Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California FEBRUARY 2018 Contents About the Author 3Introduction Manatt Health, a division of Manatt, Phelps & Phillips, LLP, is a fully integrated, multidisci- 3Approach plinary legal, regulatory, advocacy, and strategic 4Key Federal Laws and Authorities business advisory health care practice. Manatt Health’s extensive experience spans the major 6 POLICY APPROACH #1 issues re-inventing health care, including pay- Single Payer ment and delivery system transformation; Overview health IT strategy; health reform implemen- Medicaid Issues tation; Medicaid re-design and innovation; health care mergers and acquisitions; regula- Marketplace Issues tory compliance; privacy and security; corporate Medicare Issues governance and restructuring; pharmaceutical ERISA Issues market access, coverage and reimbursement; and game-changing litigation shaping emerg- 11 POLICY APPROACH #2 ing law. Improved Marketplace Affordability Overview For more information, visit www.manatt.com. Medicaid Issues Marketplace Issues About the Foundation 12 POLICY APPROACH #3 The California Health Care Foundation is Medi-Cal Expansion to Undocumented Adults dedicated to advancing meaningful, measur- able improvements in the way the health care Overview delivery system provides care to the people of Medicaid Issues California, particularly those with low incomes Marketplace Issues and those whose needs are not well served by the status quo. We work to ensure that people 13 POLICY APPROACH #4 have access to the care they need, when they Public Option need it, at a price they can afford. Overview Medicaid Issues CHCF informs policymakers and industry lead- Marketplace Issues ers, invests in ideas and innovations, and connects with changemakers to create a more 15 Conclusion responsive, patient-centered health care system. 17 Appendix A. Single Payer and Pay-or-Play Option For more information, visit www.chcf.org. 18 Endnotes California Health Care Foundation 2 Introduction Since the implementation of the Affordable Care Act $$ Improved marketplace affordability. To make (ACA) in 2014, the uninsured rate in California has coverage in the individual market under Covered dropped by nearly half, from 16% in 2013 to 9% in 2015. California more affordable, the state would create However, 2.9 million Californians remained uninsured.1 a new program to help subsidize premiums and/or And although California policymakers and the California cost sharing for a segment of enrollees. The state ACA marketplace, Covered California, have nimbly could also create a reinsurance program designed to responded to federal threats, plan choice and afford- reduce premiums for individual market coverage. ability are nonetheless concerns for many people with $$ Medi-Cal expansion to undocumented adults. To coverage. In continuing California’s tradition as a national expand access to coverage, the state would allow leader on health policy, state policymakers, advocates, Californian adults not eligible for Medi-Cal because and other stakeholders are exploring state-based of their immigration status to enroll in state-only approaches to expand or improve coverage in California. funded Medi-Cal. Some of the approaches under discussion to increase coverage include creating a single-payer system to pro- $$ Public option. To ensure consumer choice and vide universal coverage, improving the affordability of enhance plan competition — and potentially improve Covered California products to expand enrollment in the affordability for Covered California beneficiaries individual market, and expanding Medi-Cal to include throughout the state — California would create a undocumented Californian adults. A public option to state-sponsored public coverage alternative that improve choice and competition among marketplace would be available statewide through Covered plans has also been discussed. This paper examines the California and offered alongside other marketplace ways these state-based policy approaches intersect with plans. federal law. There are myriad ways California might seek to expand Approach coverage as well as address other issues such as con- Because coverage financing and program rules are a sumer choice and health care affordability. Many of complicated patchwork with deep federal involvement, these are private, market-based approaches or could California’s actions are constrained by and must be be advanced through existing state taxation or health informed by federal requirements. There is a chicken- insurance regulatory authority.2 This paper is not a and-egg problem: Proposing state policy solutions comprehensive inventory of such options. Instead, it absent a deep understanding of federal constraints identifies four approaches designed to expand cover- is fraught, yet it is hard to navigate federal constraints age that have been proposed legislatively or discussed without having a specific proposal in mind. This paper among state policymakers. These approaches interact, to presents illustrative examples intended to spark further varying degrees, with federal programs and federal laws. refinement going forward. Medicare, Medicaid, and mar- This paper explores those interactions to illuminate legal ketplace coverage must meet statutorily and regulatorily issues that the state and stakeholders would need to specified standards. Federal requirements governing consider under each of the following proposed options: Medicare and Medicaid benefits will come into play to $$ Single-payer system. To expand coverage to all the extent that California either changes the way in which state residents while maximizing state purchasing current beneficiaries receive services or seeks to use power and reducing system administrative costs, federal dollars to expand services. If California seeks to California would create a state-run, comprehen- alter the terms of employer-sponsored health benefits, sive, universal, single-payer health care system. The the federal Employee Retirement Income Security Act of single-payer system would provide comprehensive 1974 (ERISA) is relevant. coverage to those who are currently insured as well as those who are uninsured by merging Medicare, The proposals examined, and the assumptions made, Medi-Cal, and marketplace funding, and potentially are designed to explore how different policy approaches employer health care contributions as well. interact with federal law. The underlying assumptions Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 3 about policy design for each approach are described Marketplace. Title I of the ACA created marketplaces, below; changes to these assumptions could affect this such as Covered California, to expand access to private analysis and the manner in which federal law might or insurance coverage. The ACA also created premium might not constrain implementation. tax credits that help pay premiums for individuals with incomes up to 400% of the federal poverty level (FPL) This paper does not analyze state legal constraints, who are enrolled in qualified health plans (QHPs) and because the legislature (and/or ballot initiatives) can alter do not have access to other affordable coverage. The state laws. Nor does this paper analyze the various pub- ACA established a maximum out-of-pocket amount for lic policy implications, positive and negative, that the coverage,5 and it permits individuals with incomes up proposals might have, for example, on provider access to 250% of the FPL who purchase coverage through the or the state budget. Rather, it examines feasibility solely marketplace to receive reduced cost sharing. The ACA through a federal legal and regulatory lens. also establishes minimum benefit standards, or essential health benefits, for the individual market, including mar- ketplace coverage. Key Federal Laws ERISA. ERISA is a federal law that sets standards for pri- and Authorities vate-sector employers that establish employee benefit plans. Certain ACA requirements are incorporated into Below is an overview of the key federal laws and authori- ERISA and apply to employee benefit plans that cover ties examined in this paper. For many of the policy health care. ERISA preempts “any and all State laws inso- proposals analyzed here, only some of these federal laws far as they may now or hereafter relate to any employee are relevant. benefit plan” covered by ERISA, although ERISA does not prevent states from regulating health insurance issu- Medicare. Title XVIII of the Social Security Act, the ers and the products they sell to employee benefit plans.6 Medicare statute, creates an entitlement to coverage for individuals age 65 or older who have worked the equiv- alent of 10 years in the United States and for people with disabilities.3 Medicare is run by the federal govern- ment and funded through federal Medicare trust funds. Services are available through fee-for-service or managed care networks, at the beneficiary’s choice. The secretary Because coverage financing and of the Department of Health and Human Services (HHS) has authority to waive Medicare provisions under Section program rules are a complicated 402(b) of the Social Security Amendments of 1967 and Section 1115A of the Social Security Act. patchwork with deep federal Medicaid. Title XIX of the Social Security Act, the Medicaid statute, creates an entitlement to coverage for involvement, California’s actions eligible low-income individuals and to funding for states, which share in Medicaid financing with the federal gov- are constrained by and must be ernment. The Medicaid statute sets various minimum eligibility, benefit, coverage, financing, and administra- tive standards that states that choose to participate must informed by federal requirements. honor in administering their programs. States implement changes that are consistent with federal law by amending their Medicaid state plan.4 If states wish to deviate from federally required standards to test new ways to design coverage and deliver care, states can seek demonstra- tion authority (referred to as “waivers”) under Section 1115 of the Social Security Act. California Health Care Foundation 4 Obtaining Waivers of Federal Health Care Law Several authorities exist whereby the federal government can waive otherwise applicable laws and program standards for Medicaid, Medicare, and the ACA. (Note that ERISA is not included here as its provisions are not waivable by administrative action). We note that granting waivers is at the discretion of an administration. By longstanding prac- tice, once an administration has approved a waiver of particular provisions, it treats that waiver as a precedent and will generally approve similar waiver requests, but policy approaches can vary across administrations. However, without congressional action, an administration is never legally obligated to approve a waiver request. The current administra- tion’s position on coverage expansions supported by federal dollars is not likely to be favorable, which could make it difficult to secure federal authority, where necessary. The authorities described below include different standards for their approval and thus are used by states with varying degrees of frequency. Examples of relevant authorities are as follows: Medicare 402(b) waivers. Medicare demonstration waivers granted by the secretary of HHS under Section 402(b) of the Social Security Amendments of 1967 permit Medicare payments to be made at variance with the standard Medicare payment rules for approved projects that aim to increase the efficiency and economy of the provision of Medicare health services.7 Outside of the standard payments authorized by the Medicare Act, 402(b) Medicare dem- onstration projects are also funded by the Medicare trust funds. To date, this authority has been used rarely. Medicaid Section 1115 waivers. Section 1115 of the Social Security Act gives the secretary of Health and Human Services authority to approve experimental, pilot, or demonstration projects that promote the objectives of the Medicaid and Children’s Health Insurance Program (CHIP) programs. Under this authority, the secretary may waive certain provisions of the Medicaid law (i.e., those contained in Section 1902 of the Social Security Act) to enable states to meet their policy goals, subject to evaluation and monitoring requirements. Though not delineated in statute or regulations, budget neutrality requirements apply to ensure that the federal government does not spend more on the demonstration (or waiver) than it would spend in the absence of the waiver.8 Many states operate some or all of their Medicaid programs under Section 1115 authority. Medicare and Medicaid Section 1115A. Section 1115A of the Social Security Act created the Center for Medicare & Medicaid Innovation (CMMI) to test “innovative payment and service delivery models to reduce program expendi- tures while preserving or enhancing the quality of care” for those individuals who receive benefits through Medicare and certain other federal health care programs.9 For example, CMMI has exercised the Section 1115A authority to partner with states to support multipayer health care payment and delivery system reforms. CMMI’s State Innovations Models initiative has given states flexibility to test new delivery-system reform approaches, such as those that rely on Medicare participation.10 Although Section 1115A is a new authority, the Centers for Medicare & Medicaid Services (CMS) continues to advance new models and approaches, though it is somewhat of an open question as to how the current administration will approach the authority. Affordable Care Act, Title I Section 1332 waivers. Section 1332 of the ACA permits states to apply for a State Inno- vation Waiver to pursue strategies for providing their residents with access to high-quality, affordable health insurance as an alternative (in whole or in part) to standard marketplace coverage. States can apply for waivers of selected mar- ketplace requirements, including those governing essential health benefits and tax credits, if they meet four guardrails to retain the basic protections of the ACA. Coverage provided under a 1332 waiver must (1) be at least as comprehen- sive as coverage provided absent the waiver, (2) provide coverage and cost-sharing protections so that coverage is at least as affordable as coverage absent a waiver, (3) provide coverage to a comparable number of residents of the state as would be provided coverage absent a waiver, and (4) not increase the federal deficit.11 States could repurpose pre- mium tax credits (and cost-sharing reductions [CSRs] if appropriated12) under a 1332 waiver. If a state’s 1332 proposal reduced federal premium tax credit spending, the state could receive pass-through funding in the amount of the savings to the federal government. For example, in the three states with approved reinsurance waivers (Alaska, Min- nesota, and Oregon), the states reap the federal savings for their policies that reduce premiums, which in turn lowers tax credits and thus federal expenditures. The 1332 authority is the newest of the federal waiver authorities, effective starting in 2017, so there is less information about what types of initiatives will be approved under this authority. Fur- ther, the current administration’s reluctance to approve waivers that support ACA implementation could be a limiting factor on future approvals. Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 5 POLICY APPROACH #1 would be prohibited from offering benefits or ser- Single Payer vices for which coverage is offered under the Healthy California program. $$ Care coordination services would be provided to all Overview enrollees, including administrative tracking and medi- This section analyzes the federal ramifications associated cal recordkeeping services. with creating a state-based single-payer infrastructure. Although there are various ways the state could struc- $$ The Healthy California board would apply for any ture a single-payer system, this analysis considers the necessary federal waivers so that Healthy California Healthy California Act, SB 562 (2017-2018 session), the members could receive all benefits through Healthy most current single-payer proposal under consideration California, financed with federal program funding by California state policymakers.13 that might have otherwise supported their care. The legislation also directs the board to seek authority for The Healthy California Act would create a new Healthy Healthy California to receive and deposit all federal California program to administer a comprehensive, uni- payments under those programs. versal, single-payer health care coverage system. The proposal is intended to eliminate segmentation of the Of the four policy approaches analyzed in this paper, health insurance market and instead create a single the single-payer proposal interacts with the most federal coverage program for individuals eligible for Medicare, laws because it relies on existing federal program financ- Medi-Cal, employer-sponsored coverage, and individual ing and thus raises a number of legal questions.16 That insurance, as well as the currently uninsured.14 Key fea- said, although a goal of Healthy California is to promote tures are as follows: administrative simplicity, SB 562 is drafted in a manner that also appears designed to skirt some of the thorni- $$ The state would create a new authority to operate est legal issues by acknowledging the ongoing role of a single-payer system for all state residents, admin- federal health care programs even in a single-payer envi- istered by a new Healthy California board, which ronment. In particular, although the legislation directs would be an independent entity not affiliated with the Healthy California board to seek waiver authority any existing agencies or departments. to ensure that “federal payments are paid to Healthy $$ Federal financing that supports existing federal California in place of federal funding of, or tax benefits programs (including Medicaid, Medicare, ACA tax for, federally matched public health programs or federal credits, and other federal funds and subsidies) would health programs,”17 the legislation also specifies that the be merged into the Healthy California fund to pay Healthy California board “may apply for coverage for, for coverage. Although employer contributions to and enroll, any eligible member under” Medi-Cal, CHIP, health coverage are not expressly addressed in the or Medicare.18 Indeed, the legislation further directs the current draft of Senate Bill (SB) 562, the spirit of the board to maximize enrollee eligibility for such federal proposal suggests a goal of redirecting contributions programs.19 to the Healthy California fund rather than towards the employer’s health care benefit plans. Therefore, while the legislation seeks to establish a system in which enrollees receive all Healthy California benefits $$ Healthy California would provide enrollees with a through the program, it also appears to acknowledge that broad range of benefits, encompassing those pro- the state may nevertheless need to maintain compliance vided by existing public programs and deemed with existing federal eligibility, benefit, and enrollment medically appropriate by the enrollee’s health care rules. This includes verifying income upon initial enroll- provider, with no premiums or cost sharing.15 ment and at regular renewal intervals to ensure that the $$ Healthy California would permit enrollees to choose state can claim available federal funding through Medi- health care services from any participating provider, Cal, marketplace subsidies, or Medicare. It is unclear from who would be paid on a fee-for-service basis until the legislation the extent to which Medi-Cal will continue another payment methodology is established by the as is, but it appears likely that Medi-Cal could operate Healthy California board. Health plans and insurers in the background of Healthy California (e.g., enrollees California Health Care Foundation 6 may think of themselves as enrolled in Healthy California, extent that Healthy California would either stand “in the but, for purposes of accessing federal financing, would shoes” of the DHCS (e.g., through interagency agree- be enrolled in Medi-Cal). Similarly, the legislation clearly ments) or formally function as the single state Medicaid envisions repurposing marketplace tax credits to support agency as required by federal law, following all existing Healthy California enrollment and also gives the Healthy laws and regulations that govern the administrative func- California board the option of enrolling its participants tions of the Medicaid agency, minimal federal Medicaid who are eligible for Medicare into Medicare Parts A, waivers would be needed.22 B, and D (whether through fee-for-service Medicare or Medicare Advantage plans and whether administered by Indeed, SB 562 explicitly provides that the Healthy other entities or Healthy California itself) so that the fed- California board may apply for coverage for, and enroll, eral government could continue to cover the cost of their any eligible member in Medi-Cal.23 Because Healthy care, with premiums and copays assumed by Healthy California would rely on pooling federal funds from Medi- California.20 Cal, marketplace subsidies, and Medicare, it would need to conduct some initial eligibility screening to assess income and other factors to determine which federal Medicaid Issues dollars could be claimed for which enrollees. Therefore, Recognizing the importance of Medicaid financing and screening for Medi-Cal would be expected to be done the various requirements that attach to that financing, SB as part of the initial enrollment process (and at regularly 562 appears to (1) direct the state to seek broad waivers scheduled renewals), even if it was not transparent to to secure maximum flexibility to implement a seamless applicants that Healthy California was conducting eligi- single-payer system and (2) authorize a hybrid solution bility determinations related to Medi-Cal (or other federal that relies on continued compliance with, at a minimum, programs).24 Although the legislation is not explicit about traditional Medicaid eligibility and enrollment rules so how the program would be administered and how fund- that the state could continue to access federal Medicaid ing would be tracked, the most straightforward approach matching funds. The legislative authorization for such would be for Healthy California to track claims for Medi- a hybrid approach may be an acknowledgment of the Cal-enrolled individuals, even if enrollees were receiving need to balance the goal of simplicity with the difficulty their Medi-Cal services through a broader, state-admin- of securing approval for, and implementing, a more radi- istered, universal coverage program. The Medi-Cal cal departure from existing federal requirements. That tracking would not need to be transparent to enrollees, balance necessarily involves trade-offs. This section who would be treated as all other Healthy California explores how the degree of continued compliance with enrollees, some of whom also would be supported by key federal Medicaid requirements could influence waiv- other federal program funding.25 ers that the state needs. On the other hand, to the extent that Healthy California The biggest hurdles associated with maintaining federal does not wish to determine Medi-Cal eligibility and/or Medicaid funding while implementing a single-payer track expenditures on a person-by-person basis, it would system are the federal requirements that tie feder- need to seek a Section 1115 waiver. The discussion that ally matched expenditures to the services provided to follows illustrates several ways through which the state Medicaid-enrolled individuals. Eligibility would have to could seek to implement the program without following be identified and services tracked by enrollee so that all federal Medicaid eligibility, enrollment, and financing the state can claim federal matching funds for allow- rules, through waiver authority: able expenditures. Healthy California — acting under $$ Eligibilityand enrollment. If the state does not wish the authority of the Department of Health Care Services to establish eligibility upon enrollment, it could seek (DHCS) (if DHCS continues to exist) or as a new single- a waiver of certain Medicaid eligibility rules and then state agency administering Medi-Cal — could essentially conduct a post-eligibility review of income and other run these eligibility and financial tracking requirements factors to properly attribute enrollees’ costs to Medi- in the background (i.e., in a manner invisible to Healthy Cal (or other federal programs). California enrollees) to promote simplicity for the con- sumer and limit the waivers needed while meeting various $$ Financing. If the state does not wish to track expen- federal requirements for federal matching funds.21 To the ditures on a per-enrollee basis, the state would Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 7 need to negotiate capped funding with CMS, per- coverage. To take another example, although the legis- haps based on historical spending plus a trend rate lation envisions that Healthy California enrollees would adjustment, or to design and obtain approval for a have access to all providers, the legislation does not sampling methodology that would assure CMS that specify that — as under federal Medicaid law — Healthy it was not overpaying for Medi-Cal enrollees rela- California enrollees must have access to federally quali- tive to the entire Healthy California pool.26 Sampling fied health centers (FQHCs) and rural health clinics, which methodologies would carry some administrative must be paid a favorable rate under Medicaid law. To the burden but would avoid complicating the enrollment extent that the state does not intend to incorporate these process. Depending on the terms that California Medicaid requirements into the administration of Healthy would negotiate with the federal government, the California, it would need to seek waivers of requirements state could be at risk for spending over any capped regarding access to, and payment of, FQHCs. Such waiv- amount (perhaps through an approach similar to a ers are not common and are controversial, but they are per capita cap). legally allowable. The benefit and cost-sharing structure for Healthy Finally, because the single-payer system depends on California appears to not require federal waiver authority. drawing down federal Medicaid dollars, federal financing As drafted, Healthy California benefits are intended to rules governing allowable sources of the nonfederal share be at least as generous as federal Medicaid mandatory (including rules regarding intergovernmental transfers, benefit standards require,27 and Healthy California does certified public expenditures, and provider taxes) would not intend to charge cost sharing so would not be in con- continue to apply. California would need to continue flict with Medicaid’s limits on premiums or copayments. to comply with these Medicaid financing requirements, If cost estimates lead to refinement of the proposal in which are not waivable. a manner that restricts benefits or adds out-of-pocket costs, additional legal considerations would come into play.28 Although the current administration’s waiver pol- Marketplace Issues icy remains somewhat untested, it is likely to entertain To fund Healthy California, the legislation envisions repur- waivers to limit some benefits or increase cost sharing, posing premium tax credits, which are currently available although federal law does impose some guardrails to pre- to assist individuals with incomes up to 400% of the FPL vent high cost sharing. Provider rates, as envisioned, also in purchasing QHPs offered through Covered California. would appear to meet Medicaid’s access requirements, To do this, California would need to seek authority from and thus no additional authority would be required. the HHS and the Department of the Treasury for a 1332 waiver. A 1332 waiver would be necessary to eliminate It is impossible to detail all federal Medicaid require- the Covered California marketplace in favor of coverage ments that might be implicated based on the design of through Healthy California and allow Healthy California a single-payer system, but two examples illustrate pro- to repurpose premium tax credit dollars. visions that could require waivers if the state wished to deviate from federal law. Even though these waivers are A 1332 waiver also would be necessary to allow the significant and potentially controversial, in most cases the state to circumvent several other ACA requirements. For changes they seek are less far-reaching than the eligibil- example, the ACA creates a right of any “qualified indi- ity, financing, and administrative issues described above. vidual” to enroll in a QHP;30 to the extent that Healthy For example, the legislation is silent about retroactive California would replace Covered California and thus coverage (e.g., the federal requirement that Medicaid eliminate existing QHPs, a waiver would be needed. In pays for any Medicaid-covered costs incurred up to three addition, California would need to seek 1332 authority months prior to a beneficiary’s application date, so long to waive compliance with the ACA Small Business Health as the beneficiary would have been eligible for cover- Options Program (SHOP) requirements, which govern age during the three months prior to application when Covered California for Small Business and are designed the bill was incurred).29 There is precedent for waiving to help small businesses provide health coverage to this provision, at least for some Medicaid populations; their employees. Covered California for Small Business moreover, retroactive eligibility would appear to be less would no longer be needed once Healthy California was important over time in a system moving towards universal launched. California Health Care Foundation 8 Given the comprehensiveness of benefits and cost-shar- 402(b) waivers. The parameters of 402(b) are fairly vague ing limitations in SB 562, and the cost-control mechanisms and, although they could be read to permit a transfer envisioned by the legislation, the authors’ assessment is of Medicare trust fund payments to a state trust fund that Healthy California could satisfy the four 1332 waiver that serves Medicare enrollees,35 Section 402 as a whole guardrails described in the text box on page 5. However, largely considers demonstrations relating to provider as noted, waivers are discretionary, and CMS has not payments and managed care payments;36 no past 402(b) yet approved significant changes to premium tax credit demonstrations have involved the routing of Medicare funding for policies other than reinsurance, so securing payments to a state-based health care program. the authority described could be difficult. Finally, since this proposal doesn’t offer coverage through a private 1115A waivers. CMMI waivers under Section 1115A insurance plan, it would not need to meet the rating and of the Social Security Act might be another way to redi- other consumer protection requirements implemented rect Medicare trust fund payments to Healthy California. by the ACA;31 since these provisions cannot be waived CMMI’s broad authority appears to allow CMS to under a 1332 waiver, the structure of Healthy California authorize a demonstration in which Medicare funds are thus avoids a potential legal issue. directed to the state and paid to providers via the state’s own payment system. Some precedent exists for this type of Section 1115A demonstration: The Maryland All- Medicare Issues Payer Model37 permits the Maryland Health Services Cost As discussed above, under SB 562, federal financing Review Commission (HSCRC) to set the rates for Medicare that supports existing federal programs would ideally be payments to hospitals in a way that does not reduce merged into the Healthy California program, which would quality and decreases spending by an agreed upon create a new, centralized authority to operate a single- amount,38 regardless of numerous statutory Medicare payer system, administered by the state and providing a payment rules39 — which are waived under the demon- broad range of benefits (encompassing those provided stration. Although Medicare funds are not redirected to by existing public programs including Medicare) with no HSCRC and are instead paid by Medicare Administrative premiums or cost sharing. However, SB 562 also takes Contractors according to HSCRC-determined rates, into consideration that if Medicare payments cannot be CMMI could presumably redirect Medicare funding to the redirected to the Healthy California fund, the Healthy state in future demonstrations.40 Additionally, the ability California board might enroll those eligible for Medicare to set the rates at which Medicare payments are made into Medicare Parts A, B, and D (including via Medicare to providers could itself permit Healthy California to Advantage plans).32 achieve many of its goals (e.g., ensuring that certain ben- efits are covered, eliminating cost sharing by establishing Financing provider rates as payments in full), even without redirect- Redirecting Medicare trust fund dollars to the Healthy ing Medicare payments into the Healthy California fund. California fund might require federal legislative action as well as federal regulatory and administrative steps.33 Eligibility and Enrollment To the extent that the Healthy California board would Standard Medicare payments. The Medicare statute choose to require those eligible for Medicare to enroll in authorizes payments necessary to fund statutorily man- Medicare as a condition of Healthy California coverage, dated Medicare services,34 which have been limited to Healthy California seeks to require mandatory enroll- payments made to Medicare-enrolled providers and sup- ment in Medicare Parts A, B, and D,41 administered either pliers for medically necessary covered services as well as as it is now by Medicare Administrative Contractors, to Medicare Advantage organizations under Part C and Medicare Advantage Organizations, and Part D prescrip- prescription drug plan sponsors under Part D to provide tion drug plan sponsors, or by Healthy California itself.42 Medicare benefits. It is unlikely that any of the standard No Medicare law expressly prohibits states from requir- provisions of the Medicare Act would be read to permit ing Medicare enrollment.43 However, because Medicare payments to a state health fund, meaning that the waiv- is voluntary and because enrollees must pay premiums44 ers described below (or congressional action) would be for Medicare Parts B and D and Medicare Advantage required to achieve this goal. plans (and Medicare Part A for certain individuals), the de facto requirement of SB 562 that Californians eligible Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 9 for Medicare pay Medicare premiums may be subject ERISA Issues to legal challenge by individuals not wishing to enroll in To fully integrate individuals currently covered under Medicare and pay such premiums.45 group health plans regulated by ERISA into Healthy California, including channeling the employer financ- Benefits and Coverage ing of those plans into Healthy California, would likely As drafted, SB 562 appears to assume that all Healthy require federal statutory changes.52 California beneficiaries would receive a robust package of benefits that includes all Medicare-covered services as SB 562 defers specifics on financing to future develop- well as services not covered by Medicare, without any ment of a revenue plan, but the spirit of the proposal premiums or cost sharing. Non-Medicare benefits like suggests that its likely goal is to require employer con- those proposed to be covered under SB 562 may be cov- tributions to be directed to the Healthy California fund ered without legislative action, but they would require rather than towards the employer’s health care benefit waivers where original Medicare coverage is involved plans. ERISA generally preempts state laws that “relate and would have to meet supplemental benefits require- to” employee benefit plans53 offered by employers.54 A ments where Medicare Advantage plans are involved. pure single-payer system, which would involve terminat- ing all existing ERISA plans and requiring employers to $$ Under original Medicare, non-Medicare benefits contribute to a state-administered health program fund, may be covered as part of a Medicare demon- would likely be found to constitute the impermissible and stration project under a Medicare 402(b) waiver. preemptable regulation of an employer health benefit Specifically, Section 402 waiver authority permits plan absent the grant of a federal legislative exemption Medicare demonstration projects involving grants to from ERISA. Although not contemplated in the bill, an public agencies (i.e., Healthy California) to pay for alternative pay-or-play approach that would not require non-Medicare services that would result in more eco- termination of ERISA plans but would require employers nomical provision and more effective use of Medicare to pay to finance health care provided through Healthy services.46 The broad language of Section 1115A, California or in coordination with Healthy California which permits CMMI to test “innovative payment and may not be preempted if structured appropriately, but service delivery models” that either reduce costs or it would likely be tested in the courts. (For more on the improve quality of care47 could also be read to permit pay-or-play approach, see Appendix A). CMMI demonstration projects in which non-Medicare benefits are offered. The Next Generation account- ERISA Exemptions able care organization (ACO) demonstration and its If it seeks to termination ERISA plans, Healthy California Telehealth Expansion Waiver, Post-Discharge Home would likely need federal legislation to receive an Visit Waiver, and Three-Day Skilled Nursing Facility exemption from ERISA preemption. Congress has only Waiver48 exemplify a CMMI demonstration that per- exempted one state health program from ERISA pre- mits the offer of services not traditionally covered by emption by statute and has expressed an unwillingness Medicare. to do so again: Hawaii enacted its Prepaid Health Care Act in 1974, the same year that ERISA was enacted.55 The $$ Under Medicare Advantage, non-Medicare benefits Hawaii law requires most employers to provide health may be covered as supplemental benefits. The addi- coverage to most employees. It regulates employee tional non-Medicare benefits proposed under SB 562 benefit programs in contradiction of ERISA and is pre- might be covered as mandatory supplemental ben- empted.56 However, in 1983, Congress amended ERISA efits given the intent of the bill to provide an identical to create a limited exception for Hawaii, allowing it to package of benefits to all enrollees.49 However, not continue to enforce its law as it existed in 1974. Hawaii all non-Medicare benefits are eligible to be covered still is not permitted to amend the law except to further as supplemental benefits,50 so Healthy California the “effective administration” of the law as it existed in would have to structure its benefits package to 1974.57 Furthermore, in creating this exception Congress ensure that ineligible benefits are not offered,51 or it said it “should not be considered a precedent” for would have to offer the additional benefits outside of exempting any other state law from ERISA preemp- Medicare Advantage. tion.58 No other state’s employee benefit laws have been exempted from ERISA. California Health Care Foundation 10 Note on the Pay-or-Play Option coverage. This would improve affordability for enrollees California could potentially adopt a pay-or-play system in not receiving premium tax credits. which the state requires employers that do not contrib- ute a minimum amount to their health care benefit plans As described below, federal requirements are triggered to contribute to the Healthy California program. Strictly primarily if California seeks federal funding for these speaking, a pay-or-play system is not compatible with a proposals. single-payer system because employers could choose to “play” by offering their own coverage rather than “pay- ing” into the single-payer fund. Aside from falling short Medicaid Issues of the single-payer goal by permitting the existence of Using state-funded dollars to increase subsidies to multiple payers, another issue raised by the pay-or-play improve the affordability of Covered California coverage approach is that the benefits and cost sharing associated does not invoke Medicaid in any way. However, to the with plans offered by these multiple payers would not be extent that the state wishes to use Medicaid dollars to uniform. For these reasons, the pay-or-play option is not provide a premium or cost-sharing wrap for lower income analyzed at length here. A discussion of the pay-or-play individuals enrolled through Covered California, the state option is included in Appendix A. could pursue a 1115 waiver to do so. Massachusetts and Vermont have such authority through Section 1115 waiv- ers, but those were granted by the prior administration. In light of the Trump administration’s positions regarding POLICY APPROACH #2 various Medicaid and marketplace policies, it is unlikely Improved Marketplace that it would grant a waiver for this purpose. Affordability Any such proposal would have to be budget neutral to the federal government, meaning that the state would likely need to find efficiencies elsewhere in the Medi-Cal Overview program to offset the cost of the affordability wrap. To make individual market coverage more affordable, the state could create a new affordability program for cov- erage purchased through Covered California. Currently, Marketplace Issues premium tax credits are available for eligible enrollees Nothing in these proposals requires waiving federal with incomes up to 400% of the FPL. California consum- law or federal approval if the state, rather than the fed- ers with incomes between 138% of FPL up to 250% of eral government, is providing the additional funding the FPL can enroll in enhanced cost-sharing reduction for these purposes. Using state funding, California can (CSR) plans that reduce out-of-pocket costs.59 There are increase premium subsidies and make affordability sup- various ways to structure such a proposal, depending on port available to additional populations, subsidize cost the desired target population, including the following: sharing, and create reinsurance programs, provided the $$ Increasing premium subsidies for Covered California state does not rely on the IRS structure to do so. consumers with incomes below 400% of the FPL If California were instead to seek federal funding to sup- $$ Extendingpremium tax credits to consumers with port these initiatives, the state would need to apply for a incomes above 400% of the FPL 1332 waiver to access federal funding. California would $$ Lowering cost sharing for those enrolled in Covered need to propose a provision or provisions of the federal California with premium tax credits by increasing law that the state wants to waive in order to either repur- the value of CSRs for individuals and families with pose federal funding or demonstrate savings under a incomes under 250 percent of the FPL and/or 1332, as well as meet the four guardrails described in the offering lower cost sharing to those earning above text box on page 5. For the affordability initiatives other 250 percent of the FPL than reinsurance, California would need to demonstrate a policy that would reduce federal premium tax credits to The state could also create a reinsurance program receive funding under a waiver. designed to reduce premiums for individual market Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 11 Reinsurance. Reinsurance lowers premiums in the indi- POLICY APPROACH #3 vidual market by paying a portion of high-cost claims so insurers do not have to bear the risk of those claims or Medi-Cal Expansion to price products to assume higher cost claims. Three states have received 1332 reinsurance waivers (waiving the Undocumented Adults single risk pool provision60) to receive federal funding. Overview These waivers require the state to generate funds (out- To expand access to coverage for Californians not eli- side of only taxing marketplace plans61) for the federal gible for Medi-Cal because of their immigration status, government to provide pass-through funding. Because California could create a state-only funded eligibility state-financed reinsurance programs lower premiums, expansion for people who otherwise meet Medi-Cal eli- the federal costs of the premium tax credits also go gibility criteria. This approach builds on California’s recent down, and the federal government passes those savings expansion of Medi-Cal to all low-income children regard- on to the state. To date, states with reinsurance waivers less of immigration status.64 This approach could include have planned to use pass-through funding from those the following key features: waivers to partially offset the state cost of the reinsurance program; however, a state contribution remains neces- $$ The coverage expansion would leverage the sary to access the federal funds.62 Medi-Cal infrastructure, including the state’s existing eligibility and enrollment process; benefit structure; Increasing premium or cost-sharing subsidies. If claims payment systems; and administrative, over- California sought federal financing for increasing pre- sight, and management capabilities. mium tax credits or CSRs, it would need to demonstrate $$ The state would contract with existing Medi-Cal man- how the state’s proposal would save federal funds. The aged care organizations (MCOs) to deliver care for administration would review the proposal looking for this population and would negotiate rates with plans. policies that either (1) lower federal costs in some way or (2) repurpose the federal funding in a way that also met $$ The plans would leverage the Medi-Cal provider the four guardrails already described — including cover- network; Medi-Cal rates would apply and, indeed, age requirements and deficit neutrality. As of this writing, providers would be unlikely to know the immigration CSRs are not appropriated, so the administration would status of their patients. permit California to use only federal tax credit funding, and not CSRs, in its calculations. Unless an additional pro- posal were included, it is difficult to determine a way that Medicaid Issues the state could demonstrate savings simply by providing Federal Medicaid dollars cannot be used to pay for ser- affordability support as envisioned in this proposal. No vices for undocumented immigrants, with the exception state has been able to do this to date. Iowa proposed of emergency Medi-Cal services and labor and delivery. changes to the tax credit structure to increase tax cred- This is not a waivable prohibition. Since federal approval its for higher income individuals by reducing tax credits is not possible, the inability to access Medicaid funding for lower income individuals, but ultimately withdrew its for this proposal simplifies this analysis. Because federal waiver request before CMS formally ruled on whether Medicaid laws are not applicable, California could set the waiver would meet 1332 standards. In fact, since the benefit and eligibility criteria that are different from those affordability changes would likely increase enrollment in of its current Medi-Cal program. Covered California and tax credits compared with the status quo,63 attempting to address affordability through Financing and administration. The structure of the a 1332 waiver, in conjunction with a reinsurance proposal, state’s program would determine whether it impacts the could encounter challenges from a federal deficit neutral- state’s — or individual hospitals’— access to federal funds ity perspective. that are tied to the uninsured (e.g., Medicaid dispropor- tionate share hospital [DSH] funding). If services were to be delivered through Medi-Cal MCOs that are paid a capitated rate for individuals made eligible through the expansion, there could be an interaction with DSH pay- ments to hospitals.65 California Health Care Foundation 12 The availability of state-funded services for these popu- state and over the long term under Covered California. lations would not impact the state’s continued ability The public option might additionally enhance the abil- to claim federal Medicaid funding for restricted scope ity of Covered California enrollees to maintain coverage Medi-Cal services that are currently paid by Medicaid, so when they move within California and might increase long as the state complies with applicable federal laws provider continuity for Californians whose eligibility shifts on claiming those services. The state would do this by between Medi-Cal and Covered California. These ben- separately tracking spending for immigrants. efits would depend on how the program was designed and implemented, however. Provider network and contracting. This approach to expand coverage for undocumented immigrants would The public option could include the following key leverage existing Medi-Cal plans to deliver services to the features: expansion population. Again, because federal Medicaid $$ The state would offer a new public coverage alter- dollars are not supporting the services, no additional fed- native in the marketplace that would be available eral approval would be required. statewide through contracts with MCOs that partici- pate in Medi-Cal. This could necessitate the state contracting with multiple carriers given regional Marketplace Issues variation in participation of Medi-Cal MCOs. The current proposal does not envision leveraging the Covered California infrastructure, unlike California’s sub- $$ Qualified enrollees would receive the premium tax mitted (and later withdrawn) 1332 waiver proposal to credit subsidy. enable undocumented immigrants to purchase coverage $$ The state would use the Medi-Cal infrastructure through Covered California.66 There are no marketplace- to conduct other administrative, oversight, and related federal legal barriers to implementing a Medi-Cal management functions for the new product.68 coverage expansion. $$ The state product would be required to meet Covered California standards (i.e., benefits, network adequacy, quality, and other QHP requirements as POLICY APPROACH #4 certified by Covered California). The product would Public Option also be required to meet state insurance require- ments as certified by the Department of Managed Overview Health Care or Department of Insurance. A public option could be designed in various ways, $$ The state would contract with Medi-Cal MCOs to depending on the state’s goal. Although many details deliver care. To distinguish this offering from the of a California public option approach remain unclear, status quo, where some Medi-Cal MCOs already the authors of this report assume that California’s pri- participate in Covered California, the state could mary goal is to ensure that robust coverage options are consider providing additional encouragement or available in all counties and expand competition within compulsion to induce plan participation in the public Covered California in areas where issuer participation is option.69 One option would be to tie the Medicaid thin.67 To advance those goals, California could contract and marketplace contracts together in a way that with local Medi-Cal managed care plans to create a state- would require plans to participate in both programs sponsored product that it could offer as a QHP available or provide preferential treatment in the procure- for purchase through Covered California. Some health ment process (e.g., additional bonuses on a request plans doing business with Medi-Cal are already partici- for proposal for plans that participate in Medi-Cal pating in Covered California, but participation is neither and the marketplace public option). Alternatively, statewide nor assured. California could create a contracting requirement to spur participation (e.g., Medi-Cal MCOs would One aim of this approach would be to promote contin- have to bid for the public option). There could be ued marketplace stability because the state would ensure other incentives, such as California sharing the risk that a state-sponsored product was available across the on behalf of the public option or providing reserves. Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 13 These types of initiatives would not require federal To the extent that California holds the public option to approval. the same standards that other Covered California plans are held to — which is a reasonable assumption given well-established state policy — it is likely that little fed- Medicaid Issues eral authority would be needed to implement the public Although the public option approach anticipates rely- option described here. ing on Medi-Cal managed care plans and the Medi-Cal infrastructure for paying claims, oversight, and so on, it If California decided to design the public option in a way would not rely on federal Medicaid dollars to finance the that did not meet Covered California requirements, some coverage or operate the program. The subsidy would be policy approaches could require federal approval, others through the marketplace premium tax credits. As such, might be able to be resolved within the state, and some there are no federal Medicaid issues to address or federal are not waivable. These parameters are described below. approvals to secure. The authors again note that the current administration has not approved 1332 waivers for these provisions. Marketplace Issues $$ Meeting network adequacy standards. Since the As the state develops its public option proposal, differ- federal government has deferred network adequacy ent structural decisions will influence whether the state requirements to the states in its regulations, a devia- would need to seek 1332 waiver authority to implement tion in network adequacy would be a state legal and the proposal. regulatory issue, not a federal one. Payment of premium tax credits. The most straightfor- $$ Meeting federal health insurance requirements. ward approach would be for premium tax credits to be Certain basic federal health insurance requirements paid to the public option plan (rather than to the state), are not waivable under 1332 waiver authority. As which would not require any additional authority if the long as the public option is a QHP, it could not devi- plan meets California standards for ACA marketplace ate from the federal requirements (e.g., guaranteed participation. issue, modified community rating with no discrimi- nation for health status, and no annual and lifetime State-licensed entity. Federal law requires that tax cred- limits). its can be paid only to QHPs and that only state-licensed issuers can be QHPs.70 As long as the public option is $$ Prohibition on mandatory or restricted enrollment. a state-licensed issuer, no additional federal authority Under the ACA, California could not require some would be needed. If California designed a public option individuals to choose the public option,72 although that did not meet existing state licensing requirements this provision is waivable under 1332. The public — an approach whose implications for consumer protec- option also could not generally be available only to tions, market stability, and competition would have to be select individuals, but there are limited exceptions carefully weighed — a 1332 waiver of the requirement to this requirement. For example, a plan can have that tax credits are paid only to QHPs would be neces- its enrollment restricted if it has limited network or sary to establish a public option.71 financial capacity; CMS has in the past relied on this “network capacity” exception to permit states to Plan certification. To use premium tax credits, the state design plans with limited enrollment.73 would either have to seek federal authority to waive the requirement that the public option must qualify as a QHP $$ Complying with essential health benefit standards, to be offered through Covered California, or the state- coverage, and meeting actuarial value coverage. sponsored public option must be certified as a QHP, As long as the public plan offered at least the essen- which entails meeting certain requirements described tial health benefits, no waiver of federal law would be below (e.g., guaranteed availability). If the public option required. plan cannot meet these requirements, then a 1332 waiver would be required to secure authority for the premium tax credits to be paid to the public plan. California Health Care Foundation 14 $$ Meeting actuarial requirements, including offering both metal tiers (silver and gold). Federal law per- Conclusion mits QHPs to offer coverage based on only five tiers California has a variety of paths available by which it could (bronze, silver, gold, platinum, and catastrophic) and expand coverage or bolster consumer plan choice across also requires plans to offer, at a minimum, both silver the state. As summarized in Table 1, the four approaches and gold options. The metal-level tiers are distin- — a single-payer system, improved marketplace afford- guished by actuarial value, and limiting the number ability, Medi-Cal expansion to undocumented adults, and of options promotes consumers’ ability to compare a public option — vary in terms of their dependence on plans. The public plan option is not expected to federal action. Not surprisingly, the proposal for a single- deviate from these requirements, but a 1332 waiver payer system, which has sweeping ambitions in terms would be necessary if it did. of altering the current financing and coverage arrange- ments, would need to navigate numerous federal legal $$ Quality and other marketplace reporting. Most of constraints. Regardless of the path California chooses, a these requirements are established at the state level clear understanding of the role of federal laws and regu- and are subject to state discretion, beyond the eligi- lations, the constraints federal requirements impose on bility reporting requirements for those who receive state-based solutions, and the routes for federal approval tax credits. are important to understand as California considers its options. Table 1. Comparison and Summary of Policy Approaches, continued KEY FEDERAL AUTHORITIES POTENTIAL PATHWAYS TO FEDERAL APPROVAL POLICY GOALS INVOKED Granting waiver approval is at the discretion of an administration. 1. Single-payer system. $$ Expand cover- $$ Title XVIII $$ California could operate Medicaid in the Create a state-run age to all state (Medicare) background of Healthy California to avoid seeking single-payer health care residents. and Title XIX any Medicaid waivers, provided California follows coverage and health (Medicaid) of the all federal Medicaid requirements. A Medicaid $$ Maximize state care cost-control system Social Security Act Section 1115 waiver would be necessary if purchasing power. that would provide California did not wish to determine eligibility and/ $$ Title I of the comprehensive cover- $$ Reduce system or track expenditures on a person-by-person basis. Affordable age to those who are administrative Additional waivers could be required if budget- Care Act currently insured, as costs. ary pressures lead to a reduction in benefits or an well as those who are $$ The Employee increase in cost sharing for beneficiaries. uninsured, by merging Retirement Income $$ Center for Medicare & Medicaid Innovation (CMMI) Medicare, Medi-Cal, Security Act of and/or Medicare 402(b) waivers would be neces- and marketplace 1974 (ERISA) sary to transfer Medicare trust fund dollars to the funding, and potentially state or to mandate and administer enrollment into employer health care Medicare. contributions as well. $$ An Affordable Care Act Title I 1332 waiver would be necessary for repurposing tax credit funding to pay for coverage that would meet existing market- place benefit requirements. $$ Since the Employee Retirement Income Security Act of 1974 (ERISA) preempts certain state laws for employee benefit plans, California would encounter barriers to any requirement that employers contrib- ute to Healthy California rather than to current plans. Because ERISA is not waivable, federal legis- lation would be required to address this challenge. $$ As an alternative to a pure single-payer system, a pay-or-play option might be possible if California follows the guidelines in Golden Gate Restaurant Ass’n v. City & County of San Francisco, 546 F. 3d 639 (9th Cir. 2008), but it is likely to be challenged. Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 15 Table 1. Comparison and Summary of Policy Approaches, continued KEY FEDERAL AUTHORITIES POTENTIAL PATHWAYS TO FEDERAL APPROVAL POLICY GOALS INVOKED Granting waiver approval is at the discretion of an administration. 2. mproved marketplace I $$ Make individual $$ No federal $$ A Medicaid Section 1115 waiver would be needed affordability. Create a market coverage authority invoked if California seeks Medicaid funding to support new program to subsi- more affordable. unless federal marketplace affordability improvements. dize premiums and/or funding sought. $$ An Affordable Care Act Title I Section 1332 waiver cost sharing for cover- would be needed if California were to seek federal age purchased through tax credit funding. Covered California. The state could also create $$ An Affordable Care Act Title I Section 1332 waiver a reinsurance program would be needed if California were to seek federal designed to reduce funding for a state-run reinsurance program. premiums for individual market coverage. 3. Medi-Cal expansion to $$ Expand access $$ No federal N/A undocumented adults. to coverage for authority invoked; Allow Californian adults ineligible no federal adults not eligible for for Medi-Cal Medicaid funding Medi-Cal because of because of their permitted. their immigration status immigration status. to enroll in state-only funded Medi-Cal. 4. Public option. Create a $$ Ensure consumer $$ Title I of the $$ An Affordable Care Act Title I Section 1332 waiver state-sponsored public choice. Affordable would be needed if California seeks to modify coverage alternative Care Act marketplace rules. $$ Enhance market- that would be avail- place plan $$ No federal authority necessary if all marketplace able statewide through competition. requirements are met by the public option. Covered California and offered alongside other $$ Potentially improve marketplace plans. continuity for Californians whose eligibility shifts between Medi-Cal and Covered California. California Health Care Foundation 16 Appendix A. Single Payer and Pay-or-Play Option Strictly speaking, a pay-or-play system is not compat- 3.The program should allow employers offering ible with a single-payer system because employers could ERISA plans to leave those plans unchanged and choose to “play” by offering their own coverage rather must not require employers not offering ERISA than “paying” into the single-payer fund. Aside from plans to do so. falling short of the single-payer goal by permitting the existence of multiple payers, another issue raised by the 4.The program being funded by employer contribu- pay-or-play approach is that the benefits and cost-sharing tions should be open to all residents regardless of associated with plans offered by these multiple payers employment or whether employers contribute. would not be uniform. However, a pay-or-play system (a) could cause some employers to pay into a single-payer 5.The program should not be established or main- fund; and (b) could require all employers to pay into a tained by, or controlled by (e.g., benefits offered) single-payer fund if they opted to not provide coverage s an employer. to all of their employees. 6.Employers should not be permitted to contract Although the pay-or-play option is controversial, a 9th with the government to administer the program for Circuit opinion74 suggests that, under narrowly defined their employees. circumstances that meet certain requirements, ERISA may not always be found to preempt state laws requir- 7.The program should apply uniformly to all employ- ing employers who do not contribute a minimum amount ers (and not apply only to ERISA plans or to to their own health care benefit plan to contribute an employers with ERISA plans). amount to a health care program administered by a government agency. The fates of challenges to future 8.The program should provide employers with a statewide pay-or-play approaches may differ, and they “meaningful alternative” to establishing or modify- would be influenced by the specific details of future ing their ERISA plans by ensuring that the “pay” Healthy California proposals relating to employer plans side of the pay-or-play decision gives employ- that are not currently known. ers some actual benefit (e.g., employer payments might serve as credits for their employees towards The chances that Healthy California’s employer proposal receipt of coverage under the program).76 would escape ERISA preemption could be improved if the proposal resembled the health care program at issue Even if the proposal were to meet these requirements, in Golden Gate Restaurant Ass’n v. City & County of San it would not likely escape litigation, because the 9th Francisco, 546 F. 3d 639 (9th Cir. 2008), which was a pay- Circuit’s pay-or-play holding in Golden Gate Restaurant or-play option that exhibited the following eight traits75: Ass’n and guidelines are somewhat controversial77 and potentially even in conflict with a 4th Circuit opinion in a 1.The program does not mandate a particular set similar case.78 of rules, structure, or benefits for employers — it should only mandate that they contribute a certain monetary amount. 2.The program should require employers to pay a certain amount of money on behalf of employees in a simple way that would not require a complex administrative scheme that would constitute a ben- efit plan. Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 17 Endnotes 1.Reflects population under 65 years old. Fronstin, “California’s 14.For more discussion about considerations that Uninsured.” arise when considering single-payer proposals, see “Key Questions When Considering a State-Based, Single Payer 2.For example, in light of the elimination of the financial penalty System in California,” California Health Care Foundation, for individuals to maintain health coverage to purchase health November 2017, www.chcf.org. insurance, Pub. L. No. 115-97, Section 11081, California could impose its own tax penalty for individuals who do not maintain 15.The current draft of SB 562 does not explicitly address qualifying coverage. This paper does not examine that issue whether long-term care benefits — currently available to here as there are no substantive federal legal barriers. Med-Cal eligible enrollees — would be available to all without cost sharing. 3.An entitlement program is one in which individuals who meet certain eligibility criteria are guaranteed specific benefits as 16.Note, too, that SB 562 prohibits the legislation from established in legislation. becoming operative until the secretary of California HHS gives written notice that the Healthy California trust fund has the 4.Seeking a state plan amendment is a procedural step the state reserves to fund the costs of implementing the act. must take to alter its program within allowable statutory and regulatory standards (e.g., changes to benefits, cost sharing, 17.SB 562, Chapter 7, Article 1, Section 100650(b)(1), (2). provider rates). Although it is a procedural hurdle, CMS does 18.SB 562, Chapter 7, Article 1, Section 100650(e). not have discretion to deny state plan amendments that Federally matched health care programs are defined as adhere to Medicaid standards. Thus, this analysis focuses on Medi-Cal and CHIP. policy changes that will require the state to seek waivers of Medicaid requirements (where the federal government does 19.SB 562, Chapter 7, Article 1, Section 100650(f), (g), (h). have discretion) and does not specify all instances where the 20.SB 562, Chapter 7, Article 1, Section 100650(e), (f)(1), (h), proposed policies could require state plan changes. (i). 5.The maximum out-of-pocket limit applies beyond marketplace 21.Tracking expenditures also may be necessary if the state coverage to large-group, small-group, and individual market wishes to claim Medicaid drug rebates under Section 1927 of coverage. the Social Security Act. 6.ERISA, Section 514(a), 29 U.S.C., Section 1144(a). 22.Social Security Act Sections 1902(a)(4) and (5) and 42 7.Social Security Amendments of 1967, Pub. L. No. 90-248, C.F.R. 431.10 outline the requirement for the Medicaid Section 402, 42 U.S.C. Section 1395b-1. single-state agency. 8.For more information about Section 1115 waivers, see 23.SB 562, Chapter 7, Article 1, Section 100650(e). “Section 1115 Demonstrations,” Center for Medicaid and 24.The Medicaid statute and regulations specify eligibility CHIP Services, CMS, www.medicaid.gov. and enrollment standards to facilitate simplified eligibility 9.“About the CMS Innovation Center,” Centers for Medicare & processing and to ensure that eligible Medicaid beneficiaries Medicaid Services, June 23. 2017, are promptly enrolled if they are determined to be eligible innovation.cms.gov; “State Innovation Models Initiative: for Medicaid. In addition, screening would be needed to General Information,” Centers for Medicare & Medicaid determine eligibility for marketplace premium tax credits as Services, October 31, 2017, innovation.cms.gov. well; the methodology for determining eligibility for both programs is already aligned (i.e., there is already a combined 10.Section 1115A(b)(2) gives the secretary of HHS authority application/eligibility determination process in Covered to select models to be tested, including “[a]llowing States to California). test and evaluate systems of all-payer payment reform for the medical care of residents of the State.” 25.Because it appears that Healthy California would use a centralized administrative infrastructure to administer the 11.Section 1332(b)(1) of the ACA, codified at 42 U.S.C. program (regardless of how it operates the eligibility and Section 18052(b)(1). For more information about 1332 waivers, financial claiming elements described here), cost-allocation see: “Section 1332: State Innovation Waivers,” Center for methodologies would be necessary to ensure that Medicaid Consumer Information and Insurance Oversight, CMS, dollars support only Medicaid beneficiaries and functions. www.cms.gov. The state already uses cost allocation for other health care 12.As of this writing, CSRs funding is not appropriated, so programs and federal approval is not required, although the the authors refer primarily only to premium tax credits when state should have auditable cost-allocation methodologies describing dollars available under a 1332 waiver. in place. OMB Circular A-87, The White House Office of Management and Budget, last updated May 10, 2004, 13.SB 562, “The Healthy California Act,” Introduced by www.whitehouse.gov. Senators Lara and Atkins, California Legislature, Amended May 26, 2017, leginfo.legislature.ca.gov. 26.HHS has the authority under Section 1115 to set a per capita cap on Medicaid spending as well as to place a global cap on total Medicaid expenditures by a state (as it has done California Health Care Foundation 18 in the past for Vermont and Rhode Island; those waivers are such amounts as the Secretary of Health and Human Services no longer in effect). HHS does not have authority to waive certifies are necessary to make the payments provided for the requirement that states pay their share of expenditures by this part, and the payments with respect to administrative or the Federal Medical Assistance Percentage claiming rules. expenses . . .”); Social Security Act 1841(g) (Part B/D: “The Therefore, even under a per capita or global cap established Managing Trustee shall pay from time to time from the Trust under a waiver, the state would continue to be required to Fund such amounts as the Secretary of Health and Human develop a methodology to track spending for the Medicaid- Services certifies are necessary to make the payments eligible population. provided for by this part, and the payments with respect to administrative expenses in accordance with Section 201(g)(1). 27.SB 562, Section 100630(b)(34)(B) specifies that in The payments provided for under part D, other than under addition to benefits enumerated earlier in the section, covered Section 1860D-31(k)(2), shall be made from the Medicare benefits for members shall include “all health care services Prescription Drug Account in the Trust Fund. The payments required to be covered under” Medi-Cal (and other federal provided for under Section 1860D-31(k)(2) shall be made from health programs) without regard to whether the member the Transitional Assistance Account in the Trust Fund.”). would otherwise be eligible for or covered by the program or source referred to. 35.Cf., Blue Cross Asso. v. Harris 664 F2d 806 (10th Cir. 1981). (HHS has the power to award Medicare demonstration 28.One particular area to monitor is long-term care due projects to other than standard intermediaries or statutorily both to its expense and because of potentially conflicting defined “carriers” and can contract with “public agencies.”) language in the current version of SB 562. To meet federal requirements, long-term services and supports would need 36.See, for example, Medicare Preferred Provider to be covered for all Medi-Cal recipients for whom the Organization Demonstration and M+C Alternative Payment services are medically necessary. How this would be funded Demonstrations authorized under 402(b). Government and administered is not clear. To the extent that long-term Accountability Office Report to the Ranking Minority Member, care services are no longer provided to Medicaid-eligible Committee on Finance, U.S. Senate: Medicare Demonstration beneficiaries who meet level of care criteria to qualify for Preferred Provider Organizations, GAO-04-960, available at: such services, a waiver of Section 1902(a)(10)(B) of the Social www.gao.gov. Security Act would be required to enable the state to use 37.Authorized under Section 1115A(b)(2)(B)(xi). Medicaid financing for coverage that does not meet all otherwise applicable Medicaid requirements. 38.Under the terms of the Maryland All-Payer agreement, Medicare will pay rates that are at least 6 percent less than the 29.Social Security Act Section 1902(a)(34). all-payer rates, and the demonstration is required to generate 30.ACA Section 1312(d)(3)(C). Medicare hospital inpatient savings of $330 million over five years. 31.See Title XXVII of the Public Health Service Act. 39.Including rules under IPPS, OPPS, Readmissions 32.This analysis focuses on SB 562’s primary goal of routing Reduction Program, Hospital Acquired Conditions Program, Medicare funding directly to the Healthy California fund, with Hospital Value Based Purchasing, EHR penalty. some discussion of the secondary option of having Medicare eligibles enroll in Medicare Parts A and B and a Medicare 40.Although it did not involve a single-payer or all-payer prescription drug plan under Part D. Although one of the system, the HealthPath Washington Medicare and Medicaid general goals of SB 562 includes eliminating premiums and Integration Demonstration did involve Medicare funds being cost sharing, the current draft of SB 562 does not discuss paid to the State of Washington under ACO authority. whether these goals would continue to apply if the Healthy 41.SB 562, Sections 100650(g)-(h). California board decides to enroll Medicare eligibles into Medicare Parts A, B, and D (except with respect to Part 42.SB 562, Sections 100650(c). D, where the current draft does contemplate engaging in 43.In fact, some federal laws essentially require (or did premium assistance at the low-income benchmark premium essentially require) certain individuals to enroll in Medicare. amount or a greater level of cost-effective premiums for those For example, individuals receiving Social Security or Railroad in Medicare Advantage Prescription Drug [MAPD] plans). SB Retirement Board benefits are automatically enrolled in 562, Chapter 7, Article 1, Section 100650(i). This analysis does Medicare Part A and Part B. Those eligible for Part A were not include discussion of other options that SB 562 does not strongly incentivized to enroll in Part A by the fact that the clearly contemplate (e.g., that Healthy California itself would former minimum essential coverage requirement was satisfied become a Medicare Advantage organization or prescription by Part A enrollment. drug plan sponsor). 44.SB 562, Section 100650(i) contemplates that Healthy 33.Susan Phillip and Marian Mulkey, “Key Questions When California will make a de minimis premium payment for Part Considering a State-Based, Single-Payer System in California,” D plan enrollment (at the low-income benchmark premium California Health Care Foundation, page 13, www.chcf.org. amount or, in some cases, a slightly higher premium amount 34.See Social Security Act 1817(h) (Part A: “The Managing for those enrolled in MAPD plans). However, Section 100650(i) Trustee shall also pay from time to time from the Trust Fund does not discuss making premium payments under Medicare Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 19 Parts A and B or making more than a de minimis premium 56.Standard Oil Co. of California v. Agsalud, 633 F.2d 760 payment for Medicare Advantage or Part D plans. Separately, (9th Cir. 1981), aff’d 454 U.S. 801 (1981). Section 100650(f) could be read as requiring the Healthy 57.29 U.S.C. Section 1144(b)(5). California board to decrease or eliminate Medicare premiums and cost sharing, but it is unclear (1) whether this section 58.Pub. L. No. 97-473 Section 301(b), 96 Stat. 2605, 2612 does indeed call for the decrease of elimination of Medicare (1983). premiums and cost sharing and, if so, (2) whether this proposal 59.The authors note that as of this writing, the Trump is part of the primary effort to redirect Medicare funds to administration has eliminated CSR payments to plans. Healthy California or if it is intended to be part of one of the However, eligible enrollees in enhanced (CSR) plans are still fallback plans to keep Medicare intact. charged lower cost sharing for services as they are legally 45.Note also that although 402(b) waivers address only entitled to these cost reductions. those Medicare requirements relating to payments to 60.Section 1312(c)(1) of the Patient Protection and ACA providers (making it unlikely that this Section 402 can be used (P.L. 111-148). to waive other Medicare requirements, including those dealing with eligibility and cost sharing), more flexibility exists in the 61.Funding must come from outside of the insurers in the language of Section 1115A, particularly via its authorization of marketplace to reduce premiums, because if the funding came all-payer payment models. solely from the insurers participating in the marketplace it would not have the intended effect of reducing premiums. It 46.42 U.S.C. Section 1395b–1(a)(1)(B). is permissible to tax all plans and include marketplace plans, 47.Section 1115A(b) of the Social Security Act. For more although that would reduce the amount of savings generated. information about 1115A authority and the CMS Innovation 62.The federal pass-through amounts are based on the Center, see “About the CMS Innovation Center,” Centers total expected spending on reinsurance, and in order to for Medicare & Medicaid Services, June 23. 2017, achieve federal savings, some state spending is necessary innovation.cms.gov and “State Innovation Models Initiative: to lower premiums and thus achieve savings. To date, states General Information,” CMS.gov: Centers for Medicare & have received different levels of federal support for their Medicaid Services, October 31, 2017, innovation.cms.gov. programs under the approved waivers. For example, Alaska 48.Although telehealth, home visit, and skilled nursing received about 80 percent of the total reinsurance program facility benefits are existing Medicare benefits, these waivers funding and Oregon an estimated 33 percent under their 1332 relax the rules associated with each benefit to expand and waivers. modify these benefits. For example, Medicare telehealth 63.Deficit neutrality under 1332 waivers is calculated by benefits were traditionally limited to rural settings, but this assessing the effect on the federal deficit; increasing the waiver permits Medicare to cover nonrural uses of telehealth. enrollment in premium tax credits would increase federal See “Benefit Enhancements” section at: innovation.cms.gov. spending, www.federalregister.gov. 49.See 42 CFR Section 422.102. 64.See SB 4, approved by the governor October 9, 2015 50.Medicare Managed Care Manual, Ch. 4, Section 30.4 (leginfo.legislature.ca.gov) and SB 75, Section 34, approved includes a list of services ineligible from being offered as by the governor June 24, 2015 (leginfo.legislature.ca.gov). supplemental benefits, which appears to include items and 65.Federal DSH audit rules define uninsured inpatient and services that Medicare has determined to be medically outpatient revenue as “Total annual payments received by the unnecessary (e.g., cosmetic procedures, pap smears/pelvic hospital by or on behalf of individuals with no source of third exams more frequently than 24 months). party coverage for inpatient and outpatient hospital services 51.See Medicare Managed Care Manual, Ch. 4, Section they receive. This amount does not include payments made 30.4 (“Items and Services Not Eligible as Supplemental by a State or units of local government, for services furnished Benefits”). to indigent patients.” See 42 C.F.R. 447.299(c)(12). Therefore, if the state pays capitated rates for the coverage expansion, 52.Phillip and Mulkey, “Key Questions.” the coverage expansion would appear to constitute a source 53.An employee benefit plan is “any plan . . . which . . . of third party coverage, which could interact with hospital- is . . . established or maintained by an employer . . . for the specific DSH caps, meaning that the state may be limited in purpose of providing for its participants . . . through the its ability to pay DSH at previous levels to individual hospitals. purchase of insurance or otherwise . . . medical, surgical, or The state’s overall DSH allotment would not be impacted, hospital care or benefits.” 29 U.S.C. 1002(l). however, and the state could redirect DSH funding to hospitals with room under their DSH caps. If the state simply 54.29 U.S.C. Section 1144(a); Shaw v. Delta Air Lines, 463 pays providers out of a pool of dollars dedicated to support U.S. 85, 96-97 (1983) (a law “relates to” an employee benefit services for people who are participating in the eligibility plan if it has “a connection with or reference to such a plan”). expansion, the state could avoid this result. In addition, the 55.Haw. Rev. Stat. Section 393-1 et seq. precise interaction with uncompensated care funding included in California’s existing 1115 waiver is dependent on program design and is not addressed here. California Health Care Foundation 20 66.In that proposal, the state had planned to offer mirror 77.For example, Professor Edward Zelinsky argued that the plans with the same issuers providing the same benefits, cost fact that Healthy San Francisco permits employers to make sharing, and networks and meeting all QHPs. The primary a payment to the city in a way that yields benefits to their difference would have been that undocumented individuals employees (see previous footnote) militates in favor of ERISA eligible under the 1332 waiver would not be eligible for preemption and not against it — because the employers premium tax credits or CSRs. California’s December 16, are essentially buying an ERISA plan from the city. Edward 2016, Section 1332 proposal is available at: www.cms.gov. Zelinsky, Golden Gate Restaurant Association: Employer To expand Covered California coverage to undocumented Mandates and ERISA Preemption in the Ninth Circuit (Cardozo immigrants, California sought a waiver of Section 1311(d) Sch. of Law, Jacob Bums Inst. for Advanced Legal Studies, (2)(B)(i) of the ACA, which prohibits exchanges from making Working Paper No. 219, 2008). available any health plan that is not a QHP. This authority 78.See Retail Industry Leaders Ass’n v. Fielder, 475 F.3d 180 would have permitted the state to offer mirrored health plans (4th Cir. 2007) (finding a Maryland statute to be preempted through the exchange to the target population. The waiver of where it required certain large employers to spend either this provision is necessary due to the requirement that QHPs 8 percent of total payroll costs on employee health insurance are only available to qualified individuals (Section 1312(a)), a or pay the shortfall to the state; the fact that the “pay” option term that can only refer to a “citizen or national of the United yielded no benefit for employers made the law tantamount States or an alien lawfully present in the United States” as to an impermissible direct requirement that employers spend specified in Section 1312(f)(3) of the ACA. Such a waiver 8 percent of total payroll on employee health insurance). would not be needed for the Medicaid eligibility expansion described above. 67.This proposal does not anticipate that undocumented consumers would be permitted to access tax credits to buy into the public option. 68.The Medicaid statute requires states to establish a single state agency to administer their Medicaid programs (See Social Security Act Sections 1902(a)(4) and (5) and 42 C.F.R. 431.10). Depending on how a public option is designed, the single state agency could remain DHCS, which would execute a memorandum of understanding with Covered California. Or, the single state agency could be switched to Covered California (perhaps with memoranda of understanding back to DHCS for purposes of services for other populations). 69.It is assumed that different Medicaid MCOs would participate in different parts of the state. 70.ACA Section 1301(a)(1)(C). 71.A challenging state-level issue, would be how to maximize participation by current public plans, including County Operated Health Systems, some of which are not currently state licensed for Medi-Cal. This and other potential issues are beyond the scope of this paper. 72.ACA Section 1312(d)(3). 73.CMS, Frequently Asked Questions on Exchanges, Market Reforms, and Medicaid, question 14, (2012), www.cms.gov. 74.Golden Gate Restaurant Ass’n v. City & County of San Francisco, 546 F. 3d 639 (9th Cir. 2008). 75.Traits gleaned from Golden Gate Restaurant Ass’n v. City & County of San Francisco. 76.Under the Healthy San Francisco program, when employers choose the “pay” option, their covered employees receive either discounted services under the program or city- managed medical reimbursement accounts, which yield an indirect benefit to the employers. San Francisco, CA, ADMIN. CODE Section 14.1(b)(7) (2006); ESR Reg. 4.2(a). Understanding the Rules: Federal Legal Considerations for State-Based Approaches to Expand Coverage in California 21