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Backers of the new law, which Mitch Daniels signed in May, argue that it's needed to prevent any federal money from going to abortions, which Planned Parenthood provides. Planned Parenthood argues that the law is illegal because it violates the rules of Medicaid.
From the Associated Press:
The Indiana attorney general's office contends that federal law forbids Medicaid to cover abortions in most circumstances and that the joint federal-state health insurance program indirectly funds abortions because the organization's financial statements show it commingles Medicaid funds with other revenues.
Last week, the Department of Health and Human Services said that it agrees with Planned Parenthood's argument that the law illegally blocks Medicaid recipients from receiving treatment, and gave the state 60 days to change it to comply with federal law.
The Attorney General said the state would continue to defend the law, despite the federal government's objections.