Medicaid Cost and Efficiency

What is Medicaid?

There are three broad categories of Medicaid recipients: poor adults and their children, disabled adults (including people who are institutionalized individuals and those needing kidney dialysis), and seniors requiring long-term care. The program is funded by the federal government (90%) and state governments (10%). States set income thresholds for Medicaid eligibility for different types of recipients. For example, in Alabama, a non-disabled adult must have an income below 13% of the Federal Poverty Level (FPL) ($15,060 in 2024), while in Wisconsin, the limit is 95% of the FPL.

The Affordable Care Act (enacted in 2014) allows states to expand Medicaid to enroll adults under 65 with income at or below 133% of the FPL. Participation in Medicaid Expansion is optional. Since 2014, 40 states have expanded Medicaid, enrolling about 24.6 million additional people as of March 2023, and 10 states have opted not to.

Medicaid recipients are U.S. citizens or permanent residents.  Some states provide some health care benefits to undocumented residents, and some of the undocumented population pay for private insurance.  But no federal funds are used to provide health care to the undocumented.  

What does Medicaid pay for?

Using data from the Kaiser Family Foundation from 2021 (the latest year with available data), our first figure shows the relative size of different groups of Medicare recipients.

By itself, the enrollment data suggests that Medicaid primarily pays for medical care for poor people. Including people enrolled through Medicaid Expansion, nearly 80 percent of Medicaid recipients are poor adults or their children.

A different and more accurate picture emerges if we examine the amount of money that the Medicaid program spends on each type of recipient, as shown below:

The cost data gives a very different picture: over 50% of Medicaid funds provide care to just over 20% of recipients – seniors and the disabled.

How Efficient is Medicaid?

One criticism of Medicaid is its per-recipient costs are significantly higher than private health insurance providers. However, most Medicaid funds pay for health care for seniors and the disabled, many of whom require a higher level of care, including full-time nursing home care. Assessing Medicaid’s costs relative to private insurers requires an apples-to-apples comparison.

The figure below offers a first-cut comparison. Using federal government data, we calculate Medicaid’s cost of providing healthcare to a healthy adult and for an average-sized family (two adults and three children). We compare these figures to the Kaiser Family Foundation’s estimate of the average cost of private health insurance for the same individual and family.

The comparison reveals that for healthy adults and families, the cost of care through Medicaid is slightly lower than private insurance.

The comparison we make here is limited. Private plans may offer a wider range of benefits. Medicaid recipients may not be as healthy as the average private insurance recipient. Moreover, Medicaid recipients may be less likely to make routine visits for medical care. All these factors complicate a straightforward comparison of per-capita costs. Even so, our initial analysis shows that per-recipient Medicaid costs are not wildly different from those in the private sector.

The Take-Away

Many Americans think that Medicaid provides healthcare to poor people. However, more than half of its budget pays for long-term care for seniors and disabled adults.

Our comparison of Medicaid with private insurers suggests that the high cost of Medicaid is partially due to the large number of beneficiaries and the kinds of care they require rather than bureaucratic inefficiencies.

The Medicaid program illustrates the lack of an easy solution to high healthcare costs.  On the one hand, it is not inevitable that the government pays for nursing home care, dialysis, or even healthcare for the poor. On the other hand, without Medicaid, some current recipients would have no way to access these services. Americans face tough decisions about what standard of care they are willing to provide to the old, the poor, and the disabled and how these programs will be paid for.