A key part of American federalism is states’ ability to serve as laboratories where the consequences of various programs can be explored without committing the entire nation to what may turn out to be expensive blunders. For instance, Wisconsin successfully took the lead on welfare reform in the early 1990s, setting the template for national bipartisan legislation in 1996 that lifted millions of women and children out of poverty. But in health-care reform, President Obama and congressional Democrats didn’t wait for state experiments to run their course. State reform efforts—on the left and right—were still in their earliest stages in March 2010, when Congress passed the Patient Protection and Affordable Care Act, committing the nation to trillions of dollars of new health-care spending. The consequences of this rush to national reform could be dire.

Just a few years earlier, Massachusetts governor Mitt Romney had struck a deal with Democrats in the state legislature to expand health insurance to the relatively small fraction of residents who didn’t have it (about 10 percent, compared with 15 percent nationally). Today, hundreds of thousands more Bay State residents have insurance, but costs are rising at dizzying rates, and state insurance regulators and current governor Deval Patrick are locked in a bitter fight with insurers over price controls in the small-group and individual-insurance markets. Leaked e-mails from the state’s insurance department suggest that state-imposed caps on insurance premiums could force some insurers into bankruptcy. The state may not be far behind: experts at the RAND Corporation believe that without far-reaching reforms, health-care costs may reach unsustainable levels—growing 8 percent faster than state GDP and doubling to $123 billion by 2020. In taking the same gamble that Massachusetts did, President Obama has exposed the whole country to the risk of fiscal meltdown.

Obama’s embrace of a fundamentally flawed reform model may also kill off the nation’s first consumer-driven effort to cover the low-income uninsured. In 2007, Indiana governor Mitch Daniels built bipartisan support for extending coverage to over 100,000 uninsured Hoosiers who made too much money to qualify for the state’s Medicaid program. Daniels and Mitch Roob, then the secretary of Indiana’s Family and Social Services Administration, knew that the state was spending millions through its Medicaid Disproportionate Share Hospital (DSH) program, which subsidized treatment for uninsured Hoosiers who showed up in emergency rooms or wound up hospitalized for preventable illnesses. Roob says that the governor decided that it would be more efficient to purchase insurance for the uninsured than to buy their health care directly from the hospitals. Daniels figured that private insurance would also “enfranchise the individual, not the institution,” says Roob.

Working with state senator Patricia Miller, a Republican, and state representative Charlie Brown, a Democrat, Daniels and his team developed a fiscally sustainable plan that would attract bipartisan support. The discussions were anything but easy, Roob recalls: “We went through four or five complete iterations of program proposals until we hit on what became the Healthy Indiana Plan,” or HIP. The plan had three core principles. One of these, again, was individual control of health-care spending. A second was protection for taxpayers; the program was designed so that enrollment couldn’t grow faster than the available funding. (The program is funded partly by diverting current Medicaid DSH funding—which required a waiver from the federal Department of Health and Human Services, the Medicaid program’s overseer—and partly by a cigarette-tax increase.) The third was disease prevention: Daniels, who exercises and watches his own diet, was adamant that HIP focus on wellness instead of just paying bills.

The Healthy Indiana Plan covers Indiana residents who make too much money to qualify for the state’s traditional Medicaid program—those who earn from 19 percent to 200 percent of the federal poverty level for families and childless adults. Part of HIP is a health savings account (HSA), which Indiana calls a Personal Wellness and Responsibility (Power) account. If he’s able to do so, each enrollee must make a monthly payment into his Power account that is no more than 5 percent of his gross family income. The state government also pays into the Power accounts, and it adds catastrophic insurance coverage, in case of medical emergencies too expensive for the accounts to handle. The program includes first-dollar, or zero-deductible, coverage for preventive services like mammograms and PSA tests—up to $500 annually. HIP members who can pay but don’t make the minimal payments are removed from the plan for a year; Daniels felt that this incentive would give them a sense of ownership in the program and help them take responsibility for their own health. So far, the design has been successful: HIP has a 1.86 percent rate of nonpayment, and its members are likelier to stick with their plan than Medicaid recipients are.

When it took effect in early 2008, HIP was swamped with applicants. Today, about 45,000 low-income Hoosiers enroll in the program, with another 49,000 on a waiting list (HIP is capped by the federal government’s current share of Medicaid spending, which limits enrollment). Recent data show that Daniels’s planning has paid off: about 76 percent of HIP’s population have used preventive services, and that population is less likely to use emergency rooms than are Medicaid recipients in Indiana. In fact, for HIP members required to make contributions to their Power accounts, emergency-room use declined by 15 percent over the first six months of enrollment; even those not required to make contributions showed a 5 percent decrease. Generic drugs are very popular—they constitute 84 percent of drugs used in HIP. Patient satisfaction is high: 94 percent of HIP clients claimed satisfaction with the program, and 99 percent indicated they would re-enroll.

Daniels has become a vocal critic of the president’s health-care reforms, citing a state-sponsored study by the accounting firm Milliman that found that Indiana would incur between $2.9 and $3.6 billion in new costs under Obamacare. The governor also warns that the new law could do in HIP by requiring many recipients to enroll in the state’s traditional Medicaid program. It happens that Daniels broadly agrees with the president’s analysis of America’s health-care problems. What he takes issue with is the 2,400-page bill forced on the states, which he sees as too expensive, too bureaucratic, and too Washington-centered. In the long term, Daniels believes that moving toward a consumer-driven system—modeled on HSAs and catastrophic insurance—is the way to go. “We’ve got to trust people to take charge of their own health-care decisions,” he says, “and make insurance more like car insurance,” which covers major costs, not routine ones.

For now, HIP is in limbo, since the expansion of Medicaid under Obamacare won’t take effect until 2014. Daniels has no doubt that his model is worth emulating. The question is whether states will have any chance to put into practice what Indiana has done so well.

Paul Howard is the director of the Manhattan Institute’s Center for Medical Progress.