Tucked away in the president’s latest budget was a recommendation to delay scheduled cuts in payments to hospitals that treat large numbers of the uninsured patients and therefore provide a disproportionate amount of uncompensated care. The cuts in Disproportionate Share Hospital (DSH) payments were enacted under Obamacare, and the call to postpone them constitutes another admission that Obamacare’s grand plans and promises are falling short. More important, it provides another reason for states not to undertake the Medicaid expansion encouraged by Obamacare.

Under Obamacare, DSH payments are to be cut by $18.1 billion over a ten-year period, starting in FY 2014. The rationale behind the cuts was that, as the new coverage provisions of Obamacare — the subsidies and Medicaid expansion in conjunction with the individual mandate — go into effect, there would be less demand on hospitals to serve the uninsured. In its amicus brief to the Supreme Court case, the American Hospital Association argued the DSH cuts were part of such a “grand bargain.”

But, the Supreme Court decision, while keeping the individual mandate in place, made the mandatory Medicaid expansion optional for the states. That puts the administration’s grand coverage plans and the grand bargain for hospitals at risk, and the postponement of these cuts makes it all the less likely. In fact, the continued DSH payments will make it marginally easier for states to reject the Medicaid expansion for now, because they will continue to receive federal payments that help compensate for having a large uninsured population.

The states’ expansion of Medicaid was supposed to provide half the expansion of insurance coverage the administration was planning for. Now, although the number is fluctuating, roughly half of all states appear unwilling to accept the Medicaid expansion. That’s not surprising. They’re taking a longer view and waking up to the unavoidable fact that, despite the federal offer to pick up all expansion costs for the first three years, adding millions onto an already struggling Medicaid program will stretch tight state budgets more in the future. Expansion can also only exacerbate the real quality and access problems facing current beneficiaries in Medicaid.

As for the hospitals, with the Obamacare grand bargain falling apart, they have shifted their attention to the states. They are now trying to convince governors and state legislators that a series of state-level “grand bargains” could produce “savings“ in exchange for expanding Medicaid. But as my colleague, Ed Haislmaier points out, “such savings are doubtful” and as a matter of fact, “governors and states legislators should expect their state’s hospitals and clinics to lobby them for more — not less” spending.

Recently, Secretary Kathleen Sebelius had to admit the following:

There was some hope that once the Supreme Court ruled in July and then once an election occurred there would be a sense that, ‘This is the law of the land, let’s get on board, let’s make this work.’ And yet we will find ourselves having state-by-state political battles.

Now the administration has all but admitted the grand deal is falling apart and the proposed hospitals cuts are unrealistic. Maybe it is time for the states to tell the hospitals to shift their attention to the real problem: Obamacare.

— Nina Owcharenko is Preston A. Wells Fellow and the Director of Health Policy Studies at the Heritage Foundation.