The central question of the case is whether the language of the Affordable Care Act allows premium subsidies for Americans in states relying on the federal government for enrollment in exchange plans.
Kennedy questioned the implications for states' rights and federalism posed by the plaintiffs' argument because their reading would coerce states to establish exchanges by imposing onerous consequences for states that declined.
"There's a serious constitutional problem if we adopt your argument," Kennedy said.
The Supreme Court generally assumes that Congress doesn't intentionally violate the Constitution, a doctrine known as "constitutional avoidance," which U.S. Solicitor General Donald Verrilli seized on as "another very powerful reason to read the statutory text our way."
The justices are likely to hold a conference at the end of this week and possibly take a preliminary vote. Chief Justice John Roberts will assign the writing of the opinion if he is in the majority. If he is not, then the senior justice in the majority will assign the opinion. A decision in the case is expected in June.
"If Justice Kennedy believes that the challengers' interpretation of the statute would lead to an unconstitutional federal coercion of states, then the law's challengers will lose," said Jesse Witten, healthcare partner with Drinker Biddle & Reath. "There is no way they can prevail unless Justice Kennedy is on their side."
Later in the arguments, however, conservative justices Antonin Scalia and Samuel Alito suggested that lawmakers could mitigate the fallout from a negative decision in the case.
The case has raised considerable concern that a decision siding with the challengers could abruptly end subsidies for 7.5 million people in states relying on HHS to run their exchanges, as well as wreak havoc on insurance markets and cause ripple effects across the healthcare industry.
Republican lawmakers have said in recent days that they would pursue a legislative fix, but it's unclear whether they can unite around a particular approach.
Scalia, though, asserted that Congress would act to prevent a doomsday scenario, allowing Verrilli to get a laugh with the quip, "This Congress, your honor?"
Alito hinted that the justices might consider staying a negative ruling until the end of 2015 so that subsidies wouldn't immediately disappear and Congress and states would have time to act. Verrilli said that still would leave states too little time to establish their own exchanges and maintain access to subsidies for their residents.
Scalia and Alito's comments may be arguments they'll make behind the scenes in coming days and months to persuade other justices to side against the administration, said Ankur Goel, a health partner with McDermott Will & Emery who co-authored an amicus brief in the case for the American Public Health Association siding with the government.
“I think what you can anticipate is the possibility that those who are on that side of the case will be making a pitch to say the idea that this death spiral has to be caused, it's not the case,” Goel said.
Joel Ario, a managing director at Manatt Health Solutions and the former exchange director with HHS, said he hopes that Roberts' relative silence means he might side with the government. “I would like to think he's trying to be very judicious here, be very careful, and I think, in general, the more judicious and careful he is, the more that favors the government,” Ario said.
A number of notables filled the courtroom as arguments were heard, including Sen. Orrin Hatch (R-Utah), HHS Secretary Sylvia Mathews Burwell, former HHS Secretary Kathleen Sebelius, Rep. Paul Ryan (R-Wis.), and U.S. House Minority Leader Nancy Pelosi (D-Calif.).
Throughout the nearly 90-minute arguments, the court's four liberal-leaning justices largely aimed their questions at the challengers' attorney, Michael Carvin of the firm Jones Day, while Scalia and Alito probed Verrilli with questions.