The Medicaid program is jointly funded by the federal government and states. The federal government pays states for a specified percentage of program expenditures, called the Federal Medical Assistance Percentage (FMAP). 

FMAP varies by state based on criteria such as per capita income. The regular average state FMAP is 57%, but ranges from 50% in wealthier states up to 75% in states with lower per capita incomes (the maximum regular FMAP is 82 %). 

FMAPs are adjusted for each state on a three-year cycle to account for fluctuations in the economy. The FMAP is published annually in the Federal Register. 

Medicaid State Plan Determines State Payment Methodology for Medicaid Services

States must ensure they can fund their share of Medicaid expenditures for the care and services available under their state plan. Recognized sources of funding for the state share of Medicaid payments include:

• Legislative appropriations to the single state agency
• Inter-governmental transfers (IGTs)
• Certified public expenditures (CPEs)
• Permissible taxes and provider donations

Before CMS approves a state plan amendment, they must verify that state funding sources meet statutory and regulatory requirements so they can authorize federal financial participation (FFP) for the covered services.

Service Delivery & Provider Payment Rates

States can establish their own Medicaid provider payment rates within federal requirements. States generally pay for services through fee-for-service or managed care arrangements. 

Under fee-for-service arrangements, states pay providers directly for services. States may develop their payment rates based on:

• The costs of providing the service
• A review of what commercial payers pay in the private market
• A percentage of what Medicare pays for equivalent services

Under managed care arrangements, states contract with organizations to deliver care through networks and pay providers. Approximately 70% of Medicaid enrollees are served through managed care delivery systems, where providers are paid on a monthly capitation payment rate. 

Payment rates are often updated based on specific trending factors, such as the Medicare Economic Index or a Medicaid-specific trend factor that uses a state-determined inflation adjustment rate. The methodologies for service rates are described in the Medicaid state plan.

How States Change Their Payment Methodology

To change the way they pay Medicaid providers, a state must submit a State Plan Amendment (SPA) for CMS to review and approval. Before the amendment’s effective date, the state must also issue a public notice of the change. The notification is intended to widely inform providers and other stakeholders of changes to Medicaid payment rates. 

CMS Review of Reimbursement Methodologies

CMS reviews state plan amendment reimbursement methodologies for consistency with the Social Security Act and other federal statutes and regulations. 

This section requires that states "assure that payments are consistent with efficiency, economy and quality of care and are 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 the geographic area".

Regulations provide guidance for states on implementing Medicaid state plan payment rates consistent with the Act (the Code of Federal Regulations (CFR) at 42 CFR 430 and 42 CFR 447).