On October 22, 2018, the United States Departments of Health and Human Services and Treasury (the Departments) released guidance, entitled State Relief and Empowerment Waivers, that relaxes the requirements for states seeking waivers under section 1332 of the Patient Protection and Affordable Care Act (PPACA).1 Section 1332 permits states to waive certain provisions of PPACA and receive pass-through funding for any savings generated by the waiver. According to the Centers for Medicare & Medicaid Services (CMS), the purpose of the guidance is to allow states to “increase choice and competition within their insurance market while protecting people with pre-existing conditions.”2 The changes in policy align with previously implemented Trump administration policies as well as policies proposed during the Republican attempt to repeal and replace PPACA in 2017. To-date eight states have been granted section 1332 waivers, which have created reinsurance programs in each instance, except for Hawaii.3
While the changes may appear subtle at first glance, they have the potential to significantly expand the scope of section 1332 waivers and weaken reforms contained in PPACA. PPACA supporters were quick to criticize the revised guidance.4 Timothy S. Jost, Professor Emeritus at Washington and Lee University School of Law and PPACA expert, noted that the guidance “takes another step toward undermining the ACA and its goals” and attempts to “accomplish through administrative fiat changes in the ACA that Republicans repeatedly tried and failed to bring about through legislation in 2017.”5
The guidance replaces guidance published by the Obama administration in December 2015.6 If states implement section 1332 waivers under the expanded interpretation of section 1332, it could lead to further segmentation of the individual market and expand the differences between the states that have embraced PPACA and the states that have battled PPACA since its passage in 2010.
Section 1332 State Innovation Waivers
Congress enacted PPACA “to increase the number of Americans covered by health insurance.”7 Section 1332 of PPACA grants the Secretaries of Health and Human Services and Treasury (Secretaries) authority to waive certain provisions of PPACA with the intention that states would implement alternative reforms consistent with the goals of PPACA. Waivable provisions include the health insurance exchanges; the requirement to maintain minimum essential coverage (commonly referred to as the “individual mandate”); essential health benefits;8 the structure and design of the premium tax credit and cost-sharing reductions; and the employer mandate.9 In return, the state may receive pass-through funding based on savings from the state plan submitted under a section 1332 waiver.10 The market reforms, which are contained in subtitles A, B, and C of Title I of PPACA, are not waivable. This includes the popular protections for individuals with pre-existing conditions such as guaranteed issue, guaranteed renewability, and community rating. Notably, the statute provides significant discretion to the Secretaries to decide whether or not to approve a state plan.11 The statute provides that the Secretaries “may” grant a section 1332 waiver “only if” it meets stringent guardrails. The state plan must:
(1) provide coverage that is at least as comprehensive as the essential health benefits in section 1302 of PPACA;
(2) provide coverage that is at least as affordable as coverage offered through the Exchanges;
(3) cover at least a comparable number of residents as under PPACA; and
(4) not increase the federal deficit.12
Senator Ron Wyden (D-Oregon) is credited with the inclusion of State Innovation Waivers under PPACA.13 Senator Wyden has been clear that the waivers were meant to expand the goals of PPACA: “These waivers should be seen as a tool for states to meet or surpass the progress made by the ACA, not as an opportunity to deconstruct the law, remove protections, or make it harder for Americans to get affordable, quality health coverage.”14
Implementation of Section 1332
On March 14, 2011, the Departments promulgated a proposed rule implementing procedural requirements for section 1332 waivers.15 A final rule was issued on February 27, 2012.16 The regulations implemented procedural requirements for a waiver application including the contents of a waiver application and state and federal public notice and comment periods.17 In December 2015, the Departments issued much anticipated guidance in the Federal Register that offered clarifying information and interpretations about meeting the statutory guardrails for the evaluation of state plans.18 The guidance provided strict requirements addressing each of the four statutory guardrails and faced criticism that the interpretations were so rigid as to limit the availability of a waiver.
The protection of vulnerable populations was a critical component of the Obama administration’s approach to section 1332 waivers. A waiver application that had negative implications on affordability, comprehensiveness, or coverage for vulnerable populations would not be approved. The guidance specifically referenced vulnerable populations such as “low-income residents, including low-income individuals, elderly individuals, and those with serious health issues or who have a greater risk of developing serious health issues.”19 The Departments stated that the same number of residents would need to have minimum essential coverage under the waiver as would be the case without the implementation of the waiver. With regard to affordability, the impact on all state residents would be considered and it would generally be measured by comparing net out-of-pocket spending for health coverage and services to residents’ incomes. Increasing affordability for many other residents would not overcome an increase in the number of residents who would have large healthcare spending burdens. The Departments also noted that healthcare.gov did not have the ability to discern differences in eligibility or benefits by states, which limited the ability for states without a State-based Exchange20 to implement significant changes through a section 1332 waiver.
In an effort to promote state flexibility, the Trump administration encouraged states to seek section 1332 waivers implementing high-risk pool/state-operated reinsurance programs, such as the state plan approved for Alaska.21 In May 2017, CMS released a checklist for section 1332 waiver applications, specifically containing items related to applications with a high-risk pool/state-operated reinsurance program.22 In addition to Alaska, Hawaii, Minnesota and Oregon have section 1332 state plans in effect in 2018. Maine, Maryland, New Jersey, and Wisconsin have had waivers approved in 2018 that will go into effect for the 2019 plan year.23 In 2017, Iowa submitted a section 1332 waiver application that sought to significantly alter the individual insurance market, but such application was eventually withdrawn.24
State Relief and Empowerment Waivers
The new guidance supplants the December 16, 2015 guidance, which the Trump administration believes “imposed significant restrictions on states in meeting the guardrails beyond what was required by the PPACA.”25 Section 1332 waivers will now also be referred to as “state relief and empowerment waivers.”26 The new guidance offers interpretations that significantly diverge from the previous administration, pivoting to a focus on “value” and “access” compared to a more strict reading of the statutory guardrails.
The guidance announces five principles for states to consider:
- Provide increased access to affordable private market coverage;
- Encourage sustainable spending growth;
- Foster state innovation;
- Support and empower those in need. Americans should have access to affordable, high value health insurance; and
- Promote consumer-driven healthcare.
The new interpretation aligns with the Trump administration’s policies for private coverage and support for expanded availability of Association Health Plans (AHPs)27 and short-term, limited-duration insurance (STLDI).28 This is notable because the new interpretation’s focus on private coverage options is likely to weigh against a section 1332 state plan that aims to incorporate a public option or Medicaid buy-in program.
Comprehensiveness and Affordability
The Departments’ new interpretation will consider the comprehensiveness and affordability guardrails together. In a noteworthy change in policy, the Departments will consider the statutory guardrails to be met so long as consumers have access to affordable and comprehensive coverage.29 This shift will permit consumers to choose coverage that is less comprehensive, for instance, STLDI or an AHP, so long as comprehensive and affordable coverage is available to residents. The administration will permit state plans that would allow the use of premium tax credits to be used to purchase STLDI. Young and healthy individuals enrolling in alternative coverage types such as STLDI and AHPs is likely to increase the cost of coverage for coverage that complies with the PPACA requirements. Additionally, STLDI and AHPs are not a part of PPACA’s risk adjustment program, which is intended to mitigate against the type of adverse selection encouraged by these types of coverage.
The Departments relaxed the strict consideration of a waiver’s effects on vulnerable populations and instead indicated that while they will continue to “consider the effects on all categories of residents,” the guardrails may be met even where there are small detrimental effects on certain groups.30 A state plan will be permitted to result in making coverage more affordable for some groups but more expensive for others.
Comprehensiveness will still be determined by examining the essential health benefits requirements as defined in section 1302(b) of PPACA. However, a state will have the same flexibility to choose a benchmark plan or design a benchmark plan based on essential health benefits categories adopted by other states for the 2017 plan year, as was finalized in the 2019 Payment Notice.31
Taken together, the new interpretations of comprehensiveness and affordability will permit a state to implement a state plan that leaves residents with coverage that is less comprehensive and less affordable than they presently have, so long as coverage that is comprehensive and affordable is available to purchase. While such an approach would certainly benefit consumers wishing to purchase coverage that is less expensive, it could also lead to the comprehensive coverage currently required under PPACA to become more expensive for those who want it.
The Departments will now interpret “coverage” to include “minimum essential coverage” under PPACA or “health insurance coverage” in line with the definition at 45 C.F.R. § 144.103. This change will permit coverage under STLDI and AHPs to count towards the coverage guardrail. This change aligns with the focus on value and consumer-driven healthcare but may be inconsistent with PPACA’s focus on ensuring minimum quality standards for coverage purchased in the individual and small group markets. The guidance may permit a state plan to result in a coverage reduction so long as it is forecast to come into compliance with the coverage guardrail within a reasonable amount of time.33 The guidance does not define what the Departments will consider “reasonable.”
PPACA contains a requirement to enact a law that authorizes state action under a section 1332 waiver including implementation of the state plan.34 According to the National Conference of State Legislatures, there are 35 states that have considered legislation that would permit the state to seek a waiver.35 The Departments clarify that in certain circumstances a state may use existing legislation that authorizes the enforcement of PPACA or the state plan, in combination with a state regulation or executive order. This modification will benefit states that have run into hurdles, such as a biannual legislative session.
The guidance also announces that healthcare.gov now has the functionality to account for different eligibility and enrollment rules that may be implemented through a section 1332 state plan. States will be required to pay for any state-specific customization.36 The guidance goes on to note, however, that the IRS is not able to administer state-specific tax rules.37 Therefore, any tax changes a state may wish to undertake under a state plan using this new flexibility would need to be administered by the state.
The guidance does not make significant changes to the Departments’ interpretation of the deficit neutrality guardrail or the calculation of pass-through funding. However, the guidance does provide that a state may update its amount of pass-through funding to reflect changes in state and federal law.38
The guidance took effect immediately, but was published in the Federal Register with a comment period that ends at 5 p.m. on December 24, 2018.39 Notably, the earliest a section 1332 state plan approved under the guidance would be implemented is the 2020 plan year. The Departments urge states interested in applying for a waiver to engage with the Departments early in the process and represent that generally an application will need to be submitted no later than the first quarter of the year prior to implementation.40
- Waiver Concept A: State-Specific Premium Assistance;
- Waiver Concept B: Adjusted Plan Options;
- Waiver Concept C: Account-Based Subsidies; and
- Waiver Concept D: Risk Stabilization Strategies.
Approved Section 1332 Waivers
To date, the Departments have granted eight section 1332 waivers, primarily implementing reinsurance pools.43 Alaska, Hawaii, Minnesota and Oregon have implemented section 1332 state plans in effect for 2018. Alaska, Minnesota and Oregon have implemented reinsurance programs that have stabilized their individual markets and significantly reduced premiums. For instance, in Alaska there was a 22 percent decrease in individual market premiums for 2018.44 In 2019 Maine, Maryland, New Jersey and Wisconsin will all begin reinsurance programs as a result of approved section 1332 waivers.
Iowa’s previously withdrawn application may be instructive of the type of application that may be considered in light of the new guidance. Iowa submitted a section 1332 waiver application when it appeared there may not be any insurers offering coverage in the individual market. The final application submitted in August 201746 would have standardized coverage by offering a single silver level of coverage with larger deductibles than would have otherwise been permissible under PPACA ($7,350 for individual coverage and $14,700 for group coverage). PPACA’s premium tax credits that reduce monthly premiums for eligible individuals under section 36B of the Internal Revenue Code (as created by section 1401 of PPACA) that tie an individual’s premiums to a percentage of his/her household income would have been changed to a flat amount based on age and income. Cost-sharing reductions that reduce out-of-pocket expenses for eligible individuals under section 1402 of PPACA would have been eliminated. The most controversial aspect of the proposal was a continuous coverage requirement applicable to certain special enrollment periods that would have required a consumer to maintain coverage with a gap no longer than 60 days in the prior 12 months. The state plan also created a reinsurance program to cover the costs of high-cost enrollees. Iowa’s application received significant criticism and questions were raised about whether the state plan met the statutory requirements.47 As the 2018 open enrollment period approached without an approval, Iowa withdrew its application.48
The 2018 guidance ushers in a new era for section 1332. The Departments have put forth an expansive reading of the statutory guardrails in order to offer greater flexibility to states. Georgetown University Law Center Professor and Following the ACA author for the Health Affairs Blog,49 Katie Keith, noted that “the new guidance arguably conflicts with the language of the Affordable Care Act, so legal challenges are likely if a section 1332 waiver is approved under the new guidance.”50 However, the guidance aligns with the Trump administration’s push to provide alternative coverage options that are not as comprehensive or consumer protective as were previously required under PPACA. In turn, the policy goal is for consumers to have increased choice and competition. It is possible that Congress will intervene to relax the statutory guidelines while retaining the structure and consumer protections contemplated under PPACA. Such an approach was contemplated in late 2017 under the PPACA stabilization legislation introduced by Senators Lamar Alexander (R-TN) and Patty Murray (D-WA).51 While the stabilization legislation did not pass in the 115th Congress, Senators Alexander and Murray expressed a willingness to revisit the proposal in the 116th Congress.52
As we turn the page on repeal and replace and begin the next chapter of PPACA implementation, the 2018 guidance reaffirms the Trump administration’s support for section 1332 waivers. While the guidance presents states with new opportunities to reform their health insurance markets, the PPACA statutory guardrails remain in place to serve as a check on any state plans that would attempt to erode the market reforms and consumer protections provided under the law.
2 FACT SHEET: State Relief and Empowerment Waiver Guidance, Centers for Medicare and Medicaid Services, October 22, 2018, available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Downloads/SRE-Waiver-Fact-Sheet.pdf.
3 Hawaii’s section 1332 waiver waives PPACA Small Business Health Options Program requirements. See https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Downloads/Hawaii-1332-Letter-final-and-signed.pdf.
4 See Christen Linke Young, The Trump Administration Side-Stepped Rulemaking Processes on The ACA’s State Innovation Waivers – and it Could Make Their New Section 1332 Guidance Invalid, USC-Brookings Schaeffer on Health Policy, Nov. 28, 2018, available at https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2018/11/28/the-trump-administration-side-stepped-rulemaking-processes-on-the-acas-state-innovation-waivers-and-it-could-make-their-new-section-1332-guidance-invalid/.
5 Timothy S. Jost, Using the 1332 State Waiver Program to Undermine the Affordable Care Act State by State, To the Point, Oct. 30, 2018, available at https://www.commonwealthfund.org/blog/2018/using-1332-state-waiver-program-undermine-affordable-care-act-state-state.
8 See 42 U.S.C. § 18022(b)(1); ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.
9 See 42 U.S.C. § 18053(a)(2). States may waive Part I of subtitle D (Qualified Health Plans); Part II of subtitle D (Exchanges); section 1402 (cost-sharing reductions); and sections 36B (premium tax credit), 4980 (employer mandate), and 5000A (individual mandate and exemptions) of the Internal Revenue Code.
11 42 U.S.C. § 18053(b)(1) (“The Secretary may grant a request for a waiver…”) (emphasis added). The new guidance acknowledges the Secretaries’ discretion to grant a waiver: “The Secretaries retain their discretionary authority under section 1332 to deny waivers when appropriate given consideration of the application as a whole, even if an application meets the four statutory guardrail requirements.” 83 Fed. Reg. at 53577.
20 PPACA provides that each state shall establish an Exchange to facilitate the purchase of qualified health plans. See 42 U.S.C. § 18031(b). In states that did not establish an Exchange, the federal government established a Federally-facilitated Exchange. See 42 U.S.C. § 18041(c).
22 Checklist for Section 1332 State Innovation Waiver Applications, including specific items applicable to High-Risk Pool/State Operated Reinsurance Program Applications, Centers for Medicare & Medicaid Services, May 11, 2017, available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Downloads/Checklist-for-Section-1332-State-Innovation-Waiver-Applications-5517-cpdf.pdf.
25 FACT SHEET: State Relief and Empowerment Waiver Guidance, Centers for Medicare and Medicaid Services, October 22, 2018, available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Downloads/SRE-Waiver-Fact-Sheet.pdf.
27 On June 19, 2018, the Department of Labor (DOL) published a final rule that expands access to AHPs. The DOL cited to Congressional Budget Office predictions that 400,000 uninsured individuals and 3.6 million people with existing coverage are likely to enroll in an AHP. 83 Fed. Reg. 28912 (June 21, 2018).
31 CMS publishes an annual rulemaking that addresses policies related to the Exchanges and individual and small group insurance markets for the following benefit year. HHS Notice of Benefit and Payment Parameters for 2019 final rule, 83 Fed. Reg. 16930, 17007 (Apr. 17, 2018).
41 Section 1332 State Relief and Empowerment Waiver Concepts Discussion Paper, CMS, Nov. 29, 2018, available a: https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Downloads/Waiver-Concepts-Guidance.PDF.
42 Section 1332 State Relief and Empowerment Waiver Concepts Discussion Paper, CMS, Nov. 29, 2018, available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Downloads/Waiver-Concepts-Guidance.PDF.
43 See Generally Section 1332: State Innovation Waivers, Centers for Medicare & Medicaid Services, available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Section_1332_State_Innovation_Waivers-.html.
45 See Dickson, Virgil, Vermont First State to File Waiver Request to Duck ACA Regulations, Modern Healthcare, Mar. 17, 2016, available at https://www.modernhealthcare.com/article/20160317/NEWS/160319905/vermont-first-state-to-file-waiver-request-to-duck-aca-regulations.
47 For additional details and an analysis of the Iowa Stopgap Measure, see The Effects of Iowa’s Proposed Stopgap Measure on Health Insurance Costs and Coverage, RAND Corporation, 2017, available at https://www.rand.org/pubs/research_reports/RR2228.html.