42 USC 1396 is the section of the Social Security Act that creates Medicaid and sets the federal rules every state program must follow. It defines who states must cover, what benefits must be included, how federal money flows to the states, how long-term care eligibility is calculated, and what penalties apply when providers or states break the rules. States run their own programs, but any state that wants federal Medicaid funding has to operate inside this statute’s boundaries.
Who Qualifies Under 42 USC 1396
Eligibility turns on income, household size, and the category a person falls into. Federal law requires every state to cover certain mandatory groups: low-income families with children, pregnant women, children up to specified income levels, and people who receive Supplemental Security Income. Beyond those groups, states can extend coverage to additional populations through State Plan Amendments or waivers.
The Affordable Care Act gave states the option to open Medicaid to nearly all adults with household incomes up to 138% of the federal poverty level. The Supreme Court’s 2012 decision in National Federation of Independent Business v. Sebelius made that expansion voluntary, so whether a childless adult qualifies still depends on the state.1HealthCare.gov. Medicaid Expansion and What It Means for You In 2026, 138% of the poverty line for a single person is $22,025.2ASPE. 2026 Poverty Guidelines
Income for most applicants is calculated using Modified Adjusted Gross Income (MAGI), the same method used for marketplace subsidies. MAGI counts taxable income plus certain deductions and applies a 5% income disregard, which is why the effective threshold is 138% rather than the statutory 133%. States must accept applications online, by phone, and in person, and coordinate with the Health Insurance Marketplace so an application filed in one place gets routed to the right program.
Citizenship and Immigration Status
U.S. citizens and nationals who meet income limits are eligible. Legal permanent residents and other “qualified” noncitizens generally face a five-year waiting period from the date they received their qualifying status.3HealthCare.gov. Health Coverage for Lawfully Present Immigrants Refugees and asylees are exempt from the wait. Undocumented immigrants are not eligible for full Medicaid, though federal law requires states to cover emergency medical services regardless of immigration status.
Benefits States Must Cover
Every state Medicaid program has to cover a core set of services: inpatient and outpatient hospital care, physician visits, lab work, nursing facility services, and home health care. States also have the option to cover additional services such as prescription drugs, dental care, physical therapy, and vision. Most states cover a substantial list of optional benefits, but the scope varies. Any restrictions a state places on a covered benefit must apply uniformly to everyone within an eligibility group.
Children’s Coverage and EPSDT
Children get broader protections than adults. The Consolidated Appropriations Act of 2023 requires every state to provide 12 months of continuous eligibility for children under 19. Once a child is determined eligible, coverage stays in place for the full 12 months even if the family’s income or household changes. Coverage can end during that period only in narrow circumstances: the child turns 19, moves out of state, voluntarily disenrolls, was enrolled due to fraud or agency error, or has died.4Centers for Medicare & Medicaid Services. SHO 23-004 Continuous Eligibility – Medicaid
The Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit requires states to provide comprehensive preventive and treatment services to all Medicaid-enrolled children under 21. EPSDT goes beyond a state’s regular benefit package: if a screening reveals a condition that needs treatment, the state must provide that treatment even if the service is not otherwise part of the state plan.5eCFR. 42 CFR Part 441 Subpart B – Early and Periodic Screening, Diagnosis, and Treatment of Individuals Under Age 21
Retroactive Coverage
Federal law allows Medicaid to pay medical bills incurred up to three months before the month a person applies, as long as the person would have qualified when the services were provided. This protects people who delayed applying because of a medical crisis or did not know they qualified. Some states have obtained waivers eliminating retroactive coverage for certain populations, so the protection is not universal.
How Federal Matching Funds Work
The federal government reimburses each state for a share of its Medicaid spending through the Federal Medical Assistance Percentage (FMAP). The FMAP varies by state based on per capita income. No state receives less than 50%, and poorer states can receive over 70%. Certain categories of spending, such as family planning services, get an enhanced match.
For the ACA expansion population, the federal government initially covered 100% of costs from 2014 through 2016, phasing down to 90% for 2020 and beyond.6Centers for Medicare & Medicaid Services. Increased Federal Medical Assistance Percentage Through the Affordable Care Act of 2010 That enhanced rate is what has made expansion financially attractive to states.
State Plans and Section 1115 Waivers
Every state has to file a State Plan with CMS describing how its program will operate, and any change requires a State Plan Amendment. A state that wants to test an approach outside the standard rules can apply for a Section 1115 demonstration waiver, which lets the HHS Secretary authorize experimental projects the Secretary determines will promote Medicaid’s objectives.7Medicaid.gov. About Section 1115 Demonstrations
Waivers get challenged in court. In Gresham v. Azar (2020), the D.C. Circuit vacated CMS approval of Arkansas’s Medicaid work requirement, finding the Secretary’s decision arbitrary and capricious because it failed to account for the thousands of people who would lose coverage.8Justia Law. Gresham v Azar, No 19-5094 (DC Cir 2020) Work requirements remain a live issue as states seek new waivers and advocacy groups keep challenging them.
Long-Term Care Rules
Medicaid is the primary payer for nursing home care in the United States, and the eligibility rules for long-term care are considerably tighter than the standard rules. Applicants must meet both income and asset limits, and the program looks hard at what the applicant did with money and property before applying.
The 60-Month Look-Back
When someone applies for Medicaid coverage of nursing home care, the state reviews all asset transfers made during the 60 months before the application. If the applicant gave away money or property, or sold assets for less than fair market value during that window, Medicaid imposes a penalty period of ineligibility for long-term care benefits. The penalty is not a fine. It is a length of time calculated by dividing the uncompensated value of the transfers by the average monthly cost of private nursing home care in that state. A $150,000 gift in a state where nursing home care averages $10,000 per month produces roughly a 15-month penalty. This is where families get blindsided: transferring a house to an adult child five years and one day before applying is fine; four years and 364 days before is not.
Home Equity Limits
Applicants for nursing home Medicaid can be denied coverage if their home equity exceeds a state-set threshold. The limit does not apply when a spouse, a child under 21, or a blind or disabled child of any age lives in the home. The specific equity cap varies by state.
Spousal Impoverishment Protections
When one spouse enters a nursing facility and the other stays in the community, federal law prevents the spend-down from impoverishing the healthy spouse. The community spouse keeps a protected share of the couple’s combined resources, called the Community Spouse Resource Allowance, and a protected floor of monthly income called the Minimum Monthly Maintenance Needs Allowance. For 2026, that monthly floor is $4,067.9Medicaid.gov. Spousal Impoverishment If the community spouse’s own income falls below the floor, income is redirected from the institutionalized spouse to close the gap.
Estate Recovery and Liens
Federal law requires every state to seek recovery of Medicaid costs from the estates of deceased beneficiaries who were 55 or older when they received benefits. Recovery targets nursing facility services, home and community-based services, and related hospital and prescription drug costs. States may also elect to recover costs for other optional services.10Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
Recovery cannot begin until after the death of the beneficiary’s surviving spouse, and it is barred entirely when there is a surviving child under 21 or a blind or disabled child of any age.11Medicaid.gov. Estate Recovery States must also have a process for waiving estate recovery when it would cause undue hardship, though the hardship criteria vary by state.
Liens on Property During Life
While a beneficiary is alive, a state may place a lien on the real property of a Medicaid enrollee who is permanently institutionalized, meaning the state has determined the person cannot reasonably be expected to return home. The state must give notice before making that determination and provide an opportunity for a hearing. A lien cannot be placed on the home if any of the following live there: the spouse, a child under 21, a blind or disabled child of any age, or a sibling with an equity interest who lived in the home for at least a year before the beneficiary entered the facility.12eCFR. 42 CFR 433.36 – Liens and Recoveries If the beneficiary does return home, the state must remove the lien.
Appeals When Coverage Is Denied or Cut
When a state Medicaid agency denies an application, reduces benefits, or terminates coverage, the affected person has the right to a fair hearing. Federal regulations give applicants and beneficiaries up to 90 days from the mailing date of the notice to request one.13eCFR. 42 CFR Part 431 Subpart E – Fair Hearings for Applicants and Beneficiaries If a beneficiary appeals a termination or reduction within the required timeframe, benefits generally continue at the existing level until the hearing decision issues. That continuation rule matters: without it, a person could lose access to medication or treatment during the months a hearing takes.
An impartial hearing officer reviews the evidence, hears testimony, and issues a written decision. The beneficiary has the right to examine the case file, present witnesses, and make arguments. If the hearing upholds the adverse action, the beneficiary has 10 days to appeal to the state agency for further review. Beyond administrative hearings, systemic problems, such as mass improper terminations or delayed application processing, have been challenged in federal court under civil rights statutes.
Fraud Penalties Under Federal Law
Medicaid fraud enforcement runs through five overlapping federal laws: the False Claims Act, the Anti-Kickback Statute, the Physician Self-Referral Law (Stark Law), the Exclusion Authorities, and the Civil Monetary Penalties Law.14Office of Inspector General. Fraud and Abuse Laws
- False Claims Act violations carry civil penalties per claim plus three times the government’s loss. Knowing submission of false claims also carries criminal fines of up to $250,000 and up to five years in prison.15Centers for Medicare & Medicaid Services. Laws Against Health Care Fraud Fact Sheet
- Anti-Kickback Statute violations, offering or accepting payment to induce referrals for federally covered services, carry criminal penalties of up to $25,000 and five years in prison. Under the Civil Monetary Penalties Law, kickback violations can also draw penalties of up to $50,000 per violation plus three times the kickback amount.14Office of Inspector General. Fraud and Abuse Laws
- Providers convicted of healthcare fraud, kickbacks, or certain other offenses face mandatory exclusion from all federal healthcare programs. Discretionary exclusion covers additional grounds, including license revocation and misdemeanor drug convictions.
The HHS Office of Inspector General maintains the List of Excluded Individuals and Entities. Anyone on the list cannot receive payment from any federal healthcare program, including Medicaid, and a facility that hires or contracts with someone on the list faces civil monetary penalties of its own.16U.S. Department of Health and Human Services, Office of Inspector General. Exclusions
At the state level, Medicaid Fraud Control Units investigate provider misconduct including billing for services never delivered, misrepresenting diagnoses, and falsifying patient records. Providers found guilty of serious violations can be permanently barred from Medicaid. States themselves also face consequences for noncompliance: CMS can withhold federal matching funds from states that fail to process applications on time, improperly terminate enrollees, or otherwise violate federal Medicaid requirements.