When the patient is Medicaid

Prepare for one of the boldest experiments in a government service program since welfare reform in 1996. Florida, South Carolina, and other states are moving to transform Medicaid - healthcare for the poor and disabled - into a system that would provide tax dollars for recipients to choose a health plan best for them.

Currently, Medicaid defines the available benefits for the more than 50 million Americans in need of this $300 billion, joint federal-state program. It's a system, though, that gives few incentives to contain costs or to use many types of alternative care. As a result, Medicaid is eating about one-fifth of state treasuries and widening the federal deficit, as increases in healthcare prices far outpace inflation or tax revenues. [Editor's note: The original version misidentified Medicaid.]

Efforts by Congress to trim or limit Medicaid are in political deadlock. (Medicare, which serves the elderly, is also in need of major reform.) Many states can't afford to wait for Washington to act, so some are eyeing a market-based approach. They hope to tap competitive pressures among private healthcare plans to help contain Medicaid's budget. That approach might help reduce the micromanaging of healthcare by states for a large portion of their citizens. And it could provide more incentives for preventive healthcare, as private plans would seek to limit their costs.

While Colorado already has a very limited Medicaid experiment in place for the severely disabled, known as Consumer-Directed Attendant Support, Florida may soon adopt comprehensive reform that could become a national model. Gov. Jeb Bush recently received federal approval to set up a demonstration project in Broward and Duval counties, and he hopes the state legislature will approve the plan next month. South Carolina's governor, Mark Sanford, has asked for federal approval of a similar plan. [Editor's note: The original version misidentified Governor Sanford.]

The Florida plan would provide those eligible for Medicaid with enough money based on their health condition to buy coverage from a menu of insurers approved by the state, many of whom might tailor coverage to specific groups. The aim is to use free-market pressures among insurers to keep down medical costs.

Whatever money recipients don't spend could be put in a special account for out-of-pocket medical expenses. In some cases, recipients could opt out of Medicaid by having government subsidize their employer's healthcare plan. In special cases, especially for many children, certain guaranteed benefits would remain.

Mr. Bush's decision to keep this experiment limited to two counties is a wise one. Before the program expands, the rules may need to be adjusted to deal with potential challenges: Will incentives be strong enough to attract enough insurers? Can the state accurately estimate the average cost of each health need? Will many recipients be unable to make a choice among private insurers? (Patients will be offered "choice counselors.") Who will pay for expensive treatments beyond any limits set? How easily can an insurance provider drop a patient?

Any one of these possible problems could sink an otherwise prudent proposal for Medicaid reform. But as with welfare reform, states can lead the way where Congress won't.•