ObamaCare's Medicaid Mandate

Is the health care law's Medicaid expansion unconstitutional?

Can a technically voluntary program also be coercive? The 26 states challenging the federal government's expansion of Medicaid called for by ObamaCare are going to the Supreme Court to argue that it can.

When the Supreme Court hears the state challenge to ObamaCare later this year, most of the attention will likely be on the challenge to the law's individual mandate to purchase health insurance and its implications for the Constitution's Commerce Clause. But in a somewhat unexpected move, the Supreme Court has decided to allow for a full hour of oral argument regarding another part of the case: the expansion of Medicaid, the joint federal-state health program for the poor and disabled, which is expected to account for half of the law's health coverage expansion.

Technically, Medicaid is a voluntary program. But the states' case rests on the argument that ObamaCare's expansion is unconstitutionally coercive, and a violation of congressional power under the Spending Clause.

To understand why, consider the following thought experiment with your own budget in mind: After decades of taking a very large tax break—one worth perhaps a fifth of your total income—the government changes the qualification requirements. Qualifying in the future will require substantially more effort, and will also require significant additional spending on some recurring expenditure you're already having trouble paying for. You can avoid the new requirements by declining the tax break entirely, but doing so would leave you with a mangled budget and impossible fiscal obligations.

In a technical—and perhaps the legal—sense, you're free to opt out. But most people would probably feel that being forced into such a choice amounts to coercion: They would have no real choice but to comply. 

That's the situation the states are in with ObamaCare's expansion of Medicaid. Strictly speaking, states are allowed to opt out of the program. But the program's financial incentives are structured in such a way that the states feel they have no choice but to comply with the expansion, and the additional costs that come with it.

Right now, Medicaid represents the biggest single state budget item. In many states, the program has been expanded greatly over the years thanks in large part to the incentives provided by federal matching funds: For every dollar a state spends on Medicaid, the federal government contributes more than an additional dollar in return (the exact amounts vary by state, but overall the federal government has funded about 57 percent of the program's cost).

Until recently, states have had some freedom to determine eligibility requirements within their borders. But under ObamaCare, all participating states will be required to offer Medicaid to most anyone whose income falls under 138 percent of the federal poverty line (in many states, the requirement has been much lower). By the end of the decade, states will be required to pay for 10 percent of the cost of the newly eligible. That may sound trivial, but in Texas alone, Medicaid expenditures from the general fund are projected to rise by nearly $10 billion between now and 2020. States like Florida, California, and New York are also likely to see billion-dollar increases. And this comes in the midst of a nationwide fiscal crunch in which Medicaid is already straining many state budgets.

Yet the alternative is even less appealing for state officials trying to balance the books. If states drop out of the program, they lose all of the federal money that comes with it.

As the conservative American Action Forum noted in a recent amicus brief on behalf of the states, "The States are in no realistic position to fill the enormous gap that the loss of federal Medicaid funding would leave." According to the brief, Medicaid spending is equal to more than a third of all state taxes collected nationwide, and without federal funds, state budget expenditures would rise by 22.5 percent, an impossible burden for any state.

Is this enough to constitute coercion? Perhaps. Legally, the federal government can use financial incentives to influence policy decisions made by the states, and it does so frequently. But it cannot "coerce" them into compliance. And as I. Glenn Cohen and James Blumstein recently explained in the New England Journal of Medicine, a sufficient financial push by the federal government might count: In its ruling in the 1987 case South Dakota v. Dole, the Supreme Court declared that "in some circumstances the financial inducement offered by Congress might be so coercive as to pass the point at which [permissible] pressure turns into [impermissible] compulsion." Up until now, courts have sided against the states. And although it's unlikely that the Supreme Court will rule differently, it's not impossible.

Conservative states have done themselves no favors by talking up the possibility of dropping out of Medicaid in recent months. The threat of a walkout was used mostly as a way of drawing attention to its considerable flaws, and exiting the program was never particularly likely; but the fact that some state officials discussed it openly could end up undermining their current case that dropping out isn't really a plausible option.

Ultimately, the problem lies in the very existence of a safety net program that relies so heavily on the addictive flow of federal matching funds. Whether or not states have a choice now, they did when they joined the program decades ago. States allied with the federal government and allowed themselves to become dependent on its health care handouts—and now they're paying the price.

Peter Suderman is an associate editor at Reason magazine.