Medicaid
Image source: Medicaid.gov.

Medicaid plays a key role in providing healthcare to more than 70 million low-income Americans , including more than 30 million children who get coverage under the agency's Children's Health Insurance Program. Yet unlike Medicare, which has national guidelines that apply across the nation, Medicaid coverage is largely defined by individual states. As part of comprehensive healthcare reform in recent years, the federal government has offered financial incentives to states if they broaden Medicaid coverage to include a larger segment of their populations. Many states have done so, but 20 haven't yet, and 2016 is likely to see continued debate over whether the holdouts should make the move. Let's take a closer look at how Medicaid works and what's at stake for states and the federal government in 2016 and beyond.

The federal-state partnership with Medicaid
Medicaid is unusual in that it involves a cooperative effort between the federal government and state governments across the country. In order to participate, states must provide coverage for certain groups of individuals, including low-income families, qualified pregnant women and children, and individuals receiving Supplemental Security Income from the Social Security Administration. States can also choose to provide coverage to other parts of the population, such as workers getting continuation coverage under COBRA or individuals eligible for family planning or home and community-based services.

Under the Affordable Care Act, the federal government attempted to expand Medicaid eligibility to a broader range of people than under previous law. As written, Obamacare had called on states to allow anyone earning up to 133% of the poverty line to qualify for coverage, with the federal government paying 100% of the cost in 2014 to 2016 and then gradually decreasing to a 90% share in 2020 and beyond. The District of Columbia and 30 states have expanded their Medicaid coverage in compliance with this aspect of the Affordable Care Act, taking advantage of the federal funding.

However, in a controversial legal battle, the Supreme Court found that the federal government couldn't coerce states to make this Medicaid change and required that states be allowed to keep their pre-Obamacare eligibility guidelines if they chose. Currently, 20 states have opted out of Medicaid expansion, but pressure is rising in some of those states to join with those that have already expanded their coverage under the program.

What's at stake
One focal point for the debate is in Kansas, where the political stakes are particularly high. Kansas currently has a Republican governor, but former Democratic governor Kathleen Sebelius served as the secretary of Health and Human Services -- the agency that oversees Medicaid and Medicare -- from 2009 to 2014. The fact that the Supreme Court case granting states the right to hold out from expanding Medicaid -- called National Federation of Business v. Sebelius -- is just another indicator of how strong feelings in the Plains state are on the issue.

Proponents of Medicaid expansion argue that the moves don't cost the states anything up front and essentially make healthcare less expensive for their remaining populations. By contrast, they argue that those states choosing not to expand Medicaid are forcing those who do have coverage to bear the costs of those who currently don't qualify for the program.

Meanwhile, opponents argue that the move is an attempt by the federal government to coerce states to take on more financial responsibility for healthcare. At a time when many state budgets are under fiscal stress, even the long-term responsibility for 10% of the costs of Medicaid expansion could prove onerous for some cash-strapped areas. In addition, some argue that the better solution is to ensure that individuals near the current eligibility guidelines can get private coverage rather than participating in Medicaid.

2016 will be a key year for Medicaid expansion for several reasons. First, it's the last year that the federal government has committed to fully paying for the program. Second, with the presidential election set for November, a change in the White House could bring back into question a whole host of healthcare reforms enacted in recent years.

What to watch for
The majority of states have already expanded Medicaid coverage, but those that remain include some of the largest by population, including Texas and Florida. As the year progresses, you can expect to see the debate over Medicaid expansion to get even more heated, and for the millions of Americans who could be affected by those decisions, 2016 will bring a key battle for their healthcare coverage.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.