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Last month, the Centers for Medicare and Medicaid Services (CMS) released waiver concepts to give states examples of reforms they could pursue under section 1332 of the Affordable Care Act (ACA). The concepts are a good start, but CMS will need to go much further, with more detailed templates, to get states to take on the risks associated with running their own health reform programs.

Sen. Ron Wyden and the late Sen. Bob Bennett championed giving states the option to pursue their own reform concepts under the ACA. Their efforts led to the inclusion of section 1332 in the final legislation.

Section 1332 allows states to apply to the Departments of Health and Human Services and Treasury for waivers of ACA provisions. In particular, states can ask to receive the federal funds provided for insurance enrollment in the ACA in a manner that differs from what the law specifies.

The law stipulated that 1332 waivers could be approved only if they stayed within certain “guardrails.” States’ reform plans must provide levels of insurance coverage to their citizens comparable to what is offered under the ACA, with comparable levels of benefits and premiums, and without increasing the federal government’s budget deficit above the level that would have occurred without the waiver (so-called “deficit neutrality”). Approved waiver programs can last up to five years before they have to be renewed or terminated.

The Obama administration interpreted the guardrails for these waivers rather strictly in guidance that was released to the states in 2015.

The Trump administration decided to take a different approach. It released revised guidance in October that loosened some of the previously issued rules. In particular, the new guidance says the government will measure comparability with respect to affordability and benefits based on what is available to state residents rather than on the actual distribution of consumers among insurance plans. The new guidance also says the federal government will look at insurance enrollment in the aggregate rather than for subpopulations of state residents. Finally, the definition of what constitutes insurance will be expanded to include short-term plans, which were liberalized under a separate Trump administration regulation.

The administration has signaled an eagerness to receive 1332 waivers from the states, in part to demonstrate that there are practical alternatives to the ACA’s statutory template. In its October guidance, the administration said that it wanted to receive state waiver proposals that emphasize private-market coverage, cost discipline, and consumer-driven health care, in addition to proposals that target resources on individuals in particular need of assistance.

The scope of what can be changed under section 1332, at least in theory, is impressive. While states can’t alter the ACA’s protections for people with pre-existing conditions, or allow insurers to deny coverage or charge higher premiums to consumers with high expected health costs, they can:

  • use federal funding for the premium tax credits payable under the ACA to provide subsidies to individuals in a different manner;
  • alter the essential health benefit requirements of the ACA;
  • change other ACA insurance rules; and
  • terminate the ACA exchanges while building new mechanisms for establishing enrollment in health coverage.

Further, section 1332 specifically contemplates and accommodates states that wish to pursue Medicaid waivers, under section 1115 of the Social Security Act, in combination with their waivers of ACA provisions. In theory, these “mega waivers” would allow states to control substantial resources that are now directed mainly by federal laws and regulations.

Given the clamoring for flexibility by governors over many years, one might expect this unprecedented ability to pursue significant, state-led reforms would lead to a backlog of applicants seeking approval for their innovative ideas.

But that’s not what’s happening. So far, eight states have received approval for waivers filed under section 1332, but these waivers have all been relatively limited in scope. Seven of the waivers allow states to use some federal funding to pay for reinsurance payments to health plans (reinsurance reduces premiums, and thus federal premium credits; the waivers allows states to use the savings to capitalize their reinsurance funds). The eighth state, Hawaii, used its waiver to conform the ACA’s rules for small employers with those that had been in place in the state since 1974.

Further, at the moment at least, there is no prospect of any state coming forward with an ambitious and interesting waiver request under section 1332, or Medicaid.

There are a few reasons why states are for more flexibility in health care in theory but less so in practice.

First, there are only so many ways to provide subsidized coverage to households with low incomes. Under current federal law, subsidies are provided through Medicaid and the ACA’s premium tax credits. If a state wanted to go about doing this differently, they could do so by requesting Medicaid and section 1332 waivers. But the state would need to make sure low-income households were able to get health coverage somehow, which means it would need to build its own system of providing and subsidizing that coverage. States have a hard time envisioning how they would do this much differently from what is already done through the Medicaid program and through the premium credits provided by the ACA.

Second, with waivers, states could find themselves in a deep financial hole if they miscalculate key budgetary parameters of their reform plans. Health care is expensive. A few wrong assumptions could mean the difference between delivering promised budgetary results to voters and a political disaster for a governor. Given the risks, states have tended to pursue waivers only when the terms make it clear they can’t lose financially. The desire to prevent any losses for the state rules out many ideas that might provide big payoffs but which also carry substantial risks.

Third, developing a workable statewide health reform plan is a complex undertaking, politically and substantively, and yet states still would not have full control over the health system. Medicare is the nation’s largest and most influential insurance program, and it can’t be changed under a section 1332 or a Medicaid waiver. Further, employer-sponsored coverage, which is subsidized through the federal tax system, provides coverage to some 181 million people. That coverage is mostly outside the control of state regulation. With limited resources and time, and limited control, most governors see little upside to taking on reforming health care.

The absence of strong momentum toward state-led reform is probably what motivated CMS to publish its waiver concepts in late November. The concepts are intended to show states what they could do through the waiver process, and thus to lower the uncertainty and risk of going down this road.

In its release, CMS described four broad concepts that could be pursued in a section 1332 waiver. First, states could use individually owned accounts to deliver assistance instead of, or in addition to, premium tax credits. Second, states could devise new premium assistance payment systems that differ from the premium tax credits and exchanges of the ACA. Third, states could allow subsidies to go toward subsidizing coverage for insurance that is not considered qualified coverage under the ACA, such as short-term, limited-duration plans. Finally, states could pursue market stabilization strategies, such as the reinsurance programs that have already been approved for multiple states.

While CMS is hoping its concept document will spur more state waiver requests, it is unlikely to have this effect. The concepts CMS developed are too general to give states the assurances they need that a waiver they develop and submit will be approved by CMS without a protracted negotiation.

To get a better response, CMS will need to take the next step and draft up actual model waiver plans that, if followed precisely by states, would be approved expeditiously. Model waivers would lower the time and resources states would need to invest in the development of reform plans, and would also lower the risk that whatever time and resources a state invests in the process would be wasted because of a disapproval decision.

The Trump administration and Republicans in Congress failed in their attempt to repeal and replace the ACA, but they remain committed to showing the country that there are better alternatives to current law. Their best hope of doing that is by enlisting states to pursue alternate program designs. Unfortunately for the Republicans, states are more interested in securing the right to pursue new ideas in health care than in actually developing and implementing novel approaches.

CMS has begun the process of trying to draw the states into a more ambitious mind set with the release of its waiver concept document. But states are going to need more than general concepts from the federal government before taking the leap into health reform. States say they want flexibility, but what they actually want is more certainty from the federal government that whatever waivers they pursue will have large potential financial benefits and no discernible risks.

James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.

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