THE DILLARD FAMILY SITS with dozens of other screaming kids and frazzled moms in the Bedford-Stuyvesant Family Health Center on a sticky Monday morning, part of the back-to-school rush for physicals and shots. Monica is enrolled in Medicaid, along with her three children. The whole family qualifies based on Monica's low income. Without public assistance, not only would the kids' routine medical care be prohibitively expensive, Monica's asthma and diabetes would have to go untreated as well.

A year ago, the family moved down to Brooklyn's Bed-Stuy from Yonkers, New York. Up there, Monica's asthma had been fine, but since moving she's had to take a couple of doses a day from her steroid pump and swallow a pill before bed each night to help her breathing. "The air's just bad down here, I guess," she shrugs. She also takes two meds every day for her diabetes. One of those drugs is affecting her cholesterol, so her doctor at the clinic put her on still another daily tablet to help keep that down. It's a lot of pills.

More than two-thirds of the patients waiting with Monica will pay with Medicaid. Forty percent of the clinic's patients are living below the poverty line; federal law requires all states to cover them in order to keep Washington's checks coming into their Medicaid coffers. New York state has recently expanded its Medicaid program, and other states have similarly opened up in recent years, leveraging federal money to broaden access to health care for millions of families. They’ve raised the income level at which people qualify, added new disability categories, and covered more parents who used to be able to get care only for their children. But this much-needed expansion of Medicaid coverage is about to shrink, if the White House gets its way.

Last January, the Bush Administration proposed closing the federal money spigot for Medicaid. Just before turning its attention to privatizing Medicare, the Administration presented a plan that would turn the federal contribution to the program into a block grant--a fixed, lump-sum payment each year. In return, the Administration would strip away nearly all of the federal rules that govern Medicaid programs, giving states "complete flexibility" to construct their health care safety nets as they see fit. The White House supposes that, with such freedom, states can craft innovations that will save them money and allow their programs to continue expanding. The reality is that, when cut off from open-ended federal support in the midst of historic budget crises, states are likely to make unpleasant decisions about who they can't keep covering and what benefits they must discontinue.

Most anti-poverty programs were conceived as "entitlements," meaning the feds dish out an agreed upon share of however much money a state needs to provide an adequate safety net. In turn, the states follow certain rules about how they spend that money--rules designed primarily to protect the beneficiaries. But from the Reagan-era forward, conservatives have slowly maneuvered to end those protections.

Block grants are the agents of this change, and the Bush administration--anxious to build upon the momentum gained from Clinton-era welfare "reform," which brought us the Temporary Assistance for Needy Families block grant--is lobbing them at Congress like scud missiles.

The White House's plan for overhauling Medicaid is its most ambitious. And, not coincidentally, it's the most likely to become a reality in some form. The Administration will surely try to ride the momentum from its Medicare victory, and it will be helped along by the fact that today’s Medicaid system is unquestionably in critical condition. Twenty percent of states’ collective spending annually goes to Medicaid, even as nearly every state faces dramatic budget shortages. Meanwhile, Medicaid accounts for 44 percent of all federal grants given to states.

Those numbers are expected to keep getting bigger. Medicaid spending grew by almost 12 percent in 2002. The program has exploded from being a $161 billion effort in 1998 to a projected $310 billion in 2004. And as the ranks of the unemployed continue climbing, the program's growth will eventually become unsustainable.


AS MONICA DESCRIBES HER burgeoning pill regimen, she's regularly interrupted to tend to the kids surrounding her. She's got more to worry about than the machinations of federal Medicaid funding and what they will mean for her. "Most people aren't thinking about that sort of thing," laughs Albertha Brown, the clinic's patient care coordinator, whose job it is to keep everyone happy during their long wait. "They just know it's free."

That was the idea. Medicaid was the result of nearly a half-century's worth of Democratic efforts to create a public insurance system. Each failed miserably, until the Democrats' lopsided control of Congress in 1965 allowed Lyndon Johnson to usher in Medicaid and Medicare. The strategy was to start by offering basic health care to the most vulnerable groups--kids and pregnant moms living below or just above the poverty line, poor seniors, and people with disabilities--and then slowly grow into a national health insurance system.

But it wasn't until the 1990s, in the wake of the fiasco of Bill Clinton's failed health care reform efforts, that Medicaid began seriously expanding. The Clinton Administration, unable to move its larger health agenda through a hostile Congress, dusted off a tool that had been rarely used by Medicaid administrators: the rule waiver. Waivers allow for "demonstration projects" that are supposed to be pilots for reform, and the Clinton Administration encouraged states to apply for them. Washington overseers made it clear that they were interested only in waivers that were part of efforts to expand coverage. Governors, who had long clamored for more flexibility, responded enthusiastically. And today, more than one-fifth of Medicaid funding is spent on these nominal demonstration projects.

The catch is that federal custom holds that no demonstration can cost the feds more money than they would have spent without the rule waiver. So states said their innovations--primarily managed care--would save money, and that the savings would fund the program's expansion. Meanwhile, Congress passed a series of laws giving the states greater leeway--creating a program to cover more children and clearing the way for them to set up Medicaid managed care without prior approval. With tax revenues soaring, the question of whether innovations actually cut costs was not an urgent one. To the contrary, most observers focused on the good news: The program expanded from covering around forty million people in 1998 to forty-seven million at last count.

Enter the recession. And enter Health and Human Services Secretary Tommy Thompson, who, as Wisconsin's GOP governor and chair of the National Governor's Association, was the leading spokesperson for state control of federal poverty programs. He says the tough times provide an ideal moment for finally giving the states carte blanche.

"The bottom line," Thompson intoned in a press conference announcing the plan, "is that Medicaid is outdated. It's inefficient. Its spiraling costs and straightjacket rules are forcing states into no-win situations."

But with freedom comes responsibility: Under the White House plan, states will have to produce the predicted savings from their reforms, pay for expanded coverage themselves, or make cuts. As proposed, the whole initiative would be optional, giving each state the choice of switching to the block grant formula or staying with the traditional entitlement system. But the choice is not a neutral one. The White House wants to allot $13 billion over the next seven years to give funding boosts to states that choose the new block grants. States that stick with the old entitlements, however, will be left lobbying an increasingly stingy Congress to raise the feds' share of their ballooning Medicaid expenses.


WHAT THE INITIATIVE IGNORES is that Medicaid's high price has less to do with the program itself than it does with the national health economy's two core conundrums: prescription drugs cost lots of money, and private insurance is prohibitively expensive for people needing long-term care, people like Lynaree (a pseudonym).

Lynaree has been in treatment for HIV since 1990. Today, she takes a daily combo of anti-viral meds. Like many poor forty-nine-year-old black women, she's got high blood pressure. She takes two pills a day for that condition, along with a water pill. She estimates her drug bill would be around $1,000 a month if it came out of her pocket instead of New York's Medicaid system.

Lynaree's been in the hospital three times in the last three years, and both of her conditions require at least bimonthly maintenance.

In April, she spent three days in the hospital taking drugs to clear a blockage of blood flow from her spleen and tackle a bacterial infection in her digestive track. Last year, she had tumors removed from her breasts. One side effect of her HIV meds is fat redistribution in unsightly places. So three years ago she had to go in the hospital to have a lump of fat removed that had gathered on her scalp, just past the hairline at her left temple. She's still got some in her stomach, but she does crunches to keep it under control. "You wouldn't even know it was there if I didn't tell you," she proudly notes.

Lynaree ticks off the different drug combos she's cycled through for both her HIV and high blood pressure with the confidence of a med student. "I went back on HIV medications in '95 or '96," she explains, when she enrolled in Medicaid. "I've taken all of the stuff that they were giving out in the '90s. I've had all kinds of side effects. Right now, I just have a bad sinus problem."

But in August, Lynaree's previously undetectable viral load--the measure of how much HIV has reproduced in your blood, and how close you are to developing AIDS--had jumped to alarming levels. HIV is a tricky disease because it mutates quickly, and a drug combination only holds it at bay for so long before you have to throw a new one at it. If Lynaree's latest combo has pooped out, her long treatment history will work against her: Her virus may already have seen and adapted to most drugs on the market. She may have to go onto a newly developed med that many HIVers who have used up other options are considering. The drug, called T-20, can cost as much as $20,000 a year.

Lynaree's case is just the sort that's breaking Medicaid's bank. The program's big growth area, cost-wise, comes not from the hordes of new moms and kids that have signed up in recent years, but from elderly and disabled folks. Spending on poor elderly and disabled enrollees accounts for three-quarters of Medicaid costs nationally, though they make up only a quarter of all beneficiaries. That's largely because of prescription drugs, which accounted for nearly one-fifth of all Medicaid costs between 1998 and 2000, according to the Kaiser Family Foundation.

Asked if the Bush plan would do anything to help bring down the cost of prescription drugs, Thompson punted. "That's the beauty of this plan," he bragged. "We're going to leave it up to the states."

But the states’ solution was to leave it up to Washington. During the debate over how to add a drug benefit to Medicare, the National Governor’s Association unsuccessfully lobbied for Washington to completely take over the drug costs for “dual eligibles”--low-income people in Medicare who get drug coverage through Medicaid. Instead, the new law shifts more of the cost onto those roughly six million poor elderly and disabled people. Whereas most either paid nothing or a nominal $1 or $2 per month on each prescription in the old system, they will now pay up to $5 a month per prescription. And the costs for those living just above the poverty line will go up at the same rate as the overall Medicare drug costs, which the Congressional Budget Office predicts will be 10 percent a year.

States are already looking for ways to save money, working within the bounds of existing federal rules that force them to make any Medicaid benefit they offer uniformly available. The Bush proposal would throw those rules out, clearing states to try things like offering prescription drugs only to patients with certain illnesses, setting up large co-pays for people with expensive conditions, giving different benefits to people in different parts of the state, or simply denying enrollment altogether to those that cost a lot to treat.

Bush’s plan would leave a full one-third of Medicaid enrollees with no protection from federal rules whatsoever. And in the end, states that can't economize with innovations will have to cut benefits for these people.

That’s why governors gave the White House plan a decidedly cool reception when Thompson unveiled it last year. But having failed to win relief from Washington through Medicare, states are now left with few options.

When the White House rejoins the battle over its Medicaid proposal, governors will be tempted to support the plan, cash in on the short-term funding boost it offers, and let their successors worry about the future. States would actually have to pay back the extra funding they'd get up front, through reductions to their block grants in later years.

But, as Thompson remarked when reporters pushed him on that point, "I'm not going to be here to solve that problem."