Health Affordable Care Act
September 12th, 2017 10 Minute Read Testimony by Paul Howard, Yevgeniy Feyman

How Congress Should Clarify and Expand the ACA's 1332 Waiver Construct

Editor's note: The following is supplementary testimony requested by the U.S. Senate Committee on Health, Education, Labor and Pensions


States are just beginning to seriously explore the potential of 1332 waivers. The limited engagement to date reflects both the highly partisan nature of the debate around the ACA and uncertainty about the future and scope of funding sources that currently flow through the ACA exchanges. Congress and the Trump Administration should address both issues simultaneously. 

Congress should enact waiver legislation that clarifies the availability of federal subsidies for the purposes of evaluating waivers’ deficit neutrality, including all potential federal spending that could be offset by a waiver, and evaluates its impact over a long (8-10 year) time period after an initial pilot period. Federal “guardrails” to prevent unintended consequences on patient outcomes and the deficit should focus on collecting data on costs and impact on vulnerable populations, while expanding consumer choices around affordable, high quality plan options. 

Congress should also instruct HHS to create a set of standardized, expedited waivers that could be quickly approved, to enhance confidence in the process. Congress should also allow states to form multi-state compacts to share costs and develop the necessary implementation infrastructure. 

How Should Waivers Be Funded and Evaluated? 

Any waiver-based reform will have to be financially attractive to the states and demonstrate long term budget neutrality to gain support of both governors and fiscal conservatives in Congress. This makes the scope of funding available through the waiver process a prime concern and challenge. 

As far as budget neutrality is concerned, the only relevant number to the federal government should be the bottom line. Combined Medicaid 1115/1332 waivers that keep total federal spending flat, but redistribute that spending around different populations in a more efficient way, should be promoted rather than prohibited. (Commingling savings from 1115 and 1332 waivers is currently prohibited by an Obama-era regulation that the Trump administration could reverse, but we believe 

that it would be best for Congress to make the change legislatively, making the waiver combination more attractive for long-term state planning.) 

With that in mind, there are multiple funding sources both within and outside of the ACA that should be made available, including Advanceable Premium Tax Credits (APTCs), Cost-Sharing Reduction (CSRs) subsidies, and small business (SHOP) tax credits. Other federal funding streams could include Disproportionate Hospital Share (DHS) support, safety net federal spending (through federally qualified health clinics, supplemental nutrition and assistance, the Children’s Health Insurance Program, or even federal earned income tax credits), as well as offsets from the reduction in any federal share of Medicare/Medicaid dual eligible spending. 

What Would States Do? 

While we cannot predict ahead of time how states would respond to clarified and expanded waiver authority, we can suggest several promising approaches that states are likely to consider. Potential waiver options could include: 

1. Modifying benefit design requirements. Current ACA insurance designs are much less attractive to middle-income or younger uninsured Americans with low expected costs who do not benefit from the current subsidy structure. States could offer more attractive coverage to these populations by choosing to make baseline coverage a high-deductible health plan with a health savings account at a given actuarial value (70%, for instance). States could also choose to vary cost-sharing within essential health benefits (EHBs), based on the ability of patients to shop for services with adequate tools for quality and cost comparison. 

Benefit: Current ACA guardrails regarding the comprehensiveness of coverage are likely to limit states’ ability to experiment with targeted benefit designs and coverage approaches that could provide greater consumer choice and better care (for instance, through exclusive networks that focused on intensive disease management). Targeted plan designs could work effectively within market stabilization tools like high risk pools and/or reinsurance to encourage plans to compete on improving patient outcomes for high cost patients as efficiently as possible.

2. Establishing a permanent reinsurance or high-risk pool mechanism. It is widely acknowledged that the ACA’s temporary risk corridors and reinsurance programs helped keep premiums lower than they otherwise would have been in the early years of the law. To that end, there are several possible ways to structure such an approach, whether implementing a reinsurance or high-risk pool program. Because reinsurance would reduce the need for larger federal tax credit, the savings should be passed through to the states. 

Benefit: Lower premiums across the market, reducing the need for federal tax credits and improving the risk pool by attracting more price-sensitive uninsured. 

3. Enacting an alternative to the individual mandate/penalty. The ACA’s individual mandate is one of the most controversial aspects of the law. However, there is also evidence that the mandate is having a small effect on coverage, especially since the penalty is relatively modest, and exemptions have been widespread. States should be encouraged to experiment with alternatives that address the same end: reducing the costs of adverse selection created by healthy individuals staying out of the risk pool. Here, states might modify the penalty to be tied to the cost of the second-lowest-cost silver plan for instance, experiment with auto-enrollment strategies, phase out the tax credit, or even reallocate credits to safety net providers. 

Benefit: Return authority to the states, while testing alternatives to the individual mandate (or even dispensing with it entirely) in favor of approaches that would ensure consumer choice while also reducing incentives for residents to wait until they are sick to purchase coverage. 

4. Allowing employers to make tax-free contributions to exchange coverage. Currently, IRS regulations prohibit employers from providing pre-tax defined contributions to employees to purchase non-group coverage. In order to incentivize increased use of the non-group market, and help spur a shift away from employer-sponsored coverage, these regulations might be waived or altered to permit such arrangements. Under this approach, employers (perhaps under some size threshold) would be allowed to make defined contributions (up to some limit) pre-tax for the purchase of non-group coverage. Ideally, this would occur within the context of equalizing the tax treatment between exchange funding and the tax deduction for employer-based insurance. This would ensure that individuals would have access to a stable, portable source of insurance, and could be targeted to expand insurance coverage among employees of small-businesses, where it is lacking today. 

Benefit: Strengthen employer-based coverage among small businesses, which often cannot afford to offer employer coverage. 

5. Allowing cost-sharing reduction funding to be used to support private, employer-based coverage. Some enrollees, who might otherwise opt for private coverage, turn it down and access exchange coverage because it is deemed unaffordable (above 9.5% of income for an individual). The ACA’s cost-sharing reductions could be used by small businesses to reduce these costs, making insurance coverage more affordable, and reducing the need for either tax credits on the exchanges or for Medicaid coverage. 

Benefit: Allow more employees to accept an offer of employer coverage, while reducing costs to taxpayers from those that would otherwise seek coverage from the exchanges or Medicaid. 

Best Practices and Protections Against Unintended Consequences 

Historically, states have expressed frustration and some distrust with the Center for Medicare and Medicaid Services’ (CMS) waiver process, and the ACA’s current guardrails may deter innovative state-based waiver programs. To help spur faster state action on waivers, as well as improve transparency and replicability, CMS should consider authorizing the Center for Medicare and Medicaid Innovation (CMMI)to develop a set of standardized set of waivers with predictable benchmarks available for states to quickly measure their ideas against. 

Below, we propose ideas for potential frameworks that CMMI could develop, which states can attempt to implement in a more predictable, pre-defined way: 

1. State Innovation Zones. Within the context of delivery system reforms, transparent pricing, and value-based insurance designs, states should have the opportunity to grant participating providers freedom from federal regulations such as anti-kickback (Stark) regulations, Medicaid Best Price, or the Medicare freeze on physician-owned hospitals. Reductions in the cost of services and/or insurance provided through these providers could be used to calculate deficit offsets. 

Benefit: Accelerate the adoption of innovative business and reimbursement models from the ground up. 

2. Auto-enrollment. A state may use waivers to develop ultra-high-deductible non-QHP (qualified health plan) products using funding from individual and/or employer penalties. In turn, the funds collected from such payments (perhaps supplemented by additional state funds) could be used to auto-enroll eligible individuals into these policies. A standardized framework from CMS might offer guidelines on the details of such products, what benefits they must offer, and how narrow coverage could be. 

Benefit: Design insurance products that offer financial protection to consumers against catastrophic health care costs. Help stabilize the market by improving the risk pool. Could be combined with other market stabilization reforms, like continuous coverage protections. 

3. Private option Medicaid expansion. A standardized option might offer guidelines as to what cost-sharing requirements and premiums (if any) might look like for Medicaid populations that are moved into private coverage, including what populations would be eligible, and specific criteria for evaluating success/failure of the expansion. 

Benefit: Shift more state residents into high-quality private plan options, improve access to providers at an affordable cost to taxpayers and enrollees. 

4. Expanding employer-based enrollment. States could use tax credits and cost-sharing subsidies to offset the cost of individual coverage in the small group market, conditional on employer size and a minimal contribution. 

Benefit: Employer-based coverage is the primary vehicle for access to high-quality insurance. While in the long run coverage between the employer and individual markets should be equalized to ensure portability of coverage and encourage greater market competition, stabilizing coverage among small employers could reduce reliance on other public programs. 

5. Private Exchange Option. States could also make federal tax credits available through private exchange options for individuals and small businesses, with states having the option to shift its own employees and retirees (and perhaps able-bodied Medicaid enrollees) to the exchange to improve the risk pool. Private exchanges operating in this way should be required to offer plans statewide, to risk adjust across plan designs, and offer risk corridors. 

Benefit: Private exchanges can offer lower-cost marketplaces for individual coverage, while offering consumers more tools to compare cost and quality. The biggest barrier to adoption is the current requirement that exchanges automatically enroll Medicaid-eligible enrollees. Allowing a private exchange to redirect Medicaid-eligible enrollees to a public portal would make private exchange adoption more attractive. 


Greater congressional clarity on waivers would encourage more innovative state waiver applications and programs for delivering affordable, high-quality coverage at a sustainable cost for taxpayers and uninsured. 

Policymakers should recognize that states will follow their ideological priors in testing waiver designs, but as long as they do so with their own dollars and a capped amount of federal funding, such experimentation should be allowed. 

One objection to expanded waivers is that it will introduce too much state variation, and “a race to the bottom.” One response is that there is already enormous state variation in programs like Medicaid, and too little state accountability ensuring that spending results in improved health outcomes. 

Federalizing health care responsibilities with explicit accountability for costs and outcomes would bring much needed rationality to the status quo. It would encourage state competition around lowering costs and implementing critical delivery system reforms that have been avoided because the federal government has borne the lion’s share health care costs. 

Waivers along the lines we have suggested would finally align both funding and responsibility with the state authorities who are in the best position to create competitive, sustainable markets for individual and small group insurance. The federal government could then concentrate on reforming the tax treatment of health insurance, and modernizing Medicare to ensure that program’s long term sustainability. 

The result would be a system with more cleanly designated federal and state responsibilities, and where voters could allocate the credit—or blame—with a more realistic expectation of accountability.


Paul Howard is a senior fellow and director of health policy at the Manhattan Institute. Follow him on Twitter here

Yevgeniy Feyman is an adjunct fellow at the Manhattan InstituteFollow him on Twitter here.


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