State Innovation Waivers, the Next Wave of Health Care Reform?

It’s clear the President-elect and members of Congress are intent on repealing and replacing the ACA, the specifics of which are still in development. However, it is likely that a potential replacement strategy could include punting health care reform to the states. One plausible way the incoming administration could accomplish this is by significantly relaxing the 1332 innovation waiver requirements or establishing new waiver requirements that provide states with enough flexibility and control to become their own incubators of health care reform.

The ACA currently permits states to apply for a 1332 innovation waiver to pursue innovative strategies for providing their residents with access to high-quality, affordable health insurance while retaining the basic protections of the ACA. Current 1332 waiver guidelines require states to provide access to quality health care that is at least as comprehensive and affordable as the ACA, and covers a comparable number of residents in the state as would be covered under the ACA while not contributing to the federal deficit.

To date, there has been little interest from states to apply for a waiver because of the strict requirements for 1332 waiver applications. California, Hawaii, and Vermont have applied for 1332 waivers, but these state waivers are essentially aligning pre-existing state reform efforts with requirements of the ACA rather than seeking broad reforms. For example, California’s waiver application requests that undocumented Californians be allowed to purchase coverage through Covered California, but excludes the availability of ACA federal subsidies. However, if the administration were to significantly relax the 1332 innovation waiver requirements, there would be greater interest from states to pursue a waiver.

Under one of many possible replacement scenarios that employs 1332 waivers, the federal government could provide states with a funding mechanism similar to a block grant. States could use the funds to help offset the cost of health coverage for qualified individuals. In theory, a block grant-type funding mechanism would give the states more discretion than other grants in determining how to use the funds to meet their unique health reform initiatives. States could also be given the flexibility to develop their own eligibility requirements that would be unique to the demographics of their state. Qualified individuals could in turn use those funds to purchase a health plan through several different distribution channels including an already established state exchange, directly from an issuer or through a broker or private exchange.

Using 1332 state innovation waivers as an alternative approach to health care reform could garner bi-partisan support, as it would essentially take the federal government out of determining the eligibility for and facilitating the purchase of commercial health insurance while still guaranteeing individuals continue to have access to affordable coverage.

Since the inception of the ACA, Leavitt Partners has actively tracked the evolution of the 1332 state innovation waivers as well as state activity and interest in the waivers through our Insurance Market Discern data center. We have a deep understanding of the requirements and complexities of the 1332 waivers and have provided clients with guidance around the waivers.  For more information about the service we can provide, please visit