As demonstrators for greater taxpayer-funded health care coverage gathered at the Texas State Capitol on Wednesday, it is worth asking if any of them protested the most imminent threat to our state’s fiscal well-being and health care system: Medicaid.

When Medicaid was created by the federal government in 1965, it was intended to do for lower-income Americans what Medicare was to do for elderly Americans: provide a taxpayer-funded recourse for medical bills that might otherwise go unpaid, or simply not incurred.

Unlike Medicare, Medicaid was to be jointly funded by the state and federal governments. State participation, voluntary in theory, has been compelled by the pressures of market distortion and political logic, and therefore universal for the past 30 years.

The problem is that the federal share of Medicaid is meeting fewer of the needs of states, even as the program at large consumes a greater share of state budgets.

In Texas, the proportion of state spending on Medicaid has grown so large it effectively guarantees a state fiscal crisis in two years.

Federal funds typically cover about 60 percent of Texas’ Medicaid costs. Unfortunately, this proportion is set to decline just as Medicaid costs are increasing.

The passage of federal health care reform has significantly expanded mandatory Medicaid coverage. The result is a health care system that threatens to break Texas finances in the coming decade.

Medicaid is already the second largest expense in Texas’ state budget. In the 2008-2009 biennium, the program required 28.2 percent of the all-funds budget. Our research projects that to increase to 46.6 percent by 2014-15.

The effect of this dramatic growth in Medicaid costs can hardly be overstated. As Medicaid goes from just under 30 percent of the state budget to just under 50 percent, that money will have to come from somewhere.

The new federal health care law provides 100 percent funding for newly eligible individuals at first, but it does not provide funding for those currently eligible but not enrolled that will be compelled to enroll by the individual mandate.

Within the state budget, the funds to sustain Medicaid will likely crowd out other state priorities such as education, infrastructure, and public safety. Washington, D.C.’s dictates will shift the business of the state of Texas away from broad governance, and toward provision of inefficient government-subsidized health insurance.

All this is the bad news. The good news is there are ways out of this cul-de-sac-if there is political imagination and will to pursue them.

There is little chance that the federal government will make the reforms necessary to fix Medicaid-and by extension, all of the health care economy. But there is a decent chance that the state of Texas might enter into an interstate compact with other states for the purpose of reclaiming the right to administer its own health care system.

Interstate compacts are a constitutional means the states have to govern themselves. Once ratified by two or more state governments and approved by the U.S. Congress, it becomes as powerful as federal law.

Members of the Texas Legislature are working right now on passing our portion of the Health Care Compact, as are several other states. This compact is founded on a simple idea: if you give Texas the money and the freedom, we can do a better job of serving our citizens than the federal government.

In fact, the Foundation’s research shows that Texas can cover everyone under 175 percent of the federal poverty limit, grandfather every client currently receiving long-term care, and increase health care access for all of the non-disabled population for 5 percent less than what the program cost in 2008-09.

Rather than throwing good money after bad at a failed status quo, let’s simply fix Medicaid.

Spencer Harris is a health care policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.