A federal appeals court has ruled the Obama administration cannot subsidize insurance premiums for nearly 7 million Americans, dealing a serious blow to the Affordable Care Act (this does not impact state funded exchanges like New York and Connecticut). The ruling sets up an almost-certain appeal to the U.S. Supreme Court.

Two judges with the D.C. Circuit Court of Appeals in Washington ruled Tuesday that the text of the reform law clearly forbids income-tax subsidies to go to low- and middle-income Americans who use one of the 34 federally run insurance exchanges. The tax subsidies have been flowing since the beginning of the year, based on a 2012 interpretation of the law by the IRS.

The actual text of the law says the sliding-scale tax credits are only available for coverage purchased “though an exchange established by the state,” which only 16 states did. IRS officials had claimed the imprecise wording of the law contradicted Congress’ overall intent to expand insurance coverage as widely as possible. But that argument did not win the day Tuesday.

“Because we conclude that the ACA unambiguously restricts the section 36B subsidy to insurance purchased on Exchanges “established by the State,” we reverse the district court and vacate the IRS’s regulation,” the two-member majority wrote.

The ruling was the second dose of bad news for the Democrat-passed reform law this summer. Last month, the Supreme Court dealt a major symbolic blow to the law by ruling in Burwell v. Hobby Lobby Stores that the administration could not force the owners of closely held corporations to defy religious objections and cover contraceptives in their employees’ insurance plans. The ruling prompted new legislation to ensure contraceptives are covered without cost for millions of women, but the future of that proposal is far from certain.

Tuesdays ruling poses a much greater financial threat to the law’s internal function, but the decision was not altogether surprising.

During oral arguments in March, the judges seemed to be split along the partisan lines that eventually became the 2-1 vote on Tuesday, with Republican-appointed judges Thomas Griffith and A. Raymond Randolph voting for the plaintiffs and Democrat-appointed judge Harry Edwards siding with Obama’s IRS.

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Jeffrey R. Ungvary President

Jeffrey R. Ungvary