President Obama scored a huge victory today. Chief Justice John Roberts led a Supreme Court majority in upholding most of the Patient Protection and Affordable Care Act, including the critical mandate that most people either purchase health insurance or pay a financial penalty. Yet in that victory was a significant loss—and a potential gain for federalism. The court took away one of Washington’s favorite ways of making sure that the almost-poor don’t go without insurance: forcing the states to take care of it. And the ruling just might lead to a much-needed reform of Medicaid.

The Affordable Care Act (ACA, or “Obamacare”) is supposed to cover 32 million Americans who currently don’t have insurance. Fully half of these people would get coverage through Medicaid, which was enacted nearly half a century ago to cover needy families with children, pregnant women, disabled and blind people, and the elderly poor. Washington funds most of the program, but states administer it, and they must offer coverage to such people in return for their funding. The ACA would vastly expand states’ Medicaid responsibilities, requiring coverage even of childless adults who earn up to 133 percent of the federal poverty level. (Many states currently don’t offer childless adults Medicaid coverage at all.)

Under the ACA, Washington would wield both a carrot and a stick to force states to carry out the new mandate. The carrot is money: the feds will pay the full bill for the expanded Medicaid costs until 2016 and at least 90 percent thereafter. But Congress understood that some states still might not accept the cash. That’s where the stick would come in: states that chose to forego their new Medicaid money would risk giving up the Medicaid money they were already receiving for existing coverage. The 26 states that sought to overturn Obamacare claimed, as the Court noted in its opinion, “that this threat serves no purpose other than to force unwilling States to sign up for the dramatic expansion in health care coverage effected by the Act.”

The Roberts court declared this threat unconstitutional, finding that Washington could use the carrot (dangling new money) but not the stick (withdrawing old money). The states, when they initially signed up for Medicaid, could not have anticipated that Congress would one day enact a law that caused Medicaid to be “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 Court reasoned. The threatened punishment would effectively take away states’ choice in participating in the program, as the possibility of losing revenue that constitutes over 10 percent of state budgets “is economic dragooning that leaves the States with no real option.” Such coercion, Roberts noted, “runs counter to this Nation’s system of federalism.”

The ruling adds another element of uncertainty to a complex law. The court will “preclude the Federal government” from “imposing” its “sanction” on states, but not from imposing the Medicaid expansion itself. That leaves a question: what happens to people newly eligible for Medicaid who live in states that decline the new Medicaid money? Such people might try to get private health insurance through the premium tax credits and subsidies available on the new state insurance exchanges (which will begin operating in 2014). But it isn’t clear whether the ACA allows Americans making less than 133 percent of the federal poverty level to do that. If not, Democrats’ hopes for achieving near-universal coverage under the law would be substantially undercut.

One option would be to make those people eligible for tax credits and subsidies to purchase insurance on the exchanges. But this is an unattractive option because it would sharply inflate costs for federal taxpayers; Medicaid payments to doctors and other providers are much lower than private-insurance payments, even under government-subsidized plans. Alternatively, the White House could use the bully pulpit to create political pressure, with the president reminding the low-income uninsured living in noncompliant states that their government was forfeiting free money that it could use to care for them.

A third option would require compromise. States that balked at the expansion of an already budget-busting Medicaid program could bargain for additional reforms, like increased flexibility in how to structure Medicaid coverage and copays. Since Medicaid’s structure leaves states few practical ways to reduce costs other than cutting provider reimbursements, a grand bargain on Medicaid reform that promoted state innovation—much as welfare reform did—might be the best outcome for all concerned.

Roberts’s ruling should remind observers that the health-care law’s reliance on Medicaid left a dangerously dangling loose end. In many states, poor people who rely on Medicaid struggle to find doctors and dentists because the program’s reimbursements are so low. That problem is likely to worsen as millions more seek public health care for the first time. (The ACA does contain a provision increasing Medicaid reimbursements for primary care to Medicare levels for two years, but that’s not a powerful inducement for physicians to commit to these patients for the long term.) “We do not consider whether the Act embodies sound policies,” Roberts wrote. “That judgment is entrusted to the Nation’s elected leaders.” Those leaders have further burdened the already shaky Medicaid program. The Supreme Court may just have given them an excuse to reform Medicaid.


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