In our blog post of July 10, 2018, we discussed the key elements of the Final Rule issued on June 21, 2018 with respect to Association Health Plans (AHPs). As we noted, the expansion of ERISA’s definition of an employer and the other elements of the Final Rule designed to expand insurance opportunities for small employers, including sole proprietorships had been opposed by a variety of interests, including the Attorneys General of a number of States, some of whom promised litigation to stop the implementation of the Final Rule prior to the potential effective date of September 1, 2018 for fully insured AHPs.

The States’ Complaint

On July 26, 2018, those States (and the District of Columbia) seeking to challenge the Final Rule did so in an action filed in the D. C. Federal District Court. State of New York et al. v. United States Department of Labor et al, Civ. Action 18-1747 [Case1:18-cv-01747], D.C. D.C, filed July 26, 2018. The plaintiff States are New York, Massachusetts, DC, California, Delaware, Kentucky, Maryland, New Jersey, Oregon, Pennsylvania, Virginia, and Washington.

The overall policy assertion made in the complaint is that the true effort in the Final Rule is to “undermine” and “dismantle” the Affordable Care Act (ACA). This is alleged to occur as a result of “manipulation of [ERISA]” to shift a larger number of small employers into the large group insurance market, “because the ACA’s core protections do not apply to that market.” From plaintiffs’ perspective, the new AHPs created under the Final Rule would lack the incentives and protections provided under the existing ERISA framework, which would result in less coverage and destabilizing impact on both the individual and small group markets. As plaintiffs see it, “the Final Rule would return the country to the pre-ACA world where people with pre-existing conditions will lack federal protections that enable …quality, affordable health insurance.”

The Legal Allegations

From a legal perspective, the action arises under the provisions of the Administrative Procedure Act which allows challenges to rule-making on the basis that the adoption of the rule was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C, 706(2)(A). Plaintiffs make five claims that this is the case.

Plaintiffs’ first claim is that the overall goal of applying the same standards to large and small employers violates the provisions of the ACA, and the ACA’s overall structure, by allowing AHPs to be treated as “large employers” for some purposes, but not for purposes of the shared responsibility protection. That protection provides that large employers (defined as any company or organization that has an average of at least 50 full-time employees) are not offering health coverage if they fail to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. Thus, the assertion is that by allowing large employer treatment for otherwise small employers, but not requiring these entities to meet the coverage requirements, there is created a new plan outside of the ACA limitations and requirements.

The second claim is that the treatment of self-employed individuals (a “working owner”), with no other employees, as both an employer or an employee is contrary to ERISA as well as long settled case law. Citing the ERISA definition of employer —  “such term shall include only employers of two or more employees” [42 U.S.C. § 300gg-91(g)(6)]—the contention is that this proposed treatment simply is inconsistent with the statutory definition. Thus, a working owner, without other employees could not be an employer capable of being in an association of employers creating an AHP.

One of the major changes in the Final Rule was to change the standards for associations of qualifying employers able to offer group insurance. Under the Final Rule, it would be acceptable for an association to have the primary goal of selling insurance, as long as there was some other type of linkage forming the “commonality of interest.” The Final Rule was not specific in terms of what might be sufficient as to what that might be, but noted that the applicable nexus might now be geographic or simply in the same “trade, industry, line of business or profession”.

Plaintiffs’ third claim is that the new Final Rule standard is simply insufficient to meet the necessary and established commonality test under ERISA, and in effect, allows organizations with non-substantive relationships other than the sale of insurance, to meet the necessary test.

The fourth and fifth claims are more general in nature. The Plaintiffs claim that the Final Rule is in excess of the statutory authority because there is nothing in the Final Rule that is consistent with a grant of authority to implement ERISA, as the effort here is to make a change to the definition of AHPs, to which Congress itself has repeatedly objected. [It is worth noting that similar types of arguments were made by 29 States seeking to prevent prior Obama Administration efforts in a variety of other fields, for example in regulatory efforts affecting the coal industry.] Finally, plaintiffs’ claim that the consideration of the Final Rule failed to appropriately consider the history of abuse in the era of AHPs or other multiple employer welfare plans (MEWAs) which were not subject to stringent oversight by many states as such plans oftentimes claimed, incorrectly, that ERISA pre-empted state regulation.

What’s Next

In the ordinary course, the Federal defendants will have 60 days to respond to the Complaint. Assuming there is not an effort to preliminarily enjoin the implementation date, and that the case will be resolved ultimately on cross-motions for summary judgment, it is likely the case will not be resolved at the District Court level for 6-9 months.

From the perspective of those contemplating creating an AHP which was only viable under the provisions of the Final Rule, and which is enabled by appropriate state legislation or regulations, the question is whether to move forward with the investment required for creation and investment in this vehicle. That analysis should be based not just on a view of the likelihood of success of the Federal Court challenge, but also of the likelihood that the state of residence of a new AHP will have the necessary enabling legislation. That is a state by state analysis, and at this point it appears that at least New York, Massachusetts, Vermont and Pennsylvania have indicated that they will not allow the creation of AHPs for the sole purpose of buying insurance through the large group market.