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Virginia Gov. Terry McAuliffe, a Democrat, said the conflicting rulings “should not discourage Virginia families from seeking affordable health insurance through the federal marketplace.”

But Republicans wasted no time in highlighting the partial blow to Obamacare, which follows the Supreme Court’s decision to let closely held corporations ignore Obamacare’s contraception mandate if they have religious objections to it.

“For the second time in a month, the courts have ruled against the president’s unilateral actions regarding Obamacare,” said House Speaker John A. Boehner, Ohio Republican. “The president has demonstrated he believes he has the power to make his own laws. That’s not the way our system of government was designed to work.”

Under the D.C. Circuit’s ruling, only the District and the 14 states that have taken on the responsibility for their exchanges would be able to dole out premium tax credits to their residents. Other states, most of which have Republican governors or legislatures, refused to set up the exchanges, forcing the federal government to step in for them.

If the Obama administration loses this legal battle, about 5 million Americans who used the federal exchange will see their health costs soar because they no longer have subsidies to knock down their premiums, according to Avalere Health, a Washington-based consultancy.

“The responsibility for that lies squarely on the shoulders of the president,” Michael Cannon, director of health policy at the libertarian Cato Institute and key architect of the legal theory behind the Halbig case, told The Washington Times in a recent interview.

He has argued that Congress wanted to entice states to set up their own marketplaces, yet the IRS unlawfully extended subsidies to all states.

“We thought at first it was a glitch,” he said of the law’s text. “Then we started researching it. They meant to do this.”

The plaintiffs in Halbig come from states that opted not to set up their own health exchanges. They said the subsidies produce a ripple effect in which companies in their states are no longer insulated from the law’s twice-delayed employer mandate, which requires companies with 50 or more full-time employees to offer health coverage or pay fines.

The rule is triggered when an employee takes advantage of government subsidies on an Obamacare health exchange. Without any subsidies, the plaintiffs reasoned, they wouldn’t have to worry about the employer mandate.

The Obama administration says Congress always intended the Department of Health and Human Services to “stand in the shoes” of states that decided not to run their own marketplaces. That’s what it did during the law’s first enrollment period, setting up HealthCare.gov to serve the three dozen states that deferred to the federal government.

“You don’t need a fancy legal degree to understand that Congress intended for every eligible American to have access to tax credits that would lower their health care costs, regardless of whether it was state officials or federal officials who were running the marketplace,” Mr. Earnest said. “I think that is a pretty clear intent of the congressional law.”

Dave Boyer contributed to this report.