The Obama administration’s requirement that most citizens maintain minimum health coverage as part of a broad overhaul of the industry is unconstitutional, a federal judge ruled, striking down the linchpin of the plan.

U.S. District Judge Henry Hudson in Richmond, Virginia, today said that the requirement in President Barack Obama’s health-care legislation goes beyond Congress’s powers to regulate interstate commerce. While severing the coverage mandate, which is set to become effective in 2014, Hudson didn’t address other provisions such as expanding Medicaid.

“At its core, this dispute is not simply about regulating the business of insurance -- or crafting a scheme of universal health insurance coverage -- it’s about an individual’s right to choose to participate,” wrote Hudson, who was appointed by President George W. Bush in 2002.

The ruling is the government’s first loss in a series of challenges to the law mounted in federal courts in Virginia, Michigan and Florida, where 20 states have joined an effort to have the statute thrown out. Constitutional scholars said unless Congress changes the law, its fate on appeal will probably be determined by the U.S. Supreme Court.

‘Lot of Activity’

“There’s a lot of activity focused now on alternatives to the mandate,” said Dan Mendelson, chief executive officer of Avalere Health, a Washington-based consulting firm. One option might be to provide access to all people, even ones with pre- existing conditions, to buy insurance and limit the times they could sign up.

“It’s using a carrot instead of a stick,” Mendelson said in a telephone interview before the ruling.

Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, a health insurers’ Washington lobby group, declined to comment on the record about whether insurers have discussed alternatives with the administration or whether a policy could be designed to replace the effects of losing the individual mandate.

Hudson didn’t stop the government from moving ahead with implementing the law while an appeal is pending.

Virginia Attorney General Ken Cuccinelli, who brought the suit, said in a statement he was “gratified we prevailed.”

“This won’t be the final round, as this will ultimately be decided by the Supreme Court, but today is a critical milestone in the protection of the Constitution,” he said.

Republican Senator Orrin Hatch of Utah called the decision “a great day for liberty. Congress must obey the Constitution rather than make it up as we go along,” he said in a statement.

Appeals Court Hearing

The government may ask the judge to reconsider his ruling, or seek a hearing by the U.S. Court of Appeals in Richmond. Two opinions from federal judges in Virginia and in Michigan have sided with the government on the law’s constitutionality.

Health plans rose as much as 2.7 percent after the ruling was announced, and then fell back. The Standard & Poor’s Managed Health Index of six insurers was up less than 1 percent at 1:44 p.m. in New York trading, led by a 1.1 percent increase for UnitedHealth Group Inc. of Minnetonka, Minnesota, the largest medical plan by sales. Aetna Inc. of Hartford, Connecticut, gained 1 percent.

White House spokesman Robert Gibbs said at a press briefing today said that the administration still believes the legislation is constitutional.

‘Different Decision’

“One hundred and fifteen miles away, a different judge in a different district rendered a different decision,” Gibbs said, referring to a Nov. 30 ruling by U.S. District Judge Norman Moon, in Lynchburg, Virginia. That decision upheld the act in a lawsuit brought by the evangelical Liberty University and five individuals.

“Our belief is that when all the legal wrangling is done, this is something that will be upheld,” Gibbs said.

Mark Hall, a professor at Wake Forest University School of Law, who serves on a federal advisory board set up to help implement the law, said that while the case is certain to go to the high court, the outcome is unpredictable.

“Some prominent conservative justices will go against it, but there is no serious indication that every single one will go against it,” he said in an interview before Hudson’s decision.

Cornerstone of Overhaul

Justice Department lawyers in court papers called the mandatory insurance measure the cornerstone of the overhaul as it pushes younger and healthier people into the insurance pool. Through the individual mandate and expansions of Medicaid and employer-based coverage, the law is estimated to provide 32 million more people with coverage by 2019, according to the Congressional Budget Office.

The law bars insurers from denying coverage to people who are sick or imposing lifetime limits on costs. Without payments generated from the required policies, the health-insurance market would face extinction, the government argued. The mandate falls under Congress’s power to regulate interstate commerce as $43 billion in unpaid medical bills are absorbed by the market each year, U.S. lawyers said.

“If people aren’t compelled to buy insurance and the insurance carriers are compelled to offer it, then many will simply wait until they are sick,” said John Sullivan, an analyst at Leerink Swann & Co. in Boston. “If the Supreme Court were to rule this law unconstitutional, then it would be back to the drawing board. You can’t just pull this part out of it.”

Virginia’s suit claimed Congress has only the power to tax, not to force participation in a market. Its case defended the Virginia Health Care Freedom Act, a state law barring compulsory purchase of health insurance by its citizens.

Florida Suit

Florida, joined by 19 other states, filed a separate lawsuit challenging the law’s constitutionality and arguing it puts too big a burden on its budget by expanding state-run Medicaid programs. U.S. District Judge Roger Vinson in Pensacola, Florida, is slated to hear arguments Dec. 16 on motions by each side to decide the case in their favor.

The Florida case, involving 20 states, has drawn the most attention from outside interests. The states are backed by 63 members of the U.S. House of Representatives, mostly Republicans, in a court brief while incoming House of Representatives Speaker John Boehner, an Ohio Republican, and 32 Republican U.S. senators separately submitted papers arguing the legislation represents an unconstitutional expansion of congressional legislative powers.

Florida’s Attorney General Bill McCollum said he is hopeful Vinson will strike down the individual mandate and halt the expansion of Medicaid.

“The implementation of this law could add more than 1.9 million Floridians to the Medicaid program, a tremendous financial burden on our state at a time when our budget has no room for extra expenses,” he said in a statement today.

Economics Scholars

A group of about 40 economics scholars, including Nobel laureates Eric Maskin, George Akerlof and Kenneth Arrow, filed their own brief, arguing in favor of the legislative package.

The challenges brought by the attorneys general in Virginia and Florida are the most likely to reach the Supreme Court, according to health-care and constitutional lawyers.

“The Florida and Virginia cases have both been well briefed and well drafted,” said Peter Urbanowicz, a managing director at Alvarez & Marsal Healthcare Industry Group in Washington.

The case is Commonwealth of Virginia v. Sebelius, 10-cv- 00188, U.S. District Court, Eastern District of Virginia (Richmond).

To contact the reporters on this story: Tom Schoenberg in Richmond, Virginia, federal court at tschoenberg@bloomberg.net; Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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(CNN) - A federal judge in Florida on Thursday rejected a motion by the government to dismiss some counts of a multi-state challenge to the sweeping health care reform signed into law by President Barack Obama earlier this year.

The ruling by Senior U.S. District Judge Roger Vinson means the lawsuit filed by attorneys general from Florida and 19 other states can proceed on questions of whether the health care law is constitutional in requiring citizens to obtain health care coverage or face financial penalties, as well as forcing states to expand Medicaid.

Vinson threw out four other counts of the lawsuit.