Pauline Leung, Cornell University

State Responses to Federal Matching Grants: The Case of Medicaid

Abstract: When designing a cost-sharing mechanism to fund a social program, federal governments can choose among several types of intergovernmental grant structures, including open or closed-ended matching grants, and block grants. While the theoretical implications for spending on the program are unambiguous, the empirical magnitudes are unknown and may depend on the program in question. The Medicaid program is funded by open-ended matching, but there has been interest in transforming this financing structure to a block grant throughout the program's history. In this paper, I measure the effect of match rates on Medicaid spending by exploiting the variation induced by a kink in the match rate formula in a regression kink design. Using my estimate, I consider the welfare implications of a block grant reform.