WASHINGTON - The Bush administration is headed for a confrontation with states over the financing of Medicaid, the nation's largest health program, as federal officials crack down on arrangements used by many states to shift costs to the federal government.
The federal action comes as states, struggling with severe fiscal problems, are cutting benefits and restricting eligibility for the program, which serves 50 million low-income people each year.
Federal officials and auditors contend that states use creative bookkeeping and other ploys to obtain large amounts of federal Medicaid money without paying their share of the costs.
Washington and the states split Medicaid costs, with the federal portion at least 50 percent and sometimes more than 70 percent. But in many cases, the administration says, states have paid their share with "phantom dollars" rather than with state or local tax revenues.
State officials acknowledge their desire to make the most of federal Medicaid payments as health costs are soaring. The National Conference of State Legislatures advises its members on "Medicaid maximization" strategies, and says such techniques are legitimate and desperately needed to avoid cutting benefits for poor people.
The dispute will be high on the agenda when National Governors Association holds its winter meeting here this week.
The General Accounting Office, an investigative arm of Congress, recently added Medicaid to its list of high-risk programs. "States have used various financing schemes to generate excessive federal Medicaid matching funds while their own share of expenditures has remained unchanged or decreased," it said.
In some cases, it said, "states have created the illusion that they have made large Medicaid payments" to county hospitals and nursing homes, and they claimed federal Medicaid money to help defray the costs, even as they required counties to return most of the money to the state.
Federal investigators have found such practices in Alabama, Illinois, Michigan, Nebraska, North Carolina, Pennsylvania and Washington, among other states. In his new budget, President Bush said he could save $1.5 billion next year and $23.6 billion in the coming decade by restoring the "fiscal integrity" of Medicaid.
"The Medicaid program must be a federal-state partnership, not an exercise in financial gamesmanship," said Dennis G. Smith, the top federal official for Medicaid.
In a notice published this month in the Federal Register and in the draft of a letter to state Medicaid directors, the Bush administration says it will soon require states to provide a detailed description of "each source of revenue" used to pay their share of Medicaid costs.
Under the plan, state Medicaid budgets would be subject to federal approval, and states could not draw federal money to cover additional costs "unless and until the expenditures are approved" by the federal government.
State officials bristled at the prospect of such a change.
"Federal officials see themselves as having prior approval over state budgets. State legislators do not see that as a proper role," said Mary B. Kennedy, the Medicaid director in Minnesota.