In an afternoon session today, the justices will consider a challenge by 26 states that object to a section of the law that expands the federal-state Medicaid health-insurance program for the poor.

Questions from the bench during yesterday's hearing on mandatory insurance coverage indicated the justices may split 5-to-4, with the court's five Republican appointees joining to overturn that part of the law.

Justice Anthony Kennedy, who most often occupies the court's ideological middle ground, said that by requiring Americans to take unwanted action, the law “changes the relationship of the government to the individual in a very fundamental way.”

The Obama administration needs support from at least one Republican appointee on the nine-member court to uphold the 2010 law. Four of them — Chief Justice John Roberts and Justices Antonin Scalia, Samuel Alito and Kennedy — interrupted U.S. Solicitor General Donald Verrilli repeatedly yesterday as he pressed his case for upholding the law.

“I don't think the challengers could have hoped to have had a better day, and I don't think the government realistically could have had a more distressing day,” said Tom Goldstein, an appellate lawyer whose Scotusblog website tracks the court. Bloomberg Law sponsors the blog.

Revamping an Industry

The health law would extend coverage to 32 million people who lack insurance by 2016, and revamp an industry that accounts for 18 percent of the U.S. economy, in part through the coverage mandate.

The court hasn't overturned legislation with such sweeping impact since the 1930s, when it voided parts of Franklin D. Roosevelt's New Deal, the package of economic programs enacted in the 1930s in response to the Great Depression.

The justices probably will rule in late June, months before the November election. A ruling against the measure would give ammunition to Obama's Republican challengers, who have said the law should be repealed.

This morning's hearing will review a decision by an Atlanta-based federal appeals court that found the health-insurance mandate unconstitutional and ruled that the rest of the law remains valid. None of the parties to the case wants the Supreme Court to follow suit.

The government, agreeing with the insurance industry, says if Congress can't make everybody have coverage, the justices should toss out sections of the law known as the guaranteed-issue and community-rating provisions. Those sections say insurers must issue policies and set rates without regard to pre-existing health problems.

Without mandatory insurance rules, the government says those provisions would create an industry “death spiral,” in which only patients with costly health conditions would obtain insurance. That would lead to higher premiums, which would prompt healthy policyholders to drop coverage, causing more rate increases, the government says.

“Premiums would increase significantly under that scenario, and the availability of insurance would decline — exactly the opposite of what Congress intended,” Verrilli argued in court papers.

Insurance industry groups, in a court brief, said Congress structured new policy requirements in a “package deal” with mandatory coverage.

Industry Position

America's Health Insurance Plans, a trade group in Washington, and the Chicago-based Blue Cross Blue Shield Association, which didn't take a position on the insurance mandate's constitutionality, argued that the guaranteed-issue and community-rating rules aren't practical by themselves.

“Congress would not have intended those insurance-market reforms to operate on their own, without the vital counterbalance of the minimum individual coverage mandate there to prevent the skyrocketing premiums that would otherwise arise,” the industry groups' brief said.

The states, and a small-business group that sued to overturn the health-care law, say the court should invalidate the entire statute if it decides the mandatory insurance section is unconstitutional.

The law “is a delicate balance of inextricably intertwined provisions, none of which can survive without the act's core components,” the states' lawyer, Paul Clement, argued in court papers.

Because none of the participants supports the appeals court's conclusion, the Supreme Court appointed an outside lawyer, H. Bartow Farr III, to argue that the rest of the statute — including the guaranteed-issue and community-rating sections — should be left in force even if the justices strike down the individual mandate.

Those provisions “were put in place specifically to open the health insurance market to millions of people who had been unable to acquire affordable coverage because of their poor health,” Farr argued in a court brief.

If one part of the law is found to be unconstitutional, Farr said, “the court should have clear evidence” before presuming that Congress would want any other section invalidated. “There is no such evidence here,” he said.

A 2010 Supreme Court ruling suggests the justices won't be eager to strike down the rest of the statute, even if a majority declares the mandate unconstitutional. In that case, the court left intact an auditing industry oversight board, while voiding a provision that insulated its members from being fired.

'Problematic Portions'

“Generally speaking, when confronting a constitutional flaw in a statute, we try to limit the solution to the problem, severing any problematic portions while leaving the remainder intact,” Chief Justice Roberts wrote in his majority opinion for the 5-4 court. His statement in part quoted an opinion written by Justice Sandra Day O'Connor in a 2006 abortion case.

In the afternoon argument, the Medicaid issue may be an uphill fight for the states. No lower court judge has accepted their contention that the law unconstitutionally coerces the states into spending their own tax dollars against their will.

The health law's Medicaid expansion is designed to cover 17 million uninsured people by extending eligibility to those with incomes up to 138 percent of the federal poverty line. States that don't comply with the new expansion would lose all or part of their share of federal Medicaid funding.

The issue is an important one to managed-care companies with large Medicaid businesses.

Shares of St. Louis-based Centene Corp. have almost doubled, and those of Wellcare Health Plans Inc. of Tampa, Florida, have more than doubled since Obama signed the law in March 2010 on the expectation that states with rising caseloads will turn to them to help control program spending.

“The overwhelming consensus among investors is that the expansion is likely to be upheld,” said Heldman, the analyst. “If there's any reason to believe that the conventional wisdom was wrong after the oral arguments on Wednesday, that would put heavy pressure on Medicaid managed care stocks and also probably hospitals as well.”

To get the federal portion of Medicaid funding, states must abide by the rules of the health-care program for the poor or receive waivers.

The Supreme Court in the past has given Congress broad latitude to place conditions on federal funds. In 1987, the court upheld the use of federal highway dollars to induce states to raise the drinking age to 21.

The states in the health-care case point to the 1987 majority opinion's statement that “in some circumstances the financial inducement offered by Congress might be so coercive as to pass the point at which pressure turns into compulsion.”

The states say that's what has happened with the health-care law. They contend the federal government is depending on increased Medicaid participation to help meet the requirement that tens of millions of people get insurance.

“Congress created a mandate for all individuals to obtain insurance while providing no alternative to Medicaid for the most needy to obtain the mandated insurance,” Clement argued in court papers. “A program that is necessary for the satisfaction of a mandate is not voluntary.”

The Obama administration counters that the federal government would pay the entire cost until 2017, when states begin contributing a share that will eventually rise to 10 percent.

“The extension of Medicaid eligibility in the Affordable Care Act is neither unprecedented nor likely to impose significantly onerous burdens on the states,” Verrilli argued in court papers.

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