Debate over Gov. Scott Walker's budget-cutting plan could soon shift to a program that accounts for half of the state's $3.6 billion budget gap over the next two years: Medicaid.

At least 50,000 people could lose Medicaid coverage, and many others could face increased fees, reduced benefits or other hurdles. Walker and the Legislature last week proposed giving the state Department of Health Services new powers to seek reforms in Wisconsin's version of the state-federal health plan for the poor.

Dennis Smith, the new health department secretary, is a former federal Medicaid official who has called for states to drop out of the program entirely. With Walker set to release his upcoming budget March 1, Smith's presence could signal dramatic changes.

"It's making us watch carefully what the department is going to do with all this new flexibility," said Jon Peacock, research director for the Wisconsin Council on Children and Families, an advocacy group.

Medicaid, a group of health plans including BadgerCare Plus, Family Care and SeniorCare, covers 1.2 million people in Wisconsin, or one in five residents. With an annual budget of $6.7 billion — roughly 60 percent paid by the federal government — the program faces a state budget deficit of $1.8 billion over the next two fiscal years beginning July 1.

Enrollment has swelled in recent years, as former Gov. Jim Doyle expanded eligibility just before the economic downturn caused many people to lose jobs with insurance and turn to the state for help.

Children, low-income parents and some childless adults make up about 75 percent of enrollees. But the remainder, mainly people who are elderly or disabled, account for most of the spending, such as nursing home care.

Cullen Werwie, Walker's spokesman, said changes are needed to plug the $1.8 billion hole and prepare for health care reform.

Darrick DeMeuse, a former Madison resident now living in Green Bay, signed up for the BadgerCare Plus Core Plan in 2009 after losing jobs at Walgreen Drug Store and Shopko and being without insurance for a decade.

DeMeuse, 32, had a painful cyst for years until his state coverage let him have it surgically removed. He's had temporary jobs recently but hasn't found steady work.

Without the insurance, he said, "I'd still be in pain." Now, "I'm afraid they'll take it away. With the way jobs are now, it's pretty scary."

'Emergency rules'

Walker's budget repair bill for the current fiscal year, introduced last week but stalled by protests, would allow the health department to make "emergency rules" for Medicaid that could restrict eligibility, increase premiums, modify benefits or revise reimbursements to doctors and hospitals.

Only the Legislature's budget committee would review the rules, something the whole body has done before. The plan would "significantly modify" Medicaid and "supersede most statutory provisions," a Legislative Fiscal Bureau analysis said.

It's unclear, however, how much the state can do without federal approval, especially under the federal health reform law passed last year and now being challenged in court. The law requires states to maintain their Medicaid eligibility criteria through 2014, even if they accept people with higher incomes than required, as Wisconsin does.

Under the budget repair bill, the health department would seek an exemption so it could review people's income levels more frequently, verify their residency and check if they're eligible for private insurance, Smith said.

If the federal government doesn't grant the permission by the end of this year, the state would drop higher-income adults who aren't pregnant or disabled beginning July 1, 2012.

Currently, 50,000 people are in that group, according to the health department. The fiscal bureau put the figure at 63,200. The people make more than 133 percent of the federal poverty level, or $29,726 for a family of four. Wisconsin's Medicaid program today accepts adults who make up to double the poverty level, or $44,700 for a family of four.

Taking them off Medicaid would save the state $57 million to $80 million a year, according to the health department and the fiscal bureau.

Also unclear is whether the state could dismantle the BadgerCare Plus Core Plan, started two years ago for childless adults. Some 44,600 are currently enrolled, with about 80,000 on a waiting list. Another plan, BadgerCare Plus Basic, started last year for people on the waiting list. Supported by premiums, it provides limited coverage to 4,900 people.

Enrollment hurdles

Meanwhile, the state could make it harder for all people to enroll in Medicaid, requiring more paperwork along with the more frequent income reviews, Peacock said. 

"Our biggest concern is that they would create a lot of hurdles for people to jump over," he said. "Those hurdles tend to trip up the lowest-income families."

Among other steps the state could take is ending optional Medicaid services, which account for about 40 percent of costs. They include physical therapy, speech therapy, optometry services, dental care and prescription drugs.

Another possible change is limiting who can get birth control services, as Wisconsin provides free birth control pills, vasectomies and other contraceptives to more people than required. The state further expanded the services just before the gubernatorial election in November, which resulted in Walker, a Republican, replacing Doyle, a Democrat.

Yet another alternative is rationing care — ranking services and refusing to cover those deemed least necessary, as Oregon does. The Wisconsin Medical Society has proposed the model instead of removing people from Medicaid or paying doctors less.

Would state opt out?

Some wonder if Smith, former director of the federal government's Center for Medicaid and State Operations, could be preparing for an extreme step: opting out of Medicaid altogether.

In a December 2009 paper for the Heritage Foundation, a conservative think tank where he was a senior fellow, Smith said the health reform law's expansion of Medicaid would threaten states financially.

"Now that the federal government has committed itself to a massive new entitlement, states should solve their budget problems by simply getting out of Medicaid," he wrote.

By leaving the voluntary program, states could keep providing just long-term care and pay for it themselves, Smith said. From 2013 to 2019, states would save $725 billion, including $7.2 billion in Wisconsin, he said, despite losing their federal matching funds.

Smith told the State Journal last week his commentary was addressing the House version of the health reform bill, which was altered significantly before passage. The changes gave fewer people subsidies for private insurance, making it less attractive for states to leave Medicaid, but the overall law remains harmful to states, he said.

Texas toyed with pulling out of Medicaid last year but dropped the idea after a report said the state would lose $15 billion in federal dollars, shift costs to counties and potentially add billions in uncompensated care at clinics and hospitals.

Health care advocates in Wisconsin don't think Smith will take such major action here. Smith wouldn't discuss Medicaid provisions in the upcoming budget bill.

The advocates do wonder what he has in store.

"Are we going to create a learning laboratory for Republicans nationally for how to disassemble elements of Medicaid?" asked Bobby Peterson, executive director of ABC for Health, a nonprofit law firm in Madison that helps uninsured and underinsured people get health care.

If the state removes people from Medicaid, more uninsured patients will end up in emergency rooms, which results in higher premiums for people with private insurance, Peterson said.

"We all end up paying for it eventually," he said.