While conservatives are winning most of today’s economic policy debates, in the long run runaway big government is still slated to flatten us all. According to the Congressional Budget Office, under current law, federal spending as a percentage of gross domestic product will soar to 34% by 2050, from 20% of GDP, where it has been for the last 50 years.

A 70% increase in the size of the federal government relative to the economy, along with corresponding increases in state and local spending, would mean Eurosclerosis for America and an end to the free enterprise system.

Medicare, Social Security, and Medicaid are driving the cost explosion, with Medicaid hitting state budgets particularly hard because they finance almost half the program.

Governor Sanford of South Carolina has come up with a better way to do Medicaid, utilizing the American way of expanded ownership for all that would improve the quality of care available while reducing the cost to taxpayers.

Under the Sanford plan, each non-disabled Medicaid recipient would own a personal health account. “Own” is the key idea. It represents a paradigm shift from the contemporary model of state-encouraged dependency because with ownership comes the power to choose.

How does it work? Each year, South Carolina would grant recipients an amount sufficient to buy health coverage from a list of state-approved plans. The grant amount would vary based on age, sex, and category of eligibility to ensure that all would have enough to buy approved coverage – ranging from full-scale managed care, to participating provider options, to self-directed plans with insurance coverage for catastrophic hospital care and cash to pay for less urgent needs directly. At a minimum, however, the plans would all have to cover the mandatory services provided by Medicaid. Providers would remain free to add coverage and services.

Mr. Sanford’s proposed reforms, which have already drawn fire from supporters of the dependency status quo, give recipients the incentive to control their health costs. Under the current system – which liberal special interest groups such as the Center on Budget and Policy Priorities defend while attacking the Sanford proposal – the only incentive that exists is to drive up health costs as much as possible.

The Sanford reforms mean plans would compete to provide services at lower costs, achieving high savings for recipients. Different models – ranging from total managed care to higher deductibles and copays, along with maximum consumer choice – would battle it out to see which would achieve more for recipients and best meet their preferences. The combination would, over time, drive down the cost of what South Carolina has to pay.

The state has already applied for a federal waiver to implement these innovations. Mr. Sanford and other governors bent on free-enterprise Medicaid reforms, such as Florida’s Jeb Bush, are engaged in the same process of state experimentation that eventually produced the success that is welfare reform.

The arguments put forward by reform opponents like the CBPP are the same shopworn scary-cisms that supporters of state sponsored social welfare programs always put forward: Services will be cut; reduced coverage for diseases such as diabetes, cancer, and heart ailments; and the image of sick children getting sicker.

In fact, Mr. Sanford’s proposal explicitly requires all participating plans to provide all the coverage required under Medicaid in South Carolina today, including the same coverage for children.

The facts are plain. Medicaid must be reformed so that its costs grow no faster than the GDP. Let the reforms begin, with the Sanford plan leading the way. The costs of doing nothing are just too high.

Mr. Factor is chairman and president of the Free Enterprise Fund.