The Patient Protection and Affordable Care Act has only been in force since Jan. 1, 2014, but it's had some amazing ups and downs in its short history.
Known better as Obamacare, the PPACA struggled out of the gate to enroll uninsured consumers due to a host of IT-architectural design issues underlying a number of state- and federally run marketplace exchanges. It took more than two months for permanent fixes to be put into place on the federally run exchange, Healthcare.gov, allowing consumers to finally complete the sign-up process for health insurance.
Fast forward a year and change, and everything is generally running very smoothly. Obamacare enrollment approached 12 million by the end of the 2015 regular enrollment period on Feb. 15. This is well ahead of the estimated 9.1 million enrollees that the Department of Health and Human Services believed would be signed up by the end of the year.
But just because Obamacare is succeeding now in its enrollments doesn't mean the law itself is out of the woods.
Obamacare faces a major challenge
One challenge set to shake things up in the coming weeks is a case being reviewed by the Supreme Court, King vs. Burwell. The plaintiffs in this challenge are focused on the verbiage of the law, which states that subsidies are to be paid to exchanges "established by the State."
As you probably know, not all states chose to establish their own exchanges. Some 37 states -- a figure that seemingly grows by the year -- are now a part of the federally run healthcare marketplace, Healthcare.gov. Some states found it easier to simply join Healthcare.gov from the get-go (especially those idealistically opposed to Obamacare that didn't want to accept federal funds to set up state exchanges). Meanwhile others, such as Hawaii, Oregon, and Vermont, were coerced to join Healthcare.gov after their state-run exchanges failed to either get off the ground or be profitable enough to continue running. But the one thing in common here is that for these states, the federal government is in charge of doling out subsidies on the states' behalf, rather than the states themselves handing them out. The plaintiffs are arguing against this practice and hoping to eliminate it.
What might happen if King vs. Burwell is upheld?
In previous fool.com articles, we've alluded to this challenge and the many challenges before it, which have resulted in victories for the supporters of the PPACA. These included challenges to the legality of the individual mandate, which requires consumers to purchase health insurance or face a penalty, and lower-profile case Coons vs. Lew, which was dismissed by a lower circuit court and not heard by the Supreme Court.
But what would happen if King vs. Burwell was actually upheld? That's what one reader emailed me a few weeks ago, and that's what I'll attempt to answer today.
One preface before we dive in, though: no one knows with any certainty how the Supreme Court is going to rule, or what would happen if the Supreme Court upheld the plaintiffs' side of the case. That means my version of what may happen is purely hypothetical and is based on years of experience following Obamacare and the healthcare sector as a whole. Thus it could all come true, none of it may come true, or, more likely, it'll land somewhere in between those two extremes.
In total, I see five possible consequences.
1. Millions may lose their ability to afford insurance
The first consequence -- and this is the one we can file under the "thanks Captain Obvious" section -- is that nearly 7.7 million people who enrolled via Healthcare.gov would lose subsidy coverage, and likely health insurance.
Based on statistics from the federal government following the most recent enrollment period, nearly 11.4 million people signed up for health insurance, including 8.8 million via Healthcare.gov, with 87% qualifying for some form of Advanced Premium Tax Credit, or APTC. This APTC is what'll be removed should the Supreme Court justices uphold the plaintiffs' views. Should that happen, I'd opine that very few of the nearly 7.7 million tax-credit recipients would be able to afford health insurance on their own without a subsidy.
2. Millions could gain the ability to claim individual mandate exemption
At the same time, the move would also add millions of people to the list of those who'd qualify for an individual mandate exemption.
As described earlier, the individual mandate requires consumers to purchase health insurance or face a penalty on their taxes equal to the greater of $325 or 2% of their modified adjusted gross income in 2015. This penalty is set to rise again in 2016. However, without subsidies the cost of health insurance in this country averages $3,468 per year for an entry-level plan. Based on the exemption rule of 8% of modified-AGI, anyone earning less than $43,350 per year would be exempt. This exemption may disincentivize consumers from trying to purchase health insurance since there would be no consequences for not having it, and it would certainly reduce revenue collected by the IRS from those violating the individual mandate.
3. States might scramble to set up their own exchanges
Third, I believe the 37 states that are part of Healthcare.gov would have no choice but to scramble to set up their own healthcare exchanges.
What's worrisome about this is that some of the states that are now part of the federally-run marketplace tried on their own and failed miserably. CGI Group (NYSE:GIB), the company originally behind the problems at Healthcare.gov during its first couple of months, was also the architect behind Vermont's, Massachusetts', and Hawaii's failed exchanges. Part of the blame fell with incorrect state enrollment estimates, but a vast onus of responsibility lies with CGI Group itself and other contractors who completely dropped the ball.
My suspicion is it would take a good two years to get all 37 states up and running individually and on the same page. What we have to ask here (and what I frankly don't want to venture a guess on) is whether or not states whose governors are opposed to Obamacare would even consider setting up an exchange, and where the funding would come from.
4. Premium rates may rise, noticeably
Fourth, I believe this would be a blow to insurers, who'd have little choice but to increase premium rates in lieu of millions of account losses tied to Obamacare.
On one hand, it's important to understand that losing as many as 7.7 million people isn't going to bankrupt the U.S. healthcare system or insurers. The majority of insurers' current and ongoing customers were enrolled via commercial business accounts or through the traditional healthcare system that preceded Obamacare -- and little of this has changed since Obamacare was enacted.
However, it doesn't mean that losing millions of clients from the healthcare system won't sting. Estimates vary wildly on how much premiums could increase, and I certainly don't want to give too much weight to hypothetical scenarios, so I'm just going to leave it at this: premiums could rise noticeably for the remaining enrollees.
5. Politicians could face a backlash
Lastly, King vs. Burwell being upheld could lead to some serious backlash against those who opposed the law in the first place.
It may seem ironic considering that a majority of respondents in the nearly monthly Kaiser Family Foundation Health Tracking Polls have often expressed an unfavorable view of Obamacare, but taking away subsidies from more than 7 million people just a little over a year away from election time -- especially in a number of swing states -- could spell bad news for opponents of the law -- namely Republicans.
To be clear, I'm not a fan of analyzing the politics behind such a Supreme Court decision. Instead, I'm merely suggesting that the dynamics of Congress, or the presidency, could be disrupted by the sentiment behind this decision, and that can affect how efficiently economic problems are dealt with and influence the stock market and your investments over the long-term.
This case certainly has all the signs of being a game-changer for Obamacare. Now we simply watch and wait for the Supreme Court to issue its ruling sometime next month.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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