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Obamacare Faces Toughest Test in Supreme Court Challenge

The U.S. Supreme Court will take up a legal challenge Wednesday that could throw the Affordable Care Act, better known as Obamacare, into deep disarray. NBC justice correspondent Pete Williams reports.

The Supreme Court is preparing to hear a challenge to Barack Obama’s signature healthcare policy that could deal it a crippling blow, if not a fatal one.

The case comes before the justices on Wednesday, nearly three years after the Supreme Court saved Obamacare during a legal battle at the law's inception.

The health insurance industry warns that if the challengers succeed this time, the Affordable Care Act would enter a "death spiral" — with costs rising for a shrinking number of participants, eventually causing the system to collapse.

Here's the question the justices must answer: who qualifies for federal subsidies that lower the cost of health insurance premiums?

More than six million lower-income Americans who get their health insurance through the federal marketplace or exchange — HealthCare.Gov — depend on the subsidies, which reduce their premiums an average of 72 percent, amounting to almost $270 a month.

"The Affordable Care Act saved my life," says David Tedrow of Durham, North Carolina, who was forced to close his retail business when non-alcoholic liver disease left him bedridden.

"My liver was ceasing to function, and I was dying."

Crucial to him, he says, was the launch of Obamacare and the federal subsidy that came with it, allowing him to afford an insurance policy that would cover the cost of a liver transplant.

"Really, honestly, you couldn't find a clearer case"

Tedrow joined a friend-of-court brief urging the Supreme Court to rule in favor of the Obama administration.

But the challengers cite a phrase in the Affordable Care Act statute passed by Congress. They argue that the text makes subsidies available only to insurance customers who bought their policies through "an exchange established by the state" where the policyholders live.

If the challengers prevail, customers who bought their insurance on the federal exchange would lose their subsidies. The stakes are high, because only 16 states now have their own health exchanges up and running.

"Really, honestly, you couldn't find a clearer case," says Michael Carvin, a Washington, D.C. lawyer representing the challengers. He says Congress designed the law to push reluctant states to set up their own health insurance marketplaces.

"Congress wanted to provide an incentive to the states to take on the very politically unpopular and logistically difficult task of creating these exchanges."

In response, the Obama Justice Department urges the Supreme Court to look at the entire 900-plus pages of the Affordable Care Act, not just a single phrase.

Under the act, if a state is unable or unwilling to launch its own exchange, then the federal government steps in with an exchange set up by the Department of Health and Human Services.

As a legal matter, the government argues, an exchange set up by HHS for a particular state qualifies as an exchange "established by the state."

What's more, Solicitor General Donald Verrilli contends in the government's legal brief, Congress "did not engage the states in a high-stakes game of chicken" but instead designed Obamacare to apply to people in every state.

Among the law's provisions are requirements that insurance companies cover people with pre-existing conditions and that nearly all Americans obtain health insurance. Congress knew that those components of the health care system would not work, Verrilli says, if the subsidies that make insurance affordable for millions of people were available only on state exchanges.

A brief filed by 22 states — some with their own exchanges, some without — said Congress could not have intended to give them the authority to rely on the federal exchange while depriving their residents of the benefits of using it.

Friend-of-court briefs have piled up, offering different assessments of what a victory for the challenges would mean.

"It's very important for the court to get into this dispute as soon as possible to stop that spigot from the federal treasury."

"We will not mince words," said the representatives from hospital industry in a filing predicting "a disaster for millions of lower-and-middle income Americans."

Health insurance companies warn that the effect of a loss for the government "would make the situation worse than it was before Congress acted."

On the other side, Consumers' Research, a non-profit group aligned with the law's opponents, says the court's duty "is to say what the law is, not to determine what it should be to promote good consequences or to avoid ill consequences."

And says Michael Carvin, the lawyer representing the challengers, "There's billions of dollars of federal money literally heading out every month based on what we view as an incorrect interpretation of the law.

"So it's very important for the court to get into this dispute as soon as possible to stop that spigot from the federal treasury."

A decision is expected by the time the Supreme Court's term ends in late June.