States may gain more flexibility to shape insurance markets using "state relief and empowerment waivers" — a new name for state innovation waivers under the Affordable Care Act (ACA). A recent fact sheet and a 39-page discussion paper from the Centers for Medicare and Medicaid Services (CMS) suggest four approaches for state innovation waivers. These guidelines follow the October release of joint agency guidance easing the criteria that states must meet to pursue innovation waivers. State waivers could have an impact on large employers' group health plans, especially if a state changes or waives ACA's premium tax credits or employer shared-responsibility requirements. Plan sponsors will want to pay attention to state waiver activity, particularly if they are interested in the recent proposal to let employees use health reimbursement arrangements (HRAs) to buy individual health coverage.
Shifting interpretation of waiver criteria
Under ACA Section 1332, state innovation waivers allow states to pursue their own reforms without adhering to certain ACA requirements. If a waiver program reduces how much the federal government pays in premium tax credits and other ACA subsidies, the state can get those savings directly as federal pass-through funding.
ACA standards that the departments of Health and Human Services (HHS) and Treasury can waive include:
- Employer shared-responsibility obligations
- Public exchange and qualified health plan certification requirements
- Exchange premium tax credits
- Certain individual and small-group insurance standards
However, HHS and Treasury can't grant a waiver unless the proposed state reform meets four criteria, often referred to as ACA guardrails: The new reforms must generally provide coverage comparable to ACA-compliant coverage in comprehensiveness, affordability, and number of residents covered and cannot increase the federal deficit.
New guardrail flexibilities in Trump guidance
The Trump administration's October guidance rescinds 2015 guidelines from the Obama administration on what states seeking innovation waivers must do to meet these ACA guardrails. The new interpretation eases the standards for states to satisfy each guardrail.
Comprehensiveness. Under the Obama guidelines, a state waiver program could not decrease the number of state residents with comprehensive coverage that satisfies all essential health benefit (EHB) standards and categories. Under the new guidance, comprehensiveness is instead evaluated by comparing access to coverage that meets the state's EHB benchmark plan, not necessarily the number of individuals enrolled in that coverage. The October guidance also notes that under HHS guidance issued last year, states will have more flexibility to select a different EHB benchmark plan starting in 2019.
Affordability. To measure a waiver program's impact on affordability, the new guidance again calls for focusing on state residents' access to affordable coverage rather than the affordability of coverage in which residents are actually enrolled. The Trump administration expects that recent regulations will give states more options to make affordable coverage available through association health plans and short-term, limited-duration policies. Under the 2015 guidance, a new waiver program couldn't reduce the number of state residents with coverage that has an actuarial value (AV) of at least 60%. This AV requirement is not in the Trump guidance on affordability.
Covered lives. Under the 2015 guidance, a state waiver program could not reduce the number of state residents covered by any type of health insurance. The new guidance allows an initial reduction in the number of covered lives as a waiver program rolls out if the longer-term impact will result in comparable covered lives. Federal regulators also will take into account whether a waiver program will prevent coverage gaps or discontinuation — for example, by encouraging enrollment in short-term, limited-duration policies.
Deficit neutrality. Besides prohibiting a program from adding to the federal deficit over the five-year waiver period or a longer 10-year window, the 2015 guidelines said a waiver would probably fail the deficit-neutrality standard if the program triggered even a single-year deficit increase. While the Trump guidance largely aligns with the earlier deficit-neutrality standard, it is silent on whether a single-year deficit increase would affect this guardrail, signaling possible flexibility.
Four HHS suggested approaches to waivers
In the fact sheet and discussion paper, CMS suggests four types of waivers that states may want to consider. Waivers are not limited to these four concepts, and states are free to pursue other approaches. However, the emphasis on these four areas shows which state reforms the Trump administration wants to support and encourage.
State-specific premium assistance
Under this approach, a state would waive federal premium tax credits to subsidize exchange coverage (Section 36B of the Internal Revenue Code) and instead create a new state premium assistance program. The federal funds previously used for state residents' premium tax credits would instead "pass through" directly to the state to fund its own program.
This type of program could allow more individuals with higher incomes to receive subsidies, the discussion paper suggests. For example, as an alternative to the current federal income and affordability rules for premium subsidies, a state program could restructure premium assistance as a set monthly amount per enrollee that varies only by age. The discussion paper also suggests other structures for state-based premium assistance.
Adjusted plan options
The ACA's federal premium tax credits are available only to eligible individuals enrolled in a qualified health plan through a public exchange. An innovation waiver proposing adjusted plan options would let a state offer premium assistance to residents enrolled in plans not allowed under the ACA, such as:
- Catastrophic plans. By waiving certain ACA rules, a state could provide premium assistance for residents enrolled in so-called "catastrophic plans." Exchanges currently can offer these plans only to individuals who are under age 30 or qualify for special exemptions, and no premium tax credits are available for these plans. The new guidance would let a state waive the ACA enrollment restrictions on these plans, along with the ACA limitation on subsidizing any coverage except qualified health plans.
- State subsidies for different types of coverage. Another option would let state premium assistance programs subsidize plans that are not offered on an exchange or do not meet the AV standards required in the individual and small-group market. For example, state assistance programs could subsidize short-term, limited-duration coverage; employer-based plans; and association health plans.
Under this approach, a state could waive the ACA premium tax credit and use the pass-through funding to set up consumer-directed defined contribution accounts to help residents pay health insurance premiums or other health care expenses. For example, a waiver program could create consumer-directed health expense accounts (HEAs) subject to state regulation rather than the federal rules for health savings accounts (HSAs) and HRAs.
Eligibility, contributions and use of accounts. A state-specific premium assistance program could have its own rules for subsidy eligibility (such as age-based criteria) and direct those subsidies into the newly created accounts. The state could determine how individuals may use the funds, such as to pay premiums, health expenses, or wellness program costs or to "support personal health (i.e. smoking cessation programs)." A state could allow employers to contribute to their employees' accounts as well.
Different sales platform. The discussion paper posits that a state premium assistance program could use the existing public exchange platform, obtain a waiver to allow the creation of a new platform, or have no exchange platform at all. States with no exchange platform could rely on the private market and allow subsidies for all types of health insurance to fund the new accounts. These suggestions align with the October guidance that encourages states to work with private-industry partners to create websites to replace the consumer-facing functions of the HealthCare.gov platform.
This approach matches the design of most state innovation waivers approved to date.
Reinsurance. State reinsurance programs provide additional dollars to insurers covering individuals with high claim costs or specific conditions, thus lowering the overall premiums that all individuals in the risk pool must pay. Since lower premiums reduce how much the federal government has to pay in premium tax credits, the savings become the federal pass-through funding that helps pay for the reinsurance program.
States like Alaska, Maryland and Minnesota have been or will be using innovation waivers for various reinsurance programs. Treasury recently released its methodology for determining the amount of pass-through funding the federal government will make available to states under already approved reinsurance state innovation waivers.
High-risk pools. The discussion paper also recommends creating a separate high-risk pool where residents with high claims or specific conditions would obtain coverage outside of the regular commercial insurance marketplace. This separate risk pool would provide coverage only for these individuals. Thirty-four states had high-risk pools prior to the ACA's passage.
While the new guidance has the potential to carve out ACA exceptions in each state, how many states will actually pursue these approaches is uncertain. States that have seen their public exchanges start to stabilize may not want to make potentially disruptive structural changes. In some cases, creating state-specific subsidies and high-risk pools could carry much higher costs than the state would get back in pass-through federal funds, requiring additional state reforms to pay for its new program. While the discussion paper suggests various new approaches, it does not address how states can show that a waiver program using one of those designs will meet the four ACA guardrails. Other uncertainties include possible legal challenges to approved waivers and uncertainty about how the suggested approaches might affect ACA requirements for large employers' group health plans.
Legal challenges could hamper progress
Unless eventually upheld on appeal, the recent court decision in Texas v. United States invalidating the ACA won't prevent waivers and their associated pass-through federal funding from moving forward. But state waiver programs could face two types of more targeted legal challenges. One could involve the ACA's fundamental protections; the other could focus on the regulatory requirements for issuing significant guidance.
Pre-existing condition and community-rating protections. The ACA does not allow waiver of the ban on pre-existing condition exclusions in any insured or employer self-insured health plan. The ACA's community-rating rules, which prohibit health-status rating and restrict age-based rating in the individual and small-group market, also cannot be waived.
While the discussion paper says the suggested waiver approaches would preserve pre-existing condition protections, expanding access to short-term, limited-duration coverage funded through state or federal subsidies raises legal questions. These policies are not considered individual health insurance under federal law, so they can have pre-existing condition exclusions and underwriting features not allowed in the individual and small-group market.
As a result, waivers involving subsidies for short-term, limited-duration coverage may be challenged in court as undermining ACA protections. Any waiver program will also have to pass muster under the ACA's nondiscrimination rules (Section 1557), which prohibits discrimination based on race, color, national origin, sex, age and disability.
Administrative Procedure Act challenges. The recent HHS and Treasury guidance redefining the parameters for state innovation waivers to meet the ACA's four guardrails was not issued as a proposed regulation. This means the guidance did not go through the formal notice and comment process typically required for agency regulations to have legal authority under the federal Administrative Procedure Act. As a result, a waiver approved under the October guidance could be challenged as exceeding the agencies' authority.
Implications for large employers not addressed. The new guidance does not address the impact that these waiver alternatives could have on large employers' ACA obligations, leaving some areas of uncertainty.
Employer shared responsibility. Most of the discussion paper's suggested approaches would involve a state waiving the ACA rules on federal premium tax credits. A full-time employee's receipt of those tax credits to help buy exchange coverage is what triggers an employer's risk for shared-responsibility assessments. So if a state waives federal premium tax credits, does that eliminate the trigger for employer shared-responsibility assessments? Do these options effectively waive employer shared-responsibility liability for employees in that state?
Employer-sponsored HRAs, HSAs. The discussion of account-based premium assistance does not address the interaction with other accounts like HSAs or employer-sponsored HRAs. How would a state-created consumer-directed account coordinate with existing federal HSA and HRA rules? What are the federal tax implications of this waiver approach?
Lack of uniform standards. Employers with multi-state worksites could have to track different state requirements to determine shared-responsibility compliance or to pursue a defined contribution approach to help employees buy individual insurance policies. Employers could also face new and differing assessments on their health plans as states pursuing waivers seek additional funds to make the reforms work. If a state's assessment involves self-insured employers, litigation on whether ERISA pre-empts the new state levy could lead to further uncertainty.