The role of the state government and the character of federal-state relations in social policy have evolved considerably. Frank Thompson uses the phrase compensatory federalism to describe increased activity by state governments to make up for a diminished federal role. For compensatory federalism to work, it is essential for states to take leadership roles in key policy areas. Few studies examine whether states have risen to the challenge of compensatory federalism in social policy. This paper examines an emerging issue of great significance in social policy-challenges involved in meeting future long-term care needs for the baby boomer generation. The paper provides an in-depth case study of attempts by Maryland to meet the challenges of financing long-term care needs for the baby boomer generation. The detailed description of the agenda-setting and problem-structuring process in Maryland is followed by an analysis that uses three different frameworks to assess the policy development processes. These models are rooted in a bureaucratic politics perspective, an agenda-setting perspective and an interest group politics perspective. The paper concludes with a discussion of the limitations and possibilities of state leadership in the social policy sphere.