States See Opportunities for Flexibility in the ACA’s Innovation Waiver Program

As the Trump administration looks to give states greater leeway under the Affordable Care Act (ACA), attention has increasingly focused on the health law’s state innovation waiver program. Earlier this year, administration officials sent states a letter encouraging them to use these “Section 1332” waivers to modify the ACA framework and a checklist designed to speed that process. As policymakers in a growing number of states show interest in the program, a bipartisan group of governors has suggested the administration further streamline waiver submission and approval rules.

Room to Innovate, But Real Limits

Section 1332 of the ACA allows states, beginning in 2017, to modify key parts of the health law in service of state-specific strategies to improve coverage. States that pass legislation authorizing an innovation waiver can apply to the federal government to waive rules concerning essential health benefits, the law’s premium and cost-sharing subsidies, the marketplaces, and the individual and employer mandates, among others. (Some protections aren’t waivable. These include the ACA’s nondiscrimination rules, protections for people with preexisting conditions, and prohibitions on health status and gender rating.)

State flexibility to change the ACA is significant, but it isn’t unlimited. Federal law makes clear a waiver can’t be granted unless the state demonstrates its proposal meets four conditions. Coverage under the waiver must be at least as 1) comprehensive and 2) affordable as without it, 3) cover a comparable number of residents, and 4) not add to the federal deficit. The Obama administration explained that these legal limitations require federal officials to consider both the overall impact of a waiver on state residents and any disparate effects a proposal may have on vulnerable populations, including those with low incomes, older Americans, and those with serious health issues.

These “guardrails” provide a hard limit on state waiver authority. Though lawmakers aiming to make it easy for states to opt out of the ACA’s insurance regulations sought to eliminate the guardrails during the repeal process, that effort stalled and the limitations remain in statute.

States Starting to Move

Since we last documented state action on innovation waivers, interest in pursuing a waiver has increased (Exhibit 1). This is likely in part because of the calendar: this year is the first in which a waiver program may be implemented. It’s also a function of market conditions. While the individual markets of most states are stabilizing, some have faced substantial challenges and many states are looking for ways to mitigate disruptions and premium increases during a time of significant policy uncertainty.

States also now have a potential model to follow. In 2016, Alaska created a state reinsurance program to cover claims for high-cost individual market enrollees and encourage insurers to participate in its marketplace. The program is projected to lead to premiums that are 20 percent lower in 2018 than they would be without it. Because, by lowering premiums, the reinsurance system saves federal dollars (dollars that otherwise would be spent on ACA subsidies), the state sought, through an innovation waiver, to capture those cost savings and use them to help fund the program. The Obama administration endorsed this approach in 2016 and Trump officials pointed to it as an example for other states before formally approving the plan this July.

Since spring, three states (Minnesota, Oklahoma and Oregon) have submitted reinsurance-focused waiver applications that follow Alaska’s lead. Another state (Maine) has enacted legislation specifically to pursue a reinsurance waiver, while two others (Iowa and New Hampshire) are developing reinsurance programs. In a broadly similar vein, still another state (Massachusetts) recently submitted a waiver to create a premium stabilization program that would help insulate its market from price hikes attributable to federal policy uncertainty.

More fundamental changes may be in the offing in several of these states. In Oklahoma, authorities are working on an expansive plan that by 2019 would affect covered benefits, subsidy eligibility, marketplace plan offering requirements, and enrollment rules, and create a state version of health savings accounts. In Iowa, officials have sought special approval of an application that would, among other things, limit plan offerings to a single standardized silver tier plan and replace the ACA’s premium and cost-sharing subsidies with a state premium credit. While both states are working creatively to respond to challenges in their markets and to ongoing uncertainty at the federal level, their proposals need to be closely analyzed to assess whether they can deliver on promises of improved coverage, including for the vulnerable. In the case of Iowa, both the irregular process pursued by the state, as well as the content of its proposals — for example, to eliminate cost-sharing assistance for lower income residents — raise red flags that suggest the application may not comply with federal protections. 

Looking Forward

Both this administration and its predecessor have encouraged states to seek innovation waivers, and the waiver welcome mat is likely to be rolled out still further in the coming months. States, both blue and red, see value in this program, and more are likely to take advantage of it — some following what appears to be an already successful model (reinsurance) and others pursuing more ambitious plans. (Going in a direction different from the far-reaching proposals of Oklahoma and Iowa, policymakers in at least three other states — California, Colorado, and Vermont — have at one time considered innovation waivers in connection with plans to create a single-payer system.)

The waiver program unquestionably provides an opportunity for coverage and affordability improvements, but one that must be monitored. Efforts to streamline the waiver application process — for example, by making it easier to piggyback on approved waivers in other states — may be appropriate. But these steps can’t override legal protections designed to ensure waivers result from a deliberative process at the state and federal levels, with sufficient opportunity for public review and input. Just as importantly, state waivers must remain within the current guardrails to guarantee that residents, particularly the most vulnerable, aren’t hurt by policy changes. As the possibilities offered by innovation waivers come into focus, it’s critical these protections not be obscured.