States are on a collision course with fiscal reality. They’ll crash on July 1, when the extra Medicaid money they’ve been getting from the federal “stimulus” disappears.

The generous federal Medicaid subsidy has led to a large expansion of Medicaid, the joint federal-state health program originally aimed at serving the poor. The recession has further swelled the number of enrollees. Today, Medicaid covers one of every six Americans.

Total federal and state Medicaid spending has quintupled over the past two decades. Even before the recession, states struggled to pay their Medicaid bills. Today, the program consumes 22 percent of the typical state budget. Over the past two years, Washington poured more than $100 billion of “stimulus” into state coffers, but that only exacerbated the problem and delayed the day of fiscal reckoning.

Meanwhile, Obamacare has placed states in a budgetary straightjacket. The federal legislation imposes strict “maintenance-of-effort” eligibility requirements on states. If states tighten Medicaid eligibility criteria, they’ll lose all federal funding for the program.

Little wonder state leaders are asking Washington to cut them some slack. All 29 Republican governors have written Congress and the White House seeking repeal of the “maintenance-of-effort” requirements. But states need even more than that. Washington should give them the flexibility needed to better manage their programs, control costs and implement reforms that will transform the broken Medicaid program.

Current Medicaid policy is very government-centric, with lots of mandates and guidelines pertaining to eligibility and benefit packages. Medicaid offers a fairly comprehensive, one-size-fits-all benefits package and pays providers a set amount for delivering those services.

States have tended to control costs by cutting what they pay doctors to provide those benefits. Low reimbursement rates (combined with mountains of bureaucratic paperwork) already have led many doctors to stop accepting new Medicaid patients or to drop out of the program altogether. As a result, the growing population of Medicaid recipients is finding access to care harder and harder to come by.

This situation may contribute to a lower quality of care provided. A recent University of Virginia study, for example, found that Medicaid patients suffered worse surgical outcomes than persons without insurance. Converting Medicaid to a premium-support program would fundamentally alter this dysfunctional dynamic. States would use Medicaid funds to give enrollees vouchers to purchase private health coverage that would suit their needs. This would immediately improve access to providers. And states would likely experience budgetary savings.

Savings would derive from:

• Greater efficiency of coverage. Enrollees would be able to select plans that offer coverage they want. Moreover, all members of a family could be covered by a single policy #8212; unlike the current system, in which some family members are covered by Medicaid and others by private plans.

• Administrative savings. States would no longer need to verify claims and directly reimburse providers.

• A more appropriate use of medical care, driven in part by continuity of coverage.

Governors also could pursue other cost-saving techniques. They could, for example, allow greater cost-sharing by enrollees. Excessive consumption of health care that provides little value is a serious budgetary problem. Having some “skin in the game” discourages unnecessary use of medical services and encourages enrollees to seek the most appropriate treatment venues (e.g., a doctor’s office rather than an emergency room for non-urgent conditions).

And recipients should pay premiums based on their income. Basing premiums on a sliding scale would channel more assistance to those who need it most while having most beneficiaries contribute toward the cost of their care.

Many other cost-saving approaches are possible as well. For example, Medicaid nursing-home coverage is easy to attain. There is no stringent income test for eligibility, and individuals may keep a small fortune in assets (such as home equity of $500,000) and still qualify. On a recent trip to New York, a Medicaid eligibility case worker told me that they occasionally still get poor people on Medicaid for long-term care services.

States can start right now to embrace these changes. However, under the current structure, they can go only so far. States need additional federal flexibility to make these policies work better. Perhaps most important, in exchange for more flexibility, the current open-ended federal reimbursement of state Medicaid spending should be replaced with fixed state allotments. This would discourage states from overspending on Medicaid.

Fiscal reality means that states must rein in soaring Medicaid spending. States will do all they can within the confines of existing federal restrictions. But given greater flexibility from the feds, states could enact bolder reforms that promise not just to reduce Medicaid spending, but simultaneously to improve patient access to care and the quality of care delivered.

The question is: Will Washington give up power and allow states to reform the broken Medicaid program from the bottom up?

Brian Blase is a policy analyst in the Heritage Foundation’s Center for Health Policy Studies.