Budget hearings are under way in Little Rock as we prepare for next year's legislative session. As we discuss how best to spend your taxpayer money on state services for the next two years, Medicaid often becomes part of the conversation. There's good reason for this, as the future of this health-care program is at the center of a number of important discussions.
First, some basic facts. Medicaid is paid for with federal-and-state tax dollars. It provides health care for about 800,000 Arkansans. The majority of Medicaid recipients are children and seniors, but services are also available for citizens who are disabled, blind or pregnant. This differs from Medicare, which provides primary health care for Americans age 65 and older. Seniors receiving Medicaid benefits are usually in nursing homes or require other long-term care.
Historically, the federal government has covered 75% of Medicaid costs, with Arkansas paying the other 25%. However, our recent improvement in per-capita income has changed that formula, increasing Arkansas's share. Starting this next fiscal year, that obligation moves to 70% federal and 30% from the state. Because of that shift and the continued overall increase in health-care costs, Arkansas faces a shortfall in our Medicaid budget next July, most recently estimated at about $350 million. To balance our future state budgets, we must address this shortfall.
We've already begun to do that through our state-wide effort to change how we pay for health care and by getting costs under control. After two years of planning, Arkansas began putting our payment-reform initiative in place this month. It is an unprecedented undertaking to rein in health-care costs while also improving care. While we believe that this initiative will eventually create significant savings, and could serve as a model for other states to replicate, we have begun on a smaller scale. This initiative will not fully address our immediate Medicaid shortfall.
We also have an opportunity to save state tax dollars through a federal expansion of Medicaid. While this expansion would add about 250,000 Arkansans to the program, most of whom are the working poor, the federal government would pay the entire cost until 2017. A small state share would then kick in, steadily rising but topping out at 10% in 2020. For this upcoming biennium, some programs paid for by the state or requiring the 70-30 split would instead be covered entirely by the federal government. This would save us an estimated $128 million in general revenue over two years. However, there must be political consensus on Medicaid expansion in the legislature, otherwise we could not appropriate and spend those federal funds.
As our state economy continues to recover from the national recession, our growth will create new ongoing revenue to help address the Medicaid shortfall. There is also bipartisan consensus to use some of our state's budget surplus to provide one-time Medicaid funding.
All of these potential sources of additional Medicaid support may not resolve the shortfall completely. In the current political climate, the only other viable step will be cuts in some programs. If it comes to that, we will work with the legislature to minimize the impact of any such cuts. This is the hard work we do to keep our budget balanced and to preserve Arkansas's tradition of fiscal responsibility while taking care of all of our citizens.