Federal health policy-making is too often shaped by mistrust of states on fiscal and programmatic matters. The current approach of micromanaging state decisions undermines the dynamism necessary to administer and improve Medicaid. The new Obama administration should commit to healing the state-federal relationship through greater policy transparency and by developing a robust, performance-oriented approach to Medicaid program oversight. The administration should undertake additional joint federal-state efforts to address other health policy priorities. These steps would lay a stronger platform on which efforts for comprehensive health reform can be built.