What was once considered a long-shot legal challenge to “Obamacare” has been approved by a Federal Appeals court, dealing a major blow to the fledgling government healthcare solution.

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Obamacare participants are not eligible for tax subsidies

By a 2-1 ruling, a three-judge panel of the U.S. Court of Appeals for the District of Columbia. Circuit said that participants in health exchanges run by the federal government in 34 states are not eligible for tax subsidies.

The ruling, which is likely to be appealed, challenges the core framework of the health care system for nearly 5 million Americans who are without employer-provided health plans.

The court ruled that the health care law as it exists allows tax credits to be offered to qualified participants only in state-run exchanges. While the Obama administration expected states to create their own, only 16 states have actually done so.  The Internal Revenue Service overreached in allowing participants in other states served by the federal exchange to qualify for billions of dollars in government assistance, the court ruled.

Obamacare enrollment figures

The aid in question has been a critical component of juicing enrollment figures in the government healthcare program, which now stand 8 million, higher than initial targets.

“We reach this conclusion, frankly, with reluctance,” Judge Thomas Griffith said of the ruling. “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.”

Judge Harry Edwards dissented, specifically citing the political motivations as “a not-so-veiled attempt to gut the Patient Protection and Affordable Care Act.” Edwards warned that the panel’s ruling “portends disastrous consequences.”  If the ruling is allowed to stand it would create a major hole in Obamacare efforts, as tax credits or subsidies are what make the insurance affordable to most Americans who are without employer-sponsored plans.

The case was brought by a coalition of states, employers and individuals. It had been considered a long shot effort tainted with political overtones as Federal district judges in the District of Columbia and Virginia previously had ruled for the government, while three similar cases remain pending.

Obamacare purposely avoided setting up health exchanges

The political problem Obamacare is that most states purposely avoided setting up health exchanges due to governors and legislatures objecting to the law, and observers say it’s not likely they will rush to do so now that the court has ruled against a key provision of the law.

If the insurance subsidies are ruled illegal in 34 states, many of the penalties levied against employers and individuals for non-compliance with the law also would be eliminated.

The next move is to appeal the decision to either the full appellate court or to the Supreme Court. The full appellate court contains a majority of judges named by Democratic presidents and is assumed to be more sympathetic to the aim of Obamacare.