Ninth Circuit Says ERISA Preempts Drug Treatment Center's State-Law Contract Claims 

Bristol SL Holdings, Inc. (Bristol), the successor-in-interest to the now-defunct for-profit drug rehabilitation center Sure Haven, Inc., alleged that by verifying out-of-network insurance coverage by phone, ERISA plan administrators Cigna Health and Life Insurance Company and Cigna Behavioral Health (collectively, Cigna) created independent contractual obligations for patient claims amounting to $8.6 million. On May 31, 2024, the Ninth Circuit held that Bristol's state-law contract claims were preempted by ERISA. 

Because Sure Haven was an out-of-network provider for Cigna-administered health plans, before Sure Haven accepted a patient covered by a Cigna-administered plan, Sure Haven would call Cigna to verify whether the patient qualified for out-of-network benefits and to determine the reimbursement rate. If the patient was eligible for coverage, Cigna would quote a reimbursement rate based on a percentage of the "usual and customary rate" (UCR). For years, Cigna reimbursed Sure Haven under this protocol. Cigna became suspicious that Sure Haven was engaging in "fee-forgiving," a practice in which a provider improperly fails to collect cost-sharing owed by plan participants, which was prohibited by the plans Cigna administered.

Cigna ultimately refused to reimburse Sure Haven for the treatment of 106 patients, whose claims totaled more than $8.6 million. When Sure Haven filed for bankruptcy, Bristol assumed its claims, attempted to negotiate payment, and eventually (as Sure Haven's successor-in-interest) sued Cigna in federal district court. Its complaint asserted a claim for recovery of benefits under ERISA § 502(a)(1)(B) as well as state contract claims, which were based on the theory that Cigna's representations during the verification calls created enforceable agreements to reimburse Sure Haven at a certain percentage of UCR and that Cigna breached those agreements when it later refused to make payments due to Sure Haven's alleged fee-forgiving.

The district court initially dismissed Bristol's ERISA claim and later granted summary judgment to Cigna on the state contract claims. In 2022, the Ninth Circuit reversed, holding that Bristol had derivative standing to bring the ERISA claim and the evidence was sufficient for a reasonable factfinder to conclude that the parties' course of conduct created an enforceable contract under California law. In its decision, the Ninth Circuit expressly reserved judgment on whether any of Bristol's state-law claims were preempted by ERISA. On remand, Cigna amended its answer to add a preemption defense and the district court again granted summary judgment to Cigna, holding that ERISA preempted the state-law breach-of-contract claims. 

On appeal, the Ninth Circuit affirmed. First, the court held that that Bristol's state-law contract claims were preempted by ERISA. The court explained that when a plaintiff's state-law claim, in reality, challenges the administration of ERISA-plan benefits, it is preempted under the "reference to" test. According to the court, because Bristol's contract claims were "ERISA benefits claims in the garb of state law," they could not stand: when Sure Haven called Cigna to verify out-of-network coverage, the communication "concerned whether reimbursement was available under the ERISA plans that Cigna administers." Later, when Cigna refused reimbursement, it did so "because Sure Haven's fee-forgiving meant that the terms of the ERISA plans no longer permitted payment." In short, "the terms of Cigna's plans [were] central to the state law claims." This conclusion, the court added, was "further confirmed by the fact that Bristol... brought a parallel claim for the denial of ERISA benefits" under § 502(a)(1)(B).

The court held that the "impermissible connection" test was also satisfied. A claim has an "impermissible connection" with an ERISA plan "if it governs a central matter of plan administration or interferes with nationally uniform plan administration" and, according to the court, Bristol's claims would do both:

• First, "permitting state law liability on Bristol's claims would unduly intrude on a 'central matter of plan administration,' namely, Cigna's overarching system of verifying out-of-network coverage and authorizing treatment by phone," which is a "standard feature of modern managed care," and "later conditioning reimbursement on whether a medical provider has secured the proper financial contributions from plan participants," which the court also characterized as "a regular feature of health plan management." According to the court, "[s]ubjecting plan administrators to the prospect of binding contracts through pre-treatment calls would... risk stripping them of their ability to enforce plan terms that cannot be applied prior to treatment, whether related to fee-forgiving or otherwise. The resulting Catch-22—that administrators must abandon either their plan terms or their preauthorization programs—is the kind of intrusion on plan administration that ERISA's preemption provision seeks to prevent." 
• Second, "allowing liability of Bristol's state law claims would impermissibly 'interfere with nationally uniform plan administration'" because, otherwise, "benefits would be governed not by ERISA and the plan terms, but by innumerable phone calls and their variable treatment under state law." The court concluded that "[t]his is the type of discordant regime that ERISA's comprehensive preemption of state law was meant to minimize."

The Ninth Circuit distinguished its decision in The Meadows v. Employers Health Insurance, 47 F.3d 1006 (9th Cir. 1995), in which it noted that "ERISA does not preempt a third-party provider's independent state law claims against a plan." In Bristol, the court explained that its observation in The Meadows was taken out of context and did not "stand for the principle that all state law claims by a third-party provider fall outside the scope of ERISA preemption." Instead, as in The Meadows, ERISA does not preempt independent state law claims that are "triggered by the complete lack of any ERISA plan."

Fifteen States Challenge HHS Rule Prohibiting Gender Identity Discrimination Under the Affordable Care Act

On May 30, 2024, a coalition of 15 states, led by Tennessee and Mississippi, filed a complaint in the Southern District of Mississippi seeking to invalidate a U.S. Department of Health and Human Services (HHS) Final Rule (the 2024 Rule) that defines discrimination "on the basis of sex" — prohibited in the provision of federally-funded healthcare by Section 1557 of the Affordable Care Act (ACA) — to encompass discrimination on the basis of gender identity. Tennessee et al. v. Becerra et al., No. 24-cv-161 (S.D. Miss. May 30, 2024). The Final Rule was published on May 6, 2024, and revives protections from a similar, Obama-era 2016 Rule that were rescinded during the Trump administration. Given the opposition of many of the plaintiff states during the 2024 Rule's notice-and-comment period and the recent passage of laws restricting the provision of gender-affirming care in multiple plaintiff states, this legal challenge to the 2024 Rule does not come as a surprise.

The plaintiff states take aim at the provision of the 2024 Rule that interprets the prohibition against sex discrimination in Section 1557 of the ACA. The Rule provides, "Discrimination on the basis of sex includes, but is not limited to, discrimination on the basis of: (i) Sex characteristics, including intersex traits; (ii) Pregnancy or related conditions; (iii) Sexual orientation; (iv) Gender identity; and (v) Sex stereotypes." The complaint alleges that the 2024 Rule violates the Administrative Procedure Act (APA) because it is contrary to law, in excess of HHS' authority, unconstitutional, and arbitrary and capricious. 

The plaintiff states allege two central arguments: that the inclusion of "gender identity" in the definition of "sex discrimination" is contrary to the ACA's embrace of a "biological-binary" understanding of "sex" and that the 2024 Rule coerces the states and subverts their authority to make policy judgments about the propriety of providing "gender-transition treatments to minors" and covering certain treatments for gender dysphoria. The complaint categorizes the 2024 Rule as forcing states and healthcare providers to "align their policies, coverage decisions, and even medical care with patients' subjective gender identities rather than sex," which would subject the states and healthcare providers to "radical" liability in the provision of routine care that takes into account differences in biological sex. The complaint dismisses the 2024 Rule's stipulation that "covered entities may raise a legitimate, nondiscriminatory reason for denials or limitations of health services in benefit design and in individual cases" as "narrow" and "hollow," because the 2024 Rule would treat "decisions based on the lack of evidence of efficacy and safety of medical gender-transition interventions generally" (emphasis added) — the reasoning at the base of the states' conflicting laws — as illegitimate evidence of discrimination.

The complaint brings four claims under the APA. First, it alleges that the 2024 Rule exceeds HHS' authority to interpret the ACA by unlawfully defining "on the basis of sex" to include "gender identity." The plaintiff states argue that the ordinary public meaning of "sex" at the time of passage of the ACA and the other civil rights statutes incorporated by the ACA was binary, thus "unambiguously exclud[ing] consideration of a person's gender identity." Referencing recent Supreme Court caselaw on the major questions doctrine, the complaint expressly pleads that HHS' interpretation cannot be saved by Chevron deference "because it purports to resolve a policy issue of major political significance without clear congressional authority." 

Second, the complaint alleges that the 2024 Rule further exceeds HHS' authority because it seeks to regulate an area of traditional state authority – the practice of medicine – and to invalidate state laws without demonstrating that such a result is the "clear and manifest purpose of Congress."

Third, the complaint alleges that the 2024 Rule is unconstitutional – and thus in violation of the APA – on multiple grounds. It lodges challenges under the Spending Clause (arguing that the Rule's conditioning of federal funding on the provision of gender-affirming care is unconstitutionally coercive and lacks statutory authority), the Nondelegation Doctrine (asserting that the Rule impermissibly exercises legislative power by defining new categories of discrimination), and the Eleventh Amendment, arguing that the Rule abrogates the states' sovereign immunity without constitutional justification.

Fourth, the complaint alleges that the 2024 Rule is arbitrary and capricious for multiple reasons, among which that HHS failed to provide a "reasoned explanation" for its divergence from the traditional binary understanding of "sex," that HHS failed to adequately respond to comments in opposition to the Rule, and that the Rule "embrace[s]" standards and guidelines for gender-affirming care that "run[] counter to the evidence before the agency" provided by commenters.

Finally, the complaint brings a fifth claim under the Declaratory Judgment Act for the court to declare that the plaintiff states have a right to HHS funding regardless of the state laws that conflict with the 2024 Rule. In addition to this claim for relief, the plaintiff states request that the court preliminarily and permanently enjoin implementation and enforcement of those parts of the 2024 Rule in violation of the APA and the Constitution, declare the Rule's "gender-identity mandates" are unlawful, and vacate the Rule. 

The plaintiff states have brought their case in the same Circuit in which another district court, the Northern District of Texas, preliminarily enjoined the 2016 Rule on the basis that its gender-identity protections violated the APA, see Franciscan All., Inc. v. Burwell, 227 F. Supp. 3d 660 (N.D. Tex. 2016), and seeks to replicate that result. The 2024 Rule is set to go into effect on July 5, 2024.

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