A Medicaid financing mechanism known as State Directed Payments has turned federal health spending into an interstate transfer scheme that redistributes billions of dollars from some states to others, according to an analysis published by the Competitive Enterprise Institute. The biggest loser is Florida, which sends an estimated $5.5 billion to other states that use the program more heavily. The system allows states to expand Medicaid spending without covering the full cost themselves, creating what the report describes as perverse incentives that fuel unchecked growth.
State Directed Payments cost federal taxpayers $93 billion in 2026, based on Kaiser Family Foundation estimates cited in the report. That works out to roughly $274 per person nationwide, whether or not they're enrolled in Medicaid. But usage differs sharply by state: those relying heavily on the payments spend around $900 per person, while 10 states don't use them at all. Florida spends only about $889 million through the program, yet its residents pay an estimated $6.4 billion of the total federal bill. New York and Texas are also major net contributors. Kentucky, Louisiana, North Carolina, and Arizona gain the most in dollar terms, while on a per capita basis, residents of the Great Plains and Northeast states pay more than they receive. Missouri, Arkansas, Alabama, Alaska, and Texas also contribute more than they get back.
The report finds that the payment structure creates incentives for states to grow programs without fully financing them, leading to unplanned and harmful expansion. Since 2020, annual spending on State Directed Payments has jumped from $26 billion to $137 billion in 2026, a fivefold increase. During the same period, national GDP rose by 50 percent, meaning these payments have grown more than eight times faster than the economy. The Office of the Actuary projected that, before recent legislation was passed, spending would reach $296 billion by 2034, far outpacing economic growth.
This explosive growth stems from states' unlimited capacity to enlarge these programs while external subsidies keep their own costs artificially low, according to the analysis. Because the federal government raises tax revenue nationwide but states set different payment levels, the system systematically encourages redistribution at a national scale. Even residents of states that choose not to participate end up financing other states' programs through their federal tax dollars. The result is rising costs and deficits, distortions in the health care market, and resources diverted toward financing mechanisms rather than actual services.
The report concludes that recent legislative limits on Medicaid managed care State Directed Payments are economically justified because they reduce incentives for states to shift costs to federal taxpayers, limit interstate redistribution, and restrain the rapid growth of payment arrangements that have expanded far faster than the broader economy. Without such constraints, the gap between program spending and economic growth will continue to widen, deepening the fiscal imbalance across states.