CO-OP Health Plans: More Competition, New Choices for Consumers and Small Business
Healthcare.gov, July 18, 2011
On July 18, the U.S. Department of Health and Human Services (HHS) proposed standards for establishing CO-OP health insurance plans.
A CO-OP is a private, nonprofit organization that sells health insurance coverage, like a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO), and will be subject to the same rules as other health insurers.
Unlike many health insurance companies today, a CO-OP:
* Gives its enrollees a say in their health plan. CO-OP members elect the board of directors, a majority of whom must also be enrolled in the CO-OP health plan.
* Uses profits to benefit enrollees. CO-OPs are required to use their profits to lower premiums, improve health benefits, improve the quality of health care, expand enrollment or otherwise contribute to the stability of coverage for members.
* Educates enrollees about the plan. Because a CO-OP relies on its enrollees to help decide the direction of the plan, communication about key features of the plan will be a high priority.
HHS is proposing standards for establishing CO-OPs, and for qualifying for $3.8 billion in loans to help start-up and capitalize these new health plans. All CO-OP loans must be repaid with interest and loans will only be made to private, nonprofit entities that demonstrate a high probability of becoming financially viable.
Establishment of Consumer Operated and Oriented Plan (CO-OP) Program
Patient Protection and Affordable Care Act
Department of Health and Human Services, July 18, 2011
Subpart F–Consumer Operated and Oriented Plan Program
§ 156.500 Basis and scope.
This subpart implements section 1322 of the Affordable Care Act by establishing the Consumer Operated and Oriented Plan (CO-OP) program to foster the creation of new consumer-governed, private, nonprofit health insurance issuers, known as “CO-OPs.” Under this program, loans are awarded to encourage the development of CO-OPs. Applicants that meet the eligibility standards of the CO-OP program may apply to receive loans to help fund start-up costs and meet the solvency requirements of States in which the applicant seeks to be licensed to issue CO-OP qualified health plans. This subpart sets forth the governance requirements for the CO-OP program and the terms for loans awarded under the CO-OP program.
§156.520 Loan terms.
(a) Overview of Loans.
(1) Applicants may apply for the following loans under this section: Start-up Loans and Solvency Loans.
(2) All loans awarded under this subpart must be used in a manner that is consistent with the FOA, the loan agreement, and all other statutory, regulatory, or other requirements.
(3) Solvency Loans awarded under this subsection will be structured in a manner that ensures that the loan amount is recognized by State insurance regulators as contributing to the State-determined reserve requirements or other solvency requirements (rather than debt) consistent with the insurance regulations for the States in which the loan recipient will offer a CO-OP qualified health plan.
(b) Repayment period. The loan recipient must make loan payments consistent with the approved repayment schedule in the loan agreement until the loan is paid in full consistent with State reserve requirements, solvency regulations, and requisite surplus note arrangements. Subject to their ability to meet State reserve requirements, solvency regulations, or requisite surplus note arrangements, the loan recipient must repay its loans and, if applicable, penalties within the repayment periods in paragraphs (b)(1), (2), or (3) of this section.
(1) The contractual repayment period for Start-up Loans and any associated penalty is five years following each drawdown of loan funds consistent with the terms of the loan agreement.
(2) The contractual repayment period for Solvency Loans and any associated penalty is fifteen years following each drawdown of loan funds consistent with the terms of the loan agreement.
(3) Changes to the loan terms, including the repayment periods, may be executed if CMS determines that the loan recipient is unable to repay the loans as a result of State reserve requirements, solvency regulations, or requisite surplus note arrangements or without compromising coverage stability, member control, quality of care, or market stability. In the case of a loan modification or workout, the repayment period for loans awarded under this subpart is the repayment period established in the loan modification or workout. The revised terms must meet all other regulatory, statutory, and other requirements.
The proposed rule has now been released for the establishment of CO-OPs under the Affordable Care Act. The CO-OPs are private, nonprofit organizations that sell insurance, like HMOs and PPOs, under the same rules as the other private insurers. The most important difference is that a CO-OP is controlled by a board of directors that is elected by the individuals enrolled in the CO-OP.
These are new organizations, and, as such, require a new infusion of capital to meet the reserve requirements for future claims. These are the same requirements that have been established by the states for other private insurers already competing in the marketplace.
Private, for-profit insurers have the capability of establishing start-up costs and solvency reserves by selling shares of stock. Since the CO-OPs are nonprofit, they don’t have this resource to tap. Recognizing this, the Affordable Care Act included provisions for government loans for start-up costs and other loans for solvency (reserve funds for future claims). It is important to understand that these are not grants but are loans that must be repaid, with interest, within five years for start-up loans and fifteen years for solvency loans.
Think about that. The CO-OPs are required to compete with the private insurers under the same terms, while having the additional requirement of paying back these loans. Since their only revenue source is premiums for the insurance they are selling, these loan costs that their competitors don’t have will have to be recovered through higher premiums. Under these terms, how could they possibly compete with the private insurers? It is no wonder that HHS anticipates a default rate of 35 or 40 percent on these loans.
There are many other issues. How long would it take to establish a critical threshold of enrolling enough members to create a viable entity? Since it is likely that the CO-OPs would be subject to adverse selection (enrolling a larger share of patients with greater health care needs), there would be further upward pressure on their premiums (death spiral) since current risk adjustment tools do not recover the full excess losses (as if health care is a “loss”).
There is also the possibility that states will rule that a reserve fund established by a loan does not qualify as a capital reserve, and for good reason. Another problem is that an unstable system of private and public plans with varying and ever changing eligibility requirements would make it very difficult for a CO-OP to maintain a stable patient population, sacrificing much of the benefits of the CO-OP model.
It’s too bad. CO-OPs should have offered us the opportunity to establish altruistic health care organizations. Instead, the politicians bent over backwards not only to keep the government out of these programs, but also to protect the private insurers’ marketplace by being sure that the CO-OPs were not allowed a fair playing field by saddling them with insurmountable debt.
We needed a seat at the table.