While much of the commentary following the Supreme Court’s ruling in National Federation of Independent Business v. Sebelius (No. 11-393) focused on the decision to uphold the minimum coverage provision of the Affordable Care Act (ACA), the Court’s limitation on the federal government’s ability to withdraw a state’s existing Medicaid funding could have an equally meaningful impact on the implementation and results of the ACA. By prohibiting the Secretary of the Department of Health & Human Services (the Secretary) from exercising her statutory authority to cut off a state from all future Medicaid payments for failure to comply with the ACA’s mandated expansion of Medicaid coverage, the Supreme Court appears to allow states to choose whether or not to participate in this “new health care program,” as described by Chief Justice Roberts. In response to the Court’s opinion, a number of governors have already expressed their intent to decline to participate in the Medicaid expansion, foregoing the lure of substantial federal subsidies.  

The decisions of the Supreme Court and individual state governments may drastically impact health care funding for individuals, health care providers and insurance companies. Understanding these effects will be crucial for payors and providers alike.

Overview of the ACA Provisions

Prior to enactment of the ACA, the Medicaid program only required states to cover certain discrete categories of needy individuals, including pregnant women, children, needy families, the blind, the elderly and the disabled. States had the option of offering coverage beyond these categories and receiving additional federal funding, but that was not a condition of receiving Medicaid funds. According to the provisions of the ACA, beginning in 2014 states are required to expand their programs to cover individuals under the age of 65 whose income does not exceed 133 percent of the federal poverty line and who were not previously eligible for Medicaid.1 The new eligibility standards were intended to significantly reduce the ranks of poor uninsured and were expected to increase Medicaid enrollment by 15.9 million by 2019.

To encourage states to participate, Congress subsidized the expansion of the Medicaid rolls by requiring the federal government to pay 100 percent of a state’s costs for medical assistance for individuals newly eligible for Medicaid through 2016. The federal share of costs gradually decreases to 90 percent for 2020 and each year thereafter, subject to further statutory amendment.2 With these percentages of shared costs, the CBO originally estimated that federal outlays for the Medicaid expansion would top $443 billion by 2022, with new state spending totaling approximately $21.1 billion. Thus, the federal government would be responsible for 95 percent of the total costs of expansion through 2019, with state spending on Medicaid expected to increase by 3 percent during that time as a result of expansion.

In addition to the “carrot” of significant federal subsidies, the federal government has always had the ability to wield a big “stick” in regard to Medicaid funds: Since the origin of the Medicaid program, the Secretary, pursuant to section 1396c of the Medicaid Act, has been authorized to terminate all or some of the payments to a state Medicaid agency if the state plan fails to comply with the federal Medicaid requirements at 42 U.S.C. §1396a. The ACA’s required expansion of Medicaid eligibility was enacted through an amendment to section 1396a, thereby allowing the Secretary to terminate payments to a state’s program for failing to offer coverage to the ACA’s new Medicaid population.

The Supreme Court’s Limitation

Rather than view the potential termination of a state’s Medicaid funds as “relatively mild encouragement,” Chief Justice Roberts likened the provision to a “gun to the head” of any state that opts out of the ACA’s expansion. His opinion, in which he was joined by Justice Breyer and Justice Kagan, found the use of section 1396c to terminate federal funding for state Medicaid programs that did not expand eligibility as mandated by the ACA would exceed the constitutional authority of Congress to impose conditions on federal funds granted to the states under the Spending Clause.3 The dissenting opinion of Justices Scalia, Alito, Thomas and Kennedy found a similar constitutional deficiency with the Medicaid expansion, creating a 7-2 majority in favor of limiting the Secretary’s authority under section 1396c.4 Interestingly, the Court’s decision did not invalidate any particular section of the ACA or existing law as unconstitutional, instead ruling that the constitutional violation would be fully remedied by precluding the Secretary from applying section 1396c to withdraw existing Medicaid funds for failure to comply with the requirements set out in the expansion.

In singling out the Medicaid expansion, Chief Justice Roberts draws important distinctions between this program and past uses of the spending authority or prior revisions to the Medicaid program, but fails to draw any bright lines to be used by future courts to determine the constitutionality of similar provisions. For example, the opinion distinguishes this expansion from the statutory right of Congress to “alter, amend, or repeal any provision of Medicaid” by characterizing the expansion as a shift “in kind” that effectively creates a new health care program distinct from Medicaid, covering a new population and subject to different federal funding rules. The opinion fails to provide guidance as to what sort of future alterations to the Medicaid program may be characterized as authorized changes “in degree” as opposed to unauthorized shifts “in kind.”

Similarly, the Court differentiates the threat to withdraw all Medicaid funds from the ability of Congress to withdraw federal funding for other programs as penalty for a state’s noncompliance with federal mandates. While the threat to withdraw 5 percent of federal highway funds from South Dakota (approximately $615 million — less than 1 percent of the state’s overall budget) for failure to enact a legal drinking age of 21 is constitutional “encouragement,” the threatened loss of over 10 percent of a state’s overall budget is “economic dragooning” that is unconstitutional compulsion. The status of mandates attached to federal funding that falls between these two marks is unclear.


While the bounds of congressional power to withdraw federal funding is likely to be challenged and examined in the coming years, the more immediate impact of the Supreme Court’s decision will be on the ACA itself. Secretary Sebelius acknowledged in a July 10 letter to state governors that the Supreme Court’s ruling prevents the Secretary from withdrawing funding for states’ existing Medicaid programs if a state chooses not to participate in the Medicaid expansion. As of July 17, two weeks after the decision, a number of states’ governors or legislatures have indicated that they will not participate in the Medicaid expansion, including Florida, Louisiana, Mississippi, South Carolina, and Texas, all of whom were plaintiffs in the Supreme Court case. These five states represent approximately 25 percent of the 16 million currently uninsured expected to enroll in Medicaid as a result of the expansion. If these states follow through on their threatened course of action, the result would significantly undermine a law intended to extend coverage to nearly all of the nation’s uninsured population.

The decision by a state to opt out of the Medicaid expansion would have significant financial effects on individuals, providers, insurance companies and state and federal budgets. Economic estimates have varied widely, with some groups concluding that state opt-outs will save the federal government money by limiting Medicaid funds disbursed under the program and others concluding that individual federal subsidies in opt-out states could cost the federal government more than Medicaid care.5 The CBO estimated that the effect of certain states opting out of the Medicaid expansion would reduce federal outlays by $84 billion through 2022, mainly due to 3 million fewer individuals obtaining health insurance through Medicaid or federal insurance exchange subsidies. The state governments of Texas and Florida estimated that despite the federal subsidies, the Medicaid expansion would cost the states billions of dollars more in Medicaid payments for new enrollees. Many states have also expressed concern that although the program currently provides for 90 percent federal funding after 2020, Congress may amend the statute to reduce funding or add additional mandates that increase state costs.

States that choose to move ahead with the expansion will add millions of new enrollees; for Medicaid managed care insurers that have contracted with some of these states to administer and provide Medicaid benefits, the expansion would result in a significant increase in revenue. In fact, an economists’ report cited in the Supreme Court decision estimated that the Medicaid expansion would increase revenues to insurance companies by approximately $350 billion over 10 years. This opportunity has already spurred merger and acquisition activity in the managed care sector, which is likely to continue in the near term.

The impact of the Medicaid expansion on hospitals could also vary significantly across states. In conjunction with the Medicaid expansion, the ACA significantly reduces funding for disproportionate share hospitals (DSH payments), which currently receive payments from the federal government based on the proportion of disabled or Medicaid-eligible patients the hospital serves. These payments are designed to reimburse hospitals for the greater costs associated with treating indigent and uninsured populations. In recognition of the expected reduction in the number of uninsured and lower uncompensated care due to the Medicaid expansion, beginning in October 2014, the ACA reduced DSH payments to hospitals by as much as 75 percent below current payment levels.6 This provision is expected to reduce payments to hospitals by $14.1 billion between 2014 and 2020. While hospitals serving larger numbers of uninsured patients in states that reject the Medicaid expansion will receive marginally higher DSH payments, this revenue will be less than the revenue that would have been available if the uninsured patients were covered by Medicaid.

State governments continue to weigh the decision of whether or not to participate in Medicaid expansion. Since CMS Acting Administrator Marilyn Tavenner assured state governors that there is no deadline to choose to expand Medicaid eligibility, we expect developments to continue to unfold throughout the coming election season and into next year.