The federal government forms for applying for health coverage are seen at a rally held by supporters of the Affordable Care Act, widely referred to as "Obamacare", outside the Jackson-Hinds Comprehensive Health Center in Jackson, Mississippi October 4, 2013. REUTERS/Jonathan Bachman

By David Ingram and Kevin Drawbaugh

WASHINGTON (Reuters) - Foes of President Barack Obama's healthcare law lost a bid on Tuesday to put an immediate stop to a key part of the law - the insurance subsidies in the 34 U.S. states that declined to establish their own online marketplaces.

At a court hearing, U.S. District Judge Paul Friedman in Washington, D.C., declined to grant a preliminary injunction sought by a group of individuals and small businesses that in a lawsuit call the subsidies unlawful.

Friedman ruled their lawsuit could move forward and said he would rule on its overall merits by mid-February, rejecting an argument from the Obama administration that the suit was too speculative to be considered.

The latest round of legal challenges to the Affordable Care Act, also known as "Obamacare," focuses on whether the 2010 law allows for subsidies in all states or only in states that have set up exchanges.

Only 16 states and the District of Columbia chose to set up the online marketplaces where people without private health insurance can shop for it, forcing the federal government to create them in the remaining states.

Subsidies, in the form of tax credits, are available to people with annual incomes of up to 400 percent of the federal poverty level, or $94,200 for a family of four. The Obama administration views the subsidies as essential if the law is going to work, because otherwise many people could not afford private insurance.

The suit was brought by a mix of individuals and businesses from Texas, Kansas, Missouri, Tennessee, West Virginia and Virginia. The plaintiffs argue the subsidies are unlawful and impose a burden by forcing them to purchase the insurance or else pay a penalty.

SEEKING AN EXEMPTION

David Klemencic, who does flooring work in West Virginia, is one of the plaintiffs. In court papers, he said he cannot afford insurance and wishes to forgo coverage entirely in 2014, using an exemption in the healthcare law for people with low income.

But the availability of the tax credits means he is not eligible for the exemption, his lawyers said, so he must either buy subsidized insurance at about $18 a month or pay a penalty equal to about $12 a month.

In rejecting a preliminary injunction, Friedman said there was no need for such an emergency measure because Klemencic has until the end of March to apply for an exemption from Obamacare, by which time the lawsuit may be over.

"As long as we get a decision in a timely manner, that's what we've been looking for," Michael Carvin, a lawyer for the plaintiffs, told reporters after the hearing. Carvin was among the lawyers who appeared before the U.S. Supreme Court in 2012 to argue that the healthcare law should be struck down entirely.

Two similar lawsuits are pending in federal courts in Oklahoma and Indiana. Neither has reached a final ruling.

Complicating the situation for the Obama administration is the wording of the law, parts of which were drafted in haste in 2010 as the legislation wound through Congress.

The law says subsidies may be given "through an exchange established by the state," not through one set up by the federal government, a point that the suit emphasizes.

The administration says the subsidies should be available to people in every state because Congress intended the online exchanges to be uniform.

At the core of this claim is what Congress intended when it wrote the law, not expecting that some states would fail to set up an exchange or would, as in the case of Texas and other Republican-controlled states, refuse to do so out of political opposition to Obamacare.

The case is Halbig v. Sebelius, U.S. District Court for the District of Columbia, No. 1:13-cv-623.

(Additional reporting by Patrick Temple-West and Terry Baynes; Editing by Howard Goller and Mohammad Zargham)