The Heritage Foundation

Backgrounder #1337 on Health Care

November 2, 1999

November 2, 1999 | Backgrounder on Health Care

How States Can Use Federal Waivers to Help the Poor and Test Health Reforms

The nation's governors and state policymakers can play a key role in improving health care for millions of Americans. Although states cannot fix the major problem encumbering health care--the federal tax treatment of health insurance--they can test various ideas that can lead to comprehensive national health reform.

Specifically, states can obtain relief from the cumbersome rules and regulations that govern the huge Medicaid program for the poor and indigent and initiate comprehensive changes that will promote patient choice and expand coverage to more children, adults, and families. They can do this by taking advantage of a current provision in law called the Medicaid Research and Demonstration Waiver, Section 1115 of the Social Security Act.

States can apply for a five-year Section 1115 waiver from the Health Care Financing Administration (HCFA). After HCFA's Office of Research and Demonstrations grants this waiver, states can try new reimbursement programs, change Medicaid eligibility criteria to include new groups of patients, and even contract with a greater variety of managed care entities within their states. Except for some small restrictions, the only requirement is that states first obtain HCFA approval for these changes and agree to allow HCFA to conduct a formal evaluation of the results.

This evaluation process is an important feature of these waivers. Without having to obtain prior approval from Congress, HCFA will be able to study comprehensive reforms that are conducted in statewide (non-national and medium-sized) markets. Comprehensive reforms should be tested in markets that are large enough to yield meaningful data on economic, social, and behavioral effects but small enough not to cause irreparable harm to the economy, the health care system, or patient care. This approach differs markedly from that of the Clinton Adminstration, which was prepared to risk one-sixth of the U.S. economy on an untried theory in 1993. Statewide reforms could even include non-Medicaid populations.

This is a winning situation for taxpayers and states alike. Testing multiple reforms simultaneously in different states would allow the HCFA to make better determinations about effective health care programs. Using Section 1115 waivers, states can help to reduce the numbers of uninsured, promote patient choice and competition among providers and plans, and improve health care at the local level.

WHAT SECTION 1115 WAIVERS OFFER

Section 1115 waivers allow state officials to design and implement unique, comprehensive, and statewide health plans for their populations. They usually cover a five-year period and can be extended or renewed.

States are free to use almost any eligibility criteria and reimbursement policies to cover children, adults, and the uninsured. As mentioned above, they could offer new or different services and new methods of reimbursement, change Medicaid eligibility criteria to reach new groups, require beneficiaries to stay enrolled in the same managed care plans for longer periods, or contract with various managed care entities for service. They also can supplement federal tax relief or vouchers for low-income families to enable them to take advantage of private health care options. Indeed, there is almost no limit to the types of reforms state officials can design.

It should be noted that these are not the only waivers available to the states. HCFA also offers two other types:

  1. Home and Community Based Services
    Section 1915(c)--Waivers, administered by the Office of Long Term Care, provide relief from such regulatory requirements as statewide application and comparability of services and provide such services as home health care, respite care, and adult day care.

  2. Freedom of Choice
    Section 1915(b)--Waivers, administered by the Office of Managed Care, can waive the right of patients to select their own providers, thus enabling them to be placed in a primary care case management system.

However, neither of these two waivers can be used to test comprehensive reforms; in addition, they are limited in scope and targeted to certain types of reforms.1

Section 1115 waivers also were limited in scope until 1982, when a Section 1115 waiver was approved for the first time to demonstrate a comprehensive and statewide Medicaid reform proposal in Arizona.2 At the time, Arizona was the only state that did not have a Medicaid program already in place. Because of its demographic makeup, it was wary of immediately offering a long-term care benefit, which was mandatory for any Medicaid system. By granting Arizona Section 1115 waiver authority, HCFA allowed state officials to provide health care for classes of patients that otherwise would have been covered by the conventional Medicaid program had it been in operation. This waiver enabled Arizona to offer essentially acute care services through a demonstration project known as the Arizona Health Care Cost Containment System.

In the 1990s, Section 1115 waivers have been used by various states to enact mandatory managed care programs. In May 1999, the U.S. General Accounting Office (GAO) reported that

Since the early 1990s 17 states have used 1115 Medicaid waivers to move their Medicaid programs closer to an employer-based insurance model by implementing managed care for targeted populations, deviating from the Medicaid benefit package, imposing cost sharing on beneficiaries, and covering individuals not traditionally eligible for Medicaid such as low-income single adults.3

HCFA itself states that "with the new emphasis on State flexibility, a rapid growth in the number of major demonstrations has occurred; and a great deal of potentially fruitful Medicaid program restructuring is being tested in this manner."4

What makes a Section 1115 waiver even more attractive to the states is that it can apply to people other than those who are enrolled in Medicaid. Although HCFA is reluctant to grant waivers early in a proposed program's development, a Section 1115 waiver can be used in conjunction with the state's Children's Health Insurance Program (S-CHIP)5 to give children access to private health plans, thereby serving as an alternative to enrolling them in traditional Medicaid. The waiver can apply either to the S-CHIP program alone or to a combined S-CHIP and Medicaid program. Massachusetts, for example, has used a Section 1115 waiver to extend coverage to non-Medicaid adults in families with children through an employer buy-in.6 HCFA also has reported that states are using Section 1115 waivers for welfare reform projects.7

In what may be the most promising use of the Section 1115 waiver, innovative state governments could develop consumer-based systems, like the Federal Employees Health Benefits Program, in which low-income persons would be provided a broad choice of portable private health plans and delivery options. Although no state has attempted this type of reform, it could serve as a way to test alternative comprehensive national reform proposals.

HOW SECTION 1115 WAIVERS WORK

For governors and state officials who want to promote patient choice and competition in health care at the state level, Section 1115 waivers have clear advantages:

  • Because congressional approval to pursue an innovative health policy is not needed, the likelihood that a proposed program will be gutted by opponents of patient choice or market competition during the legislative process is lessened.

  • States can adopt a specific health care reform measure to their specific needs (for example, the needs of their rural, urban, poor, or industrial populations).

  • The reform, administered by the state with only minimal HCFA oversight, can be both comprehensive and statewide.

  • The reform can establish unique eligibility, coverage, and reimbursement rules to include non-Medicaid populations like the working poor, children, and uninsured without threatening existing Medicare, private pay, or Employment Retirement Income Security Act (ERISA) interests.

  • The five-year waiver provides adequate time to allow a program to mature while also providing an easier way to discontinue or change the program (since technically this is a time-limited, not permanent, demonstration) if it proves to be a failure.

Limits of Flexibility.
Although the Section 1115 waiver gives state officials almost complete flexibility, there are a few things that HCFA cannot (or will not) legally waive.8 These include services for pregnant women and children; co-payment and other cost sharing requirements for current categorically needy eligible patients; federal matching Medicaid rates; requirements for maintaining appropriate levels of access to quality care along with quality assurance monitoring responsibilities; current contract approval authority; and, of course, applicable ERISA requirements. State officials may not want to waive such limitations.

Additional limitations include the fact that a health care reform proposal must be federally budget neutral9 and waivers must be renewed after five years. In any case, however, there is enough flexibility in the program to allow for the creation of a comprehensive statewide reform program that addresses a state's most pressing health care concerns.

Possible Roadblocks.
In the past, HCFA has been wary of granting statewide comprehensive waivers when it believes that no real "research" purpose would be fulfilled. In some cases, HCFA may determine that a waiver project would interfere with its data collection and analysis effort, which is essential to its function of central planning and price regulation in the huge Medicare and the Medicaid systems.

Governors also may run into opposition from their state legislatures or bureaucracies. Before applying for a Section 1115 waiver, they should be certain that dependable personnel capable of implementing serious, market-oriented reforms have been appointed. Otherwise, their reforms--no matter how well-conceived and designed--may be stymied by well-entrenched bureaucrats with an interest in resisting innovative approaches that differ from traditional entitlements. This was the lesson of Medicare&Choice at the federal level. Governors committed to change should not overlook the powerful incentives that exist within their own administrations and state legislatures to protect the status quo.

CONCLUSION

At the state level, most of the significant health care "reforms" have imposed additional regulations on the health insurance market or mandated benefits on private health plans. Instead of mainstreaming low-income families into superior private health care options, state officials have been content to expand Medicaid to include low-income families. But there is nothing innovative about expanding Medicaid or adding another layer of regulation to an already overly regulated health care system.

The main focus of health care reform should be changing the federal tax treatment of health insurance to promote patient choice and competition. Until such a reform is adopted at the federal level, however, imaginative governors should take advantage of the Section 1115 waiver authority available in the Medicaid program to improve health care across their states. With such authority, they can advance consumer choice and competition so that low-income families have access to quality health care; supplement federal tax relief or vouchers for the uninsured; and expand health care options for children.

Just as Governor Tommy Thompson initiated serious changes in Wisconsin's welfare program that became a national model for the successful federal welfare reform initiative of 1996, governors can use Section 1115 waivers to initiate changes in the provision of health care that could have a dramatic impact outside their states. Instead of assuming a passive role in the health care debate, governors should make use of these waivers to bring about significant improvements in today's overly bureaucratic system for millions of patients and their families.

Richard Teske is a health care policy consultant based in Arlington, Virginia. He served as Deputy Assistant Secretary for Public Affairs at the U.S. Department of Health and Human Services during the Reagan Administration.


1. Health Care Financing Administration Web site, at http://www.hcfa.gov/Medicaid/obs7.htm.   This information was accessed in June 1999.

3. U.S. General Accounting Office, Children's Health Insurance Program: State Implementation Approaches Are Evolving, GAO/HEHS-99-65, May 1999, p. 5.

4. HCFA Web site, at http://www.hcfa.gov/Medicaid/obs7.htm.  

5. GAO, Children's Health Insurance Program: State Implementation Approaches Are Evolving, p. 11.

6. Ibid., p. 3.

7. HCFA Web site, at http://www.hcfa.gov/Medicaid/obs7.htm.  

8. Ibid.

9. Ibid.

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