Here's one way states can lower health care costs: reduce the most commonly performed surgery, namely Cesarean sections, or C-sections, to deliver babies -- roughly half of which are performed unnecessarily.
To encourage more natural childbirths, the state of Washington will begin this month to pay hospitals the same amount for an uncomplicated C-section as for a complicated vaginal birth under its Medicaid reimbursement rules. With half of all births in Washington paid for by Medicaid, this will likely have a significant impact in reducing unneeded C-sections in the state, saving money and potentially lives.
The Alarming Rise in C-Sections: As the Washington State Department of Social & Health Services described in adopting new reimbursement rules  to encourage more natural births, the problem of unneeded C-sections had been rising dangerously in recent years:
- Nationally, the U.S. has seen a 50% increase in C-sections since 1996.
- Washington state’s C-section rates have jumped 60% in low-risk mothers.
- Paralleling national trends, Washington State is approaching a 30% surgical birth rate.
- Highlighting the arbitrary rise of the procedure, this rate varies between 15% and 48% at different hospitals.
Nationwide, the C-section rate is almost 32%, more than double what both the World Health Organization  and the Centers for Disease Control  say is necessary. When the rate of C-sections rises above 10% to 15%, both the WHO and CDC find that the harm outweighs the benefits to mothers and babies. So at least half of the approximately 22,000 C-sections performed each year in Washington are not only unnecessary, but also harmful.
Changing Incentives: The new rules adopted will cut Medicaid reimbursements for uncomplicated C-sections from about $3,600 to around $1,000. Hospitals with high C-section rates will ideally be encouraged to change practices that have been unnecessarily driving up C-section rates. Assuming no changes in C-section rates, the change in reimbursement rates will save the state close to $2 million and the federal government another $2 million. But if the incentives decrease the total number of C-sections, the savings will be even larger. And if adopted nationally, one analysis notes :
"With C-sections accounting for 45 percent of the $86 billion the U.S. spends on childbirth each year, lowering the C-section rate could go a ways toward paying for President Obama’s goal of getting health coverage to everyone in the country."
Notably, developed countries with lower C-section rates (12% in the Netherlands and 18% in France) tend to have both lower infant mortality rates  and spend less of their GDP on health care.
These proposals are just part of how Washington state is taking the lead on childbirth reimbursement reforms. By paying for home births attended by a licensed midwife, Washington has a rate of out-of-hospital birth that is double the national average, which a 2008 Department of Health cost-benefit analysis found resulted in good outcomes for mothers and babies and yielded a net savings to the government of about $250,000 per year from the reduced numbers of C-sections. Again, it's worth considering that in Europe, midwives assist at more than 70% of normal vaginal births, compared to midwives delivering just 7% of American babies in 2003 -- again with lower costs and lower infant mortality in Europe compared to results in the United States.
Washington State Department of Social & Health Services - 2009 Fact Sheet: Hospital cost controls 
Crosscut.com - Take away the incentives for too many c-sections
Childbirth Connection - Why Does the National U.S. Cesarean Section Rate Keep Going Up?
Centers for Disease Control and Prevention - Maternal, Infant, and Child Health 
World Health Organization - Identifying barriers and facilitators towards implementing guidelines to reduce caesarean section rates