Proposed regulations have just been released for a new federally-funded program that may be of great interest to sophisticated hospital or physician networks interested in competing directly with insurance companies in 2014.

Section 1322 of the Patient Protection and Affordable Care Act (PPACA) directed the Department of Health and Human Services (HHS) to implement the Consumer Operated and Oriented Plan (CO-OP) program to foster the creation of nonprofit health insurance issuers, which would offer plans under the Affordable Insurance Exchanges (Exchanges) by Jan. 1, 2014.  On July 18, 2011, the Center for Medicare and Medicaid Services (CMS) published its proposed regulations under PPACA. Comments on the proposed regulations will be accepted through Sept. 16, 2011. 

General Provisions

The proposed CO-OP regulations foster creation of new nonprofit health insurance issuers.  Under the CO-OP program, Start-Up Loans and Solvency Loans (Loans) will be awarded to CO-OP groups for the purposes of CO-OP development and meeting state solvency requirements. The Loans are awarded to encourage the development of CO-OPs and do not require security, collateral or guarantees - only a feasible business plan. Under the regulation, CO-OP programs may apply to receive loans to help fund start-up costs and to meet the solvency requirements of the state in which the CO-OP issues health plans. The proposed regulation defines a "Start-Up Loan" as a loan provided by CMS to a CO-OP for costs associated with establishing the CO-OP. A "Solvency Loan" means a loan provided by CMS to a loan recipient in order to meet State solvency and reserve requirements.

Importantly, several features of the proposed regulations and commentary reflect awareness that providers who are willing to purchase their own product and supply a service network for other like-minded consumers may be among the most advantaged of potential applicants. The proposed regulation implements Section 1322 by excluding certain parties from CO-OP loan eligibility. The following are not eligible to apply for and receive a loan under the CO-OP program: (1) pre-existing insurance issuers; (2) trade associations whose members consist of pre-existing issuers; (3) entities related to pre-existing issuers; (4) predecessors of pre-existing issuer or related entity; and (5) state or local governments. All others, including providers, are eligible to receive CO-OP Loans.

CO-OP Governance

The proposed regulation directs that CO-OPs must meet certain governance requirements.  The regulations provide for a Formation board, which is defined to mean the initial board of directors of the applicant or loan recipient before it has begun accepting enrollment and had an election by the members of the organization to the board of directors. Further, the regulations require an Operational Board, which is defined to mean the board of directors elected by the CO-OP members or insurance policy beneficiaries after it has begun accepting enrollment. The proposed regulations require that the CO-OP operate under strict ethics, conflict of interest, and disclosure standards and show a strong consumer focus including timeliness, responsiveness, and accountability to members.

In order to meet the governance standards, the proposed regulation provides that the Operational Board elections must occur within one year from the date the CO-OP provides insurance coverage to a Member. The regulation specifies a Member to mean an individual covered under health insurance policies issued by a loan recipient. Operational Board directors must be elected by a majority of the vote of the CO-OP's members. Member organizations have one vote in elections of the directors for the CO-OP's Operational Board. Finally, the regulations provide that the Operational Board elections must be contested so that there are more candidates than vacant positions. 

Once elected, the proposed regulation requires that the majority of voting directors on the Operational Board must be CO-OP Members. Each voting director may only receive one vote.  Further, each director must meet ethical, conflict-of-interest, and disclosure standards including that the director is acting in the sole interest of the CO-OP.

Loan Terms for Start-Up and Solvency Loans

The proposed regulation specifies Loan repayment period and use.  The repayment period for Start-Up Loans is five years following the drawdown of Start-Up Loan funds. The repayment period of Solvency Loans is 15 years following the drawdown of the Solvency Loan funds. Under the regulation, CMS may change the Loan terms, including repayment periods, if CMS determines that the CO-OP is unable to repay the Loans as a result of: (1) State reserve requirements; (2) State solvency regulations; or (3) Requisite surplus note arrangements; or (4) Without compromising coverage stability, member control, quality of care, or market stability.

The Loan interest rates will be determined based on the date of the award. Non-recourse financing at the federal rate will be accrued starting from the date of Loan drawdown.

More information about the potential for provider-sponsored CO-OPs and a simplified guide to understanding the program can be found by clicking here.