Worried about a huge and growing Medicaid deficit within the next five years, Vermont has signed on to a one-of-a-kind Medicaid waiver. The state has agreed to an overall ceiling of $4.7 billion in Medicaid expenditures over the next five years.

The agreement means that any outlays above the cap would have to be covered entirely by the state. There will be no federal match for additional costs. In return, however, the state gets new flexibility. To keep its costs down, it will be allowed to establish its own managed-care organization. That system will provide care for all Medicaid beneficiaries--except those in long-term care. That care falls under a separate, newly created waiver program.

With any profits engendered by its managed-care operation, the state will be allowed to "invest in health care-related programs or services that wouldn't otherwise be eligible under Medicaid," says Susan Besio, director of planning and administration at the state Agency of Human Services. Arkansas' waiver allows an expansion of Medicaid coverage to the working poor with a benefit package that does not meet usual Medicaid standards: six doctor visits a year, seven annual inpatient hospital days and two prescription drugs a month, among other limits. Beneficiaries will have to pay a small annual deductible plus 15 percent of the cost of each service, with a maximum of $1,000 a year for out-of-pocket expenses.

The idea is to provide small businesses with an insurance program that they and their employees can afford. Only businesses that have all employees sign on can particpate in the program.