WASHINGTON -- A federal appeals court dealt a potentially major blow to President Obama's health care law Tuesday, ruling that participants in health exchanges run by the federal government in 34 states are not eligible for tax subsidies.
The 2-1 ruling by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit, which is sure to be appealed by the government, threatens the framework of the health care system for about 5 million Americans without employer-provided health plans.
The case, filed by a coalition of states, employers and individuals, had been considered a long shot effort to derail the Affordable Care Act, also known as Obamacare. Federal district judges in the District of Columbia and Virginia previously had ruled for the government. Three similar cases remain pending.
The appeals panel ruled that as written, the health care law allows tax credits to be offered to qualified participants only in state-run exchanges. The administration had expected most if not all states to create their own, but only 16 states did so.
The court said the Internal Revenue Service went too far in allowing participants in other states served by the federal exchange to qualify for billions of dollars in government assistance. The aid has helped boost enrollment figures to more than 8 million.
"We reach this conclusion, frankly, with reluctance," Judge Thomas Griffith said. "At least until states that wish to can set up exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal exchanges and for health insurance markets more broadly."
The problem for supporters of Obamacare is that a majority of states purposely did not set up health exchanges because their governors and legislatures objected to the law. So it's not likely they will rush to do so now.
As a result, the only way to save subsidies for millions of health exchange customers may be to appeal the decision -- either to the full appellate court, which now contains a majority of judges named by Democratic presidents following four recent Obama appointments, or to the Supreme Court.
Judge Harry Edwards dissented, calling the challenge "a not-so-veiled attempt to gut the Patient Protection and Affordable Care Act" and warning that the panel's ruling "portends disastrous consequences."
If allowed to stand, the ruling would blow a major hole in the law, since tax credits or subsidies are what make the private health insurance policies offered on the exchanges affordable to most Americans without employer-sponsored insurance plans.
If the subsidies are invalidated in 34 states, then many of the tax penalties imposed on employers and individuals for non-compliance with the law also would be eliminated. Employers pay a penalty when their workers get subsidized on the exchange. Individuals get penalized if they don't buy affordable insurance, but the subsidies often are what make it affordable.
Michael Cannon, a Cato Institute health economist who helped devise the legal challenge, said the refusal by so many states to create health exchanges led to the court ruling. "This is popular resistance to the law," he said.
Although the ruling will have no impact while it is appealed -- either to the full appeals court, which includes four Obama appointees, or to the Supreme Court -- the result could be chaotic if ultimately allowed to apply nationwide.