by Mike Andrew - SGN Staff Writer

Two years after funding the Affordable Care Act, known as the ACA or Obamacare, the U.S. Supreme Court said it would review a new challenge to the law.

The challenge to President Obama's signature legislation claims that the tax credits that incentivize individuals to buy coverage through the federal insurance exchange are contrary to the provisions of the ACA as passed by Congress. Plaintiffs - four residents of the state of Virginia - want to block the tax credits for residents of 36 states.

The Obama administration, plaintiffs claim, is engaging in a 'gross distortion' of the law's wording by granting billions of dollars in tax credits to people in those states.

According to a RAND Corporation study, 87% of the 5.4 million people who have bought ACA policies have enrolled in an insurance plan relying on federal tax credits to make it affordable. If the plaintiffs in this suit are successful, those buyers may see their insurance premiums triple.

The Urban Institute estimates that some 7.3 million people could lose out on $36.1 billion in subsidies by 2016.

Individuals who previously could afford insurance only because of the federal subsidies would then apply for a hardship exemption, allowing them to go without. That would potentially leave only the sickest individuals seeking insurance through the individual market. That, in turn, would raise coverage costs for insurers, forcing them to raise rates. Hospitals would be left to foot the bills for more uninsured patients.

In the end, the RAND study warns, eliminating the tax credits could spell the end of the ACA altogether.

'[I]n scenarios in which the tax credits are eliminated, our model predicts a near 'death spiral,' with very sharp premium increases and drastic declines in individual market enrollment,' RAND analysts concluded.

At issue in the suit is a four-word phrase in the ACA. The law says individuals qualify for tax credits when they buy insurance on an online marketplace 'established by the state.' Washington is one of only 14 states that have established ACA exchanges. But many states with Republican-led governments have refused to set up insurance exchanges, and so the federal government stepped in with its own exchange.

Under a rule issued by the Internal Revenue Service (IRS), insurance buyers 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.

Republican 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 Supreme Court, 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 the District of Columbia reached the opposite conclusion, rejecting the administration's approach in a 2-1 ruling.

The Supreme Court's decision to hear an appeal of the Virginia decision means that at least four justices are ready to take a second look at Obamacare, after upholding the law's so-called 'individual mandate' provision in a 2012 decision.

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