The Wall Street Journal reports today on the biggest non-Washington policy fight of the next few years, the bid to get states to accept the expansion of Medicaid. The Supreme Court ruling on Obamacare gave states an opt-out for the Medicaid expansion, designed to provide 1/2 of the total coverage expansion in the law. So far, several states have said they would reject the expansion, though the Democratic Governor in one southern state, Arkansas, recently said he would move forward on it.

The WSJ article intimates that some states may go halfway, expanding Medicaid to a point but not to the full 133% of the federal poverty line envisioned by the law.

Indiana, New Mexico and Wisconsin are among the states asking the federal government to let them omit from the Medicaid expansion residents whose incomes put them just above the poverty level. The states hope to take advantage of provisions in the Affordable Care Act that offer a federal subsidy to help these residents buy private insurance, starting in 2014 [...]

State Medicaid-eligibility levels currently vary. Under the law, all states were to open their Medicaid programs to Americans who earned up to 133% of the federal poverty level, which is currently set at $11,170 for a single person. The law also made those with incomes 100% to 133% of the poverty level eligible to buy federally subsidized, private insurance through exchanges.

Some states, however, are asking the Centers for Medicare and Medicaid Services if they can include people in Medicaid up to 100% of the poverty level, but keep people with incomes between 100% and 133% of the poverty level out of the program and instead funnel those people toward the exchanges.

Their main reason: States wouldn’t have to contribute to the costs of the subsidies to purchase private insurance.

This makes a ton of sense for the states. The exchanges will provide subsidies to anyone above the poverty line to purchase health coverage. However, those exchange subsidies would come from federal funds; the states would not have to contribute a dime. While the federal government would pick up the full cost of the Medicaid expansion for the first three years, and 90% over time, states would still be on the hook for a small percentage of those costs, as well as any “woodworkers” who were previously eligible in their states, but enrolled after the publicity over the expansion made them more aware of their options. So if states just expanded to 100%, they offload a percentage of those costs (according to their figures, a pretty large percentage) to the federal government.

This would make the health care law more expensive overall.

Allowing partial Medicaid expansions could have broad implications for how the law covers uninsured Americans and add to the cost of the overhaul. The nonpartisan Congressional Budget Office has estimated the federal government would pay about $9,000 of subsidies for each person enrolled in the exchanges, compared with $6,000 for those enrolled in Medicaid.

So that’s a 50% increase for every individual that gets coverage through the exchanges rather than Medicaid. This increases average health care costs and puts more people into private insurance rather than government-run coverage. And that gets these red-state governors out of the box that was supposed to be the killer app for getting Medicaid expanded. Everyone assured us that hospitals would pressure the governors into the expansion. But under this, hospitals would get the same amount of individuals covered, AT HIGHER REIMBURSEMENT RATES, because private insurance pays out better than Medicaid. Private insurers will love the idea for similar reasons.

Incidentally, conservative analysts criticized these red-state governors for reducing their funding burdens at the expense of the federal government, linking it to the “tragedy of the commons.” It makes sense for the states but burdens the feds with additional costs. Of course, the conservative remedy is to simply not expand Medicaid at all.

Health and Human Services has not yet responded to the request, though the quotes in the article make it sound like they’d rather not go down this road. These governors have really laid a devious and ingenious trap for HHS by offering the partial deal. The ball’s in their court now.