This dissertation seeks to analyze empirically the determinants of a state’s Medicaid spending on home and community-based services in the light of a multi-tiered governance system. More specifically, the research examines the interstate spillover effect of a state’s home and community-based services (HCBS) spending. Also, the study tests the validity of the notion that the decentralized provision of public goods and services affects the government size. Based on a theory of interstate strategic interaction, an empirical model is specified, which explicitly accounts for the interdependence between states’ spending decisions. Empirical analysis applies graphical approach, spatial cross-sectional regression, and spatial panel econometrics methods to a panel data of 48 states over the six-year period from 1999 to 2004. A host of demographic, social, economic, and institutional factors are included. Findings, based on migration weights matrix, indicate that states reduce their HCBS spending in response to an increase in HCBS expenditures in other states. This finding based on migration weights matrix is robust to various model specifications. However, when alternative weights matrices are employed, the spillover effect is no longer significant. Similarly, the impact of decentralization on HCBS spending is contingent upon the choice of decentralization measure. Using fiscal autonomy as a measure of decentralization, I find a robust negative impact of fiscal decentralization on a state’s HCBS expenditures. However, there is no evidence that alternative measures of decentralization (expenditure and revenue indicators) influence a state’s HCBS spending. Other important determinants of spending are the number of HCBS enrollees, female participation in labor force, and minorities.