Medtronic Inc. (NYSE:MDT) is worried about the states’ role in deciding medical device coverage.

The Fridley, Minn.-based medical device maker is concerned about a range of issues from product liability claims to doctor payment disclosures, preferring a uniform federal standard to 50 different laws.

One issue in particular, however, looms large: The power of states to determine how much — or even whether — to pay for its devices in light of a weak economy, tight budgets and healthcare reform.

Under the new healthcare law, an additional 40 million Americans will receive coverage, mostly through the creation of state insurance exchanges and a large expansion of Medicaid, the insurance program for the poor financed by both the federal government and states.

Cash-strapped states are already having trouble paying for their end of Medicaid. According to the National Governors Assn., Medicaid spending, which accounts for 22 percent of state budgets, averaged 7.9 percent growth in fiscal 2009, its highest rate since the end of the previous recession six years ago. The NGA expects Medicaid enrollment to spike 21 percent from 2008 to 2011.

Meanwhile, states will see a collective budget shortfall of $137 billion over the next two years. The Congressional Budget Office estimates states will need to pay $20 billion more over the next decade to cover new Medicaid enrollees from healthcare reform.

With millions of new patients joining Medicaid and the insurance exchanges, states, already facing ballooning deficits, will inevitably make tough decisions on what to cover. How and who specifically will do that is a top concern for Medtronic and other medical device makers, said Rob Clark, the company’s senior director for corporate and state affairs.

For example, Washington state has already established a Health Technology Assessment committee. The group, consisting of six doctors and five healthcare experts, review “the most valid and reliable” evidence to determine the efficacy, safety and cost effectiveness of surgical instruments and procedures, medical devices and diagnostic tests.

Most importantly, HTA can recommend whether the state should fully cover, cover with conditions, or outright reject paying for the products and services.

“If the committee determines that a technology should not be covered, that recommendation supersedes any determination of medical necessity — public payers in Washington state simply cannot cover it,” according to an article published last fall in the New England Journal of Medicine.

The HTA means business. Of the nine assessments the committee has performed thus far, it rejected five technologies, including CT colonography, implantable drug delivery for chronic pain, upright or positional MRI scans, and surgeries to treat uncomplicated degenerative disc disease and osteoarthritis of the knee.

The committee approved the remaining four technologies with conditions. Even more telling, the group has yet to fully green-light any technologies without some sort of catch. By some estimates, the model will save Washington state $21 million during the first year, at a cost of $1 million.

No wonder Medtronic is nervous. Until now, the concept of comparative effectiveness (PDF), the idea that payers should only cover treatments shown to work better than others, has been mostly theoretical. President Barack Obama’s economic stimulus law provided the National Institutes of Health with millions to study the issue.

It seems that Washington state is already practicing what others have only preached. Imagine if other states adopted Washington’s model? Medtronic and other device makers will have a lot of work to do to convince skeptical, cash-strapped states to pay for their products.

“In addition to reducing the use of products and services that are of questionable value, the HTA program has the potential to increase the use of currently underutilized health care services,” the NEJM paper says. “Only with both types of strategies are we likely to see a sustained decrease in cost escalation that is sufficient to balance the long-term costs of health care reform.”