Every US policy maker knows that Medicaid presents vexing budget challenges, but a new analysis suggests that its costs are becoming truly unsustainable. McKinsey estimates that even after economic growth returns to a steady pace, this government health insurance program, which primarily serves the poor, will consume more than 75 percent of all new state revenues in 10 states, including Georgia, Indiana, and Oregon, by 2009. Medicaid will cost 11 other states, including Florida, New York, and Pennsylvania, from half to 75 percent of their incremental revenues (Exhibit 1). In an additional 22 states, this one program will consume 25 to 50 cents of each new tax dollar.¹

These results are obviously troubling for state leaders who have initiatives in education, public safety, transportation, and other critical areas high on their agendas, as well as for federal officials already grappling with record budget deficits. Yet they also present an opportunity. We believe that Medicaid's challenges have reached a critical point: the untenable nature of the status quo can be communicated compellingly to stakeholders, the press, and the public. As the risks of inaction—or of muddling...