The Supreme Court’s decision on health care subsidies — what you need to know by Laura Lorenzetti @FortuneMagazine March 3, 2015, 2:36 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons The Supreme Court is set to hear arguments Wednesday in a case that could derail the Affordable Care Act (ACA), commonly referred to as Obamacare, and potentially increase the cost of insurance for millions across the U.S. It’s a big deal, and it has insurance companies, medical providers and everyday workers holding their breath. Here’s what you need to know about King v. Burwell before the case kicks off in the nation’s top court. What’s the case about? In short, it’s about the legality of insurance subsidies provided by the federal government under the ACA to only those people enrolled through federal exchanges (i.e. Healthcare.gov). The ACA established exchanges where individuals and small businesses could buy coverage. The intention was for the states to do this on their own, but 34 states chose not to. Therefore, the federal government stepped in and launched Healthcare.gov for anyone in those particular states who wanted to shop for coverage. The exchanges are where the subsidies come into play: the government allows for a subsidy for anyone registered through an exchange who cannot financially handle the full cost of a healthcare plan. According to the government’s interpretation of the ACA, the subsidy is available to anyone who buys insurance through any exchange, whether it was established by the federal government or a state. The King prosecution disagree. The ACA bill states the subsidies apply to “an Exchange established by the State,” and therefore the challengers allege that anyone who purchased coverage through a federal exchange is not eligible for a subsidy. Subsidies would only apply to those who bought coverage through a state-run exchange. What’s at stake? If the Supreme Court rules in favor of King, it would end up leaving millions without insurance because they would not longer be able to afford the premiums, or the deductible. Last year, over 5 million people bought insurance on federal exchanges and about 87% of them qualified for subsidies. If those people opt out of buying insurance, it could end up making everyone’s healthcare a lot more expensive in the affected states. What could happen if the subsidies are struck down? The worst case scenario? A “death spiral” of rising insurance costs for everyone in the 34 states where federal subsidies would no longer apply, according to Simon Lazarus, senior counsel to the Constitutional Accountability Center. Here’s how the death spiral could work: If healthy people opt out of insurance coverage because it’s not worth the price (which would be the case without subsidies for many low- and middle-income Americans), the population buying into the system would be weighted toward relatively sick people who value the coverage even at higher prices. In order to be able to afford these clients, insurance companies will raise premiums, which in turn causes more people to leave the market. The cycle would repeat itself, spiraling until insurance rates are unwieldy, even to the point where insurers leave the individual market altogether. “People who don’t have group health policies will see premium rates skyrocket. So, many of them will decide not to hold policies.” said Lazarus. “This ‘death spiral’ happened in the 1990s, and it’s what the ACA was designed to avoid.” In the 1990s a handful of states implemented laws that made insurers cover everyone, despite their health status, and offered no subsidies. The result was that insurance premiums skyrocketed and the number of people opting into the insurance pool went down. Sicker people continued to buy insurance even as prices grew, and more and more healthy people fled. Insurance companies abandoned the individual market in some of these states because it became financially unfeasible, and in the states where they remained, prices stayed very high. If the subsidies disappear and a number of low-income, relatively healthy people opt out of insurance coverage, that could destabilize the market for everyone in those states. An economic forecast by the RAND Corporation estimates that prices could rise by as much as 47% and enrollment in the individual market would fall by about 70%. That means about 8 million people in the 34 affected states could become uninsured if the subsidies disappear. Would that mean the end of Obamacare? Not totally. The expansion of Medicaid will remain in place for all individuals who earn up to 138% of the federal poverty level, and states that established their own exchanges will not be affected. However, across more than half the U.S., the ACA will essentially be gutted. “One thing that you’ll get is an even sharper and sadder gap in the quality of health care between relatively blue [liberal] and relatively red [conservative] states,” said Lazarus. There are three key components of the ACA. First, the insurance reforms, which guarantee universal access to insurance despite any pre-existing conditions. Second, there is the individual mandate, which ensures there is a balanced pool of healthy and unwell subscribers. Third, there are the tax credits and subsidies that ensure everyone can afford coverage. “Remove one leg and the whole thing falls apart,” Lazarus explained. A ruling against the government would make the individual mandate moot in many cases, since it can be waived if a person cannot find affordable insurance, which is especially likely if the “death spiral” takes place. This could all add up to a 1990s-style implosion for states that don’t have their own exchanges pending the Supreme Court’s final decision come June.