ACA Section 1557 Litigation Casts Doubt on Status of Current 1557 Regulations

Practical Law Legal Update w-014-7607 (Approx. 5 pages)

ACA Section 1557 Litigation Casts Doubt on Status of Current 1557 Regulations

by Practical Law Employee Benefits & Executive Compensation

Background

The participants in this case, two transgender women, were employed by the State of Wisconsin and covered under group health plans for state employees. Both participants:

Were assigned male identities at birth, but self-identified as female.
Were diagnosed with gender dysphoria, a condition characterized by incongruence between an individual's gender identity and the individual's sex assigned at birth (see Practice Note, Nondiscrimination in Health Programs and Activities Under the ACA (Section 1557): Litigation Involving Gender Identity).

The plans excluded coverage for gender transition-related services. As a result, the plans denied coverage for sex reassignment surgery for both participants. However, in a complaint filed in federal district court, the participants claimed that the plans' exclusion violated sex discrimination prohibitions under Title VII of the Civil Rights Act of 1964 (Title VII), Section 1557 of the Affordable Care Act (ACA), and other statutes. The participants named as defendants (among other individuals and entities):

An employee trust fund (ETF) entity that was responsible for administering the state's plans.
A related (but autonomous) board that established policy and was responsible for the decision to exclude gender transition-related care from coverage under the plans.

The defendants moved to dismiss or, alternatively, to stay.

Outcome

The district court granted in part and denied in part the defendants' motion. After addressing a threshold issue involving standing, the district court:

Dismissed without prejudice the ACA Section 1557 claims against the board.
Declined to stay the ACA Section 1557 claim against the ETF entity.
Declined to dismiss the Title VII claims against the board and the ETF entity.

ACA Section 1557

ACA Section 1557 prohibits individuals from being excluded from participation in, being denied the benefits of, or being subject to discrimination under any "health program or activity" that receives federal financial assistance (including grants, loans, credits, and subsidies) on specified grounds, including sex discrimination. In 2016, HHS issued final regulations that, among other things, defined sex discrimination to include discrimination based on gender identity (see 81 Fed. Reg. 31375 (May 28, 2016)).

For analysis of ACA Section 1557, see Practice Note, Nondiscrimination in Health Programs and Activities Under the ACA (Section 1557).

Participants' Section 1557 Claims

Regarding the ACA Section 1557 claims, the ETF entity and board defendants argued that:

The participants failed to allege that the board received federal funds (a prerequisite for Section 1557 liability; see Practice Note, Nondiscrimination in Health Programs and Activities Under the ACA (Section 1557): Federal Financial Assistance).
The ACA claims should be stayed pending the outcome of a lawsuit challenging the HHS regulations and related rulemaking proceedings involving the regulations.

Receipt of Federal Funds

Agreeing with the defendants, the district court concluded that the participants failed to sufficiently allege that the board received federal funds. In doing so, it rejected the participants' argument that the board should be considered a recipient of federal funds merely because it was part of the ETF entity, which received federal funds. The court dismissed without prejudice to permit the participants to allege that the board actually received federal funds.

Stay of the ACA Claims

The defendants also requested a stay of the ACA claims pending the outcome of Franciscan Alliance Inc. v. Burwell, which involved a challenge to HHS's May 2016 final regulations implementing Section 1557 (227 F. Supp. 3d 660 (N.D. Tex. 2016)). In Franciscan Alliance, the district court issued a preliminary injunction enjoining HHS from enforcing the final regulations' prohibition against discrimination on the basis of gender identity (see Practice Note, Nondiscrimination in Health Programs and Activities Under the ACA (Section 1557): Nationwide Injunction of Some Section 1557 Requirements).

In support of their request for a stay, the defendants also noted that the Trump administration has indicated that it will modify or eliminate the challenged regulations.

In denying the motion for a stay, the district court concluded:

The participants' claims relied on the Section 1557 statute itself, rather than the Section 1557 final regulations.
A decision in the Franciscan Alliance litigation would not be controlling as to the participants' claims.
A stay would not simplify the issues in question or reduce the parties' litigation burden.

Title VII Claims

Declining to dismiss the Title VII claims, the district court found that the participants sufficiently alleged that:

The ETF entity discriminated against transgender persons, even though the board made the policy decision.
The plan administrator and board were "employers" under Title VII (see Practice Note, Discrimination under Title VII: Basics: Definition of Employer).

Practical Impact

Aside from underscoring the increasing prevalence of gender dysphoria claims under Section 1557 and Title VII, this case is notable for statements attributed to the defendants addressing the possible fate of HHS's May 2016 final implementing regulations under 1557. As noted, the defendants indicated to the court their belief that the Trump administration may either revise or altogether eliminate the Section 1557 final regulations. Although the decision does not offer further explanation concerning the regulations' status, HHS would presumably need to issue additional proposed regulations or other guidance as a first step in eliminating or significantly scaling back the existing regulations. The participants in this litigation also appear to have contemplated new regulations in the 1557 space, and argued that their claims are based on the Section 1557 statute and therefore would not "rise and fall" with the existence or enforceability of the current Section 1557 regulations.

ACA Section 1557 Litigation Casts Doubt on Status of Current 1557 Regulations | Practical Law