Facing ever-increasing costs for health care, officials in Vermont have brokered a landmark deal with the federal government. The state will get more flexibility in managing and distributing Medicaid funds. In exchange, it will accept a limit on the amount of federal Medicaid money it receives over the next five years.

Spending on the program will be capped at $4.7 billion, with the federal government covering about 60 percent of the funding. State officials estimate that the deal, the first of its kind, will save Vermont up to $165 million over that five-year period, because the state predicts it will spend less than the $4.7 billion.

While Medicaid expenditures have become a serious concern for most states in recent years, the problem in Vermont is even more acute. In the past decade, the state has grown its Medicaid program to cover more citizens, including some middle-class families. Currently, the program provides health coverage for one in every four Vermonters. In response to rising medical costs, the state in the past has tried to contain Medicaid expenditures by asking some beneficiaries to pay additional premiums and co-payments and imposing new restrictions on Medicaid users. Under the new plan, the state would disburse Medicaid money through a managed care organization, which would be funded by fees for each insurance recipient.

Critics of the recent state-federal deal say Vermont ultimately may not save any money and could even be forced to pay more. They say the plan leaves Vermont exposed if health care costs continue to spiral up in the next few years, because the federal government won't have to increase its contribution until 2010. Even so, other states will be watching the experiment closely.