Yesterday, U.S. Department of Health and Human Services (HHS) Secretary Kathleen Sebelius sent a letter to state governors explaining that HHS will continue to talk to, and work with states to implement health care reform following the Supreme Court’s decision on the Affordable Care Act (ACA).  In her letter, Secretary Sebelius indicated a commitment to allowing the states “as much flexibility as we can” to achieve successful implantation of the ACA.

Under the ACA, beginning in 2014, Medicaid eligibility will be expanded to adults under age 65 with incomes up to 133% of the federal poverty level who were not previously eligible for Medicaid.   Funding of the expansion will not follow traditional matching guidelines; instead 100% of the expansion will be paid for by the federal government through 2016, with the federal share decreasing to 90% by 2020.

In the Supreme Court’s decision, the majority concluded that the Medicaid expansion under the ACA is constitutional. However, the Court held that it would be an unconstitutional expansion of Congress’s authority for the federal government to withhold Medicaid funding to the states for non-compliance with the ACA’s expansion provisions.  Rather than invalidate the Medicaid expansion in its entirety, the Court adopted a more limited remedy of severing the penalty provisions from the ACA. Section 1396c gives the Secretary the authority to withhold all further Medicaid payments to the state if the Secretary determines the state is out of compliance with any Medicaid requirement, including those contained in the expansion.  The Court ruled that the Secretary could not use this section to withdraw existing Medicaid funds for failure to comply with the requirements set out in the expansion. However, §1396c remains applicable, in part, and it could be used by the Secretary to withdraw funds provided under the ACA if a state that has chosen to participate in the expansion fails to comply with the requirements of the ACA.

In her letter to the governors, Secretary Sebelius stressed the financial resources that are available to states for developing health insurance exchanges and for the expansion of Medicaid programs.  She also indicated that Congress gave HHS the authority to establish a hardship exemption from the individual mandate, and that HHS intends to exercise that authority, as may be needed for low-income individuals who cannot afford health insurance and do not qualify for Medicaid because their state has chosen not to expand eligibility.

HHS will conduct ACA Implementation Forums across the country in July and August, including a forum in Chicago on August 2, 2012.  According the letter, the sessions are intended to provide an opportunity for states and stakeholders to learn more about the next steps in implementing the health care law and ask questions about work needed to build affordable insurance exchanges in every state.  HHS will provide an overview of topics related to coverage provisions of the ACA effective in 2014.