RALEIGH – There’s another gaping hole in North Carolina’s Medicaid program. But there may be a saving grace: a hard lesson learned about savings.

Last week Health & Human Services Secretary Lanier Cansler told state lawmakers that Medicaid may need as much as $250 million in cuts or extra tax money by the end of the fiscal year in June. While the gap is a product of several factors, including recessionary increases in enrollment, a major driving force is higher-than-projected costs in a Medicaid category called personal care services. Originally funded at $185 million for the entire 2009-10 budget year, personal care services has already blown past that mark in the first six months.

Many states, not just North Carolina, decided years ago to try to increase eligibility for in-home Medicaid services for their elderly and disabled caseload based on the notion that if providing the service headed off a more-expensive stay in a nursing home, it would be not only better for the patients but also for the taxpayers. Looked reasonable on paper, I’m sure. But in practice, it didn’t work.

One of the most seductive ideas to politicians is that if they spend more of the taxpayers’ money, it will end up saving money in the long run. If you are already inclined to believe that government should be larger and more activist, this is music to your ears. And if you profess to be a fiscal conservative, you can try to split the difference between your base and the long procession of spending lobbies that come to see you every day.

Is the idea utterly false? No. Sometimes you can save money long-term by spending money short-term. In the past, I’ve called it the Prevention Myth. Upon reflection, I think a better description is that it’s the Prevention Legend – not without some foundation but grossly exaggerated and crudely applied.

The Prevention Legend has been employed to advocate a host of causes, ranging from preschool intervention to national health care reform. Again, the pitch sounds plausible. The problems lie in the details.

For example, prevention only saves money when it is carefully targeted. If you inoculate a population against a rare disease that most of the population has an exceedingly low risk of contracting, you may save a life but you probably won’t save any money. In cases such as North Carolinas’ Smart Start and More At Four, the number of children being served is far larger than the number of desperately disadvantaged, essentially non-parented children for whom early intervention may confer significant long-term benefits.

With regard to personal care services, many more Medicaid recipients have been qualified for in-home visits than would otherwise have been at significant risk of entering nursing homes. There are two reasons. One is that the eligibility standards were set too loosely from the start. The other, more important reason is that North Carolina currently gives the private vendors who provide personal care services a major role in applying the eligibility criteria. You don’t have to think these vendors are crooks to recognize that the incentives point entirely in the wrong direction – in favor of spending tax money on marginal cases, rather than saving that tax money for higher priorities.

Diversion programs of any kind – in education, health care, or criminal justice – only pay for themselves if policymakers are willing to devise and enforce strict eligibility criteria. Perverse incentives often interfere with the process. In education, eligibility rules that limit new programs to pilot counties or to a small subset of students run up against pork-barrel politics. In health care, provider lobbies often understand complex issues better than anyone else and receive deference in medical decisions despite their financial incentive to tip the balance in favor of selling more goods or services.

In the five months remaining until the end of the fiscal year, there may not be much Lanier Cansler or anyone else can do to fix the underlying causes of our Medicaid dilemma. But we’ve got to start sometime.

Hood is president of the John Locke Foundation