Returning Health Care Power to the States

Sep 21, 2016

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


In this paper, we recommend changes to the statutory and regulatory environments of the Patient Protection and Affordable Care Act (ACA) to allow states to pursue targeted, intermediate, and comprehensive reforms to strengthen their health insurance markets.

When Congress passed the ACA, it transferred significant regulatory power from the states and placed the health insurance coverage of millions of Americans under the direct authority of the federal government. But, Congress also provided states the power to innovate and improve on the ACA through a statutory provision, Section 1332, which provides states with power over some of the most controversial parts of the ACA. Beginning in 2017, for example, states may choose to waive “all or any requirements” of the ACA’s new provisions related to the federal tax code.

Section 1332 implicitly recognizes that states could do a better job meeting the objectives of the ACA than the federal government. Congress intended for states to innovate and experiment using Section 1332, and the ACA expressly grants states latitude to pursue alternative plans: “[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). 

To take advantage of Section 1332’s “Waiver for State Innovation,” alternative state plans must meet four conditions:

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

State Innovation Waivers may be used for states to pursue a range of reforms. Some states, like Ohio, have already enacted laws encouraging broad innovation and experimentation. States also could use Section 1332 to take smaller steps to target specific problems, such as the so-called “Family Glitch,” or to resolve other inequities by realigning conflicting income and standards methodologies. The waiver process could also enable states to eliminate the individual mandate, develop better ways to sell health insurance, terminate the federal statutory prescription of metal tiers and coverage benefits, and promote market competition by giving individuals more choices to meet their needs.

Unfortunately, the Obama Administration released guidance in December 2015 that discourages states from pursuing State Innovation Waivers. The administration’s guidance conflicts in part with the ACA, complicates waiver approval, and imposes arbitrary restrictions on states. 

For states to innovate in health care, they need commitment from the federal government to work cooperatively with state reform efforts and new guidance that frees states from federal overreach so that they can effectively focus on the needs of their residents. 


1. The next presidential administration should rescind the Obama Administration’s December Guidance, which deviates from the text and intent of the ACA. The Guidance 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 offset any higher costs. There cannot be a wall between Innovation Waivers and Medicaid waivers that prevents savings in one area from applying 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. Congress should amend the statutory requirement in Section 1332 to provide coverage at least as comprehensive as the Essential Health Benefits package. The current requirement in 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 plans options under the CHIP and the Deficit Reduction Act of 2005 for all children and adults who are covered by Medicaid, CHIP, or tax subsidies.  

5. Congress should amend the statutory requirement in Section 1332 regarding cost coverage and cost-sharing protections against excessive out-of-pocket spending. There are multiple definitions of “affordability” that create and reflect inequities among individuals and families depending on their source of coverage. As CHIP funding declines, Congress should have a coherent plan for integrating coverage of children with their parents’ coverage 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. 

6. State governors of both parties should continue to push for flexibility from the federal government in regulating their state health insurance markets. New guidance from the federal administration should reflect the fact that state governors have and can continue to achieve better outcomes for their citizens than is possible from a one-size-fits-all rule drafted in Washington, D.C.

Click here to download the full report: Returning Health Care Power to the States