Editor’s Note: States have long been the testing ground for new models of healthcare and coverage. Section 1332 of the Affordable Care Act (ACA), which takes effect in less than two years, throws open the door to innovation by authorizing states to rethink the law’s coverage designs. Through State Innovation Waivers, states can modify the rules regarding benefits, subsidies, insurance marketplaces, and individual and employer mandates. In a new issue brief for the Commonwealth Fund and the Robert Wood Johnson Foundation, summarized below, Manatt Health describes how states may use State Innovation Waivers to reallocate subsidies, expand or streamline their marketplaces, replace or modify the mandates and otherwise pursue their own brand of health reform tailored to local market conditions and political preferences. Click here to download a free copy of the full brief.
The ACA establishes a new national paradigm for health coverage while leaving room for considerable experimentation by the states. The door to innovation will open even further in 2017, when Section 1332 of the ACA invites states to find alternative ways to meet the coverage goals of the law while staying within its fiscal constraints.
Section 1332, known as State Innovation Waivers, authorizes states to request five-year renewable waivers from the U.S. Department of Health and Human Services (HHS) and the Treasury of the ACA’s key coverage provisions, including those related to benefits and subsidies, the exchanges (also known as the marketplaces) and the individual and employer mandates.1 States may propose broad alternatives or targeted fixes. All waivers must demonstrate, however, that coverage will remain as accessible, comprehensive and affordable as before the waiver and that the changes will not add to the federal deficit.
What May Be Waived?
States may propose alternatives to the four pillars of the ACA:
- Benefits and Subsidies. States may modify the rules governing covered benefits, as well as the subsidies available through the marketplaces. States seeking to reallocate premium tax credits and cost-sharing reductions may receive the aggregate value of those subsidies to implement their alternative approaches.
- Marketplaces and Qualified Health Plans. States may replace their marketplaces or supplant the plan certification process with alternative ways to provide health plan choice, determine eligibility for subsidies and enroll consumers in coverage.
- The Individual Mandate. States may modify or eliminate the requirement that individuals maintain minimum essential coverage.
- The Employer Mandate. States may modify or eliminate the requirement that large employers offer affordable coverage to their full-time employees.
States may not waive the ACA’s:
- Nondiscrimination policies, prohibiting carriers from denying coverage or increasing premiums based on medical history.
- Fair play rules, guaranteeing equal access at fair prices for all enrollees.
State Innovation Waivers must satisfy four criteria:
- Comprehensive Coverage. States must provide coverage that is “at least as comprehensive” as coverage absent the waiver.
- Affordable Coverage. States may provide “coverage and cost sharing protections against excessive out-of-pocket spending that are at least as affordable” as coverage absent the waiver.
- Scope of Coverage. States must provide coverage to “at least a comparable number of residents” as would have been covered without the waiver.
- Federal Deficit. The waiver must not increase the federal deficit.
Coordination with Other Waivers
HHS is required to coordinate and consolidate the 1332 waiver process with waiver processes for Medicaid, Medicare, the Children’s Health Insurance Program and other federal laws relating to the provision of healthcare services. Consolidating the waivers allows for better alignment of coverage programs and may create some flexibility in how waiver packages are assessed.
Possible Waiver Strategies
The waivers present far-reaching possibilities, but all are subject to the coverage and fiscal guardrails discussed above. The most compelling ideas may emerge after state officials and key stakeholders come together and—through the public and transparent process required under Section 1332—forge consensus. Interviews with policy experts and state officials suggest the following areas of interest:
1. Rethinking subsidies for marketplace plans
The ACA seeks to make coverage affordable for those above Medicaid income-eligibility levels through a combination of subsidies that includes premium tax credits and cost-sharing reductions. Some state officials are concerned that cost-sharing levels are too high and will impede access to care. Others would welcome plans with greater cost-sharing and lower premiums to attract younger, healthier populations. Both approaches seek to minimize “subsidy cliffs” (dramatic drops in subsidy amounts as income rises) and establish more graduated subsidies. Whatever waiver approach a state chooses, it needs to address how benefits to some consumers would be balanced against increased costs to others. States also must be mindful that current spending on subsidies will influence the amount available through a 1332 waiver.
2. Reforming the marketplaces
Some states have done little to support the marketplaces, ceding control to the federal government, while others are broadening their role. Section 1332 allows for either approach, although states using the federal marketplace may be limited in their ability to modify its provisions unless and until the federal marketplace can accommodate more state-specific policies. These states may eliminate the federal marketplace entirely, however, as long as their waiver applications address the law’s coverage and fiscal goals.
Eliminating the marketplaces may be an especially attractive option in small states where only limited numbers use them. States may choose to:
- Replace them with a system offering vouchers for eligible individuals to purchase coverage from any lawful seller of ACA-compliant coverage.
- Leverage the rapid growth of Web brokers and private exchanges to outsource marketplace functions.
Other states may want to enhance their marketplaces’ scale by using a 1332 waiver to offer coverage options for additional populations or even serve as the sole coverage provider.
States focused on reforming their marketplaces should be mindful of how changes affect access to coverage across populations.
3. Replacing or modifying the individual and employer mandates
Arguably the least popular provisions in the ACA, the individual and employer mandates may be prominently featured in states’ 1332 waiver applications. Possible alternatives to the individual mandates include:
- Implementing penalties for late enrollment,
- Reducing opportunities for enrollment (i.e., multiyear waiting periods, if open enrollment is missed), and
- Establishing automatic enrollment.
States seeking an alternative to the employer mandate may implement a “pay or play” requirement in which employers must pay a flat percentage of payroll in benefits or taxes. Waivers of the employer mandate could have a significant fiscal impact, reducing the penalty revenue to the federal government.
Targeted approaches focus on a narrow slice of the law, such as undoing the ACA requirement that small-group rating rules apply to businesses with 5–100 employees. Other targeted reforms might include:
- Filling coverage gaps, such as the “family glitch” that makes dependents ineligible for tax credits if they are offered employer coverage, even if that coverage is unaffordable.
- Providing incentives for healthcare quality improvement by reallocating subsidies to favor plans with higher quality ratings.
- Replacing the ACA’s three-month grace periods for nonpayment with the one-month grace periods common for plans outside the marketplace.
- Altering rules, such as the definition and verification of income to align exchange, Medicaid and other program rules.
- Replacing complex federal recordkeeping rules, while still preserving federal reforms.
State Innovation Waivers involve a delicate balancing act: providing states with considerable latitude to experiment with alternative coverage mechanisms while also requiring that they continue to meet the coverage and affordability goals of the ACA. If policymakers agree on the value of having accessible, affordable and meaningful health coverage for all, then 1332 waivers offer a way to achieve these goals while reinforcing states’ leadership in regulating their insurance markets and serving as the laboratories of health reform.