— The state Senate gave tentative approval Thursday to a proposal to overhaul the state's Medicaid system.

The proposal, House Bill 1181, would remove Medicaid from the Department of Health and Human Services, setting it up as an independent agency called the Department of Medical Services governed by an independent, although politically appointed, board.

Under the proposal, the state would end its direct fee-for-service management of the program, contracting it out to managed care and accountable care organizations. The contracts would be "capitated," offering a set amount of money for care per patient.

The board would divide the state into regions, and both local provider-led organizations and commercial managed-care firms would bid for the contracts.

Sponsor Sen. Louis Pate, R-Wayne, said the changes would make the state's spending on Medicaid more manageable and predictable. He pointed out that the state has spent more than $2 billion over the past four years on Medicaid shortfalls alone, and the program is expected to grow by another $1 billion over the next five years.

"That’s money that could have been invested in other priorities," Pate said. "Every year, we've come in here and done our best to contain cost and reduce growth, and every year, the choices get harder and the debates more heated.

"Competition apparently scares a lot of people, but it’s the best way to make sure Medicaid patients get the best care possible at the lowest cost to the taxpayers," he continued. "Only by shifting the risk of budget overruns away from the state will we be able to ensure budget predictability."

Co-sponsor Sen. Ralph Hise, R-Mitchell, said restructuring the program outside of DHHS is necessary to fix "a broken system."

"I don’t have to remind people about the problems we’ve had at the DHHS. Not just over the past year or 18 months but over the past decades," Hise said. "We’re going to pull it out and give it a fresh start. We think this clean separation is necessary."

Democrats commended Republican leaders for their work on the ambitious plan but said it goes too far, too fast.

Sen. Joel Ford, D-Mecklenburg, protesting the new agency, said the bill "creates an expansion of state government. You are voting to support the largest expansion of state government in recent history."

Ford also warned, as DHHS officials have also previously said, that the move would disrupt the delivery of Medicaid services.

"Whenever this General Assembly tries to jump-start efforts, it does it too quickly," said Sen. Floyd McKissick, D-Durham. "We make mistakes. We do things that are misguided with the very best of intentions."

McKissick pointed out that the new governing board would have to be appointed within 60 days.

"It’s far too quick,” he said. "We need to study it. We need to figure this thing out.”

Sen. Dan Blue, D-Wake, reminded Republicans that Medicaid's shortfalls in recent years were due, at least in part, to budget appropriations that DHHS leaders warned them were insufficient to cover the program's costs.

Blue also said that every medical practitioner and group that has spoken at Senate hearings on the bill "told us not to do what we were trying to do in this bill."

Senate Majority Leader Harry Brown conceded that "we probably did underfund Medicaid" while struggling to deal with the budget shortfall in 2011 and 2012. But he said the changes would mean more stability in the future.

"It’s not a perfect bill. We all know it’s got a long way to go," said Brown, R-Onslow. "We need to move it forward."

The vote was 28-16, largely along party lines.

The measure requires a final vote in the Senate before it moves to the House, where it's unlikely to receive immediate agreement. House leaders have expressed deep reservations about some of the bill's provisions, and Gov. Pat McCrory has also spoken out against the removal of Medicaid from DHHS.

The North Carolina Medical Society quickly decried the move.

“Today the Senate had a clear choice between the health of our state’s most vulnerable citizens and the health of Wall Street corporations, and they chose the corporations," said NCMS CEO Robert Seligson in a statement.

Seligson pointed to major problems with managed-care Medicaid programs in Kentucky, Georgia, and Illinois, where commercial insurers have been fined and sued for refusing to pay for authorized care and discriminating against patients with expensive medical conditions.

"It appears that the 28 senators who voted for managed care are not aware or don’t care about the negative history of managed care and are welcoming them to North Carolina,” Seligson said.

The Medical Society, the House, and the governor are all backing a plan that would focus on expanding provider-led accountable-care organizations instead, like Community Care of North Carolina, a program that's won awards as a national model for controlling costs and improving outcomes.

The Senate plan would allow those organizations to compete for contracts, but policy experts say it will be very difficult for them to compete with large out-of-state commercial insurers.