I think Greg Sargent’s post makes a good argument that the Democratic Party was not in agreement about how subsidies could be used to encourage state exchanges. The first faction thought subsidies should be offered to both the state and federal exchanges but it is not clear how this plan would encourage states to set up exchanges or how a federal exchange was constitutional. The question whether a federal exchange was constitutional was key part of Senator Ensign’s question to Senator Baucus. Without state exchanges all of the political and budgetary risk depends on a successful federal exchange roll-out.

The second faction thought that subsidies should only be offered in conjunction with state exchanges. This resolves the constitutionality question. Although there may be some roll-out problems they expected that most of the states would successfully implement the exchanges. The interesting quirk in the Senate finance bill was that they did not plan to set up a federal exchange but expected that they could delegate the work to a nonprofit. Their plan expected the federal government would take the lead in setting up  “an exchange for any state that refused to build one” but it would  “appoint some nonprofit entity to actually run the darned thing afterward.” This arms length approach to running an exchange for a state looks like it skirts the constitutionality question.

In hindsight I think the first faction did not care whether exchanges were constitutional or worked and that is why their wording did not end up in the merged bill. The second faction looks a little more pragmatic about having a plan that encouraged states to set up exchanges. They felt that the success of the Affordable Care Act probably depended on a majority of the states successfully implementing exchanges and a little “cooperative federalism” bribery with subsidies was necessary. Since their wording was likely to be constitutional and encourage states to set up exchanges, it is logical to see why the merged bill was very similar to that used on the Senate Finance bill.