Undocumented immigrants may be able to receive federally subsidized health insurance coverage under waiver authority built into the Affordable Care Act (ACA).  The ACA allows States to request waivers of certain major provisions of Obamacare, including a waiver of the ACA requirement limiting federal premium and cost sharing subsidies to citizens and lawful residents in health insurance exchanges. Such a waiver-based coverage program would naturally be controversial and a non-starter in most States and with many federal Administrations. But such hypotheticals can be helpful in thinking about what other changes to the rigid, highly complex, and controversial ACA structure States may wish to request under the ACA section 1332, the waiver provision.

While State ACA waiver requests must meet certain conditions and are at the discretion of the HHS and Treasury Secretaries, the ACA does provide a pathway for significant state-based health reforms. Assuming a “flexible” federal Administration, taxpayer subsidized health insurance for unauthorized immigrants could be an option – through the combination of a section 1332 waiver and small HHS rule change. In theory at least, the same waiver authority could also be used to allow State use of federal funding to insure prisoners or cover abortion services.

On a far more practical level, the wording of the ACA waiver authority may provide the Obama Administration with an escape hatch in the event the U.S. Supreme Court rules against it in King v. Burwell.

In this post, I describe how the ACA waiver authority could be used to:

  • Cover undocumented immigrants.  Given the tortuous wording of ACA, this is certainly the trickiest angle for ACA waivers and would likely also require a simple rule change.
  • Cover prisoners and/or abortion services.  Naturally, like using waivers to cover unauthorized immigrants, using waivers to allow a state to use federal funds to cover prisoners or elective abortions would be highly controversial for a host of legitimate policy, budget, political, and practical reasons.
  • Continue premium subsidies in a state(s) using the federally-run health insurance marketplace should the U.S. Supreme Court rule against the Obama Administration in King v. Burwell.  While such a use of the ACA waiver authority could be seen as shameless or an insult to the Supreme Court, this possible scenario appears to be straightforward process-wise.

This post is for educational purposes to encourage discussion about the future uses of ACA waivers. This is not intended to weigh the merits or likelihood of such hypothetical uses of the ACA waiver authority.  In fact, for many reasons, all of the waiver scenarios discussed here are extremely unlikely to ever be requested or approved (with the possible exception of the King v. Burwell workaround ideas described below).  Rather, they are raised to provoke thinking about what States may wish to reasonably pursue.  So no endorsement of these scenarios should be implied.

Qualifying for Federal Subsidies:

The Affordable Care Act creates new federal subsidies for health insurance coverage – subsidized premiums for those with incomes between 100% and 400% of the federal poverty level (FPL) and reduced cost sharing (lower deductibles, co-payments, and co-insurance) for those with incomes between 100% and 250% of FPL. Federally subsidized coverage is only available to qualified individuals who buy coverage from a qualified health plan (QHP) sold through a health insurance exchange (HIX).

As defined by ACA section 1312(f)(1), a “qualified individual” is someone who:

  • Seeks to “enroll in a qualified health plan in the individual market offered through the Exchange.”
  • Resides in the State that established the Exchange (yet another example of Congressional intent, contrary to the Administration’s rules, but I digress).
  • Not incarcerated at the time of enrollment (other than incarceration pending the disposition of charges).

The ACA specifies that only citizens and lawful residents of the US may access a health insurance exchange to buy coverage, with or without federal subsidies. Specifically, ACA section 1312(f)(3) goes on to further limit who is a qualified individual:

Access Limited To Lawful Residents – If an individual is not, or is not reasonably expected to be for the entire period for which enrollment is sought, a citizen or national of the United States or an alien lawfully present in the United States, the individual shall not be treated as a qualified individual and may not be covered under a qualified health plan in the individual market that is offered through an Exchange.

Since federal subsidies are only available through the individual market of the health insurance exchanges and unauthorized immigrants may not be covered through or use an exchange, ACA section 1312(f)(3) makes unauthorized immigrants ineligible for subsidized premiums or reduced cost sharing. They are not even permitted to buy exchange coverage at full price with their own money.

State Innovation Waivers under ACA Section 1332:

Section 1332 of the Affordable Care Act permits States to request the HHS Secretary and Treasury Secretary to waive certain parts of the ACA, including key provisions relating to health insurance exchanges, qualified health plans, essential health benefit package, cost sharing limits, individual mandate, employer mandate, federal premium subsidies, and reduced cost sharing. On a pass-through basis, a State could receive all of the federal funding the ACA would have otherwise spent on subsidies and allocate the dollars differently. Overall, a State could propose to cover state residents very differently than the federal ACA model.

“Section 1332 has the potential to instigate a new, varied, and unprecedented array of state health sector innovations from both sides of the political divide over health care reform.”
John E. McDonough, DrPH, MPA, Professor, Harvard School of Public Health

ACA Provisions That May Be Waived:

Here are the specific parts of the Affordable Care Act that may be waived by the HHS Secretary under ACA section 1332:

Part I of Subtitle D
PART 1 – Establishment of qualified health plans:
Sec. 1301. Qualified health plan defined
Sec. 1302. Essential health benefits requirements
Sec. 1303. Special rules (which deals with abortion coverage and restrictions on use of federal funding for abortion services)
Sec. 1304. Related definitions (defines insurance market sizes, employer group sizes, and the terms Secretary, State, and educated health care consumer)

Part II of Subtitle D
PART 2—Consumer choices and insurance competition through health benefit exchanges:
Sec. 1311. Affordable choices of health benefit plans (creates requirements and processes for health insurance exchanges)
Sec. 1312. Consumer choice (which includes the provisions excluding undocumented residents and prisoners from participating in exchanges and thereby from receiving federal subsidized coverage)
Sec. 1313. Financial integrity (provisions on accounting, False Claims Act penalties, and GAO audits)

Sec. 1402. Reduced cost-sharing for individuals enrolling in qualified health plans (subsidized cost sharing).

Here are parts of the Internal Revenue Code (as amended by the Affordable Care Act) that may be waived by the Secretary of the Treasury under the ACA section 1332 authority:

Sec. 36B. Refundable credit for coverage under a qualified health plan (federal premium subsidy)
Sec. 5000A. Requirement to maintain minimum essential coverage (individual mandate)
Sec. 4980H. Shared responsibility for employers regarding health coverage (employer mandate)

Using ACA Waivers to Cover Undocumented Immigrants:

As noted above, the specific ACA language that otherwise blocks use of federal funds to cover undocumented immigrants (and prisoners or abortion services, for that matter) may be waived by the HHS Secretary. Hypothetically, if a State wished to cover undocumented immigrants with the use of federal funds it could apply for:

  1. A waiver of ACA section 1312(f)(3) to make undocumented immigrants “qualified individuals” for purposes of using the health insurance exchange and applying for subsidized coverage.
  2. Waivers to reallocate the federal subsidies dollars and change the income threshold for subsidized coverage eligibility. For example, to free up the funds needed to cover undocumented immigrants, say from 0% to 200% of federal poverty, and meet federal budget neutrality described below, the State could use waivers to lower the upper bound of premium subsidies (at 400% FPL under ACA model). There are many possible scenarios.

However, any waiver application along these lines would need to get around yet two other ACA provisions which include language prohibiting subsidy eligibility for undocumented immigrants – one likely easy (okay, “easy-ish”), the other not so:

Sec. 1411 Procedures for determining eligibility for Exchange participation, premium tax credits and reduced cost-sharing, and individual responsibility exemptions.

Sec. 1412 Advance determination and payment of premium tax credits and cost-sharing reductions.

Obstacles to Waiver-Based Coverage of Undocumented Immigrants:

Specifically, section 1411(a) describes procedures for, among other things, determining whether an individual is a citizen or lawfully present for purposes of premium subsidies (technically a tax credit) under section 36B of the Internal Revenue Code and cost sharing reductions under section 1402.  But these are cross references and if a waiver changes the referenced provisions (36B and 1402) an argument can be made that the relevant restriction is also waived and determination of lawful status becomes moot in the process contemplated under section 1411(a).

On the other hand, section 1412(d) presents a serious, potentially insurmountable roadblock to using the section 1332 waiver authority to cover undocumented immigrants, absent creative interpretation of the interaction of relevant sections or a HHS rule change:

No Federal payments for individuals not lawfully present – Nothing in this subtitle or the amendments made by this subtitle allows Federal payments, credits, or cost-sharing reductions for individuals who are not lawfully present in the United States.

The subtitle section 1412(d) refers to is Subtitle E (Affordable Coverage Choices for All Americans), which encompasses sections 1401 through 1421 of the Affordable Care Act.

These kind of “notwithstanding” clauses are very tough to surmount, especially since they make Congressional intent clear and sweep in large portions of current law. In this case, it would require (1) a highly flexible interpretation of the statutes proposed for waivers and Congress’ intent for section 1332 or (2) a section 1332 waiver coupled with a new HHS interpretation of “lawfully present” for purposes of the Affordable Care Act.   The latter is easier and more straightforward.

The current HHS definition of lawfully present is set by rule at 45 CFR 152.2. It closely follows the definition used for Medicaid eligibility.  In theory, HHS could revise this rule to say, for example, that lawfully present means anyone who is covered under a section 1332 State Innovation Waiver.

Bottom line: Theoretically, undocumented immigrants could receive federally subsidized coverage through a combination of a section 1332 waiver and an HHS rule change. 

King v. Burwell Case and Section 1332 Waivers:

Here’s an entirely different angle for the use of ACA section 1332 waivers.

Should the U.S. Supreme Court rule in favor of the plaintiffs in King v. Burwell and hold the IRS to the wording of the law as it was enacted by Congress, the ACA section 1332 waiver authority could be used to bypass the “established by the State” language at issue in the case. The phrase is used 15 times in the ACA but regards federal premium subsidies, the critical uses are found in ACA section 1311 and section 36B of the Internal Revenue Code.

For example, the Obama Administration could encourage the 36 States operating under the federal marketplace to formally request a waiver striking the “established by the State” language and thereby permit continued federal subsidies.  Even the definition of “State” – which is specified in section 1304(d) – could be waived.

Another angle could be waivers of section 1311(f)(3) to allow States to contract with the Centers for Medicare and Medicaid Services (CMS) to operate some or all functions the “State exchange” on behalf of the State.  Section 1311(f)(3) allows a State to contract with private entities (other than health insurers) to handle exchange functions, but the law does not permit States to contract out a State exchange to CMS.  A section 1332 waiver could serve as a work-around for that.

Of course, the Administration could only exercise the waiver authority in response to a State request. Many Governors may not wish to participate in a back-door fix that avoids substantive reforms to the ACA or participate in a delegation of authority to CMS.

Ultimately, practical use of the ACA section 1332 waiver authority to continue federal subsidies in the CMS-run marketplace states following a SCOTUS ruling in favor of King would require Congress to change the earliest effective date for ACA waivers from January 1, 2017 to, say, July 1, 2015.  This is a very simple legislative change.

Regardless, the final ruling in the King v. Burwell case could encourage more States to seek flexibility under section 1332.

Importance of Precedents from Prior Federal Waivers:

The Medicaid waiver authority under section 1115 of the Social Security Act permits the HHS Secretary to waive provisions of section 1902 (State Plans for Medical Assistance) and section 1903 (Payment to States).  However, because of the central, structural role of these two sections and the repeated use of cross references to other provisions (or from other provisions back to sections 1902 and 1903), federally approved Medicaid waivers to States frequently include waivers to federal requirements outside sections 1902 and 1903.

The statutory structures of the ACA and Title XIX are quite different, of course. Federal Medicaid law makes the ACA look like child’s play.  Also, each Administration varies in its willingness to think creatively and push the envelope on in statutory interpretations of its authority. When a new waiver authority is created by Congress, the issue of precedent often looms large, limiting, at least in the early years, willingness to consider creative or far-reaching waiver-based program designs.  For example, the Obama Administration has been regrettably reluctant to entertain ideas for Medicare and Medicaid payment and delivery reforms under the section 1115A waiver authority (which was also created under the ACA), except for a few models and grant-based initiatives designed internally by the Center for Medicare and Medicaid Innovation (CMMI) at the Centers for Medicare and Medicaid Services.

However, whether you like or dislike its policies, the Obama Administration has certainly shown its willingness to take ACA-related regulatory, budgetary, and administrative actions that, at best, hoover at the statutory edges or – if you prefer – take an expansive and nimble view of the ACA and Presidential authority.

Regardless, as States consider possible state-based health reform opportunities through ACA section 1332 waivers, it will be wise to consider precedents and practices in structuring 1115 waivers. This is especially true given the likelihood that many States will look to apply simultaneously for ACA waivers under section 1332 and Medicaid reforms under section 1115 (perhaps also Medicare and Medicaid payment or delivery innovations under section 1115A and/or Medicare demonstrations under section 402/222).  States and the federal government do not always agree on what is even possible under waivers but the history of waivers suggests interpretations of what “may” be done evolve over time.

Requirements for ACA Section 1332 State Innovation Waivers:

Section 1332 waivers may be effective no earlier than January 1, 2017. Waivers are permitted for an initial five year period, with renewals allowed. In their waiver applications, States must demonstrate that their plan (ACA alternative or state innovation plan) will cover at least as many people as under the ACA and provide coverage that is at least as comprehensive as the ACA-mandated coverage. States must also provide a 10-year budget plan showing how the State’s innovation program is budget neutral to the federal government.

States may combine section 1332 waiver applications with requests for other federal health care waivers from the HHS Secretary, notably section 1115 Medicaid reform demonstration waivers, section 1115A Medicare and Medicaid payment and delivery reform waivers, and section 402/222 Medicare waivers (Sections 402/222 refer to section 402[a] of the Social Security Amendments of 1967, as amended by section 222[a] of the Social Security Amendments of 1972).  This opens up many state health reform possibilities – provided States find a willing and flexible Administration in Washington.

Again, the granting of waivers is entirely discretionary to the federal government.  Depending which waivers are requested under section 1332, the State would negotiate with both HHS (through the Centers for Medicare and Medicaid Services [CMS]) and the Treasury Department (through the IRS and some other designated part of Treasury) or just CMS.

In addition to review and approval by the relevant agency heads, waivers are also subject to review and approval by the White House Office of Management and Budget (OMB).  For any waivers, OMB may require changes to waivers, changes to the terms and conditions for waiver-based programs, or even deny approval.

States interested in pursuing State Innovation Waivers under section 1332 will need to begin developing their reform policies and waiver applications in 2015. Waiver applications are highly complex, require state-level enabling legislation and rigorous policy and budget development, and involve lengthy public comment processes, a 180-day federal review clock, and intricate federal negotiations. Therefore, States interested in using ACA section 1332 waivers will need to start work soon. proposed state-based health reforms leveraging multiple waiver authorities – like a combined section 1332 and section 1115 application – can use the same public comment and stakeholder involvement process required under CMS rules.

Given the rigid, complex, controversial, and poorly drafted nature of the ACA and the range of possibilities under section 1332 waivers – especially if combined with Medicaid reform waivers – both conservative and liberal States may pursue their own alternative, state-based health reforms.

Learn More or Request Help:

My colleagues and I at Sellers Dorsey have extensive experience helping States with all facets of federal waivers – policy development, waiver applications, budget neutrality modeling, public comment process, stakeholder support, federal negotiations, systems planning, staff support, and implementation. Feel free to contact me to learn more.

Updated with new information on Friday, December 5, 2014.