Small employers and their advocates continue to search for ways to bypass the extra costs of regulation under the Affordable Care Act (ACA) and find more affordable health insurance options. As noted in part I, they may have gained a new foothold in a case from Texas decided in the 5th Circuit on August 17. Despite earlier setbacks in seeking expansion of association health plan (AHP) coverage, there is seemingly always one more route to explore and get past the fuzzy legal fences guarding the ACA regulatory reservation.

This latest case arose from the efforts of some smaller employers to band together to gain both larger scale and self-insured status under the Employee Retirement Income Security Act (ERISA). They claimed to be either “working owners” or “bona fide partners” under a sketchy data marketing scheme organized by a “single employer.” The Data Marketing Partnership (DMP) plaintiffs aimed to gain exemption from the ACA’s small-group rules when their managing partner purchased health insurance for DMP members.

The Fifth Circuit Court of Appeals upheld the primary rulings of a federal district court judge in Texas notorious for his many anti-ACA rulings. In September 2020, Judge O’Connor had overturned as “arbitrary and capricious” an advisory opinion by the Department of Labor (DOL) issued in February 2020. DOL had determined that the insurance plan was not governed by ERISA. It noted that DMP’s single common-law employee covered under the insurance plan was insufficient to support such regulatory treatment for the thousands of its limited partners.

The latest appellate court ruling hinged on findings that working owners or bona fide partners can qualify as an “employee” for ERISA purposes and that DOL’s latest opinion failed to explain inconsistency with several of its previous advisory opinions.

The district court had adopted a rather permissive, minimal requirement for the ownership interests of “working owners.” It ruled that DOL’s “materiality” standard for those owners also providing services as “employees” was arbitrary and capricious. Although the 5th Circuit panel mostly agreed, it remanded the case for a more thorough analysis of the interpretation of working owners and bona fide partners under federal law, as well as consideration of the proper remedy.

These sorts of ERISA cases tend to defy quick resolution as they travel through a maze of overlapping terms and tortured regulatory history. Nevertheless, this latest case signals that another new escape route from ACA regulation for small employers may have opened. How narrow or wide it will become remains uncertain.

It’s rather ironic that this particular scheme seems to have created far more potential for abuse of thinly organized, inadequately capitalized, and insufficiently regulated insurance purchasing schemes than the Trump administration’s more limited rules in 2018 for expanded AHPs, or slow-developing individual market health reimbursement arrangements (ICHRAs), permitted. The more controversial AHP rule would have allowed more types of small firms and self-employed business owners to band together and aggregate to gain large employer regulatory status, but those arrangements still would remain subject to some state regulation when operating as multiple-employer welfare arrangements (MEWAs), if not facing other lesser levels of federal regulation.

However, the Trump AHP rule was blocked in federal district court in March 2019 in a rather overheated opinion that periodically strayed from tight legal reasoning toward looser political rhetoric. A subsequent appellate ruling in the DC Circuit never arrived, long after oral argument there concluded in November 2019. That case still remains mysteriously on hold, in legal limbo, since the Biden administration in early 2021 requested a further delay to review the issues.

Lessons from this latest legal skirmish include:

• Biden administration expediency, in stalling and hoping the Trump AHP rule would die of neglect, left even more of a legal gray zone for other parties to exploit.
• Forum shopping across various federal courts can produce quite different precedents that are hard to eliminate quickly.
• The designers and advocates of the ACA’s regulatory web for small employers should reflect more deeply on why their supposed beneficiaries keep looking for ways to escape. Both small employers and the self-employed have been poorly served by most federal and state health policy for decades (see, for example, the more recent half-hearted ACA failures involving SHOP exchanges, small business tax credits, and single-pool rating rules, as well as in implicitly pushing small firms to just drop coverage and dispatch their workers to the tender mercies of the ACA’s individual market.)

Hence, we should not be surprised by repeated probes to push the legal boundaries in search of less burdensome arrangements, even if those latest ports in a storm also prove shallow and unstable.

The post A Tale of Two Legal Tangles, Part III: Looking for the Next Way Out appeared first on American Enterprise Institute – AEI.