State of California v. U.S. Dept. of Health and Human Services

Background

Section 1303 of the Affordable Care Act requires insurance issuers that cover certain abortion services to collect separate payments for abortion and non-abortion portions of the premium and to place those funds in separate accounts. A 2015 rule allowed issuers to meet that requirement in several ways, including sending one bill that separately listed the abortion-related premium, sending a separate bill for that premium, or providing an enrollment notice about the separate charge. Enrollees could make one payment covering both amounts.

In 2019, the Department of Health and Human Services replaced that rule. The new rule required issuers to send two monthly bills and required enrollees to make two separate payments. The rule also added a provision allowing an enrollee to opt out of abortion coverage by declining to pay the abortion-related premium. HHS later extended the implementation deadline to August 26, 2020, because of the COVID-19 pandemic.

Six states and the District of Columbia sued HHS and other defendants. The plaintiffs moved for summary judgment on several grounds, including that the rule was arbitrary and capricious under the Administrative Procedure Act, conflicted with the Affordable Care Act, exceeded HHS’s authority, failed to follow required procedures, and violated the Tenth Amendment. HHS filed a cross-motion for summary judgment, arguing that the rule complied with the Affordable Care Act and the Administrative Procedure Act and was within HHS’s authority.

Court’s Analysis

The court applied the Administrative Procedure Act’s arbitrary-and-capricious standard. Under that standard, an agency must provide a rational connection between the facts it found and the decision it made. An agency may change an existing policy, but it must give a reasoned explanation, particularly when regulated parties relied on the earlier policy.

The court held that HHS did not provide that explanation. HHS said that two bills and two payments better matched Congress’s intent, but, in the court’s view, HHS did not explain why the earlier rule failed to comply with that intent or why the new approach was needed. The court also observed that the statute did not require separate issuer billings or separate enrollee transactions.

The court identified several additional problems with HHS’s reasoning. The earlier rule had responded to identified compliance problems, but the administrative record did not show comparable noncompliance requiring a change. Commenters had identified reliance on the earlier system, substantial implementation costs, consumer confusion, and a risk that consumers would lose coverage if they failed to make both payments. HHS acknowledged significant costs but largely concluded that its preferred interpretation of the statute justified them, without explaining the rule’s benefits or how the separate transactions would improve the required segregation of funds.

The court also considered the new opt-out provision, which had not been subject to public comment. It viewed that provision as further evidence that HHS had changed policy without a sufficient explanation.

Disposition

The court granted the plaintiffs’ motion for summary judgment and denied HHS’s cross-motion for summary judgment. It held that the new rule was arbitrary and capricious and set the rule aside under the Administrative Procedure Act. The court did not reach the parties’ arguments about whether HHS could use enforcement discretion because its arbitrary-and-capricious ruling resolved the case.