What Are 1332 Waivers, and Which States Are Using Them?

Several States Have Implemented or Are Pursuing 1332 Waivers

1332 waivers allow for state-based innovation in health care reform, while maintaining consumer protections
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Section 1332 of the Affordable Care Act allowed for the creation of 1332 waivers. If approved by the federal government, 1332 waivers allow states to waive or change various provisions of the ACA in order to use an innovative, state-specific approach to healthcare reform. But to protect consumers, the ACA includes strict guidelines in terms of what ACA provisions can be waived, and requires states to ensure that people will be at least as well protected under the waiver as they would be with the ACA itself.

Although the ACA was enacted in 2010 and the bulk of its provisions took effect in 2014, the earliest possible effective dates for 1332 waivers was January 2017. Only one state—Hawaii—had a 1332 waiver in effect as of January 2017, but several other states have pursued waivers in 2017, and it's expected that more will follow suit in future years. 

So while talk of 1332 waivers was largely academic in prior years, it's more likely to come up in conversation now. Let's take a look at how 1332 waivers work, what states can (and can't) do with them, and how they're being implemented thus far.

The Basic Rules for 1332 Waivers

When the ACA was drafted, lawmakers acknowledged that states have a variety of unique circumstances that might not be well-served by a one-size-fits-all approach. At the same time, they also knew that some states would prefer a very hands-off approach to health care reform, which would leave consumers with little in the way of regulatory protections if the states were simply allowed to waive ACA provisions without strict guidelines governing the process.

Historically, before the ACA created a federal floor in terms of basic regulatory framework, states were all over the map in terms of how they regulated health insurance. Some states already had regulations in place that exceeded the ACA's rules (New York, for example, doesn't allow premiums to differ by age, which is more strict than the ACA; the New York regulation has been in place since the 1990s). On the other end of the spectrum, some states preferred to take a much more market-based approach, with little in the way of regulatory oversight before the ACA established minimum standards that apply in every state.

So while Section 1332 of the ACA allows states to innovate and take their own approach to healthcare reform, there are some basic rules that must be followed. First, there are only certain provisions of the ACA that can be waived with a 1332 waiver. The waivable sections include:

  • ACA Title I, Subtitle D, Parts I and II. These sections pertain to the essential health benefit requirements, the actuarial value requirements (ie, the ACA provision that requires all plans to fit into either bronze, silver, gold, platinum, or catastrophic categories), the rules that define which employers are considered small groups, the network adequacy requirements, the single risk pool requirement (ie, the rule that requires an insurer in the individual or small group market to put all of its individual and/or small group plans in one risk pool, regardless of whether they're sold on or off-exchange), and the requirements in terms of functions that state-based exchanges must perform.
  • ACA Section 1402. This section pertains to cost-sharing reductions (CSR), which reduce out-of-pocket costs for lower-income enrollees with silver plans.
  • Section 36B of the Internal Revenue Code. This section pertains to the ACA's premium tax credit (premium subsidy). It establishes the rules in terms of who is eligible for the premium tax credit, how much each eligible enrollee's tax credit will be, and how the tax credit is distributed.
  • Section 4980H of the Internal Revenue Code. This section pertains to the ACA's employer mandate, which requires employers with 50 or more full-time equivalent employees to offer affordable, minimum value health insurance or face a possible tax penalty.
  • Section 5000A of the Internal Revenue Code. This section pertains to the ACA's individual mandate, which requires most Americans to maintain health insurance coverage or face a tax penalty.

Allowing states to waive those provisions certainly gives them some significant latitude in terms of changes they can make. But many of the ACA's important consumer protections are not in those waivable sections. The ACA provision that bans insurers from rejecting applicants with pre-existing conditions (or charging them higher premiums) cannot be waived with a 1332 waiver, nor can the ACA's ban on lifetime and annual limits for essential health benefits (although as noted above, essential health benefit rules themselves can be adjusted).

States cannot adjust the ACA rule that requires insurers to allow young adults to remain on a parent's health plan until age 26 (this is a popular provision that states probably wouldn't want to waive anyway), and they cannot waive the general rules that prohibit discrimination based on medical history, disability, race, age, or gender.

Although there is some significant scope in terms of what can be waived, the ACA also includes three basic rules that essentially require states to ensure that their residents will be no worse off under the 1332 waiver than they would be with the unadjusted ACA in place. For a Section 1332 waiver to be approved, the state must demonstrate in its waiver proposals that if the waiver is implemented:

  • Coverage will be at least as comprehensive as it would be without the waiver.
  • Coverage will be at least as affordable as it would be without the waiver.
  • The number of people who will have coverage once the waiver is in place must be at least as many as would have coverage without the waiver.

And a fourth rule ensures that the federal government will be no worse off under the terms of the waiver:

  • The waiver must be deficit neutral for the federal government.

So while states can take the money that they would have received for premium subsidies and cost-sharing reductions and use it for another purpose, for example, the federal government cannot end up spending more in a state under the waiver than they would have spent without the waiver.

Which States Have Received Federal Approval for Their 1332 Waivers?

Four states—Hawaii, Alaska, Minnesota, and Oregon—have received federal approval for their 1332 waivers as of November 2017.

Hawaii's took effect in 2017 and allowed the state to drop its small business health insurance exchange. Hawaii has had a law in effect since the 1970s that requires all employers (regardless of how big the business is) to offer coverage to any employee who works at least 20 hours per week, and the employee's coverage can't cost the employee more than 1.5 percent of their wages. This is a much more stringent rule—both in terms of affordability and which employees must be offered coverage—than the ACA, and the federal government agreed that Hawaii could use a 1332 waiver to eliminate the ACA requirement that states maintain small business health insurance exchanges.

In Alaska, Minnesota, and Oregon, the approved 1332 waivers take effect in January 2018. In all three cases, the waiver is being used to allow federal funding for state-based reinsurance programs. Reinsurance is a system whereby a separate entity (the state, in these cases) agrees to pick up the cost of claims that exceed a certain dollar amount, and cover them until they reach another dollar amount. The result is lower premiums, since insurers aren't on the hook for the full cost of high-dollar claims (the ACA included a nationwide reinsurance program, but it was temporary and only lasted through 2016).

When premiums decrease, two other things happen:

  • Among people who don't get premium subsidies, more people buy insurance as it becomes more affordable.
  • And among people who do get premium subsidies, the amount the federal government has to spend on the subsidies decreases (this is because premium subsidies are designed to keep coverage at levels that are considered affordable; when the pre-subsidy premiums are lower, the subsidies don't have to be as large to get the after-subsidy amount down to the same affordable level).

So more people end up covered with a reinsurance program in place, and the government saves money on premium subsidies. In Alaska, Minnesota, and Oregon, the states will be allowed to use the money the federal government would otherwise have spent on premium subsidies, and instead use it to fund the reinsurance program (this is known as "pass-through savings"). In all three states, premiums for 2018 are significantly lower than they would have been without the reinsurance program, and that's expected to result in more people with health insurance.

Massachusetts also submitted a 1332 waiver in September 2017, seeking to establish a premium stabilization fund in lieu of federal cost-sharing reduction payments for 2018. But the Centers for Medicare and Medicaid Services determined that the waiver proposal was submitted too late, and there wasn't time to get it approved in time for the start of open enrollment on November 1, 2017 (ultimately, cost-sharing reduction funding was eliminated by the federal government in October 2017).

States That Have Withdrawn Their 1332 Waiver Proposals

Four states—California, Vermont, Oklahoma, and Iowa—have submitted 1332 waivers but subsequently decided not to move forward with them.

California had proposed a 1332 waiver proposal that would have allowed undocumented immigrants to purchase full-price (ie, without premium subsidies) health insurance in the state's exchange. But the state withdrew the waiver proposal in early 2017, because they were concerned that the Trump Administration might use data from the state's exchange to track down and deport undocumented immigrants.

Vermont submitted a 1332 waiver proposal in early 2016, requesting permission to not have a small business (SHOP) exchange portal. Their waiver was deemed incomplete, and they did not move forward with completing it. But Vermont has used a direct-to-insurer approach to their SHOP exchange enrollments ever since 2014. Vermont also considered using a 1332 waiver to establish a single-payer system that they had planned to implement as of 2017, but they ultimately pulled the plug on that endeavor before submitting the waiver proposal, as they determined that a state-based single-payer system would be too expensive.

Iowa and Oklahoma both submitted 1332 waiver proposals in 2017 that they intended to implement in time for 2018, with the hopes of reducing premiums in their individual insurance markets. Iowa's waiver would have greatly altered the state's individual market, while Oklahoma's would have established a reinsurance program and the state anticipated following that with a series of future 1332 waivers to make more far-reaching changes. But both waiver proposals were withdrawn by the state when it became apparent that they weren't going to be approved in time to make a difference in 2018 premiums.

Details for all 1332 waivers that have been officially submitted to CMS, including those that have been withdrawn and approved, are available on this CMS webpage.

And several other states are considering 1332 waivers, and have either enacted legislation to start the process, or have publicly drafted 1332 waiver proposals. Expect to see more of this throughout 2018.

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