Editor's note: Salt Lake City hosted the annual National Governors Association summer conference this weekend. Gov. Michael O. Leavitt, a member of the Deseret News editorial advisory board and former chairman of the NGA, spoke to America's governors about health care and the U.S. economy. What follows is a summary of several high-level points from his remarks.

The nation's governors met for their annual meeting in Salt Lake City this week. Governors enjoy this opportunity to learn from and occasionally commiserate with peers dealing with similar challenges. The normally festive gathering will be tempered this year by the most severe fiscal crisis for states since the Great Depression. During the past three fiscal years, states have come up $430 billion short in their expected taxes revenues. It's the largest collapse in state government revenues on record. Needless to say, it squeezes the capacity of governors to meet the legitimate needs of their citizens.

As a person who has struggled with similar problem from both the state and federal perspective, I was asked to provide the governors some advice. I made four suggestions.

States must lead, not follow. Ground zero for these budget problems is the explosive growth of health entitlements. Medicaid (health insurance for low income Americans) expenditures have quintupled in the past two decades. One in six U.S. citizens is covered by Medicaid. It already makes up more the 20 percent of state budgets. Recently passed health-care reform legislation will add more than 20 million more people in years to come. In time, Medicaid will clearly become a bigger economic weight than Medicare.

States often turn to the federal government at times like this. However, the federal government has hit the credit card limit and is in no position politically or economically to offer relief. The Founders of our nation intended states to be a much stronger force in American governance than they presently are. This is a moment where the nation needs the unique leadership governors and their states can provide. Fixing Medicaid is a critical opportunity to reform the entire health-care system.

Don't tinker with Medicaid payment rates, transform the delivery system. No public official likes to either raise taxes or cut benefits, so when faced with a hard problem like this the path of least resistance is to cut the pay of the doctors, hospitals and other providers who render the care. There are two immediate consequences of this course. The first is that fewer practitioners will accept Medicaid patients and the quality of care will diminish. The second is that those who accept Medicaid patients tend to increase the number of procedures they perform, driving up the cost.

We need to focus on transforming Medicaid. By reforming the delivery system and payment incentives we can provide value through innovation and will create better care, not just more care. It requires change in provider behavior and also patient expectations.

Build a health insurance exchange that organizes an efficient market. Health insurance exchanges have at various times been a Republican and a Democrat proposal. While nearly all health exchanges seek to make affordable health insurance more available to individuals and small businesses, proposals differ primarily in the nature of government's role. There are two basic choices — government can be used to organize efficient and fair markets or they can dictate how the system operates. The hand of government is required, but experience in leading large government entities leads me to strongly recommend the organizing role. To work, exchanges must enliven competition and innovation and also expand choice. Well-organized markets do those things better than bureaucracies.

I'm surprised that many states are waiting for the political stars to align and produce repeal or a major revision. Some are doing little of substance, hoping that the federal government will relax the calendar. Both approaches are a mistake. Smart states will proceed to develop exchanges based on a strategy of self-determination and the benefits that come from enhancing insurance offerings within their states.

Start reform with state employees. State and local government in the United States employs approximately 20 million workers. Converting the health benefits of these workers to a consumer-directed model will provide critical mass and serve as a catalyst for the larger consumer-directed health care movement that is critical in the future. Such a change will not only help state finances where some 42 states and the District of Columbia have balanced, or are working to balance, $103 billion in shortfalls for the coming fiscal year (2012). It will provide the impetus to shape the broader marketplace.

To lead, governors must defend their state's interests, not their partisan flag. Years of involvement in the national health-care debate have taught me that the most significant barrier to governors providing badly needed national leadership is partisanship. The nation's governors have to balance their budgets now. They have a commonality of problems and a need for solutions. Health-care issues will inevitably involve politics, but for governors it should be state vs. federal politics, not Republican vs. Democrat issues. Too often, on the health-care issue, governors of both parties look beyond the interest of their states and instead defend their partisan platform. America needs solutions.

Every generation of Americans overcomes challenges to secure our nation's role as the world's economic leader. Solving the health-care problem is this generation's challenge. It time for the nation's governors to lead health reform in America.

Michael O. Leavitt is a member of the Deseret News Editorial Advisory Board. He served in the cabinet of President George W. Bush and as governor of Utah. He is the founder and chairman of Leavitt Partners. Website: www.leavittpartners.com.