Implementing Health Reform. Section 1332 of the Affordable Care Act provides for waivers for state innovation. The idea behind this provision is that if individual states can find a better way of reaching the goals of the ACA, they should be allowed to try.

Under section 1332, states may, for years beginning after January 1, 2017, apply to the Departments of Health and Human Services and Treasury for a waiver from certain provisions of the ACA, including the individual and employer mandates, the qualified health plan requirements, the actuarial value and essential health benefit requirements, and the premium and small business tax credit and cost-sharing reduction provisions. Other provisions of the ACA, including the prohibitions against imposing preexisting condition requirements or underwriting based on health status, cannot be waived.

To be granted a waiver, states must demonstrate that their alternative proposal will stay within certain guardrails. Specifically, a state must show that its proposal will:

  • provide coverage at least as comprehensive as that provided under the ACA,
  • provide coverage and protection against excessive out-of-pocket expenditures at least as affordable as that provided under the ACA,
  • cover a number of residents at least a comparable to the number who would be covered under the ACA, and
  • not increase the federal deficit.

A waiver proposal must be authorized by state legislation and be developed through a public process. Waivers can be granted for up to 5 years. Innovation waivers can be coordinated with Section 1115 Medicaid waivers. A state granted an innovation waiver that restricts access to premium tax credits, cost-sharing reduction payments, or the small employer tax credit can be paid the amounts that would have been paid to its residents under these programs to finance its waiver program.

In 2012, HHS finalized a rule establishing the procedures through which a state could apply for an innovation waiver. In the summer of 2015 it established a webpage with information on the innovation waiver program.

The New Guidance: An Emphasis On Vulnerable And Low-Income Populations

On December 12, 2015, HHS and Treasury released a guidance on the substantive requirements of section 1332. The guidance amplifies the four requirements listed above, but clarifies that proposals will be evaluated specifically as they affect the vulnerable and low-income populations on whom the ACA’s protections are focused and on their access to affordable and comprehensive care.

The guidance also discusses the limited capacity of the federally facilitated marketplace (FFM) and the Internal Revenue Service (IRS) to administer state waiver programs, basically stating that states that want to design their own premium subsidy programs are on their own.

Number Of Residents Covered

States seeking 1332 waivers must first demonstrate that the waiver program will cover a comparable number of state residents as would have received coverage absent the waiver. Coverage is defined as minimum essential coverage (MEC) under the ACA, or if the MEC requirement is waived, coverage that would qualify as MEC but for the waiver. Comparable means that the number of individuals covered will be no less in each year of the waiver than would have been covered under the ACA.

The impact on all state residents is considered regardless of their form of coverage, including changes in the population covered by Medicaid (although a 1332 waiver cannot itself change a state’s Medicaid program). The guidance makes it clear, however, that the focus of review is going to be on how a waiver request would affect coverage for the vulnerable low-income, elderly, and high-health risk individuals who are those primarily helped by the ACA. It would seem that a subsidy program that was not means-tested or age-adjusted could not pass muster under the guidance. Proposals should also prevent gaps or discontinuities in coverage.

Affordability Of Coverage

Second, health care coverage under a waiver must be as affordable as coverage would be under the ACA without the waiver. Affordability is measured by comparing the effect of the waiver on net out-of-pocket expenditures—including the cost of premiums as well as cost-sharing, and considering the cost of non-covered services—on all residents of the states. Again, the primary focus of evaluation will not be on reduction of average costs, but rather on affordability as it affects vulnerable residents and those with high health spending burdens.

Waiver proposals will also be rejected that reduce the number of individuals with a minimum level of protection against cost-sharing. In particular, waivers are problematic that would reduce the number of people with coverage that 1) has an actuarial value of 60 percent or more or 2) that complies with the out-of-pocket limits imposed by the ACA, or 3) that meets Medicaid affordability requirements. Waiver applications should analyze the effect of the waiver on premiums and out-of-pocket costs separately and in combination and describe any anticipated changes in employer contributions or wages under the waiver.

Comprehensiveness Of Coverage

Third, the scope of benefits provided under the waiver program must be at least as comprehensive as those provided under the ACA. Comprehensiveness of a waiver program will be measured by whether the benefits a waiver program provides meet the state’s essential health benefit (EHB) requirements, or, where appropriate, Medicaid or CHIP benefit requirements. A waiver program will not meet the comprehensiveness requirement if it reduces the number of residents with coverage that meets the state’s benchmark in all ten EHB categories or for any one category of EHB. Again, review will focus in particular on benefits provided vulnerable groups.

Federal Budgetary Consequences

Finally, a waiver program must be deficit neutral to the federal government—that is, the projected federal spending net of revenues under the program cannot be higher than would be the case without the waiver. Federal spending for premium tax credits, cost-sharing reductions, and small business tax credits, as well as federal revenues from individual and employer shared responsibility penalties and the excise tax on high-cost employer coverage, must be taken into account, as must changes in income or payroll taxes resulting from changes in employer coverage or deductions for medical expenses.

Changes in federal Medicaid spending or in the costs of administering federal programs are also considered. Changes in the Medicaid program caused by an 1115 waiver program, current or proposed, cannot be considered in determining whether the 1332 waiver program is budget neutral—reduced expenditures in one program cannot be considered in determining budget neutrality of the other. However, changes in Medicaid and CHIP that would result directly from the Section 1332 waiver are considered.

States must submit a ten-year budget with their waiver proposals that assumes the waiver will continue permanently. The waiver cannot increase the federal deficit either under the five-year maximum period the waiver may remain in effect or over the ten years covered by the budget. In evaluating a state waiver application, the agencies will consider changes in the state’s health care system that will be affected by approval of the waiver. The assessment will not consider the impact of changes contingent on further state action, such as anticipated state legislation.

The funds that will be passed through to a state with an approved waiver request will include financial assistance that would have been provided to residents of the state but for the waiver. It will not include, however, reductions in federal administrative expenses (which will be considered in determining budget neutrality). Although the guidance does not mention it, the calculation of pass-through payments could be complicated considerably if the House of Representatives ultimately prevails on its claim in House v. Burwell that cost-sharing reduction payments must be appropriated annually, as it will be difficult to predict from year-to-year whether the funds will be appropriated and thus what the amount of the pass-through payments will be. Estimated pass-through payments will take into account the experience of similar states.

Throughout, the guidance refers back to the methodological requirements found in the earlier procedural rule. The guidance further specifies databases that should be used for making coverage projections and variables that those assumptions should consider. In general, states should use the databases used for federal budget projections unless a rationale is submitted as to why state-specific data is better.

Feds To States: If You Design Changes, Be Prepared To Administer Them

The guidance cautions that at this point the FFM cannot accommodate different rules for different states. It cannot handle, for example, changes in the calculation of federal financial assistance, non-standard enrollment periods, or customized plan management or plan display options. States contemplating these kinds of changes will have to establish their own state exchange—a process that under the proposed 2017 benefits and payment rule would require 21 months’ notice.

The guidance also notes that the IRS cannot customize its tax rules for individual states. While states can entirely waive ACA tax provisions—such as the individual or employer mandate—they cannot modify tax provisions. A state proposing a modified premium tax credit program, for example, would have to waive the federal program entirely and administer the program though its own tax system.

Finally, the guidance provides that the public comment periods that must be provided sequentially first by the state and then by the federal government on waiver proposals may vary based on the significance of the changes proposed, but in any event must each be at least 30 days.

Flexibility Limited To Waivers That Meet The Goals Of The ACA — For Now

Anyone who thought that the 1332 waiver program would allow states to design health care programs that deviated radically from the program found in the ACA will be disappointed by the guidance. But that should come as no surprise: section 1332 on its face authorizes programs that meet all of the affordability and comprehensiveness aspiration of the ACA, just through a different approach. States that have innovative ideas that will promote the goals of the ACA, however, should be able to get approval under this guidance.

It should be noted in conclusion, though, that this is only guidance, not a rule. Guidance can be changed easily; rules can only be changed through rulemaking, which takes time and requires a reasoned explanation. Section 1332 innovation waivers cannot take effect until 2017, and in 2017 we will have a different administration.