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The ERISA Edit: Fourth Circuit Addresses Constitutionality of Gender-Affirming Care Coverage Exclusions

Employee Benefits Alert

Fourth Circuit Holds That State Health Plan Exclusions Violate Equal Protection Clause

On April 29, 2024, a divided Fourth Circuit held in an 8-6 en banc decision that because two state health plans excluded from coverage certain treatments for gender dysphoria, the plans violated the Equal Protection Clause of the Constitution's 14th Amendment. See Kadel v. Folwell, No. 22-1721 (4th Cir. April 29, 2024). The plans cover the treatments for certain diagnoses but bar coverage for a diagnosis unique to transgender patients. According to the majority, the plans discriminated on the basis of sex and gender identity and failed to meet the heightened level of scrutiny required to constitutionally justify such discrimination. 

The Fourth Circuit's proceedings consolidated a case originating in a North Carolina district court and another case from a West Virginia district court. In both cases, summary judgment had been entered in favor of the plaintiffs, transgender individuals denied coverage for healthcare prescribed for their gender dysphoria diagnoses. The North Carolina court found that a state health plan, which excluded from coverage "[t]reatment or studies leading to or in connection with sex changes or modifications and related care," violated the Equal Protection Clause. In West Virginia, the district court found that the state Medicaid program, which excluded coverage for "transsexual surgery," was likewise unconstitutional and also violated the federal Medicaid Act and the federal Affordable Care Act (ACA). In both cases, the states were enjoined from enforcing the coverage exclusions.

On appeal, the states' principal argument was that the exclusions restricted coverage based on diagnosis, not suspect class – i.e., the exclusions prevented all patients from receiving coverage for excluded treatments based on a diagnosis of gender dysphoria, regardless of the sex or gender identity of the individual patient. The Fourth Circuit rejected the states' argument, holding that it "elides common sense and is inconsistent with Supreme Court precedent about how to approach equal-protection analyses," which focuses on "the group for whom the law is a restriction, not the group for whom the law is irrelevant."

First, the Court determined that the plans' exclusions were facially discriminatory:

  • As to gender identity, the Court opined that, "gender dysphoria is simply the medical term relied on to refer to the clinical distress that can result from transgender status." Because the diagnosis served as a direct proxy for transgender identity, the plans facially discriminated on the basis of transgender identity by discriminating on the basis of the diagnosis of gender dysphoria. 
  • As to sex, the court found that coverage for certain surgeries, such as breast reconstruction, are provided only to people assigned female at birth. The Court found that this was "textbook sex discrimination," in that it "condition[s] access to these surgeries based on a patient's sex assigned at birth."

Second, the Fourth Circuit concluded that the exclusions did not pass constitutional muster. The court applied "intermediate scrutiny," which requires that the government demonstrate that a sex-based classification "serves important governmental objectives and that the discriminatory means employed are substantially related to the achievement of those objectives." The Court rejected the states' cost-based argument, finding such a justification to be "a non-starter." In addition, although the Court acknowledged that "[p]rotecting public health from ineffective medicine" is an important government interest, it did not agree that the states had shown that treatments for gender dysphoria were so ineffective as to justify the blanket exclusions at hand.

The majority then affirmed the district courts' remaining findings. It upheld the North Carolina court's evidentiary rulings relating to the inclusion and exclusion of certain expert testimony and affirmed the West Virginia court's class certification. The Fourth Circuit also agreed with the West Virginia court that the state Medicaid program's exclusion violated the ACA's anti-discrimination mandate (for the same reason it violated the Equal Protection Clause) and the Medicaid Act (because the exclusion did not meet that statute's "availability and comparability requirements" to categorically deny medically necessary treatment).

Multiple dissents were filed in the case. The principal dissent was joined, at least in part, by all six dissenting judges. It opined that "North Carolina and West Virginia do not target members of either sex or transgender individuals…. They instead condition coverage on whether a patient has a qualifying diagnosis. Anyone—regardless of their sex, gender identity, or combination thereof—can obtain coverage for these services if they have a qualifying diagnosis." While the principal dissent agreed with the majority that discrimination based on transgender status is necessarily sex discrimination based on the Supreme Court's reasoning in Bostock v. Clayton County, 590 U.S. 644 (2020), it found no such discrimination in this case, where coverage for certain treatments hinged on the presence or absence of a qualifying diagnosis. Two additional dissents argued, respectively, that the majority opinion announced a "novel unenumerated right" and that it ignored genuine district court violations of the Federal Rules of Evidence by excluding certain expert testimony and treating the medical community's acceptance of various gender-affirming care treatments as fact.

North Carolina and West Virginia will almost certainly appeal the Fourth Circuit's decision to the Supreme Court, which has not yet weighed in on the constitutionality of state restrictions on gender-affirming care. In the meantime, the Fourth Circuit's decision is binding in Maryland, Virginia, West Virginia, North Carolina, and South Carolina, and its reasoning – both the majority and the dissents – will influence other courts as they grapple with similar issues involving both government-sponsored and private-employer plans.

DOL Rescinds 2018 Regulatory Amendments for Association Health Plans 

Also on April 29, the U.S. Department of Labor (DOL) issued a final rule rescinding in their entirety the 2018 amendments to 29 C.F.R. § 2510.3-3 and 29 C.F.R. § 2510.3-5 that had expanded the types of multiple employer welfare arrangements that could qualify as single-employer, ERISA-covered association health plans (AHPs), known as "Pathway 2 AHPs." Pathway 2 AHPs that qualified as large market group health plans were not subject to many of the market reforms that the ACA imposed on individual coverage and small employer plans. The Trump administration touted Pathway 2 AHPs as a way small employers and business owners could access affordable healthcare, whereas the Biden administration, when rescinding the rule, emphasized the adverse effect the 2018 rule had on ACA risk pools and on employees who risked being underinsured by Pathway 2 AHPs. 

Both the 2018 rule and this week's final rule focused on what it means to be an "employer" under ERISA. According to DOL:

The 2018 AHP Rule reflected a substantial departure from the Department's longstanding pre-rule guidance on the definition of "employer" under ERISA. The 2018 AHP Rule struck the wrong balance between ensuring a sufficient employment nexus and enabling the creation of AHPs. The employment relationship is at the heart of what makes an entity a bona fide group or association of employers capable of sponsoring an AHP, and of what separates bona fide employer associations from commercial ventures aimed at selling insurance to unrelated individuals and employers. The approach taken in the 2018 AHP Rule does not comport with the better reading of the statute because it goes too far in disregarding ERISA's focus on employment-based relationships. The pre-rule guidance rightly insisted on the existence of an employment relationship and on a common employment nexus between entities participating in a bona fide employer association. By departing from these standards, in the 2018 AHP Rule, the Department undermined ERISA's employment-based focus and wrongly treated as "employers" entities whose primary purpose was the marketing of health benefits to unrelated employers and individuals.

The rescission of the 2018 rule leaves in place the pre-rule guidance governing AHPs. DOL stopped short of codifying that guidance and left untouched a similar association retirement plan rule from 2019. DOL indicated it may revisit both topics in future rulemaking.

DOL Rejects Recommendations to Update Target Date Fund Guidance

On April 29, 2024, the Government Accountability Office (GAO) released a report on the performance and risk of the nearly $3 trillion invested in target date funds (TDFs) held by defined contribution plans. TDFs are the most popular investment option for 401(k) plan participants, driven in part by the fact that many plan sponsors automatically enroll participants in these funds.

In its report, dated March 28, 2024, the GAO cites the challenges identifying and understanding disclosures for collective investment trusts and recommends that DOL update its 2013 guidance for plan sponsors to reflect recent developments, including the use of collective investment trusts "and differences between 'to' and 'through' TDF glide paths." GAO also recommends that DOL update its 2010 guidance for plan participants on the selection of TDFs and the use of collective investment trusts.

According to the report, DOL disagreed with the GAO and, through officials, stated that its guidance documents are "balanced and provide basic information" for improving retirement outcomes regardless of investment structure. DOL said it will continue to monitor the TDF marketplace for potential concerns, adding that its ongoing review of participant disclosures under the SECURE 2.0 Act will include "special attention to any ERISA disclosure requirements that are specific to TDFs."

Upcoming Speaking Engagements

Joanne will speak at the American Bar Association Joint Committee on Employee Benefits (JCEB) CLE program "ERISA: Beyond the Basics" on May 7 and at the American Staffing Association 2024 Staffing Law & Compliance conference on May 16. She will also co-present the Strafford webinar "ERISA Covered Health and Welfare Plan Administration: Compliance, Fiduciary Liability, DOL Enforcement Actions" on May 14.

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