Health Affairs: ACA’s Section 1332, Escape Hatch Or Straightjacket For Reform?

In state capitols across the country, health care lobbyists and consultants are pushing a relatively unknown provision of the Affordable Care Act (ACA): Section 1332. According to some proponents, these waivers will “turbocharge state innovation” and will provide states with an “exit strategy” from the ACA. But is the hype true? Will Section 1332 waivers be as truly transformative to our health care system as suggested?

As policy practitioners who work daily with state policymakers around the country, we have seen proponents be overly dismissive—or perhaps even unaware—of the large practical and political challenges surrounding the implementation of these waivers. A serious, objective examination of the new Section 1332 federal guidance sparks far more questions than answers for policymakers.

What Section 1332 Waivers Are

Some of the details of 1332 waivers have been explored in previous Health Affairs posts. At a high level, Section 1332 allows states to waive specific parts of the ACA.

In practice, however, the final federal guidance cemented the limited state flexibility laid out in the ACA by reaffirming its four clear statutory requirements. Proponents were hoping to gain significant flexibility from the Department of Health and Human Services’ (HHS) guidance, but their hopes were misplaced. The statutory guardrails are straightforward. States must:

  1. Provide coverage that is “at least as comprehensive” as coverage mandated by the ACA;
  2. Limit out-of-pocket obligations to ACA-approved levels;
  3. Cover at least as many people as the ACA; and,
  4. Ensure the waiver does not increase the federal deficit.

What Section 1332 Waivers Are Not

Some advocates have called 1332 waivers vehicles to “pursue virtually any type of proposal for health care reform” imaginable and the “ACA’s Swiss Army knife.” Unfortunately, these misleading characterizations have led to confusion among policymakers about what is possible under Section 1332 and what is fantasy.

The confusion has been exacerbated by relative silence from the Centers for Medicare and Medicaid Services (CMS) on this issue. Even in private conversations between state leaders and CMS, the agency has declined to provide details about how these waivers will be approved or evaluated outside of the general statutory requirements detailed above.

The resulting vacuum has fueled outlandish claims by health care consultants that states can radically transform their Medicaid programs and even use Exchange subsidy funds for Medicaid costs or vice versa under a 1332 waiver. Despite the fact Section 1332 does not provide authority for any changes affecting Medicaid, Medicare, or other federal health care programs, some state policymakers have cited these promises as the basis for seeking these waivers.

What To Do With 1332?

Health care lobbyists have a laundry list of things they want states to try with a 1332 waiver. But while eager to share ideas, advocates fail to address a plethora of practical challenges.

The following 1332 ideas may have first-glance appeal, but illustrate the immense difficulty of fulfilling the ACA’s statutory requirements.

Eliminating The Employer Mandate Would Be Difficult To Achieve

Although the state of Ohio is considering such a move, the Congressional Budget Office (CBO) estimates eliminating the employer mandate would reduce the number of people with health insurance and reduce federal revenues by nearly $167 billion over 10 years. This means any proposal to eliminate the employer mandate would violate at least two of Section 1332’s statutory requirements (coverage and budget neutrality). Ensuring that at least as many people were covered would also likely increase federal spending on premium tax credits, cost-sharing reduction subsidies, and Medicaid. State taxpayers would have to cover the extra costs.

Proposals To Eliminate The Individual Mandate Face Similar Practical Challenges

Ohio is also discussing this option, but again, practical hurdles abound. The CBO estimates a repeal of the individual mandate would reduce the number of people with health insurance by roughly 14 million recipients and reduce federal revenues by $43 billion over 10 years.

Auto-Enrolling Eligible Individuals Would Result In Lost Federal Revenue

The Obama administration has proposed automatically enrolling eligible individuals in coverage as a replacement for the individual mandate, but states would still need to replace the lost tax penalty payments and cover any additional costs of enrolling more people in subsidized exchange plans or Medicaid in order to satisfy budget neutrality.

Waiving Essential Health Benefits Is Technically Possible, But Incredibly Difficult

The new coverage offered under the waiver must be “at least as comprehensive” as the Essential Health Benefits (EHB) package available under the ACA. To meet this test, states must prove the waiver will not reduce the number of residents with coverage at least as comprehensive in each of the 10 EHB categories, individually and cumulatively. States could ratchet up benefits and make the plans more generous, of course—if they were willing to cover the additional costs—but they could not reduce benefits. Policymakers in Arkansas have floated this idea.

Allowing Subsidies Outside The ACA Exchange Would Increase Federal Spending

This proposal, under consideration in Minnesota, would presumably satisfy Section 1332’s coverage requirements, but would increase federal spending on premium tax credits and cost-sharing reduction subsidies, running afoul of budget neutrality. States could still choose to go this route, but they would have to put their taxpayers on the hook.

Expanding Subsidies To More Metal Tiers Would Increase Federal Spending

Proposals to expand cost-sharing reduction subsidies to all metal tier levels (rather than only silver plans) would increase federal spending, but is still being discussed in Arkansas. Federal costs would also increase if states made individuals with access to employer-sponsored insurance eligible for premium tax credits, as some have proposed. States would be required to cover these additional costs, plus any additional administrative costs to the federal government as the result of implementation.

Finally, Using Section 1332 To ‘Transform’ Medicaid Is Infeasible

Section 1332 provides no authority for Medicaid reforms, which has been proposed in Kentucky. Recent guidance from CMS confirms that these waivers “may not change the terms of a state’s Medicaid coverage.” States that wish to change their Medicaid programs must continue to rely on Section 1115 of the Social Security Act, among other provisions.

The federal government has also made it clear that Section 1332 does not change the review or approval process for other waivers. While states can submit a Section 1115 Medicaid waiver in conjunction with a 1332 waiver, the waivers will be evaluated independently and changes proposed in one are not considered in reviewing the other. Savings accrued under one waiver cannot be used by the other to meet the deficit neutrality requirements. Ultimately, any changes states might seek to their Medicaid programs must be done outside of the Section 1332 waiver process.

Without flexibility in cost-sharing, coverage, or enrollment, it is difficult to see what room for meaningful change remains outside of the kind of single-payer system that attracted Vermont and Colorado to Section 1332. That is unless states are willing to take on higher risks and increased costs in order to obtain a waiver.

While it is possible to devise hundreds of possibilities for Section 1332 waivers, it is considerably more difficult to devise a plan that actually meets Section 1332’s statutory requirements, and improves the outlook of both taxpayers and beneficiaries.

Other Practical Concerns

States frequently comment on the frustrating, time consuming, and seemingly “corrupt and opaque” process of the Medicaid Section 1115 waiver route. It is unclear how the Section 1332 approval process will be any better. In fact, it could be much worse.

According to CMS, there is no defined period of time between when states submit waiver applications and when the waiver will be approved or implemented. Section 1115 waivers take an average of 323 days to win approval, despite the fact that federal officials have years of experience reviewing those waivers. Given the complexity and newness of Section 1332 waivers, combined with the fact that they must be approved by two agencies (Department of Treasury and the Department of Health and Human Services) instead of one, it seems unlikely that the approval process will be short.

Additionally, the Internal Revenue Service (IRS) has made it clear that changes to the ACA’s tax provisions may be difficult to approve. The agency has indicated that it is unable to apply one set of tax rules in one state and a different set of rules in another state. Accordingly, the agency has advised states exploring 1332 waivers that they may need to waive certain tax provisions altogether and replace them with state-administered tax programs.

Political Challenges

Policymakers exploring Section 1332 waivers should not be politically naïve. Many Republican legislators were elected on their opposition to the ACA. If they choose to adopt a Section 1332 waiver, they will have to explain to their constituents why they have decided to implement a new section of the ACA, rather than working with their Congressional delegation to reopen or repeal the law.

While some may try to successfully message these waivers as a pathway towards greater “innovation,” voters, donors, and grassroots supporters will be left wondering how their state can possibly “escape” the ACA by implementing another provision of the law.

At the federal level, the fight to repeal the ACA has deepened. Congress has already passed legislation to roll back much of the law, setting up a preview of what could happen if a Republican wins the presidency. Proponents of Section 1332 waivers now find themselves trying to convince states to pursue a provision of a law that is certain to be changed, if not entirely repealed.

Many analysts have conceded that the Obama administration is unlikely to approve a “free-market” reform proposal, while others are hopeful that a newly-elected Republican president would kick start the “Section 1332 revolution” in 2017. But the next president will be limited by the same statutory requirements that exist today.

Congress could theoretically make statutory changes, but these efforts would be at least as politically strenuous as making other, more comprehensive changes to the ACA. If the next president is committed to unwinding major sections of the law, he or she may find tweaks to Section 1332 are not worth the investment.

For these reasons, state lawmakers on both sides of the aisle are coming to the realization that Section 1332 waivers will require more money and effort than they are worth. Policymakers should instead focus their time on proven, state-level reforms that drive costs down, agnostic to the ACA. By enabling a robust, transparent health care market that financially rewards providers for being a good value and patients for being smart consumers, policymakers can achieve innovation in a world dominated by ACA gridlock.

This article originally appeared at Health Affairs on May 26, 2016.

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