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As citizens and stakeholders in the health care arena, Axene Health Partners, LLC consultants are actively informing policymakers on strategies to develop and preserve sustainable health care markets. In that regard, we prepared a comprehensive report1 in 2016 offering recommendations for improving the Patient Protection and Affordable Care Act (ACA) through the annual payment notice regulation Patient Protection and Affordable Care Act; Health and Human Services (HHS Notice) of Benefit and Payment Parameters for 2018.2 At the time, we recognized the future benefits of states leveraging Section 1332 waivers to meet their own ACA challenges.
A significant portion of our report was focused on recommendations to strengthen the individual marketplace. Broadly, we noted “that the enrollment challenges related to the underlying enrollee incentives will ultimately require legislative changes to address the serious issues present in the individual market.”3 Specifically on the regulatory front, we recommended “HHS should work with states and interested stakeholders to facilitate State Innovation Waivers under Section 1332 that allow states to use existing federal funds to create a broader market appeal…A competitive market scenario requires financial modifications of the existing rules that allow the market to be more attractive to enrollees as well as issuers. Exploration of options through Section 1332 provides some innovative opportunities that do not require federal legislation. Many states do not fully appreciate these opportunities, and we believe open dialogue would facilitate a strong potential for mutual goals to be achieved.”4
In March 2017, a letter to states from HHS Secretary Tom Price signaled such encouragement, inviting states to reach out “for assistance in formulating an approach that meets the requirements of Section 1332.”5 The letter specifically mentioned a reinsurance program as a potential waiver example and highlighted the favorable initial experience of such a program in Alaska. Over the course of 2017 and 2018, additional state waivers have been filed. While some waiver applications have been rejected and withdrawn, a total of eight have been approved.
Seven of the eight are approved waivers are reinsurance programs similar to the Alaska model. While these waivers have resulted in substantial premium savings6 for state residents, stakeholders have recently expressed frustration with the limited use of Section 1332 and constraints of the original regulatory guidance. Seema Verma, the Administrator for the Centers for Medicare & Medicaid Services (CMS) noted “While these reinsurance waivers show the inefficiencies of the ACA’s tax credit structure and have given states an important tool to reduce premiums, they barely touch the surface of what may be possible to achieve through a waiver”.7
As legislation to strengthen, modify, or repeal the ACA has stalled, solutions to ACA challenges are more likely to occur at the state level.8 A divided Congress in 2019 will certainly dampen further legislative repeal efforts, and the likelihood of any substantive federal modifications is remote. Updated guidance on Section 1332 waivers offers additional flexibility to states and we are encouraged by the new opportunities to improve local markets.
What is Section 1332?
Section 1332 of the ACA created opportunities for waivers in commercial markets that allow states to bypass some of the marketplace requirements, mandates and benefit requirements constructed by the ACA.9 Beginning in 2017, this section explicitly allowed states to pursue the ACA’s objectives in innovative ways, with federal approval and within limits. Specifically, states can use the federal funds provided through the ACA and redistribute them in a more efficient, equitable manner to provide incentives and create broader market appeal.
A Section 1332 waiver requires discretionary approval from the Secretary of Health and Human Services and the Secretary of the Treasury and is predicated on meeting four require¬ments, frequently referred to as guardrails:
- Comparable scope of coverage.
- Comprehensive coverage.
- Deficit neutral.
Regulatory guidance was first issued by the Obama Administration in December 2015. Relative to new guidance in October 201810, the prior guidance was restrictive and limited states’ abilities to innovate. A notable (and largely unattainable) requirement was that the guardrail measurements were required to not only be met on an average enrollee basis, but on certain subsets of the population as well. These restrictions have effectively limited state waivers to reinsurance and restrained the market improvement opportunities available to states. While there has been criticism that the new guidance allows unintended deviance from ACA ideals, the basic requirements of the guardrails remains in place. Regardless of the political landscape in state government, there are opportunities for all states to innovate through Section 1332 and overcome some of the inherent consumer challenges with the ACA.
While states will prescribe different solutions, the consistent challenge is the acknowledged ACA dynamic of premiums being misaligned with expected claim costs.11 The risk adjustment program attempts to neutralize this impact from the perspective of insurers through a transfer payment methodology based on insurers’ varying risks.12
Risk adjustment does not resolve the same dilemma for insurance consumers. Consequently, individuals with premium levels above actuarially determined rates are less attracted to the marketplaces. This is offset to some extent by premium subsidies (aka Advanced Premium Tax Credits), but the subsidy allocation is unbalanced and results in mixed incentives13 for eligible enrollees.
Through Section 1332, the federal government allows states to rebalance the subsidy distribution with the same level of federal financial commitment. A formal process exists to complete a waiver application, and a modeling analysis of the impact and an actuarial certification are required. With the new guidance, the process is now more flexible and facilitates tangible opportunities for states to improve their local markets.
Section 1332 provides opportunities for states to adjust some of the ACA difficulties within their borders and tailor the federal requirements to the states’ needs. This allow corrections to some of the ACA’s unintended consequences, such as addressing the rough edges and unfortunate coverage gaps in the individual market. Specifically, states can smooth some of the sharp break points, resolve the “family glitch” through a restructured affordability definition, and reallocate the subsidy dollars to be more attractive to eligible enrollees with poor financial options. More broadly, a state can fund its reform effort by redirecting the federal financial assistance in more strategic ways.
In the blog post coordinated with the new guidance, CMS stated that “the ACA imposed a one-size-fits-all set of federal regulations that put a straightjacket on state innovation.”14 There is truth to this claim, but it should not be misinterpreted. A “laboratories of democracy” ideal is common with federal waiver programs, but the problem is not that the ACA works well in some states but not others. The problem is that some aspects of the ACA don’t work in a voluntary market; some states have managed these challenges better than others, but all states could benefit from a subsidy allocation that is more strategic and more balanced than the default ACA methodology. Notably, the ACA regulatory rules and consumer protections cannot be modified through Section 1332, so a strategic response to such rules via federal funding provides the best response for states to address consumer challenges with the regulatory framework.
Leveraging Federal Funds
A mastery of the financial dynamics of the ACA is key to successfully leveraging Section 1332 opportunities. The ACA-induced enrollment growth relative to the incurred costs has proven to be inefficient (details in next paragraph); this provides tremendous upside for states to leverage federal dollars. States can work with actuaries to financially model the impact of allowed changes in alignment with state goals.
Since 2013, individual market enrollment has grown from 10.6 to 14.4 million people. The primary catalyst for market growth is the premium tax credits instituted in 2014. In 2018, the estimated cost of premium tax credits is about $50 billion.15 This equates to a governmental cost of more than $13,000 per year per incremental enrollee. Comparatively speaking16, the average annual individual market premium was $2,820 in 2013.17 A more efficient use of federal dollars would allow states to attract more people, improve the risk mix and lower premiums. The current inefficiency provides a strong baseline of federal support to design a more attractive marketplace.
The new Section 1332 guidance, dubbed State Relief and Empowerment Waivers (SREW), implements an access standard rather than a coverage standard. Accordingly, guardrails can be satisfied if comprehensive coverage is available even if less comprehensive coverage is selected.
The new guidance also takes a long-term approach and measures coverage adequacy and deficit neutrality over the 5-year waiver period and 10-year budget window, unlike the prior guidance that required such adequacy every year.
In November 2018, CMS published a Discussion Paper18 providing concepts of the type of waivers that are likely to be considered under the new guidance. These concepts largely align with the opportunities for states to leveraged federal dollars to attract broader market appeal.
Actuarial Strategy in Changing Environment
The individual marketplace dynamics have changed since 2017. Many stakeholders and market observers don’t fully appreciate this. As premiums have increased since 2014, enrollment of unsubsidized individuals has continued to decline. Subsidized enrollees are largely insulated from premium changes, and this group represents a larger and growing proportion of the individual market.
As premiums have increased since 2014, enrollment of unsubsidized individuals has continued to decline.
President Trump’s decision to discontinue reimbursement of cost-sharing reduction payments has increased premium subsidy amounts, which has resulted in lower net premiums for subsidized enrollees. This has catalyzed beneficial market changes in 2018.19 Insurer profitability is at record levels and average premium rates are decreasing for the first time in 2019. Insurer interest has been reignited, and the number of state-levels insurers is 17% higher in 2019 after reductions of 28% and 21% in the two prior years.20
While the subsidy boost eases the Section 1332 deficit neutrality requirement, the removal of the individual mandate penalty and the growth of alternative options lowers the baseline coverage guardrails measurement. As the actuarial comparison must project waiver results to current law absent a waiver, relaxed benchmarks due to regulatory changes facilitate more flexibility for states.
Some states have responded to federal action with regulations (e.g. state-level individual mandate) outside of a Section 1332 waiver. A more holistic approach would incorporate such changes that advance guardrail compliance within a waiver filing and facilitate more flexibility to achieve states’ other goals. States considering a Section 1332 waiver could benefit from a proper analysis before proceeding with other state goals.
States have untapped opportunities to use the waiver authority provided by the ACA to create more dynamic and sustainable markets. While some opportunities are discussed here, it is only a sampling of the possibilities available to states to optimize their markets.
States can move forward with the new guidance for plan year 2020; ideally, applications should be submitted in early 2019. States should determine the specific problems they would like to solve and begin discussions of how the more flexible waiver guidance can be used to facilitate those solutions.
Greg Fann has discussed State Innovation Waiver options utilizing Section 1332 through a Society of Actuaries newsletter article21 and featured podcast.22 He also recently wrote a LinkedIn post23 with the encouragement of the SOA Health Section Council. Please contact Greg at firstname.lastname@example.org to explore and discuss new opportunities available with State Relief and Empowerment Waivers.
1 Attachment 15, https://www.regulations.gov/document?D=CMS-2016-0148-0598
3 Attachment 15, https://www.regulations.gov/document?D=CMS-2016-0148-0598
4 Attachment 15, https://www.regulations.gov/document?D=CMS-2016-0148-0598
11 Actuarial Standard of Practice No. 12 discusses the risk of broadly determined risk classes that do not properly align premiums and expected claims. http://www.actuarialstandardsboard.org/wp-content/uploads/2014/07/asop012_101.pdf
16 Not normalized for medical trend, benefit changes, or regulatory factors.
About the Author
Greg Fann, FSA, FCA, MAAA, is a Consulting Actuary with Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.