Congress, governors and the new Secretary of Health and Human Services began negotiations yesterday on the future of Medicaid. Congress and the governors are trying to develop a relationship like the one that produced the changes in federal welfare law in 1996.

Sen. Grassley, (R-Iowa), Chairman of the Senate Finance Committee said that there needed to be some immediate savings in Medicaid and also enough flexibility for states to absorb the changes but it would be very difficult to reach agreement this year.

Medicaid spending has increased by 63% in the last five years, so that state and federal outlays together now total more than $300 billion a year. With no change in current law, the Congressional Budget Office predicts the cost will grow an average of 7.7% a year in the next decade.

Governors want to slow the growth of Medicaid, which they say is eating up state tax revenues they want to use for education.

Michael Leavitt, Secretary of Health and Human Services said the Bush administration wants to give states more freedom to decide who gets what benefits. At the same time, Sec. Leavitt said, the administration will crack down on what he described as abusive practices used by many states to maximize the federal Medicaid money they receive.

Governors fear that Congress, in an effort to reduce the federal deficit, will limit federal Medicaid spending without relieving the states of any of their legal or financial obligations.

President Bush proposes to cut $60 billion from projected federal Medicaid spending of $2.8 trillion in the next decade.

Leavitt has said that states should be free to provide less comprehensive benefits to “optional populations”, whom they are not required to cover.