Officials in Boston and Washington are currently negotiating the renewal of Massachusetts’ Medicaid waiver, which funds a large portion of the state’s landmark health reform law. After a short-term extension was granted two weeks ago, talks are scheduled to end on Monday. In a recent memo, Ed Haislmaier and I note that the outcome of the negotiations will be significant beyond the state of Massachusetts.

The policy precedent set by the Massachusetts experiment is particularly important, and the terms of any waiver renewal will either confirm or undermine an important policy shift that should also occur in the rest of the country.

The last renewal of the long-standing waiver precipitated Massachusetts to enact a fundamental shift in policy from subsidizing hospitals to treat the uninsured to subsidizing coverage for the uninsured. But the state is projecting cost overruns of $153 million this fiscal year and $144 million next in its new Commonwealth Care program offering subsidized coverage to the low-income uninsured.

Yet, as the local media have highlighted, Heritage has shined a “national spotlight on an issue that state officials, including Gov. Deval Patrick, have been reluctant to discuss openly…” The Massachusetts reform could stay within budget if state lawmakers stick to their agreement with the federal government to phase out direct subsidies for certain health care providers.

If state lawmakers eliminated subsidies explicitly earmarked for certain providers they could cover any extra costs. Furthermore, we argue that continuing these and other “supplemental payments” is contrary to the basic intent of the key element of the path-breaking reform, which was to shift state and federal tax dollars from subsidizing institutions to subsidizing people.

We also explain that the state should eliminate barriers to competition in the subsidized Commonwealth Care program for lower-income uninsured adults and allow them to apply government assistance to any private plan of their choice.