I’ve spilt many pixels writing about the constitutional challenges to the Patient Protection and Affordable Care Act, which are now nearly certain to end up in the just-commenced 2011–12 term of the Supreme Court. But there’s another important health-care lawsuit on the high court’s docket, one that pits the Obama administration against congressional and California Democrats. It’s Douglas v. Independent Living Center of Southern California, a case that gets at the fundamental flaw in the humanitarian catastrophe known as Medicaid. That is: What should you do when you can’t make two plus two equal seven?

Numerous studies show that many Medicaid patients have worse outcomes than those with no health insurance at all. This is in large part driven by the fact that Medicaid severely underpays physicians and hospitals for the cost of treating Medicaid patients. As a result, many doctors don’t take appointments from Medicaid patients, leaving our nation’s poorest without access to essential health care.

Even though Medicaid is bankrupting many states — most notably New York and California — most states are unwilling to pare down their Medicaid rolls to devote more resources to the truly needy. Those that are willing are stymied by bureaucrats in Washington. So governments take the path of least political resistance: underpaying the providers of health care.

On Feb. 16, 2008, in response to California’s fiscal crisis, the state legislature passed a law cutting payments to the already-underpaid providers in the state’s Medicaid program, Medi-Cal, by as much as 10 percent. It was the straw that broke the camel’s back. California’s providers sued the state.

Under the federal Medicaid law, states are obligated to “assure that payments [to providers] are consistent with efficiency, economy and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.”

In other words, states aren’t allowed to underpay providers to such an extent that it compromises the quality of care, and the degree of access to care, that Medicaid beneficiaries receive.

Lower courts agreed with the providers, and enjoined the state from enacting the Medi-Cal cuts. The U.S. Court of Appeals for the Ninth Circuit upheld a lower-court decision, agreeing in March 2010 that “the ten percent rate reduction threatens access to much-needed medical care.” The Schwarzenegger administration appealed the decision, an appeal that has been carried on by current governor Jerry Brown (D.) and his director of health-care services, Toby Douglas.

Governor Brown may be one of the nation’s most famous liberals, but he is subject to the same laws of arithmetic that Arnold Schwarzenegger was. When Governor Brown was sworn in on Jan. 4, 2011, he was staring at a 2010–12 budget deficit of $25.4 billion. Brown, too, needs to trim Medicaid spending; California is projected to spend $18.8 billion on Medi-Cal in 2011–12, not including the additional $25 billion–plus contribution from the federal government. Brown, too, signed legislation cutting Medi-Cal payments by 10 percent.

Unusually, the Obama administration intervened in the case. Even though the federal government isn’t a party to the lawsuit, the Department of Justice filed a friend-of-the-court brief in support of the State of California. And small wonder: Given that nearly half of Obamacare’s expanded health coverage comes in the form of Medicaid, the administration needs to avoid the political damage that would come from bankrupting large Democratic states such as California, New York, and Illinois.

Suffice it to say that progressives were displeased. “I find it appalling that the solicitor general in a Democratic administration would assert in a Supreme Court brief . . . that poor recipients of Medicaid cannot challenge state violations of federal law,” said Washington & Lee health-law professor Timothy Jost.

Leading Democrats in Congress, many of whom hail from California, were also aggrieved. Rep. Henry Waxman (D., Calif.), one of the architects of Medicaid, told the New York Times, “I am bitterly disappointed that President Obama would . . . file a brief that is contrary to the decades-long practice of giving Medicaid beneficiaries and providers the ability to turn to the courts.” Waxman, Nancy Pelosi, Harry Reid, and four others filed their own brief in the case, arguing that “California has failed to adhere to its obligations.”

And that brings us to the Supreme Court, which heard oral argument for the case on Monday, the opening day of the new term. According to Mark Sherman of the Associated Press, Chief Justice John Roberts appeared skeptical of the providers’ claims, stating that the legislature “intended to deprive [providers] of the right to sue under the statute.” Elena Kagan took the other side, accusing California of evading federal law.

It’s the kind of lose-lose case that is the inevitable result of government-run health care. If the State of California wins, doctors and hospitals who treat Medicaid patients will be forced to choose between dumping those patients and bankruptcy. If the providers win, California won’t be able to balance its budget, driving the entire state over the fiscal cliff.

Unlike in Hollywood movies, two plus two never equals seven in real life. The implosion of Medicaid in California is a tragedy that affects the lives of millions. But if Obamacare remains the law of the land, Medi-Cal is only the trailer.

— Avik Roy is author of The Apothecary, a blog on health-care and entitlement reform, and a senior fellow at the Manhattan Institute. You can follow him on Twitter at @aviksaroy.