Although the controversy over Medicare reform has dominated the headlines, the heated debate over entitlement spending has also thrust Medicaid into the spotlight. Responsible for shouldering part of Medicaid costs, fiscally strapped states have been crying uncle as enrollment in the program has ballooned as a result of the recession and a growing elderly population. While national lawmakers remain at loggerheads over entitlement reform on Capitol Hill, both Democrats and Republican-controlled states are pushing aggressive Medicaid reforms in hopes of cutting costs. In recent months, nearly a dozen states have passed or proposed plans to move more Medicaid participants into managed care, run by for-profit HMOs as well as nonprofit health insurers.

This week, California will begin to place all of its elderly and disabled Medicaid patients — the costliest, most illness-prone beneficiaries — into managed care programs under a waiver it received from the Obama administration in October. Although these long-term care patients make up only about a quarter of Medicaid patients nationwide, they’re responsible for two-thirds of the program’s expenditures. Certainly, the projected cost-savings of California’s plan are ambitious: The state budget calls for 10 percent savings through managed care over traditional fee-for-service, giving insurers a fixed lump sum for each Medicaid rather than directly paying doctors and other providers for individual services. Managed care proponents argue that these systemic changes — which include better care coordination, closer assessment of which services are necessary, and incentives for doctors to choose more cost-effective treatments — will save states money without sacrificing the quality of care.

Similarly desperate to rein in Medicaid costs, states including Tennessee, Rhode Island, Kentucky, New Jersey and Florida have also pushed to expand managed care to cut Medicaid costs. In recent months, for example, a handful of states have followed California’s lead by placing elderly and disabled Medicaid enrollees — known as “Seniors and People with Disabilities,” or SPDs — into mandatory managed care. In some respects, the move is simply the next step of the managed care expansion that began in the 1990s and has grown steadily since then. Over 70 percent of Medicaid beneficiaries nationwide are in some version of managed care, and the current fiscal crunch has accelerated its expansion.

But the California example is also telling of the concerns and questions surrounding the growth of managed care for Medicaid patients. In 2005, then-Gov. Arnold Schwarzenegger similarly proposed to make managed care mandatory for SPDs — a bill that was ultimately scuttled due to concerns that would compromise good patient care. Although some managed care companies have now spent decades covering Medicaid patients, they’ve mostly covered the program’s youngest and healthiest patients and have comparatively little experience overseeing elderly and disabled patients who require long-term care and have far greater medical demands.

The worry among consumer advocates is that HMOs and other managed care companies will end up cutting corners at the expense of a particularly vulnerable population. “The details matter a lot. SPDs have unique needs we don’t meet particularly well,” says Harold Pollack, chair of the University of Chicago’s Center for Health Administration Studies. What’s more, some have cast doubt on the projected savings that HMOs have touted: A 2005 study by the Robert Wood Johnson Foundation, for example, showed that an earlier expansion of managed care in California’s Medicaid actually increased costs to the state by as much as 17 percent without improving health outcomes.

California has tried to allay such skepticism by working together with the Obama administration to develop more stringent oversight of the new Medicaid plans, improve care coordination and outreach to patients, and use pilot programs to test the programs before making them mandatory for the elderly and disabled across the state. In fact, California’s managed care programs for SPDs will be subject to care requirements that go well beyond state and federal law to ensure that patient services and access aren’t compromised.

The upshot, however, is that such safeguards don’t come cheap: California will receive some $10 billion in federal funds in part to help implement these changes, as well as prepare for the federal health insurance exchanges, the Medicaid coverage expansion, and other changes under the Affordable Care Act. So though the state itself might save money through expanding managed care, it will be simultaneously relying on federal dollars to help with this transition. And the Obama administration seems to be betting that the investment will ultimately pay off if California manages to innovate a better way to cover its costliest, frailest Medicaid patients.

Suzy Khimm is a staff reporter in the Washington bureau of Mother Jones.