Will states really turn down federal money? They’ve done it before.

June 29, 2012

The Supreme Court has now forced states to make a choice about whether to expand Medicaid, as my colleague Sarah explains this morning. But will they actually turn down federal money, while other states scoop it up? Certainly it's happened before, as states have rejected federal money for everything from health care and high-speed rail to unemployment benefits. But state lawmakers have also reneged on their promises to turn their backs on the federal government.


(DARREN HAUCK / REUTERS) Wisconsin Gov. Scott Walker

The most prominent and obvious example is the original Medicaid program itself. In 1965, when Congress first created the federal-state partnership, every state moved to implement it—except for Arizona. For 17 years, Arizona was the only state without Medicaid, instead leaving it to county governments to manage health coverage for the poor. "For most of that period, Arizona state legislators congratulated themselves on their wisdom. As other states wrestled with budget crises caused by rapidly escalating Medicaid expenditures, Arizona’s legislative leaders observed, 'We told you so,'" Charles Brecher explained in a 1984 article for the Journal of Health Politics, Policy, and Law.

But Arizona eventually relented and joined Medicaid in 1982. Brecher explains the about-face: first, county government officials were being saddled with growing health-care costs, and they were angry with the state for "failing to capitalize on an opportunity to receive millions of dollars in federal aid." What's more, he explains: "Critics charged that Arizonans were paying federal taxes to support Medicaid programs in other states, without receiving federal help for their own indigent health care programs." Ultimately, Brecher continues, the state decided to implement its own unique version of Medicaid, though it also secured numerous waivers from Washington to exempt it from some federal requirements deemed onerous.

Texas is a more recent example. The state-based Children's Health Insurance Program was passed in 1998 to cover children from families whose incomes were modest, but too high for them to qualify for Medicaid. Texas dragged its heels on joining up, held back by conservatives who were fearful of a growing welfare state. But the state soon relented and joined CHIP in 2000.

Arizona and Texas' experiences point to some of the political difficulties that state governments could face if they choose to opt out of Obamacare's Medicaid expansion. But there's also a key difference in the case of Arizona, at least: During the stretch without Medicaid, Arizona still took up the responsibility to cover patients who might otherwise be covered by the program. And the county governments saddled with those costs were a leading pressure group that ultimately convinced the state to opt in.

That might not happen this time around: states that opt out of the expansion aren't necessarily signing themselves up for finding an alternate way to insure that group being added to the federal program. Instead, low-income individuals caught in that "donut" hole" will be paying the price themselves. And they're less likely to be an effective pressure group than Arizona's county governments in the early 1980s.

More recently, there's been a cohort of Republican governors who've refused federal money, particularly from the stimulus. In late 2010, Ohio Gov. John Kasich turned down $385 million and Wisconsin Gov. Scott Walke $810 million in stimulus money for rail projects, arguing that inevitable cost overruns would ultimately require the state to subsidize the project. Florida Gov. Rick Scott rejected $2.4 billion in federal funds for high-speed rail on similar grounds.

Some states have also refused to accept federal money for extending unemployment benefits. The funds didn't require the state to spend any money, but to accept the money, most states would have to pass new laws regarding how benefits would be distributed. Arizona, Wisconsin, Alaska, and Pennsylvania were among those to turn down the money, both because of ideological opposition to prolonged unemployment benefits and because of the federal strings attached.

But some governors who've boasted of their ability to "just say no" to federal money have flip-flopped later on. Just a few months after rejecting federal rail money, Walker asked the Obama administration for at least $150 million from the same pot, though for a different project that he said was better suited for the state. Similarly, four months after Wisconsin let the federally-funded extension of unemployment benefits expire, GOP state lawmakers dropped their opposition to the federal funds, and Walker signed a bill to let the federal money through.

So it's conceivable that GOP-led states could opt out of the Medicaid expansion under Obamacare, despite the inevitable pressure from hospitals and other interest groups. But that doesn't mean their opposition will remain for time eternal.

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