RALEIGH – Medicaid has been the single-biggest cost driver in state budgets throughout the country. Growing in most places far faster than education, transportation, or law-enforcement budgets, Medicaid programs spent more than $300 billion in state and federal funds in 2006, up nearly 50 percent from 2000. North Carolina’s experience with Medicaid growth has been similar.

Something had to give, if states were to avoid massive tax hikes or a major resource shift from public schools and colleges to state health care expenditures. In this current economic slowdown, which has crimped state revenue growth, that something is proving to be Medicaid itself.

Reeling from huge budget deficits, California cut its Medicaid reimbursements to providers by 10 percent and is preparing to tighten eligibility. New York plans to slash reimbursements, too, as does Florida. Maine has added a $25 enrollment fee for adult Medicaid recipients.

Not surprisingly, there is a political backlash against governors and state lawmakers enacting these policy responses. It’s always important to remember that while Medicaid appears to be a program benefiting the poor, it is actually a funding device that routes billions of dollars a year to affluent doctors, hospitals, medical-products manufacturers, and other providers. They have a strong incentive to lobby policymakers and influence elections. They also form large constituencies in both major political parties (think docs and drug-company execs among the Republicans and unions representing health-care workers among the Democrats).

Moreover, some of the critics have a good point when they question the wisdom of states enacting sudden changes in Medicaid reimbursements or eligibility, in reaction to fiscal emergency, rather than legislating a comprehensive, long-term reform of the medical safety net as a whole. Such critics would have more credibility, however, if they had not spent the past decade advocating further Medicaid expansion and resisting fundamental changes in the program to bring it into line with reality.

Comprehensive reform inherently means disaggregating Medicaid into its constituent parts and addressing the unique challenges of each. For the able-bodied children and adult caseload, Medicaid presents the same kinds of perverse incentives that traditional first-dollar, employer-based health insurance did. When patients bear little direct cost when they consume medical services, they tend to consume them wastefully. In the private market for health plans, where costs have also been soaring and eating into the take-home pay of average Americans, employers have been raising deductibles, expanding cost-sharing, encouraging wellness, and experimenting with savings-based financing of routine expenses (either through flex accounts, health-reimbursement accounts, or health savings accounts). Similar financial incentives to make better health-care decisions, even modest ones, will be necessary in Medicaid, too.

The more-serious problem, actually, lies in the elderly and disabled components of the Medicaid caseload, by far the more expensive ones. Earlier this year, JLF published a policy report on North Carolina’s failure to address long-term care in a way that is both fiscally sustainable and friendlier to families. The state should send an unmistakable message that taxpayer-funded care in nursing homes is a welfare program, intended only for desperately poor individuals who have no families to take care of them, rather than a middle-class entitlement to be secured through clever financial planning and attorney-assisted fraud.

Restructuring Medicaid will be a time-consuming, complicated process. It is absolutely true that careful reforms are unlikely to be enacted by panicked state legislators in the midst of a fiscal crisis. But if not then, when?

Hood is president of the John Locke Foundation.