FRED DE SAM LAZARO: Medicaid was created in 1965 as part of a larger welfare bill to provide health insurance for low-income Americans. Shalandra Burton just turned 18, making her ineligible to remain on her mother's private health insurance policy. Pregnant with her first child, the Detroit woman is now eligible for Medicaid coverage.

SHALANDRA BURTON, Medicaid Applicant: Right now, it's kind of convenient, but once I, you know, get back on my feet, you know, and go to college and get a degree or get some kind of education and get another job and make some money, then I'll probably be able to buy insurance then.

FRED DE SAM LAZARO: The level of benefits Burton receives is determined by the state. Those benefits vary among states, which are allowed to administer Medicaid according to their own criteria within broad federal guidelines. The federal government provides matching funds, a share ranging from 50 to 85 percent, depending on the average income of the state's residents. Today, the total tab for Medicaid is $155 billion a year. But only 1/3 of those dollars are spent on the poor, the original intended beneficiaries. Two thirds of the Medicaid dollars actually go to elderly and disabled Americans, who've become impoverished by their need for long-term care and eventually qualify for Medicaid. Eugene Feingold is a professor of public health at the University of Michigan.

EUGENE FEINGOLD, University of Michigan: Medicaid pays for long-term care very often for middle class people who can't afford the cost of medical care--of the long-term care. And actually, that's the bulk of the spending in Medicaid, is not for welfare people but, rather, for middle income and other people who are getting long-term care and can't afford to pay for it.

TOMMIE VARNER, Medicaid Recipient: I've been here now going on starting the sixth year, and I love it here. All of my nurses and doctors, I'm so thankful for them all.

FRED DE SAM LAZARO: Eighty-seven year old Tommie Varner, a former construction worker, is one of 3.7 million elderly Americans who receive benefits from Medicaid. At this Detroit nursing home, the cost of a semi-private room and board is about $2700 a month. Varner's Social Security and pension cover only 1/4 of that cost. Under Medicaid rules, a beneficiary's savings and other assets must cover the rest until those funds are exhausted. Medicaid then takes over. It pays most of Varner's bills that his pensions don't cover. Nursing home director Lowell Schrup.

LOWELL SCHRUP, Evangelical Home of Detroit: Most of the people who are on our campus receive assistance from the state or the federal government in one manner or another. In our nursing home, about 90 percent of our 120 people who reside here are on Medicaid programs.

TEACHER: (working with impaired child) We're going to start with having you type all the letters you can reach.

FRED DE SAM LAZARO: Over the years, Medicaid eligibility has also been extended to some 4.9 million disabled Americans, including six-year-old Joshua Ghrist, who is visually impaired and has cerebral palsy.

TEACHER: All right. Let's see you type a few more letters, and then we'll be finished with our typing.

FRED DE SAM LAZARO: Joshua spent most of his first three years in hospitals, undergoing surgery on 38 separate occasions. He's since stabilized enough to live at home with his mother, Angi, but also with considerable home health care services paid for by Medicaid.

ANGI GHRIST, Mother of Medicaid Recipient: He has 16 different medications. We carry medications all the time in case he goes into a severe seizure or in case his airway shuts down. Oxygen is a regular part of his life. Wherever we go, we carry oxygen. He's regularly on a feeding pump. He's on monitors to monitor his heart rate, monitor his respiration rate, to measure the level of oxygen in his blood to make sure that he's processing oxygen okay.

FRED DE SAM LAZARO: A few years ago, Joshua Ghrist would likely not have survived his medical challenges, but the modern medical technology that sustains him comes at a cost. Technology has been one of the biggest factors that is driving up the cost of Medicaid. Another factor is growing enrollment in the program.

DOCTOR: (talking to pregnant patient) Having a contraction?

WOMAN: Yeah.

FRED DE SAM LAZARO: The state of Michigan, for example, extends Medicaid coverage to most uninsured pregnant women and their children, not just those on welfare. This has increased the cost of Medicaid, especially for the federal government. Many states have been able to manipulate the matching fund formulas to increase the federal share of the jointly-financed program.

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