States Begin to Make Decisions Regarding Medicaid Expansion and Exchanges

by King & Spalding

Following the Supreme Court’s June 28, 2012 decision in NFIB v. Sebelius upholding most of the Patient Protection and Affordable Care Act (PPACA), state governors were left to make vital decisions regarding their states’ implementation of PPACA’s Medicaid expansion and insurance exchanges.  The Supreme Court upheld the PPACA individual mandate, which will be implemented in part through the health insurance exchanges.  However, the Supreme Court also held that the federal government cannot withhold current Medicaid spending on existing eligible populations if states opt to forego PPACA’s Medicaid expansion.  On July 10, HHS Secretary Kathleen Sebelius sent a letter to the governors announcing new funding and federal assistance to set up the exchanges and expressing hopefulness that all states would participate in the Medicaid expansion. 

Medicaid Expansion

Under PPACA, as of 2014, states may expand their Medicaid-eligible populations to those adults under the age of 65 with incomes up to 133 percent of the federal poverty level.  In the first three years of the program, the federal government will pay all costs of the additional Medicaid populations.  After 2016, the federal government will pay at least 90 percent of those costs.  The Congressional Budget Office and Center on Budget and Policy Priorities have estimated that the true state share of the Medicaid expansion will be only seven percent, with only a three percent increase in total state Medicaid spending.  The Medicaid expansion is one of the chief vehicles through which PPACA should expand the insured population.  Safety net advocates, such as the National Association of Public Hospitals and Health Systems, have suggested that rejecting the Medicaid expansion would result in four million Americans remaining uninsured in those states that have already announced that they will not expand Medicaid eligibility, and warned that millions more may be at risk.

Both the National Governors Association and the National Association of Medicaid Directors have sent letters to CMS following the Supreme Court’s decision, inquiring about issues related to the Medicaid expansion and the additional federal funding available.  Numerous state governors of both political parties are currently evaluating their states’ plans and have expressed doubts regarding whether the additional federal funding can truly make up the costs of the expansion.  Several states, including Florida, South Carolina, Louisiana, Mississippi, and Texas have already announced their intention to reject the Medicaid expansion.  Nevertheless, Secretary Sebelius and other outside observers expect that most, if not all, states will eventually embrace the Medicaid expansion, given the generosity of the federal government’s financing and pressure from safety net hospitals and other providers.  On July 13, CMS Acting Administrator Marilyn Tavenner sent to a letter to Virginia Governor Robert McDonnell, who is currently chairman of the Republican Governors Association, stating that there is “no deadline” for states to inform CMS of their intentions regarding the Medicaid expansion and that states can receive federal funding for Medicaid IT costs related to the expansion even before they have declared their intention to expand Medicaid eligibility, adding that if the state ultimately decides not to go forward with the expansion, those costs will have to be repaid.

State-run Insurance Exchanges

PPACA gives state governments the option to establish insurance exchanges, through which many Americans will purchase their own individual or family policies, or to allow the federal government to establish and operate an exchange market on behalf of the state.  Secretary Sebelius previously announced additional funding available to states whether the states set up their own exchanges, partner with the federal government to operate certain functions of the exchanges, or allow the federal government to establish and operate those exchanges.  This new funding is available through the end of 2014.

In addition to Massachusetts, which already operates an insurance exchange based on its state healthcare reform law, 15 states, including California and New York, have announced their intention to establish state-run exchanges and are taking legislative and administrative steps to authorize and establish them.  However, six states, including those that rejected the Medicaid expansion, have already announced that they will not implement state-run exchanges, while other state governors have vetoed legislation that would authorize their creation.  Additional states continue to evaluate their options.  The deadline for each state to notify HHS of its plans regarding the health care exchanges is November 16.

HHS Secretary Sebelius’ July 10 letter can be found by clicking here. CMS Acting Administrator Tavenner’s July 13 letter is located here.

Reporter, Adam Laughton, Houston, +1 713 276 7400,

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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