So many states are fighting Obamacare in the legal arena because they are already teetering on the edge of bankruptcy and they know this law and its demands will push them right over the precipice. That is one of the dirty secrets of passing a mandate like Obamacare during a financial crisis like this one, requiring that the states expand their Medicaid coverage to include those who earn 133% of the poverty level.

This is a first: to establish a universal floor for eligibility that applies to all states. There is an additional new requirement that childless adults be covered in all states; this was not a mandated category before Obamacare and will account for the bulk of the expansion. Florida, for example, estimates that its Medicaid rolls will expand by a whopping 50% at least as a result.

To do this, the bill promises to federally fund that expansion—but only until 2014. After that, the states will have to pay 10%, which may not sound like much but with the high cost of medical care it’s actually a big deal (Medicaid also covers dental benefits and nursing homes, the latter likely to be an even bigger cost in light of the aging boomer cohort).

Here’s how it works

Unlike Medicare, which is solely a federal program, Medicaid is a joint federal-state program. Each state operates its own Medicaid system, but this system must conform to federal guidelines in order for the state to receive matching funds and grants. The matching rate provided to states is determined using a federal matching formula (called Federal Medical Assistance Percentages), which generates payment rates that vary from state to state, depending on each state’s respective poverty level. The wealthiest states only receive a federal match of 50% while poorer states receive a larger match.

Medicaid funding has become a major budgetary issue for many states over the last few years, with states, on average, spending 16.8% of state general funds on the program. If the federal match expenditure is also counted, the program, on average, takes up 22% of each state’s budget.

States must follow federal guidelines and cover certain populations, but they have quite a bit of leeway about the details of how they will do so: for example, managed care vs. fee for service. The states facing financial ruin would like to trim their Medicaid budgets. The prospect of Medicaid cuts at the state level is not a pretty one. But neither is bankruptcy at the state level (not to mention the federal level).

Obamacare takes away the ability of the states to balance their budgets in this way. Obamacare tries to squeeze blood from stones. How can a state cut its budget in the face of these burgeoning requirements? The federal government can laugh at the idea of balancing its own budget—for a while, that is. But states are unable to print money or borrow vast quantities from China, and are therefore more restrained by reality.

One can see this phenomenon as a small fractal of the policies that led us here in the first place. Increased benefits lead to increased debt, and the federal government cannot bail the states out indefinitely. We are running out of “other people’s money” at both state and federal level, and yet not only cannot give up any of our entitlements but instead are actually bent on expanding them. It’s a spiral that, if continued, has no possible end except astronomical taxes or runaway inflation or bankruptcy—perhaps all three in due time.