Changing Medicaid Formula Can Improve Distribution of Funds to States

In response to an Omnibus Budget Reconciliation Act of 1981 mandate, GAO evaluated the Medicaid formula relative to narrowing differences between program benefits provided by States, providing a more equitable distribution of tax burdens between the richer and poorer States, and reducing the rate of increase in Federal Medicaid funding.

GAO found that changes can be made to the formula which would result in a more equitable distribution of Federal Medicaid funds to States. The current formula uses per capita income as an indicator of the size of the needy population which the program is intended to serve and as an indicator of a State's tax base. GAO believes that the distribution of Federal funding to States is not as equitable as it could be, because per capita income does not measure either completely. Under the formula, States with high per capita incomes receive a smaller Federal share of Medicaid expenditures. A GAO study shows that, although the use of per capita income compensates for varying State taxing capacities, the poorer States would still have to shoulder significantly higher tax burdens if they were to provide benefits comparable to the wealthier States. Per capita income is also an incomplete measure of a State's capacity to pay for the services it provides. GAO believes that the Representative Tax System measures a much greater range of a State's potential revenue sources and is therefore a more complete measure of true tax capacity. Finally, GAO also noted that the 1981 act could lead to greater program disparities and tax burden inequities among States.