State responses to federal matching grants: The case of medicaid

Abstract

While Medicaid is currently financed by open-ended matching, in which the federal government’s contribution is uncapped, there has been interest in transforming the financing structure to block grants, which limits federal cost-sharing to a fixed amount. To understand the implications of this reform, I measure the effect of match rates on Medicaid spending by using the variation induced by a kink in the match rate formula. I find that a percentage point increase in the federal match raises per-beneficiary spending by 3 to 6 percent and that these results are driven by high-spending states. Using this estimate, I discuss the welfare impact of a block grant reform.