What can states do to change key parameters of the individual market?

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DISCLAIMER: The views and opinions expressed are those of the interviewees and are not necessarily those of McKinsey & Company. The views expressed herein are not for the purpose of providing legal advice and should not be considered legal advice.

Stephanie Carlton: There’s a lot of discussion about changes to the Affordable Care Act through the legislative route, as well as through options that the Department of HHS has to work through different waiver authorities. 1332 waivers enable the change of key parameters to federal regulations of the individual insurance market. I would love to hear from both of you on what the possibilities are for the use of both waivers.                   

Tom Barker: Section 1332 of the Affordable Care Act gives both the Secretary of HHS and the Secretary of Treasury broad authority to waive many provisions, but not all provisions, of Title I of the Affordable Care Act as long as -- and there are four standards in the statute -- the waiver has to provide coverage that's at least as comprehensive as coverage under the ACA.

It has to provide coverage and cost-sharing that are at least as affordable as the provisions of the ACA. It has to provide coverage to at least a comparable number of residents. And it cannot increase the federal deficit. So, as long as those four guideposts are met, then the Secretary of HHS can waive various provisions of Title I and the Secretary of Treasury can waive various provisions of the individual mandate, the employer mandate, and the tax credit subsidies.

Ken Choe: And to add to what Tom said, there are only certain provisions of Title I of the Affordable Care Act that may be waived under Section 1332. They are key provisions that are essential to the current regulatory regime, but nonetheless there are only specified provisions that are subject to waiver.

Those include what qualifies as a qualified health plan that may be offered on a health insurance exchange, what constitutes essential health benefits that must be offered by plans offered on exchanges, key definitional provisions related to the health insurance exchanges, the health insurance exchanges themselves, the requirement regarding single risk pool, and then as Tom said, the requirements regarding cost-sharing reductions, premium tax credits, the employer mandate, and the individual mandate.

Erica Coe: Thanks. Tom, you raised the helpful point of laying out the four guardrails that currently are in place in terms of how a 1332 waiver can be used to change the individual market in a state. So, a question building off of that. There's the curiosity around, "How may the new administration release new guidance as it relates to interpretation of those guardrails or their broader application" and we’re wondering if you can either take a few examples of how a 1332 waiver may be used or start at a higher level?               

Tom Barker: So, I guess maybe starting at a 30,000 foot level, I do agree that the new administration is perfectly free to, and my guess is, likely will, revise the guidance that was issued in the summer of 2012 by the Obama Administration over interpretations of the four guardrails in Section 1332. I think it is likely that the Trump Administration is going to issue some new guidance possibly to make it easier for states to get waivers.

But I do want to emphasize, though, that there is only so far that any administration can go because they are constrained by the four guardrails in the statute. So, for example, I think Ken and I are both of the view that Section 1332 could not be used to waive any of the reforms to the individual insurance market that were enacted as part of Title I, like for example, the medical loss ratio.

Because those are provisions for which Section 1332 does not grant waiver authority. I think we are both of the view that there are only limited provisions of Title I that can be waived. And the individual insurance market reforms are not one of those provisions.             

Ken Choe: I agree with Tom that many of the discussions about, for example, the rating rules that those are not subject to waiver under Section 1332. So, for example, I know that in the discussions about market stability and providing regulatory relief to insurers, there has been talk about age rating and the degree to which insurers may depart from the current ratios set forth in statute of three-to-one when setting their rates. It does not appear to us that that is a provision that is subject to waiver under Section 1332, because it falls outside of the statutory provisions that Congress identified as subject to waiver.

It might be helpful just to flesh out a bit more the potential types of flexibility that an administration may have in ascertaining whether a particular waiver application meets the criteria.

So, for example, when assessing whether the coverage under the waiver would be comparable, the prior administration put out guidance that supplemented the rule that Tom referenced. And this was guidance, I believe, from last year. And they talked a little bit more about what they would do when evaluating an application for a 1332 waiver.

So, for example, when it comes to comparability of coverage, they indicated that they would look to see whether there would be comparability in each year of the waiver. They would look to see whether there would be comparability across all residents in a state, not just those who would be obtaining coverage under the specific terms of the waiver. They indicated that they would be looking to see whether vulnerable populations in the state would somehow be disproportionately affected in an adverse way. They said that they would look at whether the proposed regime under the 1332 waiver would create gaps in coverage or result in discontinuations of existing coverage.

None of these is set forth in the statute. This is a gloss that the prior administration put on this particular criterion. Now, the current administration could decide to take a different view, potentially a more flexible view in determining whether coverage under the 1332 waiver would be comparable to that without it. But, of course, we're here talking as lawyers and noting some of the legal possibilities. But, one has to look holistically through the lens of what is practically and politically possible as well.

Erica Coe: If we think about the second guardrail of comprehensive cost-sharing when it comes to maintaining a certain level of affordability in the markets, I think there's been a lot of discussion on the topic of premium tax credits and cost-sharing reduction subsidies and how subsidies in the market are structured.

Would love your thoughts on the flexibility as it relates to subsidies under a 1332 waiver, and how the past Obama Administration interpreted the comprehensive cost-sharing and what flexibilities you see there.

Ken Choe: I'll start by noting that the cost-sharing limitations are set forth in a provision that is subject to waiver under Section 1332. So, at least in theory, under Section 1332, the caps on maximum out-of-pocket expenditures could be waived and replaced with a different policy.

But, of course, one of the four guardrails is affordability, whether the coverage under the Section 1332 waiver would be as affordable as coverage in the absence of the waiver. And so, of course, that puts a constraint on the ability to substitute for the current cost-sharing limitations. I'll note that, when it comes to assessing affordability, the prior administration, again, put its gloss on that criterion and indicated what it would look to in evaluating that criterion.

So, again, it looked to whether it would be as affordable in each year of the waiver. It looked to whether there would be affordability as to all of the residents in the state even under other forms of coverage. It would look to whether there would be some disproportionate impact on vulnerable residents and those with large healthcare spending burdens. So, these are the kinds of things that the prior administration indicated it would look to as touchstones to determine whether, in fact, in its view, the coverage proposed would be as affordable. But again the current administration could take a different view, again, subject to some of the practical and political considerations that we discussed earlier.

Erica Coe: Just one clarifying point. You mentioned that cost-sharing limitations are subject to 1332, so that could mean that caps on maximum out-of-pocket expenditures could be replaced with a different policy. As it relates to premium subsidies, would you interpret that they would also be subject to 1332? Or would you characterize those differently?

Ken Choe: We would expect that premium obligations would be considered along with cost-sharing obligations in assessing whether the coverage would be as affordable as the coverage in the absence of the waiver. 

Tom Barker: That sounds right to me. And I think that that's sort of the trade-off that you get going to adopt a policy where there's maybe higher cost-sharing. One would expect that that might result in lower premiums. And there's a trade-off there.

Erica Coe: One other question, just building off of the potential interpretation of these guardrails. When we take something such as comprehensive cost-sharing, so ensuring that any different policy that's implemented that may introduce change to cost-sharing or premium subsidies would achieve the same levels of affordability as current coverage, given there are a number of potential changes being considered at the moment that could change the structure of the individual market as it relates to premium subsidies and cost-sharing reductions, would the comparison point for the waiver be the current market or be the future end state when we're in this period of transition in terms of what comparison or what benchmark the state must adhere to?

Tom Barker: My view is that the reference point that you're comparing from is what is happening under current law at the time that the waiver request is submitted. Whatever is happening with respect to affordability and coverage in a particular state at the time the waiver request is submitted is the reference point.

Ken Choe: And you raise an interesting conundrum because if there are legislative changes that affect the reference point, the question becomes, "Which reference point does the agency use when applying these criteria?" You may remember that when the Affordable Care Act was passed, there was proposed legislation to accelerate the timeframe of the Section 1332 waivers.

Ultimately, that legislation was not successful. And those who argued against it suggested that it did not make sense for Section 1332 waivers to be available immediately, because there had to be a baseline set under the current regulatory regime against which a proposed regime could be compared. And if Congress were to change the rules of the game the question would be, "Would there have to be some sort of modeling about what would have happened under this changed regime," and use that as a comparator or, "Would there be some period of delay before, the 1332 waivers would be compared to this new regime?"

Tom Barker: And I think it raises the larger point, which is that presumably, in addition to anything that the administration may do in the next several months, that does have to be viewed in the context of what Congress may do.

And I think that if Congress does do replacement legislation for the ACA, they are likely to consider revisions to Section 1332, I guess, to the extent that they can be done through the reconciliation process. But I do think Congress is likely to review and revise Section 1332 as part of an overall replacement legislation for the ACA.

Erica Coe: One additional follow-up question, in terms of changing the interpretation of some of the guidelines, when we think about what could be changed state by state as it relates to the tax code, any examples come to mind of things that you think may fall under a 1332 versus may not?

Ken Choe: Under a 1332 waiver, instead of the current premium tax credit and cost-sharing reduction scheme, those federal funds that would be projected to be expended toward the residents of this state would instead, or could instead, be handed over to the state to be used in some alternative way to achieve the goals under Section 1332.

That does suggest at least a possibility that, for example, instead of the individual mandate and the associated tax penalty, there might be some alternative way that folks could see to encouraging sufficient participation in the market to achieve the coverage goals.

Tom Barker: I'll just throw out another example. And this is a topic that I know Congress is thinking about in terms of restructuring the refundable tax credit. A state could apply for a waiver to do away with the income limitations for the credit and instead make the credit an age-based credit rather than an income-based credit. That's certainly, in my view, within the parameters of Section 1332 as long as, of course, the four guardrails are met. But in theory, a state could change the structure of the credit. They could, as Ken said, change the individual mandate or the employer mandate. I think all of those would be fair game. 

Ken Choe: I agree that a state might have some innovative way of subsidizing coverage for individuals perhaps in one of the alternative ways that Tom suggests, perhaps in other ways. Of course, among other things, that would be evaluated against the affordability criterion. So it will be interesting to see what approach is taken if, in fact, for some individuals it can be argued that their coverage is ultimately less affordable under the proposed waiver.

Erica Coe: So, if a state were to get a 1332 waiver approved that made some of the changes in the premium tax credit structure or the individual mandate that would mean changes running through the tax code, if you then have individuals living in one state that have different structured subsidies than individuals in other states in the country, would that mean that the federal government would be taxing people differently based on where they live because of this approved 1332 waiver? Is that the right way to think about it?

Tom Barker: So, I was just thinking that when I was talking about the change in the structure of the credit, and neither Ken nor I are tax lawyers, but I do think that that does raise an interesting question under the Uniformity Clause of the Constitution, which requires that taxes be uniform when they're applied to citizens in different states. So I do think that that's an interesting question and one that might ultimately have to be litigated in the court system, assuming that a state actually provided or was granted a waiver in that context.

Ken Choe: One other consideration is a practical one, as CMS and IRS have indicated in their guidance, there are some practical limits on what for example, IRS can do in terms of administering tax credits through the federal exchanges that differ from state to state.

As everyone remembers, there were a number of hurdles in setting up the exchange regime and that included some of the technological hurdles. And I think some of those persist today. And so there is sort of just a question practically of even if a state and the federal government were to want to embark on some alternative premium tax credit or cost-sharing reduction scheme it may not be technologically feasible at this time, especially to the extent that they are to be run through the federal exchange infrastructure. 

Erica Coe: Great point. One other question as it relates to 1332 waivers. I think that what we've seen is that some states have already included authorizing language in a bill without providing the concrete policies or specific goals for the waiver application, just to get the ability to apply for a 1332 waiver in place in their state. Do you expect to see more states following a similar pattern to fast-track intended 1332 waiver requirements? Or do you expect any other kind of actions on the state side to try to drive changes at a local level?

Ken Choe: I wouldn't be surprised to see additional state legislation along those lines. State legislatures are watching and waiting, like everyone else, to see what the new administration does once it settles in. But the way the calendar works, most state legislatures are in session in the first half of 2017 and they may fear that the guidance that might liberalize 1332 waivers might not be forthcoming until later in the year, when they're out of session. 

And so they might, as you suggest, pass legislation that gives broad authority to agencies in the state to apply for 1332 waivers without yet specifying exactly the terms of those waivers. But, of course that would likely come down to the politics in each state.

Tom Barker: Yes. I agree with that. I think to some degree, states are waiting to see what the administration does and what Congress does. My guess is that to the extent that the new administration wanted to see any type of action this year, they'll need to be as flexible as possible. 

Erica Coe: Very helpful and very interesting as it relates to some of the actions that states could be considering despite some of the uncertainty at the moment. 

Stephanie Carlton: The last question was around the guardrail with respect to comparable coverage. And Ken, you mentioned there's some operational flexibilities. And do you define coverage on an annual basis? Is it over a series of years? So, taking that a step further, could the next administration choose to take a more flexible view of coverage, perhaps focusing on health outcomes, for example?

Ken Choe: Tom and I discussed this, and I don't want to speak for him, but I think the answer appears to be no. While there is some flexibility in how these four criteria are interpreted and implemented, ultimately, one can't wholly depart from these criteria and substitute a different one. And it would appear that focusing on overall health outcomes in the population would not be reasonably thought to be the same thing as looking at coverage and its attributes.

Tom Barker: I don't have much to add other than to say, I agree. The Secretary really is constrained by the four guideposts and cannot create a new guidepost and substitute it for another. You cannot substitute the new one for one that's in the statute. 

Stephanie Carlton: Great. Thank you both so much. 

Ken Choe: One quick observation. Earlier, we talked about some of the practical constraints on, for example, 1332 waivers. And, of course, one of them is timing. You know, there's just a question of how quickly any alternate regime could be implemented. And of course, having that square with the current plan year, so that's another potential practical limitation. 

And then as previously discussed, of course, this is all happening against the backdrop of potential fundamental legislative changes and other, fundamental changes to the current regulatory regime. And, of course, that, too, could be a real factor in how 1332 waivers, and for that matter 1115 waivers, are considered.

Stephanie Carlton: Very helpful point. And very important considerations as we move forward. This has been extremely insightful. We appreciate it.