THE BLOG

'Innovation Waivers' Allow States to Experiment, Try to Improve Upon ACA

02/12/2015 06:03 pm ET | Updated Apr 14, 2015

It's easy to think of the Affordable Care Act as monolithic national policy, a federal program so big that it is impregnable and impervious to change. But that would be wrong.

In fact, there are provisions in the ACA that allow states to change major parts of the law as long as those changes preserve the ACA's goals of establishing quality, affordable health care coverage.

Those provisions are known as "innovation waivers." Technically, they are called "Section 1332," "2017" or "state innovation" waivers.

They were the brainchild of Sen. Ron Wyden of Oregon. He saw innovation waivers as a way for states to design systems for expanding and delivering health care coverage that could look very different from the ACA. The federal government would allow states to restructure their approach to health care reform by waiving and replacing some key provisions of the law.

The innovation waivers received bipartisan support and became Section 1332 of the law. The waivers were lauded and endorsed by the Obama administration.

States have often been called laboratories for national reforms, and opponents of the ACA have argued that state-based initiatives are a better alternative than a system imposed through federal regulations and mandates, so the notion of waivers would seem to appeal to a broad spectrum of policy-makers.

Under Section 1332, states would be allowed to waive one or more of four central provisions in the ACA beginning on Jan. 1, 2017:

The individual mandate, which requires individuals to purchase health insurance or pay a tax penalty. Alternative options could include expanding or narrowing exemptions, increasing or decreasing penalties, implementing a late-enrollment penalty (like the one used in Medicare) or limiting open-enrollment opportunities.

The employer mandate, which imposes federal tax penalties on large employers (with 50 or more full-time equivalent employees) who fail to offer affordable and comprehensive insurance coverage. Alternative options include exempting mid-sized employers, raising or lowering the requirements for qualifying coverage, modifying the definition of covered employees or requiring a percentage of payroll to be paid in benefits or taxes.

This mandate has been postponed twice by the Obama administration and is currently the focus of a lawsuit filed against the president by the U.S. House of Representatives. Barring any legal action, the mandate will take affect for large employers (with 100 or more employees) in 2015. For medium-sized employers with 50 to 99 employees, the provision has been postponed until 2016.

Essential health benefits and subsidies; the state alternative must ensure that insurance coverage is as comprehensive and affordable as it is under the ACA. Alternatives could include expanding or reducing subsidy eligibility, reducing subsidy grace periods, adjusting income boundaries for cost-sharing eligibility, or designing an alternative benefit and subsidy strategy.

Qualified health plan certification and health insurance exchanges; states can eliminate or alter certification of Qualified Health Plans, including essential-health-benefit requirements, annual limits on total cost sharing, actuarial value standards for metal-tier plan categories (bronze, silver, gold and platinum), as well as the definition of individual and small- and large-group insurance markets. States can also modify or eliminate the requirement to establish health insurance exchanges as the exclusive mechanism for enrolling consumers and determining their eligibility for subsidies. Alternatives include replacing current exchanges with one or more private marketplaces, eliminating the non-exchange market, allowing state exchanges to function as an active purchaser in rate setting and allowing subsidy-eligible consumers to purchase coverage directly from an agent or broker.

Federal funding for premium and cost-sharing subsidies would be passed directly to the state to pay for the state's plan. The Department of Health and Human Services would determine the annual "pass-through funding" based on an analysis of subsidy costs in other states.

Not all provisions of the federal health care law can be sidelined. States can't reinstate exclusions for pre-existing conditions or eliminate the guaranteed issue of coverage. Insurance companies can't re-establish old rating factors (like gender rating or claims history) that were prohibited under the ACA. And states will have to prove that their alternative would provide coverage to as many people as the ACA would without the waiver.

A state plan must also offer "coverage and cost-sharing protections" against excessive out-of pocket costs. In addition, coverage must be just as "comprehensive and affordable" as that currently offered through state or federal health insurance exchanges. Finally, since the state plan will likely be federally funded, the waiver can't increase the federal deficit.

Those are demanding requirements, but the innovation waivers offer states the chance to build a better mousetrap.

Even though there is no official deadline for applying for an innovation waiver, states will have to begin that process this year in order to pass legislation and negotiate with the federal government so that waivers can begin in 2017. Applications must include an actuarial and economic analysis, an implementation timeline and a 10-year budget proposal. States must also indicate how the plan would meet the ACA's goals of coverage expansion, affordability, cost containment, comprehensive coverage and the impact on provisions of the ACA that will not be waived.

Applications must be approved by the secretary of Health and Human Services as well as the secretary of the Treasury.

The latest Supreme Court challenge to the ACA, King v. Burwell, which the court will hear in March, could have an impact on innovation waivers. That decision will determine whether states with federal rather than state-based exchanges can receive subsidy funding. If the court sides with opponents of the law, Republican-controlled states that would like to use waivers to implement reforms would no longer have access to the source of funding for implementation of alternative plans.

Nevertheless, some states have already picked up the gauntlet. Vermont, Hawaii and Minnesota are expected to file an application for a 1332 waiver. And innovation waivers may represent another option for states like Arkansas and Iowa that want to implement a private alternative to Medicaid expansion.

The bottom line is that Section 1332 provisions offer a practical state-based alternative to the very old and hyper-political "repeal and replace" debate. Here is the opportunity for single-payer advocates on the left, free-market advocates on the right and everyone else in between to offer alternatives that could deliver results equal to or better than the ACA.