U.S. Labor Department headquarters in Washington, D.C. Credit: Mike Scarcella / NLJ

A federal judge in Washington, D.C., has struck down a proposed rule by the Trump administration intended to dismantle part of the Affordable Care Act, or Obamacare, by allowing small businesses and self-employed individuals to collectively participate in a health care plan.

The rule was promulgated by the U.S. Department of Labor last year as a way to save those groups money on health care by participating in so-called association health plans, which allow employers to provide health coverage with fewer benefits than mandated under Obamacare.

New York Attorney General Letitia James led a coalition of 12 states in the litigation against the federal agency. They challenged it on grounds of the Administrative Procedure Act and argued at the time that the rule would actually drive up the cost of health care by draining the traditional market of consumers.

U.S. District Judge John Bates of the District of Columbia said in a decision handed down late Thursday that the proposed rule violated the Employee Retirement Income Security Act of 1974, or ERISA.

“The final rule is clearly an end-run around the ACA. Indeed, as the president directed, and the secretary of labor confirmed, the final rule was designed to expand access to AHPs in order to avoid the most stringent requirements of the ACA,” Bates wrote. “In short, the final rule exceeds the statutory authority delegated by Congress in ERISA.”

Association health plans allow self-employed individuals and small businesses to essentially team up to provide health coverage to themselves and their employees. Those plans allow them to define themselves together as a large group, rather than purchasing several individual and small group health plans.

That could, in theory, save those individuals money, but it could also allow smaller employers to offer less comprehensive health coverage for their employees. Large group plans don't have to cover as many benefits as a small group or individual plan, as mandated under Obamacare.

That goes against the intent of Obamacare, the states claimed in their lawsuit last year. That part of Obamacare was written specifically to ensure that health insurance plans included certain health benefits.

The rule would have also allowed a self-employed individual with no other employees to define themselves as both the employer and the employee. That would have contradicted the definition of group health plans under ERISA, the states argued. Bates said Congress didn't intend for that kind of change when approving ERISA.

“As a practical matter, one does not have an employment relationship with oneself,” Bates wrote. “There is no indication that Congress crafted the statute with the intent of sweeping working owners without employees—who employ no one—within ERISA's scope through the statutory definition of 'employer.'”

The lawsuit had also claimed the proposed rule would have contradicted ERISA by allowing businesses to form an association health plan if they're in the same industry, state or metropolitan area. ERISA currently only allows those plans to be formed based on common interest.

Bates wrote that expanding how association health plans can be formed would go against what was authorized under ERISA.

“There is nothing intrinsic in common geography that would generate the types of economic or reputational ties that courts have deemed essential for a plan to be covered by ERISA,” Bates wrote. “DOL does not provide a rationale that would connect geography and common employer interest.”

James and Massachusetts Attorney General Maura Healey led the lawsuit along with attorneys general from Washington, D.C., California, Delaware, Kentucky, Maryland, New Jersey, Oregon, Pennsylvania, Virginia and Washington. Representatives for James did not immediately comment on the decision.

James, in a statement issued Thursday evening, said the ruling will ensure better health care for millions of people nationwide.

“Today's ruling is a win for the New Yorkers and Americans who seek access to quality, affordable health care in this country,” she said. “We are pleased that the district court saw past the Trump administration's transparent effort to sabotage our health care system, and gut these critical consumer protections in the service of its own partisan agenda.”

A spokesman for the DOL deferred comment to the U.S. Department of Justice on Thursday evening. A spokeswoman for the DOJ said Friday morning  that they're reviewing their options in the litigation going forward.

“We disagree with the district court's ruling and are considering all available options. The Administration will continue to fight for sole proprietors and small businesses so that they can have the freedom to band together to obtain more affordable, quality healthcare coverage,” said Kelly Laco, a DOJ spokeswoman. “The Association Health Plan rule opened healthcare options for dozens of associations representing thousands of small businesses and sole proprietors and provided them with access to the same type of affordable healthcare options offered by other employers.”

Read the ruling below: