Initially intended for all states, Medicaid expansion became a state-by-state choice after the Supreme Court ruled in 2012 that including expansion in the Affordable Care Act was coercive because states didn't have enough time to voluntarily consent to the change, and states failing to enact it could lose their federal funding.

The Court's decision dented the ACA's auspicious goal to extend insurance coverage to tens of millions of uninsured Americans, but it didn't derail expansion altogether, and that's proven to be good news for insurers and their Medicaid business, including UnitedHealth Group (NYSE:UNH), WellPoint (NYSE:ANTM), and Molina Health (NYSE:MOH).

Overall, 25 states chose to expand their Medicaid programs heading into 2014 and New Hampshire became the 26th state earlier this year. Last week, Pennsylvania became the 27th state, so let's learn more about the program's expansion and what it could mean for the insurance industry.

Source: State of Pennsylvania.

First, a bit of background
States aren't required to participate in Medicaid at all, but all 50 states do. The program was established in 1965 with the addition of Title XIX to the Social Security Act in a bid to offer health insurance coverage to low income Americans, and by 1972, every state had adopted it, except Arizona, which established a low-income program in 1982. As a result, 66 million Americans are covered by Medicaid or CHIP, the Children's Health Insurance Program, as of June.

Each state is responsible for its own Medicaid program, and eligibility requirements and benefits vary from state to state. As a result, the Medicaid experience can be quite different depending on where an enrollee lives. For example, a study conducted in 2007 by Public Citizen using Kaiser Family Foundation data found that Massachusetts offered the best Medicaid plan in terms of eligibility and coverage, and Mississippi offered the worst program.

Source: Dept. of Health and Human Services.

Moving the goal posts
The Affordable Care Act aims to decrease the uninsured population by more than 30 million by mandating that individuals purchase health care insurance, creating state insurance marketplaces that offer private health insurance plans, and expanding Medicaid income eligibility requirements to 133% (effectively 138%) of the poverty line.

The federal government picks up 100% of the cost of expanding Medicaid through 2016 and then gradually reduces its funding of expansion enrollees to 90% in 2020, where it remains for all subsequent years.

Since the Supreme Court's decision made Medicaid expansion opt-in, and just 27 states have adopted it, the level of uninsured is higher nationally than it would have been if all states had adopted it out of the gate. Regardless, more than 7 million people have signed up for Medicaid since healthcare exchanges opened last fall. States that expanded Medicaid have seen their enrollment jump an average 18.5%, and including non-expansion states, Medicaid membership is still up 12.4% nationwide.

That membership growth has proven a boon to healthcare insurers that run Medicaid programs for many states. In the second quarter, UnitedHealth Group reported that enrollment in Medicaid plans it runs climbed 19%, or by 730,000 people, to 4.67 million members in the past year. WellPoint saw enrollment in its Medicaid plans increase by 8.4% to 4.8 million people, and Molina added 230,000 new members to its Medicaid plans over the past year.

That's led to big revenue growth for these insurers. UnitedHealth's Community and State business sales grew 29% year over year to $5.8 billion in the second quarter. Second quarter sales for WellPoint's Government Business segment, which also includes Medicare, grew 7.4% to $8.26 billion. And Medicaid expansion helped lift Molina's sales by 44% in the past year to $2.3 billion.

Source: State of Pennsylvania.

Jumping on the bandwagon
Pennsylvania's decision to adopt Medicaid reform comes after significant legislative effort to create an alternative model that uses federal funding to buy private insurance for 500,000 low income residents starting next year.

Pennsylvania's plan is similar to Arkansas' and Iowa's plans, which also use Federal funds to buy private insurance for low-income residents. But it differs from those two state plans because it buys that private insurance outside of the ACA's marketplaces. 

Pennsylvania's plan also differs from traditional Medicaid expansion because it requires those earning 100% or more of the poverty level to kick in 2% of the cost of their monthly premium beginning in 2016. Pennsylvania had previously lobbied for a plan that would require premiums from those earning 50% or more of the poverty level, but federal watchdogs balked.

Fool-worthy final thoughts
More than 2.4 million people are already enrolled in Medicaid in Pennsylvania as of June, up 17,000 from the third quarter of 2013. That means that the addition of 500,000 new enrollees may boost low-income insurance coverage in the state by more than 20% in the coming year.

Additional states may join Pennsylvania in expanding Medicaid given that overall enrollment in non-expansion states is on the rise, too. According to the Department of Health and Human Services, Medicaid enrollment grew 4%, or by nearly 1 million people, in non-expansion states since last fall. Those additional enrollees will pressure state budgets given that they won't qualify for federal Medicaid expansion funds. That may suggest that the threat of an increasingly unfunded membership lures additional states to expand. Time will tell.