Update 12:32 pm: The Fourth Circuit Court of Appeals ruled that Obamacare subsidies are legal. Specifically, it upheld the IRS' interpretation of the health care law — that subsidies can be disbursed in states using the federal exchange — "as a permissible exercise of the agency’s discretion," according to the decision

Original post: A federal appeals court ruled Tuesday in favor of challengers who argue that Obamacare subsidies aren't actually legal in most states in a decision that could threaten the entire health care law. The Obama administration's next move it to appeal the decision to the full circuit court which, according to The National Journal, some allies think is more likely to rule in the government's favor. 

According to the Associated Press, a D.C. Circuit Court of Appeals ruled 2-to-1 the Affordable Care Act, as written, only allows premium subsidies in states that built their own exchanges. As we've explained in the past, the law reads that premiums shall be provided through exchanges built by the "State," with the assumption being that most states would create their own exchanges. The government argues that, when several states didn't create their exchanges, they created one for them (the federal exchange). The group suing the government argues that subsidies were meant to be a reward for creating an exchange, while the feds say it was always the intention of lawmakers that every state have subsidies.

The three judges heard oral arguments on the case back in March, and at the time at least two judges seemed open to the idea of limiting subsidies to just state exchanges. Today's news just confirms that bad news for Obamacare proponents. 

The good news for millions of low and middle income families using subsidies is that, according to the White House, "premium tax credits will continue, unchanged." And, assuming the government is given a rehearing, the decision will be vacated

But if today's ruling is upheld, the Urban Institute estimates that 62 percent of the 11.8 million people expected to enroll through the federal exchange through 2016 will lose their Obamacare subsidies. That's about 7.3 million people.  For many of them, their insurance premiums will qualify them for a hardship exemption: if your premium takes up too much of your income, you're excused from Obamacare. That will leave a lot of older, sicker people on the exchanges, and premiums will jump up.

And that, of course, is exactly the plan. Like most Obamacare lawsuits, this is about succeeding where House Republicans have failed — permanently crippling the health care law.