The squeeze is on. The states' partner in Medicaid--the federal government--has the program in its budgetary sights. At first, federal officials were just making veiled threats about capping costs and turning Medicaid into a grant program. Now, the U.S. Congress has taken the overt step of budgeting in $10 billion in cuts to the program over the next five years.

The driving reason behind all this is the growing cost of Medicaid. The federal price tag for the program is escalating, and that's before down-at-the-heels baby boomers begin signing on for long-term care.

The federal government is not, of course, the only taxpayer-supported body to worry about sustainability. It's even rougher in the states, where books have to be balanced every year. Medicaid now eats up nearly a quarter of state budgets, but the real difference for the states is that they are in the trenches where the immediate solutions- -the twin pains of cutting benefits and slashing rolls--are experienced most acutely. Dirk Kempthorne, the governor of Idaho, often talks about how he never saw a tax cut he didn't like and how he's inherently averse to tax increases. And yet, a few years ago, when Idaho's budget was in extremis and he was set to make deep cuts in the Medicaid program, he was approached after one of his speeches by a man in a wheelchair who told him that Medicaid was his only means of continuing to live an independent life outside of an institution. Kempthorne says he was so moved by the reality of what the diminution in services would mean to citizens of his state, that he reversed course and called for--and won--an increase in taxes in order to avoid the cuts.

But it's not just Medicaid costs that put states in a revenue bind. So do program cuts. There's a fiscal return on states' health care spending. Money put out to pay for physician visits, hospital or nursing home stays, prescription drugs and various therapies that Medicaid patients require is cash that creates jobs--jobs that help support a state's economy.

A report by the Kaiser Commission on Medicaid and the Uninsured looked at studies done in 17 states on the effect Medicaid spending cuts have on local economies. The studies took into account, of course, the multiplier effect of Medicaid spending. That is, the matching federal money that washes into a state's economy for every Medicaid dollar the state spends, as well as the negative impact when state--and federal--dollars are cut from the program. Not surprisingly, states with the higher matching rates--three federal dollars for every state dollar--have the most to lose, economically speaking. The studies found that in all the states decreases in Medicaid spending translated into reductions in employment, income, state tax revenue and economic output. In fiscal 2003, for instance, Florida slashed $49.5 million from its $4 billion a year in state Medicaid spending. As a result, $59 million was lost in salaries and wages and $155 million in economic activity.

As Tennessee Governor Phil Bredesen prepares to remove 300,000 from TennCare's rolls, companies that formed to serve TennCare patients or support the system say they expect to see lower revenues, and hospitals across the state expect to lose a total of $650 million in revenue; some small, rural hospitals will probably have to close.

Tommy Thompson, a former Wisconsin governor and U.S. Health and Human Services secretary, noted in a recent interview, "The federal match makes Medicaid a hell of a buy." When he was governor in the early 1990s, Wisconsin had to put up only 41 cents to spend $1 on its Medicaid program. Nonetheless, in hard times, he acknowledges, "it can be tough to come up with that 41 cents."

Thompson has a proposition to solve Medicaid's spending woes: Split Medicaid into two halves--acute care and long-term care--and change the ratio of federal versus state payments for each half. Let the states pay a bigger share for acute care--75 percent--with more flexibility in meeting the primary-care needs of women and children. Then let the feds take on more responsibility--75 percent--for long- term care. States would ante up 25 percent and administer the program. The feds could offer tax credits for family caregivers and other options that would give those needing care the opportunity to control their destiny. "The train is coming down the tracks," Thompson says. "We have to get a conversation going."

It's a point reiterated by the current HHS secretary, Michael Leavitt, who is a former governor of Utah. He notes that no one cares about Medicaid as much as the states do. "For Congress, it's just a budgetary item. Governors have to find consensus on things they agree on and go to Congress and break the door down. We have to have changes, and we have to have them now."