Understanding School Medicaid


Medicaid provides health coverage to more than 65 million people across the United States, including 37 million children in low-income families. It covers comprehensive and preventive physical and behavioral healthcare services.

Since 1988, Medicaid has reimbursed states for certain medically necessary services provided in a school-based setting to children with an Individualized Education Program (IEP) and in other limited situations, providing billions of dollars of federal funding to support school health services. This amounts to less than 1 percent of total federal Medicaid program costs, but it represents a significant source of revenue for schools, making Medicaid the third-largest funding stream for K-12 public schools.

States are not required to participate in Medicaid, nor are they automatically eligible to receive Medicaid payment for services provided in schools. But schools are required to provide the services listed in an IEP — whether or not Medicaid funding is available. Many states and school districts (also known as local educational agencies, or LEAs) rely on federal Medicaid funding to offset the expenses of providing these medically necessary services and ease the pressure on the state education budget.

Prior to the 2014 CMS policy clarification on the “free care” rule, schools were not allowed to seek reimbursement for services delivered to Medicaid-enrolled students without an IEP if those services were provided free of charge to all students. The revised guidance paved the way for schools to receive reimbursement for services delivered to all Medicaid-enrolled students, though some states still need to take action to leverage this funding.

EPSDT Benefit

Medicaid’s signature benefit for children and adolescents, the Early and Periodic Screening, Diagnostic and Treatment (EPSDT) benefit, is designed to ensure that children receive all medically necessary services. Its components include:

  • Early: Assessing and identifying problems early
  • Periodic: Checking children’s health at periodic, age-appropriate intervals
  • Screening: Providing physical, mental, developmental, dental, hearing, vision, and other screening tests to detect potential problems
  • Diagnostic: Performing diagnostic tests to follow up when a risk is identified, and
  • Treatment: Control, correct or reduce health problems found.

For services to be considered medically necessary, they must be reasonable and necessary for the treatment of illness, injury, disease, disability, or developmental condition. Medical necessity is a critical factor for determining eligibility for Medicaid-reimbursable services.

How Medicaid Reimbursement Works

Medicaid is a federal-state partnership; states must pay a certain percentage of their state’s overall Medicaid costs, known as the Federal Medicaid Assistance Percentage (FMAP). The FMAP varies from state to state, but the federal government reimburses, at a minimum, 50 percent of a state’s spending on eligible services provided to Medicaid enrollees. This means states are responsible for up to 50 percent of the cost of care (otherwise known as the state’s match).

To raise their share of the match, states rely on many different funding sources, and most states require LEAs to draw from their district budget to contribute some or all of the non-federal share of school-based services.

CMS reimburses states for a portion of the services that are billed, and each state passes some of the money back to schools and districts. The process for reimbursement is complicated and varies state-by-state, but one thing is clear: when a state increases the number of eligible services that are billed to Medicaid, the state gets back more money from CMS.

The converse is also true: not billing for otherwise eligible services that are already being provided in schools means leaving federal dollars unclaimed. When that happens, state taxpayers bear the entire cost of services. This makes Medicaid a very important source of funding for school health services — and for state health and education budgets overall.