With the proposed regulations lingering for almost two years, the Department of Health and Human Services (HHS) has released the much-anticipated final 1557 regulations. (opens a new window)

Section 1557 of the Affordable Care Act (ACA) prohibits discrimination by covered entities in health programs and activities on the basis of race, color, national origin, sex, age or disability. The final rule aligns with the U.S. Supreme Court landmark 2020 decision in Bostock v. Clayton County, defining discrimination to include discrimination on the basis of gender identity and sexual orientation.

Beginning on Jan. 1, 2025, these new rules will replace the current 2020 regulations.

Executive Summary

• Section 1557 applies to covered entities, and prohibits discrimination by covered entities in health programs and activities on the basis of race, color, national origin, sex, age or disability.

• The final rule defines discrimination to include discrimination on the basis of sex stereotypes; sex characteristics, including intersex traits; pregnancy or related conditions; sexual orientation; and gender identity.

• Under the final rule, Section 1557 prohibits covered entities from applying limitations, restrictions or blanket exclusions of gender-affirming care.

• Those deemed covered entities will have additional responsibilities, including providing notices, implementing policies and procedures, and setting forth a grievance process.

• Importantly, the rules exempt employers or other plan sponsors of group health plans from being deemed covered entities; however, employers may be indirectly impacted by Section 1557 nondiscrimination requirements if the insurance carrier or the third-party administrator (TPA) of a self-insured health plan is subject to 1557 as a covered entity.

• Note that group health plans themselves may be deemed covered entities if they receive federal financial assistance (very rare).

• Although outside the scope of 1557 liability, employer plan sponsors may want to also review their health plans for discriminatory provisions, such as exclusions of gender-affirming care, and determine whether such a provision complies with Title VII of the Civil Rights Act.

• These final rules are effective for plan years beginning on or after Jan. 1, 2025.

Covered Entities

In a direct divestiture from the 2020 regulations, the final rule applies a broad interpretation of what entities fall under the rules as a covered entity.

Covered entities include health programs and activities receiving federal financial assistance, such as through Medicare and Medicaid, administered by a federal executive agency, and any entity established under Title I of the ACA, such as the health insurance marketplaces. Covered entities include any health programs or activities that receive federal financial assistance from HHS (including credits, subsidies, or contracts of insurance), or programs administered by HHS.

Lockton Comment: More plainly speaking, based on their receipt of federal healthcare dollars through avenues such as Medicare and credits or subsidies related to Exchange coverage, 1557 will apply to health insurance carriers, HHS-administered health programs and activities, and certain entities that provide healthcare services such as hospitals, physician practices, pharmacies, health clinics, nursing facilities, community-based health care providers, and state or local health agencies.

Generally speaking, if anyone is in the boat, everyone is in the boat. The nondiscrimination provisions apply to all operations of an entity that receive federal financial assistance. More specifically, Section 1557 liability is not limited to just those segments that actually receive those federal funds. This would include any entity that provides or administers health-related services including health benefits (including telehealth benefits) offered by health insurance carriers in relation to fully insured group health plans as well as the carrier’s serving as TPAs to self-insured plans, and potentially pharmacy benefits managers (PBMs).

Lockton Comment: The broad interpretation of the rules could result in potential liability under 1557 for various entities such as TPAs and PBMs based on their affiliations with health insurers or indirect receipt of federal funds based on contracts with insurers or other covered entities.

What about employer sponsors of group health plans?

The new rules provide that employers are not considered covered entities merely based on providing health care benefits to employees through a group health plan, with the exception of those employee benefit plans that receive federal funding such as retiree programs receiving drug subsidies. However, the broad reach of 1557 means that employer-sponsored health plans, both fully insured and self-funded, could be indirectly impacted by the rules as a result of the insurance carrier or TPA being deemed a covered entity.

Lockton Comment: Although 1557 does not apply to employers directly, other federal discrimination laws such as Title VII of the Civil Rights Act (Title VII) could apply. The conservative play for most employer plan sponsors who want to avoid any discrimination claims would be to remove any discriminatory plan provisions, including exclusions for gender-affirming care or other treatments for gender dysphoria. Employers who object to offering this type of coverage based on religious freedoms or conscience protections will want to work with their legal counsel.

TPAs who are deemed covered entities could be liable under 1557 for administration of discriminatory plan provisions of an employer-sponsored self-funded health plan if the TPA develops or designs the plan documents or plan policies adopted by the employer. The HHS speaks to the determination of the TPA liability as a case-by-case analysis. If the employer plan sponsor is ultimately responsible for the discriminatory plan provision, and the TPA has no influence on the plan provision, the TPA would not be held liable.

Lockton Comment: A federal judge in Washington recently ruled that an insurance carrier acting as a TPA for self-funded plans violated 1557 by administering plan exclusions of gender-affirming care. The court enjoined the carrier from administering any exclusion of gender-affirming health care, including administrating the exclusion for ERISA self-funded group health plans. The case is currently under appeal and the judge’s order is stayed.

It is important to note, though, if HHS identifies discrimination in review of a TPA’s administration of a plan that the employer is ultimately responsible for, HHS will refer the issue to the appropriate regulatory agency, such as the EEOC.

Lockton Comment: Based on the broad application of 1557 and potential liability the TPA may have for administration of a discriminatory plan provisions, it is possible TPAs may refuse to administer plan provisions that could be viewed as discriminatory, such as gender-affirming care plan exclusions, or require clear indemnification from the employer plan sponsor if HHS holds the TPA liable for discrimination under 1557.

Religious Exemption

Although the rules do not include a specific religious exemption, HHS makes clear existing federal protections for religious freedom and conscience are still applicable. The rule outlines the administrative process entities should follow to apply for a written exemption from 1557 provisions, and while HHS is reviewing the request, the entity is provided a temporary exemption until the final determination is made.

Nondiscrimination Requirements

The new rule prohibits covered entities from discriminating in healthcare programs and/or healthcare activities on the basis of race, color, national origin, age disability, sex, including gender identity or sexual orientation, or disability.

Of importance in the benefit plan realm, covered entities cannot incorporate plan limits or exclusions that would discriminate in plan design or impose cost-sharing, limitations, or restrictions with regard to claims based on those protected classes, including gender identity. The rules specifically prohibit categorical coverage exclusions or limitations for all health services related to gender transition or other gender-affirming care, or deny or limit coverage, or impose additional cost sharing, restrictions or limitations on coverage for specific health services related to gender transition or gender-affirming care.

The rules allow plans to include provisions that might limit or exclude coverage in a non-discriminatory manner, but must apply standards in a consistent, neutral, nondiscriminatory manner that does not limit or deny services to individuals based on a protected basis. However, a covered entity cannot deny care based on assigned gender. For instance, plan limits, exclusions or denials based on legitimate medical necessity criteria would not be a violation of 1557. That being said, covered entities will want to be mindful of plan limitations or denials specific to the treatment of gender identity disorder, as the rule is clear that a covered entity cannot deny care based on assigned gender.

Lockton Comment: As a reminder, gender dysphoria is a recognized mental health disorder, meaning any plan limitations or exclusions related to the treatment of gender dysphoria, including gender-affirming care, must also comply with Mental Health Parity and Addiction Equity Act.

Nondiscrimination policies and procedures

Under the new rule, HHS will require covered entities to submit assurances of compliance with 1557, and to implement certain policies and procedures to ensure nondiscrimination.

• Section 1557 Coordinator: A covered entity with 15 or more employees must appoint a Section 1557 Coordinator to coordinate compliance with Section 1557, including investigating any grievances alleging noncompliance with Section 1557.

• Grievance process and record retention: Covered entities with 15 or more employees must develop and implement a grievance process that allows affected individuals to lodge complaints regarding discriminatory policies or practices and seek redress. All documentation related to the grievance must be retained for at least three years from the date the grievance is filed.

• Language services: Covered entities must provide notice of language assistance services and auxiliary aids to individuals, and said notice must be provided in the top 15 languages spoken by individuals with limited English proficiency (LEP) in the state(s) the entity operates in.

• Training: Covered entities are required to train staff on the nondiscrimination policies and procedures to ensure staff are knowledgeable about the nondiscrimination policy, grievance procedures, and processes by which to obtain language assistance services for LEP individuals and to ensure effective communication with, and provide reasonable modifications for, individuals with disabilities. The covered entity must document that employees have completed the training and retain the documentation for three years.

Required Notice

Covered entities will once again be required to provide participants, beneficiaries, enrollees, and applicants of its health programs and activities, both an annual notice of nondiscrimination as well as a notice of the availability of language assistance services.

Patient Care Tools

The new rule applies nondiscrimination requirements to patient support tools, including AI tools, used to assist patients in making healthcare decisions or understanding their care.

When does the new rule go into effect?

Generally, the new rule goes into effect 60 days after publication, but HHS has delayed the applicability of certain provisions, most notably those which might require plan changes, as effective for plan years beginning on or after Jan. 1, 2025.

Lockton Comment: As with past iterations of these rules, it is possible, and probably likely, there will be judicial challenges to the rule.

Next steps

Covered entities will want to work with their partners and legal counsel to review Section 1557 requirements and responsibilities, and immediately start to take steps ensure compliance by the applicable effective dates. Additionally, in light of the coordination of HHS and the Equal Employment Opportunity Commission, employer plan sponsors not deemed covered entities under 1557 will want to review their plans for discriminatory provisions such as exclusions of gender-affirming care and consider removal of these provisions to avoid potential liability under Title VII.

Not legal advice: Nothing in this document should be construed as legal advice. Lockton may not be considered your legal counsel, and communications with Lockton's Compliance Consulting group are not privileged under the attorney-client privilege.

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