With their one-time Recovery Act funds about to expire, budget conscious governors from around the nation are petitioning the Department of Health and Human Services to give states more flexibility in how they manage Medicaid. More than half the states “want permission to remove hundreds of thousands of people from the Medicaid insurance program,” and some conservative governors are proposing radical changes to how the program is financed.

Under the current arrangement, Medicaid — which provides health coverage to approximately 53 million lower income Americans — operates under a matching fund basis. That is, the federal government matches state spending on a per-claim basis; it pays a fixed percentage of each state’s Medicaid costs (anywhere between 50 and 75 percent), sending more money to the states as their costs increase. It in turn also requires states to maintain certain eligibility and benefit standards and grants waivers to states that seek to alter the program on a case-by-case basis.

But as Politico’s Sarah Kliff reports, GOP governors attending the National Governors Association’s winter meeting are now asking the federal government to permanently convert the the existing matching system into block grants, where states would receive a fixed dollar amount annually that would fall below current growth projections:

“For myself, I would take a capped blocked grant in return for true flexibility to run the program,” Mississippi Gov. Haley Barbour told reporters. “We could use money more widely.”

Barbour said that he’s heard “a lot of talk” about Medicaid block grants throughout the NGA conference and would expect to hear more of it as the meetings continue through Monday….

Florida Gov. Rick Scott even took to CNN’s “State of the Union” Sunday morning, before attending the NGA health meeting, to make the case for block grants.

“All of us know that Medicaid is a problem for the states,” he said. “So we are going to do a better job of managing our Medicaid population and our Medicaid program. We would like the federal government to just give us a block grant because I could spend the money way better without all the strings attached.”

While anyone would welcome state-centric proposals that reduce costs without undermining coverage, under this arrangement, the cost of the program is shifted from the federal government to the states, which would be responsible for bearing the cost of any increases in Medicaid spending once the capped federal contribution is exhausted. In all practicality, states would either have to increase their contribution to the program or (more realistically) cap enrollment, cut eligibility, stop offering mandatory benefits, lower provider reimbursements etc. As the CBO put it in examining Rep. Paul Ryan’s (R-WI) Medicaid block grant proposal: “reducing federal payments for Medicaid relative to currently projected amounts would probably require states to provide less extensive coverage, or to pay a larger share of the program’s total costs, than would be the case under current law.”

After all, had the block grant structure been in effect during the Great recession, when an increasing number of Americans lost their employer-sponsored health care coverage and turned to the Medicaid program, it’s likely that states would be in even more dire straights. Under the block grant proposal, states would have received significantly less from the federal government than under current law and would have had to absorb significantly higher Medicaid costs while dealing with plummeting state tax revenues and large budget shortfalls. That would meant a lot more people without coverage and as CAP’s Tony Carrk explains, a far higher unemployment rate.

Instead, the federal government reacted to the economic crisis by temporarily increasing its share of Medicaid funding in the Recovery Act. Those funds are set to expire on June 30 and states will have to make up for the budget shortfall until new federal funds can be used to expand the Medicaid program in 2014 (in accordance with the Affordable Care Act). HHS is working with states to find maximum savings and today President Obama asked the NGA to form a bipartisan task force that would develop solutions to lower health costs. But those proposals shouldn’t leave millions of lower income Americans without coverage or establish a system of financing that would force states to curtail their health programs during the periods of greatest need.

The New York Times’ Kevin Sack is reporting that President Obama is ready to endorse Sens. Ron Wyden’s (D-OR) and Scott Brown’s (R-MA) ‘state flexibility’ amendment, which would move up the date for when states can opt out of certain requirements of the Affordable Care Act and pursue innovative methods for expanding access and reducing costs. Under the measure, states can opt-out of the law’s individual mandate provision, the employer penalty for not providing coverage, standard benefit package design and the structure of the health insurance exchange beginning in 2014 so long as their alternative solutions cover as many beneficiaries with comprehensive coverage as the existing health law. Currently, states are not able to receive the waivers until 2017:

Senior administration officials said Mr. Obama would reveal to the National Governors Association in a speech on Monday morning that he backs legislation that would enable states to request federal permission to withdraw from the law’s mandates in 2014 rather than in 2017. The earlier date is when many of the act’s central provisions take effect, including requirements that most individuals obtain health insurance and that employers of a certain size offer coverage to workers or pay a penalty.

The announcement is the first time Mr. Obama has called for changing a central component of his signature health care law, although he has backed removing a specific tax provision that both parties regard as onerous on business. The shift comes as the law is under fierce attack in the courts and from Republicans on Capitol Hill and in statehouses around the country.

The bipartisan amendment that Mr. Obama is now embracing was first proposed in November, eight months after enactment of the Affordable Care Act, by Senators Ron Wyden, Democrat of Oregon, and Scott Brown, Republican of Massachusetts. Senator Mary L. Landrieu of Louisiana, a Democrat, is now a co-sponsor.

Obama’s endorsement is a boon for a state like Vermont — which is considering pursuing a single-payer health care system — and other states considering more progressive policy solutions, but it also serves an important political purpose. By allowing states to opt out of the individual mandate on the day that it goes into effect, the administration is giving states that are now challenging the policy an exit lever without sacrificing coverage or affordability standards. The amendment even allows the administration to adopt a more offensive tact as it moves into the 2012 election cycle, telling states that they need to focus on developing workable alternatives that can help bring down health care costs and expand coverage rather than filing lawsuits over the provision.

Still, it’s unclear how many states would be able to meet the requirements of the waiver. While Wyden has championed the “innovation” concept throughout the health debate, some progressive health policy analysts have questioned if states that adopt less drastic initiatives will be able to reform the health insurance market without implementing the individual mandate. Under the law, states would still have to abide by the popular insurance market reforms like prohibiting insurers from excluding coverage for pre-existing conditions based on health statue, guaranteeing the availability of coverage for all those who apply, and charging applicants a “community” premium.

January Angeles, a health policy analyst at the Center on Policy and Budget Priorities, for instance, argues that states would have a hard time implementing the guaranteed issue and community rating reforms if it does not compel younger and healthier individuals to enroll in coverage. “There is no way to implement those market reforms” without a mandate, she told me during an interview last year. “There is just no way to make it work and have the popular elements of reform.”

But Wyden’s office argues that “if a state can’t come up with a solution that meets those reforms and all of the other cost and coverage requirements then it won’t qualify for a waiver.” “Senator Wyden wrote the state waiver provision to be purposefully unspecific so that states would be free to innovate new ideas that none of us may have thought of yet,” Wyden’s communications director Jennifer Hoelzer wrote me in email.

Earlier this month, Sens. Lindsey Graham (R-SC) and John Barrasso (R-WY) introduced a more extreme measure would allow states to “opt out” of the individual mandate, Medicaid expansion, and employer requirements, but would exempt states from having to offer other coverage alternatives.