Throughout the nation, conservative governors who opposed President Obama’s health care law are now grappling with how to make decisions assuming it remains reality. One major decision has been whether to set up a state-based health care exchange as allowed by the law, or default to a federal exchange. Another has been whether to expand Medicaid. On Saturday, following his well-received speech at the Conservative Political Action Conference, I spoke with Wisconsin Gov. Scott Walker about his unique solution to the Medicaid question as well as his thoughts on the larger health care debate in the age of Obamacare. What follows is a transcript of our interview.

PHILIP KLEIN: If you want to give an overview of the decision you made (on Medicaid) and explain why.

GOV. SCOTT WALKER: Well, the decision is simple. I wanted fewer people uninsured and fewer people on Medicaid. And so, unlike other governors who picked expansion or not expanding, we kind of found a variation that hadn’t been done before. Under my predecessor, he moved eligibility up to 200 percent of the federal poverty level for childless adults. In my plan, I move it back down to 100 percent, because Medicaid to me should be about covering people in poverty. I then transitioned people above poverty into the market place, either through traditional insurance or through the exchanges, which will be set up as a federal exchange in our state on January. I move 87,000 people who are above poverty, transition them into the private market or the exchanges and take 82,000 who were eligible because they were living under poverty, but who were capped off because my predecessor raised eligibility, but didn’t put enough money in, so he capped them off. So, everybody living in my state in poverty will be covered going forward, everybody living above poverty will be transitioned into the market place.

KLEIN: When you say cap it off, you men he limited the number of people who could enroll?

WALKER: There was a cap by number, yup. So the irony was, he said he was covering 200 percent, but really, people living at or below the poverty level weren’t always covered because of the cap. So, we make Medicaid what it was designed to be, which was a temporary program for people living in poverty, particularly for childless adults. But overall, our actuarial estimates are that because of the way we did that, they’ll be 224,580 fewer people uninsured in our state, but they’ll be a net of 5,000 fewer people on Medicaid and obviously a huge number of people in the marketplace. And so we just believe it makes more sense. What do I want? I want fewer people uninsured, but I also want fewer people dependent on government for their health insurance and that’s why we made the decision we made.

KLEIN: The issue though is that it’s a result of the fact that there are these exchanges that at least supposedly are going to be operational next year. So, couldn’t it be argued that people are still dependent on government, it’s just that they’ll be dependent on federal subsidies for the exchanges instead of on Medicaid?

WALKER: It’s a legitimate argument and there are two phases of that. If you had to choose between Medicaid dependency or a transition, because as people’s income eventually grows there’s less of a subsidy, less of a dependence, whereas they are entirely dependent on Medicaid, on the government to provide Medicaid — it’s preferable for me to get people into at least more of a marketplace even if it comes with some government subsidy to it, because there’s a progression there. The other part is there’s a practical one, not only a philosophical one, and that is, the state doesn’t pick up that subsidy, the federal government does. In the case of Medicaid, we’ve seen a continued pull back. Even without an expansion, which obviously I didn’t take, I have to add just over $600 million just in cost to continue in Medicaid in my state just as it is.

KLEIN: That’s over the next two years?

WALKER: Over the next two years. Thirty-nine percent of that is attributable to the federal government, either through the Affordable Care Act or through provisions related to it where they pulled back on earlier commitments. So, one of my arguments as well, has been, the federal government can’t even keep its commitment to the states currently for Medicaid costs, for me the cost to continue, where in the world are they going to get the resources to cover the supposed amount for a full-scale expansion?

KLEIN: The states that agree to do the Medicaid expansion are eventually going to have to pick up 10 percent of the tab. Do you think that that’s going to go up?

WALKER: I think so. I think, one, just if you assume the law, first three years 100 percent, gradually goes down to 90, just that alone, particularly in states where there’s a huge uptick in terms of people on, that’s a large unfunded liability that states just haven’t budgeted for, which was a concern for us. And that’s without any changes to the law. That’s without anything going awry. I look at the debate on the sequester a few weeks ago when I was in Washington, and I said, everybody agrees there’s a deficit problem, the only question is how you do it. Do you let it go through the sequester, do you do it through an alternative, that the president could offer more reasonable cuts, or do you do what the president wants, which is some taxes combined with some undefined cuts. But nobody in Washington is saying there shouldn’t be deficit reduction. I remember at the time, I’d say, well, how does that fit with the logic then that everybody agrees that the deficit and the debt are a problem, but by the same breath the administration is telling us governors, don’t worry about Medicaid, there’s plenty of money for that. Well, there can’t be, if you’re telling us there’s a clear deficit problem, it’s just a matter of how to fix it, you can’t in the same breath then tell governors don’t worry, the money will always be there because we’ll cover it. It’s just apparent to me not only that it phases out, but that that’s one of the first areas that any sort of reasonable assumption could be made in terms of what the Congress and president will get to in the future, which is, why wouldn’t they take it from an area where they haven’t even expended the funds yet?

KLEIN: Is it a concern to you, because studies have shown, including the CBO, that the exchanges – at least to federal taxpayers – are a lot more expensive than expanding Medicaid because in the Medicaid program they keep medical provider payment rates lower than private insurance. And so, the idea is that it would be costlier to do it through the exchange. Is that a concern to you?

WALKER: Again, that’s under the assumptions built into this, but it’s been rare that the federal government or any level of government has been able to keep cost projections in terms of keeping costs under control. If anything, I think those costs will continue to escalate, and I think one of the challenges , one of the reasons I have not been a fan of Obamacare in the first place is that I think controlling the cost of health care is incredibly important, whether it’s Medicaid or anybody else in the market as a whole is an issue. But you’ve got one or two extremes. Where we’re at now creeps, not there yet, but creeps of more government-driven, mandated-type care and coverage to a point where not yet, but eventually, decisions to control costs are actually driven by rationing in deciding who gets what coverage in what ages and what criteria. The other end of the spectrum is one that I prefer, which we’ve tried to put things into place with or without the ACA in Wisconsin with our Wisconsin health information system is to have a more transparent, open system. The system we’re coming out of clearly is broken. But it is not a free market system. And so long term, I’d like to get to one where really to control costs, people have to not just managed care organizations, they’ve got to take a step further and we have to have skin in the game as consumers of health care when we have better, more vibrant decisions. One last example of that is until Americans follow their health care and health care coverage as closely as they cover their cell phones and iPhones, we’re never going to get to the point where we control health care costs.

KLEIN: What about in terms of the implementation timeline? In theory, the exchanges are supposed to be up and running by the fall and people are going to be actively enrolled in the program by January 1. But a lot of people cite the logistical hurdles, the IT challenges, leveraging all of the government databases. Do you think that the exchanges will be operational by –

WALKER: Well, I have real concerns, mainly because of the way the federal government has come down. It’s one of the reasons why I opted not to do a state or partnership exchange, but to defer to the federal government, because I call them “state in name only,” meaning I felt that we were just the middle man for provisions and regulations that were essentially driven by the federal government. I’m concerned about that, so much so that this transition we talk about, of moving people off of Medicaid to the marketplace is conditional on getting the exchanges up and moving. We’re not just doing that January 1, we’re doing it as long as exchanges are operational. If for some reason their start date, their implementation date, is deferred, our transition would follow that deferment.

KLEIN: In the broader debate, Wisconsin Congressman Rep. Paul Ryan just released a budget and one of the things that he does is that he repeals Obamacare. A lot of people criticized him, particularly on the left, saying it’s just sort of unrealistic. This is now the law of the land. How do you think conservatives should strike this balance between trying to grapple with the reality that this is currently the law in the books versus knowing that there are a lot of problems and barriers to implementing and getting to the type of health care system, and consumer-based market that you’d want.

WALKER: I think there’s a couple key points in that. One is, I think it’s wrong, more at the state level than it would be at the Congress, it’d be wrong to say, “I don’t like this, I’m not going to do anything related to it.” I didn’t like it. I fought it in the courts. I fought it politically. We didn’t win the election, and so for the time being, it’s still the law. So I made a decision on Nov. 16 – whether there would be an exchange or not – I deferred to the federal government even though everything in my genes tell me never to give up everything in the federal government and in this case I really didn’t have any control over it, so I did that. And then, the decision with Medicaid, I made a decision knowing that’s the law, and I had an option one way or the other because of the Supreme Court. But I don’t think that just because it’s the law today – you have to abide by the law, don’t get me wrong – but by the same token, it doesn’t mean we shouldn’t offer an alternative for those of us who disagree with it. And so, I think what Paul Ryan has done is not only viable, I think it makes a lot of sense. And I think it’s incumbent on any of us who don’t like it to offer a more viable alternative. One of the things he does in his budget proposal is give states a block grant, which I think is a tremendously positive idea, because I think it allows us to be true innovators out there.

KLEIN: In Oklahoma, there’s a lawsuit based on the idea that in the actual statute of Obamacare it says that the subsidies are for state-based exchanges, not federal exchanges…Have you looked at this issue? Have you studied it, and where do you stand on it?

WALKER: Well, the interesting point overall is this shows the fallacy of the whole process of cramming things in. Going into the Christmas holiday and not even knowing everything that was in the bill. I mean, the old infamous line of Rep. Pelosi that we have to pass the bill to know what’s in the bill. This is a good example of that where they really didn’t do a good job of drafting this and so you have something that potentially could be inconsistent. My view is, instead of focusing on ways to trip up whatever is law, my preference is on a larger, grander scale, we should be making the argument why I no longer want the federal government — I prefer not even to have the state government — dictate to me and my family what we do with health insurance and health care in general. I’d rather find a way to put that power back in the hands of individuals and families all across America and that’s what we should spend our time focused on, is providing a viable alternative. Not just stopping it, but more importantly saying, here’s a better approach that puts the power in the hands of health care consumers.

KLEIN: Do you think that over time you might see a sort of convergence in the sense that Paul Ryan is proposing essentially exchanges for Medicare and Obamacare is exchanges for those up to 400 percent of the federal poverty level. Do you see a convergence where, maybe down the line, everyone is on some sort of exchange, and the subsidies vary by age, income, health status and maybe Republicans and Democrats fight over how regulated the exchanges are and so forth?

WALKER: I clearly believe we have to think about what would typically be the normal free market. For those who aren’t on Medicaid and Medicare, I think the preference would be, we’d like the ability to be able to tap into and there are plenty of exchanges today that aren’t set up by the government that people certainly can’t take advantage of. It doesn’t take a federal law or a state law to do that. I’d love on a long-term basis the more you get toward consumer-driven, much like the health savings accounts that employers have in some states and other employers are looking to, empower people to have a fixed amount of money then let them go out and pick what they want to do with that. I think in that case you get skin in the game, it empowers people not just in how they spend their dollars and health care expenditures, it makes them more vested in wellness and preventative measures and things of that nature that we don’t often think of. I mean, I say it half jokingly and half seriously about cell phones. I know, most Americans know, I know in my case I’ve got two teenagers who text all the time. If I didn’t have a plan with unlimited texting, I’d be in the poor house. And yet most Americans don’t know much of anything about the true cost of their health care plan and where the money goes. And if they had money, they could say, “I’m going to apply this to me and my family, I think I’d pay more attention about procedures they got that shop around. Most things we do are elective. It’s only the occasional emergency where somebody shows up with a heart attack or something like that. Obviously, you’re not shopping that around, but for most of the other things we do in health, they’re elected. There’s enough time to be medically solid and still shop around for the best price and quality together.

KLEIN: Do you think the move to a consumer-based market is even achievable with Obamacare intact?

WALKER: No. No, I mean, we’re going to do things to try and set the table for that, to make it easier, but I think to truly get to a free market, it’s not just a matter of repealing the Affordable Care Act, it’s going completely in the other direction and doing more to empower individuals and families that control their health care decisions that we don’t have right now. It also means transparency. The one role where the government plays, I think, a legitimate place in, is ensuring that there’s true transparency amongst health care providers.