State Discretion in Ftderal Categorical Assistance Programs: the Case of Medicaid

Abstract

Categorical assistance programs to date have provided the most common method for transterring public funds from the federal government to states and localities. This study develops a model for a representative voter-taxpayer in which income redistribution is viewed as a public good. The model yields several unambiguous predictions about the effect of selected exogenous variables, including taxpayer income, the number of poor persons in the state, and the federal matching proportion for Medicaid (which varies by state) on the amount the Medicaid program pays doctors per procedure. An alternative view is that Medicaid payments are determined largely by interactions among government bureaucracies, private insurance carriers serving as fiscal agents for Medicaid, and physicians. Explanatory variables consistent with the bureaucratic view are included in some regressions. The most important result is that the federal matching proportion has a substantial impact on generosity of state Medicaid programs.