The U.S. Department of Health and Human Services (HHS) has proposed regulations for the Consumer Operated and Oriented Plan (CO-OP) program – an initiative that is supposed to create a new type of nonprofit, consumer-governed health insurer.

The CO-OP provision of the Patient Protection and Affordable Care Act of 2010 (PPACA) is supposed to create a federal program that will provide startup loans for the CO-OPs. If all goes asPPACA regs the provision authors hoped, the CO-OPs will begin selling qualified health plans through the new health insurance exchanges that are set to open for business in 2014.

PPACA bill negotiators added the CO-OP provision in an effort to bridge the gap between Democrats who wanted to create a single-payer, “Medicare for all program” or a Medicare-like “public option” that would compete with private plans, and Democrats who favored protecting the existing role of non-government health plans.

HHS officials say the department will provide two rounds of loans to help CO-OPs get off the ground.

  • $600 million in loans will go to help CO-OP organizers develop business models.
  • $3.2 billion will go to help CO-OPs that are in operation have enough capital on hand to cover unexpected claims.

HHS wants the loans to help CO-OPs meet the same solvency standards that apply to traditional for-profit insurance companies.

HHS is estimating a default rate of 40% for the planning loans and 35% for the solvency loans.

HHS would work out individualized repayment schedules for each loan, officials say. If a CO-OP had trouble making its payments, HHS would consider keeping the plan solvent to be more important than recovering the principal, officials say.

The startup loans would have to be paid back within 5 years and the solvency loans within 15 years. A CO-OP would not have to begin making payments until it had started enrolling members, officials say.

The CO-OP regulations would prohibit any entity that was selling insurance in 2009 from becoming a CO-OP, and a CO-OP would be prohibited from converting to for-profit status.

“This prohibition on conversions and sales to for-profit or non-consumer operated entities would ensure that loans awarded under this program are used to sustain program goals over time,” officials say.

In a conference call with reporters, Steve Larsen, deputy director for oversight at the Center for Consumer Information & Insurance Oversight (CCIIO), an arm of HHS’ Centers for Medicare & Medicaid Services (CMS), played down the importance of the cost estimates.

“There is that back-end estimate, for conservatism’s sake,” he said.

Although PPACA prohibits an existing insurer from becoming a CO-OP plan, HHS says an applicant could apply to start a CO-OP even if the applicant was:

  • Sponsored by a nonprofit that was not an issuer but controlled an existing issuer — as long as the applicant and the existing issuer had different chief executive officers and separate boards.
  • A self-funded, church or Taft-Hartley plan.
  • An organization that “purchased assets or services from a preexisting issuer in an arm’s length transaction where neither party was in a position to exercise undue influence over the other.”

HHS is proposing that state university medical centers and their hospitals and physician practices would not be able to sponsor a CO-OP plan.

HHS would permit the creation of a “formation board” to get the cooperative under way, but it would require the election of an “operational board” by the members of the cooperative no later than one year after the organization began to provide coverage.

Under the rule, the operational board must be elected by cooperative members on a one member-one vote basis and a majority of the voting board members must be members of the cooperative. The proposal requires that elections must be contested. Members must comply with strict conflict-of-interest and disclosure requirements to protect against insurance industry involvement and interference.

At least two-thirds of the health insurance policies and contracts issued by a CO-OP plan in each state would have to be for qualified individual and small group health plans.

Robert Zirkelbach, a spokesman for America’s Health Insurance Plans (AHIP), says AHIP is still reviewing the proposed regulations.

AHIP believes in principle that “there must be a level playing field where all companies providing insurance, including CO-OPs, are required to abide by the same rules and regulations,” Zirkelbach says.

Other CO-OP coverage from National Underwriter Life & Health: