It’s pretty easy to sympathize with both the nation’s governors and the Bush administration on Medicaid: President Bush wants cuts, and the governors don’t. Congress should consider this strategy: Reform now, cut later.

The governors, who held their annual winter meeting in Washington, D.C. earlier this month, are faced with such rapid growth in medical costs for the poor and disabled that it’s outstripping education as a state budget item. [IMGCAP(1)]

In state after state, governors are raising eligibility requirements and slashing beneficiaries from the rolls. On a bipartisan basis, they opposed Bush’s proposed $45 billion in cuts over a 10-year period.

It’s true that Bush’s proposed cuts — $60 billion in Medicaid, but $15 billion to be added back to the SCHIP program for low-income children — represent only a fraction of the costs of a program that’s destined to cost $5 trillion over the next 10 years.

But governors are faced with growing numbers of recipients and surging health costs — and feel they need every federal penny.

As officials of the National Governors Association point out, employers are dropping health insurance for about 3 percent of the work force every year, and Medicaid rolls are growing by the same amount. Moreover, the over-85 age group is getting bigger by 3.5 percent every year, causing a surge in costs for nursing home care.

Overall, the program — paid for by 55 percent federal funds and 45 percent state funds — costs more than $300 billion a year and will double over the next decade. Both governors and Bush officials say that’s “unsustainable.”

The Congressional Budget Office estimates that by 2040, Medicaid for the poor and Medicare for the elderly will eat up 20 percent of the nation’s gross national product. That’s the size of the entire federal budget now.

This situation cries out for massive reform — primarily, a comprehensive health care plan that will provide all Americans with basic health insurance (I’d make it mandatory) and investments in technology to make the system more efficient and to reduce medical errors, which are estimated to kill as many as 90,000 Americans every year.

It’s clear that national health reform isn’t going to happen under Bush. But the administration has come up with a list of Medicaid reforms that Congress ought to consider. Money aside, both the feds and the governors agree that Medicaid is a rigid, rule-bound program that prevents creative problem-solving.

Perhaps Congress should adopt the proposal of a bipartisan group of Senators led by Gordon Smith (R-Ore.) and Jeff Bingaman (D-N.M.) for a national commission to revise the program. But as Bush’s Medicaid chief, Mark McClellan, told me, “every year we wait on reforms, more people are going to lose their services.”

One Bush reform seems to be a no-brainer. Medicaid is a program for low-income people, yet routinely elderly people with significant assets transfer them to their adult children to become poor on paper so they can become eligible for publicly financed nursing home care.

Health and Human Services Secretary Mike Leavitt calls Medicaid “an inheritance-protection plan.” An entire wing of the legal profession has sprung up to help the well-off hide assets so they can get the government to pay for nursing homes that can cost up to $60,000 a year.

According to Stephen Moore, president of the Center for Long Term Care Financing in Seattle, you can have practically unlimited income and get the government to pay for nursing home care, because many forms of assets are exempted from calculations of wealth.

The Bush administration is proposing to tighten rules for asset transfer. It will save only about $4.5 billion over four years. What’s needed is a system that encourages (or requires) that seniors with homes take out “reverse mortgages” that will allow them to pay for nursing home care for one spouse out of home equity while the other lives in the home.

More important, younger workers should be encouraged — and this is part of the Bush plan — to open a “Long Term Partnership Account,” an asset that is exempt from calculation of wealth for Medicaid eligibility and can be built up to pay for nursing home care.

Congress ought to enact a means-tested tax deduction or credit to encourage young people to buy insurance for long-term care. And it ought to make the Medicaid program flexible enough to pay for at-home care, not just nursing home stays.

McClellan says that Medicaid law needs to be rewritten to allow for the same flexibility that’s now part of S-CHIP, whereby families can integrate public benefits with employer-based insurance plans to give children enhanced coverage. States “have to jump through hoops” to modify Medicaid in any way, he says.

The governors, too, crave flexibility. Some want to charge co-pays based on income to make Medicaid budgets stretch farther. Others want to give recipients a defined benefit and allow them to purchase their own health insurance. That would certainly entail pooling of recipients to hold down costs.

The Bush administration accuses states of “gaming” the system to inflate costs and pass them along to the federal government. Stopping that, it says, will save $40 billion over 10 years. “Gaming” should stop — but states are largely doing it because they are strapped.

In its budget resolutions, the House seems intent on imposing the cuts Bush wants while the Senate is slightly more governor-friendly. What’s needed is not shaving the bottom line but changes to the program’s design. Reform can lead to lower costs, and a better program.