By BRENT KENDALL, LOUISE RADNOFSKY and JESS BRAVIN

A divided Supreme Court upheld the constitutionality of the Obama administration’s health-care law, in one of the most anticipated high-court rulings in a generation. Jess Bravin reports on The News Hub. Photo: AP.

WASHINGTON—A divided Supreme Court largely upheld the Obama administration’s health-care law, saying the law’s penalty for those who ignore a mandate to carry health insurance counted as a tax and was justified by Congress’s constitutional taxing power.

The court did find one part of the law unconstitutional, saying its expansion of the federal-state Medicaid program threatened states’ existing funding. The court ruled that the federal government can’t put sanctions on states’ existing Medicaid funding if the states decline to go along with the Medicaid expansion.

Streaming Live: Health-Law Decision

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Real-time updates, analysis and reaction on the Supreme Court’s decision to uphold the health-care law. Click here to see full coverage of the decision.

The ruling on the insurance mandate question was 5-4. Chief Justice John Roberts wrote the opinion, joined by the court’s four liberal justices, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan. Justices Antonin Scalia, Anthony Kennedy, Clarence Thomas and Samuel Alito dissented on the mandate question.

Though the challengers mostly lost on Thursday, the court did affirm one of their basic arguments: that Congress can’t use its powers to regulate interstate commerce to require people to buy insurance. Chief Justice Roberts said the government’s arguments on this point would fundamentally change “the relation between the citizen and the federal government.”

The majority upheld the insurance mandate on other grounds. The chief justice wrote that the penalty’s “practical characteristics pass muster as a tax under our narrowest interpretations of the taxing power.” He said a person who does not wish to carry health insurance is left with a “lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.”

Chief Justice Roberts added: “It is well established that if a statute has two possible meanings, one of which violates the Constitution, courts should adopt the meaning that does not do so.”

The ruling is mostly a victory for Democrats and President Barack Obama, who had passed the biggest reworking to the health system since the creation of Medicare in the 1960s and faced the prospect of the court nullifying their effort. It also averts disruption for hospitals, doctors and employers who have spent more than two years preparing for changes in the law.

The ruling may give more leeway to states that don’t want to cooperate with the law by letting them avoid punishment for refusing to expand Medicaid.

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Health-Care Industry Gains Clarity

Though the coming election and expected budget negotiations could throw off more changes, the Supreme Court’s decision to effectively uphold most of the law removes a big question mark and will add momentum to shifts that were already in progress.

Chief Justice Roberts wrote that the Medicaid portion “violates the Constitution by threatening existing Medicaid funding.” He said the remedy for the violation was to preclude the federal government from imposing a sanction on states that decline to accept an expansion of Medicaid under the law’s provisions. But he said that remedy “does not require striking down other portions” of the law.

Twenty-six states filed suit the day Mr. Obama signed the Patient Protection and Affordable Care Act in March 2010, and a cloud of uncertainty had hung over the law ever since. Lower courts issued conflicting rulings on whether the law’s insurance mandate was constitutional.

Even as the law’s fate was in doubt, the administration moved ahead with implementing its provisions. It has been negotiating with states to set up exchanges where consumers can buy subsidized insurance policies and sign up millions of lower-income Americans for Medicaid. Some states, including Florida and Texas, refused to cooperate because they expected the law to be overturned.

The exchanges are set to open in 2014, the same year insurers will have to accept all customers regardless of their medical histories. The insurance mandate will also take effect that year. People must show when they file tax returns for 2014 that they had coverage during that year or pay a tax penalty. The size of the penalty will rise over time and eventually reach a maximum of several thousand dollars a year.

Also starting in 2014, companies with more than 50 workers will have to pay penalties starting at $2,000 per employee if they didn’t offer a set level of health benefits.

The law’s challengers argued the federal government didn’t have the constitutional power to compel Americans to obtain health insurance. They urged the Supreme Court to strike down the insurance requirement and void the rest of the health law along with it.

Although the law survived the court challenge, it faces an uncertain future. Republican presidential candidate Mitt Romney and GOP congressional leaders pledged to repeal the law if they take control of Congress and the White House in November elections. Mr. Romney said Thursday, “what the court did not do, I will do on my first day as president.”

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Senate Minority Leader Mitch McConnell, Republican of Kentucky, said: “Today’s decision makes one thing clear: Congress must act to repeal this misguided law.”

The court’s decision, while a relief to Democrats, could further energize voters who dislike the law to back Republicans in November. And it forces the Obama administration to continue defending the unpopular insurance mandate, which the court has now made clear is legally equivalent to a tax on those who refuse to carry health insurance.

On the other hand, the court’s blessing could itself shape public opinion of the law, particularly among independents and undecided voters who view the justices as relatively free of the partisan agendas of the government’s elected branches. Polls consistently show that the public places greater confidence in the Supreme Court than either Congress or the presidency, although the justices’ approval ratings have slipped somewhat over the past year.

The Supreme Court reached its decision in the final week of its 2011-12 term, following an extraordinary three days of oral argument in late March at which conservative justices sharply questioned the mandate. Justice Scalia suggested that under the government’s logic, Congress could require the purchase of any product and “you can make people buy broccoli.”

Justice Kennedy, often the court’s deciding vote, said the government faced a “heavy burden.” He dissented in the ruling on the mandate.

The court’s four liberal justices made clear they saw the health law as squarely within congressional authority over interstate commerce, and the nation had been in suspense for three months as the justices in their customary secrecy deliberated and drafted the opinion.

Explore the Ruling

Read more about the Supreme Court’s decision on the health-care law.

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Implementation of the law has been uneven to date. Some changes—such as allowing young people up to age 26 to remain on their parents’ plans—have taken effect smoothly and are popular with consumers. Insurers are also already covering preventive services without out-of-pocket costs, a proposal that is generally well-liked but has sparked a fight between the administration and the Catholic church over the inclusion of birth control in the benefits.

The administration has struggled with other early elements of the law, such as high-risk insurance pools designed to cover people with medical conditions until 2014. Thousands of companies have sought temporary waivers to the part of the law that prevents them from capping annual benefit payouts, saying that they would drop coverage otherwise.

The Obama administration and state agencies face considerable challenges to get the rest of the law in place within the next 18 months. Despite support for the consumer-friendly provisions, more Americans oppose the law than favor it, according to recent polls.

Mr. Obama is expected to emphasize the consumer provisions in his re-election effort. Republicans are likely to step up their attacks and stress that after the Supreme Court’s decision, the only way to eliminate the unpopular individual mandate is to elect Republicans to the presidency and Congress.

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  Court Upholds Mandate as Tax
  
  
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  What Ruling Means for Consumers
  
  
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  Health-Care Industry Gains Clarity
  
  
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  ‘Stolen Valor’ Act Was Struck Down
  
  
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  Ruling Won’t Cure States’ Ills
  
  
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  Few Small Firms Take Advantage of Health-Law Benefits
  
  

Write to Brent Kendall at brent.kendall@dowjones.com, Louise Radnofsky at louise.radnofsky@wsj.com and Jess Bravin at jess.bravin@wsj.com