By Robert Holden, Vice President

Prior to the Supreme Court’s decision, most Court watchers’ attention was focused on the challenge to the individual mandate.   Striking down the individual mandate could have brought down the entire Affordable Care Act (ACA), or at least eliminated the private health insurance provisions of the law.  But instead of striking down the private insurance provisions, the Court instead supported the plaintiff states’ contention that the law unfairly allowed federal agencies to withhold Medicaid funding to compel state compliance with the ACA’s Medicaid expansion.  As Chief Justice Roberts stated in the Court’s ruling (which can be found here in full):

“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.”

The Medicaid holding, what disappointed Colorado Attorney General John Suthers referred to as the “Silver Lining,” offers states a real opportunity to opt out of the Medicaid expansion under the ACA and continue to receive funding for their existing Medicaid programs.

The Supreme Court’s decision will have enormous fiscal impacts on the states and political implications on ACA implementation.  While implementation of a state-level health insurance exchange has always been optional under the law, Medicaid eligibility expansion to 138% of the federal poverty level was practically a given.  Federal funding would have picked up the entire direct cost of additional Medicaid claims, at least for a few years.  But the states would be required to support the administrative cost of adding, in some instances, 50% more enrollees to Medicaid programs already strained by the recession.  These additional costs were tolerable for states only given the alternative catastrophe of losing all of their existing federal Medicaid funding if they did not agree to the Medicaid eligibility expansion.  This proposition will be revisited now that they can avoid those administrative costs and receive Medicaid matching funds.

Thirty states have now either joined lawsuits to strike down the ACA, or have made formal requests for flexibility in Medicaid reform implementation.  If a large number of these states opt out of the ACA’s Medicaid expansion, and assuming implementation of the private insurance exchanges, many people formerly eligible for Medicaid will now seek federal subsidies in the health insurance exchanges.  This gives states inclined to disrupt ACA implementation leverage by increasing federal costs in two ways.  A larger number of state residents will be seeking federal subsidies – adding to the program’s bottom line.  Additionally, states could continue to opt out of creating state exchanges and rely on a federally established insurance exchange.  What the states do next will frame much of the debate as we head into the ultimate challenge for ACA implementation in November.

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Robert Holden is Vice President at Stateside Associates managing the health care practice, addressing issues concerning public and private payers, as well as service and product providers. Mr. Holden also uses his issue and policy group experience to guide the legislative and regulatory monitoring teams focusing on healthcare policy issues.