Seyfarth Synopsis: Following years of back and forth, new final rules were published by the Department of Health and Human Services (HHS) on May 6, 2024 reinstituting the Department’s interpretation that the prohibition on discrimination by health programs and activities “on the basis of sex” includes treatments for gender-affirming care. In this post, we explore the rule’s impact on self-funded group health plans. Please see our firm’s Legal Update here for a broader look at the rule.

Background and Key Take-Aways

As summarized below HHS’s Final Rule under Section 1557 would essentially prohibit covered health plans from directly or indirectly discriminating on the basis of gender identity (e.g., limiting or otherwise excluding coverage for gender-affirming care). 

While most employer health plans will not be considered covered entities under the Final Rule (and, as such, will be exempt from many of the rule’s process requirements), employers will likely determine they cannot impose such exclusions or limitations regardless, either by operation of the rule’s impact on their third-party administrator, or due to other Federal laws. 

No Discrimination

When the Affordable Care Act was signed into law in 2010, it contained a provision (Section 1557) that forbids discrimination on the basis of race, color, national origin, sex, age or disability by a health program or activity that is receiving federal financial assistance. 42 U.S.C. Section 18116. HHS was authorized to issue regulations under Section 1557, and started out issuing an RFI in 2013, at the time under the Obama Administration. That process culminated in final regulations issued in 2016 that interpreted the protected category of “sex” to include gender identity.  HHS under the Trump Administration then replaced those final rules with new final rules issued in 2020 that reversed course on the interpretation of “sex”.  When the Biden Administration came into office, HHS issued new proposed rules to include sexual orientation and gender identity under the scope of Section 1557, and those rules were finalized recently – the Final Rule. 

Under Section 1557, covered entities may not restrict a patient’s or participant’s ability to receive medically necessary health care based on one of the protected classes, including “sex.” The Final Rule confirmed “sex” covers gender identity including gender-affirming care, based solely on sex assigned at birth or a person’s gender identity.

Other Requirements

Entities covered by Section 1557 (“Covered Entities”) must:

• Appoint a Section 1557 Coordinator, if they have 15 or more employees
• Implement written policies and procedures, including if they have 15 or more employees a grievance procedure.
• Train relevant employees on the policies and procedures, and document and retain records of the training for at least three years
• Create a Notice of Nondiscrimination as well as a notice regarding access assistance, which must be distributed annually and upon request, and posted in a conspicuous location on the Covered Entity website and physical locations. The notice of access assistance must be in the 15 most common language in a state that the entity is located or does business.  It must also be included in various other notices, including the Covered Entity’s HIPAA Notice of Privacy Practices, Section 1557’s Notice of Non-Discrimination, and notices of denial of benefits, EOBs and appeal rights. Sample language for the Notices can be found at www.hhs.gov/1557

Covered Entities

The guidance provides a new definition of “Health Program or Activity” which broadly includes all operations of an entity that is principally engaged in providing or administering health services or health insurance coverage. The Final Rule specifically provides the following are Covered Entities:

• Health plans (but only if they receive any federal financial assistance from HHS)
• Health programs or activities administered by HHS
• Health programs or activities administered by a Title I entity, including State Exchanges and Federally-Facilitated Exchanges

Importantly, the Final Rule also reiterates that Section 1557 does not include employers with regard to their employment practices, including the provision of health benefits (but as discussed below, the definition could potentially encompass an employer’s group health plan). 

HHS was well aware of the potential legal challenges the Final Rule would face and was careful to state that it would not be interpreted in a manner that would violate Federal protections for religious freedom and conscience. This discussion did not stop an immediate suit by a Catholic Hospital system and two Florida state agencies.

Group Health Plans

Group health plans (a legal term generally characterizing employer-sponsored health plans) clearly are “health plans” (as that term is used under Section 1557). So to the extent a group health plan receives Federal financial assistance, it would be subject to Section 1557. In our experience, this is uncommon and typically would only apply in the context of a retiree benefit receiving a CMS retiree drug subsidy or structured as an Employer Group Waiver Plan (EGWP). Most employer-sponsored group health plans offered to active employees would not be covered by Section 1557. Moreover, insured group health plans will almost certainly be covered where they are Medicare supplemental arrangements.

HHS reiterates the concept found in ERISA that group health plans are separate entities from employers and plan sponsors. So, whether Section 1557 will apply will be analyzed separately as to each.  Even where the employer is not subject to Section 1557, the group health plan might be (and vice versa). HHS states in the preamble “We decline to take the position that a group health plan is an indirect recipient of Federal financial assistance whenever the plan sponsor receives Federal financial assistance.”

Third Party Administrators

Much has already been made about the Final Rule’s approach to regulating third party administrators (TPAs) for self-funded group health plans. A TPA may be a Covered Entity where it is affiliated with a health issuer (which is commonly the case), as most health insurers receive some form of CMS funding. A covered TPA may be held responsible for:

• A violation of 1557 where the TPA is involved in the plan design
  • “OCR does not intend to enforce this rule against a [TPA] for a plan design that it did not design and over which it has no control. Where the discriminatory terms of the plan originated with the covered [TPA] rather than with the plan sponsor, the [TPA] could be liable for the discriminatory design feature under section 1557.”
  • Note, HHS indicated in the preamble that even if the TPA did not design the plan, OCR may refer the matter to EEOC or DOJ for investigation under other laws.  Notably, the EEOC has jurisdiction over Title VII enforcement, which does apply directly to most employers and similarly prohibits discrimination on the basis of sex.   
• Administration of a neutral plan term in a manner that could violate 1557
  • HHS warns in the preamble “… if a covered [TPA] applies a plan’s neutral, nondiscriminatory utilization management guidelines in a discriminatory way against an enrollee, OCR will proceed against the covered [TPA] as the entity responsible for the decision.”

Aside from the guidance above, HHS cites to two recent federal cases where TPAs were held liable for a violation of Section 1557 based on a discriminatory feature in a self-funded plan. The preamble provides insufficient context to assess whether the citations to these cases are intended to constitute an endorsement of their rationale. 

Practical Impact

Many employer plans simply adopt the benefit package designed and structured by their TPA.  Within that context, the final rule appears to indicate the TPA in such an instance is likely to be considered to be involved in the plan design, and therefore may be responsible for any 1557 violations by administering that design (even if the group health plan itself is not a Covered Entity). Moreover, given the regulatory ambiguity and recent case law in this space, plan sponsors may see TPAs refusing to administer self-funded plans that seek to exclude treatments for gender-affirming care.  

Other Legal Constraints on Self-Funded Plans

Note that Section 1557 may not be the only constraint on the design and administration of plans regarding coverage for gender affirming care. As ERISA does not preempt other federal laws, plan sponsors should be aware of the implications under Title VII of the Civil Rights Act of 1964 (Title VII), the Americans with Disabilities Act of 1990 (ADA), and the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA).

In 2020, the United States Supreme Court found in Bostock that “sex” as used in Title VII includes gender identity. 

More recently, the Fourth Circuit ruled in their 2022 decision in Williams v Kincaid that although the ADA explicitly excludes certain conditions from being a covered disability (i.e., transvestism, transsexualism, and gender identity disorders), gender dysphoria (as a distinct condition) may be a covered disability under the ADA. SCOTUS denied cert. So that decision stands in that jurisdiction. 

Further, the MHPAEA prohibits plans from imposing non-quantitative treatment limitations on mental health conditions unless such limitations are in parity with those imposed on medical conditions. Most commonly recognized medical classification systems would treat gender dysphoria as a mental health condition, meaning heightened protections apply.