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Medicaid ruling upholds 'carrot,' overturns 'stick'; will states sign on anyway?

Virginia Republican Gov. Robert McDonnell said that even at 90 percent federal funding, the Medicaid expansion would be a "crushing" burden on many states.

Updated at 3:20 p.m. ET: While it upheld most of President Barack Obama's health care reform program Thursday, the Supreme Court took away the stick the White House had hoped to use to force states to expand Medicaid coverage for millions of poor Americans.

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The court, in an opinion by Chief Justice John Roberts, said states can't be penalized for refusing to join the Medicaid expansion by losing all of their federal Medicaid funds. That leaves cash-poor states in the position of deciding during an election year whether the benefits of the expansion outweigh the potential downsides — both financial and political.

First, some background. Medicaid currently covers many families that are at or below about 63 percent of the poverty line, with some categories — such as children under age 6 — covered up to 133 percent. But most states don't cover lower-income adults.

The Patient Protection and Affordable Care Act sought to compel states to expand coverage to nearly everyone up to the 133 percent threshold — income of about $30,000 a year for a family of four — which would add about 17 million people to the Medicaid rolls.

The carrot was the federal government's promise to cover all of the states' Medicaid expenses for the new enrollees through 2016, gradually dropping to 90 percent by 2019. The stick was that states that refused to sign on would lose all of their federal Medicaid funding.

Christina S. Ho of the Rutgers University School of Law told msnbc.com that the decision could leave the poorest residents of states that decline the money in a particularly vulnerable situation.

Another provision of the law the so-called state health insurance exchanges, extends subsidies to people between 100 percent and 400 percent of the poverty line to buy coverage. But if you're below the poverty line, you're not eligible — because the law assumes you'll get the new Medicaid benefit.

So if a state rejects the expansion of Medicaid, "there are some people that may not be able to get coverage at all," said Ho, who was a member of President Bill Clinton's Domestic Policy Council. "They may not get Medicaid, and they may not be eligible to purchase insurance through the exchange."

States charge plan was blackmail
Twenty-six states filed a petition with the court arguing that the provision was unconstitutional, saying it amounted to blackmail: Either they accept the added funding for a few years, with its increased burden on state coffers in later years, or they lose all of their billions of dollars of federal Medicaid distributions.

That would be a crippling financial blow, because states can't opt out of Medicaid itself. Currently they pay about 40 percent of those expenses; without any federal funding, they would have to come up with the remaining 60 percent themselves.

Supreme Court upholds health care mandate

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Full ruling from the court

Roberts upheld the constitutionality of the expansion itself, in essence saying the carrot was fine but the stick was illegal.

"Nothing in our opinion precludes Congress from offering funds under the Affordable Care Act to expand the availability of health care, and requiring that States accepting such funds comply with the conditions on their use," he wrote. "What Congress is not free to do is to penalize states that choose not to participate in that new program by taking away their existing Medicaid funding." 

Twitter reactions to the ruling

"The states claim that this threat serves no purpose other than to force unwilling states to sign up for the dramatic expansion in the health care coverage effected by the act," he added. "Given the nature of the threat and the programs at issue here, we must agree.”

While it might be fair to say the ruling turned a virtually mandatory program into a voluntary one, few if any states are likely to reject the increased coverage for so many more of their residents, said Katherine Hayes, a lawyer who is an associate research professor for the George Washington University School of Public Health and Health Services.

"I think, to the extent that they do, it will be largely for political reasons rather than financial or policy reasons," Hayes told msnbc.com. In an election year, it might be useful for some conservative lawmakers "to say you oppose quote-unquote Obamacare," she said.

Jay Bhattacharya, a physician and economist at the Stanford University Center for Health Policy, disagreed, saying some state budgets are so stretched that state officials might "consider this option since they will ultimately be on the hook for financing at least a portion of this expansion."

"If enough states decide to deny the Medicaid expansion, this may substantially reduce the ability of ACA to expand insurance coverage," Bhattacharya wrote on the center's health policy blog.

Virginia Gov. Robert McDonnell predicted that would happen, saying that once the federal contribution begins dropping, states will still be left with a large "unfunded mandate" — $2.2 billion over 10 years in his state, he said.

"We've already had Medicaid grow from 5 percent to 21 percent of our budget in the last 30 years, and for every governor, these mandates are crushing expenditures to endure," McDonnell, chairman of the Republican Governors Association, said in an interview on MSNBC-TV. "So this is a real hardship."

But Hayes said that in practical terms, the incentives for states to sign on are too big to turn down: They can provide hundreds of thousands of residents with health care coverage at no cost for a few years, and even in the outlying years (when the federal government will pick up only 90 percent of the bill), they can work on strategies to mitigate the reduction, such as seeking waivers from the Department of Health and Human Services.

"I don't know what more the federal government or (Health and Human Services) could do" to bring reluctant states on board, she said.

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