How States Can Use Section 1332 Waivers To Improve Health Care Affordability and Access

Coverage expansion, affordability, and innovation are three central goals of the Affordable Care Act (ACA).¹ One significant way the ACA supports innovation is by providing states Section 1332 waiver authority. Under Section 1332, states can seek approval from the U.S. Centers for Medicare and Medicaid Services (CMS)—part of the U.S. Department of Health and Human Services (HHS)—and the U.S. Department of the Treasury to waive or modify certain provisions of the ACA in order to present an alternative approach to affordable, high-quality individual and small group health care coverage for their residents. These waivers provide states with the flexibility to develop and implement reforms that address market challenges while maintaining the core protections and intentions of the ACA.²

Within Section 1332 applications, states must prove that their proposed alternative coverage approaches are at least as effective as other coverage in four core guardrails: 1) comprehensiveness, 2) affordability, 3) number of lives covered, and 4) deficit neutrality to the federal government.³ States cannot waive ACA provisions related to nondiscrimination, medical underwriting, and preexisting conditions.⁴ Once approved, state innovation waivers go into effect for up to five years, though they can be extended.⁵ If the waivers lower federal spending, states are eligible to receive the federal savings as “pass-through funding” that they can use to offset the cost of enacting reforms.⁶

Since 2017, more than 20 states have submitted Section 1332 waiver applications seeking to establish reinsurance programs, eliminate employer mandates, introduce premium subsidy alternatives, or privatize their health insurance marketplaces.⁷ CMS has approved 19 waiver applications to date.⁸

This report provides an overview of the initial Section 1332 waivers that have funded state-based reinsurance programs. It then highlights a newer generation of waiver applications from Colorado, Washington, and Nevada that aim to improve health care affordability by supporting state public options and expanding access to previously ineligible populations—including undocumented individuals. The report concludes with policy recommendations for states considering applying for Section 1332 waivers in the future, as well as recommendations for CMS to refine and streamline the waiver application process.

The ACA first made Section 1332 innovation waivers available in 2017, when marketplaces faced significant uncertainty and instability. Numerous challenges—including the conclusion of the federal transitional reinsurance and cost-sharing reduction programs, the elimination of the individual mandate penalty, and an abbreviated federal open enrollment period—contributed to insurer concerns about the health of the marketplaces’ single risk pool and higher claims costs.⁹ As a result, many insurers exited the marketplaces, and those that remained were approved for substantial premium increases.¹⁰ Between 2017 and 2018, for example, the nationwide average premium increase for the lowest-cost silver plan was 32 percent.¹¹ The prospect of annual double-digit premium hikes was untenable and threatened the viability of the marketplaces, so states looked to Section 1332 waivers as a potential way to stabilize premiums. 

From 2017 to 2019, 12 states—Alaska, Minnesota, Oregon, Wisconsin, Maine, New Jersey, Maryland, Colorado, North Dakota, Montana, Delaware, and Rhode Island—applied for and received CMS approval to waive the ACA’s single risk pool requirement and establish state-based insurance programs.¹²

Alaska, the first state to receive Section 1332 waiver approval for a reinsurance program, achieved a 38 percent average premium reduction from 2018 to 2022, exceeding its projected baseline reduction of 20 percent.¹⁶ Maryland’s waiver-approved reinsurance program—the largest reinsurance program in the nation—experienced a nearly 40 percent average premium reduction in 2019 and a 36 percent average premium reduction in 2020 due to reinsurance relative to the state’s projected baseline.¹⁷ To date, CMS has approved Alaska, Colorado, Hawaii, Maryland, Minnesota, New Jersey, Oregon, and Wisconsin to extend their waiver applications and continue implementing their reinsurance programs for an additional five years.¹⁸

Federal policy changes in response to the COVID-19 pandemic have considerably altered marketplace dynamics since states first began submitting Section 1332 waiver applications. Additionally, pioneering states’ experiences with their waivers have shaped other states’ use of waivers to achieve affordability and coverage access goals.

As part of the federal government’s comprehensive response to the COVID-19 pandemic, Congress passed several pieces of legislation that included provisions related to marketplace affordability. Notably, the American Rescue Plan Act, which Congress passed in March 2021, provided enhanced premium tax credits to new and existing marketplace enrollees and expanded that tax credit eligibility for 2021 and 2022.¹⁹ These enhanced subsidies lowered enrollees’ 2022 net premiums by $59 per month on average—more than $800 annualized²⁰—and helped drive 2022 marketplace enrollment to a record high of 14.5 million people. As a result, the nationwide uninsurance rate fell to an all-time low of 8 percent.²¹ The Inflation Reduction Act, which Congress passed in August 2022, extended the enhanced premium tax credits through 2025.²²

In addition, from March 2020 through March 2023, the Families First Coronavirus Relief Act required all 50 states and Washington, D.C., to maintain continuous coverage for Medicaid beneficiaries for the duration of the public health emergency in exchange for a 6.2 percentage-point increase in the federal government’s share of Medicaid payments.²³ As of April 2023, all 50 states and Washington, D.C., had resumed eligibility redeterminations for the first time in three years—a process referred to as “Medicaid unwinding”²⁴—and HHS had estimated that 2.7 million former Medicaid enrollees would qualify for subsidized marketplace coverage.²⁵ To ease enrollment transitions and reduce coverage loss, states are employing a variety of strategies to direct former Medicaid enrollees into marketplace coverage.²⁶

With federal support in place to subsidize premiums until 2025 and additional marketplace enrollment expected post-Medicaid unwinding, states have recently used Section 1332 waiver applications to consider new ways to improve affordability and expand access—including by supporting public option implementation and expanding marketplace eligibility populations. This section takes a closer look at such waiver applications from three states: Colorado, Washington, and Nevada.

Colorado’s amended waiver supports public option cost savings

Colorado was the first state to leverage a Section 1332 waiver to directly support public option reform, introducing cost containment measures alongside standardized public option plans to compete against existing marketplace plan options.²⁷ In 2019, CMS approved a waiver from Colorado’s Division of Insurance, allowing the state to implement a state-based reinsurance program to reduce individual market premiums.²⁸ Two years later, the Colorado legislature passed HB 1232, which established the Colorado Option.²⁹ This public-private partnership is a standardized set of health benefits that private insurers are required to offer to individuals and small groups on Colorado’s marketplace as of 2023.³⁰ Under this public option, the state has set targeted premium reduction goals of 5 percent in the first year, 10 percent in the second year, and 15 percent in the third year, relative to a 2021 baseline adjusted for medical inflation.³¹

To further improve marketplace affordability, Colorado submitted an amendment to its waiver in November 2021 that would allow the state to operate the Colorado Option in tandem with its existing reinsurance program, previously authorized through 2026.³² The Colorado Department of Insurance projected that tandem operation would reduce premiums by an average of 1.3 percent in 2023 and by nearly 14 percent in 2025 in both the public and private markets.³³ In its amended waiver, the state also proposed using pass-through funds to finance state subsidies for individuals with incomes up to 300 percent of the federal poverty level (FPL), including undocumented individuals. CMS approved the waiver in June 2022, and it became effective on January 1, 2023. It will remain effective through December 31, 2027.³⁴

Results from the inaugural year of the combined reinsurance and public option programs are mixed but encouraging. In 2023, Colorado Option plans represented 13 percent of total marketplace enrollment, with more 35,000 enrollees.³⁵ And although carriers have largely fallen short of the state’s premium reduction targets,³⁶ the combined programs are generating savings.

HHS calculated that the Colorado Option and reinsurance program would reduce monthly premiums by 22 percent in 2024, compared with the 20 percent reduction that would be achieved by reinsurance alone.³⁷ HHS recently announced that Colorado would receive an unprecedented $245 million in pass-through funding in 2023.³⁸ The state plans to reinvest these funds to support its reinsurance and public option programs.³⁹

Nevada’s upcoming waiver will support implementation of a public option

Nevada also plans to submit a Section 1332 waiver application by January 1, 2024, to support the upcoming implementation of its public option.⁴⁰ Passed through the state legislature as Senate Bill 420 in 2021, the Nevada Public Option will come into effect on January 1, 2026, and will set premium reduction targets that can be revised if premiums are reduced by 16 percent in the first four years.⁴¹ Public option premiums must be at least 4 percent lower than the average reference premium—the second-lowest priced silver plan—and cannot increase by more than the inflation rate for that year.

SB 240,⁴² the legislation enabling the Nevada Public Option, instructs state health officials to pursue a Section 1332 waiver by January 1, 2024, in order to access federal pass-through funding and facilitate additional funding for the program.⁴³ In December 2022, the Nevada Department of Health and Human Services (Nevada HHS) released a draft waiver application ahead of scheduled public hearings.⁴⁴ Similar to Colorado, Nevada seeks to allow public option plans to make plan-level adjustments to the marketwide adjusted index rate. Nevada HHS actuarial and economic analysis projects that by lowering premiums via reduction targets and reducing federal premium tax credit expenditures, Nevada could see a potential $341 million to $464 million in savings in the first five years of the waiver and nearly $1 billion in federal pass-through funds in the first 10 years.⁴⁵ Nevada HHS also projects that 55,300 Nevadans would enroll in public option plans in the program’s first year and that 92,500 Nevadans would be covered in its fifth year.⁴⁶ Nevada plans to improve affordability further by using pass-through funds to support new state-based subsidies at a time when expanded federal subsidies are set to expire.⁴⁷ It would also use pass-through funds to offer incentive bonus payments to public option carriers that exceed state health care quality, equity, and provider network goals and priorities.⁴⁸

Washington’s waiver expands marketplace eligibility for undocumented individuals

In 2020, Washington state sought a Section 1332 waiver to expand eligibility and improve coverage for the estimated 25 percent of its uninsured population that was shut out of the marketplace because of immigration status.⁴⁹ After passing enabling legislation in 2021 (SB 5377-2021-2022),⁵⁰ in May 2022, Washington became the first state to file a waiver application with CMS to allow undocumented immigrants, including families with mixed immigration statuses, to purchase health and dental insurance on the state marketplace.⁵¹ Washington sought to waive Section 1312(f)(3) of the ACA, which prohibits individuals who are not lawful residents of the United States from purchasing federally subsidized or full-cost marketplace medical or dental coverage.⁵²

In addition, Washington’s waiver sought approval to offer state subsidies to undocumented residents with family incomes at or below 250 percent of the FPL who enroll in Cascade Care, the state’s public option standardized plans.⁵³ Washington estimated that the first year the waiver went into effect, 105,000 undocumented uninsured residents would gain access to coverage.⁵⁴ CMS approved Washington’s waiver application for 2024 to 2028.⁵⁵

During the application’s public comment period, the proposal received widespread support: More than 400 of 410 submitted comments were affirmative.⁵⁶ The insurance industry also unanimously supported the waiver, with America’s Health Insurance Plans and the Association of Washington Healthcare Plans asserting that the waiver would improve the sustainability and affordability of the individual market.⁵⁷ Washington’s waiver represents an important step toward equitably closing coverage gaps by establishing an affordable, comprehensive coverage option for the state’s undocumented uninsured residents, who are disproportionately Latino at 46 percent and Asian at 37 percent.⁵⁸

Beyond Section 1332: Other options for state-driven reforms

Section 1332 waivers are an attractive option for states to improve marketplace affordability and expand access to health care. However, a state may choose not to pursue a waiver. The applications are time intensive; they require significant resource investment on the front end, including enabling legislation, actuarial analysis, and then up to 180 days for CMS review and approval.⁵⁹ Therefore, states with favorable political environments and adequate financial resources may choose to forgo the waiver process and implement state-level affordability reform more rapidly and for a lower upfront cost.

State-funded affordability initiatives can be successfully implemented without waivers. For example, without a Section 1332 waiver, New Mexico offers state-funded premium subsidies and cost-sharing assistance that improves the value of coverage and thus marketplace affordability, including for individuals currently eligible but not enrolled.⁶⁰ In 2023, the state began offering premium subsidies to individuals with family incomes up to 400 percent of the FPL.⁶¹ It also launched turquoise plans the same year, which have reduced out-of-pocket costs (deductible, copays, and coinsurance) compared with other marketplace plans and are available to individuals with family incomes up to 300 percent of the FPL who qualify for federal premium tax credits.⁶² New Mexico funds its state affordability programs via a tax on health insurance carriers.⁶³

Connecticut provides another example with its launch of Covered Connecticut in 2021. The program provides state-funded premium subsidies and a cost-sharing assistance program for individuals ineligible for Medicaid and with family incomes up to 175 percent of the FPL.⁶⁴ Eligible individuals enroll in a subsidized silver marketplace plan, and the state pays the remaining portion of the monthly premium as well as all out-of-pocket expenses.⁶⁵ As of December 2022, more than 10,000 residents had enrolled in the program.⁶⁶

States that intend to pursue a Section 1332 waiver to expand affordable coverage options should do the following before starting the application process:

1. Identify a primary affordability goal. State officials must first identify the primary affordability objective they hope to achieve via a waiver, as well as which specific ACA requirements need to be waived in pursuit of that objective. For example, does the state seek to improve affordability by lowering premiums, providing wraparound state subsidies, or containing or reducing statewide health care costs? Secondarily, states should consider whether their affordability goal would be best met via a waiver or if they could achieve it via state-only action.
2. Plan for a multistep, resource-intensive application process. Applying for a Section 1332 waiver requires enabling legislation, public hearings and comment periods, and actuarial and economic analysis. Application requirements can present administrative challenges for state departments of insurance, as well as other state entities that have limited resources and personnel who are also tasked with advancing other market reforms and policy priorities.

How CMS can better support states’ Section 1332 waiver applications

CMS can support states in achieving their affordability and coverage goals by revising the Section 1332 waiver application process. The breadth of the current process can be a barrier for states that face resource limitations and constraints. CMS can reduce some of this burden by refreshing previous guidance and support materials. In 2018, CMS published a discussion paper that outlined four potential waiver concepts—state premium assistance, adjusted plan options, account-based subsidies, and risk stabilization strategies—as well as waiver application templates for states to leverage as they develop applications.⁶⁷ Refreshing these materials to reflect the latest waiver concepts of eligibility expansion and public option support would allow state agencies to modify and configure as needed. Furthermore, the release of a template for waiver amendments would help states with existing reinsurance waivers that seek to modify them and explore additional reforms.

States would also benefit from regulatory clarity regarding how Section 1332 waivers can be coordinated with other marketplace flexibility programs such as the Basic Health Program (BHP). The BHP, an option under Section 1331 of the ACA, provides lower-cost, comprehensive coverage for individuals with family incomes between 133 percent and 200 percent of the FPL.⁶⁸ To minimize the cost of the BHP to states, the federal government gives states funding equivalent to 95 percent of the amount of marketplace premium tax credits.⁶⁹ Recently, Section 1332 waiver states—including Minnesota, New York, and Oregon—have sought to leverage the BHP to further expand marketplace affordability for their residents.⁷⁰ However, the current interaction between Section 1332 waivers and the BHP can be counterintuitive. For example, BHP-eligible individuals enroll in lieu of marketplace coverage, which reduces states’ available premium tax credit dollars and can increase premium costs for moderate-income enrollees, unless state-funded subsidies are available to make up the difference.⁷¹ Pursuing both Section 1332 and Section 1331 waivers may not be feasible for states that are unable to provide any additional funding of their own. CMS should clarify how these waiver flexibilities can be mutually supportive. A carefully coordinated Section 1332 and BHP waiver that identifies clear protective parameters for enrollment and eligibility standards could amplify the affordability impact of both programs by permitting states to reinvest BHP savings in support of marketplace affordability.

States can use Section 1332 waivers as a tool to build on the successes of the ACA and pursue innovative, state-specific reforms that improve affordability and expand access to high-quality marketplace coverage. As marketplace challenges and contexts evolve, states are amending their existing waivers or submitting applications to support new types of market reforms such as state public options or extensions of coverage to previously ineligible populations. As more states explore and pursue waivers, it is important that they identify a primary affordability goal and consider the resources needed for a successful application. The federal government can better support state efforts by streamlining the application process and clarifying how waivers interact with other existing programs.