Four states--Arizona, California, New York, and Pennsylvania--undertook major Medicare reforms in the early 1980s based on competition, price negotiation, regulation, and diagnosis related groups. To increase our understanding of what led to these reforms, we analyzed data from interviews with representatives of state executive and legislative branches and from providers and others involved in the reforms, and examined published and unpublished information on the reforms. We identified seven factors influencing choice of Medicaid reform: the crisis that triggered reform, the purposes of reform, the locus of the innovation (legislative versus executive), the power and views of key provider groups, state officials' perception of providers and recipients, the scope of the change implemented, and reform as a reflection of past state practices. We discuss these factors extensively.