California Not Affected by Obamacare Court Challenge; At Least Not Yet

It's been three years, but the Affordable Care Act is before the Supreme Court again. The constitutionality of the law was settled then. This time, the question is subsidies. Oral arguments happen Wednesday.

The case is King v. Burwell, and the heart of the matter is whether the ACA permits subsidies to be granted to people who live in the 34 states that use the federally-run marketplace, healthcare.gov.

Note well: people in California, and the 13 other states that set up their own insurance marketplaces are not affected by this case. No one is challenging the legality of the subsidies as a whole -- only whether they may legally go to people who live in states using healthcare.gov.

Here's Kaiser Health News' Julie Rovner on the part of the ACA in question:

At issue in this case is a line in the law stipulating that subsidies are available to those who sign up for coverage "through an exchange established by the state." In issuing regulations to implement the subsidies in 2012, however, the IRS said that subsidies would also be available to those enrolling through the federal health insurance exchange. The agency noted Congress had never discussed limiting the subsidies to state-run exchanges and that making subsidies available to all "is consistent with the language, purpose and structure" of the law as a whole.

But those challenging the law, Rovner says, insist that indeed Congress did intend to limit the subsidies to those buying insurance on a state exchange, like Covered California.

If the Supreme Court rules against the Obama administration and invalidates those subsidies, more than 9 million people in the 34 states that use healthcare.gov stand to lose their subsidies -- and it would be almost immediately after the ruling is handed down.

Without the subsidies, many people would likely cancel their insurance because it would become unaffordable. Yes, there's an individual mandate in the ACA, but people are exempt from it if they cannot find insurance that is affordable to them, defined as greater than 8 percent of your household income.

Once people start dropping insurance, "the individual insurance markets in those states would probably melt down," says Larry Levitt, senior vice president at the Kaiser Family Foundation. That's because the health law's requirement of guaranteed issue -- that insurers must offer insurance to anyone who applies -- would still stand.

But those most likely to keep their coverage would be people who are sick, Levitt says, which would drive up premiums, without the healthy people to balance the risk pool.

At the Commonwealth Fund blog, Joel Ario has been writing about this possibility:

Should a Subsidy Shutdown happen this summer, insurers would suddenly have a risk pool filled with high-need, high-cost people, after having priced their 2015 premiums based on a balanced pool containing both healthy and sick people. Claims would quickly outpace premium revenue as insurers lose most of their low-cost, healthy customers but retain customers whose medical costs exceed their premiums.

If you're wondering about spill-over effects, insurance is sold state-by-state, so Californians and the people in the other 13 states with their own exchanges would continue to get subsidies. The individual insurance market would largely be unaffected.

"You'd really have big differences between states in access to affordable coverage," Levitt said. "It would very much be a north/south divide. It's really the south where states have not set up their own marketplaces."

Should the Supreme Court rule against the healthcare.gov subsidies, there's no straightforward solution in sight. Congress could pass a bill striking the line from the health law, but that's unlikely given Republican opposition to the law. Yes, states could set up their own exchanges and get the subsidies, but that cannot be done overnight. Plenty of governors and state legislatures won't want to set up a state exchange anyway because they have fought the ACA all along.

There could be bigger threats to the health law as a whole. "There could be a move in Congress to repeal the Affordable Care Act and replace it with something else," Levitt says, "but where that ends up is very unpredictable, it could easily end in stalemate."

The Supreme Court is expected to hand down their ruling in June. Decisions generally take effect 25 days after they are issued.