The Department of Health and Human Services, along with the Centers for Medicare and Medicaid Services, have told the state of Indiana that they cannot block Planned Parenthood, a qualified provider under Medicaid, from funding, and that they would risk all of their Medicaid funding if they followed through with the policy.

Indiana passed a law earlier this year that effectively defunds Planned Parenthood by blocking their state Medicaid program from contracting with any entity that provides abortion services. But federal law is pretty clear on this point: Medicaid programs that exclude qualified health care providers from providing eligible services, merely because of other services they provide, are out of compliance. Federal Medicaid money does not go to abortion services, under the Hyde amendment. But the bulk of Planned Parenthood’s work is eligible under Medicaid – such as family planning services – and if a recipient wants to use their services, Indiana cannot block that from happening. Aaron Carroll actually tracked down the law in question:

The Family and Social Services Administration (FSSA) reports that federal law requires state Medicaid plans provide any eligible individual medical assistance and that they can obtain such assistance from any institution, agency, community pharmacy, or person, qualified to perform the service(s) required. This also includes an organization which provides such services, or arranges for their availability, on a prepayment basis. Federal law permits states to define a qualified provider, but requires that this definition is related to a provider’s ability to perform a service and not what services are provided.

The question is whether or not this would void the $3-4 million that Indiana’s Medicaid program gave to Planned Parenthood last year, or whether this throws into question all of the state’s Medicaid funding from the federal government. CMS thinks the latter:

CMS Administrator Don Berwick notified Indiana Wednesday that its plan to bar the state Medicaid agency from contracting with abortion providers is illegal. If it does so, Indiana could stand to lose all federal funding of its Medicaid program, an administration source tells POLITICO.

Media outlets previously mused that Indiana stood to lose about $4 million in family planning funds, of which Planned Parenthood had previously received $3 million […]

But a source at CMS told POLITICO there’s much more at stake, namely, the entirety of Indiana’s federal Medicaid funding. That came in at $4.3 billion last year, according to the nonpartisan Kaiser Family Foundation. That accounts for about two-thirds of the state’s $5.9 billion Medicaid budget.

“We are working with Indiana and fully expect that the state will follow the federal law that sets the conditions for its receipt of more than $4 billion in Medicaid funds,” the CMS source said.

That really escalates this fight. For the moment, Indiana plans to continue implementing the law. But if CMS really does revoke all of the state’s Medicaid funds, they would open up a $4 billion hole in Mitch Daniels’ budget. This is the guy who wanted to call a truce over social issues. But he’s pushing this one so far that he stands to create real chaos for hundreds of thousands of Medicaid recipients. All because the state wants to deny an eligible contractor funding over things they do outside the scope of the contract.

Several other states, like Kansas, North Carolina and Texas, are considering stripping funding from Planned Parenthood, so how this plays out in Indiana will have a lot of consequences going forward. Indiana has 60 days to appeal the decision from CMS.

More from Kaili Joy Gray.

David Dayen

David Dayen

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