Medicaid is funded through a partnership between the federal government and individual states, with both sharing the cost. In fiscal year 2024, total Medicaid spending reached $931.7 billion, making it one of the largest items in both federal and state budgets. The federal government’s share is open-ended, meaning there is no cap on how much it will pay as long as states follow program rules.
The Federal-State Funding Split
Every dollar a state spends on Medicaid services gets partially reimbursed by the federal government. The federal share is called the Federal Medical Assistance Percentage, or FMAP. This isn’t a flat rate. It’s calculated using a formula that compares each state’s per capita income to the national average, so poorer states get more federal help.
The formula works like this: the federal government covers a larger percentage of costs in states where residents earn less. The statutory floor is 50%, meaning no state receives less than half its Medicaid costs from the federal government. The ceiling is 83%, so even the poorest states still pay at least 17 cents of every Medicaid dollar. Wealthier states like New York and California sit near the 50% floor, while states like Mississippi and West Virginia receive federal matching rates closer to the top of the range.
One critical feature: federal Medicaid funding is an open-ended entitlement to states. Unlike a block grant with a fixed budget, there is no upper limit on federal dollars. If enrollment rises or costs increase, the federal government keeps matching. This structure means Medicaid can automatically expand during recessions when more people qualify.
How States Pay Their Share
States use several revenue sources to cover their portion of Medicaid costs. The most straightforward is general fund revenue, meaning the same tax dollars (income taxes, sales taxes) that fund schools and roads. But many states also rely heavily on provider taxes, sometimes called health care-related taxes or assessments. These are taxes levied on hospitals, nursing homes, managed care organizations, and other health care providers.
Provider taxes are a significant and somewhat creative funding mechanism. A state might tax hospitals a percentage of their revenue, then use that tax money as the state’s share of Medicaid spending. Because the federal government matches every state dollar, the total Medicaid payment back to those same hospitals can exceed what they paid in taxes. Federal rules allow this, but with guardrails: the tax must be broad-based (applied to all providers in a class, not just a few), uniform in how it’s applied, and cannot guarantee that providers get all their tax money back. There’s a safe harbor threshold of 6% of net patient revenue to help enforce these limits.
States also use intergovernmental transfers, where local governments like counties or public hospital systems contribute funds that the state then uses to draw down federal matching dollars.
Enhanced Matching for the Expansion Population
When the Affordable Care Act expanded Medicaid eligibility to adults earning up to 138% of the federal poverty level, the federal government sweetened the deal with a much higher matching rate for this new group. The federal government initially covered 100% of costs for newly eligible adults, and that rate has since settled at 90%. This is substantially more generous than the regular FMAP, which averages around 60% nationally. States that adopted the expansion therefore pay only 10 cents per dollar for this population, compared to 20 to 50 cents per dollar for traditional Medicaid enrollees.
Administrative Costs Get Separate Matching Rates
The federal government matches state administrative spending at different rates than it matches medical services. General administration and eligibility processing are matched at a flat 50%, regardless of a state’s income level. But certain technology investments get more generous treatment: operating an approved claims-processing system is matched at 75%, and building a new one is matched at 90%. These higher rates for technology are designed to encourage states to modernize their enrollment and payment systems.
How Territories Are Funded Differently
U.S. territories like Puerto Rico, Guam, and the U.S. Virgin Islands operate under fundamentally different rules. Instead of open-ended federal matching, territories receive a capped annual allotment, sometimes called the Section 1108 cap. Once a territory hits its ceiling, no additional federal dollars flow, even if residents still need care. The territories’ FMAP is also set by statute at 55%, rather than calculated by the income-based formula. This structure has been a persistent source of funding shortfalls, since territories cannot draw unlimited federal funds the way states can.
Safety-Net Hospital Payments
A separate funding stream within Medicaid supports hospitals that serve a disproportionate number of low-income and uninsured patients. These Disproportionate Share Hospital (DSH) payments are required by federal law, and each state receives an annual DSH allotment that caps the federal contribution. Hospitals can receive DSH payments only up to their actual uncompensated care costs, meaning the cost of treating Medicaid and uninsured patients minus whatever payments they’ve already received. This prevents hospitals from profiting off the program beyond their actual losses.
Where the Money Goes
Most Medicaid dollars flow to enrollees through managed care organizations. States pay these private insurers a fixed monthly amount per person (a capitation rate), and the insurer then covers that person’s medical needs. The federal matching rate applies to these capitation payments the same way it applies to traditional fee-for-service claims. Federal rules require that capitation rates be set based on legitimate cost projections, not manipulated to maximize the federal match for certain populations.
Projected Growth in Federal Spending
Federal Medicaid outlays are estimated to reach $708 billion in 2026, a 6% increase over 2025. Growth is expected to slow significantly after that, dropping to around 1% by 2029. That slowdown is largely driven by recent legislation that changed eligibility rules, enrollment processes, and financing. Starting in 2030, spending is projected to pick back up at about 4% per year, driven primarily by rising costs per person, growth in the number of enrollees over age 65, and increases in disability-related enrollment.