Indiana's Medicaid director Patricia Casanova received a written warning from the Obama administration prohibiting the Hoosier state from banning funding to Planned Parenthood.
On Wednesday, Donald Berwick, administrator of Medicaid, said the U.S. Department of Health and Human Services will prohibit Indiana from implementing its new law that cuts off money to Planned Parenthood clinics. The Hoosier law declares that no entity that performs abortions will be able to receive federal funding.
"Medicaid programs may not exclude qualified health care providers for reasons not related to their qualifications to provide such services," Berwick said in the letter.
Government officials say that federal law requires Medicaid beneficiaries to be able to seek services from any qualified provider. Thus, cutting off funding to Planned Parenthood is deemed illegal.
Senator Scott Schneider, R-Ind., said the state has not done anything illegal and will defend itself.
"Indiana's on solid legal ground," Schneider said. "There's no reason for us to change course at this time."
Rep. Sheila Klinker, D-Lafayette, said she was not surprised at the reaction of the federal government.
"We did make an effort to try and block the bill," Klinker said, "but we just couldn't get the vote."
If Indiana defies this warning, it could lose all federal funding of its Medicaid program. This would mean a loss of more than $4 million in federal funding.
"I hope that Indiana will bend to the administration's will," Klinker said. "We can't afford to lose those state funds."
Indiana's Family and Social Services Administration said it will seek guidance from the Attorney General on how to proceed going forward.
The Administration, for now, must continue to follow the law the Indiana General Assembly has passed.
Indiana's Medicaid office has 60 days to appeal the administration's decision.
The Associated Press contributed to this story.