Obamacare 101: What if Supreme Court rules against federal subsidies?

A ruling coming within the next two weeks from the US Supreme Court has the potential to unravel the law known as Obamacare – and to leave as many as 8 million or more Americans suddenly without insurance.

The impacts of a ruling against the Obama administration would be especially severe for low-income families. One study found that out-of-pocket expenses would rise 256 percent for families receiving federal subsidies. But it would also be significant for many middle class families – essentially anyone in the affected states who doesn’t have employer-based coverage and is shopping for a health plan.

That’s because the court case not only puts Affordable Care Act (ACA) subsidies at risk, but also could cause a spike in insurance prices. The fallout would affect health-care markets in two-thirds of US states. 

Why not in all 50 states?

The King v. Burwell court case revolves around four words in the ACA: “established by the state.” Plaintiffs argue that the Obama administration has been violating the law by giving subsidies to residents of 34 states that never established their own health insurance marketplaces. The administration argues that the intent of the law is to provide subsidies in all 50 states – even those that opted to let the federal government set up their marketplaces.

The Supreme Court could end up siding with the Obama administration. But a ruling against the administration would impose a kind of double penalty: Prices would surge because of the loss of subsidies, causing people to drop out, and insurers would then respond to a shrinking marketplace by seeking a boost in premiums.

“We will see a huge spike in premiums because the younger and healthier people are the ones who are most likely not to … seek coverage” if the subsidies disappear, says Ron Pollack of the advocacy group Families USA. “The insurance pools will be disproportionately filled by sicker and older people. And as that occurs, premiums will skyrocket. We will see what many refer to as a death spiral.”

In the death-spiral scenario, critics say insurance would become less and less affordable.

The 34 states that would be affected tend to be ones with Republican governors or legislatures, such as Florida, Georgia, Michigan, North Carolina, Ohio, and Texas.

Fully 6 in 10 people who might lose subsidies are in the Republican-dominated South.

In all, a ruling could eliminate subsidies for some 9.6 million people, and an estimated 8 million of those would end up with no insurance as a result, a RAND Corp. analysis concludes. Subsidies are available to people with incomes no more than four times the official poverty level.

“These people don't have another option, another affordable option, for health insurance,” says Carter Price, an analyst at RAND.

A study by the Urban Institute and the Robert Wood Johnson Foundation concludes, similarly, that the ranks of newly uninsured Americans would swell by 8.2 million under an anti-Obama ruling – a 44 percent increase relative to the current uninsured population in the 34 states. 

Separate from the change in subsidies, the study predicts the average premium would jump 35 percent for a person shopping for insurance – from $4,130 to $5,590 a year. 

The RAND analysis predicted a similar spike of 47 percent in premiums – using the example of a 40-year-old nonsmoker buying a typical plan with “silver” coverage quality.

Factoring in the subsidies, the hardest hit would be the near-poor, who are not eligible for Medicaid and would face premiums that could be “many multiples of what they had been paying,” says Mr. Price. Complicating matters, many of the affected states also opted out of the Medicaid expansion that came in as part of the ACA, which means more of their lower-income families rely on the subsidies for coverage.

Here’s a sense of how important subsidies are for those who get them: The ACA tax credits average $268 monthly per person, covering 72 percent of premium costs, according to the Kaiser Family Foundation, a health-care research organization. People who lose subsidies would see their out-of-pocket expense for premiums rise by 256 percent.

If the Supreme Court voids ACA tax credits in 34 states, a key question will be whether the subsidies are phased out immediately or whether the justices provide a softer landing for those affected, such as by allowing subsidies to continue through the end of the calendar year.

A ruling against the Obama administration would leave policymakers scrambling if they want to avert a premium spike and a surge in the uninsured. Congress could pass legislation to allow subsidies to continue, but it’s not clear that the Republican-controlled House and Senate would do so on terms acceptable to President Obama.

Still, Republicans could feel the heat of public blame for the loss of subsidies if they don’t act, says Mr. Pollack, the executive director of Families USA. 

Another option is for states to set up their own insurance marketplaces, to qualify for the subsidies to continue. That also comes with political uncertainties. And even for states eager to act, it would be challenging to get up and running for a 2016 enrollment period that starts in November.