Medicaid is funded jointly by the federal government and individual state governments. In fiscal year 2023, total Medicaid spending reached $894 billion across the 50 states, Washington D.C., and U.S. territories. The federal government covers the larger share of that bill, but exactly how much depends on where you live.
The Federal-State Partnership
Unlike Medicare, which is entirely a federal program, Medicaid operates as a partnership. The federal government pays each state a set percentage of its Medicaid costs, and the state covers the rest. That percentage is called the Federal Medical Assistance Percentage, or FMAP. Every state gets at least 50 cents from the federal government for every dollar it spends on Medicaid, and poorer states get significantly more.
This structure means Medicaid funding is open-ended for the 50 states and D.C. There’s no annual cap on how much federal money a state can receive. If a state’s Medicaid costs go up because more people enroll or health care prices rise, the federal contribution automatically increases to match. States must, in turn, ensure they can fund their share of the program.
How the Federal Match Rate Is Calculated
The FMAP formula compares each state’s per capita income to the national average. States where residents earn less get a higher federal match, while wealthier states receive the minimum. The formula works out to: 1 minus the square of the state’s per capita income divided by the square of the national per capita income, multiplied by 0.45.
In practice, this creates a range with a floor of 50% and a ceiling of 83%. For fiscal year 2025, ten states sit at the 50% floor, meaning the federal government and the state split costs evenly. These tend to be higher-income states like California, New York, and Connecticut. At the other end, Mississippi receives the highest regular match rate at 76.9%, meaning the federal government covers more than three-quarters of its Medicaid costs. No state currently hits the 83% maximum.
Where States Get Their Share
The state portion of Medicaid funding comes from several revenue streams, not just one line in the state budget. The largest source is state general funds, which are the broad tax revenues (income tax, sales tax) that states collect and allocate through their legislatures. In a typical breakdown, about 69% of the state share comes from general revenues.
Local governments contribute roughly 16% of the state share through mechanisms like intergovernmental transfers and certified public expenditures, where counties or public hospitals document spending on Medicaid-eligible services and the state counts that toward its match. Federal law requires that at least 40% of the nonfederal share come from the state itself, with up to 60% allowed from local government sources.
Health care provider taxes account for about 10% of the state share. These are taxes states levy on hospitals, nursing homes, or other health care providers, then use to help finance Medicaid. The remaining 5% comes from other sources like bond proceeds or dedicated fees. Altogether, Medicaid accounts for about 16% of total state spending from nonfederal sources, making it one of the largest items in most state budgets.
Higher Match Rates for Expansion and Other Activities
Not all Medicaid spending gets the same federal match. The Affordable Care Act created a separate, much higher match rate for states that expanded Medicaid eligibility to cover adults earning up to 138% of the federal poverty level. The federal government pays 90% of costs for this expansion population, compared to the regular FMAP that averages closer to 60%. This 90% rate applies regardless of a state’s income level, so even wealthy states at the 50% floor receive 90 cents on the dollar for expansion enrollees.
Administrative costs also have their own match rates. General administration, things like processing applications and managing the program, gets a flat 50% federal match in every state. But states that invest in health information technology systems receive more generous support: 75% for operating approved claims processing systems, and 90% for implementing new ones. These higher rates are designed to encourage states to modernize how they manage the program.
Disproportionate Share Hospital Payments
A separate funding stream within Medicaid goes to hospitals that treat large numbers of Medicaid patients and uninsured people. These Disproportionate Share Hospital (DSH) payments help offset the financial strain on safety-net hospitals. Each state receives an annual federal allotment that caps how much federal money can go toward DSH payments. Individual hospitals also face limits: federal funding can’t exceed a hospital’s actual uncompensated care costs, meaning the gap between what it spent treating Medicaid and uninsured patients and what it received in payment.
How U.S. Territories Are Funded Differently
Medicaid in U.S. territories like Puerto Rico, Guam, and the U.S. Virgin Islands works under a fundamentally different financial structure. While states receive open-ended federal funding that grows with their costs, territories face annual federal spending caps. Once a territory hits its cap, it must cover any additional Medicaid costs entirely on its own or cut services.
The match rates for territories are also set differently. They aren’t calculated using the standard per capita income formula. Puerto Rico, for example, has a temporary FMAP increase to 76%, up from its usual 55%. That temporary boost is scheduled to expire in September 2027, which could create a significant funding cliff for the island’s health care system.
The Scale of Medicaid Spending
At $894 billion in fiscal year 2023, Medicaid is one of the largest health care programs in the world. Spending is projected to grow at an average rate of 5.6% per year through 2030, driven by rising health care costs, an aging population that needs more long-term care services, and broader enrollment. Because the program’s funding is open-ended for states, this growth translates directly into larger obligations for both federal and state budgets. Any changes to the FMAP formula, expansion match rates, or the open-ended funding structure would ripple through state budgets and affect coverage for the roughly 90 million people enrolled in the program.