Supreme Court Divided Over Obamacare Challenge

(Reuters) - The U.S. Supreme Court appeared divided on ideological lines on Wednesday as it heard a second major challenge to President Barack Obama's healthcare law targeting tax subsidies intended to help people afford insurance, with Justice Anthony Kennedyappearing to be the possible swing vote in a decision.

Kennedy, a conservative on the nine-member court who often casts the deciding vote in close cases, raised concerns to lawyers on both sides about the possible negative impact on states if the government loses the case, suggesting he could back the Obama administration. But he did not commit to supporting either side.

Chief Justice John Roberts, who supplied the key vote in a 5-4 ruling in 2012 upholding the law in the previous challenge, said little during the argument to signal how he might vote.

If the court rules against the Obama administration, up to 7.5 million people in at least 34 states would lose the tax subsidies that help low- and moderate-income people buy private health insurance, according to the consulting firm Avalere Health.

The court's four liberals all appeared supportive of the government, while conservativesAntonin Scalia and Samuel Alito asked questions sympathetic to the challengers. Conservative Justice Clarence Thomas, sticking to his usual practice, asked no questions.

At one point during the 85-minute oral argument, Alito suggested if the court rules against the government in the conservative challenge to Obama's signature domestic policy achievement, it could give states time to prepare for the impact by saying the ruling would only go into effect at the end of the year.

Kennedy's concerns focused on the possibility that if the law allows subsidies only for states that set up their own insurance exchanges, it would raise a new, more serious question about whether the law is unconstitutionally coercive by essentially punishing states that fail to establish exchanges.

"There's a serious constitutional problem if we adopt your argument," he said to the challengers' lawyer, Michael Carvin.

The legal question, hinging on just a few words in the expansive law, is whether only people who have bought insurance on state exchanges qualify for the tax-credit subsidies.

Kennedy said throwing out subsidies would potentially unlawfully pressure states and cause an insurance "death spiral." But Kennedy added that the challengers may win anyway based on the plain meaning of the provision at issue.

Kennedy later said the law would not be giving states a "rational choice" if they had to either set up exchanges or face losing subsidies for their residents.

Alito disputed Obama administration lawyer Donald Verrilli's assertions about the disruptive impact of a ruling that allows subsidies only in states that set up their own exchanges. Alito said states could simply establish new exchanges.

"Going forward, there would be no harm," Alito told Verrilli.

But most of the 50 states have not created exchanges. Thirteen states and the District of Columbia have set them up, with another 34 run by the federal government and three operating as state-federal hybrids.

It was when Verrilli noted that people would lose tax credits immediately if the government loses that Alito said the court could delay the ruling from going into effect until the end of the year.

Scalia also noted that Congress could potentially amend the law, although Verrilli expressed skepticism that the Republican-led House of Representatives and Senate would do so.

One possible outcome is that the court could find that the law is ambiguous and defer to the government interpretation of the law. In one of his few remarks, Roberts said that would allow a future president to reverse course.

A decision is due by the end of June.

DREARY DAY

On a chilly, damp, cloudy day in the U.S. capital, about a couple hundred demonstrators mostly from pro-Obamacare forces including labor unions, a nurses group, Planned Parenthood and women's groups gathered on the sidewalk in front of the white marble columned courthouse ahead of the argument.

A couple of dozen demonstrators from the conservative Tea Party movement rallied against the law. Conservatives have denounced Obamacare as a government overreach.

The Democratic-backed Affordable Care Act, narrowly passed by Congress in 2010 over unified Republican opposition, aimed to help millions of Americans who lacked any health insurance afford coverage.

The case does not affect people who obtain health insurance through their employer.

The court will be focusing on whether a four-word phrase in the law has been correctly interpreted by the administration to allow subsidies to be available nationwide.

That provision says subsidies are available to those buying insurance on exchanges "established by the state." The challengers, financed by a libertarian Washington group called the Competitive Enterprise Institute, say the government should lose based on the plain meaning of that phrase.

Hospital stocks, which Wall Street analysts have warned could be volatile around the Supreme Court arguments and ruling, jumped during Wednesday's arguments.

Community Health Systems Inc <cyh.n> shares rose 5.6 percent, HCA Holdings was up 7.7 percent, Tenet Healthcare Corp was up 6 percent. They are among the hospitals that have benefited from new customers from the exchanges and from the Medicaid insurance program for the poor.

Kennedy's comments gave the impression he would side with the government, several analysts said.

The case is King v. Burwell, U.S. Supreme Court, No. 14-114.