The nation's healthcare system faces another major policy fork in 2012 as a U.S. Supreme Court case and a national election will decide whether the 2010 federal healthcare overhaul continues, major portions are eliminated, or the entire law is scrapped.

The potential for significant upheaval from either a Supreme Court rejection of the law or repeal by a newly elected Republican Congress and president has left many healthcare policy leaders nervous. But several insist a major rejection in 2012 is unlikely.

What is certain is that this year will bring a slate of major new regulations implementing the healthcare law, including requirements states must meet to create health insurance exchanges. State exchanges—or a federal version in states that fail to act—are a central linchpin of the law and their status remains uncertain.

The leading 2012 healthcare policy discussions that have nothing to do with the 2010 law revolve around congressional plans to address the Medicare physician payment formula, formally known as the sustainable growth-rate formula, and automatic deficit-reduction cuts slated to begin in 2013 as a result of inaction last year by the congressional supercommittee.

On the first item, Congress delayed a 27.4% Medicare pay cut for the first two months of the year, but legislators will need to address that and several other expiring payment provisions. On the second issue, providers hope to persuade lawmakers to find offsets that avert the need for provider cuts of up to 2% under a deficit-reduction scheme Congress approved in 2011.

Chip Kahn, president and CEO of the Federation of American Hospitals, says the immediate challenge for hospitals in this year will be the contentious SGR formula for physicians that lawmakers will revisit.

“We are against arbitrary policy robbing Peter to pay Paul,” Kahn says, referring to a decision to pay for the physician payment fix by cutting reimbursements to hospitals. “It doesn't make any sense to arbitrarily and punitively act against other providers or clinicians to right a wrong.”

Three months into 2012, the high court will begin considering the constitutionality of the Patient Protection and Affordable Care Act when the nine justices will hear 5 1/2 hours of oral arguments over three days. The amount of time devoted to oral arguments for this case is not typical for a Supreme Court case, says Bobby Burchfield, a partner with McDermott Will and Emery in Washington. Typically, the high court will grant an hour of argument per case and hear about three or four arguments a day.

“It's worth the attention,” says Thomas Miller, a legal scholar at the conservative American Enterprise Institute. “It's a serious and significant issue in constitutional law, but in the larger sense, it's about our politics and how people felt Congress and the president went too far in pushing this through, so there has been a reaction politically as well legally and constitutionally.”

The justices will decide on four issues related to the healthcare law: the anti-injunction act, which Burchfield calls a “ticket to get to the individual mandate”; the individual mandate, in which the high court must decide whether Congress exceeded its constitutional powers under the Commerce Clause in the law's requirement that individuals who don't have health insurance must buy coverage starting in 2014; severability to determine if the law can still stand if one part of the statute is struck down; and lastly, whether Congress violated the 10th Amendment of the U.S. Constitution by requiring states to expand their Medicaid programs.

On the question of whether Congress exceeded its constitutional power under the Commerce Clause with the individual mandate requiring uninsured people to buy coverage, Burchfield says he is inclined to think the court will strike it down with five votes.

Burchfield's experience includes arguing before the Supreme Court in McConnell v. Federal Election Commission, a 2003 case in which the court determined that most of the Bipartisan Campaign Reform Act of 2002—more commonly known as the McCain-Feingold Act—is constitutional. As he explains, although the reasoning behind the individual mandate is constitutional and practical, “if the court were to uphold the individual mandate, it is very difficult to see how the Commerce Clause is limited at all.”

The two key votes on this will likely come from Chief Justice John Roberts and Justice Anthony Kennedy, according to Burchfield. He assumes the four left-of-center justices—Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor—will be pretty firm in upholding the statute, so the action will be among the other five, even though none is absolutely certain to go one way or another. Kennedy is one to watch, he explains, not only because he has been in the majority on commerce-related cases that struck down federal actions, but because “he has been the deciding vote in almost every big issue case that has come to the (Supreme Court) in the last six or seven years.”

Meanwhile, Burchfield describes Roberts as an “institutionalist” who is very protective of the Supreme Court's institutional stature.

“He will generally look for ways to avoid overruling the statute if there is a way out,” Burchfield says, adding that it's not a lack of boldness or intellectual rigor. “He believes the court has a specific function to fulfill. And he appears to take the position in other cases that the court should rarely invalidate acts of commerce.”

Burchfield also says it's unlikely that Kagan and Justice Clarence Thomas will recuse themselves from the proceedings. Kagan had served as solicitor general in the Obama administration, but Burchfield says she generally avoided involvement with the Affordable Care Act. Meanwhile, any allegations that Thomas' wife is involved with groups that oppose the law would not merit recusal, he contends.

If the high court strikes down the individual mandate, then Burchfield predicts the court will find that the individual mandate is severable—despite the law's authors' neglecting to include a severability clause—which would allow the rest of the law to stand.

Alternatively, the loss of the individual mandate could lead the court to strip some of the law's major insurance provisions, says Miller of the AEI. In fact, America's Health Insurance Plans submitted a preliminary brief arguing that eliminating the mandate and keeping the law's requirements for insurers would undermine the entire insurance market.

And on the final matter—whether Congress violated the Constitution's 10th Amendment—Burchfield says the statute will stand because “it's not forcing states to do anything—it's giving states the choice of whether to participate in these expansions or not, and the federal government is paying for the additional coverage.”

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The second critical point for the healthcare law will come in November, when voters will decide who holds the presidency, all seats in the House of Representatives and one-third of the Senate.

Paul Keckley, executive director for the Deloitte Center for Health Solutions, says providers will face a tumultuous political environment in 2012. “I don't think you're going to see either political party bringing real rational discussion to solving problems because it's an election year,” he says. Conservative Republicans will focus on repealing “Obamacare,” while liberal Democrats focus on the haves and have-nots.

The election season is already affecting the law, health policy experts say. Helen Darling, president and CEO of the National Business Group on Health, which advocates for some of the nation's largest companies and biggest healthcare payers, sees the federal government backing off many provisions that centralized power in Washington.

For example, several provisions that drew sharp criticism for allowing federal overreach have been repealed or indefinitely delayed, including “free choice vouchers” and the Community Living Assistance Services and Supports, or CLASS, Act. The former program would have required employers to give employees vouchers that were the equivalent of their healthcare costs to buy insurance through the state exchanges, and the latter is a voluntary, public-supported long-term-care assistance program.

“We have seen the regulations and public policy go from being much tougher, rigid and federal-government focused to more flexibility,” Darling says.

The latest example of this, she says, was the December decision by HHS to allow states to design their own packages—within tight restrictions—of the benefits that their insurance exchange plans must offer, instead of a single federal model.

Another effect of the election season may include reducing any overhaul of Medicare to political rhetoric rather than actual discussion of policy alternatives.

“We're going to have to have some very difficult discussions about things like Medicare,” Keckley says. “And that seems to be a discussion to have among adults, and that doesn't happen in political cycles.”

The latest development on the issue—a bipartisan plan offered in December by Rep. Paul Ryan (R-Wis.) and Sen. Ron Wyden (D-Ore.) aimed at curtailing Medicare growth by allowing future beneficiaries to use private insurance subsidies—quickly drew blistering attacks from liberal Democrats and healthcare activists.

“The latest Ryan-Wyden plan still leaves seniors vulnerable,” Sen. John Rockefeller (D-W.Va.) said in a written statement. “The best approach is the Independent Payment Advisory Board, which helps to manage rising healthcare costs but protects seniors from cuts to their benefits or increases in premiums.”

Another obstacle to major legislative changes to the law, according to some observers, is the extremely unlikely scale of victory Republicans would need in the Senate to roll back the healthcare law. That is because even if the election resulted in Obama's defeat and a Republican takeover of both chambers of Congress, Republicans still would need to gain 13 Senate seats to override Democratic filibusters aimed at keeping the law.

Another 2012 development likely to have an outsized effect on providers is the development of state exchanges and a federal exchange for states that do not develop their own version of an insurance marketplace.

Julie Scott Allen, government relations director at the Washington law firm of Drinker Biddle & Reath, describes the current status of state health insurance exchanges as a “mixed bag.”

“Thirteen states have agreed to go forward; 10 have said no,” Allen says, adding that of those 10 states, some are currently looking toward an as-yet undefined federal option. Meanwhile, the Obama administration is pushing hard for most other states to address this issue through the legislative sessions that began in most states this month.

The state resistance to creating exchanges concerns many provider advocates, some of whom highlight past Republican support for insurance exchanges.

“I thought that if anything the states would not want the federal government to be in the position it will be, as of Jan. 1, 2013, to have to step in with a federalized exchange,” says Michael Regier, senior vice president of legal and corporate affairs at VHA. “Maybe it's a political bet that the federal government would never be in a position to do that with only a year's notice.”

Part of the state resistance, Allen says, also stems from three factors that make exchange creation troublesome.

First is whether federal rules governing exchanges (a proposed rule was released last summer and a final rule is expected this year, possibly as early as the spring) are too restrictive and costly for states, and whether ever-more federal mandates will follow.

Next are the infrastructure and health information technology challenges of setting up an exchange. “The exchange is meant to help an individual help select a health plan, but also help those on Medicaid or children's health insurance,” Allen says. “You're talking about an integration of a lot of systems and a lot of data,” which can be particularly tough for state systems that are either antiquated or undergoing upgrades—making it all the more challenging to be up and running by 2014.

A third inhibitor for states is the uncertainty surrounding the fate of reform law as healthcare providers and states await the Supreme Court ruling likely this summer. All of those obstacles add to the political environment.

“We're in an election cycle and Republicans by and large have a lot of concerns about the exchanges, the rules from HHS and the funding,” Allen says.