Gov. Mitch Daniels, a Republican, set the stage for a legal and political clash with the Obama administration when he said he would sign legislation that blocks funds to any entity that performs abortions, the Los Angeles Times reported Wednesday.
The measure targets 28 clinics run by Planned Parenthood in Indiana, four of which offer abortions, the group's president said.
In many states Planned Parenthood clinics provide basic health care and medical tests for low-income women.
Mary Kahn, a spokeswoman for the Centers for Medicare and Medicaid Services, said it would be illegal for Indiana to deny payment to these providers for services other than abortions.
"There are some options available to us," she said. "But I can't say what action will be taken to bring the state into compliance."
Law professor Sara Rosenbaum of George Washington University said the federal government has few options.
"This is about the exclusion of a qualified provider over something that is unrelated to Medicaid," Rosenbaum said. "But the secretary (of Health and Human Resources) doesn't have an obvious remedy other than a total cutoff of federal funds."
Lawyers for Planned Parenthood said they plan to seek a federal court order against the Indiana measure once it is signed into law.