New ACA Waivers Could Subsidize Short-Term Coverage

Major changes in the way innovation waivers are vetted could set the stage for federal subsidies of non-ACA-compliant plans.

A drastic overhaul of the way the federal government handles innovation waivers under the Affordable Care Act opens the door for states to offer skimpier health plans with federal subsidies, potentially incentivizing a migration out of the markets for ACA-compliant plans.

Each state's waiver application would still need specific approval from the Centers for Medicare & Medicaid Services, but the Trump administration's announcement Monday that states will have far greater flexibility under the ACA's Section 1332 waivers than they have in the past signals a willingness to consider proposals the prior administration would have rejected.

Matthew Fiedler, PhD, a fellow with the Brookings Institution Center for Health Policy who served as chief economist of the Council of Economic Advisers during the Obama administration, said the changes outlined in the new guidance document could enable states to redirect federal subsidy dollars from ACA-compliant plans to cheaper alternatives that offer less coverage.

Related: States Gain Greater Flexibility Under New ACA Waiver Guidance

"Naturally, the more money the state redirects, the more money the healthier people in the short-term market have to work with and, correspondingly, the larger adverse impacts on the ACA-compliant market and people with greater health care needs," Fiedler told HealthLeaders in an email, warning that an exodus of healthy people from ACA-compliant plans would drive up premiums for those left behind and could result in a complete collapse of the ACA-compliant markets.

CMS Administrator Seema Verma described a similarly dire scenario in which healthier people leave a given market, driving up premiums for those left behind. But she attributed the problem to health insurance premiums being too high.

"Eventually, if rising costs prompt enough healthy people to leave the market, insurance becomes unaffordable for everyone," Verma wrote in a blog post. "This is what insurance actuaries call a death spiral."

The Solution? Reinterpretation

Chris Sloan, a director with Avalere who supports health plans and providers on public policy issues, said the Trump administration's changes to the 1332 waiver process rely on broader definitions of several key terms in the ACA.

"They have given states substantially more authority to request changes to their individual market and to use federal funds to do so, and that [includes] promoting and potentially subsidizing the expansion of short-term plans and association health plans," Sloan told HealthLeaders.

Under the 2015 guidance—which Monday's announcement replaced immediately—a state had to demonstrate that its 1332 waiver proposal met four statutory guardrails, as the Center on Budget and Policy Priorities explained last year:

1. The waiver had to provide benefits that were at least as comprehensive as the ACA's "essential health benefits;"
    
2. The waiver had to provide cost-sharing protections and coverage at least as affordable as those in the ACA exchanges;
    
3. The waiver had to ensure that at least a comparable number of people would continue having coverage as they do under existing law; and
    
4. The waiver could not increase the federal budget deficit.
    

"That was sort of a foundational bedrock of 1332s all throughout the Obama administration," Sloan said.

Under the new guidance, however, the Trump administration has reinterpreted comprehensive coverage as including association health plans and short-term limited-duration options. And the requirement that a comparable number of people must continue having coverage under the waiver now means that a comparable number of people must continue having access to coverage, regardless of whether they actually purchase it.

"That's a huge change," Sloan added.

Incentivizing Short-Term Plans?

It would be possible, Sloan said, for some states to offer short-term plans with premiums fully subsidized by the federal government to low-income or even some higher-income beneficiaries.

"Now that's just an idea," he added. "But it's a real possibility because of how cheap some of these plans can be."

"Because they count as coverage, states are going to have some incentive to enroll people in those plans." Sloan said. "The money goes further but obviously because the plan covers fewer things and medically underwrites its enrollees."

Although some have described short-term plans categorically as "junk insurance," Sloan disagreed with that characterization. It's generally a good idea to have comprehensive coverage, rather than the less-generous offering of most short-term plans, but the real concern is consumers simply not understanding the terms of the coverage they're buying, he said.

"Some people buy them and want them because it fits what they want out of their healthcare, but it's really important to note that it's not a substitute for comprehensive care," Sloan said.

Impacts to Come

Including skimpier options within the definition of what constitutes coverage could result in an increase in coverage rates, even if consumers migrate to plans with less-generous benefits.

A spokesperson for CMS did not respond to a question from HealthLeaders on whether the administration would separately track enrollment in ACA-compliant plans for the purpose of measuring net gains or losses in coverage in light of the expanded definition.

As far as business opportunities are concerned, some insurers are planning to push into the newly expanded market for short-term options, though the magnitude of the opportunity will vary from state to state, Sloan said.

"It remains to be seen whether this will have a material impact because obviously states have to apply for this, and they have to be approved for their applications," he added.

"The impact of this will depend on whether states apply for it and whether they go all the way," Sloan said, "but it is unquestionably a substantial departure from previous approaches by the Obama administration to 1332s."