In a potentially crippling blow to Obamacare, a federal appeals court panel declared Tuesday that government subsidies worth billions of dollars that helped 4.7 million people buy insurance on HealthCare.gov are illegal.
The 2-1 ruling said such subsidies can be granted only to people who bought insurance in an Obamacare exchange run by an individual state or the District of Columbia-not on the federally run exchange HealthCare.gov.
"Section 36B plainly makes subsidies available in the Exchanges established by states," wrote Senior Circuit Judge Raymond Randolph in his majority opinion, where he was joined by Judge Thomas Griffith.
"We reach this conclusion, frankly, with reluctance. At least until states that wish to can set up their own Exchanges, our ruling will likely have significant consequences both for millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly."
In his dissent, Judge Harry Edwards, who called the case a "not-so-veiled attempt to gut" Obamacare, wrote that the judgment of the majority "portends disastrous consequences."
Indeed, the 72-page decision threatens to unleash a cascade of effects that could seriously compromise Obamacare's goals of compelling people to get health insurance, and helping them afford it.
However, the ruling does, and will not ultimately affect the taxpayer-fund subsidies the federal government issued to 2 million or so people through the 15 exchanges run by individual states and the District of Columbia,
The Obama administration is certain to ask the full U.S. Court of Appeals for the District of Columbia Circuit to reverse the panel's decision, which for now does not have the rule of law.
White House spokesman Josh Earnest said the ruling-for now-"does not have any practical impact" on premium subsidies issued to HealthCare.gov enrollees now. "
"We are confident" that the ruling will be overturned, Earnest said. "We are confident in the legal position we have . . . the Department of Justice will litigate these claims through the federal court system."
Earnest said "it was obvious" that Congress intended subsidies, or tax credits, to be issued to Obamacare enrollees regardless of what kind of exchange they used to buy insurance.
Tuesday's ruling endorsed a controversial interpretation of the Affordable Care Act that argues that the HealthCare.gov subsidies are illegal because ACA does not explicitly empower a federal exchange to offer subsidized coverage, as it does in the case of state-created exchanges. Subsidies for more than 2 million people who bought coverage on state exchanges would not be affected by Tuesday's ruling if it is upheld.
HealthCare.gov serves residents of the 36 states that did not create their own health insurance marketplace. About 4.7 million people, or 86 percent of all HealthCare.gov enrollees, qualified for a subsidy to offset the cost of their coverage this year because they had low or moderate incomes.
If upheld, the ruling could lead many, if not most of those subsidized customers to abandon their health plans sold on HealthCare.gov because they no longer would find them affordable without the often-lucrative tax credits. And if that coverage then is not affordable for them as defined by the Obamacare law, those people will no longer be bound by the law's mandate to have health insurance by this year or pay a fine next year.
If there were to be a large exodus of subsidized customers from the HealthCare.gov plans, it would in turn likely lead to much higher premium rates for nonsubsidized people who would remain in those plans.
The ruling also threatens, in the same 36 states, to gut the Obamacare rule starting next year that all employers with 50 or more full-time workers offer affordable insurance to them or face fines. That's because the rule only kicks in if one of such an employers' workers buy subsidized covered on HealthCare.gov.
The decision by the three-judge panel is the most serious challenge to the underpinnings of the Affordable Care Act since a challenge to that law's constitutionality was heard by the Supreme Court. The high court in 2012 upheld most of the ACA, including the mandate that most people must get insurance or pay a fine.
If the Obama administration fails to prevail in its expected challenge to Tuesday's bombshell ruling, it can ask the Supreme Court to reverse it.
A high court review is guaranteed if another federal appeals court circuit rules against plaintiffs in a similar case challenging the subsidies. And the only other circuit currently considering such a case, the Fourth Circuit, is expected by both sides to rule against plaintiffs there in a decision that is believed to be imminent.
Tuesday's ruling focused on the plaintiffs' claim that the ACA, in several of its sections, says that subsidies from the federal government in the form of tax credits can be issued through an exchange established by a state.
The law also says that if a state chooses not to set up its own exchange, the federal government can establish its own marketplace to sell insurance in such states.
However, the ACA does not explicitly say, as it does in the case of state-run exchanges, that subsidies can be given to people who buy insurance on a federal exchange.
The plaintiffs' claim has been met with derision by Obamacare supporters, who argue that it relies on a narrow reading, or even misreading of the law. Those supporters said the claim ignores its overarching intent: to provide affordable insurance to millions of people who were previously uninsured.
Supporters argue that the legality of the subsidies to HealthCare.gov enrollee derives from the fact that the law explicitly anticipated the potential need to create an exchange in the event that a state chose not to.
When the ACA was passed, most supporters believed that the vast majority of states would create their own exchange. But the opposition to Obamacare of many Republican governors and state legislators lead to most states refusing to build their own marketplaces, setting the stage for the challenges to the subsidies issued for HealthCare.gov plans.
Two separate federal district court judges-in D.C. and Virginia-have rejected plaintiffs' challenge to the subsidies. Those denials lead to the appeals in the D.C. federal circuit and in the Fourth Circuit.
Out of the more than 8 million Obamacare enrollees this year, fewer than 2.6 million people signed up in plans sold via an exchange run by a state or the District of Columbia. Of those people, 82 percent, or about 2.1 million, qualified for subsidies.
The subsidies are available to people whose incomes are between 100 percent and 400 percent of the federal poverty level. For a family of four, that's between about $24,000 and $95,400 annually.
In a report issued Thursday, the consultancy Avalere Health said that if those subsidies were removed this year from the 4.7 million people who received them in HealthCare.gov states, their premiums would have been an average of 76 percent higher in price than what they are paying now.
Another report by the Robert Wood Johnson Foundation and the Urban Institute estimated that by 2016, about 7.3 million enrollees who would have qualified for financial assistance will be lose access to about $36.1 billion in subsidies if those court challenges succeed.
Before the decision, a leading Obamacare expert who was firmly opposed to the plantiffs' arguments said a ruling in their favor could have major consequences for the health-care reform law.
"If the courts were to decide that the Halbig plaintiffs were right, it would be a huge threat to the ACA," said Timothy Jost, a professor at the Washington and Lee University School of Law.
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"It's a very big deal," said Ron Pollack, founder of the health-care consumers advocacy group Families USA, and Enroll America, a major Obamacare advocacy group.
Pollack noted that the more than 5 million people who have received subsidies via HealthCare.gov "would have them taken away."
"It certainly would cause a lot of people to rejoin the ranks of the uninsured," Pollack said. "The provision of the tax credit premium subsidy makes a huge difference in terms of whether people considering enrollment or enrolling in coverage will find such coverage affordable."
Last week, two analyses underscored the potential effects of the subsidies ultimately being deemed illegal.
The consultancy Avalere Health said people who currently receive such subsidies in the affected states would see their premium rates rise an average of 76 percent.
And the Robert Wood Johnson Foundation and the Urban Institute said that by 2016, about 7.3 million enrollees would lose about $36 billion in subsidies.
On Monday, one of the intellectual godfathers of the argument that is the basis of the Halbig case, as well as three other similar pending court challenges, said that tens of millions of people would be eliminated from Obamacare mandates in the affected states if the challenges prevailed.
Michael Cannon, director of health policy studies at the libertarian Cato Institute, said more than 250,000 firms in those states-which have about 57 million workers-would not be subject to the employer mandate being phased in starting next year. That rule, which hinges on the availability of subsidies on Obamacare exchanges, will compel employers with 50 or more full-time workers to offer affordable health insurance or pay a fine.
And if the challenge prevailed, a total of about 8.3 million individuals will be removed from Obamacare's rule that they have health insurance or pay a fine equal to as much as 1 percent of their taxable income, said Cannon.
Oral arguments heard by a three-judge panel in March gave Halbig supporters renewed hope that their claim would succeed.
--By CNBC's Dan Mangan