WHERE IT MAY REALLY HURT

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With this rising tide of the aging and disabled, how will states meet tight new budget targets? The options aren't pretty. They can drop people from the rolls, but that makes the problem of the uninsured worse. Employer-based health coverage has already declined in recent years as companies turn to part-time workers who don't get benefits--or simply lay people off. Medicaid has helped limit the damage caused by these cutbacks. (Without it, according to the independent Kaiser Commission on the Future of Medicaid, 9 million more Americans would be uninsured today.) But if the G.O.P. prevails, the ranks of the uninsured seem sure to grow. The Urban Institute, a Washington research group, projects that between 4 million and 9 million Americans will lose Medicaid coverage, depending on how states carry out the change. As a result, the cuts could inadvertently poison the prospects for welfare reform. How? It's a matter of incentives. As states cut back, they're likely to leave coverage for the truly destitute intact but drop it for working families struggling near the poverty line. Losing the Medicaid that covers their kids will be another way of telling these Americans that they're better off staying on the dole, where health coverage remains guaranteed, at least for now.

Cutting payments to doctors and hospitals is another option. But Medicaid already pays far less to health providers than Medicare and private insurers pay; nursing homes, for example, often get 25% to 30% less. If payments fall further, more doctors and hospitals could simply refuse to treat Medicaid patients. Managed care, meanwhile, is still touted as a cost-saving panacea. And it does hold promise, as many state experiments attest. But there may be only so much efficiency to be extracted from the treatment of, say, disabled seniors tethered to oxygen machines.

In Medicare there are more than a few places to save money. For example, the government can raise premiums, co-payments and deductibles for the middle- and upper-income beneficiaries who don't really need generous subsidies from the feds. Republicans have had the courage to call for these increases, which make sense. President Clinton has hypocritically assailed them, while his own Medicare blueprint does basically the same. But such costs for the poor or near poor can't really be raised. In fact, Medicare and Medicaid are intertwined in a way that ensures that every time Medicare premiums go up, Medicaid's costs automatically rise as well, since Medicaid pays the Medicare premium expenses for 4 million needy seniors.

Given the box they'll be in, what are states to do? In the next recession, with demands on Medicaid rising and the feds saying, "That's your problem," the states will be the site of an awful showdown. The powerful elderly and nursing-home lobbies will be fighting for Medicaid expansions to serve seniors. The only pot of money big enough to raid will be education, a state's biggest expense, which averages 30% of state spending. If state legislatures bow to pressure and steal from the classroom, communities will have to raise property taxes to protect their local schools.