This summer, a federal court overturned Maryland's so-called Fair Share Health Care law. This law would have forced large employers, primarily Wal-Mart, to spend at least 8 percent of their payrolls on health care or contribute an equal amount to Maryland Medicaid. This wrongheaded bill arose from the notion that Wal-Mart relies on Medicaid to provide health care to many of its employees, thus forcing other taxpayers to subsidize its labor costs.

Medicaid spending is indeed out of control, but it's not because companies such as Wal-Mart are abusing it. Rather, it's because the program gives politicians an incentive to overspend. Medicaid, which is paid out of state and federal taxes, perversely encourages all states to spend more, regardless of how useful those dollars may be. That's because the law requires the federal government to match each state's Medicaid funding. When Maryland spends an extra dollar on Medicaid, the federal government is required to pitch in a matching dollar - and there is nothing Congress can do to stop it.

This is profoundly undemocratic. The federal legislature has little control over how federal taxes are spent on Medicaid, and each state legislature can effectively tax the 49 other states without their consent. The results are both predictable and appalling.

National Medicaid spending amounts to more than $300 billion a year, up more than 50 percent in the last five years. The program now affects more than 50 million Americans - more than one in six. The Congressional Budget Office projects that without major surgery, the cost of Medicaid will nearly double by 2012.

According to data from the Centers for Medicare and Medicaid Services in Baltimore, the average American spent (adjusted for inflation) almost five times as much on private health care in 2004 as in 1967. The amount contributed to Medicaid, however, shot up by 14 times, even though there has not been a big increase in the number of poor people. From 1970 to 2003, the number of people living below the poverty line went from 12.5 percent to 12.6 percent.

Meanwhile, the number of seniors grew from 9.9 percent of the population to 12 percent, a significant jump. Yet Medicaid is even outpacing Medicare, the health program for senior citizens. While Medicaid spending went up fourteen-fold, spending on Medicare increased by less than 10 times.

It's easy for states to succumb to the spending bug, because federal law divides Medicaid recipients and services into "mandatory" and "optional" groups. So, states have reached out to enroll "optional" patients with "optional" illnesses. As a result, optional coverage is now the norm. Only 39 percent of Medicaid spending in 2001 was on mandatory coverage.

Indeed, about 12 percent of adults who are enrolled in Medicaid also have access to employer-sponsored health insurance.

Ironically, Maryland's Fair Share law would have made this worse. For every Wal-Mart employee earning $20,000 who did not receive health benefits from the company, Fair Share would have levied a surtax of $1,600, payable to Maryland Medicaid.

However, this would have automatically pulled in another $1,600 from the federal government - which would have increased the incentive for employees to stay on (or move to) Medicaid rather than seek good private health insurance.

As such, bashing Wal-Mart with the Fair Share law would not have made either individuals or employers more responsible for health care.

The solution to controlling Medicaid costs lies in restructuring how we pay for it by removing automatic federal matching payments. Instead of matching the states, no matter what they spend, Washington should give them an annual Medicaid lump sum based on the number of residents in the state. Calculating this figure is straightforward arithmetic.

This simple spending reform would eliminate the incentive for states to increase Medicaid spending, heedless of the cost. Alongside this, the federal government could greatly increase the freedom of states to innovate in how they deliver Medicaid.

The current Medicaid bureaucracy is extremely burdensome, because even the smallest reforms (at the county level) have to be federally approved. This regulatory nightmare is an attempt to control spending - but it's obviously a failure.

With spending reform, the need for this bureaucracy would diminish. Once state politicians were forced to make more fiscally responsible choices about how to allocate Medicaid money, we could expect a flourishing of Medicaid reforms that would save taxpayers money and improve individuals' health insurance choices - without punishing employers such as Wal-Mart.