Obama administration readies for Medicaid opt-outs

July 11, 2012

HHS Secretary Kathleen Sebelius is exploring how to make the health law workable without a Medicaid expansion.

The Obama administration does not like to talk much about the possibility of states opting out of the health law's Medicaid expansion - but it's top health care official certainly is thinking about it.

Health and Human Services Secretary Kathleen Sebelius sent a letter to all governors last night, assessing the state of the Affordable Care Act. She urged them to act on implementing the Medicaid expansion, noting she was hopeful that "state leaders will take advantage of the opportunity provided to insure the poorest working families."

The letter also acknowledged that some states may not. To that end, Sebelius hinted that the Obama administration has been looking at how to make the law work best in recalcitrant states.

One issue they're thinking about is how the individual mandate would work for the poorest Americans. When the Affordable Care Act was drafted, that didn't really matter:  anyone who earned less than 133 percent of the Federal Poverty Line would have Medicaid, thereby meeting the law's requirement to carry coverage.

If a state does not participate in the Medicaid expansion, most low-income Americans would be exempt from the individual mandate through a hardship exemption. That provision waives the tax penalty for those who cannot find affordable health insurance, with affordable defined as less than 8 percent of a family's income.

There's a fear, however, that some would not qualify. A small group of the poorest Americans would be ineligible for the hardship exemption if there was just one plan in their geographic area that cost less than 8 percent of their income. They could either buy a policy, or pay the $695 fee for not carrying coverage.

The Obama administration wants to make sure that does not happen. It wants to ensure that all people below the poverty line get covered under the hardship exemption. In studying the law, Sebelius writes that she would have the authority to do so.

"As to the very small number of affected individuals who would not qualify for the statutory exemption." Sebelius writes, "Congress provided additional authority, which we intend to exercise as appropriate, to establish any hardship exemption that may be needed."

That's one glimpse into the Obama administration's Plan B. It's not the entire thing: Republican governors and Medicaid directors still have a number of questions about what exactly it would mean for a state not to participate in the Medicaid expansion. But it does signal that the White House recognizes the possibility of states opting out is a real one.

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Dylan Matthews | July 11, 2012