How Medicaid Works

In addition to low-income Americans, other eligible groups include people with serious illness and unmet health care needs; this includes women with breast cancer or cervical cancer, as well as adults who need treatment for tuberculosis. Some states offer programs tailored to help people who are considered medically needy but otherwise wouldn't qualify for benefits; these Medicaid programs are available to individuals with serious but unmet health care needs who also have an income too high to traditionally qualify for coverage through public insurance -- these programs are usually administered in what's called a "spend-down" style, a method where health benefits begin only after a patient's income has been depleted enough by health care costs to qualify as below the poverty line.

Medicaid also provides coverage for roughly 10 million Americans who need long-term medical services and support (LTSS), such as long-term home-based or institutional care. Medicaid benefits cover at least 60 percent of nursing home residents, for example, a benefit not offered through Medicare [source: KCMU].

Medicaid and Medicare are often confused with one another; they're not the same thing. They're both government-sponsored health insurance programs (and both run by the U.S. Department of Health and Human Services, and they were created at the same time), but they cover different demographics and offer different benefits. About 45 million Americans use Medicare programs, which provide health benefits to senior citizens (individuals age 65 and older), individuals younger than age 65 diagnosed with Lou Gehrig's disease or any condition that qualifies for Social Security disability benefits, and anyone with kidney failure requiring dialysis or a transplant [sources: Koba, WebMD]. Depending on their circumstance, some people may qualify for both Medicaid and Medicare, a situation described as dual eligible; a low-income senior, for example, is considered dual eligible. More than 17 percent of people benefiting from Medicaid coverage are dual eligible [source: Medicaid.gov].

Lawful immigrants may be eligible for benefits after a five-year waiting period, but may not qualify for full benefits -- the state where you live has the final say as to whether or not you're eligible. Undocumented immigrants aren't eligible for Medicaid benefits at all (although Medicaid does cover emergency services for all immigrants).

The federal and state governments both have a say in how the benefits program works. It breaks down like this:

The federal government sets the basic requirements that all Medicaid programs must meet, and establishes the rules of how Medicaid benefits are administrated; every state runs its own state Medicaid program.

The federal government also approves all state Medicaid plans. Under the federal guidelines, each state is able to customize enrollment, eligibility, benefits, payment and delivery, among other details of its program offerings, but it must be in compliance with federal rules.

Medicaid coverage is similar to private health insurance coverage, but may cover some services usually unavailable through private plans, such as long-term care. According to federal law, Medicaid programs must provide coverage for certain services: Coverage of physician, nurse midwife, and nurse practitioner services, inpatient and outpatient hospital services, X-rays, laboratory services, family planning services, nursing facility and home health care services (for beneficiaries age 21 and older), federally qualified health center (FQHC) services, rural health clinic (RHC) services and transportation services are mandatory. State Medicaid programs must also provide early and periodic screening, diagnostic and treatment (EPSDT) services for kids under age 21 [source: KCMU].

States may also choose to offer optional benefits. Additional services may include prescription drug coverage (and as part of that, what drugs and supplements will and won't be covered), oral health care, coverage of prosthetic devices, eyeglasses and durable medical equipment (such as blood sugar monitors, home oxygen equipment and crutches), rehabilitation therapies and hospice care. Each state must provide the same benefit package to everyone enrolled within the state -- plans vary from state to state but they don't vary within a state. Each state is responsible for determining its own health care program offerings but must have its state plan approved by the U.S. Department of Health and Human Services.

As part of health care reform, Medicaid application and enrollment became consolidated through the Health Insurance Marketplace. Enrollment information is provided by each applicant and verified against information from the Social Security Administration, Department of Homeland Security and Department of Labor, among others, before benefits are extended.

Income eligibility is determined by something called the MAGI. Beginning in 2014 under the Affordable Care Act (ACA), all states implemented a new, unified system for determining Medicaid (as well as Children's Medicaid, or CHIP) eligibility called the modified adjusted gross income (MAGI) tax rules. To understand MAGI you first need to know your adjusted gross income (AGI). AGI is your total taxable income, according to the IRS, and MAGI is calculated by adding tax-exempt interest (such as student loan interest or traditional IRA contribution deductions) to your AGI. Before the ACA went into effect, eligibility was determined using state-specific income deductions known as disregards, and in some circumstances included requirements such as in-person interviews or reliance on electronic data matches.

Medicaid expansion also changed the income eligibility threshold, allowing families with incomes that fall 138 percent below the federal poverty level (FPL) (which was just shy of $16,000 for an individual and roughly $27,000 for a family of three in 2013) to qualify for public-funded health coverage, as long as they live in a state that chose to expand its Medicaid program -- that's right, expansion is optional [source: KCMU].

The Medicaid expansion program was, under the ACA, originally intended for every state. But in 2012 the U.S. Supreme Court ruled that the Federal government couldn't withhold funding from states that didn't implement the Medicaid expansion. Medicaid expansion became voluntary under this ruling, and by the close of 2013 only about 50 percent of states had chosen to expand their programs.

Expansion programs vary from state to state. While some states opened benefits up to low-income adults without dependents, some chose not to expand their programs at all. Others chose alternative benefit programs; for example, Arkansas and Iowa's Medicaid expansion programs use federal funding to cover eligible adults with private insurance coverage purchased through the Marketplace.

Both state and federal governments are responsible for costs of state-run programs that have been approved by the U.S. Department of Health and Human Services. Funding used to pay physicians, hospitals and other health care and long-term care providers caring for Medicaid beneficiaries are paid for by the state. States may require that Medicaid beneficiaries share costs as well, and any state can require participants to pay out-of-pocket expenses for deductibles, co-payments or coinsurance among other charges (although there are exemptions for pregnant women and children).

During the first years of expanded Medicaid coverage, between 2014 through 2016, the federal government is responsible not only for its contribution to established (not expansion) Medicaid state programs but for 100 percent of the costs of the expansion as well. By 2020, federal funding will drop to a minimum of 90 percent coverage of the bill and each state will become responsible for the remaining costs of expanding its program. So if, for example, all 50 states implemented Medicaid expansion in 2014 under the Affordable Care Act, it's estimated that the total Medicaid costs (including insurance subsidies) would equal $1 trillion during the first 10 years under the expanded eligibility rules, a 16 percent increase from estimated Medicaid costs without expansion over the same period of time. No less than 90 percent (more than $900 billion) of that falls to the federal government, and the remaining is state responsibility [sources: KCMU, Rau].

Funding for individuals enrolled in Medicaid programs that are not part of the expansion program is covered by grants from both federal and state governments. The federal government matches every dollar a state spends on its own program -- at least, that's the minimum funding requirement. Exactly how much each state receives is determined by the Federal Medicaid Matching Rate (FMAP), which takes a state's overall wealth into consideration. In 2011 the total costs covered by state and federal funding was an estimated $414 billion, and, on average, the federal grants to states covers about 57 percent of costs [source: CBPP].

About 4 percent of Medicaid expenses are for what are called disproportionate share hospital (DSH) payments -- states make DSH payments to cover any health care costs hospitals incur when they treat a high volume of Medicaid patients or incur a high volume of costs providing services to underserved areas and uninsured patients.