The Obama administration continues to use its executive authority to expand societal inclusion of transgender individuals. On September 3, the Department of Health and Human Services issued proposed rules under Section 1557 of the Affordable Care Act that provides in part that health programs and activities that receive financial assistance from the federal government cannot discriminate against a person based on the individual’s gender identity.

Gender identity refers to the gender that a person identifies with.  The gender identity of a transgender individual differs from the individual’s sex assigned at birth. When the proposed HHS rule goes into effect, insurers will not be able to include in their policies blanket exclusions for coverage related to gender dysphoria or associated with gender transition or otherwise discriminate against individuals on that basis (However, the current form of the rules does not explain if under the rule insurers will be required to provide coverage for gender transition services specifically or will simply be required to provide general medical services for transgender persons including services that stem from or related to those gender transition services).

To be clear, the proposed rule only applies to entities receiving federal funds. It remains to be seen how this rule might more directly impact employers that do not receive federal funds.  Specifically, these employers might still be impacted if they sponsor a group health plan administered by a TPA that also separately issues policies on the Health Insurance Marketplaces (most major TPAs do).  To the extent the employer’s plan includes a blanket exclusion for medical costs associated with gender transition services, the TPA may require the employer to remove that exclusion, in light of the restrictions imposed on the TPA by Section 1557.

The proposed rule will be finalized after the public comment period closes on November 6, 2015. In issuing the proposed rule, the administration sought comment as to: 1) how to address sexual orientation discrimination, and 2) whether health providers can be exempted from this provision based on their religious beliefs.

The scope of the final rules and the exemptions that are allowed may provide a template for courts, and society at large, as they continue to grapple with balancing notions of LGBT equality with contrary religious beliefs.

The tension between religion and the provision of employee benefits was previously addressed in the Supreme Court’s ruling in Hobby Lobby. There, the Court held that a business could deny mandatory benefit coverage when the coverage conflicted with the closely held religious beliefs of the business owners.  The Court recognized the tension between religious beliefs and the anti-discrimination principles of the Fourteenth Amendment in this summer’s same-sex marriage ruling.

If the final rules allow coverage denials for LGBT individuals based on the providers’ religious beliefs it will signal that notions of religious liberty excuse certain types of discrimination against LGBT individuals. On the other hand, if the final rules contain no religious exemption, it will add strength to the argument that LGBT discrimination should be handled under Federal law in the same manner as other forms of impermissible animus.

Where HHS comes out in the current proposed rules remains an open question. However, how it comes out may signal where society is headed in terms of both the breadth of LGBT anti-discrimination protections and the scope of mandated benefit coverage of LGBT individuals.