The US Court of Appeals for the District of Columbia has thrown out a federal regulation implementing key subsidies of President Barack Obama’s signature healthcare law, ObamaCare.
It means that participants in health exchanges run by the federal government in 34 states are not eligible for help.
The ruling deals a setback to ObamaCare, jeopardizing health insurance for four million low and middle-income people.
The White House said it is confident in its legal position on subsidies.
The ObamaCare has been under siege by opponents since it was passed in 2010.
A three-judge panel found in favor of plaintiffs who sued over tax credits for people buying health insurance.
“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,” Senior Circuit Judge Raymond Randolph in his majority opinion.
The US Court of Appeals for the District of Columbia ruled on Halbig v Burwell on Tuesday, one of four lawsuits currently challenging the legality of Internal Revenue Service (IRS)-funded subsidies under the Patient Protection and Affordable Care Act.
The court – considered the second highest in the nation behind the US Supreme Court – returned the case to a lower court with instructions to rule in favor to plaintiffs who had fought against the subsidies being offered in 36 states.
The IRS is said to have dispensed billions of dollars in taxpayer subsidies through federal healthcare exchanges, or marketplaces.
Plaintiffs in the lawsuit argued they were injured by the IRS actions because it triggered additional taxes for employers.
The subsidies, or tax credits, have been made available to Americans with annual incomes up to 400% the federal poverty level.
That works out to $94,000 for a family of four.
In a dissenting opinion, Judge Harry Edwards calling the lawsuit a “not-so-veiled attempt to gut” the healthcare law, and “portends disastrous consequences”.
The US Appeals Court’s ruling may impact on more than four million Americans who are currently eligible for subsidies to offset their healthcare costs.
Should this mean large numbers of people be ineligible for health insurance, it would result in higher overall premiums for non-subsidized members.
The ruling is the latest blow for the embattled healthcare law, which last month saw the US Supreme Court overturn a crucial portion regarding contraception coverage.
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