Final Section 1557 Rules: Highlights for Health Plan Sponsors

With the issuance of final regulations under Section 1557 of the Affordable Care Act by the U.S. Department of Health and Human Services (HHS), group health plan sponsors (as well as hospitals and many other health care providers) will need to consider whether and how the rules apply to their programs and activities and take appropriate measures for compliance. This Briefing aims to highlight some of the major considerations for health plan sponsors.

Overview

Section 1557 of the Affordable Care Act prohibits discrimination on the basis of race, color, national origin, sex, age, or disability in certain health programs and activities. Generally speaking, these rules apply only to HHS itself (including the programs it administers, including Medicare) and health programs and activities that accept federal funding. Section 1557 was part of the original draft of the Affordable Care Act passed in 2010, but the journey to final regulations has been a long and complicated road of published and withdrawn regulations. 

The new final regulations provide nearly 200 pages of guidance on the implementation of Section 1557’s wide-reaching protections. This guidance largely follows the rules that were proposed almost two years ago, clarifying certain details, but leaving many issues to be addressed based on applicable facts and circumstances. Although the new rules generally take effect July 5, 2024, a number of the practical measures and administrative tasks for covered health plans have delayed effective dates.

Application to Employee Benefit Plans

The first question that a plan sponsor needs to address is whether its plan is subject to Section 1557. As explained above, Section 1557 applies only to health programs and activities that receive direct or indirect federal funding (covered entities). As a result, many health insurance issuers and claims administrators will be subject to Section 1557. However, the Section’s application to employer-sponsored group health plans – particularly self-funded plans – is less clear. For example, some plan sponsors in the health care industry questioned whether their receipt of funding from HHS would cause their employee benefit plans to be considered “covered entities.” That is, would their plan be considered to “indirectly” receive federal monies? The final regulations clarify that a group health plan is not considered to be an indirect recipient of federal financial assistance merely because the plan sponsor receives federal financial assistance. Rather, a benefit plan will be considered a covered entity only if the federal funding relates to the benefit plan itself (such as, in the form of Medicare Part D subsidies or a Medicare Advantage option).

Unfortunately, the question of whether federal funding relates to the benefit plan does not lend itself to straightforward analysis. The regulations concede that the question of whether a group health plan has directly or indirectly received federal funding will ultimately be a fact-specific question to be decided by HHS:

“When [HHS] receives a complaint alleging discrimination related to a group health plan, we will conduct a fact-specific analysis to determine if the group health plan is a recipient or sub-recipient of Federal financial assistance. […] Determining whether an entity is an indirect recipient requires a fact-specific inquiry.”

Adding to the complexity is the much broader application of the rules to many health insurance issuers and third-party administrators. They may have obligations under Section 1557 that apply to their administration of benefits and, in some cases, the design of the plan. To evaluate responsibility for compliance under Section 1557, plan sponsors should work with their third-party vendors to determine whether and how Section 1557 applies. 

Administrative Structures and Procedures

As in the proposed regulations, the new rules impose various administrative requirements on health plans. Although the new rules generally apply on July 5, they provide extended opportunities for compliance for a number of requirements: 

Sex Discrimination

The final regulations retain the broad definition of sex discrimination contained in the proposed regulations, which includes discrimination based on sexual orientation, gender identity, sex characteristics and stereotypes, and pregnancy. Health plans may not categorically exclude or limit coverage for services pertaining to gender transition or gender-affirming care, although restrictions for nondiscriminatory reasons, including those based on medical necessity, religious beliefs, or conscience may continue to apply. 

Requirements to offer this coverage are likely to remain newsworthy for some time. Soon after the regulations were issued, 15 states filed a lawsuit challenging the application of Section 1557’s nondiscrimination provisions to coverage for gender transition and gender-affirming care. On the other hand, the Fourth Circuit Court of Appeals (principally based on the Equal Protection Clause of the Constitution) and the Eleventh Circuit Courts of Appeals (based on title VII of the Civil Rights Act) have both recently overturned state governmental restrictions on coverage for such care.

Conscience Protections

Some covered entities have complained that Section 1557 (particularly its prohibition against discrimination based on transgender status) violate their religious and moral principles. The final regulations make clear that existing federal laws governing freedom of religion and freedom of conscience (such as, the Religious Freedom Restoration Act of 1993) will continue to apply. The regulations also establish a procedure for covered entities to seek an exemption in writing from Section 1557 on the basis of religion or conscience. HHS will issue a temporary exemption while it considers the request; if the request is denied, the covered entity may appeal that decision to HHS. 

Concerns about AI in Health Care Decisions

The proposed regulations added new language that prohibited covered entities from discriminating through the use of “clinical algorithms in decision-making.” The final regulations keep these general principles in place. The preamble notes that there was confusion about the term “clinical algorithm” and whether this appropriately captured the broad range of technology-aided tools used by the health care industry. Accordingly, the final regulations replace the term “clinical algorithm” with a new and more expansive term of art: “patient care decision support tools.” HHS defines this term to mean “any automated or non-automated tool, mechanism, method, technology, or combination thereof used by a covered entity to support clinical decision-making in its health programs or activities.” The preamble confirms that the department harbors concerns about the rise of AI and the potentials for discriminatory results as a result of using such tools:

“Given covered entities’ widespread use of automated decision systems and AI, and the scale by which AI can influence covered entities’ clinical decision-making, we are confirming that the types of patient care decision support tools subject to [this rule] include automated decision systems and AI used to support clinical decision-making.”

The regulations require all health plans to make reasonable efforts to identify how patient care decision support tools are used in the administration of benefits and mitigate the risk of discrimination. Plan sponsors should consult with their third-party vendors to identify these tools and their applications and to address the risks of discrimination that may arise from their use. 

Next Steps

Plan sponsors should perform a careful analysis to determine whether they are required to comply with Section 1557 and, if they are, take appropriate compliance measures to meet the revised discrimination requirements. Even if they are not subject to the requirements of Section 1557, plan sponsors should contact their third-party administrators to determine whether the administrator is a “covered entity” in its own right and whether this will impact the design or administration of their plan.

Attorneys in Ballard Spahr’s Employee Benefits and Executive Compensation and Health Care teams are on hand to counsel on benefits and compensation, labor and employment, compliance, regulatory, transactional, and financing matters.

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