United States District Court, District of Columbia
STATE OF NEW YORK, et al. Plaintiffs,
v.
UNITED STATES DEPARTMENT OF LABOR, et al. Defendants.
MEMORANDUM OPINION
JOHN
D. BATES UNITED STATES DISTRICT JUDGE.
Eleven
states and the District of Columbia have sued the Department
of Labor (“DOL”), [1] alleging that its final rule
interpreting the definition of “employer” in the
Employee Retirement Income Security Act of 1974
(“ERISA”), 88 Stat. 829, 29 U.S.C. § 1001 et
seq., is unlawful under the Administrative Procedure Act
(“APA”), 5 U.S.C. § 706. DOL's
interpretation of the term “employer, ” found at
Definition of “Employer” Under Section 3(5) of
ERISA-Association Health Plans, 83 Fed. Reg. 28, 912 (June
21, 2018) (hereinafter “Final Rule”) (codified at
29 C.F.R. pt. 2510), A.R. at 1-53, [2] impacts the treatment of
certain healthcare plans under both ERISA and the Patient
Protection and Affordable Care Act (“ACA”), Pub.
L. No. 111-148, 124 Stat. 119 (2010).[3] The States charge that
DOL's Final Rule stretches the definition of
“employer” beyond what ERISA's text and
purpose will bear. For the reasons that follow, the Court
agrees.
ERISA
governs employee benefit plans arising from employment
relationships. It provides that some employer associations
acting “in the interest of” employer members are
sufficiently employer-like to fall within the statute's
scope. Health plans offered by these associations may qualify
as single ERISA plans, a designation that confers regulatory
advantages under the ACA. For decades, DOL has interpreted
these provisions narrowly so as to allow only so-called
“bona fide associations” with close economic and
representational ties to their employer members to qualify as
“employers” under the statute.
In
2018, DOL abruptly reversed course, issuing the Final Rule
challenged in this case. The Final Rule allows virtually any
association of disparate employers connected by geographic
proximity to qualify as single ERISA plans. These
associations no longer have to be viable apart from offering
an association health plan (“AHP”) and may form
solely for the purpose of creating an AHP. In addition, the
Final Rule brings sole proprietors without any employees
within ERISA's scope by counting them as both
“employers” and “employees.” Because
the ACA defines terms key to its implementation-including
“employer” and “employee”-according
to the definition of these terms in ERISA, the Final Rule
expands AHPs in a way that allows small businesses and some
individuals to avoid the healthcare market requirements
imposed by the ACA.
The
Final Rule is clearly an end-run around the ACA. Indeed, as
the President directed, and the Secretary of Labor confirmed,
the Final Rule was designed to expand access to AHPs in order
to avoid the most stringent requirements of the ACA. Exec.
Order 13, 813, 82 Fed. Reg. 48, 385 (Oct. 12, 2017), A.R.
6970; Final Rule, 83 Fed. Reg. at 28, 912 (citing Executive
Order); see also Alexander Acosta, A Health Fix
for Mom and Pop Shops, Wall St. J., June 18, 2018. But
equally important for the analysis that follows, the Final
Rule does violence to ERISA. The Final Rule scraps
ERISA's careful statutory scheme and its focus on
employee benefit plans arising from employment relationships.
It purports to extend ERISA to cover what are essentially
commercial insurance transactions between unrelated parties.
In short, the Final Rule exceeds the statutory authority
delegated by Congress in ERISA. For the reasons that follow,
the Final Rule's provisions defining
“employer” to include associations of disparate
employers and expanding membership in these associations to
include working owners without employees are unlawful and
must be set aside.
BACKGROUND
Statutory
schemes created by ERISA and the ACA shape the content and
context of the Final Rule. First, therefore, it will help to
describe relevant parts of ERISA and the ACA, explain the
structure and function of the Final Rule, and set the stage
for the provisions challenged in this case.
I.
ERISA AND THE ACA
ERISA
is the key statute at issue in this case. It regulates
employee benefit plans, including welfare plans and pension
plans, arising out of employment relationships. Congress
enacted ERISA in 1974 “following almost a decade of
study[]” of employment benefits and pension systems and
after making “detailed findings which recited, in part,
‘that the continued well-being and security of millions
of employees and their dependents are directly affected by
[employee benefit] plans.'” Nachman Corp. v.
Pension Benefit Guarantee Corp., 446 U.S. 359, 361-62
(1980) (quoting 29 U.S.C. §1001(a)). ERISA states that
its purpose is to address the “growth in size, scope,
and numbers of employee benefit plans” across the
country and to protect “the interests of participants
in employee benefit plans and their beneficiaries.” 29
U.S.C. § 1001(a)-(b).
The ACA
is a statutory scheme that regulates health insurance markets
more broadly. The ACA, among other things, establishes
standards that apply differently to individual, small-group,
and large-group health insurance markets. Congress targeted
the individual and small-group healthcare markets for special
heightened protections. Individual and small-group healthcare
plans are required by the ACA to provide ten essential health
benefits to insured individuals. 42 U.S.C. §§
300gg-6, 18022(a). Large-group market participants face a
choice: They may decline to provide these essential health
benefits and instead pay a tax-the so-called “employer
shared responsibility payment.” I.R.C. § 4980H, 26
U.S.C. § 4980H. Congress differentiated small employers
from large employers-for the purpose of placing them in
small- or large-group markets-by the number of employees
these employers employed. See 42 U.S.C. §
300gg-91(e)(2).
The ACA
absorbs key ERISA definitions into the ACA statutory scheme.
Under ERISA, an employer is “any person acting directly
as an employer, or indirectly in the interest of an employer,
in relation to an employee benefit plan; and includes a group
or association of employers acting for an employer in such
capacity.” ERISA § 3(5), 29 U.S.C. § 1002(5).
An employee under ERISA is simply “any individual
employed by an employer.” ERISA § 3(6), 29 U.S.C.
§ 1002(6). The statutory definitions of
“employer” and “employee” in ERISA
have remained unchanged since ERISA's enactment in 1974.
Congress
codified many of the ACA's key provisions in the Public
Health Service Act (“PHS Act”), 42 U.S.C. §
201 et seq. At the time that Congress passed the ACA, the PHS
Act already defined the term “employer” as having
“the meaning given such term under [ERISA § 3(5)],
except that such term shall include only employers of two or
more employees, ” and defined “employee” as
having the meaning given to the same term under ERISA §
3(6) without exception. 42 U.S.C. §§
300gg-91(d)(5)-(6).[4] Congress preserved these definitions of
“employer” and “employee” when it
passed the ACA, and thus ERISA's definitions of those
terms were incorporated into the ACA's statutory scheme.
II.
Association Health Plans and the Final Rule
AHPs
are group health plans offered through an association of
employers, such as an industry group. DOL has always
permitted some AHPs meeting stringent criteria to
qualify as a single ERISA employee benefit plan, as if the
plan was sponsored by a single employer for its employees.
Under
DOL's longstanding sub-regulatory guidance, only
so-called “bona fide associations” could sponsor
an AHP under ERISA. Bona fide associations had to display
certain employer-like characteristics, because “the
Department's regulation of employee benefit plans [was]
focused on employment-based arrangements, as contemplated by
ERISA, rather than merely commercial insurance-type
arrangements that lack the requisite connection to the
employment relationship.” Final Rule, 83 Fed. Reg. at
28, 914. The “overall structure” of ERISA
“contemplates employment-based benefit arrangements,
” and since these AHPs qualify as ERISA plans, they had
to fit within an employment context, notwithstanding the fact
that they were sponsored by employer associations rather than
directly by single employers. Id. at 28, 913.
Of most
relevance to the issues raised in this case, DOL's
sub-regulatory guidance analyzed bona fide associations based
on three criteria: “(1) Whether the group or
association [was] a bona fide organization with
business/organizational purposes and functions unrelated to
the provision of benefits; (2) whether the employers share[d]
some commonality and genuine organizational relationship
unrelated to the provision of benefits; and (3) whether the
employers that participate[d] in a benefit program, either
directly or indirectly, exercise[d] control over the program,
both in form and substance.” Id. at 28, 914.
This opinion will refer to these three criteria as
requirements for purpose, commonality of interest, and
control, respectively.
Passage
of the ACA raised the regulatory stakes. The majority of
AHPs-which were not sponsored by associations qualifying
under DOL's bona fide association test-were
“treated as the mechanism by which each individual
employer obtains benefits and administrative services for its
own separate plan.” Id. (citing CMS Ins.
Standards Bulletin, “Application of Individual and
Group Market Requirements under Title XXVII of the Public
Health Service Act when Insurance Coverage Is Sold to, or
through, Associations, ” Sept. 1, 2011, at 1-3, A.R. at
2211-13). In other words, the fact that the insurance came
from an AHP did not matter for purposes of determining which
ACA market standard applied. A small employer purchasing
coverage through an AHP had to meet the ACA's
requirements for small employers, individuals purchasing
coverage through an AHP had to meet the ACA's individual
market requirements, and so on. Id. Most AHPs
providing coverage to individuals and small groups, then, had
to satisfy the ACA's essential health benefits
requirement. However, in the “rare instances” in
which AHPs were sponsored by associations meeting DOL's
bona fide association criteria, the “association
coverage [would be] considered a single group health plan,
” and the number of total employees of all employer
members would be counted to determine whether small or large
group rules applied. CMS Ins. Standards Bulletin at 3,
A.R. at 2213. If a bona fide association served as
“employer” of “an average of at least 51
employees” over the past year, then the bona fide
association would qualify as a “large employer, ”
and its AHP would be subject to “large group
market” rules. 42 U.S.C. §
300gg-91(e)(2)-(3).[5]Hence, AHPs sponsored by these bona fide
associations avoid the more comprehensive requirements for
healthcare coverage in the individual and small group
markets.
The
Final Rule loosens the requirements for associations to
qualify as ERISA-covered “bona fide associations,
” thereby allowing the AHPs they sponsor to qualify as
single ERISA plans and avoid the ACA's individual and
small-group market requirements. President Trump prompted DOL
to undertake this change. In October 2017, President Trump
issued an Executive Order titled “Promoting Healthcare
Choice and Competition Across the United States, ”
which directed DOL to “[e]xpand[] access to AHPs”
by “allow[ing] more small businesses to avoid many of
the [ACA's] costly requirements.” Exec. Order 13,
813, 82 Fed. Reg. at 48, 385; see also Final Rule,
83 Fed. Reg. at 28, 912 (citing Executive Order). More
specifically, the Executive Order suggested that DOL
“expand[] the conditions that satisfy the
commonality-of-interest requirements” in DOL's
then-existing guidance and “consider ways to promote
AHP formation on the basis of common geography or
industry.” Exec. Order 13, 813, 82 Fed. Reg. at 48,
386.
DOL did
as instructed. In June 2018, DOL promulgated the Final Rule,
which significantly relaxed two of the three key criteria for
qualifying as a bona fide association: the commonality of
interest and purpose requirements. See Final Rule,
83 Fed. Reg. at 28, 912. Associations can satisfy the new
“commonality of interest” test if their members
are either in the same trade or business or in the same
geographic area (the same state or same metropolitan area,
even if that area includes multiple states). 29 C.F.R. §
2510.3-5(c). Before the Final Rule, “geography, alone,
was not sufficient to establish commonality.” Final
Rule, 83 Fed. Reg. at 28, 928 n.40. The Final Rule also
allows an association to qualify as a “bona fide
association” even if its primary purpose is “to
offer and provide health coverage to its employer members and
their employees” so long as it has “at least one
substantial business purpose” unrelated to the
provision of health care. 29 C.F.R. § 2510.3-5(b)(1).
This represents a “departure from” DOL's
prior guidance, which required that associations be viable
organizations even without providing an AHP. Final Rule, 83
Fed. Reg. at 28, 917.
The
Final Rule also adds an entirely new provision allowing
working owners (i.e., sole proprietors) without any
common-law employees to “qualify as both an employer
and employee” for two key ERISA purposes. 29 C.F.R.
§ 2510.3-5(d). First, working owners may join bona fide
associations of employers, including for purposes of
“the requirement . . . that each employer member of the
group or association participating in the group health plan
must be a person acting directly as an employer of one or
more employees who are participants covered under the
plan.” Id. Second, working owners qualify as
both employer and employee for purposes of satisfying the
requirement that AHPs-as ERISA health benefit plans-may only
offer health coverage “to employer members through the
association” for qualifying employees and
beneficiaries. Id. The effect of this provision is
that working owners with no employees may join these newly
expanded bona fide associations and receive health benefits
through the association's AHP, a single ERISA employee
benefit plan. Under DOL's prior guidance, “working
owners without common law employees were not permitted to
participate” in an AHP. Final Rule, 83 Fed. Reg. at 28,
928 n.40.
Although
the Final Rule primarily interprets ERISA, the preamble to
the Final Rule describes at least one other important
implication of this new interpretation under the ACA. The
preamble notes that the definition of 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 the . . . PHS Act . . . provisions that apply
to the individual, small group, or large group market, and
not, for example, the purposes of taxation under the Internal
Revenue Code.” Id. at 28, 915. In other words,
DOL indicates that the Final Rule permits AHPs to qualify as
large employers under the ACA yet avoid the choice that other
large employers must make between providing essential health
benefits or paying a shared responsibility payment. Under the
Final Rule, AHPs avoid both ACA requirements for essential
health benefits as described in the PHS Act and the employer
shared responsibility payment under portions of the ACA
codified in the Internal Revenue Code.[6]
The
Final Rule applied to fully-insured AHPs in September 2018
and to not-fully-insured existing AHPs in January 2019; it
will apply to newly created AHPs beginning in April 2019. 29
C.F.R. § 2510.3-5(f).
III.
Procedural History
Eleven
States and the District of Columbia sued DOL over the Final
Rule, raising claims under section 706 of the APA. Compl.
[ECF No. 1]. The States allege that the Final Rule's bona
fide association test and working owner provision are
“not in accordance with law” under ERISA and the
ACA, that the Final Rule does not “carry out”
Congress's intent in enacting ERISA, and that the Final
Rule is arbitrary and capricious. Id. ¶¶
108-45. The States moved for summary judgment. Pls.' Mem.
of Law in Supp. of Mot. for Summ. J. (“Pls.'
Mot.”) [ECF No. 31-17]. DOL moved to dismiss the
complaint on jurisdictional grounds for lack of standing and
cross-moved in the alternative for summary judgment. Mem. of
P. & A. in Supp. of Defs.' Mot. to Dismiss, or, in
the Alt., for Summ. J. (“Defs.' Mot.”) [ECF
No. 47-1]. The parties have fully briefed their positions on
the motion to dismiss and on the motions for summary
judgment, and the Court heard argument on the motions on
January 24, 2019. The issues presented are now ripe for the
Court's consideration.
LEGAL
STANDARD
A court
must “hold unlawful and set aside agency action . . .
found to be . . . arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law” or
“in excess of statutory jurisdiction, authority, or
limitations, or short of statutory right.” 5 U.S.C.
§ 706(2)(A), (C). “[W]hen a party seeks review of
agency action under the APA, the district judge sits as an
appellate tribunal.” Am. Bioscience, Inc. v.
Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001).
“The ‘entire case' on review is a question of
law, ” id., and summary judgment is the proper
mechanism for review, Ctr. For Food Safety v.
Salazar, 898 F.Supp.2d 130, 138 (D.D.C. 2012).
ANALYSIS
The
Court first considers the issue of standing raised in
DOL's motion to dismiss. Finding that the States have
standing to challenge the Final Rule, this opinion then
considers the merits of the States' challenges to the
Final Rule.
I.
Standing
As a
threshold matter, DOL urges dismissal of all claims on
jurisdictional grounds. DOL argues that the States do not
have standing to sue because they have not suffered a legally
cognizable injury. DOL explains that “[t]he Final Rule
applies to AHPs and not to states; it does not command any
state to take, or refrain from taking, any action.”
Defs.' Mot. at 14. The States respond that they have
several different forms of injury, each of which confers
standing. Pls.' Mem. of P. & A. in Opp'n to
Defs.' Mot. (“Pl.'s Opp'n”) [ECF No.
54-1] at 2-15.
“Standing
is a structural, constitutional restraint on the subject
matter jurisdiction of the federal judiciary.” Air
Alliance Houston v. EPA, 906 F.3d 1049, 1057 (D.C. Cir.
2018). “To establish Article III standing, an injury
must be ‘concrete, particularized, and actual or
imminent; fairly traceable to the challenged action; and
redressable by a favorable ruling.'” Clapper v.
Amnesty Int'l U.S.A., 568 U.S. 398, 409 (2013)
(quoting Monsanto Co. v. Geertson Seed Farms, 561
U.S. 139, 149 (2010)). A court “presume[s] that federal
courts lack jurisdiction ‘unless ‘the contrary
appears affirmatively from the record.'” Renne
v. Geary, 501 U.S. 312, 316 (1991) (quoting Bender
v. Williamsport Area School Dist., 475 U.S. 534, 546
(1986)). “[T]he presence of one party with standing is
sufficient to satisfy Article III's case-or-controversy
requirement.” Rumsfeld v. Forum for Acad. &
Inst. Rights, Inc., 547 U.S. 47, 52 n.2 (2006).
“Since
they are not mere pleading requirements but rather an
indispensable part of the plaintiff's case, each element
must be supported in the same way as any other matter on
which the plaintiff bears the burden of proof, i.e.,
with the manner and degree of evidence required at the
successive stages of the litigation.” Lujan v.
Defs. of Wildlife, 504 U.S. 555, 561 (1992). At the
summary judgment stage, a plaintiff must set forth by
affidavit or other evidence specific facts necessary to
support standing. Swanson Grp. Mfg., LLC v. Jewell,
790 F.3d 235, 240 (D.C. Cir. 2015).
First,
although the parties agree that the Final Rule does not
directly preempt state law, the States allege harm to their
sovereign interests in making and enforcing a legal code.
They express concern that the Final Rule sets the stage for
possible future preemption-more specifically, that
DOL might “enact future regulations to preempt State
insurance laws as to AHPs . . . if States go ‘too
far' in regulating them.” Compl. ¶ 101 (citing
Final Rule, 83 Fed. Reg. at 28, 937). The Court agrees that
States have sovereign interests in “the exercise of
sovereign power over individuals and entities within the
relevant jurisdiction, ” which can be articulated as
“the power to create and enforce a legal code.”
Alfred L. Snapp & Son, Inc. v. Puerto Rico
(“Snapp”), 458 U.S. 592, 601 (1982). The
D.C. Circuit accordingly has recognized federal preemption of
state law as a concrete injury that can give rise to
standing. See Alaska v. U.S. Dep't of Transp.,
868 F.2d 441, 444 (D.C. Cir. 1989) (recognizing state
standing to sue the Department of Transportation where its
regulations on airline pricing preempted state consumer
protection laws). But the problem here is that the Final Rule
does not preempt or otherwise constrain state law.
The
preamble to the Final Rule expresses DOL's intention to
leave AHPs to regulation by the states. For fully-insured
AHPs, the Final Rule
provides that State laws that regulate the maintenance of
specified contribution and reserve levels (and that enforce
those standards) may apply, and State insurance laws are
generally saved from preemption when applied to health
insurance issuers that sell policies to AHPs and when applied
to insurance policies that AHPs purchase to provide benefits
. . . [, and] it is the view of [DOL] that ERISA section
514(b)(6) clearly enables States to subject AHPs to
licensing, registration, certification, financial reporting,
examination, audit and any other requirement of State
insurance law necessary to ensure compliance with the State
insurance reserves, contributions and funding obligations.
Final
Rule, 83 Fed. Reg. at 28, 936. For AHPs that are not fully
insured, “section 514(b)(6)(A)(ii) of ERISA [provides
that] any State law that regulates insurance may apply to the
AHP to the extent that such State law is ‘not
inconsistent' with ERISA.” Id. The States
point to no law that will be preempted, instead alleging that
DOL might “enact future regulations to preempt
State insurance laws as to AHPs . . . if States go ‘too
far' in regulating them, ” and that “no
statement in the Final Rule disclaim[s DOL's]
intent” to preempt other non-insurance state laws.
Compl. ¶ 101 (citing Final Rule, 83 Fed. Reg. at 28,
937). The Court finds that the possibility of future
preemption is too speculative-and the concern about a
possibility of preemption of unidentified non-insurance laws
is too nebulous-to constitute an injury-in-fact. See
Clapper, 568 U.S. at 401; Whitmore v. Arkansas,
495 U.S. 149, 158 (1990). Hence, the States do not have
standing based on the possible future preemption of state
law.
The
States next allege harm to their quasi-sovereign interests
based on their “responsibility to protect the health,
safety and welfare of their citizens.” Compl. ¶ 2.
They predict that the Final Rule will harm state insurance
markets “in States where state law does not duplicate
ACA requirements for individual and small group plans”
because the Final Rule will allow healthier individuals to
“leave the traditional market in states without
sufficiently protective state laws.” Id.
¶ 104.[7] These healthier individuals allegedly will
leave individual and small-group insurance markets for AHPs,
which are predicted to be less expensive but also less
comprehensive. This in turn will allegedly cause insurance
premiums in the individual and small-group markets to rise,
potentially pricing consumers out of coverage and/or pushing
insurers out of these markets. Id. ¶¶
104-05. The States express particular concern about employees
earning less than four-hundred percent of the federal poverty
level and working for small employers, because if these small
employers were to offer insurance through an AHP-even if that
insurance did not cover the employee's full insurance
needs-the employee could lose eligibility for premium tax
credits under the ACA and thereby be priced out of a plan in
the individual market offering all essential health benefits.
Id. ¶ 106; Pls.' Opp'n at 10 n.10.
A state
may have standing to sue under the doctrine of parens
patriae when a state “express[es] a
quasi-sovereign interest, ” including “in the
health and well-being-both physical and economic-of its
residents in general.” Snapp, 458 U.S. at 607.
And here the States have raised such interests. But because a
state cannot claim superior sovereignty to the federal
government, a state “does not have standing as
parens patriae to bring an action against the
Federal Government.” Id. at 609 n.16 (citing
Massachusetts v. Mellon, 262 U.S. 447, 485-86
(1923)); see also Pennsylvania v. Kleppe, 533 F.2d
668, 677 (D.C. Cir. 1976) (explaining that “the state
can not have a quasi-sovereign interest because the matter
falls within the sovereignty of the Federal
Government”). Here, the States' general
responsibility for their citizens' health and welfare-
including the threat of increased premiums, loss of insurance
coverage, or loss of tax credits- cannot directly support
State standing because the underlying harms would be suffered
by the States' citizens. Any theory of standing on this
ground would derive from the State's status as parens
patriae, which is not available to States in a suit
against the federal government. See Snapp, 458 U.S.
at 609 n.16; Mellon, 262 U.S. at 485-486. The States
accordingly do not have standing on this ground.
The
States also allege that the Final Rule will cause them three
forms of proprietary or economic harm. First, they predict a
rise in “uncompensated care costs” because an
“individual who formerly had access to coverage through
the [ACA] marketplace will now be underinsured or uninsured
due to the Final Rule, ” in which case the States
“will . . . become responsible for providing care to
individuals who cannot afford coverage or who are
underinsured.” Compl. ¶ 106. Second, five
States-New Jersey, Delaware, California, Washington, and
Massachusetts-allege that under the Final Rule they will lose
“tax revenue or administrative fees paid to state
agencies for small group and individual plans obtained on a
state insurance exchange.” Id. ¶ 102; Tr.
of Jan. 24, 2019, Mot. Hr'g (“Tr.”) [ECF No.
77] at 31:20-23. Third, three States allege that the Final
Rule will cause “a substantially increased regulatory
burden on the States” as they “substantially ramp
up enforcement against a new type of plan[] or face a wave of
fraud and abuse similar to what occurred under [multiple
employer welfare arrangements (“MEWAs”)] in past
decades.” Compl. ¶ 103. The preamble to the Final
Rule acknowledges that DOL “anticipates that the
increased flexibility afforded AHPs under this rule will
...