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U.S. Department of Health and Human Services, Health Care Financing Administration
A Profile of Medicaid: 2000 Chartbook, Section 1
September, 2000

Medicaid: A Program Overview

The Medicaid program is the third largest source of health insurance in the United States - after employer-based coverage and Medicare. As the largest program in the federal "safety net" of public assistance programs, Medicaid provides essential medical and medically related services to the most vulnerable populations in society. The significance of Medicaid's role in providing health insurance cannot be overstated. Medicaid covered 12.0 percent of the total U.S. population in 1998, compared to 9.1 percent in 1978. The Medicaid program covers millions of low-income women, children, elderly people and individuals with disabilities. 

The Medicaid program was enacted in the same legislation that created the Medicare program - the Social Security Amendments of 1965 (P.L. 89-97). Prior to the passage of this law, health care services for the indigent were provided primarily through a patchwork of programs sponsored by state and local governments, charities, and community hospitals.

Before 1965, federal assistance to the states for the provision of health care was provided through two grant programs. The first program was established in 1950 and provided federal matching funds for state payments to medical providers on behalf of individuals receiving public assistance payments. In 1960, the Kerr-Mills Act created a new program called "Medical Assistance for the Aged." This means-tested grant program provided federal funds to states that chose to cover the "medically needy" aged who were defined as elderly individuals with incomes above levels needed to qualify for public assistance but in need of assistance for medical expenses.

In 1965, Congress adopted a combination of approaches to improve access to health care for the elderly. The Social Security Amendments of 1965 created a hospital insurance program to cover nearly all of the elderly (Medicare Part A), a voluntary supplementary medical insurance program (Medicare Part B) and an expansion of the Kerr-Mills program to help elderly individuals with out-of-pocket expenses such as premiums, copayments, deductibles and costs for uncovered services. At the same time, Congress decided to extend the Kerr-Mills program - now the Medicaid program - to cover other populations including families with children, the blind and the disabled.

In general, Medicaid provides three types of critical health protection: (1) health insurance for low-income families with children and people with disabilities; (2) long-term care for older Americans and individuals with disabilities; and (3) supplemental coverage for low-income Medicare beneficiaries for services not covered by Medicare (e.g., outpatient prescription drugs) and Medicare premiums, deductibles and cost sharing. Since its inception in 1965, Medicaid enrollment and expenditures have grown substantially. In addition, the Medicaid program has evolved as federal and state governments balance social, economic and political factors affecting this and other public assistance programs. Major legislative milestones of the Medicaid program are highlighted at the end of this section.

Program Structure

Medicaid is a joint federal and state program. Each state establishes its own eligibility standards, benefits package, payment rates and program administration under broad federal guidelines. As a result, there are essentially 56 different Medicaid programs - one for each state, territory and the District of Columbia.


In general, Medicaid eligibility is based on a combination of financial and categorical eligibility requirements. Medicaid is a means-tested program. Beneficiaries must be low-income and meet certain resource standards. Each state determines income thresholds and resource Data from the Office of the Actuary, Health Care Financing Administration. The percent of the population covered by Medicaid was estimated using average Medicaid enrollment data and Census Bureau estimates of the national population for each year..standards for their Medicaid program following federal guidelines. These thresholds and standards can vary by state and may differ for each Medicaid-eligible population group within a state (i.e., children, adults, elderly, individuals with disabilities.)

Financial eligibility for Medicaid was linked to receipt of federally assisted income maintenance payments such as Aid to Families with Dependent Children (AFDC) and starting in 1972, Supplemental Security Income (SSI). Over time, legislative changes to the Medicaid program and the AFDC welfare program have led to the creation of certain Medicaid groups where financial eligibility is based solely on income and resources, not receipt of cash assistance. Some of these "non-cash" groups are referred to as the "poverty-related" groups. Congress created these groups in the late 1980's in an effort to expand Medicaid coverage of pregnant women and children by delinking Medicaid eligibility from receipt of AFDC. "Poverty-related" groups, both adults and children, are an increasing proportion of Medicaid beneficiaries.

Medicaid does not provide medical assistance to all low-income individuals. Traditionally, Medicaid has been available only to persons in certain categories: members of families with children and pregnant women, and to persons with disabilities or who are aged or blind. Low-income individuals who did not fit into one of these categories, such as childless couples or adults without disabilities, typically did not qualify for Medicaid-regardless of how low their income was. The establishment of new eligibility groups in the 1980's and the approval of Medicaid program waivers have provided states opportunities to extend Medicaid services to populations beyond the traditional welfare-defined groups.

The Medicaid statute identifies certain populations that states are required to cover and other populations that states may choose to cover.

All states must provide Medicaid coverage to the following eligibility groups:

  • AFDC-eligible individuals as of July 16, 1996: States are required to provide Medicaid to individuals who meet the requirements of the AFDC program that were in effect in their state as of July 16, 1996.

  • Poverty-related groups: States are required to provide Medicaid to certain pregnant women and children defined in terms of family income and resources. States must cover all pregnant women and children below age 6 with incomes up to 133 percent of the federal poverty level (FPL).

  • All children born after September 30, 1983 with incomes up to 100 percent FPL: This requirement will result in the mandatory coverage of all children below 100 percent FPL under age 19 by the year 2003.

  • Current and some former recipients of SSI: States are generally required to provide Medicaid to recipients of SSI. States, however, may use more restrictive eligibility standards for Medicaid than those used for SSI if they were using those standards prior to the enactment of SSI in 1972.

  • Foster care and adoption assistance: States must provide Medicaid to all recipients of foster care and adoption assistance under Title IV-E of the Social Security Act.

  • Certain Medicare beneficiaries: State Medicaid programs must provide assistance to low-income Medicare beneficiaries. All Medicare beneficiaries with incomes below the poverty level receive Medicaid assistance for payment of Medicare premiums, deductibles and cost sharing. These individuals are Qualified Medicare Beneficiaries (QMBs). In addition, individuals at the lowest income levels are entitled to full Medicaid benefits, which provide coverage for services not covered by Medicare such as outpatient prescription drugs. Medicare beneficiaries with income levels slightly higher than poverty receive Medicaid assistance for payment of Medicare premiums. These individuals are Specified Low-Income Medicare Beneficiaries (SLMBs).

This date coincides with the passage of the welfare reform law creating the Temporary Assistance for Needy Families (TANF) block grant. Congress established this eligibility group to insure individuals did not lose Medicaid coverage due to TANF..States have the option to provide Medicaid coverage to other groups. These optional groups fall within the defined categories mentioned above but the financial eligibility standards are more liberally defined. Optional eligibility groups include:

  • Poverty-related groups: States may choose to cover certain higher-income pregnant women and children defined in terms of family income and resources. For example, states may choose to cover pregnant women and infants with family incomes up to 185 percent FPL.

  • Medically needy: States may choose to cover individuals who do not meet the financial standards for program benefits but fit into one of the categorical groups and have income and resources within special "medically needy" limits established by the state. Individuals with incomes and resources above the "medically needy" standards may qualify by "spending down" - i.e., incurring medical bills that reduce their income and/or resources to the necessary levels.

  • Recipients of state supplementary income payments: States have the option to provide Medicaid to individuals who are not receiving SSI but are receiving state-only supplementary cash payments.

  • Long-term care: States may cover persons residing in medical institutions or receiving certain long-term care services in community settings if their incomes are less than 300 percent of the SSI payment level.

  • Working disabled: States have the option to provide Medicaid to working individuals who are disabled, as defined by the Social Security Administration, who cannot qualify for Medicaid under any statutory provision due to their income. If states choose to cover this group then they may also cover individuals who lose Medicaid eligibility as a result of losing SSI due to medical improvement. States also have the discretion to expand eligibility beyond these optional groups. Through demonstrations such as the 1115 research and demonstration authority and statutory provisions that allow less restrictive methodologies for calculating income and resources (i.e., section 1902(r)(2)), states may provide Medicaid services to individuals who do not meet standard Medicaid financial or categorical requirements. This discretion has aided states significantly in their health care reform efforts.


The Medicaid program is jointly financed by the states and the federal government. Medicaid is an entitlement program and the federal spending levels are determined by the number of people participating in the program and services provided. Federal funding for Medicaid comes from general revenues. There is no Trust Fund for Medicaid as there is for Medicare Part A or Social Security. The federal government contributes between 50 percent and 83 percent of the payments for services provided under each state Medicaid program.

This federal matching assistance percentage (FMAP) varies from state to state and year to year because it is based on the average per capita income in each state. States with lower per capita incomes relative to the national average receive a higher federal matching rate. The federal matching rate for administrative costs is uniform for all states and is generally 50 percent, although certain administrative costs receive a higher federal matching rate.


The Medicaid benefit package is defined by each state based on broad federal guidelines. There is much variation among state Medicaid programs regarding not only which services are covered, but also the amount of care provided within specific service categories (i.e., amount, duration, and scope of services).

Each state Medicaid program must cover "mandatory services" identified in statute. In addition to covering the mandated services, states have the discretion to cover additional services - i.e., "optional services." States may choose among a total of 33 optional services to include in their Medicaid programs. (see on following page). Certain services (i.e., family planning services) receive a larger federal match.

This document is not necessarily endorsed by the Almanac of Policy Issues. It is being preserved  in the Policy Archive for historic reasons.

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