This is the traditional way Medicaid made payments for services and was the only way technically allowed until 1997 by federal Medicaid law, which mandated freedom of choice for all Medicaid recipients. However, there was a catch to this freedom of choice—doctors have the option of opting out of the Medicaid system and refusing to accept Medicaid patients.

Medicaid fees for physicians are set by the state and so vary from region to region. However, they are usually low—paying well below private rates for physician services and usually below what Medicare pays. As a result, the argument has been made that Medicaid recipients often do not get the quality care received by other medical insurance recipients. In many areas, it is difficult to find doctors who will treat Medicare patients because of the low payments, and in other cases doctors have sued to force higher payments from Medicaid programs. Hospitals are more limited in their abilities to turn down Medicaid patients, since they are often tax exempt or have obligations under other federal statutes.

Because states are allowed to set payment rates, such rates can be changes at anytime. Thus, when a state undergoes a budget shortfall or other problem, rates can be and often are lowered.