Last year, the Legislature cut about $15 billion in state spending and roughly $12 billion in services to balance the two-year budget. Medicaid represents about 20 percent of the state budget, and for every $1 Texas spends on the program, the federal government matches $1.47 to help cover the costs, many mandated by federal law.

While poor children represent 66 percent of the people enrolled in Medicaid, they only represent 32 percent of the costs, according to agency data. The disabled and the elderly who can no longer afford to pay their Medicare premiums and copayments represent 25 percent of Medicaid clients, but account for 58 percent of the costs. Lawmakers faced fierce opposition last year when they tried to cut people from Medicaid or reduce their services, since those costs are passed on to family members or local authorities.

One area where Millwee and lawmakers agreed they could find savings was in keeping the elderly and disabled out of emergency rooms, which represents about 30 percent of Medicaid spending. The state could save money by rewarding better preventive care and paying for more skilled care-givers who could make sure patients don't need the emergency room, agency experts testified.

Millwee said the state has also found savings by cutting services, for example by treating a child's distorted skull shape only when medically necessary — not for cosmetic purposes — and by paying for porcelain dental crowns only on a child's front, permanent teeth, and using cheaper options, such as gold, for back teeth. The state also cut reimbursement rates to some health care providers by up to 10 percent and to hospitals by 8 percent.

One controversial cut that the agency is reconsidering, Millwee said, was how it pays doctors to treat the elderly. Medicare doesn't cover all of the costs, and in the past, the state paid the balance based on the Medicare rate. But now the state is using Medicaid rates, which are 27 percent lower, to reimburse doctors and saving billions.

However, health care providers, particularly doctors, say they will stop accepting elderly Medicaid patients because of the lower reimbursement.

Chris Traylor, commissioner for the Department of Aging and Disability Services, said his agency has also cut rates to home care providers and nursing facility-related hospice services, but has created incentive programs for nursing homes to provide better care. A new quality-control initiative has cut use of restraints and anti-psychotic drugs in nursing homes and increased the vaccination rates for preventable diseases.

Traylor and Millwee both touted a new program that is less of a reimbursement of services and instead bases payments to health care providers more on successful treatment of a patient. Traylor said one test program brought re-hospitalizations from nursing homes down dramatically, and Millwee said a similar program was expected to yield similar results from hospitals.