Funding for the nonfederal, or state, share of Medicaid comes from a variety of sources; at least 40 percent must be financed by the state and up to 60 percent may come from local governments (§1902(a)(2) of the Social Security Act). ). In state fiscal year 2018, 68 percent of funds came from state general revenues, 12 percent from local governments (including intergovernmental transfers and certified public expenditures), 17 percent from health care related taxes, and 4 percent from other sources (GAO 2020).
Each state makes its own decisions, within federal requirements, regarding how to finance its share of the Medicaid program. As a result, the extent to which states rely on funding sources other than general revenue varies considerably and may be influenced by states’ traditional sources of general revenue and approaches to financing health care for low-income individuals. At various points, particularly beginning in the early 1990s, this multi-source approach to financing has been the subject of federal scrutiny, sometimes because of evidence of state excesses (GAO 1994, GAO 2004), and sometimes in an effort to control federal spending by limiting states’ ability to make expenditures that qualify for federal contributions. At the same time, the fact that Medicaid enrollment increases and state revenues decrease during economic downturns, coupled with the fact that most states operate within one- or two-year budget periods, may increase pressure on states to find ways to finance their share of the Medicaid program during such times.
Local sources of non-federal share
Counties, municipalities, and other units of local government, including providers operated by local governments, contribute to the non-federal share of Medicaid spending in many states. As noted above, this local-level Medicaid spending is rooted in the history of the program and varies by state. These units of local government, which may also be Medicaid providers (e.g., a county hospital or school district), either transfer local government funds in the amount of the non-federal share of Medicaid payments to the state Medicaid agency through an intergovernmental transfer, or certify the total expenditure incurred to provide Medicaid services or Medicaid program administration, known as a certified public expenditure.
Intergovernmental transfers (IGTs). An IGT is a transfer of funds from another governmental entity (e.g., a county or other state agency) to the Medicaid agency before a Medicaid payment is made. When these funds are used as the non-federal share of a Medicaid expenditure, they are eligible for federal financial participation (FFP). That is, they can be matched by federal dollars. IGTs are commonly used by counties to contribute the non-federal share for certain governmental providers (e.g., community mental health centers, hospitals) located in those counties. IGTs may also be contributed directly by governmental providers themselves, such as hospitals operated by state or local government. The ability of states to use IGTs to finance their Medicaid programs is recognized in both federal statute and regulation (§1903(w)(6) of the Social Security Act; 42 CFR 433.51).
Certified public expenditures (CPEs). A CPE is a statutorily recognized Medicaid financing approach by which a governmental entity, including a governmental provider (e.g., county hospital, local education agency), incurs an expenditure eligible for FFP under the state’s approved Medicaid state plan (§1903(w)(6) of the Social Security Act; 42 CFR 433.51). The governmental entity certifies that the funds expended are public funds used to support the full cost of providing the Medicaid-covered service or the Medicaid program administrative activity. Based on this certification, the state then claims FFP.
CPE-based financing must recognize actual costs incurred. As a result, CMS requires cost reimbursement methodologies for providers using CPEs to document the actual cost of providing the services, typically determined through a statistically valid time study, periodic cost reporting, and reconciliation of any interim payments.
Health-care related taxes. Health-care related taxes (sometimes referred to as provider taxes, fees, or assessments) are defined by federal statute as taxes of which at least 85 percent of the tax burden falls on health care providers (§1903(w)(3)(A) of the Social Security Act). (Provider donations are also permitted as a source of the non-federal share if they meet stringent conditions.)
Such taxes are typically approved by state legislatures and are mandatory for providers. However, federal statute and regulations place limits on states’ ability to use such tax revenue as the non-federal share of Medicaid payments. Statutory provisions under the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 102-234) regarding health care related taxes require that:
- Health care related taxes must be broad-based and uniform. That is, they must be levied against all non-governmental providers in a particular class, not only those that accept Medicaid payments, and the tax rate must be uniform across all providers in the class.
- Providers cannot be held harmless through a direct or indirect guarantee that they will be repaid for the amount of taxes that they contribute. However, the indirect guarantee test does not apply if the tax rate falls within a safe harbor established under regulation. The safe harbor is currently 6 percent of net patient revenue.
Learn more about how states raise their share of Medicaid revenues:
State Approaches for Financing Medicaid (March 2012)
Health Care Related Taxes in Medicaid (January 2020)