The Supreme Court today granted certiorari to four Virginia residents appealing the way the federal government hands out subsidies for Obamacare. The Court did this after two separate Courts of Appeals ruled in the opposite way. If the Court rules against the Obama administration, more than four million people could lose their subsidies. That could start the “death spiral” that could crush Obamacare under its own weight.

The Obamacare subsidy structure

New York office of the IRS. Photo: Matthew G. Bisanz, CC BY-SA 3.0 Unported License.

The current Obamacare case comes out of Virginia. Four residents there believe the way the Obama administration is carrying out the law, puts them at a disadvantage. Some Oklahoma residents filed a similar suit last year. Dick Morris explained the problem with the law in a video shortly afterward. (See the embed.)

Briefly: section 1401 of the “Patient Protection and Affordable Care Act” says any person can get a subsidy, if he buys a “qualified” insurance plan on an insurance exchange established by the State where he lives. A separate section of the law says if a State will not set up such an exchange, the federal government can do it for them. That section says nothing about any subsidy.

But the IRS issued its own rule, saying it would grant a subsidy to any insurance buyer no matter where he lives. The law doesn’t say that. But U.S. Solicitor General Donald Verrilli argued the subsidies had to apply everywhere so every State would have “functional insurance markets.”

Congress determined that the tax credits at issue here are essential to the Affordable Care Act’s goals of making affordable health coverage available to all Americans and ensuring functional insurance markets.

Not so fast, says Senator John Cornyn (R-Texas) and four other Senators:

Nothing in the ACA supports the notion that Congress meant to create the legal fiction that the federal government acts on behalf of a state when it establishes an exchange.

The Fourth Circuit Court of Appeals upheld the Obamacare rules from the IRS. But the DC Circuit Court of Appeals did not. Thus the two circuits have split. The Supreme Court almost never lets stand decisions that split the circuits.

The Court will rule in June, unless the Virginia plaintiffs win “expedited review.” They prayed for this on the basis of the money at stake.

Whither Obamacare?

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The Supreme Court could rule that, according to law, only those living in an “exchange State” can get a subsidy. So more than four million insurance buyers will lose their subsidies. When they do, their policies will cost more than they can afford, even under the terms of the law itself. They then would invoke a hardship provision and avoid getting insurance altogether. (They could still enroll in a faith-based expense-sharing ministry. The government would not subsidize this, but “monthly shares” generally cost less than half the typical insurance premium. This holds even when the enrollee accepts a lower “annual household portion” than the typical Obamacare-qualified deductible.)

This could leave only the sickest or most desperate people enrolling in Obamacare. That way lies the death spiral. Insurers raise rates. Even more people claim hardship. Result: insurance available only at impossible rates. Another result: a system paying out more in claims than it can rake in in premiums net of subsidies.

Critics said all along this would happen. But no other ruling would follow the Constitution. And in view of this last election, Obamacare will not get a legislative “fix.” The reason: Senator Ben Nelson (D-Neb.) voted for Obamacare only because it said the States had to set up an exchange for their residents to get subsidies. Any other way of doing it, would produce a Canada-style single-payer system. This is exactly what Senator Nelson and other Senators did not want. And it is what the American people said with their votes, three days ago, they do not want.

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