What Advocates Should Know about 1332 State Innovation Waivers

Beginning in 2017, the Affordable Care Act permits states to apply for waivers to begin experimenting with strategies to provide residents with access to high-quality, affordable health insurance. Known as 1332 state innovation waivers, these waivers can be an important vehicle for the next round of state improvements in health care.

Federal guidance contains strong protections for low-income and vulnerable consumers
In this analysis, we summarize the law and the new guidance from the federal government regarding requirements for 1332 waivers. In December 2015, the Department of the Treasury and the Department of Health and Human Services issued guidelines for states submitting 1332 waivers that contains strong protections for low-income and vulnerable consumers. It builds on parameters laid out by the ACA itself for the waivers, and on federal regulations issued in 2012. HHS and Treasury should add some of the protections in this guidance to federal regulations. The public can comment to the federal government on the guidance at any time, and can also urge that provisions be added to regulations.

Particularly in states that are willing to combine some of their own revenue with federal pass-through funds, states could improve upon the ACA’s protections to make coverage and care even more affordable and accessible to residents. But state officials and consumer advocates should be watchful to ensure that innovations will, in fact, advance consumer health. State consumer advocates can play a vital role in helping to shape state waiver proposals and on commenting on proposed provisions that could harm and those that could help state residents.

What aspects of the Affordable Care Act can states change under a 1332 waiver?
Under a 1332 waiver, states can ask the federal government for permission to change some major elements of the ACA that apply to private health insurance coverage. If approved, state waivers can be implemented beginning in 2017. For example, states could decide to:

Change the requirements for health plans to offer bronze, silver, gold and/or platinum metal level coverage, or change other requirements of qualified health plans
Stop using health insurance marketplaces or change the way marketplaces operate
Alter premium credits and cost-sharing reductions, although coverage would have to remain at least as affordable to state residents (more on that below)
Change or eliminate the employer shared-responsibility provisions (also known as the employer mandate) that require large employers to offer affordable coverage to employees or pay a tax penalty if they don’t
Change or eliminate the individual-shared responsibility provision (individual mandate) that requires individuals to obtain coverage (unless they have a hardship) or pay a tax penalty if they don’t.
Will 1332 waivers affect Medicare or Medicaid?
The 1332 waivers apply only to private health insurance coverage and the marketplace, not to public programs like Medicare or Medicaid. But states can seek multiple waivers from HHS at the same time. For example, they might ask permission to change their Medicaid programs under an 1115 waiver and their marketplace coverage under a 1332 waiver. However, the federal government will evaluate each type of waiver separately – an 1115 waiver must still meet all of the existing standards for Medicaid 1115 waivers, and a 1332 waiver must meet the requirements we describe below. To learn more, see How Could a 1332 Waiver Affect Medicaid or CHIP?

What does the new guidance explain?
As mandated by the ACA, the federal government will only approve waivers that meet these criteria:

Provide coverage to a comparable number of state residents as would be provided absent the waiver;
Provide coverage that is at least as affordable as would be provided absent the waiver;
Provide coverage that is at least as comprehensive as would be provided absent the waiver; and
Will not increase the federal deficit.
When a waiver is approved, states receive the amount of federal money that would have been provided to their residents under ACA’s financial assistance programs as a “pass through” to use for the state’s innovation.

The new guidance further explains and delineates each of these criteria. Importantly, the guidance explains, besides looking at the impact of the waiver on the state’s residents as a whole, the state must assess how it will affect vulnerable residents, including those with low-incomes, who are elderly, or have serious health conditions or health risks.

Coverage to a comparable number of residents: States must forecast how many residents would have minimum essential coverage under a waiver, and show that this is at least as many would have minimum essential coverage without the waiver. Minimum essential coverage includes a wide variety of types of health coverage. Additionally, the state must show that the waiver will not reduce coverage to vulnerable groups, including low-income individuals, elderly individuals, those with serious health issues, and those at greater risk of developing serious health issues. States must consider whether people will experience gaps in coverage as well as whether they would lose coverage entirely. Even though a state cannot use a 1332 waiver to change Medicaid policy, states must consider whether the waiver will have any effect on Medicaid enrollment.

Coverage that is at least as affordable: To meet this test, states compare residents’ net out-of-pocket spending for premiums and cost-sharing under the waiver with their out-of-pocket expenses absent a waiver. If the waiver alters what services are covered, the state may also take into account spending for those services. Besides considering the impact of the waiver on affordability for all state residents, the state must assess how it will affect vulnerable residents, including low-income, elderly, and individuals with serious health conditions or risks.

Waivers cannot reduce the number of people who have at least minimum protections against high cost-sharing. For example, they can’t reduce the number of people who have coverage that pays at least 60 percent of typical health care expenses (called the “actuarial value” level of a plan). This is about the generosity of a bronze plan on the marketplace and the minimum value of coverage that large employers provide. Further, 1332 waivers can’t reduce the number of people that have coverage meeting Medicaid’s generosity requirements. For example, under Medicaid, adults with family incomes of 101-150 percent of federal poverty guidelines can’t be charged more than $4 for most drugs, and can’t be charged more than 10 percent cost-sharing for other outpatient services, so a waiver could not reduce the number of low-income individuals who have coverage that is at least that generous.

Coverage that is at least as comprehensive: States must forecast the number of residents who would have coverage at least as comprehensive as the state’s entire essential health benefits package. Additionally, for each category of essential benefits (ambulatory services, emergency services, mental health and substance abuse services, etc.), states must make sure that at least as many residents have coverage that is as comprehensive for that category. Finally, states must make sure that there is no decrease in the number of people who have coverage for the full set of services covered under the state’s Medicaid and/or Children’s Health Insurance Programs. Again, the waiver must take into account the effect on the comprehensiveness of coverage for different groups of state residents, including low-income individuals, elderly individuals, those with serious health conditions, and those at greater risk of developing serious health issues.

Will not increase the federal deficit: To determine that the waiver will not increase the federal deficit, the state prepares a 10-year budget (assuming that the waiver would continue) as well as projecting costs over the 5-year period of the waiver. For this calculation, all changes in what the federal government collects and pays out must be considered. For example, will there be a change in:

Individual shared-responsibility payments or employer shared-responsibility payments?
The financial help the government provides through premium credits and cost-sharing reductions?
The credit for small businesses offering health insurance?
There may also be effects on federal revenue if the waiver results in changes in job-based coverage in the state. For instance, there could be changes in income and payroll taxes or in residents’ deductions for medical expenses. Even though a 1332 waiver cannot change Medicaid or CHIP policy, it could affect Medicaid spending, and so that is also considered. (See How Could a 1332 Waiver Affect Medicaid or CHIP?)

How much federal money can the state use for an innovation under its waiver – that is, what is the federal “pass-through funding?”: The state can use the amount of federal money that would have otherwise gone to its residents for premium credits and cost-sharing reductions in the marketplace. This pass-through amount is calculated annually, and takes into account experiences in similar states. Other changes in federal spending, such as any savings in administrative expenses, are not passed onto states for the innovation. Note that this formula is different than the formula under #4 above: To determine if the waiver will be approved, the federal government looks broadly at all changes in federal spending that will result from the waiver, but to determine how much federal money will be passed onto the state, the federal government only considers the amount of financial assistance marketplace participants would have claimed absent a waiver.
How must the state estimate costs and impacts of the waiver?
The state will provide an actuarial and economic analysis. It will provide state-specific estimates of the population, including by income and source of health coverage. For many factors, states must rely on federal estimates to project growth, but states can ask the federal government to consider state-specific assumptions if they expect that their state experience will differ.

What waiver issues might a state run into if it now uses a federally facilitated exchange or if it wants to alter the tax provisions of the ACA?
States that use the federally facilitated exchange (HealthCare.gov) may find that that platform cannot accommodate changes that the state wants to make through an innovation waiver. For instance, right now, healthcare.gov cannot change its calculation of financial assistance for a state, change its enrollment periods, or generally change the way it displays plans – so a state wanting to make these changes might need to establish its own platform.

States that want to change the way taxes and tax credits apply in their state may also run into administrative hurdles: the Internal Revenue Service cannot administer different eligibility rules for premium credits for one state’s residents. To get around this problem, states might instead waive the federal premium tax credit rules entirely and administer a premium assistance program through their own tax program or subsidy structure.

How can the public have input into waiver proposals?
The law requires that states provide the public with notice of a proposed waiver and an opportunity to comment. The guidance further specifies that states must provide a public comment period that is sufficient to assure a meaningful level of public input – at least 30 days. States with federally recognized Indian tribes must consult with those tribes. Waiver applications must be posted online in a way that assures access to people with disabilities. Once a waiver application is submitted to the federal government, the federal government must also provide the public with notice and a meaningful comment period of at least 30 days, and longer for complex waivers.