Why the Supreme Court May Toss Out Obamacare Subsidies

Source:  Architect of the Capitol.

The Supreme Court has decided to insert itself into the battle over Obamacare subsidies in a move that jeopardizes the government's share of monthly premium payments for millions of Americans. If the Supreme Court eventually rules that the ACA doesn't grant the government the ability to offer insurance subsidies to people signing up through the federally operated healthcare.gov insurance exchange, it could significantly decrease the number of members willing and able to buy insurance plans offered by UnitedHealth Group (UNH 1.35%), WellPoint (ELV 1.11%) and their competitors.

Kicking up dust
On Friday, the Supreme Court announced it will consider King v. Burwell -- a case that calls into question the government's authority to provide payment subsidies to people signing up for health insurance through the health care.gov exchange. 

That case is just one of a handful of challenges that are making their way through the court system and so far judgments in these cases have been mixed. 

In July, a D.C. circuit court voted two to one that the ACA does not contain language allowing government subsidies for people signing up through health care.gov, the federally managed insurance marketplace. A decision later that week out of a Virginia court said that the ACA does provide for subsidies on the federal exchange. And an Oklahoma court ruled last month that it did not. Those conflicting judgments virtually guaranteed that the Supreme Court would weigh in on the matter and now that the court has officially said it will hear the case, ACA supporters are scrambling.

If the high court eventually sides with plaintiffs, it could lead to a surge in premium payments for millions of people living in the 36 states that did not establish their own individual state health exchanges. 

According to The New York Times, 4.5 million of the 7 million people who signed up for insurance did so through healthcare.gov, and 90% of those people receive subsidies. If those subsidy payments are eliminated, monthly premium payments could jump from $82 to nearly $350 on average in those states, based on prices for 2014.

Will it matter?
So far, opponents as a whole have fallen short in their goal of dismantling the Affordable Care Act. For example, questions surrounding the constitutionality of mandating that states expand Medicaid resulted in a 2012 Supreme Court decision that removed the mandate and made states opt-into Medicaid expansion instead.

Despite that obstacle, the ACA has broadly succeeded in its mission to decrease the number of Americans without insurance coverage. According to a study conducted by Gallup and Healthways, the percentage of Americans without insurance declined from a peak of 18% in 2013 to 13.4% in the third quarter.

That drop has come despite the Supreme Court's ruling on Medicaid expansion. Overall, 25 states still chose to adopt Medicaid expansion last year, resulting in more than 8 million new Medicaid members signing up for the government program since October 2013.

Looking ahead.
Since the Supreme Court won't issue its judgment until next summer, the issue of subsidies won't go away anytime soon. In the Oklahoma ruling in October, federal Judge Ronald White concluded that the ACA allows subsidies specifically for insurance bought "through an exchange established by the state." Since the federal government established the health care.gov exchange, White argued that subsidies can't be offered to people who sign up for coverage through that marketplace.

If the Supreme Court finds similarly, it's unclear what would happen to Obamacare or insurers including UnitedHealth Group and WellPoint, which are counting on millions of new members this year. If subsidies are eliminated for health care.gov members, many healthy young and low-income earners may cancel their policies. That would leave only the sickest and most costly people remaining in insurance pools. If that were to happen, insurers could adopt "material change" opt-out provisions that would allow them to exit plans sold through the federal exchange. However, that may not happen. After all, many states might simply create their own health exchange to skirt the issue altogether.