“Doughnut hole” is a familiar term in the health policy world.

For years, it has been used to describe the gap in Medicare Part D prescription drug coverage. Now, there is a new doughnut hole — a gap in health insurance options for low-income individuals in states that opt against expanding Medicaid.

The Affordable Care Act was built with a safety net for people who fall short of requirements for subsidized insurance through the exchanges: the Medicaid expansion. However, with many states are refusing to participate in the expansion, observers are questioning whether federal or state officials will act first, or at all, to close the gap.

With Expansion Made Optional, Coverage Gap Emerges

The ACA calls for states to expand Medicaid to individuals with incomes up to 138% of the federal poverty level, or $15,415 annually. However, in its ruling on the Affordable Care Act, the Supreme Court said it is unconstitutional to penalize states financially for not expanding Medicaid. As a result, states can decide whether to boost income eligibility per the ACA. As of earlier this month, 21 states had decided not to participate and four were considering the expansion but would not commit to it.

Meanwhile, the ACA offers subsidies for those purchasing health policies through state insurance exchanges. Individuals with incomes between 100% and 400% of the federal poverty level are eligible.

However, in states that opt out of the Medicaid expansion, uninsured individuals earning too much to meet pre-ACA Medicaid eligibility limits but too little to meet the 100% federal poverty level baseline for federal subsidies have few options for obtaining health coverage in 2014.

Denise Rodriguez, an attorney with Foley & Lardner in Los Angeles, told Government Health IT, “It is highly unlikely that those people would be able to afford coverage [via the exchanges] without the subsidy and, as a result, they would remain uninsured.”

About 5.2 million individuals, or an estimated 27% of uninsured U.S. residents, will fall into the coverage gap, according to a Kaiser Family Foundation report released last month. Researchers noted that many of these individuals live in states that have declined to expand their Medicaid programs.

According to the analysis, nearly half of the uninsured individuals who are projected to fall into the coverage gap live in Florida, Georgia and Texas — none of which are expanding Medicaid at this time. In addition, the report finds that more than one-third of the uninsured populations in three other states not expanding Medicaid — Alabama, Louisiana and Mississippi — will fall into the coverage gap.

Over at the AcademyHealth Blog, Aaron Carroll examined the study, noting, “Ironically, in states where the Medicaid expansion will occur, things were already better relative to those states who are refusing to participate. As it currently stands, the median eligibility level for a parent to obtain Medicaid in a participating state was 106%” of the federal poverty level. He notes that in states that are not participating in the expansion, median eligibility is 49% of FPL, or about $7,600 for a single mother. He writes, “Think about that for minute: a single mom working 20 hours a week making $7.50 an hour is too ‘rich’ for Medicaid in those states. Next year, the median eligibility level is expected to go down to 47%.”

Meanwhile, a Commonwealth Fund study finds that as many as two out of five uninsured adults living in states that are opting out of the Medicaid expansion will have no new health insurance options in 2014.

Why wouldn’t such states decide to expand Medicaid and offer new coverage to more residents? Lucy Nashed, spokesperson for Texas Gov. Rich Perry (R), provided this summation to Politico: “As President Obama himself has said, Medicaid is a broken system. It would be reckless and irresponsible to continue adding people and pumping billions of taxpayer dollars into an unsustainable program that already consumes one-quarter of the state’s entire budget.” She added, “The fact is that expanding Medicaid under Obamacare would lower the uninsured rate in Texas by only 3 percentage points.”

States Want More Options for Medicaid Expansion, Expert Says

Matt Salo — executive director of the National Association of Medicaid Directors — told California Healthline that the number of people who will fall into the coverage gap probably “is not enough cause for any state to say ‘yes’ they are going to expand Medicaid” when state officials and legislators oppose the initiative.

However, he said, “I do think the vast majority of states would like a way to get to ‘yes,’ but the challenge is that they don’t like that their only options are to expand Medicaid as is or not at all.” According to Salo, states are holding off for “financial, ideological and political reasons,” but they would come around “if there were more options on the menu.”

Will There Be a Federal Fix?

For states that do not expand Medicaid, it will be “crucial for federal policymakers to look into legislative fixes that will allow the lowest-income residents in those states to purchase subsidized health insurance through their state marketplaces,” David Blumenthal — president of the Commonwealth Fund and former National Coordinator for Health IT — said in a release accompanying the Commonwealth study.

In response, Salo said, “I don’t see this Congress as being capable of passing any fix for the Affordable Care Act.” He continued, “What I think will be interesting is what the Obama administration’s response is going to be. Maybe it will be willing to cut some deals.”

Such a deal already has shaped itself in Arkansas, where CMS has approved a plan that allows the state to use funds intended for the Medicaid expansion to help residents purchase private health insurance through the state’s health insurance exchange. Under the plan, Arkansas would use three years of federal funding meant for the Medicaid expansion to pay for private insurance in the exchange. Specifically, the funding will help subsidize private insurance coverage for roughly 250,000 state residents with incomes up to 138% of FPL.

Salo said, “Arkansas could be a turning point, but it took eight months to negotiate that. Even if the administration is willing to bargain with states to get more people covered, do they have time to negotiate with 25 different states, with 25 different flavors?”

Who Will Blink First, States or Obama?

After the release of the Commonwealth Fund study, Blumenthal said, “I am optimistic that many states will change course and accept the Medicaid expansion.”

For Salo, the Obama administration might have to blink first. “Just because states are not accepting the Medicaid expansion doesn’t mean that they don’t care about poor people. It means that they want more flexibility in how they do it.”

For example, shortly after the Supreme Court ruling that made the expansion voluntary, some state leaders said they wanted the expansion to go to 100% rather than 138% of FPL. According to Salo, “The Obama administration said their lawyers found that the proposal wasn’t feasible. But I think that was more of a policy issue.”

To close the coverage gap, officials at both levels must re-examine their priorities, Salo said. “For both the administration and states, they need to ask themselves, ‘Will what we do next get as many people covered as possible?'”

Weekly Roundup

Here’s what else is happening in health reform.

State Success Stories: Sarah Kliff writes in Washington Post‘s “Wonkblog” that despite technological problems with enrollment in the federal health insurance exchange, several state exchanges — including Covered California — seem to be on track in their enrollment goals thanks to a big uptick in the early part of November.

To Help a Patient, To Harm a Hospital: Karan Chhabra at the Millennial Project discusses a recent UC-San Francisco quality of care study that reduced spending by significant amount for insurers but likely caused UCSF immediate financial harm, revealing an important lesson about “what’s wrong with American health care.”

The Medical Education Bubble: At Disease Management Care Blog, Jaan Sidorov examines the “growing disconnect between what physicians can charge patients and what medical schools are charging their students.”