Medicaid pays doctors roughly 71% of what Medicare pays for the same services, and the gap with private insurance is even wider. This isn’t an accident or oversight. It’s the result of structural forces baked into how the program is funded, governed, and budgeted at both the state and federal level.
States Set the Rates, and States Are Broke
Medicaid is jointly funded by the federal government and individual states, but states have enormous discretion over what they actually pay providers. That’s where the trouble starts. Unlike the federal government, nearly every state is legally required to balance its budget, either by statute or constitutional mandate. When state revenues dip during a recession or when enrollment surges, Medicaid becomes one of the largest line items competing for limited dollars alongside education, infrastructure, and public safety.
States facing budget pressure have three main levers: cut provider payment rates, trim benefits, or restrict who qualifies. Cutting provider rates is politically the easiest option because it doesn’t visibly remove anyone from coverage or eliminate a benefit. The people who absorb the cost, doctors and hospitals, have less political leverage than millions of voters who would lose their insurance. So rates get squeezed, and once they’re low, there’s rarely political will to raise them back.
How Medicaid Rates Compare to Medicare
A 2024 analysis of 27 common physician services found that Medicaid fees nationally average about 71% of Medicare fees. That number varies by service type: office visits pay just 69% of Medicare rates, hospital and emergency department visits 68%, and obstetric care fares somewhat better at 87%. Between 2019 and 2024, Medicaid fees inched up from 72% to 75% of Medicare using one measurement approach, but a broader updated index pegged the figure lower at 71%.
Keep in mind that Medicare itself doesn’t pay generously. Private insurers typically reimburse well above Medicare rates. So when Medicaid pays 71 cents on the Medicare dollar, the gap between Medicaid and commercial insurance is substantial, sometimes paying less than half of what a private plan would for the same procedure.
The Federal Matching Formula
The federal government covers a share of each state’s Medicaid costs through the Federal Medical Assistance Percentage (FMAP), which is calculated based on a state’s per capita income relative to the national average. Poorer states get a higher federal match, wealthier states a lower one, but the formula doesn’t directly reward states for paying providers more. There’s no bonus for setting competitive rates and no penalty for setting rock-bottom ones, as long as the state can technically demonstrate adequate access to care.
Federal law does include an “equal access” provision requiring that Medicaid payments be “sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population.” In practice, this standard has been nearly impossible to enforce. A detailed legal analysis from the University of Colorado characterized it as “thirty-five years of inaction,” noting that the provision’s promise has gone largely unfulfilled. States have wide latitude to argue their rates are adequate, and federal oversight has been minimal.
Managed Care Adds Another Layer
More than two-thirds of Medicaid enrollees now receive their care through managed care organizations (MCOs), private insurers that contract with states to cover Medicaid beneficiaries for a fixed per-person payment. The state pays the MCO a set amount each month, and the MCO then decides how much to pay individual doctors and hospitals out of that budget. This creates a second layer of cost pressure: the MCO needs to keep spending below its fixed payment to remain profitable, which can push provider reimbursements even lower than what a state’s traditional fee-for-service rates would be.
MCOs do bring some efficiencies. Because they don’t benefit from the same statutory drug rebates that state Medicaid programs receive, they’re incentivized to steer patients toward lower-cost generics and biosimilars. In one study, MCOs had dramatically higher use of cheaper alternatives for two expensive drugs: 60.5% market share for a biosimilar insulin versus just 3.7% in traditional fee-for-service Medicaid. But whether those savings translate into better provider payments or simply better margins for the MCO varies widely by state and contract.
Fewer Doctors, Longer Waits
Low reimbursement has a direct, measurable effect on whether people with Medicaid can actually get care. Only 74.3% of physicians accept new Medicaid patients, compared to 87.8% for Medicare and 96.1% for private insurance. Some specialties are hit especially hard. Just 46.2% of dermatologists and 45.5% of psychiatrists accept new Medicaid patients. Internal medicine sits at 62.9%. Even pediatrics, a specialty with heavy Medicaid volume, drops to 84.7% compared to 97.6% for privately insured children.
The consequences go beyond just finding a doctor who says yes. A meta-analysis of 34 studies found that Medicaid patients are 1.6 times less likely to successfully schedule a primary care appointment and 3.3 times less likely to get a specialty appointment compared to someone with private insurance. Even when a provider’s office technically accepts Medicaid, the wait times can be unreasonably long, creating a gap between having insurance on paper and being able to use it.
Hospitals Absorb Billions in Losses
The financial pressure falls heavily on hospitals, particularly safety-net hospitals that serve large numbers of Medicaid and uninsured patients. The American Hospital Association reported a total Medicaid shortfall of $24.8 billion in 2020, meaning hospitals collectively spent that much more treating Medicaid patients than Medicaid paid them. Hospitals try to offset these losses by negotiating higher rates from private insurers, a practice known as cost-shifting, but that strategy has limits, especially for rural or smaller hospitals with less bargaining power.
The federal government partially addresses this through Disproportionate Share Hospital (DSH) payments, supplemental funding directed to hospitals serving a high proportion of low-income patients. But these payments have been targeted for cuts repeatedly. The Affordable Care Act mandated reductions to DSH allotments, with a methodology finalized to implement annual cuts through fiscal year 2025. Congress has delayed some of these reductions, but the uncertainty itself makes financial planning difficult for hospitals already operating on thin margins.
Why Rates Stay Low
Several forces keep Medicaid reimbursement persistently below other payers, and none of them are easy to fix. Medicaid enrollees are disproportionately low-income and often lack the political influence of older Medicare beneficiaries or employer-insured voters. State legislators face constant pressure to hold down spending, and provider rate increases compete with every other budget priority. The federal matching structure doesn’t incentivize higher payments. And the legal requirement for adequate access has proven toothless in practice.
There’s also an inertia problem. Medicaid rates in many states haven’t kept pace with inflation for years or even decades. Each year they fall further behind, the cost of bringing them up to parity grows, making a catch-up even less politically feasible. Some states have experimented with temporary rate increases for primary care or targeted specialties, but these often expire when the funding runs out, leaving providers uncertain about whether higher payments will last.
The result is a program that covers over 90 million Americans but pays the providers who treat them far less than any other major payer in the health system. That tension between broad coverage and low reimbursement is the defining feature of Medicaid’s design, and it shows no sign of resolving.