How Medicaid works

Medicaid is authorized under federal law but operated by the states. The federal government sets minimum standards and shares in the cost through matching funds, and in return each state must cover certain mandatory populations and benefits. Beyond that floor, states design their own programs, choosing optional eligibility groups, optional benefits, delivery systems, and payment methodologies. This is why a service, benefit limit, or billing rule that applies in one state may not apply in another, and why program details are revised as states amend their plans.

CMS reviews and approves each state's Medicaid state plan and any waivers that let a state operate outside standard rules for defined purposes. The practical consequence for billing is that the state Medicaid agency — not a single national payer — defines enrollment, coverage, and claim requirements. The degree of state program variation is substantial and is one of the defining features of Medicaid billing.

Medicaid eligibility is organized into categories, some of which states must cover (mandatory) and some of which they may choose to cover (optional). Categories are defined by factors such as income relative to the federal poverty level, household composition, age, pregnancy, disability status, and other criteria. States determine the precise thresholds and rules within federal parameters, and those rules change, so eligibility for a given individual is always a point-in-time determination.

A related program, the Children's Health Insurance Program (CHIP), covers certain children and, in some states, pregnant individuals whose income exceeds Medicaid limits; states operate CHIP as a separate program, as a Medicaid expansion, or as a combination. Because coverage status can change month to month, eligibility verification before each date of service is a foundational billing step. The full set of Medicaid eligibility categories is defined at the state level.

Mandatory eligibility groups

Populations that federal rules require states to cover as a condition of receiving federal matching funds.

Optional eligibility groups

Populations a state may elect to cover; presence and thresholds vary by state and over time.

Point-in-time determination

Eligibility reflects a specific period; coverage should be confirmed for the actual date of service.

States deliver Medicaid benefits through two broad models, and many use both for different populations or services. Which model applies determines who adjudicates a claim, who issues payment, and which rules govern submission and prior authorization.

Under fee-for-service (FFS), the state pays enrolled providers directly per service according to its fee schedule. Under managed care, the state contracts with a managed care organization (MCO) to arrange care for enrolled members, and the MCO adjudicates and pays claims under its own policies within the state contract. The distinction between fee-for-service and managed Medicaid is one of the first things to establish for any Medicaid patient, and the mechanics of Medicaid managed care organizations differ from direct state billing.

Providers generally must complete Medicaid provider enrollment with the state — a process related to but distinct from credentialing — before claims can be paid, and managed care participation may additionally require joining each plan's network. Claims are typically submitted on standard formats, the CMS-1500 for professional services and the UB-04 for institutional services, and are returned with a remittance advice after adjudication.

Medicaid generally functions as the payer of last resort, meaning other liable coverage is applied first and Medicaid pays after. This drives coordination of benefits and third-party-liability handling, and it shapes how claims for dual-eligible beneficiaries — individuals covered by both Medicare and Medicaid — are processed. Two operational rules that consistently affect Medicaid claims are prior authorization and timely filing, both of which are set by the state or plan and vary.

1. 01

   Confirm coverage and plan

   Verify active Medicaid eligibility and whether the member is FFS or assigned to a specific managed care plan for the date of service.
2. 02

   Confirm the responsible payer order

   Identify any other coverage first, since Medicaid is generally billed after other liable payers.
3. 03

   Meet plan-specific requirements

   Obtain any required prior authorization and follow the applicable submission format and rules.
4. 04

   Submit and reconcile

   File within the applicable timely-filing window and reconcile the remittance advice after adjudication.

The federal-state design explains the day-to-day realities of Medicaid billing: the same procedure may be covered differently, paid at different rates, and require different documentation depending on the state and delivery model. It also explains why denials frequently trace back to eligibility gaps, wrong-payer routing, missing authorization, or filing outside the applicable window — issues rooted in program variation rather than in a single national rulebook.

• Eligibility can change monthly, so verification is tied to the date of service.
• The delivery model (FFS vs. managed care) decides where a claim goes and whose rules apply.
• Payer-of-last-resort status makes coordination of benefits central to correct Medicaid billing.
• State and plan variation means specifics must be confirmed, not assumed.