In December, the Department of Health and Human Services (HHS) and the Department of the Treasury released new guidance on how the agencies will evaluate state applications for the ACA’s Section 1332 State Innovation Waivers. Prior to this release, the only guidance on 1332 waivers was a regulation on the waiver application process. A substantive attempt to define the contours of the waiver—which would allow a state to waive major provisions of the ACA to experiment with different coverage models, so long as it offers comparably comprehensive and affordable coverage—was eagerly awaited by states and interested stakeholders.

For states, it turned out to be a classic example of “be careful what you wish for.” From a state perspective, the new guidance considerably limits their flexibility. However, it is important to note, as states continue to consider potential waiver opportunities, that a future administration could revisit and expand this flexibility.

Budgetary (in)flexibility

First, the guidance strengthens the state’s budgetary guardrails, requiring waiver applications to be deficit neutral — not just over the life of the waiver, as with 1115 waivers, but in each and every year of the waiver. States would not have the flexibility to invest in initial years and ramp up to savings in later waiver years. In addition to the annual deficit test, the guidance makes clear that states must consider all impacts on federal revenue and spending as a result of the waiver. That means states must consider the impact of their actions on the income tax, payroll tax, and excise tax — which limits the capacity for states to spread innovation into the employer market.

The new guidance also precludes combining a Section 1332 waiver with an 1115 waiver. This is significant because it prevents states from considering broad reforms that span both their Medicaid program and subsidized marketplace coverage, blunting the transformative promise of the waiver. More practically, it means that a state can’t rely on budget savings from one waiver to help offset increases in another. For consumers, the differences in rules, coverage sources, and systems of care exist as an artificial construct, and state efforts to make the system more consumer-friendly across public and private programs may be stymied by these requirements.

Operational (in)flexibility

The guidance also indicates that a Section 1332 waiver is likely not an option, at least initially, for a state using the Healthcare.gov platform for their marketplace (currently 38 states), because CMS cannot customize Healthcare.gov to account for changes in eligibility or benefits. While this was expected, it does signal an operational constraint for many states that may be interested in different approaches to expanding coverage.

It also provides additional urgency for improvements to the federal platform. The limitations of the federal platform for Section 1332 innovation should also be a consideration for states that are currently using their own State-Based Marketplace technology but are analyzing the feasibility of transitioning to the federal platform. In fact, Minnesota’s Health Care Finance Task Force recently rejected a recommendation to consider a migration to Healthcare.gov in part based on its lack of flexibility.

Outlook For 2016

So what does the new guidance and its stricter-than-expected interpretation mean for states interested in transforming their coverage system? It’s now clear that the only waivers likely to be approved in the final year of the Obama Administration are applications focused on narrow, targeted changes.

Hawaii and Massachusetts are the most likely examples of such waivers, and both will focus on retaining the characteristics of the employer coverage systems that existed before the Affordable Care Act. Both states had pre-ACA employer mandates and had a regulatory structure to support those systems that were altered by the ACA.

Similarly, Vermont is seeking to waive requirements for a technology-supported Small Business Health Options Program (SHOP marketplace). Look for these first 1332 waivers to seek relief in order to maintain those state-specific structures and in doing so, to push back somewhat on the complex data and modeling requirements outlined in the waiver guidance. While Hawaii relies on the federal marketplace platform, the state’s proposal is limited to the employer market and does not require any changes to Healthcare.gov.

Despite the inflexibility in the guidance, fans of state innovation need not despair. There’s still significant state interest in opportunities under Section 1332. Many states have been waiting to complete their third open enrollment, in the hopes of creating a more stable experience on which to build more innovative programs. Minnesota’s Health Care Financing Task Force report is the most ambitious innovation idea since Vermont delayed its Green Mountain Care proposal. The report suggests a number of innovations that could be achieved under Section 1332 waivers, including: expanded access to dental coverage, addressing the family glitch, and smoothing cost cliffs (large jumps in premium costs) for persons up to 275 percent of the federal poverty level.

The following map outlines the states with 1332 activity:

Howard_Exhibit1

Looking Down The Road

It is also important to remember that the December 2015 guidance is just guidance — it is not formal rulemaking or regulation, and a new administration is likely to have its own interpretation of the available innovations under Section 1332. States also still have the 1115 authority to reform and innovate in their Medicaid programs, which continues to be a tremendous source of flexibility for states.

While 2016 will probably not be the year of blockbuster, game-changing Section 1332 waivers, it is in states’ best interests to use this year to prepare for the future. Waivers are tools to achieve policy goals, and many states are still wrestling with what their coverage system goals should be post-ACA implementation. Setting those goals and examining the ability to use Section 1332 waivers to achieve them is the next step in coverage reform efforts.