On the average, the federal government pays about two-thirds of the costs of Medicaid, and it makes funds available to the states on a matching basis. In theory, the federal funding formula is designed to redistribute money from wealthier states to poorer states by giving poorer states a higher match for every dollar they spend. However, there is no cap on the amount the federal government matches. The more a state spends, the more it receives. In practice, states with above-average per capita incomes tend to adopt more liberal eligibility requirements and cover more people. They also tend to spend more per recipient.
For example, the average total expenditure per Medicaid enrollee in 2007 was $5,163. However, New York, a high-income state, spent twice as much as low-income Alabama ($8,450 versus $3,945).
As a result, the distribution of federal dollars under the program is more consistent with a policy of taking from the poor and giving to the rich:
In 2009, Texas had 9.9 percent of the nation’s total poverty population, but received only 6.7 percent of federal Medicaid funds.
A much fairer way to distribute funds would be to give each state a percent of federal Medicaid spending, based on its percent of the nation’s poverty population. We will save the topic of Medicaid reform for future posts. Until then, the curious reader may wish to consult my Independent Institute book, Priceless: Curing the Healthcare Crisis.