The Obama administration Thursday offered to help budget-strapped governors find ways to reduce Medicaid costs, but did not agree to urgent requests to sharply cut eligibility for the program, which covers 48 million poor, disabled and elderly people.

In a letter to governors, Health and Human Services Secretary Kathleen Sebelius did say the health overhaul law allows states with deficits to cut people as long as they are adults who are not disabled or pregnant, and they have incomes above 133 percent of the federal poverty level ($14,500 for an individual).  Twenty-one states and the District of Columbia currently offer coverage to such adults above that income level.

She also promised to continue to “review what authority, if any, I have to waive” the law’s other eligibility requirements.

Beyond that, Sebelius said she would work with states to help them identify ways to lower Medicaid costs by improving quality. She said that states could save money by managing care better for the sickest Medicaid beneficiaries, by purchasing drugs more efficiently, and by decreasing payments that are made in error.

Governors are bristling against rules in the stimulus program and the health overhaul law that generally require them to maintain current Medicaid eligibility levels for adults until 2014, when much of the law kicks in, or risk losing federal matching funds. They say they need to be able to trim their Medicaid rolls now because their state budgets are in such dire straits – partly because stimulus funding that helped many prop up their health programs ends in June.

The Republican Governors Association isn’t satisfied with Sebelius’ response. Governors are “well aware of the current options available to them,”said spokesman Mike Schrimpf. “Secretary Sebelius’s cleverly buried response to governors is that she is still studying the issue. It has been nearly one month since Republican governors formally asked federal leaders to lift the excessive constraints placed on state governments by the maintenance of effort requirements. Governors continue to look forward to a direct response.”

The National Governors Association and the RGA recently urged congressional leaders to let them downsize their programs. Matt Salo, director of the Health and Human Services Committee at the NGA, said that some governors’ staff members are warning congressional offices that, unless they get help, they might have to ignore the law and change their eligibility rules anyway.

If that occurred, the federal government would have to decide whether to stop sending Medicaid money to those states. Even without the extra stimulus aid, the federal government on average pays 57 percent of the cost of the joint program; in some states it is as much as 75 percent.

Without rules requiring states to maintain eligibility levels, there “isn’t a mechanism that the states will use funding the way it is intended by Congress,” says Dan Mendelson, CEO of Avalere Health, a consulting firm. “States have taken a lot of federal money over the past couple of years with strings attached and these are the strings.”

Under the law, Medicaid will expand sharply in 2014 when 16 million more people are expected to become eligible for the program. The federal government will pick up the full tab for the newcomers for the first three years. By 2020, the federal share ratchets down to 90 percent.

Arizona’s governor was the first to ask for permission to drop people from the joint federal-state program, which states say is eating up huge portions of their budgets. If they don’t get approval, states warn they may need to slash payments to doctors and hospitals and make deep cuts in other programs such as education.

Republicans in the House generally want to allow states more leeway, but their only hope is to get some members of the Democratic-controlled Senate on board.

Sen. Max Baucus, D-Mont., who chairs the Senate Finance Committee, said in an interview he is aware that states are under pressure to cut eligibility and that he will “look at” options. Still, he said, any such effort should “find a way to maintain as much coverage as we can.”

He and other Democrats, including Iowa Sen. Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee, and House Minority Leader Nancy Pelosi of California, said they would like to extend the expiring Medicaid aid until 2014.

The odds are against making such a move. Republicans have complained bitterly about the stimulus funding. Now that they control the House, they’re stressing the need to narrow the ballooning federal budget deficit. 

Arizona, which says its Medicaid spending has gone from 17 percent of its general fund in 2007 to nearly 30 percent this year, recently asked the administration for permission to drop coverage for 280,000 Medicaid recipients. The state argues it’s already more generous than most states – it’s one of only 7 states that cover childless adults — and says Medicaid costs are jeopardizing other priorities.

Democrats in Congress have additional ideas, but most have little chance of moving forward because they go against Republican priorities of reducing federal spending and control.

Harkin, for example, said he also plans to look into an idea that has surfaced in the past to turn Medicaid over entirely to the federal government. “Maybe the federal government should take over the whole thing, and in exchange states would do other things,” he said.

Mendelson points to another past proposal for the federal government to pick up the nursing home costs for Medicaid enrollees who are also eligible for Medicare, the federal health program for the elderly.

The elderly and disabled account for the majority of Medicaid spending, with a good chunk of that being used for long term care. Medicaid payments represent 40 percent of all nursing home spending, according to the Kaiser Commission on Medicaid and the Uninsured. (KHN and the Kaiser Commission on Medicaid and the Uninsured are both part of the Kaiser Family Foundation.)  

While AARP’s state policy director JoAnn Lamphere says the idea is “intriguing,” it is “a long term policy discussion that not going to save the states right now.”