Can the courts stop 1332 waivers from taking effect?

Iowa has submitted a waiver proposal under section 1332 of the Affordable Care Act that, if granted, would radically reshape its individual insurance market; Oklahoma may soon do the same. Both states have been accused of relying on some magical numbers, and Iowa’s waiver appears to violate the ACA’s guardrails, which require states to assure that any new approach covers at least as many people with coverage that’s at least as comprehensive and affordable.

But what happens if HHS approves the waivers anyhow? Could the courts block them from taking effect?

You bet. Although neither of the two waivers that have been granted so far (Hawaii’s and Alaska’s) has attracted a court challenge, we’ve had decades of experience with challenges to waivers granted under section 1115 of the Social Security Act. Most of those challenges have failed, but back in 1994, in Beno v. Shalala, the Ninth Circuit ruled in favor of a group of welfare beneficiaries who challenged the grant of a California waiver.

Invoking the presumption in favor of judicial review of agency action, the court rejected HHS’s argument that the courts couldn’t review its decision to grant a waiver. “The statute does not give the Secretary unlimited discretion. It allows waivers only for the period and extent necessary to implement experimental projects which are ‘likely to assist in promoting the objectives’ of the [welfare] program.”

With that in mind, the court enjoined California’s waiver from taking effect. In the court’s view, HHS never explained how the waiver—which would have imposed work requirements on welfare recipients—was a genuine experiment or would advance the program’s objectives. In 2011, the Ninth Circuit issued a similar ruling when Arizona sought to impose copayments on Medicaid beneficiaries.

Courts in other circuits have universally agreed that the decision to grant an 1115 waiver can be challenged in court. Their reasoning should apply with equal force to 1332 waivers. (Although the ACA precludes the courts from reviewing some agency decisions, there’s no preclusion language for 1332 waivers.) All you have to do is find a litigant who can plausibly allege that the waiver will make her life worse. For waivers like Iowa’s, that won’t be remotely difficult.

Still, the courts tend to be very deferential to HHS. They’re not really equipped to second-guess the agency’s predictive judgments about a waiver’s on-the-ground consequences, as Judge Friendly explained more than 30 years ago. But deference only goes so far. For 1332 waivers, the courts will still ask hard questions about whether the waiver in question adheres to the guardrails.

That’s going to be a problem for waivers like Iowa’s, which would divert funding for cost-sharing reductions and eliminate protections against excessive out-of-pocket spending. As David Anderson notes:

The Iowa waiver submission will increase the number of low income residents with high percentages of their income devoted to health care costs. The hypothetical 40 year old who has an expensive chronic condition will see a dramatic change in his total out of pocket spending from 8.52% of income under the ACA to 44% of income … . There will be a number of individuals who will have significant, real and obvious harms from this waiver. I will be shocked if at least one of them does not file suit to stop the Iowa waiver for at least the 2018 plan year.

I’ll be shocked, too. How on earth does Iowa’s waiver provide “cost sharing protections against excessive out-of-pocket spending that are at least as affordable” as the ACA, as the statute requires? It eliminates those protections!

Deferential or not, the courts won’t stand for this. The guardrails are really restrictive. If you take them seriously—and the courts will, even if HHS doesn’t—they suggest that a state’s waiver can be approved if and only if it doesn’t make a substantial number of people worse off than they were under the ACA. Iowa’s waiver flunks that test.

Iowa is nonetheless pressing forward—and on an expedited, emergency basis so that its waiver can take effect for 2018. If the waiver is approved, however, there’s a very good chance a court will enter a preliminary injunction to prevent it from taking effect. That’s the worst of all worlds for Iowa. Inviting a legal battle on the eve of open enrollment will not give insurers the confidence they need to participate on the exchanges.

What’s true in Iowa is true for other red states. If they want to revamp their insurance markets, they’re going to have to ask Congress to relax the guardrails. Maybe Congress will oblige, either in Cassidy-Graham or in a bipartisan deal to include more targeted fixes. In the meantime, the courts probably won’t allow the states to radically change the ACA’s structure through waivers.



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