A case with the ability to turn the Affordable Care Act on its ear finally went mainstream. Halbig v. Burwell has been coming so long that it was originally filed under a different name (Halbig v. Sebelius). It took its time, but the case led to a 2-1 appellate court decision that has brought the long-running debate over health insurance exchanges to a boil.

The suit challenges an IRS rule that interprets Section 1311 to allow subsidies in all 51 exchanges. The ACA defines an exchange as a governmental agency or nonprofit entity that is established by a state. The plaintiffs argue that means subsidies can only be offered in state-run exchanges and are illegal in federally facilitated exchanges (FFEs), which comprise the majority of exchanges.

That a court finally ruled against it should not be a total surprise. Because of an immediate federal appeal, the D.C. Court of Appeals ruling changes absolutely nothing. Subsidies endure for now. Next the case will get a hearing before the full D.C. Court of Appeals. If the full court reverses the decision, the three-judge panel's ruling is wiped out and every court will have ruled the subsidies are legal. The plaintiffs would then file an appeal to the Supreme Court, just as the Justice Department would if the full court upholds the panel's decision.

If the Supreme Court takes the case, all bets are off. Remember, when the Supreme Court upheld the constitutionality of the ACA, the justices also made Medicaid expansion optional. That resulted in nearly half the states having a coverage gap comprising people who earn too much for Medicaid and too little to receive subsidies.

A Supreme Court ruling in favors of the plaintiffs would pull the plug on subsidies for those who bought policies through federally facilitated exchanges. The previously subsidized would qualify for hardship exemptions because unsubsidized premiums would become unaffordable. In federal and partnership exchanges, 87 percent of people who picked a plan qualified for subsidies. Without those enrollees, insurers would clamor for modifications - if not an outright end - to the individual mandate.

State-run exchanges would be unaffected. The progress made in covering the uninsured in California, Connecticut and Kentucky would not be impeded. If making Medicaid expansion voluntary has separated the states into haves and have-nots, Halbig v. Burwell could spawn an even greater coverage gap.

However, states could have a fair degree of wiggle room to keep those subsidies alive. What would actually constitute an exchange established by the states? It isn't simply a matter of state v. federal, because new variations of exchange operations have arisen. The partnership exchange emerged after the ACA became law. Idaho and New Mexico plan to run their own exchanges but relied on federal technology support for 2014.

Only a handful of states have zero role in their exchanges, even among the FFEs. Most state departments of insurance continued to review plans submitted for the exchanges. Failed state exchanges in Oregon and Nevada will be run through Healthcare.gov in 2015, but they still qualify as state exchanges. This could also buffer the six partnership exchanges from loss of subsidies.

The biggest divide would be in states that have refused any role in ACA implementation. Three states likely to do nothing to save subsidies (Florida, North Carolina and Texas) would account for more than 2 million exchange enrollees.

Halbig v. Burwell still has miles to go before a verdict is reached. Until it does, the decision is a sword of Damocles dangling over the ACA, its biggest threat since the original case challenging the individual mandate.

Follow Bill Melville on Twitter @BillMelvilleDRG

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