President Bush’s fiscal year 2004 budget proposes replacing Medicaid’s matching payment system with capped allotments or block grants. The proposal raises issues about the future of Medicaid and the differences between a block grant, in which federal funding is capped, and an entitlement, in which federal funding is provided on an as-needed basis. This issue brief compares the Medicaid financing system to a generic block grant financing system to illustrate the key differences in the structure and incentives of the alternative approaches.