Variation in state Medicaid expenditures 1984-92: the behavioral impact of the matching federal grant

Although the federal Medicaid matching grant was designed to decrease disparities in state Medicaid spending, significant inequities persist. A potential reason for this is that states substitute federal for state funds and therefore expenditures in low-income, low-spending states are not stimulated. This study uses a fixed-effects model on pooled state expenditure data for 1984-92 to examine the fiscal response of states to the federal Medicaid grant. Results indicate that states' responses to the grant were to raise fewer tax dollars but still spend more by using federal funds. Significant substitution was found during the study period. Findings have implications for deliberations on grant structures for Medicaid and other federal/state programs.