Although the federal Medicaid matching formula was designed to decrease disparities in state Medicaid expenditures, significant inequities persisted throughout the 1980s. A potential reason for this is that states may substitute federal for state funds and hence, expenditures in low-spending states are not stimulated. This study uses a fixed-effects model on pooled state enrollment and expenditure data from 1984 to 1992 to examine the fiscal response of states to the Medicaid matching grant. Results indicate that states’ response to the grant was to raise fewer own-tax dollars but still spend more by using federal funds. Findings have implications for current deliberations on grant structures for Medicaid and other federal and state programs that affect low-income populations.
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