Final Anti-Discrimination Rule Protecting Gender Identity May Indirectly Impact Employer Health Plans

Newsletter

On April 26, 2024, the Department of Health and Human Services (HHS) issued a final rule under Section 1557 of the Affordable Care Act (ACA), which broadly protects against discrimination in health programs or activities that receive Federal financial assistance.

The final rule, 89 Fed. Reg. 37522 (May 6, 2024) (Final Rule or Rule), retains most of the rule proposed in 2022, 87 Fed. Reg. 47824 (Aug. 4, 2022) (Proposed Rule), including: (1) protections against discrimination on the basis of sexual orientation or gender identity; and (2) the express carveout for employment practices, including the provision of health benefits.

The Final Rule is generally effective on July 5, 2024, with delayed compliance deadlines for some requirements.  

Background

The Final Rule is the latest administrative step in what has been a long, ever-changing, and often confusing period for those subject to Section 1557. Much of the controversy and confusion related to Section 1557 has revolved around the regulatory interpretation of the statute’s protections for discrimination on the basis of “sex.”

The first regulation issued under Section 1557, 81 Fed. Reg. 31376 (May 18, 2016) (2016 Rule), by the Obama Administration, construed sex discrimination to include that based on gender identity and termination of pregnancy. Shortly thereafter, the 2016 Rule was enjoined in these respects by a federal district court in Texas. Franciscan All., Inc. v. Burwell, 227 F. Supp. 3d 660 (N.D. Tex. 2016). Almost three years later, the same court vacated the 2016 Rule in these respects. Franciscan All., Inc. v. Azar, 414 F. Supp. 3d 928 (N.D. Tex. 2019).

In 2020, the Trump Administration issued a final rule, 85 Fed. Reg. 37160 (June 19, 2020) (2020 Rule) that repealed and replaced significant parts of the 2016 Rule, including the protections for gender identity and termination of pregnancy. Before the 2020 Rule became effective, a federal district court in New York stayed the rule’s repeal of the 2016 Rule’s protections for gender identity and enjoined its enforcement, citing the 2020 Rule’s failure to address the impact of Bostock v. Clayton Cnty., Georgia, 590 U.S. 644 (2020), which had held that under Title VII, discrimination based on sex includes discrimination based on homosexuality or transgender status. Walker v. Azar, 480 F. Supp. 3d 417 (E.D.N.Y. 2020).

In 2021, HHS announced that, consistent with Bostock, it would interpret Section 1557 to protect against discrimination based on sexual orientation and gender identity. 86 Fed. Reg. 27984 (May 25, 2021).

In 2022, HHS issued the Proposed Rule, which reinstated and expanded the 2016 Rule’s protections of sexual orientation and gender identity.

Final Rule Prohibits Discrimination Based on Gender Identity or Pregnancy

The Final Rule, like its predecessors, prohibits discrimination on the basis of race, color, national origin, “sex”, age, or disability in any “health program or activity”, any part of which receives “Federal financial assistance” from HHS.

The Final Rule retains the Proposed Rule’s interpretation of “sex” as including, but not being limited to: sex characteristics, sexual orientation, gender identity, pregnancy, and sex stereotypes.

Final Rule Does Not Apply to Employment Practices (Including Health Benefits)

The Final Rule specifically applies to all of the operations of hospitals, pharmacies, and health insurance issuers that receive Federal financial assistance.

The Final Rule also applies to any other enterprise or undertaking to provide or administer health-related services, health insurance coverage, or other health-related coverage, if it receives Federal financial assistance.

A group health plan is, under the Final Rule, a “health program or activity,” and thus is subject to the Rule if it receives Federal financial assistance, directly or indirectly. However, it does not necessarily become a covered entity by virtue of its sponsor’s or administrator’s receipt of Federal financial assistance.

Significantly, the Final Rule does not apply to any employer with regard to its employment practices, including the provision of employee benefits. The Final Rule also extends this protection beyond employers to any “other plan sponsor of a group health plan, including but not limited to, a board of trustees (or similar body), association or other group.”

Final Rule Might Affect Self-Insured Plans Indirectly via TPAs

Although employers are exempt from the Final Rule with regard to their employee benefits, many self-insured employer group health plans could still be indirectly affected by the Final Rule’s applicability to many third party administrators (TPAs). This is because the Final Rule holds TPAs responsible for the plans that they design, control, or play a role in developing.

A TPA that develops standard plan designs that it offers to employers is liable under the Final Rule for any discriminatory design feature of the plan. Moreover, a TPA cannot play a role in designing benefits for self-insured plans in a manner that results in prohibited discrimination, even if the plan sponsor requests that the TPA develop certain plan designs. For example, if an employer asks a TPA to design a plan that excludes all employees of a certain race, HHS will take the position that the TPA is liable under the Final Rule.

Accordingly, employers are unlikely to obtain plan designs that violate Section 1557 from TPAs or other recipients of Federal financial assistance.

Federal Financial Assistance Now Includes Medicare Part B Funding

The Final Rule reverses HHS’ longstanding position that Medicare Part B funding is not Federal financial assistance. Under the Final Rule it is, and not only for purposes of Section 1557 but also under Title VI, Title IX, and Section 504 of the Age Discrimination Act of 1975. This means that health programs and activities that receive only Medicare Part B funding could now, for the first time, be subject Section 1557 and these other federal civil rights laws.

Many PBMs are Subject to the Final Rule

HHS declined to expressly identify pharmacy benefit managers (PBMs) in the Final Rule as entities that are principally engaged in the provision or administration of the specified health activities. However, the preamble makes clear that PBMs that receive Federal financial assistance, directly or indirectly, are subject to the Final Rule, and that if the PBM is principally engaged in PBM services, then all of the PBM’s operations are covered by the Final Rule.

The preamble also notes that even PBMs that do not receive Federal financial assistance can be subject to the Final Rule as part of the operations of a health program or activity that receives such assistance, such as a health insurer or pharmacy company, depending on a fact-specific analysis of the corporate structure of the entity.

HHS to Refer Employer Violations to EEOC or DOJ

Although employers are not subject to Section 1557 directly with regard to their employment practices, including their health plans, the preamble makes clear that HHS will refer complaints about potentially discriminatory plan designs to the Department of Labor (DOL) or Department of Justice (DOJ), depending on jurisdiction. For example, a complaint about a discriminatory plan design that originates exclusively from the plan sponsor and not the TPA will be referred to the DOL or DOJ, which enforce nondiscrimination rules that apply directly to employers, including Title VII, the Americans with Disabilities Act, and the Mental Health Parity and Addiction Equity Act.

Litigation to Come

Judicial approaches to TPA liability have been generally consistent with the Final Rule but are still under development. As recently as March 12, 2024, a federal district court denied a motion to dismiss a claim that a TPA had violated Section 1557 by designing and administering a potentially discriminatory provision. Kulwicki v. Aetna Life Ins. Co., No. 3:22-CV-00229 (VDO), 2024 WL 1069854 (D. Conn. Mar. 12, 2024). In December 2023, a court concluded that Blue Cross Blue Shield of Illinois had violated Section 1557 merely by administering and enforcing categorical exclusions of some or all gender-affirming health care services. C. P. by & through Pritchard v. Blue Cross Blue Shield of Illinois, No. 3:20-CV-06145-RJB, 2023 WL 8777349 (W.D. Wash. Dec. 19, 2023) (stayed pending appeal).

History suggests that the Final Rule will inspire litigation in short order, so those subject to the Rule will want to keep alert for more to come.

For more information or if you have any questions about the information in this newsletter, please contact your Quarles & Brady counsel or:

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