The New York Times reports today that the nation’s governors, meeting in Williamsburg, VA, are taking a cautious approach to the Medicaid expansion baked into the Affordable Care Act, but rendered voluntary by the U.S. Supreme Court.

The initial reaction to the court’s ruling split along party lines. More than half a dozen Republican governors — including those of Texas and Florida, which have the nation’s largest populations of poor uninsured residents — said they would not expand their programs because Medicaid already eats up an unsustainable share of their budgets. A slightly bigger number of Democratic governors said they would move swiftly to expand coverage in their states, with the federal government pledging to pick up all the costs at first and 90 percent of them after 2020.

But as they gathered here this weekend at a meeting of the National Governors Association, most governors in both parties said that faced with a choice they did not expect to have, they needed to study how to proceed with this significant change in federal-state relations. Not all Democrats were leaping at the chance to expand their programs, and not all Republicans were ruling it out.

The recently published Fiscal Survey of the States points out the problem.

Medicaid is the single largest portion of total state spending, estimated to account for 24 percent in fiscal 2011, the last year for which data is available. State funds directed towards Medicaid increased dramatically in fiscal 2012, while federal spending rapidly declined because of the expiration of the enhanced federal matching rates temporarily authorized by American Recovery and Reinvestment Act of 2009 (ARRA).

State spending on Medicaid increased by 20 percent in fiscal 2012 (following a 23 percent increase in fiscal 2011) while federal spending declined by 8 percent.

Economist Tyler Cowen sees a tug of war over Medicaid that may take years to resolve. Read the whole thing. In his blog, he summarizes one possible outcome.

1. Many of the states slip out of expanded Medicaid obligations and many employers slip out of expanded mandate obligations to cover their employees (waivers, willingness to pay fines, lobby to have the law altered).  The system evolves toward a form of means-tested vouchers, sold on the exchanges.

2. The subsidies for the private exchanges become so expensive that the individual mandate is limited in scope.  Eventually the mandate applies to catastrophic coverage only.

3. For catastrophic coverage, we move toward a mandate and subsidized exchanges, and for non-catastrophic coverage there is no mandate and health savings accounts, the latter supplemented by public contributions if needed or if you wish.

Even in our relatively Medicaid-friendly state, the cost increases are not trivial. An Urban Institute study, commissioned by the state budget office, attempts to calculate the state cost of expanded coverage.

Our best estimates are that enrollment will growth by just under 40% during the [next] six years, while spending will grow by just over 40%.

Jason Mercier at the Washington Policy Center writes about it here and wonder how the state could afford the increases.

So how could Medicaid expansion lead to higher state taxes?

Consider the fact that billions in increased spending are being estimated for the recent K-12 McCleary school funding ruling and candidates for Governor have indicated their plans to also increase spending for higher education. These potential education spending increases may leave little room for a high dollar increase in state Medicaid spending.

Little wonder Stateline  governors are questioning the wisdom of committing to participation now.

“States have made consistent choices over four decades to keep a modest Medicaid program, when they could have had a bigger one at an 80 percent federal match rate,” says Chris Whatley of the Council of State Governments. “Why not turn down the expansion now at 90 percent? It’s not that big of a difference.”

Some disagree.

Watch for this to play out slowly over the next six months… or more.