(Bloomberg) — The U.S. Supreme Court agreed to consider a challenge to the subsidies that are a linchpin of the Patient Protection and Affordable Care Act (PPACA), accepting a case that suddenly puts President Barack Obama’s health-care law under a new legal cloud.
Two years after upholding much of the law by a single vote, the justices today said they will hear a Republican-backed appeal targeting tax credits that have helped more than 4 million people afford insurance.
A ruling blocking those credits might unravel PPACA, which is also known as the ACA, making other provisions ineffective and potentially destabilizing insurance markets in much of the country. The high court’s decision to hear the case comes days before the start of the law’s second open-enrollment season. A decision will come by June.
Health insurers, which have gained millions of new customers through the law, sank lower in New York trading. UnitedHealth Group Inc., the biggest U.S. insurer by sales, slid 2.1 percent to $94.19 at 1 p.m. WellPoint Inc. slid 1.8 percent to $125.50, and Aetna Inc. fell 1.3 percent to $83.64.
Hospitals, which must absorb costs when patients are uninsured, also dropped. HCA Holdings Inc. fell 2.9 percent to $67, and Tenet Healthcare Corp. slid 1.9 percent to $50.23.
At the White House, Obama administration spokesman Josh Earnest defended the measure.
“This is a law that is working and has generated significant benefits for working families and small-business owners all across the country, and that’s why you’re going to see a vigorous defense” by the administration, Earnest said.
The justices will consider an appeal filed by four Virginia residents seeking to block the subsidies in 36 states. The appeal says the Obama administration is engaging in a “gross distortion” of the law’s wording by granting billions of dollars in tax credits to people in those states.
The appeal, filed by Washington lawyer Michael Carvin on behalf of four Virginia residents, said immediate review was “imperative” given the money at stake and the steps being taken by employers, consumers and insurers to comply with the measure.
The law, intended to provide coverage to tens of millions of uninsured Americans, has been attacked by Republicans since it was passed on a party-line vote in 2010.
More than 100,000 anti-Obamacare ads aired before the Nov. 4 election as Republicans sought to exploit what they saw as a Democratic liability. While many provisions are popular, a majority of Americans say they disapprove of the law, polls show.
Enrollment for the second year of coverage under Affordable Care Act plans begins on Nov. 15 and closes Feb. 15. The Congressional Budget Office has estimated that 13 million people will be signed up next year.
The legal dispute centers on a four-word statutory phrase. The law says people qualify for tax credits when they buy insurance on an online marketplace “established by the state.”
Those words are significant because only 14 states have set up their own marketplaces, known as exchanges. The rest have left the job to the U.S. Department of Health and Human Services (HHS), as the law permits. The question is whether people can collect the subsidies even if they buy policies through an HHS-run exchange.
Under a rule issued by the Internal Revenue Service, consumers can claim tax credits no matter where they live. The Obama administration says the IRS approach is consistent with the law’s aims.
“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,” U.S. Solicitor General Donald Verrilli argued in court papers.
Critics say Obama has adopted an interpretation that flies in the face of clear statutory language.
“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,” five Republican senators led by John Cornyn of Texas argued in support of the appeal.
In the case in front of the justices, a federal appeals court based in Richmond, Virginia, upheld the IRS regulation in July on a 3-0 vote. On the same day a federal appeals court in Washington reached the opposite conclusion, rejecting the administration’s approach in a 2-1 ruling.
A Supreme Court ruling against the administration would open a new period of uncertainty about the future of American health care. It would mean that more than half of the 7.3 million people who have bought Obamacare policies aren’t entitled to the subsidies they are receiving.
The ripple effects might be even more dramatic. Without the tax credits, many of those people would find insurance so expensive that they would qualify for the law’s hardship exemption and no longer have to obtain a policy.
That would potentially leave only the sickest and most desperate seeking insurance through the individual market. That could raise coverage costs for insurers, forcing them to raise rates. Hospitals would be left to foot the bills for more uninsured patients.
See also: The potential to sink PPACA?
The question would then become how lawmakers would respond. States without exchanges would probably face new calls to set up their own marketplaces. One potential option is that a state could “establish” its own exchange and authorize the federal government to run it.
States might also invoke an Obamacare provision that lets them propose alternatives to the exchanges and get waivers from the federal rules starting in 2017. Some Republicans have urged that the law be amended to let states seek waivers sooner.
The case is King v. Burwell, 14-114.
–With assistance from Roger Runningen and Alex Wayne in Washington.