MONTPELIER, Vt. – A growing inability to pay the spiraling costs of the Medicaid health insurance program for the poor has forced Vermont into an innovative deal with the federal government that critics fear could jeopardize a safety net dating back to the Great Society.

But officials in Gov. James Douglas’ administration say they’re confident that their Global Commitment to Health, in which they have agreed to accept caps to federal Medicaid funding over the next five years, will give them unprecedented flexibility to manage the program and begin to control costs.

States across the country, as well as officials in the Bush administration and a congressional commission, are keenly watching because the program could provide a road map for reforming an entitlement program whose costs have risen beyond most governments’ ability to pay.

“I’m sure they’d be looking at states like Vermont, states that have gone ahead and tried approaches,” said Martha Roherty, director of the National Association of State Medicaid Directors. “The [Medicaid reform] commission and others in Congress would be looking to states like that, to see how they’ve restructured, how it’s working.”

Although such states as South Carolina, Virginia, West Virginia and Idaho are contemplating deals of their own with the federal government, Roherty said, Vermont is the first one to win approval.

Both Congress and the Bush administration have been looking for ways to curb inflation in Medicaid spending that has been running at around 20 percent a year.

Under current law, the federal government pays roughly 60 percent of the costs of providing health insurance to the poor and disabled and state governments pay the rest. Washington matches state spending basically for every medical procedure provided to beneficiaries.

The states administer Medicaid, but must do so under stringent federal rules. States say those rules often stifle creativity and innovation that might make Medicaid cheaper or at least easier to run.

Those two goals now are beginning to intersect as both state and federal governments search for ways to reduce spending and the states clamor for flexibility in running the program.

In Vermont, Gov. Douglas believes he has found a marriage of those objectives. The administration and state legislators have struggled for years to figure out how to continue funding Medicaid. They’ve instituted premiums and co-payments and tightened regulations, but still the costs rise and the potential deficits grow.

Douglas turned to Washington early this year asking for a guaranteed level of spending from the federal government and new control over running it.

He got much of what he wanted, although less guaranteed money from Washington than he initially sought.

A pending agreement calls for Vermont to spend as much as $4.7 billion over the next five years, roughly 60 percent of it from Washington. That’s about $500 million more than the state is projected to spend over that period, although deficits are still projected because the state continues to have difficulty raising its own share.

In return, Vermont will be able to transform its Medicaid program.

An actuary will determine how much it should cost to cover each person insured under Medicaid, and the state and federal governments will pay that amount, through a payment similar to an insurance premium, to a newly created managed care organization operated by the state.

If the state can offer care for less than the amount of the premium, it will be able to bank the money or spend it on other services not now covered by Medicaid. State officials say that could mean between $135 million and $165 million of additional spending capacity.

The hitch, in the minds of some critics, is that the shift would take the federal government off the hook if costs continue to skyrocket, leaving Vermont to pay for any spending above the $4.7 billion ceiling.

Some of the things that could drive up costs, critics say, would be an economic downturn, epidemic or catastrophe. The waiver granting Vermont permission to run the program contains no assurances that Washington would help cover extraordinary costs, even though the state asked for such a commitment.