This Wall Street Journal ($) article is an excellent overview of how subsidizing Medicaid is overwhelming state budgets across the country. The article uses the state of Mississippi as an example, where federal and state funding of the program has doubled from $1.8 billion to $3.5 billion over the past five years:

In the current fiscal year, which ends June 30, Medicaid is projected to cost $268 million more than the state budgeted. Officials are now warning that the program will run out of money by the end of this month unless the legislature passes an emergency appropriation. To open up funds for Medicaid, the state has slashed road construction and may delay plans to raise the salaries of public-school teachers who earn an average of about $35,000 a year.
Forty years ago, Congress, as an afterthought to the Medicare program for the elderly, created Medicaid to help pay for the medical needs of about four million low-income people. Today, the program covers 53 million people — nearly one in every six Americans — and costs $300 billion a year in federal and state funds, recently surpassing spending on the federal Medicare program. In some states, Medicaid accounts for one-third of the budget.

The article is quite good in describing the many facets of the dilemma, including the issue of how to ration care, the under-representation of poor people who truly need some type of subsidy for medical costs, and the knotty problem of trying to make a flawed government program more efficient:

As states try to slash costs under current rules, they run into many roadblocks. Federal law mandates that states must cover many types of care, such as pregnancy care for certain low-income women. Reducing the number of beneficiaries is hard because they often have nowhere else to turn. What’s more, because Medicaid is a “fee for service” program that pays doctors and hospitals every time they treat a fever or patch up a cut, it’s difficult to encourage efficiency.
Patients, too, have little incentive to ration their own care because they pay at most a small sum to see the doctor. “When something is free, people don’t care what it costs,” says [Governor Haley] Barbour in Mississippi.

Which reminds me of an observation that Milton Friedman made in an interview awhile back about the inefficiency of federal programs that interfere in the market’s allocation of services and products:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.
Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.
Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!
Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.

Read the entire article. As with the entire employer insurance-based, third party payor system of American health care finance, the Medicaid program has grown into a hulking mess largely because of the skewed economic incentives involved. Absent addressing the fundamental problem — i.e., the subversion of market forces in the allocation of health care — reforming the Medicaid program will be akin to rearranging the deck chairs on the Titanic.
Social Security reform is necessary over the long term, but the more pressing need in his country is the reform of the health care finance system. The introduction of Health Savings Accounts is a good start, but the Bush Administration and Republican Party’s reluntance to address the fundamental problems in our society’s third party payor system of financing health care may doom our children and grandchildren to the worst of all results — that is, socialized health care finance by default.