A blast from the past: Dusting off ACA Section 1333 compacts
When he was working at a Minnesota-based think tank last year, Peter Nelson wrote a report on Section 1333 Health Care Choice Compacts, a small and mostly forgotten provision in the Affordable Care Act. Now, he’s the new director of the Center for Consumer Information and Insurance Oversight (CCIIO), the federal office that oversees the ACA, among other tasks. In addition, a workgroup at the National Association of Insurance Commissioners (NAIC) plans to research “state flexibility options through the ACA” this year, which could include Section 1333 compacts along with its better-known neighbor, Section 1332 waivers. Will this long-dormant ACA provision resurface in health care policy discussions this year? It’s possible. So let’s dust off Section 1333 and refresh our memories on Health Care Choice Compacts.
ACA Section 1333 compacts
Section 1333 of the ACA authorizes Health Care Choice Compacts, a framework for a regulatory agreement among states to facilitate sales of health insurance across state lines. These 1333 compacts would let health insurers sell individual market “qualified health plans” (plans certified as ACA-complaint) in any compact state, without having to comply with each state’s laws and standards. Instead, the plans would be subject just to the laws of the state where the policy was issued, with a few exceptions. Insurers would still need to comply with certain laws of the state where the purchaser resides, including laws on market conduct, unfair trade practices, network adequacy, and consumer protection standards, including rating standards and addressing disputes under the policy contract. But the insurer could bypass many state laws, including more generous benefit requirements. Insurers must be licensed in each compact state where they sell plans and notify consumers that plans may not comply with all state laws
The ACA directs the Secretary of Health and Human Services (HHS), in consultation with the NAIC, to issue rules for 1333 compacts by July 1, 2013 (this has not been done, as discussed below). To join a 1333 compact, a state must enact a law explicitly authorizing the state to do so.
1333 compacts must be approved by the HHS Secretary and are subject to “guardrails,” similar to 1332 waivers, to ensure compacts are consistent with the goals of the ACA. As with 1332 waivers, guardrails require coverage under a 1333 compact to have benefits that are at least as comprehensive, and out-of-pocket costs that are at least as affordable as they would be absent the compact. In addition, the compact must cover a comparable number of state residents and cannot increase the federal deficit. Finally, a compact cannot weaken the laws and consumer protections listed above that remain applicable in the purchasing consumer’s state.
Unlike with 1332 waivers, the ACA does not authorize any federal funding, including pass-through funds, to support 1333 compacts.
Selling across state lines has not increased choices or lowered premiums
Private health insurance has historically been regulated at the state level, and states vary in the rules they apply to health insurance above the federal floor. Proponents of allowing health insurance to be sold “across state lines” seek to let insurers sell products in multiple states without having to comply with differing laws in every state. They theorize that with the flexibility to bypass state regulations or benefit requirements, insurers will offer products in new markets that cost less.
The concept is not new. It dates back three decades and was first introduced at the federal level in 2005. Even before Section 1333 was adopted, nothing in federal law prevented a state from allowing sales of out-of-state products or developing multi-state compacts for health insurance. In fact, a few states have tried, though none have made it work. Four states – Georgia, Maine, Oklahoma, and Wyoming – allow the sale of out-of-state health insurance, yet no insurers have opted to sell such products. In addition, three states – Kentucky, Rhode Island, and Washington – passed laws to evaluate the feasibility of allowing cross-state sales. These states found there were too many roadblocks and not enough interest to make an across-state-lines approach viable, and none of them took further action.
Ultimately, the vision does not pan out because it does not address the real drivers of health insurance premium costs nor barriers for an insurer to enter a new state. The key cost driver for health insurance premiums is the local cost of health care. Even if a policy originates in a state with low health care costs, consumers in high-cost states will still get high-cost care, and won’t pay less. In fact, they may have to pay more. Without any local market share, out-of-state insurers will lack the leverage to get network discounts from local providers.
Furthermore, cross-state arrangements do not meaningfully reduce the significant investments insurers must make to enter new states, like building a local provider network, establishing a local distribution channel, and marketing. These barriers to entry far outweigh minimal savings from reduced paperwork or fewer benefit requirements.
Selling across state lines poses risks for consumers and markets
Allowing the sale of policies that do not abide by all state laws creates an unlevel playing field for insurers and could lead to adverse selection. Insurers would have the incentive to set up shop in a state with relatively few consumer protections or benefit requirements and could attract the healthiest consumers from other states. With the market segmented, premiums would rise for consumers who rely on comprehensive benefits or robust consumer protections.
The ACA’s federal consumer protections, if in place, would help guard against adverse selection. The ultimate impact of selling health insurance across state lines would depend upon which protections – state and federal – remain in place.
Section 1333 (non)implementation
HHS has not proposed regulations for 1333 compacts, and no state has enacted a law to establish a 1333 compact. The only progress to point to is an HHS Request for Information (RFI) released in March 2019. The RFI catalogs the cross-state efforts that all failed to yield results and seeks input on actions that could facilitate interstate sales, including through 1333 compacts.
HHS received about 200 responses. Entities, including insurers, actuaries, state insurance regulators, provider organizations, and patient and consumer groups, widely expressed skepticism that interstate health insurance sales would increase options or reduce premiums for consumers. Many voiced concerns that it would actually have the opposite effect.
Comments from insurers and actuaries confirm that 1333 compacts will not reduce the operational complexity or cost for insurers to make plans available in a new state. They also raise a few thorny issues that didn’t exist in pre-ACA discussions of cross-state sales. The ACA requires risk-adjustment at the state level that cannot be waived in a 1332 waiver. Whether a consumer is counted in the risk pool of the state where the policy is issued or the state where the consumer lives will have implications for premiums and insurer solvency in both states. In addition, 17 states operate state-based reinsurance programs through a 1332 waiver. 1333 compacts would introduce questions about how out-of-state policies are assessed for or participate in state-based reinsurance and how resulting changes to a state’s risk pool would affect federal pass-through funding.
NAIC comments express concern that allowing out-of-state insurers to compete on an unlevel playing field will harm the stability of state insurance markets and leave consumers vulnerable. They note that “consumers would have to hope that the regulator in a distant jurisdiction has the ability and resources to assist consumers nationwide, which is uncertain due to funding and staff limitations.”
Looking ahead
It has been 15 years since the ACA passed. Aside from the RFI, there has been no movement on Section 1333 compacts, while issues that would make cross-state health insurance sales vexing have only grown. The fact that none of the states that have pursued sales across state lines have made it work has not stopped the idea from coming back up every few years.
In his report, Peter Nelson argues that 1333 compacts could be a vehicle for much broader changes to health insurance markets than what a plain-language reading of the statute implies. Nelson lays out the possibility that 1333 compacts could function like a waiver that not only allows states to essentially waive federal ACA protections but could also wrap in items not mentioned in Section 1333, like pass-through funding and the regulation of short-term, limited duration insurance. Regardless of whether this expansive reading is supported by statute, he notes that even a simple compact would take a significant effort by states to put together. The takeaway from past cross-state efforts is the juice isn’t worth the squeeze. If CCIIO reaches a different conclusion, the statute lays out the process for issuing regulations, starting with the NAIC.
I was appointed as a consumer representative to the NAIC shortly before the ACA passed. In the ensuing years, the NAIC focused heavily on providing input to HHS on a wide range of ACA implementation steps for which the statute explicitly directs an NAIC role. I can report firsthand that NAIC’s process to make recommendations to HHS is a lengthy and deliberative one. The NAIC has a long-standing skepticism of selling health insurance across state lines and, I suspect, would give due consideration to thorny issues of consumer protection, market stability, reinsurance, risk adjustment, and more.
