In a decision that sharply criticizes the administrative agency practice of "smurfing," a Texas district court has allowed a challenge to HHS administrative guidance issued shortly after the Supreme Court's 2022 Dobbs ruling to proceed (Texas v. HHS, (W.D. Tex. July 12, 2023)). The disputed HHS guidance addressed federal nondiscrimination requirements for pharmacies, including with regard to dispensing prescription medications involving reproductive health care. The State of Texas and a pharmacy sued HHS, asserting that the guidance sought to preempt Texas laws governing abortion.

In last summer's Dobbs ruling, the Supreme Court held that there is not a constitutional right to abortion, thereby overturning its rulings in Roe v. Wade and Planned Parenthood v. Casey (Dobbs v. Jackson Women's Health Org., 142 S. Ct. 2228 (2022); see Legal Update, Supreme Court's Overruling of Roe v. Wade Raises Health Plan and Employment Implications and Abortion and Contraceptives Services for Group Health Plans Toolkit). A few weeks after the Dobbs ruling was issued, HHS's Office for Civil Rights (OCR) issued guidance addressing federal sex and disability nondiscrimination requirements for pharmacies under Section 1557 of the Affordable Care Act (ACA) and Section 504 of the Rehabilitation Act of 1973 (see Legal Update, In Post-Dobbs Guidance, HHS Addresses Sex and Disability Discrimination Rules for Pharmacies). HHS's guidance included examples of situations in which pharmacies might violate federal sex and disability nondiscrimination rules by refusing to fill or stock prescriptions for certain medications.

As noted, the plaintiffs in the current litigation—the State of Texas and a pharmacy—sued HHS, arguing that the agency's post-Dobbs pharmacy guidance:

HHS asserted that Texas lacked standing to challenge the pharmacy guidance because the guidance was not a final agency action. HHS therefore asked the district court to dismiss Texas's claim.

ACA Section 1557 prohibits discrimination on the basis of race, color, national origin, sex, age, or disability in certain health programs and activities (see Practice Note, June 2020 Final Regulations Under ACA Section 1557: Nondiscrimination in Health Programs and Activities and ACA Section 1557 Compliance for Health Coverage Toolkit). Under Section 1557, sex discrimination includes discrimination based on pregnancy or related conditions. Section 1557 incorporates the grounds for prohibited discrimination under four federal civil rights laws, including Section 504 of the Rehabilitation Act (Section 504), which prohibits disability discrimination in certain contexts (29 U.S.C. § 794).

HHS took the view in its post-Dobbs pharmacy guidance that retail pharmacies that receive federal financial assistance may not discriminate against health plan participants and other individuals on the grounds prohibited under ACA Section 1557 and Section 504 in:

(By receiving payments from Medicare or Medicaid, pharmacies are recipients of federal financial assistance.)

HHS's pharmacy guidance described several scenarios that identified possible discrimination on the basis of sex and disability. For example, one scenario involved an individual who experienced a first-trimester miscarriage. The individual's health provider prescribed mifepristone and misoprostol (medications that are used in medical abortions) to assist with the passing of the miscarriage (see Practice Note, Health Plan Coverage of Surgical and Medication Abortion and Related Services: Medication Abortion). According to HHS, the pharmacy might improperly discriminate on the basis of sex if it refused to fill the prescriptions on the grounds that they could also be used to terminate a pregnancy.

Addressing HHS's lack-of-standing argument, the district court observed that district courts are only authorized to review final agency actions, which are generally the product of notice-and-comment decisionmaking. The court framed the standing issue as whether HHS's guidance required pharmacies to dispense drugs for abortion. The court rejected HHS's argument that its pharmacy guidance:

Citing the guidance's subject matter and proximity in time to the Dobbs ruling, the court disagreed with HHS's assertion. The court noted that HHS's pharmacy guidance, which was issued just under three weeks after the Dobbs ruling, carried out a post-Dobbs Biden administration order—issued only two weeks after Dobbs—to promote reproductive health care (see Legal Update, White House Executive Order Addresses Post-Dobbs Access to Abortion and Contraceptives). Substantively, the court observed, HHS's guidance also:

As a result, the court concluded, HHS could not now argue that its pharmacy guidance did not relate to abortion.

The court further characterized HHS's pharmacy guidance as another instance of what it termed "agency smurfing." The court borrowed this theory and terminology from the money laundering context, where a launderer breaks down a large transaction into smaller, less noticeable transactions sent to intermediaries (known as smurfs) to avoid banking reporting requirements. In the administrative agency context, the court reasoned, smurfing occurs when an agency issues small pieces of guidance that collectively seek to undercut a disfavored federal policy (for example, a Supreme Court ruling with which the agency disagrees). The agency characterizes the smaller guidance as non-final and therefore not reviewable by a court.

In this case, the court noted, HHS's overall policy goal was to promote access to medication abortion and reproductive health care (despite the Supreme Court's Dobbs ruling). (According to the court, the Biden administration's Securities and Exchange Commission (SEC) also engaged in agency smurfing during 2022 by declining to pursue enforcement actions based on the prior administration's proxy rules.)

As a result, the court concluded that Texas possessed standing to challenge HHS's pharmacy guidance (under the APA) because that guidance required pharmacies to dispense drugs for abortion purposes. This was because:

The district court also rejected HHS's argument that its pharmacy guidance could not be reviewed by the court because it was not a final agency action. In this regard, the court noted that the guidance:

The court therefore rejected HHS's motion to dismiss Texas's claims.

Although this litigation is in its early stages procedurally, it appears possible (if not likely) that the Texas district court will ultimately rule in the State of Texas's favor on its challenge to HHS's pharmacy guidance. That outcome would limit the ability of health plan participants to argue that retail pharmacies have improperly discriminated against them (in violation of ACA Section 1557) by refusing to dispense certain prescription medications related to reproductive health care. For more information, see Abortion and Contraceptives Services for Group Health Plans Toolkit.

In addition, the district court's smurfing theory—if it takes hold elsewhere—could invite similar challenges to other administrative agency guidance that appears to support an administration's larger policy objectives.