RICHMOND, Va. (Reuters)—A U.S. judge in Virginia on Monday declared a key part of President Barack Obama's landmark health care law unconstitutional in the first major setback on an issue that will likely end up at the Supreme Court.

U.S. District Judge Henry Hudson, appointed to the bench by President George W. Bush in 2002, backed arguments by the state of Virginia that Congress exceeded its authority by requiring Americans to start buying health insurance in 2014 or face a fine.

"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," Judge Hudson wrote.

But he declined to invalidate the entire health care law, a small victory for President Obama.

The administration will appeal the decision. The law is a cornerstone of the Obama presidency, aiming to expand health insurance to cover millions of uninsured Americans while trying to curb costs.

Insurers mostly opposed

Health care insurers, which include companies such as Aetna Inc. and WellPoint Inc., largely opposed President Obama's reforms but say the individual mandate is critical so additional customers can offset greater industry costs.

Insurers' shares initially rose on the ruling before later tapering off as investors saw continuing uncertainty as the case continues. The ruling did signal that changes to the bill rather than a full overhaul are more realistic.

Shares of the S&P Managed Care Health Index were up 0.6% in afternoon trading while the overall S&P index was up 0.4%.

"Investors are taking this in stride knowing this is probably going to come down to the Supreme Court sooner or later," said Morningstar analyst Matthew Coffina. "This really only adds to that uncertainty in terms of not really being sure if and when and how the legislation can be implemented."

Virginia's lawyers argued the federal government could not regulate someone for not buying a good or service under the U.S. Constitution's Commerce Clause and could not penalize them for failing to buy health insurance.

It said the individual mandate invites "unbridled exercise of federal police powers."

The White House said the law will ultimately be upheld by the legal system. It could take more than a year for the case to get to the Supreme Court.

Officials said the administration will continue implementing the rest of the law while it works through the legal questions of the individual mandate. Virginia had requested an injunction to block implementation of the entire law, but Judge Hudson did not grant it.

First major obstacle

The decision is the first finding against the law, was passed in March and aimed at overhauling the $2.5 trillion U.S. health care system.

The Obama administration says Virginia does not have the legal standing to challenge the law on behalf of its citizens, particularly for something that has yet to take effect.

Two judges rejected other challenges to the law, including one in Virginia last month.

Justice Department lawyers will argue in a multi-state lawsuit in Florida later this week.

Republican leaders in Congress have said one of their top priorities next year when they control the House is to repeal the law. But chances of that are slim because President Obama's Democrats still control the Senate.

The individual coverage mandate was considered a key guarantee in the plan for keeping health insurance premiums low, because it ensures that healthy as well as sick people will buy insurance.

If the lawsuit succeeds, "millions of Americans will lose their health insurance, premiums will go up for working families, and more people will be forced into bankruptcy when they get sick," said Rep. Pete Stark, D-Calif., the Democrat who chairs the House of Representatives Health Subcommittee.

Patient advocacy groups rejected the notion that people choose not participate in the health care system.

"Since everyone, at some point in their lives, receives health care, it is simply incorrect to assume that the law requires people to enter the health care marketplace," said the consumers' group Families USA.

Twenty states have banded together in a suit separate from Virginia's and Monday's ruling "bodes well" for the other suit, said Texas Attorney General Greg Abbott.

Constitutional scholars expect one of the suits to wend their way to the Supreme Court.

"I would be surprised at the end of the day if the Supreme Court rules against the individual mandate," said Ana Gupte, an analyst with Sanford Bernstein who covers health insurers.