New guidance from Centers for Medicare & Medicaid Services (CMS) places the spotlight on the ability of states to seek approval of “State Innovation Waivers” to test new approaches for delivering health insurance reform. Authorized under Section 1332 of the Affordable Care Act (ACA), State Innovation Waivers can grant statewide modifications to many of the ACA’s provisions, including requirements related to covered benefits, tax subsidies for low-income individuals, mandates for individuals to obtain health insurance and for employers to offer insurance to their employees, and the operation of state health insurance exchanges.

States that are approved for a State Innovation Waiver can potentially access federal funding that would otherwise be used to subsidize coverage for individuals purchasing insurance through a health care exchange. State applications will only be approved if the Secretary of the Department of Health and Human Services determines that the state’s proposal, compared to the non-waiver alternative, will cover at least as many state residents, will be at least as affordable, will provide at least as comprehensive coverage, and will not increase the federal deficit. The new guidance, published in the Federal Register on December 16, 2015, explains how CMS will evaluate these requirements. It also offers insight on related topics like the impact of other program changes on assessment of a waiver proposal and the federal funding available to states under a waiver. The guidance supplements final regulations issued by CMS in February of 2012 that set forth State Innovation Waiver application procedures, and requirements related to public notice, monitoring, compliance, reporting, and evaluation.

A major theme of the new guidance is that the Secretary’s analysis of coverage and affordability requirements will consider the effects of a waiver proposal on different groups of state residents. In particular, this examination will focus on the most vulnerable residents, including low-income individuals, the elderly, and those who have or are at greater risk of developing serious health issues. The guidance emphasizes that any proposal that would reduce coverage or protections for the most vulnerable residents will be rejected. The guidance also explains that requirements must generally be forecast to be met in each year that the waiver would be in effect, and must consider the impact of the waiver proposal on all state residents, regardless of the type of coverage (e.g. Medicaid or private insurance) they would have absent the waiver. Highlights from the guidance are summarized below.

Number of Residents Covered

To be approved, an application for a State Innovation Waiver must be forecast to cover at least as many state residents under the waiver as would be covered absent a waiver. Coverage means minimal essential coverage or something that would qualify as minimal essential coverage but for the waiver. The Secretary’s analysis under this requirement will also consider whether the proposal sufficiently prevents gaps or discontinuations in coverage.

Affordability of Coverage

State proposals will not be approved unless health care coverage under the waiver is forecast to be at least as affordable overall as it would be absent the waiver. Affordability is assessed by comparing state residents’ net out-of-pocket spending for health care coverage and services to their incomes. A state’s proposal will also be evaluated based on how it affects the number of individuals with large health care spending burdens relative to their incomes. Finally, a proposal would fail the affordability requirement if it would reduce the number of individuals with coverage that provides a minimum level of protection against excessive cost sharing.

Comprehensiveness of Coverage

Health care coverage under the waiver must be forecast to be at least as comprehensive overall for state residents as coverage absent the waiver, with comprehensiveness evaluated by comparing coverage under the waiver to the state’s essential-health-benefits benchmark and to coverage provided under the state’s Medicaid or CHIP programs. A waiver will not satisfy the comprehensiveness requirement if it decreases the number of residents with coverage that satisfies the essential-health-benefits requirements, decreases the number of residents with coverage of any particular category of essential health benefits, or decreases the number of residents with coverage that includes the full set of services that would be covered under the state’s Medicaid or CHIP programs.

Deficit Neutrality

The deficit-neutrality requirement means that projected federal spending net of federal revenues under the State Innovation Waiver must be equal to or lower than projected federal spending net of federal revenues in the absence of the waiver. Estimated effects include changes in tax credits, tax penalties, excise taxes on high-cost employer-sponsored plans, credits for small businesses offering health insurance, and changes in income and payroll taxes resulting from changes in tax exclusions for employer-sponsored insurance in deductions for medical expenses. The deficit-neutrality requirement applies both over the five-year period of the waiver and the ten-year budget plan submitted by the state as part of the waiver application.

Other Program Changes

The Secretary’s assessment of a waiver application will consider the impact of changes to ACA provisions made pursuant to the waiver, as well as changes to the state’s health care system that are contingent under state law only on the approval of the State Innovation Waiver. The Secretary will not consider proposed changes to state law that have not been enacted. In addition, the Secretary will not consider changes that are contingent on federal determinations, including changes in coverage or federal Medicaid or CHIP spending that would result from approval of a proposed section 1115 demonstration.

Available Federal Funding

Available federal funding to implement a State Innovation Waiver will be equal to an annual estimate of the federal cost for exchange financial assistance provided pursuant to the ACA that would otherwise have been claimed by state participants. The calculation does not account for other changes in federal spending or revenues as a result of the waiver, including federal administrative expenses.

Operational Considerations

The guidance cautions that certain proposals that would require changes to federally facilitated exchanges would not be feasible because of operational limitations for such exchanges. Similarly, certain changes to IRS administrative processes would not be feasible. For example, the guidance states that a proposal that would require the IRS to administer a different set of eligibility rules for the premium tax credit for residents of a particular state would not be possible.

Public Input

State and federal notice-and-comment periods required under the ACA in connection with a State Innovation Waiver proposal must be sufficient to ensure a meaningful level of public input, and in no case less than 30 days.