Supreme Court: Could Obamacare ruling destroy health insurance for millions?

If the Supreme Court strikes down subsidies offered through Obamacare's federal exchange, the business model on which the program is founded could fall apart.

As the United States Supreme Court begins to consider Wednesday's arguments in a case that could implode the Affordable Care Act in 34 states, many in the insurance and health-care industries are bracing for a possible logistical and financial tsunami.

At issue in King v. Burwell is whether Obamacare subsidies for low-income Americans are limited only to "an exchange established by the state." If the Supreme Court rules that they are, it could invalidate the federal exchange established to serve the 34 states that chose not to build their own. That would instantly break the insurance plans' business model, experts say.

Those customers unable to afford health insurance without the subsidies would most likely drop out, insurers would then lose the premium revenue essential to pay their ongoing claims, and hospitals and health-care providers would have to provide many emergency services without a structure to compensate them.

“So what’s going to happen? It’s going to go berzerk,” says David Oscar, the communications chair for the New Jersey Association of Health Underwriters and an insurance broker in Fairfield, N.J. “The insurance carriers are going to have a conniption, and they're not going to be able afford the costs anymore.”

Before each year, actuaries crunch their numbers to discern the risks of a given population pool, insurers then create their offerings of plans and prices based on the premium payments they expect to receive, and then state regulatory commissions recheck these numbers to make sure they comport with the law before approving them.

“The insurers have rates that they’ve already agreed to for the calendar year, and they've already been through rate review, which is a months-long process,” says Linda Blumberg, senior fellow at the Urban Institute’s Health Policy Center.

According to a study Ms. Blumberg co-authored in February, a Supreme Court ruling that would eliminate the Obamacare subsidies would cause health-care spending to fall by at least 35 percent for about 8 million affected individuals in these states. 

Hospitals could lose up to $6.2 billion in payments, physicians up to $2.1 billion, and drug companies $1.6 billion, the study found, noting that “uncompensated care could increase to unsustainable levels."

Such cost pressures would force insurers to try to raise their rates “smack dab in the middle of a plan year,” says Blumberg, a practice that is currently outlawed. 

Indeed, anticipating a ruling that would create such chaos in the industry, the American Academy of Actuaries, a professional association based in Washington, D.C., urged the Obama administration in February to allow insurers to revise their rates midstream, should the Supreme Court gut the law’s subsidy provisions.

And as reported by the live updates from oral arguments in the King v. Burwell case in SCOTUSblog, Justice Anthony Kennedy on Wednesday morning brought up the fears many in the insurance and health industry have been sounding. Justice Kennedy "expressed deep concern with a system where the statute would potentially destroy the insurance system in states that chose not to establish their own exchanges – likening this to an unconstitutional form of federal coercion," wrote Eric Citron, live from the Supreme Court. 

If the court rules against such federal subsidies, "premiums for 2015, which are already in place, and premiums for 2016, which need to be submitted prior to the court’s ruling, would likely be inadequate to cover claims,” the Academy’s Health Practice Council wrote in a letter to US Health and Human Services Secretary Sylvia Burwell, the named defendant in the Supreme Court case.

But last week Secretary Burwell told Congress that the administration knew of no legal actions it could take to “undo the massive damage to our health care system that would be caused by an adverse decision.”

Even if insurance companies are allowed to raise their rates for 2016, however, health experts describe a “death spiral” in which even those without subsidies would no longer be able to afford health insurance. A study by the RAND Corporation found that unsubsidized premiums for all individual plans, both those offered within healthcare.gov and those sold independently, would jump nearly 50 percent. 

“It would be very messy, and not just for the exchanges,” says Gary Claxton, vice president at the Kaiser Family Foundation and director of its Health Care Marketplace Project. “Because the way the law works, the whole non-group [individual] market for insurers is considered one risk pool, which means the business you write inside the exchanges and outside the exchanges are rated on the same basis. So it affects all of your business – basically you’d have to raise rates on everybody.”

Responding to such concerns, this week some Republican senators called for a congressional contingency plan that would provide temporary subsidies for those who would otherwise be forced to drop their coverage, and keep this year’s financial infrastructure in place, and possibly next year’s as well.

But insurance industry experts are not convinced that the current Congress will act. If the Supreme Court takes away the subsidies and Congress doesn't "adjust, fix, or amend this mess – and I think we know how likely that is," says Mr. Oscar, the health underwriter and insurance broker, "we’re up a creek without a paddle."