In a written ruling, U.S. District Judge Roger Vinson said it also needs to be decided whether it's constitutional to penalize people who do not buy insurance with taxes and to require states to expand their Medicaid programs. Another federal judge in Michigan threw out a similar lawsuit last week.
Vinson set a hearing for Dec. 16. The lawsuits will likely wind up before the U.S. Supreme Court.
In his 65-page ruling, Vinson largely agreed with the 20 states and the National Federation of Independent Business, saying Congress was intentionally unclear when it created penalties in the legislation. The states have argued that Congress is overstepping its constitutional authority by penalizing people for not doing something - not buying health insurance.
The penalties for those who do not buy insurance are never referred to as taxes in the 2,700-page act, Vinson wrote. Attorneys for the Obama administration argued at a September hearing that the penalties should be considered a tax levied by Congress - as allowed by its constitutional power to regulate interstate commerce.
"One could reasonably infer that Congress proceeded as it did specifically because it did not want the penalty to be 'scrutinized' as a $4 billion annual tax increase," Vinson wrote.
"It seems likely that the members of congress merely called it a penalty and did not describe it as revenue-generating to try and insulate themselves from the potential electoral ramifications of their votes."
The administration's attorneys had told Vinson last month that without the regulatory power to ensure young and healthy people buy health insurance, the health care plan will not survive.
Vinson also took issue with the administration's argument that the states and individual taxpayers must wait until 2014, when some of the changes take effect, to file any lawsuits. Vinson said businesses and states are feeling the ramifications of the law now.
The health care act leaves states with the difficult choice of expanding their Medicaid programs and taking on major expenses or entirely withdrawing from the insurance program for the poor, Vinson wrote. In states like Florida - where 26 percent of the state budget is devoted to Medicaid, according to the lawsuit - the law amounts to coercion, Vinson wrote.
Florida Attorney General Bill McCollum praised the ruling.
"It is the first step to having the individual mandate declared unconstitutional and upholding state sovereignty in our federal system," McCollum said in a statement.
He filed the lawsuit just minutes after President Barack Obama signed the 10-year, $938 billion health care bill into law in March.
Stephanie Cutter, a political operative tapped by Obama to guide efforts to explain the law's benefits, wrote in a White House blog late Thursday that the government expected to prevail.
Cutter highlighted a favorable ruling by a Michigan federal judge and described Vinson's ruling as procedural.
"Having failed in the legislative arena, opponents of reform are now turning to the courts in an attempt to overturn the work of the democratically elected branches of government. This is nothing new. We saw this with the Social Security Act, the Civil Rights Act, and the Voting Right Act - constitutional challenges were brought to all three of these monumental pieces of legislation, and all those challenges failed," Cutter wrote.
Vinson's ruling comes a week after District Judge George Caram Steeh in Detroit ruled that the mandate to get insurance by 2014 and the financial penalty for skipping coverage are legal. He said Congress was trying to lower the overall cost of insurance by requiring participation.
There is also a lawsuit pending in Virginia. A federal judge there has allowed the lawsuit to continue, ruling the overhaul raises complex constitutional issues.
The other states involved in the lawsuit Vinson is hearing are Alabama, Alaska, Arizona, Colorado, Georgia, Indiana, Idaho, Louisiana, Michigan, Mississippi, Nebraska, Nevada, North Dakota, Pennsylvania, South Carolina, South Dakota, Texas, Utah and Washington.