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Medicaid Funding Relationship with Nonprofit Organizations

Paper Type: Free Essay Subject: Social Policy
Wordcount: 1279 words Published: 7th Sep 2017

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Allard and Smith (2014) define legally incorporated, tax-exempt entities that provide specific services to be nonprofit social service organizations. They can help low-income families that might not qualify for federal assistance. Nonprofit organizations (NPOs) can range vastly in their size, scope, and form, but they are all reliant on donations and public funds to support their operations. This public funding is supported by grants, contracts, and tax credits (Smith et al. 2012).

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The way in which Medicaid works can be somewhat complex. From the agency standpoint, Medicaid has set values for services its clients might use. Documentation of the actual cost of a service provided is not needed, as clients need only to prove the service was provided. Once there is proof of the service being provided, Medicaid pays out a specific dollar amount for each service. This vendor rate, sometimes referred to as the fee-for-service model, requires the agencies to consistently serve enough Medicaid-eligible clients to break even amongst their revenues. “The state will only offer a certain rate for outpatient mental health counseling services, for example, regardless of an individual agency’s own internal cost structure” (Smith et al. 2012).

The Affordable Care Act (ACA), passed in 2010, has drastically increased the number of insured Americans. The ACA, which is frequently nicknamed Obamacare, prohibited insurance companies from denying coverage based on pre-existing health and vastly expanded the number of low-income families eligible for Medicaid. It also set a standard requirement for all United States citizens to have the minimum essential coverage of healthcare (MEC).

Medicaid Funding for Nonprofits

The practice of using Medicaid to supplement nonprofit organizations’ funds began in the 1980s. The social movement to provide services to the elderly and disabled led to increased government support for social services (US General Accounting Office, 1984). This has expanded greatly since then, with the main source of care belonging to substance abuse and mental health services.

One blatant benefit Medicaid funding can have for nonprofits is its quick turnaround. Even though its services are aimed primarily at high-risk groups, Medicaid funding reimbursed at a much higher rate than other insurance options for such population groupings when compared in 2006. Medicaid has boomed in the past several years, having expanded its pool of clients to cover more and more people. Reimbursement rates allow nonprofit social service organizations to cross-subsidize their resources to other activities that might not otherwise receive sufficient funding (Smith, 2007).

Unforeseen Consequences: Effects of Medicaid on NPO Funding

Nonprofits exist as a “federal safety net” to supplement lacking government and community services. Two main problems that arise when deep dependency is placed on publicly funded nonprofit social services. State governments have been recently pressured to reduce spending on programs to make more room in the budget. Additionally, nonprofits must cope with the pressures associated with being the “second order” social welfare program of the government. Because all federal and state dollars are allocated at a local level for social service programs, the activity reflects the preferences and capability of the community (Allard & Smith, 2014).

Medicaid allocates funding to a significant portion of social service organizations in the nonprofit sector, even though such organizations may not primarily be health care providers. Over 50% of the nonprofits focused on mental health and substance abuse reported Medicaid funding in their surveys. Medicaid revenues were also provided to over 40% of those providers of mental health or substance abuse services who also engaged in assistances ranging from employment services to emergency response. It is important to note, however, that only 3.2% of these organizations providing employment or emergency services did not provide the additional substance abuse or mental health services (Allard & Smith, 2014). This data indicates that while Medicaid provides funding to a wide range of nonprofits, it does place a significant emphasis on those dealing with health services in its diverse range.

An Assessment of the Arguments

As discussed earlier, nonprofits receive funding from Medicaid based on the services provided. To receive funding, an organization must show proof of a service provided to an individual. In this way, the funding is based on individual clients seeking services from nonprofit organizations. The mission of the organization, therefore, influences how much funding it will ultimately receive from Medicaid. In this way, Medicaid funding is said to “follow clients” rather than being given to a specific nonprofit organization.

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Nonprofits must factor in this design when creating their mission statement. They can more effectively secure their funding by having a service mission targeted towards populations that receive Medicaid coverage. Additionally, larger organizations are more likely to receive Medicaid funding because they have more resources and staff to provide these services. Conversely, smaller organizations often find themselves less likely to receive Medicaid funding regardless of their mission statement if they do not have the scale to provide as many services as their larger counterparts (Allard & Smith, 2014).


Nonprofits largely reliant on Medicaid for their funding may often find themselves at the mercy of elements out of their hand. They depend on the flow of Medicaid-eligible clients using their services and resources. Thus, nonprofits are dependent on the eligibility of the clients they serve. State policies dictate Medicaid eligibility, so nonprofits are vulnerable to changes in state economics and legislation. “Since it is a modest source of revenue for many nonprofits, greater instability and unpredictability may make Medicaid a less desirable source of revenue (Allard & Smith, 2014). While Medicaid might not be able to be concretely predicted, it is still better than not being able to accept Medicaid at all. While it may seem precarious, organizations must adapt to changing sources of revenue regardless of if it is government-funded or not.


Allard, S. W., & Smith, S. R. (2014). “Unforeseen consequences: Medicaid and the funding of nonprofit service organizations.” Journal of Health Politics, Policy & Law, 39(6), 1135-1172.

Smith, Steven Rathgeb. 2007. “Medicaid funding of social services: implications for social and health policy.” Paper presented at the annual meeting of the American Political Science Association, Chicago, August 31.

Smith, Vernon K., Kathleen Gifford, Eileen Ellis, Robin Rudowitz, and Laura Snyder. 2012. “Medicaid today: preparing for tomorrow; a look at state Medicaid program spending, enrollment and policy trends.” Washington, DC: Kaiser Family Foundation, Kaiser Commission on Medicaid and the Uninsured.

US General Accounting Office (GAO). 1984. ”States Use Several Strategies to Cope with Funding Reductions under Social Services Block Grant (SSBG).”GAO/HRD-84-68. Washington, DC: GAO.


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