The state law penalized Planned Parenthood because some of its clinics also perform abortions.
Dr. Donald M. Berwick, administrator of the federal Centers for Medicare and Medicaid Services, said the state law imposed impermissible restrictions on the freedom of Medicaid beneficiaries to choose health care providers. The freedom of choice, he said, is generally guaranteed by the federal Medicaid law.
But state officials said Wednesday that they intended to continue enforcing the state law, which took effect on May 10, when it was signed by Gov. Mitch Daniels, a Republican.
In a letter to Indiana officials, Dr. Berwick said the state law "would eliminate the ability of Medicaid beneficiaries to receive services from specific providers for reasons not related to their qualifications to provide such services."
For years, federal law has banned the use of Medicaid money to pay for abortion except in certain cases.
The Indiana law goes much further. It prohibits state agencies from entering contracts with or making grants to "any entity that performs abortions or maintains or operates a facility where abortions are performed." It also terminates state contracts with such entities. The law does not apply to hospitals.
Planned Parenthood of Indiana provided services last year to 85,000 patients. Most received contraceptives or preventive health screenings, but 5,580 received abortions.
In a bulletin sent Wednesday to state officials around the country, Cindy Mann, the federal official who supervises Medicaid, said states could not exclude doctors, clinics or other providers from Medicaid "because they separately provide abortion services."
After learning of the federal decision, Marcus J. Barlow, a spokesman for the Indiana Family and Social Services Administration, said: "For now, our lawyers advise us that we must continue to follow the law the Indiana General Assembly passed. We will seek guidance from the attorney general on how to proceed going forward."
Medicaid is financed jointly by the federal government and the states. When a state wants to modify its Medicaid program, it must amend its state Medicaid plan. The changes are subject to federal review and approval.
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