Governors, state legislators, and budget officials across the country are reaching the same conclusion about the Patient Protection and Affordable Care Act (PPACA): it creates massive problems for state budgets almost immediately. Medicaid expansion in 2014 may well bankrupt states, but the loss of federal stimulus dollars combined with federal limits on how states can cut Medicaid spending is a clear and present danger to budgets and taxpayers. States can either play chicken with the federal government or give up and look for other places to cut.

Health and Human Services (HHS) Secretary Kathleen Sebelius, who as a former governor should have more understanding of the dilemma facing states, has raised objections instead of supporting innovation. The frustration led Washington Medicaid Director Doug Porter to tell Health Care News, "I cannot see how [the state of] Washington can afford to support both the Medicaid program and our state-only programs."

States can save money on Medicaid by tightening eligibility, limiting services, or cutting payments to providers. But the health reform law, which Democratic governors supported before they read it, requires maintenance of effort for eligibility. The law also severely restricts the ability of states to reduce what they pay doctors if the payment reductions could reduce access to care. That leaves cuts in services, but the most expensive optional service is prescription drug coverage, which can prevent more expensive procedures and save more money than is spent.

States are at the mercy of Sebelius to approve whatever steps they try to take to address the problem. The review process could easily extend past the July 1 start of the next fiscal year even if approved. If this is not an example of the federal government commandeering states, it will be impossible to find one.

So we have a game of chicken.

Will states blink and find other places to cut? Will they stand firm in their plans to drop Medicaid, possibly before 2014, with no federal safety net? Or will the administration admit that the law is fundamentally flawed and waive requirements for states as it has for a growing list of large companies?

This item originally appeared as an e-mail alert from the Locke Foundation.