WASHINGTON (AP) -- A federal appeals court delivered a potentially serious setback to President Barack Obama's health care law Tuesday, imperiling billions of dollars in subsidies for many low- and middle-income people who bought policies.
The Obama administration immediately declared that those policyholders would keep getting financial aid for their premiums as it seeks review of the ruling. White House spokesman Josh Earnest said the decision would have "no practical impact" on tax credits as the case works its way through further appeals.
In the case, decided by the U.S. Court of Appeals for the District of Columbia Circuit, a group of small business owners argued that the law authorizes subsidies only for people who buy insurance through markets established by the states - not by the federal government.
A divided court agreed, in a 2-1 decision that could mean premium increases for more than half the 8 million Americans who have purchased taxpayer-subsidized coverage under the law. The ruling affects consumers who bought coverage in the 36 states served by the federal insurance marketplace, or exchange.
In Tuesday's ruling, two judges appointed by Republican presidents voted against the administration's interpretation of the law while one appointed by a Democratic president dissented. The Obama spokesman said the administration would seek a hearing by the full 11-judge court. The court has a majority of judges appointed by Democratic presidents, including four appointed by Obama.
The majority opinion concluded that the law, as written, "unambiguously" restricts subsides to consumers in exchanges established by a state. That would invalidate an Internal Revenue Service regulation that tried to sort out confusing wording in the law by concluding that Congress intended for consumers in all 50 states to have subsidized coverage.
In reaction, Justice Department spokeswoman Emily Pierce said the decision was incorrect, inconsistent with the intent of Congress, and at odds with the goals of the health care law.
The administration is expected to seek a hearing from the full 11-member appeals court.
The issue is crucial to the success of the health law because most states have been unable or unwilling to set up their own exchanges. The inaction stems in many instances from opposition by Republican governors to the Affordable Care Act.
The small business owners filing the lawsuit say the tax credits enacted by Congress were intended to encourage states to set up their own health benefit exchanges and that the penalty for not doing so was withdrawal of tax credits for lower-income residents.
Supporters of the act say the purpose of the tax credit was not to promote the establishment of state exchanges, but rather to achieve Congress's fundamental purpose of making insurance affordable for all Americans.
The case revolves around four words in the Affordable Care Act, which says the tax credits are available to people who enroll through an exchange "established by the state."
The challengers to the law say a literal reading of that language invalidates the IRS subsidy to people in the federal exchanges. The opponents say that people who would otherwise qualify for the tax credits should be denied that benefit if they buy insurance on a federally facilitated exchange.
"It is implausible to believe that Congress gave the IRS discretion to authorize $150 billion per year in federal spending, particularly when Congress had directly spoken to this issue," the challengers to the IRS subsidy said in a court filing. "Major economic decisions like these - indeed, any decisions granting tax credits - must be made unambiguously by Congress itself."
The Obama administration and congressional and state legislative supporters of the Affordable Care Act say the challengers are failing to consider the words of the statute in its entirety.
"Congress did not provide that the tax credits would only be available to citizens whose states set up their own exchanges," says an appeals court filing by congressional and state legislative supporters of the Affordable Care Act. Congressional lawmakers and state legislators supporting the act said that limiting the subsidies to state exchanges could destabilize important aspects of the law, such as the individual mandate requiring most people to buy insurance.
The judges on the case were Thomas Griffith, an appointee of President George W. Bush; A. Raymond Randolph, an appointee of Bush's father; and Harry Edwards, an appointee of President Jimmy Carter, who dissented.
A lower court had ruled that the law's text, structure, purpose, and legislative history make "clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated Exchanges."
But the appeals court concluded the opposite - that the letter of the law "unambiguously restricts" the law's subsidies to policies sold through exchanges established by the state.