States and the Affordable Care Act: An Offer They (Still) Can’t Refuse

By :: July 2nd, 2012

For months, astute observers called Medicaid the “sleeper issue” of the Supreme Court’s Affordable Care Act deliberations.  Last Thursday, they were proven correct.  A majority of the Supreme Court struck down a provision of the law giving the Health and Human Services Secretary authority to pull all federal Medicaid funds from states refusing to extend eligibility to low-income, non-elderly adults.

The ruling was surprising for several reasons.  First, starting with land grants for public colleges and universities and continuing through to the interstate highway system and social safety net, the federal government has a long history of conditioning state and local grants on acceptance of its rules.  A prime example is federal funding for K-12 education under the No Child Left Behind program.

This is also how Medicaid has operated since its inception in 1965.  At the time, Congress explicitly reserved to itself the “right to alter, amend, or repeal any provision.”  Indeed, it has exercised this right several times, expanding eligibility to low income pregnant women and various groups of children in the 1980s and 1990s.  Some expansions came with carrots (promises of extra money) and some with sticks (threats to existing funds).

But the majority held that this expansion was different, not just tinkering around the edges but fundamentally changing the program’s identity.  What’s more, because Medicaid has grown so big (it was states’ single largest budget item in FY 2010, including federal funds) and so much a part of state law, giving the HHS Secretary discretion to yank federal funds amounted to an order, even an existential threat (a “gun to the head” or “your money or your life” proposition).

But the same could be said of the federal tax code, which provides states with various expensive goodies (deductibility of state and local taxes, exemption of muni bond interest from federal income taxes) and whose very existence is a huge subsidy (because states can piggy back off of federal definitions and administration).  Numerous budget commissions and task forces have put these subsidies on the chopping block, and at a recent hearing Senator Max Baucus suggested he might do the same.  Are these changes now also off the table?

Moreover, in both cases, this symbiosis between states and the federal government developed over time because states said “yes” to federal support.  With Medicaid, this relationship was severely tested in the Great Recession, when states had to plug massive budget holes but could not cut Medicaid eligibility because of federal program requirements.  Several state Medicaid finance directors openly discussed rejecting federal funds to get out from under these requirements.

However, quitting Medicaid was never a real possibility.   States needed the money to take care of individuals who would otherwise go untreated and care that would go uncompensated.

Now, as then, states will take the federal money, especially in light of longer term fiscal strains like rising health care and retirement costs.   This won’t be easy.  As with any federal grant program, subsidies set out in the Affordable Care Act (100 percent, declining to 90 percent in 2020 and thereafter) are not guaranteed over time.

Another source of uncertainty is what the newly eligible population, and others who come out of the wood work, will look like.  Evidence from Arizona suggests some low cost young adults and some higher cost near-elderly with chronic health needs.

Some governors and lawmakers have already said their states will decline to participate in the Medicaid expansion.  But eight states have already gotten started on extending eligibility through waivers programs and another three are in the queue.  Notwithstanding the highest court in the land, the whole Medicaid package is still an offer states can’t refuse.


  1. Michael Bindner  ::  8:09 am on July 3rd, 2012:

    Michael Tanner disagrees in that great public policy journal, the NY Post.

  2. Michael Bindner  ::  8:24 am on July 3rd, 2012:

    Sadly, sometimes pandering can result in insane policy. Many of the same officials ostensibly support the Ryan Budget, which would be insane for them in practice. If their agenda is holding office rather than good government, they are sometimes more than willing to cut off their nose to spite their faces (even if it results in human suffering). This is why benefits are so poor now. At some point, their voters will repudiate them, but that has not happened yet.

    The only sane option may be federalizing Medicaid (and other programs), with the introduction of a consumption tax paying for the expansion and serving as the centerpiece of real tax reform which could not only take most families off the roles but also replace SNAP and an array of confusing tax credit programs with an expanded, refundable Child Tax Credit paid with wages as an offset to a VAT-like Net Business Receipts Tax. Replacing TANF with paid adult education would also be an improvement – with recipients having access to the same Child Tax Credit (considering time in classrooms and study labs as paid work).

    Sadly, sometimes radical reform only happens when you make things worse. It may be that some local politicians live to do just that.

  3. charity  ::  7:18 pm on July 4th, 2012:

    Pandering? really….the truth of the matter is the GOP is finished, and they know it. They have kicked insanity into high gear. They have shown us the level of their unpatriotic hatred, and it’s time for this madness to stop. Question…exactly what makes these Governors think that the residents, and medical community in these states will tolerate such an act. ” Let them all die to spite Obama” I am tired of this damn the poor, and suffering mantra! I am tired of this let’s take Obama down BS, and damn who ever it hurt. Never in my life in the 21st have I seen such bigotry, and hatred. The Go have done nothing but obstruct, and cast this national as a national disgrace period. I can’t believe that People are suffering, and finally comforted by knowing that help is on the way, and here we have these bigots standing in the way of progress. Well I say hell no! If there was ever a time to say in one voice Hell no this is the time! Enough if they don’t like Obama then don’t invite him over for Sunday dinner. If they think that the abusing the already struggling poor is something to where like a jock strap you need find another way to get your thrills in. I personally say to my governor, in Texas ( Perry )don’t even think about it.

  4. Dave  ::  7:20 pm on July 4th, 2012:

    Over the top Charity, but point well taken.

  5. Interguru  ::  8:18 am on July 7th, 2012:

    There was resistance to the original Medicaid

    The governors caved in because of heavy lobbying by Hospitals, doctors, and insurance companies, all of whom are heavy Republican contributors.

    The last state to cave was Arizona in 1982, just before a referendum on the issue.

    ” Medicaid funding

    Undaunted, he revived the voter registration campaign and turned to yet another cause: Medicaid funding. Arizona in 1981 was the only state without Medicaid, since the legislature had refused to appropriate money for the state’s share of this federal program.

    In 1982, with an initiative petition drive under way and headed for success, the legislature got the message and established a Medicaid program. Kromko and his allies on this issue, the state’s churches, were satisfied and dropped their petition drive. ”

    ( from )