On November 14, 2019, a three-judge panel of the Court of Appeals for the District of Columbia Circuit (D.C. Circuit)—Judges David S. Tatel, Gregory G. Katsas, and Karen LeCraft Henderson—heard oral argument in a dispute over the validity of a regulation to expand access to association health plans (AHPs). Twelve Democratic attorneys general—led by New York and Massachusetts—challenged the rule as unlawful, and a federal district court judge in the District of Columbia set aside major parts of the rule in March 2019.
The Trump administration appealed the lower court’s decision to the D.C. Circuit, which granted the government’s request for expedited appeal. Briefing was completed in August 2019, and the three-judge panel held a 45-minute hearing on November 14.
During oral argument, the federal government and the states reiterated their respective positions. The government argued that the final rule was within its authority to interpret the Employee Retirement Income Security Act (ERISA) and that the court should defer to its reasonable interpretation. The states argued that the Department’s interpretation was unreasonable under ERISA and violates provisions in the Affordable Care Act (ACA) related to the definition of individual, small group, and large group coverage. The panel seemed particularly interested in the intersection between ERISA and the ACA under the final rule, which agency is tasked with interpreting each statute, and the Department of Labor’s rationale for adopting the rule in the first place.
From here, the D.C. Circuit could reverse or affirm the lower court’s decision. Reversal would mean that invalidated portions of the final rule would be reinstated, and AHPs formed under the rule could resume marketing and enrollment of new members. If the D.C. Circuit affirms the lower court’s decision, much of the final rule would remain invalidated. In either instance, the losing party could ask for en banc review by a full panel of judges on the D.C. Circuit or ask the Supreme Court to hear their appeal.
Given the discussion in oral argument, the D.C. Circuit may narrowly conclude that the Department of Labor’s AHP rule is a reasonable interpretation under ERISA while taking a wait-and-see approach with respect to how HHS will respond in light of the new rule. If HHS ultimately interprets the ACA’s definition of small and large group employers in a manner that is consistent with the new AHP rule (as is expected), there may very well be another round of legal challenges.
Brief Background
Following repeated efforts to repeal major parts of the ACA in Congress in 2017, President Trump issued an executive order in October 2017 that directed federal agencies to expand access to AHPs, short-term plans, and health reimbursement arrangements. The executive order directed the Department of Labor to reconsider its definition of “employer” under ERISA and identify ways to promote AHP formation based on common geography or industry.
Pursuant to the executive order, the Department of Labor issued a new proposed rule in January 2018 and a final rule in June 2018. The final rule did nothing to disturb the regulation of AHPs formed under the agency’s prior interpretations; these “pathway one” AHPs already exist and could continue to exist under the final rule. However, the final rule allowed for new “pathway two” AHPs and made it much easier for an association to be considered a single multi-employer plan under ERISA. As a single multi-employer plan under ERISA, AHPs do not have to comply with many of the ACA’s most significant consumer protections, such as the law’s rating rules and the essential health benefits.
For pathway two AHPs, the DOL relaxed a long-standing “commonality of interest” requirement that associations must exist for a reason other than offering health insurance and, for the first time, allowed working owners to enroll in AHP coverage. The rule also included nondiscrimination protections that prohibit associations from conditioning membership based on a health factor (although not on other factors such as gender, age, geography, and industry).
Prior to the new rule, AHPs were marketed largely under existing ACA rules. Federal regulators adopted a “look through” doctrine that looked at whether the participating individual or employer is obtaining individual, small group, or large group coverage. This means that individual or small group coverage obtained through an association was regulated under the same standards that applied to the individual market or the small group market, respectively. This includes many of the ACA’s most significant consumer protections, such as coverage of preexisting conditions, rating rules, and the essential health benefits package.
More background on the regulation of AHPs, the history of the rule, and comments on the proposed rule are available here.
The District Court
Citing concerns that the rule increases the risk of fraud and harm to consumers and requires states to devote significant resources to preventing that risk, a coalition of 12 Democratic attorneys general challenged the final rule in July 2018. The attorneys general argued that rule is inconsistent with the text and purpose of ERISA and that the goal of the final rule is to undermine the ACA (which the Department of Labor was pursuing by changing long-standing interpretations of ERISA).
In March 2019, Judge John D. Bates of the District of Columbia agreed with the plaintiffs and set aside major provisions of the rule for being inconsistent with ERISA. Judge Bates agreed that the Department had the authority to interpret “employer” under ERISA, but this interpretation was not reasonable given the text and purpose of the law, which is to regulate benefit plans that arise from employment relationships. While some associations can qualify as employers under ERISA, they can do so only if the group or association of employers acts in the interest of employer members.
The Department can interpret what it means for associations to act “in the interest of” employer members for purposes of an AHP, but it cannot go so far as to ignore the statute’s restrictions or long-standing caselaw and prior precedent. Judge Bates concluded that the rule was “clearly an end-run around the ACA” and set aside the rule’s provisions related to working owners and commonality of interest. The rule was then remanded back to the Department of Labor.
Following the ruling, the Department of Labor issued guidance to confirm that state insurance departments continue to have the authority to oversee AHPs and that claims must be paid. This was followed by more guidance in late April when the Department of Labor, in conjunction with the Department of Health and Human Services (HHS) announced a new enforcement stance for AHPs under the new rule. Under this guidance, the DOL and HHS will not take enforcement action for violations that occurred before Judge Bates’ decision so long as the entity made those decisions in good faith reliance on the validity of the AHP rule. The guidance also indicated that HHS would apply the “look through” doctrine noted above when it became time for these plans to be renewed.
Additional guidance was issued in May to confirm that “pathway one” AHPs are not affected by the court’s ruling and can continue to operate and to reaffirm that pathway two AHPs could not market to or enroll new employer members (whether small employers or working owners). HHS intended to adopt the same approach, and the Department of Labor encouraged states to consider a similar non-enforcement policy.
On Appeal
The Trump administration appealed Judge Bates’ ruling without asking for a stay and later asked for an expedited appeal since some consumers already enrolled in new AHPs under the final rule. This request was granted, and briefing was completed in August.
Amicus briefs were filed in support of the AHP rule by state insurance regulators from Montana and Oklahoma; the Restaurant Law Center; 16 Republican state attorneys general or governors; the U.S. Chamber of Commerce and other business organizations; the National Association of Realtors and state realtor associations; and the Coalition to Protect and Promote AHPs. Amicus briefs were filed in support of the states by former Department of Labor officials; former state insurance commissioners and regulators (including eight former presidents of the National Association of Insurance Commissioners); a coalition of medical professionals led by the American Medical Association; members of Congress; a coalition of consumer advocates led by Families USA; the Small Business Majority; and 36 health policy scholars.
Oral Argument
As noted above, the panel was quite interested in the intersection between ERISA and the ACA under the final rule, which agency is tasked with interpreting each statute, and the Department of Labor’s rationale for adopting the rule in the first place. Judge Tatel asked most of the questions, followed by Judge Katsas. To my knowledge, Judge Henderson asked no questions. Surprisingly, the rule’s provisions on “working owners” were not discussed at all even though that new requirement had been a major component of Judge Bates’ decision to strike down the rule. These provisions may have been overlooked in light of the focus on small employers.
In the Interest of Employers
Many of the panel’s questions centered on what it means for an association to act in the interest of its employer members. Questions touched on whether the rule would adequately prohibit and distinguish AHPs from commercial insurers and whether the Department could reasonably adopt a less stringent standard relative to its prior requirements.
The government asserted that its interpretations exceeded what is required under ERISA. It suggested that the rule’s “control” test would be sufficient to satisfy the statutory requirement that an association act in the interest of employer members. (Under the “control” test, the functions and activities of a group or association must be controlled by its members who must control the health plan, in both form and substance, and the association must have a governing body, by-laws, and maintain other legal formalities.) The control test, the government argued, was enough to address concerns about fraudulent associations.
The government characterized other provisions in the rule (including dramatically relaxed standards on whether the association had a substantial business purpose and a commonality of interest among members) as non-essential. These provisions—along with a new nondiscrimination requirement—were referred to as “nice to have” and “icing on the cake.” These requirements help the government distinguish between a commercial venture and an employer-driven venture, but they are not essential. One judge referred to the government’s position as a “belt and suspenders” approach to help screen out problematic commercial insurance arrangements.
The government also argued that the Department was not forestalled from adopting a less stringent interpretation simply because the agency had adopted a more robust interpretation in the past. Requiring the Department to maintain more stringent prior standards for commonality and business purpose requirements was, the government argued, a “fundamental error” of Judge Bates’ opinion.
The attorney for New York emphasized that the ACA not only incorporates ERISA’s definition of “employer.” It also imports ERISA’s definition of “employee” while ignoring Supreme Court precedent and the Department’s own guidance that conclude that “employee” means a direct common law employee of an individual employer. New York argues that this definition prevents the employees of an association’s employer members from being transformed into employees of the association for purposes of determining group size under the ACA. New York described this assumed aggregation principle as a “fatal flaw” to the AHP rule.
Goal and Purpose of the Rule
Where the panel seemed to take more issue with the government’s argument was with the goal and purpose of the rule. This is because even if the Department’s interpretation of “employer” is reasonable, the government still needs a rational explanation for why it adopted the rule.
The Department’s primary rationale for the rule was to make it possible for individuals and small employers to band together in associations to qualify for large group market coverage, thereby avoiding many of the ACA’s individual and small group market protections. Judge Tatel questioned whether the rule was arbitrary and capricious because the Department cannot accomplish its goal under the ACA’s definition of large employer. (Under the ACA, a large employer is generally an employer that employed an average of at least 51 full-time employees in the prior year.) Because an association does not employ employees, Judge Tatel noted, how can its small employer members band together to qualify as a large employer under the ACA?
The government responded that allowing small employers to escape the ACA’s small group market requirements was only one of the rule’s purposes. The government pointed to the benefit of enhanced bargaining power and the ability to “tailor” coverage to each employer’s needs. At least one judge pushed back on this rationale, asserting that each of the cited benefits are related to allowing small employers to participate in the large group market.
The states, on the other hand, argued that the Department is “trying to drive a truck through a very small hole” to rework the ACA. In doing so, the agency attempts to dramatically alter a definition of a much older statute for the singular purpose of allowing small employers to escape ACA regulations. The Department also gave no justifications for the rule based on ERISA; its justifications were entirely based on the ACA.
ERISA Versus The ACA
The government further sidestepped the question about its rationale by noting that HHS, not the Department of Labor, is responsible for interpreting the ACA. As such, the government takes the position that “nothing in the Department of Labor’s rule affects how AHPs, whether created under the old guidance or the new rule, are treated.” HHS has had its own prior interpretations of federal law which are not limited to the definitions under ERISA and have not been challenged. This, the government suggests, means that HHS could adopt its own interpretation of definitions under the ACA and Public Health Service Act that are separate from the Department of Labor.
Given this, the government further argues that HHS’s interpretation is not before the court at this time. The government asks the court to rule only on whether the Department of Labor’s definition of “employer” under ERISA is reasonable while leaving the question of how an “employee” is counted under the ACA for another day. That issue would only be before the court if HHS later adopts a similar interpretation.
The states took issue with this, asserting that this issue is very much before the court now. The attorney for New York pointed to the preamble to the final rule which clearly outlines HHS’s approach. The preamble states that the final AHP rule was “developed in consultation with” HHS and other agencies and that “the final rule will apply solely for purposes of Title I of ERISA and for determining whether health insurance coverage of the AHP is regulated by Public Health Service Act (PHS Act) provisions that apply to the individual, small group, or large group market.”
Judge Katsus pressed New York on this point, noting that this interpretation is not reflected in the regulatory text. While such information might be relevant to whether the rule is arbitrary and capricious, he suggested, an interpretation in the preamble is not before the court and has no bearing on what the rule means. In response, New York argued that the rule’s incorrect interpretative assumption is so central to its future application that it should not be ignored simply because it is only in the preamble rather than the regulatory text. This interpretation, New York argues, is “a necessary part of the reasoning of the rule.” Ignoring it would be part of the “cross-your-fingers-and-hope-it-goes-away school of statutory interpretation” articulated by Judge Henderson in a prior D.C. Circuit decision on a Medicare regulation.
Here, New York emphasizes that the rule redefines “employer” only for the narrow purpose of aggregating small group employers to be treated as large employers for some purposes under the ACA (such as being exempt from covering the ACA’s essential health benefits package) but not others (such as having to comply with the employer mandate). Judge Tatel suggested that the Department of Labor does not have the authority to interpret various ACA provisions so the court should not grant any deference to those interpretations anyway.
Noting that a major purpose of the rule is to allow small employers to band together to escape regulatory burdens of the small group market, Judge Tatel pressed the government on whether the rule’s new interpretations of ERISA would still be desirable if HHS did not adopt a similar position. Put another way, if HHS maintains its “look through” doctrine even if the AHP rule is upheld, would the Department of Labor still want this rule in place under ERISA? The government suggested the answer to that question is yes but acknowledged that it would be challenging for an association to offer coverage to sole proprietors, small employers, and large employers because each market would have separate rules.
The states were pressed on a similar question. Near the end of the hearing, Judge Tatel asked if the states were concerned about the Department’s interpretation of ERISA beyond its impact on the ACA markets. New York responded that the Department unreasonably interpreted ERISA to undermine the ACA. The attorney further noted that “we are here because they are attempting to change the way the Affordable Care Act works.”
Source: Health Affairs