The Biggest Change in the Supreme Court's Health Care Ruling? Allowing States to Opt Out of ObamaCare's Medicaid Expansion

Although the Supreme Court upheld the bulk of ObamaCare as constitutional, the majority ruling made one substantial change: States can now choose not to implement the Medicaid expansion, which accounts for about half of the law's expansion of health coverage, without risking their current federal Medicaid funding.

This is potentially a huge change, and as a result many states are likely to seriously consider opting out. If they do, that means that the much-touted law's coverage expansion would be far smaller, perhaps millions less than estimated. Indeed, thanks to the court's Medicaid ruling, we may end up with many states in which ObamaCare is essentially not implemented — a piecemeal, state-by-state version of ObamaCare in which some states exist substantially outside the law's reach.

Medicaid, a health program for the poor and disabled, is jointly funded by states and the federal government, with the federal government kicking in more than half the money to run the program on a matching basis. It's not quite as big as Medicare, but it's still a huge program that plays a major part in state budgets: On average, federal Medicaid funds represent about 10 percent of each state's total budget.

Technically, Medicaid is a voluntary program, and each state has a slightly different arrangement with the federal government. But ObamaCare requires all participating states to expand the program so that it covers all individuals up to 133 percent of the poverty. The only other option is to drop out the program entirely — and potentially lose all funds as a result. As originally drafted, the law gives the Health and Human Services secretary the power to completely cut off all existing federal Medicaid funding if a state chooses not to implement the law's Medicaid expansion.

The federal government can induce states to regulate, applying financial pressure by withholding funding. But the Constitution prohibits the federal government from requiring states to regulate: The pressure cannot be so strong as to constitute compulsion. The administration argued that the states still had a choice whether or not to participate in the program, and therefore there was no coercion. But the states said that the threat of losing such a large chunk of their funding was so severe, so unthinkable, that it was not really a choice.

Chief Justice John Roberts, writing a majority opinion, agreed. "In this case," he writes, "the financial 'inducement' Congress has chosen is much more than 'relatively mild encouragement'—it is a gun to the head." Federal Medicaid funds already play such a large role in state budgets that no state could afford to lose them. "The threatened loss of over 10 percent of a State's overall budget…is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion," writes Roberts.

What's more, Roberts notes that ObamaCare's Medicaid expansion represents a fundamental change in the nature of the program:

"The Medicaid expansion…accomplishes a shift in kind, not merely degree.  The original program was designed to cover medical services for four particular categories of the needy: the disabled, the blind, the elderly, and needy families with dependent children….Under the Affordable Care Act, Medicaidis transformed into a program to meet the health care needs of the entire nonelderly population with income below 133 percent of the poverty level.  It is no longer a program to care for the neediest among us, but rather an element of a comprehensive national plan to provide universal health insurance coverage."

The upshot? "As a practical matter," Roberts says, "that means States may now choose to reject the expansion; that is the whole point."

The Supreme Court, in other words, has made it possible for states to decline to participate in a program that accounts for a huge portion of ObamaCare's coverage expansion: If the 26 states that challenged the law all opted out, the projected coverage expansion would decline by about 8.5 million individuals — all near or below the poverty line. It's not clear whether they would then get private insurance subsidies, but they would presumably still be subject to the coverage mandate. 

Given how much states are already spending on Medicaid, it seems likely that many will consider opting out: Although the federal government would pay for 100 percent of the coverage for the newly eligible for the first few years, the state obligation would gradually increase until the end of the decade, when states would have to pick up about 10 percent of the tab. That may not sound like much, but it would amount to billions in additional health care spending for some states. With Medicaid already wrecking state budgets, it's quite plausible that several will say no thanks to ObamaCare's Medicaid expansion.

Overall, this dramatically expands the choices for state governments. Already they had the option to decline to set up health insurance exchanges as called for the by the law. In theory, the federal government would then step in to create an exchange, but it's not at all clear that the federal government has the necessary funding or authority to get funding. If a state opts out of both exchange creation and the law's Medicaid expansion, it will be able to avoid many of the law's costs and consequences, and position itself largely beyond the reach of the law. Which may leave us with a fractured, quasi-federalist health care overhaul in which some states have exchanges and a beefed up, federally managed Medicaid program and other states avoid participation almost entirely. 

Update: At The Washington Post, Sarah Kliff notes that if states did opt out, it's likely that many of those who didn't get Medicaid coverage would still not qualify for private insurance subsidies:

What we do know is this: If a state does not expand its Medicaid program, it would create a "donut hole" in insurance coverage for low-income Americans.

The federal law was written with the assumption that all people living below the poverty line would become eligible for Medicaid. Federal subsidies, therefore, would be unavailable to anyone making less than that — even if the state opts out of the Medicaid expansion.

That could mean that some of the poorest Americans would be the ones who do not gain coverage through the Affordable Care Act. "It creates a no-man's land," Salo said.