If Supreme Court Strikes Federal Exchange Subsidies, Health Law Could Unravel

Exactly what would happen to the Affordable Care Act if the Supreme Court invalidates tax credits in three dozen states where the federal government runs the program?

Legal scholars say a decision like that would deal a potentially lethal blow to the law because it would undermine the government-run insurance marketplaces that are its backbone, as well as the mandate requiring most Americans to carry coverage.

In King v. Burwell, the law's challengers argue that Congress intended to limit federal tax credits to residents of states running their own insurance exchanges. Currently only 13 states and the District of Columbia operate exchanges on their own; another 10 are in some sort of partnership with the federal government. Federal officials run the rest.

Should the justices find that subsidies in federal exchanges are not allowed, "I don't think there are any rosy scenarios," said Timothy Jost, a law professor at Washington and Lee University and a supporter of the law. "It's a complete disaster."

The immediate impact would be that the Internal Revenue Service would stop paying subsidies to those in federally run exchanges.

In 2014, more than 4.6 million people were getting those subsidies but the number is projected to grow to as many as 13 million by 2016.

Most of those who lose subsidies would no longer be required to have insurance, because they would fall into an exemption in the law for those who have to pay more than 8 percent of family income for premiums.

"Since a lot of people can't afford insurance without the tax credits, you're looking at a lot of people shedding coverage," says Nicholas Bagley, a law professor at the University of Michigan.

Those who hang onto their coverage and pay the premium without help "are likely to be sicker on average than the people who shed their coverage because they're the ones who need insurance the most," he says.

Indeed, the insurance industry argued in a legal brief for a related case that elimination of the federal exchange subsidies could seriously undermine those markets, creating an insurance death spiral.

"A sicker pool of consumers results in higher premiums, which causes an additional relatively healthy subset of participants to drop out, which in turn results in a further increase in premiums," the group's trade group, America's Health Insurance Plans, said in its brief.

Eliminating subsidies also would undermine the so-called employer mandate that seeks to require larger firms to provide coverage. That's because it requires employers to pay a fine if their employees obtain subsidies on the exchange. If there are no subsidies, there are no employer fines and thus effectively, no mandate.

So what could be done? Some have argued that states that rely on the federal government to run their exchanges could establish their own marketplaces. But legal experts believe that's problematic as well.

"The practical obstacle is that creating an exchange is not child's play," says Bagley. "They've got to be able to carry out a variety of functions," including working with consumer assistance groups and overseeing plan's compliance with the laws.

While some have suggested that states could create a "virtual" exchange on paper and then contract with the federal government to run it, Bagley says the law on the subject is pretty explicit. "States would have to do more than just the bare minimum," he said.

Timing and financing would also pose practical problems. The final deadline for states to apply for federal funding to establish an exchange has passed. And a Supreme Court decision is likely to come in late June of next year, which is after another deadline (June 15) for states to use their own funds to establish an exchange in time for the 2015-16 open enrollment season.

The political obstacles are potentially even bigger.

In six states, even if a governor wanted to establish an exchange, the state legislature has specifically taken that authority away, according to the National Conference of State Legislatures. Georgia became the seventh state earlier this year.

That means state legislatures will have to get involved, said Bagley.

And many "are full of new members after the mid-term elections who specifically campaigned against the ACA."

Still, not everyone is convinced all this would spell the ACA's end.

"Congress will step in," predicts health economist Tom Miller of the conservative American Enterprise Institute.

"We're going to have the kind of political give and take which was abbreviated and artificially truncated when the law was passed," he said. "It's not a pretty process, but that's why we have a government and we elect people."

Kaiser Health News is an editorially independent program of the Kaiser Family Foundation.