This issue brief from the Center on Budget Policy and Priorities describes the State Innovation Waiver in section 1332 of the Affordable Care Act (ACA) that will become available to states beginning in 2017. Prior to the ACA, states could seek waivers through section 1115 of the Social Security Act to carry out demonstration projects in Medicaid. States have used Medicaid section 1115 waivers to expand the use of managed care, cover individuals not otherwise eligible for Medicaid, and obtain federal matching funds for services and activities that Medicaid typically doesn’t cover.

ACA section 1332 waivers would allow states to implement demonstration projects beginning in 2017 that would waive ACA provisions governing the health insurance marketplaces, the subsidies available through the marketplaces, the “shared responsibility” requirement for individuals to have coverage or pay a penalty, and the shared responsibility requirement for employers with 50 or more full-time-equivalent workers to offer health insurance to their employees. To obtain federal approval of a section 1332 waiver, a state must:

  1. provide benefits at least as comprehensive as the “essential health benefits” that all plans in the individual and small-group insurance markets must cover;
  2. provide cost-sharing protections and coverage at least as affordable as those in the marketplaces;
  3. ensure that at least a comparable number of people have health coverage as under current law; and
  4. not increase the federal deficit.

A state can not use section 1332 to waive the ACA’s prohibition against insurers denying coverage or charging higher premium rates to people with pre-existing health conditions, its ban on annual and lifetime coverage limits in most plans, its requirement to cover certain preventive medical care at no charge to enrollees, or its requirement to cover adult dependents up to age 26.

A state could use a 1332 waiver to add a “public option” under which the state would offer its own plan in the marketplace to compete with private plans. A state could also use a 1332 waiver to offer in the marketplace an alternative health insurance affordability program for people with incomes too high for Medicaid — that is, a program similar to a Basic Health Program, which states can already create under the ACA, but with more design flexibility.  Hawaii has indicated that it may pursue a 1332 waiver to maintain its longstanding requirement that employers provide workers with health insurance, which differs from the ACA’s “shared responsibility” requirement for employers.

States may apply jointly for a section 1332 waiver and a Medicaid section 1115 waiver to make changes that affect both programs. For example, a state may seek to waive certain requirements for marketplace plans and corresponding Medicaid managed care rules to achieve better continuity of care between plans offered in the marketplace and Medicaid. Such an approach could allow more managed care companies participating in a state’s Medicaid program to offer coverage in the marketplace, or vice versa. To facilitate such complementary approaches, section 1332 allows states to submit a single application for Medicaid and CHIP section 1115 waivers and the ACA section 1332 waiver.

Other federal agencies besides the Department of Health and Human Services (HHS) will likely also be involved in reviewing and approving section 1332 waiver requests because they have authority over ACA sections within the scope of the section 1332 waiver.  For example, the Treasury Department and the Internal Revenue Service jointly administer the shared responsibility provisions for individuals and employers, and jointly administer the provision of premium tax credits with HHS.

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