The Affordable Care Act (ACA) established a framework—including now-familiar elements like insurance marketplaces and premium tax credits—to expand access to affordable, comprehensive health insurance coverage. However, the law also gives states a chance to realize these goals using alternative solutions. Starting in 2017, states can pursue “innovation waivers,” sometimes known as 1332 waivers, that allow them to modify key parts of the ACA. These waivers may propose “broad alternatives or targeted fixes” to a number of the ACA’s private insurance provisions, so long as they stay true to the law’s goals and consumer protections. With 2017 fast approaching, the Obama administration recently published guidance that supplies important considerations for states to weigh as they explore their waiver options and explains the “guardrails” designed to protect the ACA’s objectives.

The Rules on Waivers

Section 1332 authorizes states to develop new approaches to deliver on the promise of health reform. States can request a waiver from many of the ACA’s requirements related to private health insurance, including those concerning covered benefits, subsidies, the marketplaces, and the individual and employer mandates.

But there’s a critical catch. States can forge their own path only within certain limits set by the law itself: a waiver must ensure coverage is at least as comprehensive and affordable as the ACA, must cover a comparable number of residents, and can’t add to the federal deficit.

Important, too, is that while section 1332 gives states flexibility over the ACA’s private coverage provisions, it does not create new waiver opportunities for public coverage programs. As in the past, any state that wishes to modify its Medicaid program must seek permission using a so-called section 1115 waiver, which federal officials will evaluate independently of any changes the state might propose under section 1332. For example, a state cannot count savings it expects to achieve via an 1115 waiver toward the deficit neutrality requirements of its separate 1332 waiver.

Unlike previously released regulations that addressed the procedural aspects of a waiver application, the new federal guidance offers substantive information about the statutory guardrails (Exhibit 1).

Exhibit 1. State Waivers of the ACA’s Private Health Insurance Rules: Key Requirements
Requirement What Does It Mean?
1. Enrollment
Waiver program must provide coverage to a comparable number of state residents as would receive coverage without it
Waiver program must cover at least as many individuals as the ACA, in every year of the program. Federal officials will consider the impact of the program on all state residents, as well as its effects across different groups of residents. This review will focus on vulnerable populations, including those with low incomes, the elderly, and those with serious health issues.
2. Affordability
Waiver program must provide coverage and cost-sharing protections against excessive out-of-pocket spending that are as affordable as would be provided without it

Affordability is measured by reference to residents’ net out-of-pocket spending, including premium contributions, cost-sharing, and spending on noncovered services. Federal officials will consider both the average impact of the program and how it affects individuals with large health care spending burdens. Review also will focus on vulnerable populations.

3. Comprehensiveness
Waiver program must provide coverage that is as comprehensive as would be provided without it
Waiver program must not decrease the number of individuals with coverage that satisfies the ACA’s essential health benefits requirements or the number of individuals with coverage that includes the services covered under the state’s Medicaid and CHIP programs. Federal officials will consider the impact of the program on all state residents, as well as its effects across different groups of residents. This review will focus on vulnerable populations.
4. Deficit Neutrality
Waiver program must not increase the federal deficit
Waiver program must be federal deficit neutral in each year of the waiver and over a 10-year budget period. This analysis must account for the budget effect of all changes in federal income and spending resulting from the waiver, while holding the state’s Medicaid policies constant. That is, any budget effects produced by changes to the state’s Medicaid program from a Medicaid section 1115 waiver will not be considered when evaluating the 1332 waiver.

Source: U.S. Department of the Treasury and U.S. Department of Health and Human Services, “Waivers for State Innovation,” 80 Fed. Reg. 78131, Dec. 16, 2015.

In addition to the legal limitations, operational considerations also constrain what states can do. Because the federal marketplace enrollment platform,, can’t yet accommodate different rules for different states, those states using the federal technology won’t be able to modify certain aspects of the ACA—including financial assistance levels and enrollment periods, among others—unless they first transition to their own enrollment platform. And though the ACA’s tax provisions are fair game for a waiver, the IRS generally isn’t able to administer its rules differently state to state. Thus, while states might waive all the ACA’s tax provisions and design new rules administered by their own tax officials, they won’t be able to require the IRS to implement a state-specific program.

Baby Steps from States

To date, only a few states, including Hawaii and Massachusetts, and Vermont, have publicly released waiver applications. The proposals offered by these states are modest and largely seek to better harmonize the ACA’s requirements with reforms or practices already in place in these states. For example, prior to the ACA, Massachusetts merged its individual and small group health insurance markets. Now the state seeks to maintain this arrangement under a 1332 waiver. (Though merged markets are allowed under the ACA, the state needs a waiver to preserve certain state rules, concerning premium rate filing and enrollment timing for small groups, that are not contemplated by the federal law.) Hawaii, which decades ago expanded access to health insurance by requiring employers to offer coverage to most workers, hopes to use its 1332 request to harmonize the ACA’s small business insurance rules with the state’s own, often more stringent standards, including by waiving the requirement to maintain a Small Business Health Options Program (SHOP) exchange. Similarly, Vermont is requesting to waive the ACA’s requirement to establish an online SHOP exchange, seeking instead to allow small employers to continue to purchase qualified health plans directly from insurers.

Though no other state has yet moved as far as these in the development of a waiver application, the prospect of obtaining additional flexibility over the ACA’s coverage programs has sparked interest among a range of policymakers. For example, California’s marketplace has partnered with the state’s Department of Health Care Services to engage stakeholders and the public about possible 1332 proposals. In Minnesota, a Health Care Financing Task Force has been evaluating 1332 waiver opportunities for the past year. Although Vermont considered but ultimately abandoned using 1332 waivers to create a single-payer system, Coloradans will vote on a similar approach later this year.

For other states, interest in the new waivers has built on existing efforts to modify their Medicaid programs under a section 1115 waiver. These waivers, which get their name from section 1115 of the Social Security Act, allow states to use Medicaid funding in ways not otherwise permitted by federal rules for demonstration projects that further the goals of the Medicaid program. The possibility of combining Medicaid section 1115 waivers with new 1332 waivers has led to discussions about the potential for “super waivers.” Combining 1332 changes with 1115 waiver authority would provide states with the opportunity to significantly alter the coverage arrangements available to their residents, particularly the low-income, vulnerable populations traditionally served by Medicaid. For example, Kentucky’s new governor recently expressed interest in pursuing twin waivers to change the state’s approach to its insurance marketplace and Medicaid expansion. Likewise, as Arkansas legislators consider whether to revisit their private option approach to Medicaid expansion, they have weighed legislation requiring the state to pursue 1332 waivers to complement those changes. However, in light of the administration’s guidance limiting the ability of states to pursue coordinated 1115 and 1332 waivers, further analysis of these state approaches may now be warranted.

Putting It All Together

Innovation waivers give states freedom to improve on the health law’s coverage framework. But a waiver is not a magic wand that lets states undermine or avoid the ACA. The law itself sets boundaries on states’ power to waive federal requirements, and the new guidance makes clear that regulators intend to take these limits seriously. The ACA was intended to improve coverage access, affordability, and comprehensiveness for all Americans, including the most vulnerable. State efforts to innovate under the law must share this focus.