Chapter 3 – Medicaid and CHIP


  • Seventy-three million Americans had health coverage through Medicaid or the Children’s Health Insurance Program in 2016 (source).
  • Medicaid is the largest public source of health coverage in the United States (source).
  • Medicaid accounts for one in six dollars spent in the nation’s health care system, as well as half of long-term care spending and 9 percent of prescription drug spending (source).
  • Spending on Medicaid totaled $509 billion in fiscal year 2015, with the federal government contributing 62 percent of that amount, and states paying 38 percent (source).
  • In 2016, Medicaid spending rose 3.7 percent, and it is expected to grow at the same rate in 2017 (source).


Seventy three million individuals are enrolled in Medicaid and the Children’s Health Insurance Program (CHIP), however numbers can vary as people move in and out of the program throughout the year (source). According to the Centers for Medicare & Medicaid Services (CMS), enrollment in Medicaid and CHIP has increased by more than 14 million people from 2013 to November 2015, marking a 25 percent increase (source).

Recent increases in enrollment, and therefore spending, resulted from the recession in 2008 and 2009, and also changes in the Affordable Care Act (ACA), which expanded Medicaid coverage to include low-income, childless adults in states that participated in the expansion. Enrollment growth, however, began to slow in 2016, and that trend is expected to continue in 2017 in both expansion and non-expansion states (source).

The Supreme Court in June of 2012 effectively made the expansion optional for states. As of September 2016, 32 states including Washington, D.C., had implemented the expansion (source).

Medicaid is a federal-state partnership, and is financed jointly. However, the federal government assumed the full cost for the ACA’s expanded population from 2014 to 2016, and this gradually phases down to 95 percent in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and beyond (source).

As a candidate, President Donald Trump called for converting Medicaid to a federal block grant program for states (source). A similar proposal, a per capita cap on federal Medicaid spending, was a feature of the American Health Care Act (AHCA) that progressed through the U.S. House in early 2017, but the bill was withdrawn from consideration by House Speaker Paul Ryan on March 24, 2017 (source).


Medicaid, an entitlement program, became law in 1965. Authorized under Title XIX of the Social Security Act, Medicaid was originally enacted to provide health care to low-income children deprived of parental support, their caretaker relatives, the elderly, individuals with disabilities and the blind. The program is financed jointly by states and the federal government, and it is administered by the individual states.

States must follow certain federal rules and cover specified groups to receive federal funding. They also must provide certain mandatory benefits, including, but not limited to, inpatient hospital, laboratory, x-ray, and physician services. Medicaid also mandates a comprehensive package of benefits for children, known as Early and Periodic Screening, Diagnosis and Treatment (EPSDT) (source). Additionally, federal law requires every state to provide nursing home care and home health care for the qualified poor. While the federal government dictates minimum benefits, states can also provide additional optional services, such as home and community-based services (HCBS) (source).


Before the ACA, the federal government contributed funds for states to cover certain categories of low-income people in their Medicaid programs, including children, pregnant women, parents of dependent children, disabled individuals and people over the age of 65. Some states, however, used their own money to provide benefits to some higher-income individuals. Medicaid did not cover most adults under the age of 65 before the ACA; about three-quarters of enrollees were children, working parents and elderly individuals, and the remaining quarter were nonelderly people with disabilities (source).

The ACA made Medicaid available to nonelderly adults and established an income eligibility threshold no greater than 138 percent of the federal poverty level. States must maintain no less than their pre-ACA eligibility limits through September 2019, and they must also provide coverage for kids aging out of foster care through the age of 26 (source).


The federal government reimburses states for a portion of their Medicaid spending through the federal medical assistance percentage (FMAP) formula. The formula is based on a state’s relative per capita income, with the federal government matching state spending at anywhere from 50 to 75 percent (source).

In 2016, Medicaid spending rose 3.7 percent, and it is expected to grow at the same rate in 2017. This is significantly lower than the increases of 9.7 percent in 2015 and 11.6 percent in 2014, which were driven in part by the ACA’s Medicaid expansion (source). Under the ACA, the federal government covered 100 percent of the expansion costs for states from 2014 to 2016. As states begin to pay a share of the cost for new enrollees (5 percent in 2017), state Medicaid spending is expected to rise (source).

Nonetheless, increased Medicaid costs are putting pressure on state budgets. In FY 2015, state funds spent on Medicaid rose 5.5 percent, and in FY 2016 it rose an estimated 6.6 percent. Medicaid is the second largest category of state government spending after primary and secondary education, comprising 16.8 percent of state spending, but its costs are rising faster than education’s (source).

The costliest Medicaid beneficiaries are the elderly and persons with disabilities. In 2011, prior to implementation of the ACA, the elderly made up only 9 percent of the population covered by Medicaid but accounted for 21 percent of Medicaid costs. Individuals with disabilities made up 15 percent of the Medicaid population but accounted for 42 percent of program costs (source).

A large portion of Medicaid spending involves coverage for individuals enrolled in both Medicare and Medicaid, also known as dual eligibles. Medicaid pays for services not covered by Medicare, such as long-term services and supports, and helps pay for Medicare premiums and cost-sharing. In 2010, dual eligibles made up 14 percent of the Medicaid population but accounted for almost 40 percent of Medicaid expenditures, which were directed to both acute care and long-term care (source).

Children are generally less expensive: Although they make up nearly half of enrollees, they account for only 21 percent of costs (source).

States have implemented various Medicaid strategies to achieve better care delivery and to lower spending. Some of these initiatives expand managed care models, which states have increasingly relied on since the 1980s, although many states vary in their approach and scope (source). Other initiatives include telemedicine and the adoption of new ways to coordinate care through patient-centered medical homes and accountable care organizations.

With those people who are dually eligible for both Medicare and Medicaid making up a small percentage of the Medicaid population but consuming a large portion of the program’s costs, many states have implemented demonstration projects through the federal government that seek to control costs and improve quality by improving how the programs work together. As of December 2015, 13 states had finalized memorandums of understanding (MOUs) with CMS to implement 14 demonstrations. The states were California, Colorado, Illinois, Massachusetts, Michigan, Minnesota, New York, Ohio, South Carolina, Rhode Island, Texas, Virginia and Washington (source).


The CHIP program has federal funding through fiscal year 2017, and Congress will be debating the future of the program leading up to that expiration (source).

In 1997, President Bill Clinton signed bipartisan legislation to create CHIP, the program responsible for the largest expansion of health insurance for children in over 30 years (source). CHIP was designed to insure children in families with incomes too high to qualify for Medicaid but too low to buy coverage on their own (source). On February 4, 2009, President Barack Obama signed The Children’s Health Insurance Program Reauthorization Act (CHIPRA), which increased funding by $32.8 billion through 2013 and extended coverage to 4 million more children (source). On April 16, 2015, Obama signed into law the Medicare Access and CHIP Reauthorization Act (MACRA), which extended CHIP allotments until 2017 (source).

CHIP covers over 8 million children (source), and together CHIP and Medicaid cover more than 1 in 3 children (source). States must meet a minimum set of federal standards for benefits. They can operate a program separate from Medicaid, add the extra children into Medicaid, or create a combination of the two approaches (source).

Under maintenance-of-effort provisions in the ACA, states must continue Medicaid and CHIP eligibility standards for children through 2019. CHIP is funded as a capped block grant to states, with the federal government allocating a certain amount of money each year to each state. The federal government matches state spending on CHIP at a higher rate than it does for Medicaid as an incentive to cover more low-income children. Depending on the state, the federal government has historically paid for 65 to 85 percent of each state’s initiative (source). The ACA established a 23 percentage point increase of the federal CHIP match rate to between 88 and 100 percent until 2019 and MACRA funded this bump through 2017 (source). States also cannot impose barriers that would make enrollment more difficult.


The ACA made a major change to Medicaid by expanding the program to nearly all adults under age 65 with incomes up to 138 percent of the federal poverty level ($16,394 for an individual in 2016 (source), including seniors and people with disabilities. Previously, few adults – mostly low-income parents – were eligible. On June 28, 2012, the U.S. Supreme Court ruled the ACA’s Medicaid expansion provision was unconstitutionally coercive to states, thus leaving the decision up to individual states. States that choose not to expand can still receive federal matching funds for their previous Medicaid populations and can decide later to expand eligibility. However, future expansions would not receive an initial 100 percent federal financing level unless the law changed.

For states that have expanded, the federal government covered the entire cost of newly eligible individuals between 2014 and 2016. The federal matching rate decreases to 95 percent in 2017, to 94 percent in 2018, to 93 percent in 2019, and to 90 percent in 2020 and thereafter.

States forgoing the Medicaid expansion face continuing pressures from stakeholders to participate. Expansion and non-expansion states are experiencing higher Medicaid costs across the board, due to increased participation among those eligible under pre-ACA rules (source).

The ACA required states to streamline and simplify processes and coordinate processes across programs, including for Medicaid, CHIP and marketplace insurance coverage. Many low-income people move between coverage programs as their financial and employment circumstances change, and states have had to refine their systems to keep up.

As part of the ACA, primary care physicians in Medicaid were reimbursed at higher Medicare rates in 2013 and 2014, and some have questioned whether these rates enticed enough physicians to see more Medicaid patients in the aftermath of the fee bump’s expiration. Medicaid physician fees averaged 66 percent of Medicare fees in 2012, and Medicaid advocates have long argued that this disparity has made it difficult for low-income patients to see a doctor (source). While some stakeholders believe that providers will deny Medicaid patients without an enhanced fee, others have disagreed, adding that the fee bump only rewards doctors already participating in Medicaid (source).

Hospitals may experience additional financial impacts as a result of the ACA’s reduction in federal Disproportionate Share Hospital Adjustment (DSH) payments that help with the cost of uncompensated care, under the assumption that the Medicaid expansion would reduce the number of patient who are unable to pay due to lack of insurance. These reductions were originally scheduled to start in 2014, but are now scheduled to begin in 2018 (source). The largest reductions will be applied to states with the lowest percentages of uninsured people and historically high DSH payments (source). Since the ACA did not account for an optional Medicaid expansion, the number of uninsured individuals may be greater than originally expected. While a revised methodology for 2018 has yet to be proposed, CMS noted that it will take a state’s decisions to expand Medicaid coverage into account (source).

Additionally, the ACA established two new federal entities – the Medicare-Medicaid Coordination Office (MMCO) and the Center for Medicare and Medicaid Innovation (CMMI). While CMMI supports the broader effort of developing and testing various payment and service delivery models in Medicaid, CHIP and Medicare, both offices are involved in efforts to study and improve care for dually eligible enrollees.


Under section 1115 of the Social Security Act, the Secretary of Health and Human Services has the authority to approve state demonstration projects to test and evaluate new approaches in their Medicaid programs (source). Waivers have been granted for many purposes, such as expanding coverage, using new delivery systems, altering benefits and cost-sharing, and modifying provider payments. Waivers are general granted for an initial five-year period and must be renewed thereafter (source).

For example, in 2012, Oregon applied for and received a waiver to create 16 regional ACOs for its Medicaid program. Called “coordinated care organizations (CCOs), they have enrolled approximately 90 percent of the state’s 1.1 million Medicaid enrollees (source). Each regional CCO is allocated a fix amount of funds per patient and is given the authority to spend those dollars as they see fit, provided that they meet certain quality metrics (source). As of January 2016, the CCOs had succeeded in meeting their cost and quality goals (source).

After the passage of the ACA, and the U.S. Supreme Court ruling that the Medicaid expansion was optional, six states requested and were granted Section 1115 waivers to implement non-standard expansions of Medicaid under the ACA. Arkansas was the first state to receive a waiver for a program that offered premium assistance for the purchase of private insurance instead of traditional Medicaid (source). In 2015, two states, Arizona and Michigan, sought waivers to modify Medicaid programs that had already expanded (source).

The Delivery System Reform Incentive Payment (DSRIP) program makes funding available under section 1115 waivers to provide incentives to hospitals and other providers who are implementing delivery system reform for Medicaid populations. DSRIPs do not provide grants, they instead help states provide performance-based incentives (source).


The election of Donald Trump as president, along with Republican control of both the U.S. House and Senate, has triggered a vigorous debate over the future of all federal health programs, including Medicaid and CHIP. A repeal of the ACA would leave that law’s expansion of coverage in doubt, and Medicaid has been considered for future federal spending reductions.  Medicaid was exempt from cuts under automatic federal spending cuts in 2013, known as the sequester. Proposals that have received the most attention include transforming Medicaid into a block grant program, or instituting a per capita cap (source) (source).

A per capita cap on federal Medicaid spending was a feature of the American Health Care Act (AHCA) that passed the U.S. House in May 2017 (source). Under a per capita cap, Medicaid would be transformed from an entitlement, under which spending is determined by how many people are enrolled and how much care they receive, to a program with fixed federal spending per enrollee. Costs above that cap would be borne by the states (source).

Leaders in several non-expansion states had been waiting to see what changes Congress and the Trump Administration would make to the ACA before reconsidering whether to expand Medicaid. In light of the withdrawal of the AHCA, efforts resumed to expand the program in states such as Georgia, Kansas, North Carolina, and Virginia (source).

In 2017 Congress will need to decide whether and how to reauthorize the CHIP program. A two-year extension of the program is estimated to cost approximately $7 billion (source).

In March 2017, HHS Secretary Thomas Price and CMS Administrator Seema Verma sent a letter to governors to notify them to expect “more freedom to design programs that meet the spectrum of diverse needs of their Medicaid population” (source). The letter stated an intention to use Section 1115 waivers to approve new state training and employment requirements for Medicaid beneficiaries, and it encouraged states to make design and benefit changes such as the following (source):

  • Health Savings Account-type features
  • Premium or contribution requirements for beneficiaries
  • Waivers of non-emergency transportation requirements
  • Emergency room copayments, to encourage the use of less-costly providers
  • Waivers of presumptive eligibilty and retroactive coverage


Joan Alker, executive director, Georgetown University Center for Children and Families, 202-784-4075,

Samantha Artiga, associate director, Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, 202/347-5270

Deborah Bachrach, partner, Manatt Health Solutions, 212-790-4594,

Lynn Blewett, director, State Health Access Data Assistance Center (SHADAC), University of Minnesota, 612/626-4739,

Tom Bradley, chief, Health Systems and Medicare Cost Estimates Unit, Congressional Budget Office, 202/226-9010,

James Capretta, resident fellow and Milton Friedman chair, American Enterprise Insititute,

Teresa Coughlin, senior fellow, Urban Institute Health Policy Center, 202/261-5709,

Lisa Dubay, senior fellow, Urban Institute Health Policy Center, 202/261-5709,

Tim Engelhardt, deputy director, Federal Coordinated Health Care Office, Centers for Medicare and Medicaid Services, Department of Health and Human Services, 202/690-6277,

Charlene Frizzera, chief executive officer, CF Health Advisors, 443/794-4379,

Rachel Garfield, associate director, Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, 202/347-5270

Darin Gordon, founding partner, Speire Healthcare Strategies, 615-386-7061,

Dan Hawkins, senior vice president for public policy and research, National Association of Community Health Centers, 202/296-3800,

Ian Hill, senior fellow, Urban Institute Health Policy Center, 202/261-5709,

Heather Howard, director of advancing coverage in states and state health and value strategies, Wilson School of Public and International Affairs, Princeton University, 609/258-9709,

Katherine Iritani, Government Accountability Office, 206-287-4820,

Frederick Isasi, executive director, Families USA, 202-628-3030,

Jim Kaufman, vice president for public policy, Children’s Hospital Association, 202/753-5336,

Genevieve Kenney, codirector, Urban Institute Health Policy Center, 202/261-5709,

Sharon Long, senior fellow, Urban Institute Health Policy Center, 202/261-5709,

Barbara Lyons, director, Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, 202/347-5270,

Dee Mahan, Medicaid program director, Families USA, 202-434-3889,

Cindy Mann, partner, Manatt Health Solutions, 202-585-6572,

Enrique Martinez-Vidal, deputy director, State Coverage Initiatives Program, AcademyHealth, 202/204-7509,

John McCarthy, founding partner, Speire Healthcare Strategies, 615-386-7061,

Mark McClellan, director, Robert J. Margolis Center for Health Policy, Duke University, 202-621-2817,

Meg Murray, CEO, Association for Community Affiliated Plans, 202-204-7509,

MaryBeth Musumeci, associate director, Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, 202/347-5270

Jeff Myers, president and CEO, Medicaid Health Plans of America, 202-857-5731,

Rachel Nuzum, vice president, federal and state health policy, The Commonwealth Fund, 202/292-6722,

Aimee Ossman, vice president for policy analysis, Children’s Hospital Association, 202/753-5333,

Julia Paradise, associate director, Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, 202/347-5270

Edwin Park, vice president for health policy, Center for Budget and Policy Priorities, 202/408-1080,

Pamela Riley, assistant vice president, delivery system reform, The Commonwealth Fund, 212/606-3862,

Sara Rosenbaum, professor, Department of Health Policy, George Washington University School of Public Health and Health Services, 202/994-4230,

Diane Rowland, executive vice president, Kaiser Family Foundation, 202/347-5270,

Robin Rudowitz, associate director, Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, 202/347-5270,

Alina Salganicoff, vice president and director, Women’s Health Policy, Kaiser Family Foundation, 650/854-9400

Matt Salo, executive director, National Association of Medicaid Directors,

Anne Schwartz, executive director, Medicaid and CHIP Payment and Access Commission, 202-350-2000,

Judy Solomon, vice president for health policy, Center for Budget and Policy Priorities, 202-408-1080,

Benjamin Sommers, assistant professor, Harvard T.H. Chan School of Public Health, 857-540-1126,

Hemi Tewarson, program director, NGA Center for Best Practices, 202-624-7803,

Vikki Wachino, principal, Viaduct Consulting, LLC,

Kelly Whitener, associate research professor, Georgetown University Center for Children and Families, 202-687-0331,

Carolyn Yocom, Government Accountability Office, 202-512-4931,

This guide was made possible with the support of the National Institute for Health Care Management (NIHCM) Foundation. This edition of the Sourcebook also had initial support from the Robert Wood Johnson Foundation.