population of note – those with HIV or AIDS – Medicaid provided coverage for 42% of this population in 2014 (Kates & Dawson, 2017). To be eligible, one must not only be disabled through HIV/AIDS, but also have an income that is low enough to qualify. Of particular importance is the programme’s coverage of antiretroviral drugs. However, despite Medicaid coverage for this vulnerable population, HIV/AIDS care constitutes only about 1.5% of the total programme expenditures (Kaiser Family Foundation, 2013).

Low-income parents of dependent children face the most stringent eligibility requirements if they are among the states that did not expand Medicaid eligibility. Most notable is Texas, where coverage is provided only to those with incomes up to 18% of the FPL (that is, an annual income even as low as US$ 4000 would disqualify the parent of a family of three from coverage in that state). Most states provide coverage up to 138% of the FPL since that is a requirement of the voluntary Medicaid expansions. This illustrates the large variation in breadth of coverage that currently exists between states.

Implementation of the Medicaid expansions, resulting from the ACA, dramatically increased the breadth of coverage for the poor and near-poor under the age of 65 in most states. Beginning in 2014, states that chose to expand their Medicaid coverage received 100% of the costs of coverage for new enrollees up to 138% of the FPL from the federal government.[8] The federal contribution gradually decreases to 90% of state costs after three years. For states that choose to expand Medicaid coverage, no categorical restrictions are allowed – for example, poor and near-poor adults without children are eligible. Finally, there are no restrictions on the possession of assets. One important caveat applies to the information provided above. Medicaid does not cover undocumented residents, nor are states required to cover legal residents during their first five years in the United States. Currently, the federal government will provide matching funds to make Medicaid coverage available to pregnant women and children who are legal immigrants with fewer than five years of residency. As of 2016, about half of states had done so (Kaiser Family Foundation, 2017h).

Scope of coverage

The scope of coverage under Medicaid is generally wide but varies by state. Federal law requires that states provide the following services (this is only a partial list of the more significant ones): inpatient and outpatient hospital, physician, nurse practitioner (NP), laboratory and radiology, nursing home and home health care for those aged 21 and older, health screening for those under age 21, family planning and transportation.

Other services are optional for states. This designation means that if a state chooses to cover the service, it will receive matching funds from the federal government. Optional services include some major services such as prescription drugs and dental care, but also such things as care provided by professionals besides physicians and NPs, durable medical equipment, glasses, rehabilitation, various types of institutional care, home and community-based services, personal care services and hospice care.

While technically “optional”, many of these services are covered to some extent by the states. All states, for example, provide some prescription drug coverage. Many states limit the number or type of services, as discussed below. It is estimated that for populations that states are required to cover under Medicaid, 31% of Medicaid spending is for these optional services (MACPAC, 2017b).

Depth of coverage

It is difficult to summarize Medicaid’s depth of coverage, except to say that like most aspects of the programme, it varies considerably by state and by population group. While a few states impose nominal co-payments under federally approved waivers, they are, as yet, generally not very significant. In contrast, coverage is often not deep in three meaningful ways: (1) some states have been given waivers by the federal government to impose premiums and non-trivial cost-sharing requirements on some Medicaid beneficiaries, and in a few recent cases, require evidence of working; (2) states often put restrictions on the number of services and/or types that are covered; and (3) access to private practising physicians is often limited, meaning that enrollees may have to seek care from public facilities or clinics. Waivers allowing imposition of work requirements are the focus of active litigation in several states (NASHP, 2020).

It was noted earlier that there are a number of mandatory services covered by Medicaid, including inpatient and outpatient hospital and physician care, home health services, laboratory and X-ray services, to name a few (a full list of required services is available on Medicaid’s website). States are, however, allowed to set limits to the number of such services provided, for both mandatory and optional services – a marked difference between Medicare and most private insurance policies provided through employment. These can significantly reduce the depth of coverage under the programme. In 2012, for example, many states had instituted visit co-payments, typically between US$ 1 and US$ 4, and a number also limit the number of prescriptions that can be filled; a typical limit is 4–6 per month depending on the state (Kaiser Family Foundation, 2012a).

Finally, because Medicaid provider payments are low compared to other insurance, access to care in physicians’ offices has been problematic, a situation that has existed since the programme’s inception. (Provider payment is discussed in more detail in section 3.7.) In 2016 Medicaid physician fees, on average, were only 72% as high as Medicare’s for all services, and 66% as high for primary care services (Kaiser Family Foundation, 2016). Medicare fees, in turn, tend to be lower than those paid by private insurers. Low physician payment rates put patients with Medicaid at a distinct disadvantage in obtaining care from privately practising office-based physicians – meaning they sometimes need to go to outpatient clinics or even the emergency room to obtain needed care. A 2011 national physician survey found that 31% of physicians said they would not accept any new Medicaid patients (Decker, 2012). One development with the potential to provide more mainstream access to physician office care is the movement towards the use of managed care in the Medicaid programme. About 75% of Medicaid beneficiaries are in managed care plans (CMS, 2016a). While the exact nature of these arrangements varies both between and within states, they may include capitation (rather than FFS) for providers and/or primary care case management. An important development is the use of managed care not only for pregnant women and children, but also for those with chronic diseases and those who are jointly covered by Medicare and Medicaid. States often prefer managed care as a means of both enhancing quality and controlling costs. It is critical, however, that capitation rates paid to managed care organizations be sufficient to provide high-quality care with access to physician offices (Kaiser Family Foundation, 2010).

Revenue collection

Medicaid is financed jointly between the federal and state governments. In general, both finance their shares from general revenues – mainly taxes. Unlike Parts A and B of Medicare, there is no trust fund dedicated to the programme’s financing.

In 2016 total Medicaid expenditures were US$ 565 billion – 85% of the US$ 672 billion spent on Medicare and 17% of total health expenditures in the United States. Medicaid constitutes almost 10% of the federal government budget and 16% of state spending. The only state budget component with a larger share is elementary and secondary education, which constitutes roughly 24% of total state spending (CMS, 2018b; MACPAC, 2017c).

About 60% of total Medicaid spending is devoted to acute care, and 40% to long-term care (MACPAC, 2017a). Of note is the fact that while only about one quarter of enrollees are senior citizens or the disabled, they account for over 60% of programme spending. In fact, average spending for a disabled enrollee (US$ 16 859 in 2014) or a senior (US$ 13 063) exceeded spending for children (US$ 2577) and non-elderly adults (US$ 3278) by about five-fold (Kaiser Family Foundation, 2014).

Pooling of funds and risk in Medicaid

Some of the more general issues surrounding the pooling of funds in the US health care system are discussed in section 3.2.2. Currently, the main pooling activity that occurs in Medicaid is through the Federal Medical Assistance Percentage (FMAP) formula, which allots a greater proportion of federal government dollars to states with lower per capita incomes.

The formula by which states’ respective shares of federal Medicaid monies are divided up is called the FMAP. The following formulas are used:

• federal share: 1–0.45 x (state per capita income/US per capita income)
• state share: 0.45 x (state per capita income/US per capita income).

Thus, states where per capita income is at the national average will receive 55%. By law, no state pays more than 50%, with the poorest state receiving about 76%. On average, the federal government share is 57%. It is important to note that this formula does not apply to states that have taken advantage of the ACA’s Medicaid expansion. After a three-year transition period, the federal government pays 90% of costs for all such new Medicaid beneficiaries, regardless of state per capita income.

The above formula is applicable to most Medicaid expenditures for medical services. Some services, and administrative costs, are determined by separate laws. Administrative costs, for example, are split 50/50 between the federal and state government irrespective of the state’s per capita income.

A perennial issue surrounding the FMAP formula is that it does not respond to the counter-cyclical nature of Medicaid. When there is an economic downturn, state revenues fall. This is problematic for states in several ways.

• Since the formula is in part based on national income, if all states have declining per capita income during a recession, they will not, on average, receive higher federal government contributions.
• During such an economic downturn, unemployment rises, which means Medicaid eligibility (and therefore costs) also rises.
• The formula is based on past rather than current per capita income. For example, the 2018 FMAP was based on incomes during 2013, 2014 and 2015 (Mitchell, 2018).