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The Next Health Reform Frontier: 1332 Waivers Explained

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"For the #1332waiver, the first step is enacting state legislation."

Update: June 28, 2017 

With the GOP's repeal-and-replace effort on pause and the future of health reform uncertain, many payers and states are exploring options to stabilize the individual insurance market within the parameters of the Affordable Care Act (ACA). And that is leading to increased interest in state waivers.

Under the ACA, states can apply to change some elements of the law related to private health insurance. Specifically, Section 1332 gives states the ability to waive  provisions of the ACA and deploy their own health insurance strategies, but still receive full federal funding. Several states have already pursued this strategy. Hawaii’s waiver application was approved in late-2016 and Alaska’s waiver application is under review, with approval expected soon. 1332 waivers have been touted by the Trump administration as a way to stabilize the individual health insurance market, and a number of additional states are testing the 1332 waters.

For health insurers in the states considering waiver applications, there is an opportunity to work with policymakers and influence the state’s approach to stabilizing the private market. But first, payers need to understand the process, pitfalls, and possibilities of the 1332 waiver, as it exists under current law.

Oliver Wyman Actuarial Consultants were behind the modeling that supported the 1332 waiver applications of both Hawaii and Alaska. Here, Tammy Tomcyzk, FSA, FCA, MAAA, of Oliver Wyman Actuarial Consulting, and Peter Regen, Director of Oliver Wyman’s North American Public Sector practice, give an insider’s view of the 1332 process and detail how states might use the waiver as it exists today.

What are 1332 waivers, exactly?

Under Section 1332, states can apply to alter or waive the following provisions of the ACA and the Internal Revenue Code (IRC):

Qualified Health Plans: States may revise the list of benefits that typically must be covered by plans sold through the Marketplace, including essential health benefits, cost sharing limitations, metal-tier (Platinum, Gold, Silver, Bronze) requirements, and definitions related to markets and employer size.

Health Insurance Marketplaces: States can put in place alternate ways for individuals and/or groups to enroll in coverage and receive financial assistance, revise enrollment periods, define risk pools, and revise limitations on coverage to citizens and lawful residents.

Financial Assistance: States can alter both the ACA rules and IRC provisions related to tax credits and cost sharing reduction subsidies. These include required family contributions, the benchmark used to calculate the amount of the subsidies, and the definition of minimum essential coverage.

Individual Mandate: States can modify the IRC requirement that most individuals have minimum essential coverage or pay a financial penalty.

Employer Mandate: States can modify the IRC requirement that employers with 50 or more employees must offer coverage to employees working 30 or more hours per week.

In order to receive waiver approval, states must prove key requirements of the ACA will still be met.  
What are the 1332 requirements?

As part of the waiver application, states must demonstrate that key requirements of the ACA will still be met. The waiver “guardrails” include:

  1. Premium and cost-sharing levels are as affordable as they would have been absent the waiver
  2. Coverage is at least as comprehensive as would have been provided absent the waiver
  3. Coverage is provided to at least a comparable number of residents as would have been absent the waiver
  4. The federal deficit may not increase under the waiver  

Guidance issued by HHS and the Treasury Department in 2015 established these additional requirements:

  • States must separately demonstrate that the first three guardrails are met for certain vulnerable populations, including low-income individuals, elderly individuals, and those with serious health issues
  • Failure to demonstrate that these guardrails are met for each of these populations would cause the waiver application to fail, even if the guardrails are met in aggregate
  • The guardrail conditions must be met in each year that the waiver is in effect
  • The impact on all state residents (even those populations not directly impacted by the waiver) will be considered when evaluating a state’s application
The first step in the waiver process is enacting state legislation.
How does a state receive a waiver?

First, legislation must be enacted authorizing the state to pursue a 1332 waiver. States must then draft an application identifying the provisions of the law they intend to waive and the rationale for the request.

The application must include a detailed 10-year budget, including actuarial analyses and certifications, economic analyses, data and assumptions, and other necessary information to support the state’s estimates that the waiver will comply with each of the required guardrails. The application must also include a detailed plan outlining how the state will implement the waiver, including a timeline.

The time required to complete these analyses will vary based on the type of waiver being requested by the state. Oliver Wyman’s work to complete the actuarial analyses for Alaska and Hawaii, which included detailed microsimulation modeling, took about six weeks to complete. Other more complex waivers, especially those that are combined with an 1115 waiver, could take longer to model. (Section 1115 Medicaid demonstration waivers give states considerable flexibility in how they operate their Medicaid program.)

Prior to submitting their application, states must provide public notice and hold a public hearing. Once the application is submitted, an additional federal public comment period occurs. HHS and the Treasury Department then have 180 days to issue their final decision. Waivers may be approved for up to five years.

In March, HHS Secretary Tom Price sent a letter to state governors encouraging states to pursue 1332 waivers. 
What is the Trump administration’s stance on 1332 waivers?

On March 13, HHS Secretary Tom Price sent a letter to state governors reminding them of Section 1332 and encouraging states to pursue waivers. Secretary Price’s letter, along with President Trump’s January executive order directing the administration to “afford states more flexibility and control to create a more free and open healthcare market,” appear to signal the administration’s willingness to work with states pursuing 1332 waivers.

What are states trying to achieve with 1332 waivers?

Ten states so far have passed 1332 legislation. The states are pursuing a variety of strategies via their waivers and are in varying stages of the process. Alaska’s waiver application, which is currently under review by HHS and Treasury, seeks federal support for a state-managed reinsurance program. The rationale behind their application is that relieving payers of costs associated with high-risk individuals will serve to reduce premiums in the individual market. Under the waiver, Alaska is asking the federal government to contribute (roughly) the amount the federal government will “save” on premium subsidies to the State’s new reinsurance program. (Read more about Alaska’s 1332 waiver here.)

Minnesota, which passed 1332 legislation just a few weeks ago, is pursuing a path similar to Alaska and is in the process of preparing its waiver application. Minnesota’s law creates the Minnesota Premium Security Plan, which establishes a reinsurance program and authorizes the Commissioner of Commerce to submit a 1332 waiver application using an approach similar to Alaska’s, but making implementation of the program contingent upon approval of the waiver application.

Hawaii, the only state with an approved 1332 application, intends to waive the requirement for a SHOP exchange (small group exchange, separate from an exchange for individuals). Hawaii’s waiver is unique in that it is not aimed at stabilizing the individual market. Their waiver modifies the coverage requirements of the ACA to align with the state’s Prepaid Health Care Act, a long-standing state law that sets minimum benefit requirements in the employer market. These minimum benefit requirements are actually greater than those that apply to plans sold through a SHOP.

Vermont also sought to alter SHOP requirements. Their waiver would have exempted the state from establishing a SHOP exchange so that small employers could continue to purchase coverage directly from carriers, but the application was deemed incomplete by HHS.

Five other states have passed laws and are still determining the specific provisions they would like to see altered or waived. Oklahoma, which passed legislation in 2016, is in the process of preparing its application and is exploring implementing a variety of reforms through a series of 1332 waivers. Kentucky recently passed 1332 legislation, but its new law does not specify or appear to place any limitations on which of the allowable provisions may be included in its 1332 application. Ohio, Massachusetts, Rhode Island also enacted legislation and are exploring options for their waiver application.

Finally, California submitted a waiver application that would have provided undocumented immigrants with unsubsidized coverage through its state exchange. However, the state subsequently withdrew its application.




What are the obstacles to 1332 waivers?

The path to a 1332 waiver is not without challenges. In some states, legislative resistance will stall progress. (Over the past few years, a number of states introduced, but failed to enact 1332 legislation.)

In all states, the 2015 federal guidance on waivers, which established the guardrails for vulnerable classes, adds a layer of complexity to the application process. As written, the guidance makes it unlikely that certain waivers, such as those that revise premium subsidies to vary by age or allow for coverage with lower actuarial values, would ever be approved. These types of waivers could help attract younger and/or healthier individuals into the market, yet may be destined for rejection because they would likely result in higher rates for older individuals or higher cost sharing for individuals with serious health issues.

Even if the 2015 guidance is relaxed by the Trump administration, states may struggle to implement certain waivers. HHS previously indicated that the federally facilitated exchange was not able to accommodate state-specific premium tax credit structures, nonstandard enrollment periods, customized plan management review, or changes to the display of plan options. Meaning, any state that uses the federal exchange will be limited in the changes that it could achieve with a 1332 waiver.

Waivers provide states an opportunity to implement reforms targeted to their unique socioeconomic make-up.  
So, are waivers worth pursuing?

We think that 1332 waivers could serve as a successful vehicle for states trying to stabilize their markets, and we are encouraged by the number of states exploring innovative approaches. It is true that uncertainty exists around the ACA markets and it is unclear how quickly Washington might be able to enact legislation that would stabilize the market. In the meantime, 1332 waivers provide states with a mechanism to take action and implement reforms targeted to their unique socioeconomic make-up, risk pool, and other circumstances.

The waivers also provide payers an opportunity to influence health reform. By educating state agencies and legislators on the potential benefits that a 1332 waiver could bring to their state, and sharing ideas of specific reforms and estimates of the impact that they could have, payers can play an important role in the future of their states’ individual health insurance markets.

Join our community of innovators. Become a contributor to Oliver Wyman Health. Email your ideas to the Editor at OWHealth.Editor@oliverwyman.com.

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