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Supreme Court Upholds Obamacare Subsidies

This story originally appeared on CNBC

Obamacare just survived a potentially fatal heart attack.

REUTERS | Joshua Roberts

In a major decision, the U.S. Supreme Court on Thursday ruled in a 6-3 decision that the federal subsidies that help nearly 6.4 million people pay for their Obamacare health plans are legal under the Affordable Care Act. 

The ruling avoids what many analysts predicted would be a nightmare scenario if the plaintiffs had won: individual plan insurance prices skyrocketing in two-thirds of the United States, and the loss of health coverage for upwards of 8 million people in states served by the federal insurance marketplace HealthCare.gov by next year.

"Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them," Chief Justice John Roberts wrote in the majority decision.

Read the Supreme Court decision upholding Obamacare subsidies here.

The Supreme Court decision is a huge victory for the administration of President Barack Obama and his landmark health-reform law, which was designed to significantly reduce the number of Americans without health coverage.

In its ruling in the case known as King v. Burwell, the high court accepted the administration's argument that the ACA allows federal tax credits to be issued to people who buy health plans through a federally run Obamacare exchange. Joining Roberts in the majority decision were Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotamayor and Elena Kagan.

Plaintiffs had argued that only customers of state-run exchanges can receive such financial help, the Supreme Court found. Just 17 such exchanges that sell insurance plans from private insurers are currently run by a state or the District of Columbia.

If the court had ruled for the plaintiffs, it would had effectively created a segregated country in terms of individual health insurance, the coverage people buy outside of their jobs. People in most of the country would have only be able to buy such insurance by paying the full retail price, while in one-third of the U.S. many people will be eligible for financial aid to offset the cost of their coverage.

Because of the key role that subsidies play in the ACA, the Supreme Court's decision in the HealthCare.gov states also kept in place the so-called "employer mandate," which requires larger employers to offer affordable health insurance to their workers or pay a fine. The ruling also keeps intact the individual mandate that requires most Americans to have some form of health coverage or pay a tax penalty.

The decision also takes pressure off the Republican-controlled Congress. If the court had invalidated the HealthCare.gov subsidies, some Republicans were prepared to extend the financial aid in the 34 affected states through as long as 2017, when the next president takes office.

Although Republicans overwhelmingly opposed Obamacare, there was serious concern about GOP leaders that their party would suffer a political backlash from people losing their health coverage just as the part mobilizes to regain the White House in the 2016 presidential election. There was fear among some Republicans that news stories of seriously ill or dying people going without health care because of the loss of their Obamacare plans will haunt them on Election Day next year.

The Obama administration before the ruling had refused to reveal its contingency plans for such a decision. But a handful of states served by HealthCare.gov have indicated they will make moves that might be able to protect the subsidies their residents currently enjoy.

The decision hinged on just a handful of words in the ACA that discussed the issuance of subsidies to customers of a insurance marketplace "established by a state." The ACA does not explicitly discuss the issuance of such aid to customers of an exchange established by the federal government in the event a state opted not to set up such an online marketplace. Most states, often because of their political leaders' opposition to Obamacare or because of cost concerns, had opted not to run their own exchanges.

The subsidies are a crucial component of the Affordable Care Act. They are available to people with low and moderate household incomes—between one and four times the federal poverty level.

Of the current 10.2 million Obamacare enrollees in the U.S., 85 percent of them, or 8.7 million customers, receive tax credits to help reduce their monthly premium payments. The average subsidy for people who qualified for subsidies was $272 per month.

About 6.4 million HealthCare.gov customers were subsidized, and now retain that financial aid because of Thursday's ruling.

Nearly 8 million people overall had been projected to lose their health plans by next year as a result of the decision against the administration. That tally is higher than the number of people with subsidies because it reflects what would have been both the loss of coverage for most subsidized people, as well as the millions who would stop buying individual health plans as their prices sharply rose on the heels of the loss of subsidized customers.

Analysts had projected that that the retail price for premiums—that is, the non-subsidized price—for individual insurance plans in the 34 states now served by HealthCare.gov would have increase by an average of almost 50 percent if the subsidies were removed.

The Supreme Court's ruling comes three years after it upheld the ACA's individual mandate as legal, but also ruled that Obamacare's expansion of Medicaid eligibility to most poor adults had to be left up to individual states to decide. That split decision has resulted in three-fifths of the U.S. granting Medicaid benefits to more people, and the remaining states keeping in place Medicaid programs that often sharply limit who can get coverage.

That ruling for several years had seemed like the last judicial word on Obamacare. But in the meantime, four effectively identical court cases wound their way through the lower federal courts, carrying the seed of Thursday's ruling.

Plaintiffs in those cases challenged the Internal Revenue Service's guidance that effectively allowed financial aid to be given to HealthCare.gov customers. That IRS guidance was issued because of the perceived ambiguity in the ACA over whether an exchange established by the federal government could sell subsidized plans.

The Obama administration, and many legal observers, had scoffed at the plaintiffs' arguments. The administration and its allies argued that it would be nonsensical for the ACA authorize the creation of a federal exchange that was unable to sell subsidized insurance plans because there would then be little or no incentive for people to buy the plans there. The exchanges are the only place subsidies can be used; customers who enroll in individual plans outside of the exchanges cannot receive subsidies.

The administration also argued that there was no evidence that Congress ever intended to deny subsidies to HealthCare.gov customers while it was authorizing such aid for state exchange customers, nor that any states weighed the cost of forgoing those subsidies in making their decision to default to a federal exchange.

But lawyers for the plaintiffs said the law was clear: only customers of an exchange established by the state could get financial aid.

Last July, the federal appeals circuit for the District of Columbia stunned the Obama administration by ruling, in a 2-1 decision, that the HealthCare.gov subsidies were illegal. Hours later, a federal appeals court in Virginia ruled 3-0 that the subsides were legal.

The DC circuit later agreed to re-hear the case with a larger panel of judges, which effectively voided its decision invalidating the subsidies. But the plaintiffs in the Virginia case requested that the Supreme Court hear their appeal of the decision in that circuit, and the Supreme Court, to the surprise of many, agreed to do so, hearing oral arguments earlier this year.

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