Decision Imminent in Case Challenging Obamacare Subsidies

U.S. Health and Human Services Secretary Kathleen Sebelius attends an event held in observance of World AIDS Day at the White House on December 2, 2013. REUTERS/Kevin Lamarque

In what could be another blow to the Affordable Care Act following the Hobby Lobby ruling last week, a little-known court case threatens to further unravel President Barack Obama's health care reform law. A federal appeals court for the D.C. Circuit will soon rule on Halbig v. Sebelius, a case that seeks to block Obamacare subsidies already obtained by more than 5 million people in order to afford the insurance plans they got through A decision could be made in the case by the U.S. Court of Appeals for the District of Columbia Circuit as early as Tuesday, CNBC reports.

The heart of the problem lies in the legality of the subsidies. Several catastrophic attempts at state exchanges (like Nevada's)—as well as the failure by some states to even set up their own exchanges—meant the federal government had to step in and take over. The plaintiffs argue that the tax credits were legal only for people who bought insurance through state-based exchanges, not the federal exchange. Considering that nearly 90 percent of the federal exchange's insurance enrollees were eligible for subsidies because of low or moderate incomes, there is the potential for an enormous setback that could send millions back into the ranks of the uninsured. Without those subsidies, health insurance plans under the Affordable Care Act could very well become unaffordable.

Other potential consequences include the "death spiral," where premium rates threaten to skyrocket because of a dearth of young, healthy enrollees and too many sick ones, and the possibility that businesses in some affected states won't be required to provide coverage for their employees.

Ultimately, the argument comes down to language. As Newsweek's Pema Levy wrote earlier this year:

At issue are the federal subsidies for individuals buying insurance in their state's health care exchanges. The law stipulates that those subsidies should be allotted for plans purchased "through an Exchange established by the State under Section 1311" (italics added), a reference to the section of the law that establishes state-run exchanges.

So if the federal government isn't a state, it technically is not allowed to provide subsidies for insurance plans through its own exchange, the plaintiffs argue.

If the decision does strike down the federal exchange subsidies, at least the effect won't be felt for a while, according to Simon Lazarus, senior counsel at the Constitutional Accountability Center. He said that the Department of Justice would immediately ask to review the case in an en banc decision—a decision in a particularly high-stakes case reached by all the appeals court judges, in jurisdictions where there is more than one three- or four-judge panel, like the District of Columbia. "In terms of actual impact, it's not likely to have any impact for quite some time," Lazarus said.

But ultimately, if those Affordable Care Act tax credits and subsidies are available only from state-based exchanges, "the impact would be vast," Lazarus said. With approximately 5 million people currently using the subsidies, and 10 million eligible for them, this means a significant number of Americans would suddenly be left, once again, without insurance.

"It doesn't really stop there. Taking those people out of the health insurance market would…radically increase the cost of all people who don't have group insurance," Lazarus said.

Then there's the matter of the individual mandate, where all Americans are required to have health insurance by 2014 or face a penalty. Halbig v. Sebelius throws this completely off-kilter.

"The individual mandate becomes completely unworkable without tax credits and subsidies," Lazarus said, adding that most people who risk losing them would qualify for a hardship exemption and wouldn't have to pay the penalty, because health insurance would then make up more than 8 percent of their income. Still, while it's important to stress that no decision has been made yet, the potential for disaster hangs in the air.

"It would literally blow these markets up," Lazarus said.