A federal appeals court ruled earlier this week that transgender state employees, and the transgender dependents of state employees, can sue North Carolina for insurance exclusions that prohibit the state’s employee health care plan from covering gender-affirming medical treatments.

Six state employees filed suit against the state in 2019, accusing the North Carolina State Health Plan of discriminating against them or their children.

Attorneys for the state had argued that the state could not be sued under a legal doctrine known as “sovereign immunity,” but last year, a federal judge ruled that the state could be sued for violating nondiscrimination provisions contained in Section 1557 of the Affordable Care Act, on the grounds that it had waived its sovereign immunity and agreed to abide by the ACA’s conditions by accepting federal funds.

The state appealed the case to the 4th U.S. Circuit Court of Appeals, which ruled to uphold the lower court’s decision on Wednesday. In a 2-1 ruling, Chief Appellate Judge Roger Gregory and Judge Albert Diaz found the state waived its immunity from prosecution when it used federal funds on the state’s health plan but failed to abide by the requirements of Section 1557, the section of the federal health care law that prohibits insurers from discriminating on the basis of sex.

Under the Biden administration, the U.S. Department of Health and Human Services has embraced an interpretation, based on the rationale underlying a Supreme Court ruling in an employment discrimination case last year, that prohibitions on sex-based discrimination apply to instances where a person is denied insurance coverage for, or access to, care based on their sexual orientation or gender identity.

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The 4th Circuit’s ruling marks the first time that a federal appellate court in the United States has ruled that claims of “sovereign immunity” do not protect state entities from liability under Affordable Care Act if they receive federal funding.

Gregory and Diaz noted that Section 1557 is intended to prohibit discrimination in insurance and health care access, writing: “That the Affordable Care Act does more than prohibit discrimination does not lessen the prohibition’s force or effect.”

They also affirmed that gender-affirming care for transgender individuals is medically necessary — thus undercutting the argument that certain transition-related treatments or procedures should not be covered by the state employee health plan.

Related: Federal judge refuses to throw out transgender West Virginians’ health care lawsuit

“People identify as transgender when their gender identity — their inherent and deeply felt sense of their gender — does not align with the sex they were assigned at birth. We have previously noted what should by now be uncontroversial: ‘Just like being cisgender, being transgender is natural and is not a choice,'” Gregory wrote, quoting the 4th Circuit’s decision in the Gavin Grimm case. “Nor is someone’s transgender status a ‘psychiatric condition’ that implies any ‘impairment in judgment, stability, reliability, or general social or vocational capabilities.'”

Gregory and Diaz noted that, if left untreated, gender dysphoria can lead to severe anxiety, depression, and suicidal ideation, also affirming that gender-affirming treatments that reduce feelings of gender dysphoria are not elective and medically necessary for people suffering from the condition.

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The judges also quoted a 2016 report issued by a consulting firm hired by the State Treasurer’s Office, which found that the state risked millions of dollars in federal funding and discrimination lawsuits if it continued to exclude coverage for medically necessary transition-related care.

That report noted that the cost of defending the state from lawsuits would far exceed the estimated cost of covering gender-affirming care, which would be approximately 0.011% to 0.027% of the state health care plan’s $3.2 billion in premiums.

It was that report that prompted former State Treasurer Janet Cowell (D) to remove exclusions on gender-affirming care from the state employee plan in 2017. But in 2019, her successor, Dale Folwell (R) rescinded the coverage, arguing that taxpayers should not be forced to pay for “sex-transition operations,” reports the Raleigh-based newspaper The News & Observer.

But 4th Circuit Judge G. Steven Agee dissented from the majority opinion, arguing that the justices should have dismissed the lawsuit and noting that two other appeals courts, the conservative 5th and 10th Circuits, had reached different conclusions regarding whether states waive sovereign immunity by accepting federal funds. This creates a split in the circuits that only the U.S. Supreme Court can resolves. Agee urged the high court to take up the case as soon as possible to “correct the constitutional error here.”

Lawyers with two LGBTQ legal organizations representing the six plaintiffs celebrated the decision as a victory for transgender patients.

“No one should  be denied access to lifesaving health care because they are transgender,” David Brown, the legal director of the Transgender Legal Defense & Education Fund, said in a statement. “We are very pleased that the Fourth Circuit affirmed that state governments are not entitled to discriminate. We are also grateful to the Court for reiterating the critical importance of ensuring transgender people are protected from discrimination in health care.”

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“We are gratified that the Fourth Circuit has affirmed the ability of people to seek justice and assert their rights against discrimination in health care perpetuated by state entities receiving federal funding, in this case, the North Carolina State Health Plan for Teachers and State Employees,” Omar Gonzalez-Pagan, a senior attorney and health care strategist with Lambda Legal, said in a statement.

“We sued the State Health Plan and North Carolina officials for their blatant discrimination against transgender state employees and their dependents, who like our plaintiffs dedicate their time and talent to improve the wellbeing of the state and its residents, but are deprived of medically necessary and often life-saving health care services,” Gonzalez-Pagan added. “We are pleased with this decision and hope the North Carolina State Health Plan for Teachers and Employees will begin providing equal health care coverage to all its employees by discontinuing their unlawful discrimination against transgender people.”

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