Editor's Note: In a new essay for the National Institute of Health Care Management (NIHCM), summarized below, Manatt Health examines Section 1332 waivers and the opportunities they offer states to customize health reform, starting as early as 2017. Narrow interpretation of the statute's protective guardrails has limited state action to date, but this guidance can be relaxed by the next administration, which could spark bolder state experiments. To download a free PDF of the full essay, click here.
Stakeholders across the country are focused on effectively implementing the Affordable Care Act (ACA) and making incremental—not radical—changes to it. But how can change happen given the deep divisions around what corrections are needed? One answer lies in Section 1332 of the ACA, which invites states to be "laboratories of democracy" in experimenting with ACA reforms.
What Could States Do?
Section 1332 authorizes states to request five-year renewable waivers from the U.S. Departments of Health and Human Services (HHS) and the Treasury to modify the ACA. States may:
- Modify the rules governing covered benefits, premium tax credits and cost-sharing subsidies.
- Replace or modify their ACA Marketplaces by providing health plan choice, subsidy eligibility determination and enrollment in other ways.
- Modify or eliminate the ACA's individual and/or employer mandates.
In designing new approaches, states must satisfy four statutory "guardrails." They must provide coverage that is at least as (1) comprehensive and (2) affordable to (3) at least as many residents as would have been covered without the waiver, all (4) without increasing the federal deficit. Substantive guidance on how reform proposals will be judged against these guardrails, released in late 2015, was decidedly more restrictive than some states had hoped. The limitations have largely discouraged states from proposing sweeping reforms.
What Are States Doing So Far?
Three states published draft waivers this spring, and each was narrowly drawn to address unique issues. The first phase of a Massachusetts proposal to maintain certain ratings practices in its merged small group and individual markets was approved by HHS on other grounds, obviating the need to file for a 1332 waiver this year. Similarly, Vermont's draft waiver to continue relying on direct enrollment through carriers rather than building a Small Business Health Options Program (SHOP) portal was rendered moot by HHS guidance delaying the mandatory change to an online portal to 2019. That makes Hawaii's waiver—asking to maintain its 40-year-old employer mandate rather than implement a SHOP with less-generous coverage—the only one to gain approval in 2016.
Two other states—Alaska and California—have recently passed legislation to pursue 1332 waivers, and each could get last-minute attention from the Obama Administration because of the subject matter. Alaska could get a savings credit under 1332 for a $55 million state reinsurance program that will reduce premiums and federal tax credits. California could get approval for making non-subsidized coverage available to immigrants who cannot obtain coverage through Covered CA today.
For 1332 waivers to be a game-changer, the next administration would need to encourage state engagement by providing more leeway for broad innovations, starting with revisions to the 2015 guardrail guidance. Ultimately, state innovations will depend on how the guardrails are interpreted, as well as on political considerations.
Changing benefits and subsidies. The ACA seeks to make coverage affordable through a combination of low premium/high cost-sharing plans and a sliding scale of subsidies that minimize both premium contributions and cost-sharing obligations for low-income consumers. Critics on both ends of the political spectrum question whether the law strikes the right balance. Many states also would like to smooth the continuum between Medicaid and Marketplace coverage, but drive toward that goal in very different ways. Conservative states, such as Indiana, have sought to increase Medicaid cost-sharing to Marketplace levels, while liberal states, such as New York, want to decrease Marketplace cost-sharing to Medicaid levels.
Redoing the exchanges. States have been weighing a wide range of alternative approaches to the ACA's exchange Marketplaces—from privatizing them to expanding their leverage. Waivers to reform the role of public exchanges must be mindful of how such changes affect access across different populations.
Replacing the individual mandate. The individual mandate is the least popular provision in the law, but experts agree that eliminating it would drive healthy people out of the insurance market, reducing coverage and increasing premiums. To avoid violating the coverage and affordability guardrails, states wanting to waive the individual mandate will need another way to keep healthy people in the insurance pool. Options include penalties for late enrollment, multiyear waiting periods if open enrollment is missed or automatic enrollment.
Repealing the employer mandate. The employer mandate could be eliminated without a significant impact on the scope or cost of coverage, but this step would raise the federal deficit by reducing the penalty revenue from large employers. States would need to have other features in their 1332 waivers to offset this lost revenue or cut federal costs elsewhere. One option might be a "pay for play" requirement for employers to pay a flat percentage of their payroll in benefits or taxes.
Section 1332 waivers could be just the ticket for unleashing state-level health reform, and relaxed guardrail guidance could encourage some states to take up bolder reforms. However, states also could opt to continue the status quo or pursue only narrow changes, if only because the ACA's success in expanding coverage is raising the political price of disrupting health coverage.