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Health Insurers Hang on Big Supreme Court Day

Stocks in this article: UNH CI AET AGP MOH

NEW YORK ( TheStreet) -- The U.S. Supreme Court will hear oral arguments Wednesday about severability and Medicaid expansion.

Wednesday marks the third and final day of hearings as the Patient Protection and Affordable Care Act, otherwise known as Obamacare, will be debated for two-and-a-half hours.

The court debated on Tuesday the constitutionality of an individual mandate -- Congress' ability to demand almost every American to have health insurance or else pay a penalty. If the justices strike down the mandate, there would still be other parts of the health care law to consider keeping.

That's where severability enters the discussion, because if the Supreme Court rules an individual mandate unconstitutional then it must consider if Congress would have intended to pass the law without that stipulation.

"It Wednesday hearings is an opportunity, basically, to remind the court about the implications of striking down the individual mandate," said Greg Magarian, a law professor at Washington University in St. Louis who clerked for former Associate Justice John Paul Stevens. "One of the themes that the government keeps hitting on is all of this stuff fits together."

Magarian said the argument of severability returns to the government's argument on Tuesday that it needed the individual mandate in order to accomplish important market regulation.

The government agreed to write the individual mandate in order to convince companies like UnitedHealth Group (UNH), Aetna (AET) and Cigna (CI) to comply with Obamacare's rule that health care companies provide care without regard to pre-existing conditions.

Also at stake Wednesday is the question of the expansion of Medicaid that the 26 states opposing Obamacare have said would put undue cost pressure on the expanded number of Americans the states would have to extend the program to.

The federal government must pay for all newly eligible Medicaid individuals through 2016 and pay 90% of the burden (the other 10% taken on by the states) starting in 2020.

If the Medicaid expansion is struck down, it could hurt managed care companies exposed to the program.

"We think that this argument probably is the least convincing, but certainly if for some reason the Medicaid expansion were deemed overly coercive to the states ... that would be a negative for any managed care company that participates in Medicaid," said Matthew Coffina, senior health care analyst at Morningstar.

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