This fact sheet explains what Medicaid financing means for older adults, people with disabilities, and the health care system.

Medicaid is financed and administered through a federal-state partnership. Under current law, the federal government matches state Medicaid spending based on a statutory formula, without a pre-set limit. If state spending increases, for example due to increased enrollment or unexpectedly high program costs, then federal spending increases as well. The countercyclical nature of Medicaid, where economic downturns increase spending, makes the flexibility of the open-ended financing structure vital; it allows federal funds to flow to states based on actual costs and needs as economic and other circumstances change. For example, a pandemic like COVID-19 can increase Medicaid costs by boosting enrollment, per capita spending, or both.

State-directed payments allow states to draw down additional federal matching funds—with federal permission—to help bolster payment rates for Medicaid providers. In addition, most states bolster their match, and often pay the state portion of state-directed payments, through provider taxes.