Health Opportunity Accounts could transform public health aid system.

New York now holds the lead on runaway Medicaid spending. To get a grip on the problem, politicians in Albany will have to create the right incentives, not just impose more government controls -- which are a major part of the problem.

When Medicare and Medicaid started, the former was far bigger. In 1970, Medicare accounted for 11 percent of the nation's health spending, and Medicaid just 7 percent. The latest figures, from 2004, show Medicaid taking up almost the same number of health dollars as Medicare: $293 billion versus $309 billion.

If it were not for the Medicare Part D prescription drug benefit, which shifts many poor, elderly Americans off Medicaid and to Medicare, the program for the poor would soon overtake Medicare. Medicaid has not grown twice as fast as Medicare because the number of poor Americans has increased twice as fast as the number of seniors over the last 40 years. Actually, Medicaid creates a truly appalling incentive for state politicians to unleash spending.

Ever since it began, Medicaid spending has been a shared state-federal responsibility. It covers what are called "mandatory" and "optional" populations and procedures. However, when states increase Medicaid spending by one dollar, it automatically pulls down at least one dollar from the federal government. For New York, the federal-state ratio is 1.06-to-1.

This means that a New York state politician can "earn" $2.06 worth of political capital by expanding Medicaid, while spending only $1 of "his" (actually, the state taxpayers') money. Up until now, the only way to restrict this perverse incentive has been through bureaucratic control from the top: the federal government has periodically (and stingily) issued waivers to states that want to change their programs. This has made it very challenging for local authorities to generate their own Medicaid reforms.

For example, Chemung County has received permission from the state to set up a pilot program that closely tracks Medicaid-financed services with locally produced software, but even this requires federal approval.

The New York Times, which has never seen a big government program it doesn't like, agrees that the Empire State's program is outrageous.

Last November, the newspaper ran a series of articles describing its waste and corruption. For example, able-bodied Medicaid patients were taking ambulettes -- wheelchair- accessible vehicles -- to get to their doctors' appointments, although the service is meant for the disabled. The reason, of course, was that Medicaid paid for ambulettes, making them free to the patients who otherwise would have to get to the doctor under their own steam.

New federal legislation gives states more freedom to implement local reforms if they give up the spending "ratchet" in exchange for block grants. One of the most important innovations is Health Opportunity Accounts, whereby the state can credit money toward a Medicaid beneficiary that he can spend only on health care (think food stamps or school vouchers) -- and he probably won't spend it on an ambulette unless he needs to.

When the patient leaves Medicaid, some of the credit goes with him into a Health Savings Account, a tax-advantaged account, like an IRA, for health care -- thus encouraging him to seek a job with health benefits instead of being dependent on the state.

Congress has given states more freedom to transform Medicaid responsibly. However, this is only a pilot program, limited to 10 states. Residents of the Empire State should demand that New York be one of those states.

John R. Graham, director of Health Care Studies at the Pacific Research Institute in San Francisco, is editor and contributing author of a new book, "What States Can Do to Reform Health Care: A Free-Market Primer." Guest View offers an opportunity to comment in-depth about an interest or to address specific issues that have public impact.