On September 9 Hawaii became the first state to post a draft 1332 waiver proposal for public comment. While Hawaii's waiver proposal is focused on the state's unique 40-year-old employer mandate, the 40-page proposal illuminates the procedural and substantive issues that other states will have to address in moving forward with 1332 waiver proposals.
What Are 1332 Waivers?
Section 1332 of the Affordable Care Act (ACA) authorizes states to request waivers from the U.S. Departments of Health and Human Services (HHS) and Treasury of key components of the ACA's coverage provisions, including those related to benefits and subsidies, the Marketplaces, and the individual and employer mandates. While 1332 waivers provide new flexibility for states, these "state innovation" waivers also must preserve core features of the ACA, such as the prohibition on denying coverage or increasing premiums based on medical history. In addition, 1332 waivers must meet four guardrails designed to ensure that coverage remains as affordable, comprehensive, and accessible as pre-waiver coverage and that the waiver does not contribute to the federal deficit.
Waivers can take effect as early as 2017, subject to an approval process that includes statutory and administrative requirements.1 Waivers require legislative authorization and public hearings at the state level, and public comment periods at the federal level. HHS posted a 1332 Fact Sheet and FAQ on July 22, 2015 that summarized procedural requirements and encouraged states to contact HHS with questions about their waivers. Neither HHS nor Treasury have indicated whether there will be additional regulations related to 1332 waivers promulgated by the Obama Administration.
What Provisions of the ACA Does Hawaii Propose to Waive?
Hawaii proposes "to maintain all aspects of the innovative Hawaii Prepaid Health Care Act" and to waive provisions of the ACA "that diminish [the Prepaid Act]." The Prepaid Act, enacted in 1974 and exempted from ERISA, requires "virtually every employer with at least one permanent, full-time worker to purchase employee health insurance coverage."2 Several features of the Prepaid Act are stricter and more "employee friendly" than their ACA counterparts. Full-time is defined as working 20 or more hours per week, compared to the 30-hour definition in the ACA. Employees cannot be charged more than 1.5% of their wages for premiums, compared to a sliding scale from 2% to 9.5% of income under the ACA. Employers must provide the equivalent of platinum or gold coverage. Other cost-sharing rules, such as out-of-pocket maximums, are also more favorable to the employee than ACA rules.
After three years of attempting to reconcile the Prepaid Act with the Small Business Health Options Program (SHOP), Hawaii proposes to waive SHOP and related provisions of the ACA to eliminate conflicting requirements between the two programs, eliminate the infrastructure required for SHOP, and reduce other administrative costs associated with ACA implementation in the small group market. Hawaii does not propose any waivers in its 1332 proposal that affect individual market purchasers. This may, at least in part, be influenced by the State's imminent conversion from a State-based Marketplace (SBM) to a Supported SBM (SSBM), which means it will rely on the Federally Facilitated Marketplace (FFM) to handle eligibility and enrollment for the individual market. The FFM will have considerably less flexibility than an SBM to administer unique eligibility and enrollment rules for the individual market, though other 1332 waivers could be proposed in FFM and SSBM states.
What Can Other States Learn From Hawaii's Proposed Waiver?
Because Hawaii's Prepaid Act is the only state-based employer mandate that is exempt from ERISA's restrictions on state regulation of employer-sponsored health benefits, other states cannot pursue the same 1332 waiver as Hawaii, but some may want to pursue their own SHOP waivers and can learn from Hawaii's experience as it negotiates with HHS and Treasury on the substantive issues related to its proposed SHOP waivers. Further, all states can learn from Hawaii's approach to the standard requirements for 1332 waivers. As Hawaii holds public hearings on its waiver this fall and engages with HHS and Treasury over the details of its waiver proposal, states can follow Hawaii's progress through the approval process as a precedent of how the federal government will apply the guardrails and other requirements to waiver proposals.
Hawaii asserts that its draft waiver proposal complies with the four statutory guardrails as follows:
- Scope of Coverage. Hawaii claims that the Prepaid Act is a more effective coverage plan for small businesses than SHOP, citing near universal compliance with the Prepaid Act and noting that only one percent of small employers have enrolled through SHOP to date.
- Comprehensiveness of Coverage. Hawaii is not proposing any waivers with respect to the ten Essential Health Benefits (EHBs).
- Affordability of Coverage. The Prepaid Act limits employee contributions to premiums and employee cost sharing more strictly than the ACA, as noted earlier. Annual out-of-pocket maximums are also capped at lower levels than the ACA—$2,000-$3,000 for an individual and $6,000-$9,000 for a family.
- Federal Deficit. Hawaii has not constructed the required 10-year budget yet, but projects that the federal government will save money by not having to administer SHOP. In place of the tax credits that small businesses would otherwise have received with a SHOP, Hawaii proposes federal funds to support financial assistance for employers with fewer than eight employees in the form of Prepaid Premium Supplementation.
Other technical and policy issues for states to watch with regard to Hawaii's waiver include:
- Replacing SHOP with Direct Enrollment. Like many states, Hawaii has had limited success in attracting insurers to offer products or employers to purchase products through SHOP. Only one of the five insurers offering off-exchange products to small businesses is currently offering products through SHOP, and 99% of small employers are still purchasing coverage off-exchange through direct enrollment with carriers. Other states will not be able to show the same level of off-exchange coverage (roughly half of small employers offer coverage nationally, in part because no state other than Hawaii has an employer mandate), but depending on how baseline coverage is defined, some states may be able to demonstrate that they could do as well or better on scope and affordability of coverage by relying on direct enrollment or another alternative to SHOP.
- Employer and Employee Choice. Hawaii's application addresses the issue of employer and employee choice by pointing out that employers actually have five insurer choices off-exchange and only one choice in SHOP, making the loss of employee choice, as required in SHOP, a theoretical concern. The facts will be different in each state, and it is unclear whether loss of choice will be an issue with 1332 waivers of SHOP. Loss of choice would not appear to have a direct impact on any of the guardrails.
- Reallocating the Small Business Tax Credit. Hawaii proposes that $46 million in federal funds be allocated to Hawaii's Premium Supplementation Fund, which assists employers with less than eight employees in covering their obligations under the Prepaid Act. The $46 million assumes that 10% of qualified employers would otherwise have received tax credits for SHOP coverage and that Hawaii employers should get an offset for this loss. This proposal raises the question of how to handle the impacts that waivers may have on provisions of the ACA, such as the small employer tax credit, that are outside the waivable sections of the law.
- January 2017 Implementation. Because virtually all small employers already enroll in coverage through the direct enrollment process that Hawaii proposes to use instead of SHOP, Hawaii proposes implementation of its waiver on January 1, 2017. Other waivers may not be ready for implementation as quickly, especially in states where the required legislative authorization may not occur until mid-2016 or later. Implementation timelines may be quite long when states account for the required public hearing and public comment periods in addition to federal requirements for what constitutes a complete application.
Hawaii's waiver, while focused on the State's unique and long-standing employer mandate, provides a test case of the 1332 state innovation waiver process. The substantive issues related to Hawaii's proposed SHOP waivers will be of broad interest to states, many of which have struggled to make the ACA SHOP successful and sustainable. The State's negotiations with HHS and Treasury will provide insight into the federal government's approach to evaluating state innovation proposals against the statutory guardrails. Hawaii's application will also merit a close watch for how the State and federal governments manage the waiver approval and implementation timeline.