On July 26, 2018, a coalition of Democratic state attorneys general sued the Department of Labor to enjoin its new rule on association health plans, which was finalized in June. The Department promulgated the rule in response to an executive order from President Trump, signed in October 2017, that directed various federal agencies to encourage the growth of insurance options outside traditional insurance plans regulated by the Affordable Care Act (“ACA”), such as short-term insurance, health reimbursement arrangements, and association health plans.
Association health plans are sponsored by an association that typically comprises small employers. This matters because the applicability of various ACA consumer protections – such as the requirement to provide essential health benefits – depends upon whether a plan is sold in the individual, small group, or large group market. The ACA provides more protections in the individual and small group markets than in the large group market. Under its prevailing ACA guidance, the federal Centers for Medicare and Medicaid Services (“CMS”) typically have not treated an association as an “employer” for determining whether the small or large group market rules applied. In practice, this meant that an association composed of small employers was subject to small group market rules.
Because CMS’ guidance applies definitions from the Employee Retirement Income Security Act (“ERISA”), which is administered by the Department and not by CMS, the executive order directed the Department to redefine who could be an “employer” under ERISA for the purposes of CMS’ guidance. The Department did so by proposing that associations meeting various tests could be treated as “employers.” This means, in practical terms, that an association offering insurance to small employers that collectively have 500 employees would be treated as a large group market plan with 500 employees, not a multitude of small group market plans. Under the Department’s final rule, an association would have to be organized either along geographic lines (such as a state or metropolitan area) or occupational lines (such as a particular profession, potentially across multiple states). Importantly, associations could include self-employed individuals that fit the association’s criteria; freelance computer coders could, for example, establish an association to offer insurance to other freelance computer coders.
The state AGs’ lawsuit alleges that the Department violated the Administrative Procedure Act in several different ways in promulgating the rule. The common argument across all allegations is that Congress intended, when enacting the ACA, to impose the more permissive large market plan rules only on plans sponsored by large employers in the traditional, common-law sense. The state AGs argue that the Congress did not intend to allow an association without a traditional employment relationship to an employee to act as a large employer, nor to offer insurance to self-employed individuals that would otherwise purchase insurance in the individual market.
Relatedly, the state AGs argue that the importance of the “employer” definition to the ACA renders the rule beyond the Department’s authority to promulgate, because the Department does not interpret or administer the ACA. The Department is tasked with implementing ERISA, upon the definitions of which the ACA relies but, as the state AGs point out, the rule does not change the general definition of the word “employer” in ERISA; it creates a separate interpretation of “employer” that only applies in the context of an association health plan. The state AGs argue this amounts to the Department impermissibly “interpreting” the ACA.
Interestingly, the state AGs are not the rule’s only critics. Several of the key small business advocacy groups that the Trump administration sought to please in enacting the rule forcefully criticized the rule for being too restrictive as to what sort of organization could serve as an “employer.” An earlier proposed draft of the rule would not have required an “employer” to have an organizational purpose outside of providing health insurance. The final rule, by contrast, imposed a requirement that an “employer” organization have some bona fide purpose besides providing health insurance, consistent with long-standing guidance from the Department that preceded the rule.