The final hour of argument the Supreme Court heard on ObamaCare had little to do with the individual mandate.  It focused instead on the 26 states’ challenge to the Medicaid expansion.  They say it is coercion: They can expand Medicaid to fit ObamaCare’s eligibility requirements, or they face the threat of losing all federal Medicaid funding to their state.

Much of the discussion in the courtroom sought to clarify whether or not states could actually lose all Medicaid funding if they “opted out” of the new rules.

As evidence that this was a realistic threat, lawyer for the states Paul Clement pointed to a letter from Secretary Sebelius to the State of Arizona.

MR. CLEMENT: I mean, in — there was a record in the district court, and there is an Exhibit 33 to our motion to summary judgment. It is not in the joint appendix. We can lodge it with the Court if you'd like. But it's a letter in the record in this litigation, and it's a letter from the secretary to Arizona, when Arizona floated the idea that it would like to withdraw from the CHIP program, which is a relatively small part of the whole program. And what Arizona was told by the secretary is that if you withdraw from the CHIP program, you risk losing $7.8 billion, the entirety of your Medicaid participation. So this is not something that we've conjured up.

Here is a copy of the letter that the states lodged with the Northern District of Florida.  You can see Sebelius did indeed write (emphasis mine):

We want you to be aware that it appears that your request triggers one of these provisions.  Specifically, it appears that your request would result in a loss of Medicaid funding for Arizona under section 2105(d)(3) of the CHIP statute, as amended by sections 2101 and 10203 of the Patient Protection and Affordable Care Act of 2010, which was enacted on March 23, 2010.  Arizona currently receives about $7.8 billion in Federal Medicaid funding per year and this funding is potentially at risk as a result of eliminating the CHIP program (KidsCare).

This letter obviously deeply concerned some of the Justices, who continued to bring up this letter in later questions:

CHIEF JUSTICE ROBERTS: Could you give me some assurance? We heard the question about whether or not the Secretary would use this authority to the extent available. Is there circumstances where you are willing to say that that would not be permissible? I'm thinking of the Arizona letter, for example. I mean, if I had the authority and I was in that position, I would use it all the time. You might — you want some little change made? Well, guess what; I can take away all your money if you don't make it. I win. Every time. It seems that that would be the case. So, why shouldn't we be concerned about the extent of authority that the government is exercising, simply because they could do something less? We have to analyze the case on the assumption that that power will be exercised, don't we?

GENERAL VERRILLI: Well, Mr. Chief Justice, it would not be responsible of me to stand here in advance of any particular situation becoming — coming before the Secretary of Health and Human Services and commit to how that would be resolved one way or another. But that -­

CHIEF JUSTICE ROBERTS: No, I appreciate that. I appreciate that, but I guess -­

GENERAL VERRILLI: That discretion is there in the statute, and I think there's every reason to think it's real, but I do think, getting back to the circumstances here -­

JUSTICE KAGAN: Well, General, what's the -­ been the history of its use? Has the Secretary in fact ever made use of that authority?

 GENERAL VERRILLI: That's correct, Justice Kagan. It's never been used -­

CHIEF JUSTICE ROBERTS: What about the Arizona letter we just heard about today?

 GENERAL VERRILLI: It has never been used to cut off -­

CHIEF JUSTICE ROBERTS: It's been used to threaten -­

JUSTICE SCALIA: Of course not.

CHIEF JUSTICE ROBERTS: Of course no State is going say, okay, go ahead, make my day, take it away. They're — they're going to give in.

The Chief Justice at another time referred to this as “holding a gun” to states’ heads. And Kennedy was concerned too:

JUSTICE KENNEDY: There's no real — there's no realistic choice. There's no real choice. And Congress does not in effect allow for an out — opt out. We just know that. And it's -­

GENERAL VERRILLI: Well, I guess I -­

JUSTICE KENNEDY: — it's substantial.

While Clement’s performance was formidable on Wednesday yet again, opponents of the Medicaid expansion should not get too excited.  This was the most difficult issue for the law’s challengers, given that decades of expanding federal power provide little guidance for a firm test for what is “coercion.”

Justices will vote today, and announce their ruling in late June.

Important Links:

Audio file of Medicaid oral arguments

Transcript of Medicaid oral arguments