http://www.cnbc.com/id/101819065In a potentially crippling blow to Obamacare, a federal appeals court panel declared Tuesday that government subsidies worth billions of dollars that helped 4.7 million people buy insurance on HealthCare.gov are illegal.
A judicial panel in a 2-1 ruling said such subsidies can be granted only to those people who bought insurance in an Obamacare exchange run by an individual state or the District of Columbia — not on the federally run exchange HealthCare.gov.
"Section 36B plainly makes subsidies available in the Exchanges established by states," wrote Senior Circuit Judge Raymond Randolph in his majority opinion, where he was joined by Judge Thomas Griffith "We reach this conclusion, frankly, with reluctance. At least until states that wish to can set up their own Exchanges, our ruling will likely have significant consequences both for millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly."
In his dissent, Judge Harry Edwards, who called the case a "not-so-veiled attempt to guy the Patient Protection and Affordable Care Act — Obamacare — wrote that the judgement of the majority "portends disastrous consequences."
Indeed, the decision threatens to unleash a cascade of effects that could seriously compromise Obamacare's goals of compelling people to get health insurance, and helping them afford it.
The Obama Administration is certain to seek a reversal of the decision by the U.S. Court of Appeals for the District of Columbia Circuit, which does not immediately have the effect of law.
The ruling endorsed a controversial interpretation of the Affordable Care Act that argues that the HealthCare.gov subsidies are illegal because ACA does not explicitly empower a federal exchange to offer subsidized coverage, as it does in the case of state-created exchanges. Subsidies for more than 2 million people who bought coverage on state exchanges would not be affected by Tuesday's ruling if it is upheld.
HealthCare.gov serves residents of the 36 states that did not create their own health insurance marketplace. About 4.7 million people, or 86 percent of all HealthCare.gov enrollees, qualified for a subsidy to offset the cost of their coverage this year because they had low or moderate incomes.
If upheld, the ruling could lead many, if not most of those subsidized customers to abandon their health plans sold on HealthCare.gov because they no longer would find them affordable without the often-lucrative tax credits. And if that coverage then is not affordable for them as defined by the Obamacare law, those people will no longer be bound by the law's mandate to have health insurance by this year or pay a fine next year.
If there were to be a large exodus of subsidized customers from the HealthCare.gov plans, it would in turn likely lead to much higher premium rates for non-subsidized people who would remain in those plans, who are apt as a group to be in worse health than all original enrollees.
The ruling also threatens, in the same 36 states, to gut the Obamacare rule starting next year that all employers with 50 or more full-time workers offer affordable insurance to them or face fines. That's because the rule only kicks in if one of such an employers' workers buy subsidized covered on HealthCare.gov.
The decision by the three-judge panel in DC federal appeals circuit is the most serious challenge to the underpinnings of the Affordable Care Act since a challenge to that law's constitutionality was heard by US Supreme Court. The high court in 2012 upheld most of the ACA, including the mandate that most people must get insurance or pay a fine.
Friday's bombshell ruling by the appeals court is expected to be met by Obama Administration asking for a panel made up of all the judges in the same circuit to review the ruling.
If it fails at that level, the administration can ask the Supreme Court to reverse the ruling.
A high court review is early guaranteed if another federal appeals court circuit rules against plaintiffs in a similar case challenging the subsidies. And the only other circuit currently considering such a a case, the Fourth Circuit, is expected to rule against plaintiffs there in a decision that is believed to be imminent.
Tuesday's ruling in DC focused on the plaintiffs' claim that the ACA, in several of its sections, says that subsidies from the federal government, in the form of tax credits, can be issued through an exchange established by a state.
The law also says that if a state chooses not to set up its own exchange, the federal government can establish its own marketplace to sell insurance in such states.
However, the ACA does not explicitly say, as it does in the case of state-run exchanges, that subsidies can be given to people who buy insurance on a federal exchange.
The plaintiffs' claim has been met with derision by Obamacare supporters, who argue that it relies on a narrow reading, or even misreading of the law. Those supporters said the claim ignores they say is its overarching intent: to provide affordable insurance to millions of people who were previously uninsured.
Supporters argue that the legality of the subsidies to HealthCare.gov enrollee derives from the fact that the law explicitly anticipated the potential need to create an exchange in the event that a state chose not to.
When the ACA was passed into law, most supporters believed that the vast majority of states would create their own exchange. But the opposition to Obamacare of many Republican governors and state legislators lead to most states refusing to build their own marketplaces, setting the stage for the challenges to the subsidies issued for HealthCare.gov plans.
Two separate federal district court judges — one in DC, the other in Virginia — have rejected plaintiffs' challenge to the subsidies. Those denials lead to the appeals in the DC federal circuit and in the Fourth Circuit.
Out of the more than 8 million Obamacare enrollees this year, less than 2.6 million signed up in plans sold via an exchange run by a state or the District of Columbia. Of those people, 82 percent, or about 2.1 million people, qualified for subsidies.
The subsidies are available to people whose incomes are between 100 percent and 400 percent of the federal poverty level. For a family of four, that's between about $24,000 and $95,400 annually.
In a report issued Thursday, the consultancy Avalere Health said that if those subsidies were removed this year from the 4.7 million people who received them in HealthCare.gov states, their premiums would have been an average of 76 percent higher in price than what they are paying now.
Another report by the Robert Wood Johnson Foundation and the Urban Institute estimated that by 2016, about 7.3 million enrollees who would have qualified for financial assistance will be lose access to about $36.1 billion in subsidies if those court challenges succeed.
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People wait in line to see an agent from Sunshine Life and Health Advisors as the Affordable Care Act website is reading, 'HealthCare.gov has a lot of visitors right now!' at a store setup in the Mall of Americas on March 31, 2014 in Miami, Florida.
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People wait in line to see an agent from Sunshine Life and Health Advisors as the Affordable Care Act website is reading, 'HealthCare.gov has a lot of visitors right now!' at a store setup in the Mall of Americas on March 31, 2014 in Miami, Florida.
Before the decision, a leading Obamacare expert who was firmly opposed to the plantiffs' arguments said a ruling in their favor could have major consequences for the health-care reform law.
"If the courts were to decide that the Halbig plaintiffs were right, it would be a huge threat to the ACA," said that expert,Timothy Jost, a professor at the Washington and Lee University School of Law.
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"It's a very big deal," said Ron Pollack, founder of the health-care consumers advocacy group Families USA, and Enroll America, a major Obamacare advocacy group.
Pollack noted that the more than 5 million people who have received subsidies via HealthCare.gov "would have them taken away."
"It certainly would cause a lot of people to rejoin the ranks of the uninsured," Pollack said. "The provision of the tax credit premium subsidy makes a huge difference in terms of whether people considering enrollment or enrolling in coverage will find such coverage affordable."
Last week, two analyses underscored the potential effects of the subsidies ultimately being deemed illegal.
The consultancy Avalere Health said people who currently receive such subsidies in the affected stateswould see their premium rates raise an average of 76 percent.
And the Robert Wood Johnson Foundation and the Urban Institute said that by 2016, about 7.3 million enrollees would lose about $36 billion in subsidies.
On Monday, one of the intellectual godfathers of the argument that is the basis of the Halbig case, as well as three other similar pending court challenges, said that tens of millions of people would be freed from Obamacare mandates in the affected states if the challenges prevailed.
Michael Cannon, director of health policy studies at the libertarian Cato Institute, said more than 250,000 firms in those states—which have about 57 million workers—would not be subject to the employer mandate being phased in starting next year. That rule, which hinges on the availability of subsidies on Obamacare exchanges, will compel employers with 50 or more full-time workers to offer affordable health insurance or pay a fine.
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And if the challenge prevail, a total of about 8.3 million individuals will be "free" of Obamacare's rule that they have health insurance or pay a fine equal to as much as 1 percent of their taxable income, said Cannon, who with law professor Jonathan Adler laid the groundwork for the challenges to the HealthCare.gov subsidies.
Oral arguments heard by a three-judge panel on that DC federal appeals court in March—when two of the judges appeared sympathetic to the plaintiffs—gave Halbig supporters renewed hope that their claim would succeed.
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Halbig was the first of those cases decided at the appellate level.
In the other case that has been heard on appeal, one first filed in Virginia federal district court, the 4th U.S. Circuit Court of Appeals is expected to issue a ruling any day.
However, that circuit is widely expected to rule against the plaintiffs' claims challenging the legality of the Obamacare subsidies on HealthCare.gov.
--By CNBC's Dan Mangan
