Medicaid was launched back in 1965 with the laudable aim of providing medical care to the poor. Since then, though, its budget has grown out of all proportion to the number of poor people in America, and to the actual cost of medical care.

Careening out of control, this welfare program threatens to devour more and more of our scarce health resources.

It's not just that Medicaid spending amounts to more than $300 billion a year, up more than 50 percent in the last five years. It's also that its growth defies all logic.

This program for the most needy now affects over 50 million Americans, or more than one in six. Without major surgery, the Congressional Budget Office projects that the cost of Medicaid will nearly double by 2012.

It's true that the cost of health care in general has risen over the last four decades. Every American spent almost five times as much on private health care in 2004 as in 1967, adjusted for inflation. But the amount every American contributed to Medicaid went up in that same period by 14 times.

How can this be? At first, one might assume a dramatic increase in the number of poor people. In fact, though, from 1970 to 2003, the number of people living below the poverty line went from just 12.5 percent to 12.6 percent of the total population.

Meanwhile, compare Medicaid to Medicare, the federal program for the elderly. From 1970 to 2003, the number of seniors in the U.S. went from 9.9 percent of the population to 12 percent, a significant jump.

Yet from 1967 to 2004, while Medicaid spending went up 14-fold, spending on Medicare increased by less than 10 times.

So what's going on here?

Part of the problem is that our Medicaid system, which is paid out of both state and federal taxes, perversely encourages states to spend more, regardless of how useful those dollars may be.

While Medicare applies to a defined group — those over 65 — Medicaid gives states flexibility in deciding who is eligible. Federal law divides recipients and services into "mandatory" and "optional" groups, yet Washington matches states' Medicaid budgets at least dollar for dollar, regardless of which category is getting the money.

State governments, of course, seek to get as many tax dollars as possible from Washington, 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.

This unlimited matching-funds system has many drawbacks. Mission creep is one: A system set up to serve the poorest now covers many citizens with other options. About 12 percent of adults who are enrolled in Medicaid also have access to employer-sponsored health insurance.

Unfair national distribution is another problem. New York, with less than 8 percent of the nation's poor, received 13 percent of the federal government's Medicaid matching funds in 2004, whereas Texas, with more than 10 percent of the country's poor, received only 6 percent of the funds, according to an analysis by Pamela Villareal of the National Center for Policy Analysis.

Nevertheless, some states have tried effective reforms. For example, "cash and counseling" projects in New Jersey, Arkansas and Florida, which give the Medicaid subsidy straight to the patient instead of the provider, have shown marked success in improving patient choice, access and quality of care.

Unfortunately, most state governors have been uninterested in real reform. That's because the system still gives them a blank check.

There's a federal solution that isn't complicated, though it will take some political will to bring about. Instead of matching the states, no matter what they spend, Washington should give them an annual Medicaid lump sum.

Once state politicians are forced to make real choices about how to allocate that money, we can expect a flourishing of Medicaid reforms that will save taxpayers and the federal budget — and bring real benefits to recipients.

John Graham is director of health care studies at the Pacific Research Institute.
© 2006 The Albany Herald/Triple Crown Media