It’s Time to Consider Federalizing State Medicaid Payments for Medicare Premiums and Cost Sharing

State policymakers are confronting budget challenges stemming from recent federal restrictions on Medicaid funding, as well as from the rising costs of health care, projected to increase state Medicaid spending by 8.5% in 2026. One set of Medicaid payments is both mandatory and out of states’ control: the state portion of Medicare Savings Program (MSP) expenditures. Through MSPs, states cover some low-income Medicare beneficiaries’ premiums and cost sharing through Medicaid. States spent roughly $15 billion on Medicare premiums and significantly more for Medicare cost sharing. A recent study found that Medicaid spending on Medicare premiums nearly doubled from 2013 to 2024, outpacing enrollment growth. In 2026 alone, the Medicare Part B premium and deductible rose by 10% with states paying part of the bill.

Congress could both alleviate state budget challenges and help low-income seniors and beneficiaries with disabilities by federalizing MSPs.

Medicare Savings Programs Are Needed—but Need Improvement

Generally, as a social insurance program, Medicare charges all beneficiaries the same premiums and cost sharing. While affordable for most people, Medicare’s Part B premium equals almost one-fourth of the income of a couple earning $21,000 annually without help. This would leave such a couple with just over $1,300 each month for housing, food, utilities, and all other costs, including Medicare cost sharing. This affects access to care. For example, a 2021 study found that older adults with incomes between $15,000 and $25,000 delayed care twice as much and experienced difficulty paying medical bills three times as much as older adults with incomes above $50,000.

Established in 1986, MSPs protect the health and financial well-being of 14 million Americans on Medicare with low incomes. They were built on the precedent at the time that only Medicaid provided income-related benefits. Four MSPs with different eligibility and benefits pay, on behalf of certain low-income beneficiaries, Medicare premiums and, depending on eligibility, cost sharing (i.e., deductibles, co-pays, and coinsurance) for their Part A and Part B programs (See table). The federal government sets required minimum eligibility standards, and 18 states have opted to expand them in various ways. Except for the Qualifying Individual program, the standard Medicaid matching rate, ranging from 50% to 83%, applies to program costs.

Source: Center for Medicare and Medicaid Services. n.d. “Medicare Savings Programs | Medicare.” Accessed April 27, 2026. https://www.medicare.gov/basics/costs/help/medicare-savings-programs.

States face challenges enrolling eligible individuals in an otherwise federally-administered program. Each state has its own system for determining eligibility into which it must incorporate the federally required MSP eligibility rules. Over one-third of eligible beneficiaries are estimated to be unenrolled in MSPs. System differences, plus demographic differences, contribute to state variation in the percent of all Medicare beneficiaries enrolled in MSPs, which ranged from less than 10% in Wyoming, North Dakota, Utah, and New Hampshire to 25% or more in Maine, Louisiana, Connecticut, and the District of Columbia in 2021. Additionally, MSP management is complicated by different payment rates in Medicare and Medicaid, different managed care options in some states, and complex cost sharing rules for certain services, such as mental health.

On top of this administrative burden, states have little ability to manage these costs. Medicare sets the premium and cost sharing levels for the year. States with relatively low payment rates do not have to pay providers the full amount of Medicare cost sharing. Yet, because MSPs are federally mandated, states with disproportionately older and lower-income residents such as Maine and West Virginia devote more of their budgets to filling in Medicare’s gaps.

Medicare Could Pay for its Premiums and Cost-Sharing

Congress could make MSPs part of Medicare, and has a model to do so. Since 2006, Medicare has operated the Extra Help program that assists low-income beneficiaries with costs related to their Part D prescription drug premiums, co-pays, and deductibles. Enrollment is conducted automatically for some and via an online Social Security Administration application that determines eligibility through self-reporting of income and other assets, which is verified with data from across federal agencies. Nearly 70% of people eligible for Extra Help are enrolled. States contribute funds to the “phased-down billing” program, commonly called the “clawback” payment, set annually based on past payments for prescription drug coverage through Medicaid.

The same approach could be used with MSPs. Congress could federalize the administration of and payment for the mandatory coverage of Medicare premiums and cost sharing (for full dual eligibles as well as for people only in MSP) and have states maintain a financial contribution through a clawback payment. The clawback payment could be set in a number of ways, and could be designed to continue current spending or provide states with relief. States that have optionally expanded eligibility could continue to do so but would have to pay their share of the cost for this optional coverage as they do today.

In the process of federalizing MSPs, Medicare could take steps to improve participation. For example, it could make enrollment automatic based on an individual’s participation in other federal programs and streamline eligibility rules. With data from the Internal Revenue Service, Extra Help, and Supplemental Security Income, key infrastructure already exists to increase participation in MSPs. While administrative costs would go down, federal benefit spending would increase if more eligible receive the benefit to which they are entitled.

Federalizing the Medicare Savings Program is a Win-Win-Win

As with any change, federalizing MSP would require tradeoffs. For example, states often check eligibility for other programs like food assistance during the MSP application process (although that would still continue for people applying for full dual eligibility). Current challenges in coordination of benefits between Medicare and Medicaid for people dually eligible would continue. And, no matter how the state clawback payment is set, some states will “win” and others will “lose,” with policy design to mitigate this coming at a federal cost.

That said, federalizing MSPs could be a win-win-win. Federalizing MSPs would help states in several ways. Foremost, states would have an improved ability to budget for this program. Additionally, more efficient operation from the federal government is likely to save administrative costs for the program overall and for states, who will have less responsibility to process applications and determine eligibility.

Second, a federalized MSP modeled after Extra Help would homogenize and streamline the eligibility processes. This would likely increase financial assistance reaching low-income Americans on Medicare.

Lastly, federalizing MSPs is within the realm of possibility. While any significant shift in payments and program administration from states to the federal government will necessarily raise concerns, bipartisan and federal-state support is likely due to the opportunity for increased impact and efficiency. The extent of budget relief to states could be dialed (for example, by setting payments at a fraction of current spending or growing them slower than Medicare cost growth) and may be more palatable to policy makers than alternative forms of relief like rolling back provider tax limits. Most importantly, federalizing payment of Medicare costs for low-income beneficiaries will help protect Americans’ health, finances, and well-being. This would likely enjoy the support of voters and advocacy groups for older and disabled Americans, and health care providers, and would foster greater retirement and economic security.

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