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Carson v. Lake County, Indiana

United States Court of Appeals, Seventh Circuit

July 26, 2017

Aaron Carson, et al., Plaintiffs-Appellants,
v.
Lake County, Indiana, Defendant-Appellee. and Ronald Paulsin, Intervenor-Appellant,

          Argued April 5, 2017

         Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 2:14-CV-117-PRC - Paul R. Cherry, Magistrate Judge.

          Before Wood, Chief Judge, and Flaum and Hamilton, Circuit Judges.

          Hamilton, Circuit Judge.

         During the recession of the late 2000s, Lake County, Indiana, experienced an emergency cash shortage. The County's positive cash flow declined from $51 million in 2007 to $9.9 million in 2008. By 2009, the County was operating at a deficit, and by 2013 its general fund was more than $1 million in the red. During that same period, the County's self-insurance fund, which it used to cover employee healthcare costs, foundered. The fund had a balance of over $10 million in 2007; that balance was wiped out by 2013.

         Something had to be done. In an attempt to stanch its financial bleeding, the County offered retirement incentives to employees age 65 or older. With one incentive package, retirees were entitled to five years of supplemental health insurance (secondary to Medicare coverage) through Aetna. Retirees who selected this package were also permitted to return to work on a part-time basis, though their employment remained at-will.

         The incentive package was attractive, and a number of employees took advantage of it. But the County had miscalculated. In 2013, Aetna informed the County that current employees were ineligible for the supplemental insurance coverage. If retirees who had been rehired as part-time employees remained on the plan, the plan would no longer qualify for special exemptions under federal law. In that case, the County's insurance costs would skyrocket. The County was in no position to absorb those added costs. It therefore notified all rehired retirees who were covered by both Medicare and the Aetna supplement that their employment would end effective October 1, 2013.

         A group of rehired retirees who were fired in October 2013 filed this suit alleging that the County had discriminated against them on the basis of their age in violation of the Age Discrimination in Employment Act of 1967 (ADEA), 29 U.S.C. §§ 621 et seq., and the Fourteenth Amendment's Equal Protection Clause. The district court granted summary judgment to the County.

         We affirm. We see no evidence that the County engaged in unlawful age discrimination. Age was a necessary but insufficient factor in the County's decision-making process. The key criterion that distinguished the terminated employees from all other County employees was not their age but rather their participation in the Aetna plan. The equal protection claim fails because the undisputed facts show that the County's action was rationally related to a legitimate state interest: preserving supplemental insurance coverage for its retirees while avoiding further financial hardship.

         I. Factual and Procedural Background

         A. Lake County's Supplemental Insurance Debacle

         Although plaintiffs' claims arise under the ADEA and the Equal Protection Clause, those claims (and the County's actions that precipitated the claims) cannot be analyzed properly without understanding some basics of health insurance law. Federal law requires group health insurance plans such as those sponsored by employers to comply with a host of terms governing portability coverage, rating, renewability, and non-discrimination. Many of these requirements were put in place as part of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010). Others were imposed earlier under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. No. 104-191, 110 Stat. 1936, or prior legislation.

         Federal law also carves out exemptions for special types of health insurance, including so-called "retiree-only" plans. These plans pay benefits secondary to Medicare and are exempt from many of the requirements of HIPAA and the Affordable Care Act that apply to primary policies. Retiree-only plans help Medicare recipients manage their out-of-pocket costs, including co-insurance and deductibles. For retirees, especially those living on modest or fixed incomes, supplemental coverage helps ensure access to essential care.

         In 2008 and 2010, Lake County offered early retirement incentives to all Medicare-eligible employees who had at least five years of continuous service and who were age 65 or older. These employees could select either a lump-sum payment or five years of supplemental health insurance at the same relatively low premium that full-time County employees paid for their health insurance. Retirees who selected the insurance package had a further choice: they could return to work on a part-time basis or receive a small monthly stipend.

         The record on appeal does not show how many County employees chose each option, but some of the plaintiffs in this case selected the insurance and part-time re-employment package. Other plaintiffs, apparently, selected the lump-sum package or retired through the normal retirement process but were later rehired on a part-time basis. The salient point is that each plaintiff at the time of termination was employed part-time and was covered by both Medicare and Aetna supplemental insurance.

         According to Thomas Dabertin, the County's human resources consultant, in 2013 Aetna informed the County that current employees (including rehired retirees) could not participate in the supplemental insurance plan. At the time, the County believed this prohibition was a consequence of the Af- fordable Care Act. However, the statutory language that authorizes retiree-only plans actually predates the Affordable Care Act. As best we can tell, the County's arrangement of providing its rehired retirees with supplemental insurance (secondary to Medicare) that did not conform to group health plan requirements under federal law was impermissible even before the Affordable Care Act took effect. See 26 U.S.C. § 9831(a) ("The requirements of this chapter shall not apply to ... (2) any group health plan for any plan year if, on the first day of such plan year, such plan has less than 2 participants who are current employees.") (emphasis added); 29 U.S.C. § 1191a(a) ("The requirements of this part ... shall not apply to any group health plan ... for any plan year if, on the first day of such plan year, such plan has less than 2 participants who are current employees.") (emphasis added).[1]

         Regardless of the prior legality of the County's insurance arrangement, one thing was clear when Aetna raised the issue in 2013: if the County did not act quickly, it risked either forfeiting its supplemental insurance coverage altogether or incurring substantial costs to bring the plan into compliance with federal rules and regulations governing group health insurance. Neither scenario was acceptable for a local government still struggling to regain its financial footing.

         Shortly after receiving the bad news from Aetna, the County retained Larry Grudzien, an attorney specializing in employee benefits. Grudzien confirmed Aetna's position, writing that a "retiree who is rehired as an employee ... should be treated as a current employee that counts against retiree only plan status and should be covered under the ERISA plan maintained for purposes of current (i.e., active) employees immediately upon rehire." Grudzien advised the County "not to rehire any retirees/' or, alternatively, to rehire them full-time and offer them regular benefits.

         In light of Aetna's warning and Grudzien's recommendation, the County decided to terminate its rehired retirees. In letters dated August 21 and September 12, 2013, the County informed a group of twenty-eight employees that their employment would end effective October 1, 2013. As the County explained in its letters, these employees were selected because they met each of four criteria: (1) they had retired from County service and were later rehired part-time; (2) they were ...


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