WASHINGTON – Dannette Coleman, vice president for individual health insurance sales at Minnetonka-based Medica, does not mince words about a possible Supreme Court decision that would outlaw tax credits in 34 states that did not sponsor insurance exchanges under the Affordable Care Act (ACA).

"It would be a public policy nightmare," she said.

ACA opponents argued to the justices Wednesday that the federal law specifies that only state-run exchanges can offer subsidies. They said federally run exchanges in states that opposed the national law are not allowed to offer tax credits that bring premiums down to affordable levels.

If a majority of the justices agree, the nation's health insurers, including Medica and Minnetonka-based UnitedHealthcare, will lose millions of policyholders.

A decision in favor of ACA opponents would cause an additional 8.2 million Americans to become uninsured in 2016, said Linda Blumberg of the Urban Institute Health Policy Center. And the individual policy market where health insurers have added new customers will shrink by 69 percent.

UnitedHealthcare, the nation's largest health insurer, faces loss of business in two of its major individual policy markets, said University of Minnesota health care finance professor Stephen Parente, a nationally recognized health insurance expert and former and health care adviser to Sen. John McCain, R-Ariz.

United has significantly expanded individual policy sales in Texas and Georgia, Parente explained. But neither state operates an exchange.

If the court finds in favor of ACA opponents and Texas and Georgia can no longer provide subsidies for their citizens, United could lose out on what the company believed was a "long-standing revenue source," Parente said. UnitedHealthcare did not did not make available details of its investments in the individual health insurance market.

Shutting down subsidies in states with federally run exchanges "would greatly affect affordability, and that would have a direct impact on our membership and revenue," Medica's Coleman told the Star Tribune. Medica sells individual health policies in North Dakota and Wisconsin, neither of which opened a state-run insurance exchange. While individual policies currently represent just 4 percent of Medica's business, Coleman said the company expected that percentage to grow because of the ACA. Medica invested in technology and administrative support to help that happen.

So did many other U.S. health insurers.

Investors have embraced the prospect of new business for insurers. Since President Obama signed the Affordable Care Act into law in March 2010, UnitedHealthcare's parent, UnitedHealth Group, has seen its stock prices jump 240 percent, easily outpacing the 78 percent increase in the Standard & Poor's 500 stock index during the same period. Other insurers with publicly traded stock, like Aetna and Humana, have notched similar outsized gains.

But much of this new business depends on government subsidizing premium costs. In the states affected by the Supreme Court case, "over 80 percent of the people getting tax credits are the working poor and middle income," explained Blumberg, whose studies were cited in 12 briefs. "That's who gets hit by this — the working poor and the middle class. You're making a big mess is what you're making."

The trade group America's Health Insurance Plans (AHIP), whose members include based UnitedHealthcare and Medica, asked the justices not to outlaw tax credits in states where the federal government runs insurance exchanges.

Policyholders in states with federally run exchanges got an average tax credit of $4,410 apiece in 2014, the Congressional Budget Office reported. Those credits reduced premium costs by roughly three-quarters.

Industry panic

Blumberg said that ending subsidies will drive up premiums in the affected states to a point where some people would have to spend 30 to 50 percent of their income to buy health insurance for themselves or their families. They can't or won't, she said. The young and healthy will drop out leaving the risk pool full of the aging and infirm.

This bodes ominously for insurance companies, because the Supreme Court decision is expected in June, the middle of a coverage year. If the justices outlaw tax credits, insurance companies will collect less revenue while paying out claims for levels of insurance coverage guaranteed by the law and for coverage rules that do not allow discrimination against would-be policyholders with prior existing health problems.

In the short term at least, "there's going to be a real panic in the insurance industry," Blumberg predicted.

Parente believes insurance companies can afford to hang on until the end of the coverage year and then decide whether to drop out. "My modeling shows that you're going to lose 4.5 million customers," he said. "What's going to happen is they're just not going to offer the plans."

A Supreme Court decision against the ACA will set off "a game of chicken between the Obama administration and a Republican-controlled Congress" to make changes in the time between the court's decision and the 2016 enrollment period, Parente said.

But while insurance companies protect themselves by withdrawing from the individual markets in unsubsidized states or by fighting to end guaranteed benefits and coverage of prior existing conditions, millions who once had coverage are left uninsured, said Alice Rivlin, director of the Brookings Institution's Engelberg Center for Health Care Reform.

"The challenge is to the Republican leadership," said Rivlin. They have to find a way to deal with the consequences of victory.

Republicans have offered an alternative bill that they say can "repeal and replace the ACA," said Parente. But it looks an awful lot like the ACA, he said, including premium subsidies.

Jim Spencer • 202-383-6123