Millions of insured individuals may lose a government subsidy to purchase health insurance, depending on a decision from the Supreme Court expected in June.

The case before the Supreme Court — King v. Burwell — questions whether the Affordable Care Act (ACA) can provide financial subsidies for individuals purchasing insurance from the federal marketplace as opposed to a state-run exchange.

Exchanges are at core of delivery
The ACA provided for the establishment and operation of online marketplaces — or exchanges — at the state level for individuals to purchase health insurance. States could also jointly create a cooperative exchange program.

https://www.putnam.com/static/img/blogs/wealth-management/294959_table.pngAnother aspect of the ACA created premium tax credits — or subsidies — to help consumers afford coverage. These subsidies are based on income level, and to be eligible, individuals must purchase insurance through an exchange.

Federal network introduced
As the law was implemented, many states chose not to create their own exchanges. As a result, a federal exchange, known as the Federally Facilitated Marketplace (FFM) was created. Today, 34 states are using the FFM.

The case
The petitioners in the Supreme Court case argue that the law does not authorize premium tax credits outside of state-operated insurance exchanges, such as the FFM. They also contend that the Internal Revenue Service (IRS) overstepped its responsibility in determining that the subsidies can be available through the federal exchange.

The court will decide whether the ACA’s subsidy language is clear and if the IRS was reasonable in authorizing subsidies through the federal exchange. A decision is expected by late June.

If the court rules that the subsidies are not available to individuals using the federal exchange, the cost of premiums would increase substantially for those consumers. Many individuals, especially those in good health, may drop coverage if they cannot afford it. If a large number of healthy, insured individuals drop their coverage, it could impact actuarial assumptions around risk and skew the risk pool toward less-healthy individuals.

Penalties within the employer mandate would also be affected. In some instances, these penalties depend on how many employees opt out of employer-based coverage to purchase insurance on the exchange and receive a subsidy. If there are no subsidies on the federal exchange, this could dilute the intent of the employer mandate in states that only default to the FFM.

The resolution of the subsidy question may also involve additional legislation. Some members of congress are working on plans to maintain current subsidies for those who meet the income requirements, while also crafting a long-term solution.


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