Medicaid Formula Narrows Differences in Some States’ Funding Ability and Widens Differences in Others

The Medicaid formula reduces by 20 percent the differences among states  in their ability to fund program services, compared with the national  average funding ability. While the formula narrows differences for 30  states, making the average difference in funding ability smaller, it moves  21 states farther away from the national average, making the average  difference wider. These 21 states include 3 that are among those with the  largest populations in poverty—California, Florida, and New York. Because of the formula’s current structure, in many instances, two states  devoting the same proportion of their own resources toward funding  Medicaid services are unable, after receiving federal matching aid, to  spend the same amounts per person in poverty, adjusted for cost  differences related to age and geographic location. Nationwide, the average difference between a state’s funding ability and  that of the average state is 22.7 percent. After the receipt of federal matching  aid, differences in states’ funding abilities ranged from 26 percent below  the national average for California and New York to 179 percent above for  Alaska. 2). For example, in fiscal year 2000,  both California and Wisconsin devoted roughly the same proportion of  their own resources to fund program benefits—about $8 per $1,000 of  taxable resources—which was close to the national average ($8.37)  proportion of resources states devoted to Medicaid that year. This occurred because Wisconsin  receives a high federal match despite its relatively high funding ability,  whereas California receives a low federal match despite its relatively low  funding ability. Once federal matching aid was factored in, with their  nearly identical funding effort, Wisconsin is enabled to spend more than  twice what California could spend per person in poverty—$7,532  compared with $3,731. Use of PCI and 50 Percent Floor Inhibits Formula’s Ability to Further Narrow Differences in States’ Funding Ability

Two factors prevent the Medicaid formula from further reducing  differences in states’ funding ability. PCI Is Not a Comprehensive Measure of States’ Resources and Is a Poor Proxy for the Size of and Cost to Provide Services to Their People in Poverty

PCI 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. However,  two states with similar PCIs may differ widely in their percentages of  people in poverty. Connecticut and New Jersey benefit the most from the  statutory minimums, receiving—as a result of the 50 percent floor— matching rates that are 35 and 20 percentage points higher, respectively,  than the rates they would have received based solely on their PCI. Receiving a higher matching rate than what the formula provides on the  basis of PCI enables these states to spend more on program benefits per  person in poverty than states with less funding ability that devote a higher  percentage of their resources to funding program benefits. Comments from External Reviewers

We received comments on our draft report from two external reviewers  who have Medicaid formula expertise. The reviewers generally agreed  with our analysis and provided technical comments, which we  incorporated as appropriate. Calculating the Reduction of Differences in States’ Funding Ability

To measure the effect of the current formula in reducing differences in  states’ funding ability, we compared differences between each state’s  funding ability before and after the value of federal matching aid is added  and calculated the percentage reduction in these differences.
Why GAO Did This Study

A primary goal in establishing Medicaid's statutory formula, whereby states with lower per capita incomes (PCI) receive higher rates of federal reimbursement for program costs, was to narrow differences among states in their ability to fund Medicaid services. States' ability to fund services depends on their financial resources in relation to their number of and costs to serve people in poverty. GAO and others have testified before Congress that the current formula does not address wide differences among states in their ability to fund their Medicaid programs and that the formula's reliance on PCI is the primary cause. GAO was asked to determine the extent to which the formula narrows these differences and to identify factors that impede further narrowing of differences. To evaluate the extent to which the formula narrows differences in states' funding ability, GAO used an alternative to PCI that more directly measures states' resources, number of people in poverty, and cost of providing services to this population. Using this measure, GAO determined the effect of the current formula by comparing states' funding ability before and after receiving their federal matching aid. If differences in funding ability were eliminated, the formula would have reduced differences by 100 percent.

What GAO Found

The Medicaid formula narrows the average difference in states' funding ability by 20 percent but often widens the gap between individual states and the national average. Although the receipt of federal matching aid moves 30 states closer to the national average, making the average difference in funding ability smaller, it also moves 21 states farther away from the average, widening the average difference. These 21 states include 3 that are among the states with the largest populations in poverty--California, Florida, and New York. After federal matching aid is added, states' funding ability ranges from 26 percent below the national average for two states to 179 percent above for another. Because of the formula's current structure, in many instances, two states devoting similar proportions of their own resources to Medicaid can spend very different amounts per person in poverty. For example, in fiscal year 2000, California and Wisconsin each devoted about $8 for every $1,000 of their own state resources toward Medicaid. However, under the current formula, Wisconsin receives a relatively high federal matching rate despite its relatively high ability to fund program services, whereas California receives a low federal matching rate despite its relatively low ability to fund program services. With the addition of federal matching aid, Wisconsin is enabled to spend more than twice what California is able to spend per person in poverty ($7,532 versus $3,731). Two factors constrain the formula from further decreasing differences in states' funding ability. First, PCI is not a comprehensive indicator of a state's total available resources and is a poor measure of the size of and cost to serve a state's people in poverty. Second, the statutory provision that guarantees no state will receive less than a 50 percent matching rate benefits many states that already have above-average resources to fund health care for their populations in poverty. For example, 2 of the 11 states that benefit the most from the 50 percent "floor" receive matching rates that are 35 and 20 percentage points higher, respectively, than the rates they would receive based solely on their PCI. GAO received comments on a draft of this report from two external reviewers who have Medicaid formula expertise. They generally agreed with the analysis and provided technical comments, which were incorporated as appropriate.