The case involves Arkansas, but the ruling is expected to affect other states pursuing work requirements. More than 10 million people have gained coverage as a result.
Kentucky estimated that 95,000 adults would lose coverage under the new rules. The state later reported more than 18,000 people dropped from the rolls, but it wasn't clear how many obtained other coverage.
"The secretary's failure to consider the effects of the project on coverage alone renders his decision arbitrary and capricious", Boasberg wrote of the Arkansas program's approval by HHS Secretary Alex Azar, because it didn't address "whether and how the project would implicate the "core" objective of Medicaid: the provision of medical coverage to the needy". He was nominated to the federal bench by Republican President Ronald Reagan.
"The text of the statute includes one primary goal, which is providing health care coverage without any restriction geared to healthy outcomes, financial independence or transition to commercial coverage", the court added. Almost 20 states are in various stages of trying to implement work requirements.
Kentucky, under a new, Democratic governor, dropped its work requirement on December 16 and asked the court to dismiss its appeal without affecting any others.
In a statement, the federal Centers for Medicare and Medicaid Services said it "is reviewing and evaluating the opinion and determining next steps".
A three-judge panel in Washington, D.C., ruled Friday the mandate violates federal law.
Advocates for low-income people called the decision a solid win. "Whatever yarn they spin, this really reins them in".
The decision will nearly certainly be appealed to the U.S. Supreme Court.
Medicaid is a federal-state program that covers about 70 million people, from pregnant women and newborns to disabled people and elderly nursing home residents. Under the Obama-era Affordable Care Act, states gained the option of expanding the program to many low-income adults previously ineligible. "It means that thousands of low-income people in Arkansas will maintain their health insurance coverage - coverage that enables them to live, work, and participate as fully as they can in their communities".
The Trump administration's legal bid to restore a work requirement for Medicaid benefits in Arkansas was rejected on appeal, a blow to the government's larger effort to reshape USA health-care policy.
One of the requirements the court noted received the most attention was for Medicaid recipients between 19 and 49, requiring them to "work or engage in specified educational, job training, or job search activities for at least 80 hours per month". ME abandoned the work requirement for its low-income health insurance program in January.