The 800-pounds Gorilla: state lawmakers are trying to cut costs so the program will survive, even when millions more are added to the rolls.

• Author: Brand, Rachel
• Position: MEDICAID

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Although many of the headlines in the debate over federal spending and the deficit focus on Medicare and Social Security, the program of greatest concern to states is Medicaid.

The 46-year-old program, which cost state and federal governments nearly $400 billion in 2009, eats about 16 cents of every dollar in state general funds. It's been growing two or three times faster than state budgets because of the rising costs of health care and the increasing number of people enrolling because of the stagnant economy.

Meanwhile, state lawmakers are looking down the road three years to when an additional 16 million people will go onto the Medicaid rolls under federal health care reform. And while Congress debates possible modifications in how it funds the program, any changes remain uncertain.

"It's a budget killer, but it's a philosophy," says Florida Representative Mark Pafford. "[Because of Medicaid] you will not see babies dying in the gutter. You don't see old people dying of heat exhaustion, or homeless dying on the street."

But for state lawmakers, Medicaid is decidedly on the table for reform.

"We can no longer have an 800-pound gorilla eat up so much of our budgets," says Washington Senator Linda Parlette. "Any time you're short of money, it forces you to make policy decisions that are different."

State policymakers are asking the federal government for more flexibility to change the Medicaid program without a lot of red tape. They want to expand managed care, experiment with new payment models, create medical homes, and streamline services for those eligible for both Medicaid and Medicare. They want to tether provider payments to patients' health results and link Medicaid funding to general fund revenue growth. They even are looking at asking patients to pay a portion of their care.

The goal: a less expensive, better, more "sustainable" health care system for the poor and disabled.

"This wave of change is motivated by the desire to cut costs," says Alan Weil, executive director of the National Academy for State Health Policy. "It's also responsive to an intuitive sense that we're not doing a very good job in terms of outcomes in a fragmented system."

Time for Change

The federal government pays about 57 percent of the annual cost--$366 billion in fiscal year 2009--though the exact split with each state varies based on per capita income.

Federal rules govern who qualifies for medical care and the basic services that must be covered. All states, however, cover more than the basic services. The rules also bar enrollees from paying more than a few dollars for services. If a state wants to experiment with a program that covers more of the uninsured through Medicaid, make managed care mandatory, or create new financial incentives, it must request an 1115 waiver and negotiate with federal administrators.

Medicaid spending has grown, on average, at 7 percent a year for the past 10 years, somewhat less than the growth in the private sector but still a big financial burden for states. Four states weighed dropping the program in recent years, but study commissions recommended against it, in part, because of the challenges of providing long-term care. Long-term care and other services for the severely disabled and elderly consume 67 cents of every dollar spent on Medicaid.

Even before federal health reform moves millions of people into the program in 2014, it has dealt a blow to state Medicaid budgets.

Health care reform contains a provision known as "maintenance of effort." It requires states to continue covering anyone who was enrolled in the program as of March 2010 when the federal health reform legislation was signed into law, in essence tying states' budgetary hands and limiting tools to contain program growth.

"We didn't sign up for Medicaid to have it bankrupt our state," says Utah Senator Dan Liljenquist.

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Changing the Model

Over the years, states have tried to limit doctor visits, procedures, payments and drugs. They also have tried to better manage patients with chronic diseases and promote managed care--anything to rein in costs. Still, the program grows because Medicaid is countercyclical--enrollment climbs when the economy stagnates and because Medicaid shoulders much of the long-term care cost in this country.

Lawmakers in Florida, Utah and Washington are trying...