A White House official said the U.S. will seek petition the full Washington appeals court, where seven of the 11 judges were nominated by Democratic presidents, including four by Obama. The judges didn't grant the plaintiff's request for a suspension of the tax credits, the official said.

If the Washington panel's ruling is upheld, it would be a potentially crippling blow to Obamacare because only 14 states and the District of Columbia have opted to set up their own marketplaces. That makes delivery of tax credits via the federal exchange crucial to meeting the health-care plan's goal of broadening coverage in the U.S.

The plan's success hinges on enlarging the pool of the insured, including those of modest means who need financial aid, to subsidize insurance costs for those who are ill.

Of the more than 8 million people who picked an insurance plan on the exchanges from October through April 19, 5.4 million selected one from the federal marketplace, according to a report by the U.S. Department of Health and Human Services.

According to the report, 85 percent of those picking a plan qualified for subsidies that reduce their premiums.

The 2-1 majority ruling in Washington held that the way Congress wrote the Affordable Care Act makes clear the subsidy is available only on state-run exchanges.

The law “unambiguously forecloses the interpretation embodied in the IRS rule and instead limits the availability of premium tax credits to state-established exchanges,” U.S. Circuit Judge Thomas Griffith wrote for the majority of a three- judge panel.

'With Reluctance'

The judges reached their conclusion “with reluctance,” Griffith, a appointee of Republican President George W. Bush wrote. He was joined A. Raymond Randolph, who was nominated by President George H. W. Bush, also a Republican.

“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. But high as those stakes are, the principle of legislative supremacy that guides us is higher still,” Griffith wrote.

U.S. Circuit Judge Harry Edwards, an appointee of Democratic President Jimmy Carter, dissented, calling the decision a “not-so-veiled attempt to gut” Obamacare.

At least two other challenges to the health-care tax credits are percolating in federal courts in Oklahoma and Indiana.

The three-judge Virginia appeals court panel unanimously court turned aside the argument of Obamacare opponents that Affordable Care Act only allows assistance for buyers on the state exchanges.

The court said while the language of the law is subject to multiple interpretations, the IRS is entitled to deference in interpreting it to write regulations for the program.

“We uphold the rule as a permissible exercise of the agency's discretion,” the court said.

The ruling which upholds a lower court, is the third decision affirming the Obama administration's contention that tax credits are intended for customers of state and federal exchanges alike.

The full circuit court in Washington will reverse the decision, said Timothy Jost, a law professor at Washington & Lee University who has tracked implementation of Obamacare.

No Division

“There's not going to be a division of the circuits, ultimately,” Jost said.

The health-care overhaul was signed into law by Obama in March 2010 after passing Congress with no Republican votes.

It's been under political and legal assault ever since while plagued by computer failures that impeded sign-ups on state and federal exchanges.

In June 2012, the law was narrowly upheld by the U.S. Supreme Court which ruled that Congress has the power to make Americans carry insurance or pay a penalty. The high court didn't rule on, or consider, the question of whether the law allows subsidies for plan buyers on the federal exchange.

The Supreme Court on June 30 ruled that closely held companies can claim a religious exemption from the requirement that they offer birth-control coverage in their worker health plans. That case, involving the craft-store chain Hobby Lobby Stores Inc., was among dozens of suits spawned by Obamacare's contraceptive mandate.

Today's ruling applies to a portion of the law making financial aid available to income-qualified people who buy their health insurance on a marketplace “established by the state.”

The government contends that when considered with other parts of the law, this language covers marketplaces set up by states themselves and by the federal government when it acts in place of states.

The IRS in May 2012 issued a rule making that point explicit. Financial aid, in the form of tax credits, would be available to taxpayers who obtain coverage on the federal exchange because that “is consistent with the language, purpose and structure” of the Affordable Care Act, according to the regulation.

The government argued that limiting the credits to the 14 state exchanges makes no sense because it flies in the face of the law's aim of reducing the number of uninsured.

Further, according to government lawyers, many sections of the Affordable Care Act anticipate the issuance of tax credits through the federal exchange.

For example, the law obligates exchanges to report tax information to the IRS, a requirement that would serve no purpose if the federal exchange wasn't “authorized to deliver tax credits,” government lawyers wrote court papers filed at the Washington appeals court

Opponents of Obamacare, including those who brought the Washington case, argued that the court is bound by the language of the law limiting the tax credits to customers of state exchanges. The language was deliberately chosen to induce states to set up exchanges, lawyers for opponents told the appeals panel.

The case is Halbig v. Sebelius, 14-5018, U.S. Court of Appeals for the District of Columbia (Washington). The Virginia case is King v. Sebelius, 14-1158, U.S. Court of Appeals for the Fourth Circuit, (Richmond, Virginia).

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