By Yasmeen Abutaleb and Robin Respaut

FRANKFORT, Ky./SAN FRANCISCO (Reuters) – For nearly three years, Democrats and former President Barack Obama pointed to Kentucky as one of the Affordable Care Act’s biggest success stories.

A poor, rural state that straddles the North and South, Kentucky was an early adopter of the healthcare law commonly known as Obamacare and saw one of the country’s largest drops in the uninsured rate.

Now Kentucky is poised for a new distinction: to be the first state to save money by reducing the number of people on Medicaid, the government health insurance program for the poor and disabled and a central tenet of Obamacare.

If successful, Kentucky would provide a roadmap for other states who are worried about paying an increasing share for people on Medicaid.

A new Republican health law that passed the U.S. House of Representatives on Thursday, along with state initiatives like Kentucky’s, would dramatically change the national healthcare system and cut more than $800 billion from Medicaid over the next 10 years.

The Republican bill still faces a long road ahead in the U.S. Senate and its final passage is far from assured, making initiatives like Kentucky’s all the more important.

Kentucky has proposed to lessen its financial burden before it grows by reducing the number of residents on Medicaid by nearly 86,000 within five years, saving more than $330 million in the process. (For a graphic click http://tmsnrt.rs/2on0HVK)

Kentucky’s plan also calls for new work requirements for able-bodied adults to get insurance. Plus, it would establish new fees for all members based on income and lock out some people who miss a payment or fail to re-enroll.

By following these proposed rules, Kentucky believes Medicaid enrollees will over time graduate from Medicaid to private and employer insurance plans.

“One of the most remarkable lies that has perpetrated in recent years in the healthcare community in America is that expanded Medicaid was working well in Kentucky,” Republican Governor Matt Bevin, who is leading the state effort, told Reuters from the governor’s mansion in Frankfort, Kentucky.

That view is in line with President Donald Trump’s administration, which has criticized Obamacare’s Medicaid expansion and urged states to pursue similar Medicaid reforms to what Kentucky is now attempting.

“If Kentucky is successful, you’ll see this spread through the more conservative-leaning states. It’s possible even a Democratic blue state could do it,” said George Huang, director and senior municipal healthcare research analyst at Wells Fargo Securities. “It’s the flexibility that some states are seeking.”

INSURING THE POOR AT A PRICE

Kentucky, a state Trump won handily last November, has been devastated by the loss of coal mining jobs and an opioid epidemic. The state sits near the bottom of health rankings for smoking rates, cancer deaths and diabetes.

“To me, morally, it was the right thing to expand Medicaid, but I had a responsibility to not to do something that would bankrupt the state,” said former Governor Steve Beshear, a Democrat, referring to the increased costs of caring for a larger population with Medicaid insurance.

More than 30 states, about a dozen of which are led by Republican governors, expanded Medicaid under Obamacare. In Kentucky, more than 400,000 people gained health insurance through the program, the highest growth rate of Medicaid coverage of any state.

Beshear commissioned independent studies by PricewaterhouseCoopers and Deloitte on the financial and health impacts of expanding Medicaid. Both studies found health and economic gains. Deloitte reported that 90,000 newly covered residents received cholesterol screening and 80,000 got preventative dental care within a year. It estimated Kentucky would see an economic boost of $30 billion and 40,000 new jobs by 2021.

Beshear’s successor, Republican Governor Bevin, was elected in 2015 on a promise to repeal and replace the healthcare law on the view that thousands of Kentuckians had unaffordable premiums and only one health insurer to choose from.

He dismissed the projections in the Beshear-commissioned studies as “preposterous,” and says the state’s share of expanded Medicaid – $74 million in 2017 and totaling $1.2 billion over five years – was too expensive and unsustainable.

“We want this to be a helping hand for people at a time when they need it, but then be able to return to the commercial marketplace,” Bevin said.

Last year, Bevin submitted the waiver to restrict Medicaid eligibility by requiring enrollees to work or volunteer at least 20 hours per week and to pay monthly premiums based on income. He’s still awaiting approval.

Bevin said he has spoken with several governors about the waiver and has had extensive conversations with Health and Human Services Secretary Tom Price about fast-tracking the approval process in order for other states to quickly adopt similar programs. Such conversations are occurring across the country in response to encouragement from the new administration to reform state Medicaid programs, said Alleigh Marre, a Health and Human Services spokeswoman.

Louisiana and Wisconsin are considering work requirements for Medicaid enrollees. The Obama administration rejected previous attempts by other states, including Ohio and Arizona, to require work programs and monthly premiums for Medicaid, historically a free program for those eligible.

“Every state is watching this to see what happens,” said Bevin of Kentucky’s waiver. “It’s the first one in the queue.”

SIGNS POINT TO “YES” FOR KENTUCKY WAIVER

The odds look good for Kentucky to get the waiver in the coming months, based on the track records of health officials that Trump named after his inauguration.

Seema Verma, the new head of the Centers for Medicare and Medicaid Services, which approves Medicaid waivers, said during congressional testimony that the agency will usher in “a new era of state flexibility and leadership.”

Verma helped craft Kentucky’s waiver, but said she will recuse herself from the approval process to avoid conflicts of interest.

She and Tom Price wrote a letter to governors in March encouraging Medicaid reforms that more closely resemble commercial insurance plans. In the letter, they suggested features such as premium fees, health savings accounts, and emergency room co-payments that encourage the use of primary care.

CMS declined to comment on Kentucky’s waiver and said it does not speculate on the process while ongoing.

Under federal law, waivers must promote Medicaid’s objective of delivering healthcare services to vulnerable populations who cannot otherwise afford them.

“Waivers have never been used to cut people from the rolls,” said Emily Parento, associate professor at the University of the Pacific’s law school and the former executive director of Kentucky’s Office of Health Policy.

But Verma’s office is encouraging changes to Medicaid that make the government program look more like private insurance policies – goals that are similar to Bevin’s in Kentucky.

“I think what will happen is that other states will look at it and go, ‘We want everything they got,’” Bevin said.

(This story has been refiled to fix spelling in paragraph 3.)

(Reporting by Yasmeen Abutaleb in Kentucky and Robin Respaut in San Francisco; Editing by Caroline Humer and Edward Tobin)