Will there be state innovation under Section 1332 Waivers?
Since the ACA was enacted in 2010, a number of states have been looking at the law’s State Innovation Waiver, also known as Section 1332, as a way to reimagine the ACA’s approach to health insurance coverage. Apart from final rules issued in 2012 that focused on the process for application, timing and content of any waiver application, CMS had released little information about how Section 1332 would be interpreted, leading a number of states to dream big. However, the new guidance released on December 12 by the Departments of HHS and Treasury suggests states may have a harder time hitching their grand plans to Section 1332 waivers and leaves us wondering: will there be state innovation under Section 1332?
As a reminder for those who haven’t followed this as closely, Section 1332 allows states to request a waiver from any of the following four ACA coverage requirements: 1) the individual health coverage mandate; 2) the employer mandate; 3) benefit and subsidy requirements; or 4) use of exchanges and qualified health plans (QHPs) to enroll consumers into coverage. However, any waiver application must guarantee that the scope, comprehensiveness, and affordability of coverage will be comparable to that provided under current ACA rules and cannot increase the federal deficit. In addition, states are barred from waiving insurance market guaranteed issue or related rating rules. States are permitted to submit a single application for waiver of Medicaid, Medicare or other tax rules and the ACA requires the HHS and Treasury Secretaries to coordinate Section 1332 review with other waivers.
NASHP hosted a session on 1332 waivers at its annual conference in Dallas in October 2015. At the session, Deborah Bachrach of Manatt Health Solutions provided a detailed overview of 1332 waivers and offered some helpful hints for states considering them. State officials that participated on the NASHP panel illustrated the wide continuum of approaches states are considering, from precise changes to tinker and adapt the ACA coverage model to ideas that entirely reimagine coverage.
For example, Minnesota’s Medicaid agency and the Governor’s Health Care Finance Task Force has been considering Section 1332 as an option to help the state simplify the ACA’s eligibility requirements, increase volume for value-based purchasing approaches, provide additional subsidies to smooth premium and cost sharing cliffs between programs, align requirements for Medicaid and private managed care entities, or support financial sustainability of their state-based marketplace. By contrast, another state panelist suggested that 1332 waivers could allow states to access tax and Medicaid funds to support private, defined-contribution models of coverage. One example envisioned a state developing a new coverage model relying on Medicaid to fund the purchase of either employer-sponsored coverage (where offered) or individual market plans, with defined contribution health savings account or high-deductible health plan options to control costs. While not actively under consideration, the panelist suggested this more expansive approach to Section 1332 might appeal to some states that have not otherwise embraced the Medicaid expansion.
The new HHS and Treasury guidance may deter many states from pursuing more expansive ideas for Section 1332. By establishing a series of high benchmarks states must meet to get waiver approval, with a strong emphasis on ensuring that the vulnerable, low-income populations the ACA supported are protected, the guidance hews closely to the letter and spirit of the ACA but may make it harder for states to demonstrate compliance with new, innovative ideas. In brief, the rule creates three important hurdles for states seeking 1332 waivers: (1) substantive comparability standards; (2) deficit neutrality requirements; and (3) administrative capacity. (For a more detailed review of the new requirements, see Tim Jost’s excellent Health Affairs blog.)
Substantive Comparability. The new guidance sets minimum thresholds to determine whether the proposed 1332 waivers provide coverage that is comparable, affordable, and as comprehensive as that otherwise available under the ACA. For example, to meet the comparability requirement, states will have to demonstrate that they are covering a comparable number of individuals, that the coverage they are providing meets the minimum essential coverage (or an alternate standard), and ensure there is no adverse impact for all residents including the most vulnerable. To show affordability, states will need to demonstrate there’s no adverse impact on all forms of individual cost-sharing and that coverage meets an actuarial value of 60 percent, complies with ACA out-of-pocket limits, and meets Medicaid affordability requirements, taking into account employer contributions toward coverage and wages. Comprehensiveness of coverage will be measured by whether the benefits provided under a waiver program meet the essential health benefits (or Medicaid/CHIP, if appropriate) requirements, with focus on benefits provided to vulnerable groups. By sticking to the letter and spirit of the ACA’s requirements, the guidance ensures that state 1332 waiver proposals will need to mirror the ACA’s coverage footprint, which may be challenging for states to demonstrate prospectively for entirely new coverage arrangements.
Deficit Neutrality. The deficit neutrality test in the guidance requires states to take into account the full range of federal spending, including federal premium tax credits, cost-sharing reductions, small business tax credits, revenues from tax penalties on individuals or employers, the “Cadillac tax” on employers for high-cost plans and any changes in employment income or payroll that affect federal tax revenues. Federal spending for Medicaid will also be considered, but any cost-savings included in a Section 1115 waiver submitted as part of a 1332 waiver request will not count toward the deficit neutrality analysis (although Medicaid savings in a 1332 waiver can be considered). Pass-through funds that the state can use to fund its 1332 waiver will include federal spending for subsidies that would have otherwise been spent, but cannot access federal administrative cost savings. Also, the guidance states that any necessary waivers submitted with 1332 waivers will be considered “independently” by respective agencies, which also dashes states’ hopes for a more combined, coordinated approach that ensures a more holistic review at the federal level. Is is also unclear how and whether states will be able to make calculations about the prospective impact of their 1332 proposal on whether employers offer coverage or choose to alter the scope of benefits or wages.
Administrative Oversight. The guidance also clarifies that federal administrative support for state 1332 waiver implementation will be limited. Because the FFM and the IRS have limited capacity to administer customized approaches for calculating federal assistance, enrollment periods, and plan options, states seeking to implement 1332 waivers that want customization will have to use or build their own exchanges and tax systems to administer them. This sets a high bar for states that have not built their own exchanges already, given that they need to provide 21 months notice before implementing and that there are no longer federal funds available to support implementation of a state-based marketplace. For these reasons, this new guidance appears to reduce the likelihood that states participating in the federally facilitated marketplace (FFM) will be able to consider 1332 waivers.
The new federal guidance on Section 1332 waivers sets the bar high for states seeking to make changes. While consistent with ACA-supported policy, the new, more stringent standards for comparability and the administrative complexities of proving deficit neutrality and administering a new program may deter states with grand coverage plans from seeking 1332 waivers in the near term. At the same time, states with more modest administrative goals that fit within the ACA framework and already have administrative structures in place (e.g., Minnesota, Massachusetts, possibly Hawaii) may not be deterred.
Section 1332 remains an option and opportunity for state innovations to improve on the ACA. Whether and how more states will use this option in 2016 is still an open question. NASHP will continue to track and report on this as state innovation unfolds.