By Marissa Evans, CQ Staff
June 1, 2015 -- Deep in the 2010 health care law is a provision that would give states a pot of federal money to create their own unique health insurance systems.
Under the "state innovation waiver" program, also known as 1332 waivers, states would pay for those new ideas with federal funds that would have gone as insurance premium subsidies to their residents. A state could create its own public insurance plan to compete with private plans on the federal exchange or offer an alternative health program for residents who don't qualify for Medicaid. They could even drop the infamous individual mandate.
But the waivers, which would begin in 2017, are at risk—at least for the 34 states that have not yet established exchanges. The waivers would be collateral damage if the U.S. Supreme Court rules this month that it's illegal for the federal government to give insurance subsidies to residents of states without exchanges, according to a recent report by Health Affairs.
"A ruling in favor of the plaintiffs would decimate the funding source for 1332-based reforms in those states," according to the report.
Heather Howard, director of Princeton University's State Health Reform Assistance Network, says the situation is somewhat ironic.
"The very states that might be most interested in the waiver could be the most screwed," she said in an interview. "That's the advantage of the waiver; it gives you money to do something else."
The waiver allows states to change the rules of the federal health law for covered benefits, subsidies, insurance marketplaces, and the individual and employer mandates. States can propose alternatives but must demonstrate to the Health and Human Services Department that coverage will stay accessible, comprehensive, affordable, and won't add to the federal deficit.
"This legislation offers an opportunity for states to engage in a 'race to the top' for what will deliver the best health care choices and options to their constituents," Sen. Ron Wyden, D-Ore., said in 2011 when he introduced the bill that established the waivers. "This provides a chance for states to do it better."
Waivers are being considered by health officials in Arkansas, Hawaii, Iowa, Minnesota, New Mexico and Oregon. Among those, only Arkansas and Iowa have not established health insurance exchanges.
Arkansas and Hawaii have established task forces to look into preparing a 1332 waiver application.
Arkansas' task force is considering using the waiver to fund an overhaul of its Medicaid program. Under its current program, which ends in December 2016, Arkansas buys private health insurance for more than 200,000 residents who qualified for Medicaid when the state expanded it in 2014.
One of the federal health care law's most vocal critics in the state, Republican state Sen. Bart Hester, said, "Regardless of how [the high court's King v. Burwell decision] turns out, we've got to have a plan that's going to work for Arkansas." He said all ideas are on the table for the task force.
"If we can overhaul the entire Medicaid program then I think we would consider [the 1332 waiver], but I just do not see any foreseeable way we would just do reform for the expansion population," Hester said.
"Our reform is going to . . . cut them off and remove them all if we can't reform the entire Medicaid program."
Hawaii's task force is considering a waiver to continue its own employer mandate, which is more expansive than the federal government's.
Vermont had applied for a waiver to help create a single-payer health insurance system, but dropped the plan earlier this year after Gov. Peter Schumlin said the costs would be too great.
Howard said that while states are "definitely interested" in the waivers, there's been little federal guidance on how they would work.
An estimated 13.4 million people could lose subsidies if the court strikes them down in King v. Burwell, according to the Kaiser Family Foundation.
"We are open and ready to assist states interested in developing innovative strategies so their residents have access to high quality, affordable coverage," said Ben Wakana, a spokesperson for HHS in an email statement regarding the 1332 waivers.
The waivers don't offer states complete freedom. They can't be used to roll back the federal health law's larger insurance market changes such as allowing insurers to deny coverage or charge customers more for having pre-existing conditions, or dropping the risk adjustment program that protects insurers if they attract high cost enrollees, or allowing annual or lifetime coverage limits.
The guidelines defining what HHS considers comprehensive and affordable will be important to examine in the next few months, according to Judy Solomon, vice president for health policy at the progressive Center on Budget and Policy Priorities. How the department defines what a state has to show to meet the waiver standards and what methodology it will use to compare the state's proposed coverage plan to the federal law is especially critical, she said.
The waiver could be an opportunity for states to ease the burden on consumers, Solomon said.
"We've seen how hard it is to provide subsidies as a tax credit," Solomon said. "We're asking people to make estimates of their income well in advance of when the year even starts, and they're at risk of paying money back or may not have enough to sustain coverage."
The waiver could be a viable option for Republicans to do something different with state health care programs if the Supreme Court upholds the subsidies, according to Doug Holtz-Eakin, president of the conservative American Action Forum. But at the moment, "There's no point under the current political conditions" for Republican governors to apply for one, he said.
"They're not going to get the waiver they want under the Obama administration," he said. "If they wait for the next president and it's a Republican, it's not going to be a matter of a waiver, it's going to be a matter of an ACA repeal."