Recommendations for Freeing State Health Care through 1332 Waivers

Jul 29, 2016

By Rea S. Hederman Jr. and Dennis G. Smith

The Patient Protection and Affordable Care Act (ACA) transfers significant regulatory power from the states and places the health insurance coverage of millions of Americans under the direct authority of the federal government. However, the ACA provides states an alternative to some of its most controversial parts. Beginning in 2017, states can choose to waive “all or any requirements” of the new provisions related to the tax code. Pursuant to the ACA’s Section 1332, “Waiver for State Innovation,” states may exercise this alternative if they meet four conditions:

  1. Their coverage must be at least as comprehensive as the Essential Health Benefits package and offered through exchanges;
  2. They provide coverage and cost-sharing protections against excessive out-of-pocket spending for individuals;
  3. They provide coverage to at least a comparable number of residents; and
  4. Their plan will not increase the federal deficit.

Congress intended that states be allowed broad authority to innovate and change the ACA, as Section 1332 provides that “[a] State may apply to the Secretary for the waiver of any or all of the requirements…with respect to health insurance coverage… (emphasis added).” State legislators in other states, such as Ohio, have enacted laws encouraging broad innovation and experimentation. However, for states to be willing to take on this challenge, and for change to happen more quickly than under the history of Section 1115’s demonstration program, they must have a clear commitment from federal authorities that there is a pathway to succeed.

However, in December 2015, the Obama Administration issued guidance seemingly designed to discourage states’ use of State Innovation Waivers. The guidance created many new questions about implementation and imposed an unnecessarily complicated approval process. Some of the guidance conflicts with Congress’ statute.

The premise of Section 1332 is that states can do a better job than the federal government to meet the objectives of the ACA. Reforms can be categorized as targeted, intermediate, or comprehensive. This policy brief offers recommendations on how to improve upon the statutory and regulatory environment so that the promise of returning power to the states can be realized, whichever level of reform policymakers may pursue.


1. The Obama Administration’s December Guidance should be rescinded through regulatory action by the next presidential administration. The Guidance deviates from the text and intent of the ACA. It also deviates dramatically from the current fiscal practices used in the Section 1115 demonstration program. The December Guidance limits the ability of states to make Medicaid a more cost-effective program with better health outcomes in the long term.

2. The executive branch should release additional guidance on how deficit neutrality will be calculated. The new guidance should allow any savings—from moving healthy lives in Medicaid and the Children’s Health Insurance Program (CHIP) into private sector markets as a result of state action, whether economic, administrative, or policy—to be counted and to offset any higher costs. There cannot be a wall between State Innovation Waivers and Medicaid waivers that prevents savings in one area to apply to another area.

3. The executive branch should release additional guidance to clarify that Section 1332 authority and Section 1115 authority can be used in combination and that a state can file a single application using both authorities under a single definition of deficit neutrality.

4. The statutory requirement in Section 1332 to provide coverage at least as comprehensive as the Essential Health Benefits package should be amended by statute. This provision of Section 1332 is inconsistent with the inherent authority itself and is anticompetitive. As an alternative, Congress should consider permitting states to use each of the five original benchmark plan options under the CHIP and the Deficit Reduction Act of 2005 for all children and adults covered by Medicaid, CHIP, or tax subsidies.

5. The statutory requirement in Section 1332 to provide cost coverage and cost-sharing protections against excessive out-of-pocket spending that are at least as affordable as the provisions of this title would provide should be amended by statute. There are multiple definitions of “affordability” that create and reflect inequities among individuals and families depending on the source of coverage. As CHIP funding declines, Congress should have a coherent plan for integrating coverage of children with their parents and recognize that affordability reflects the cost of covering all members in a family. Congress should consider closer alignment with private sector employer-sponsored insurance and alternative mechanisms of protecting individuals against catastrophic losses. Concerns that increased flexibility on the coverage requirement would lead to inadequate coverage are unfounded based on Health and Human Services’ review of the CHIP program.

6. State governors of both parties should continue to push for flexibility from the federal government. New guidance from the administration should be issued to reflect the fact that governors can achieve and have achieved better outcomes for their citizens than can a one-size-fits-all rule from Washington, D.C.

Rea S. Hederman Jr. is the Executive Vice President and Chief Operating Officer of The Buckeye Institute. Dennis G. Smith is a Principal at Dentons and is the former Director of the Center for Medicaid and State Operations at the U.S. Department of Health and Human Services.