New Arizona CO-OP will receive many, many of these now, thanks to CMS. (AP Photo/U.S. Mint via Arizona Governor's Office)

Another pair of CO-OPs (Consumer Operated and Oriented Plans) received loans today from the the Centers for Medicare & Medicaid Services (CMS) under the health reform law, ratcheting up the count to 14, in as many states.

The loans Friday went to Compass Cooperative Health Network (CCHN) in Arizona and HealthyCT in Connecticut. 

Compass Cooperative Health Network received $93,313,233; it is sponsored by “prominent local experts in insurance, chronic disease coordination, use of health information technology to better coordinate care, and business startup,” CMS states. 

HealthyCT received $75,801,000, and is sponsored by the Connecticut State Medical Society (CSMS) and the CSMS-IPA (a statewide Independent Practice Association), and plans to offer high-quality, coordinated medical care with strong physician-patient relationships at its foundation. 

The CO-OP program offers low-interest loans to eligible nonprofit groups to help set up and maintain these issuers.

To date, a total of 14 non-profits offering coverage in these 14 states have been awarded almost $1.152 billion in loans, according to CMS. The U.S. Department of Health and Human Services (HHS) pledged over $3 billion (originally $6 billion) in grants and loans in the PPACA to assist in the establishment of nonprofit, member-run these health insurance issuers. Thus, CMS is about halfway through its grant process. 

CO-OPs were created by the Patient Protection and Affordable Care Act (PPACA) to encourage eligible new, innovative and consumer-responsive health insurance companies to increase competition in the individual and small business markets. 

Grants and loans are to be awarded no later than July 1, 2013. Beginning in 2014, CO-OPs will offer plans through the affordable insurance exchanges.

The PPACA restricts the grants and loans from influencing legislation or intervening in political campaigns, while net earnings must be used to improve quality, reduce premiums, or improve benefits to members, as a report by Milliman describes. Thus, to ensure CO-OPs are truly new entities, the health care reform law prohibits any state-licensed health insurance company that existed on July 16, 2009 from qualifying for the CO-OP program. 

CMS claims it will closely monitor CO-OPs to ensure they are meeting their program goals. To ensure strong financial management, CO-OPs are required to submit quarterly financial statements, including cash flow and enrollment data, receive site visits, and undergo annual external audits. 

But it will be a challenge, as some have noted.  

CO-OPs will most likely start with small enrollment; however, costly administrative systems and technology need to be in place from the beginning. Marketing will also be necessary to educate the public about the CO-OP.

Government funds are restricted, and can’t be used for marketing, as the Milliman paper, written in 2011 by Courtney R. White, a principal and consulting actuary with the Atlanta office, notes.

The CMS monitoring is concurrent with the financial and operational oversight by State insurance regulators. The CO-OPs are required to meet State and federal standards for qualified health plans to sell coverage through the Exchanges and the State’s Small Business Health Option Programs (SHOP Exchanges).

The largest loan has been to Freelancers Health Service Corp. in  New York with an award amount of  $174,445,000.

Freelancers Health is sponsored by Freelancers Union, an association of independent workers whose model is driven by a focus on providing high quality, consumer-oriented coverage and financial sustainability that emphasizes the use of patient-centered medical homes.    

But hospital and physician groups appear best situated to create CO-OPs because they hold the key to creating a competitive product, Milliman states in its healthcare reform briefing paper, Health Insurance Co-Ops: Challenges and Opportunities

One of the criteria for governmental approval is use of an integrated care model, which is easier for provider groups to achieve. For the other entities listed above, the more stakeholders that are involved the more likely the various missions and priorities of these stakeholders would diverge and make it difficult to create a single focus for a CO-OP. 

While these other entities already have a governance structure in place, they would still have to create or rent a network of providers, adding another layer of complexity and time to the CO-OP development.

“Historically, there has been no easy path to establishing a nonprofit health insurer. Establishing a CO-OP includes the added complexity of requiring some member involvement with the government, which is providing the largest source of capital,” Milliman’s paper stated.

 ”CO-OPs will promote competition and give consumers more health insurance choices,” stated Marilyn Tavenner, CMS Acting Administrator. “These new private nonprofit insurers will be run by consumers and are designed to offer individuals and small businesses more affordable, consumer-friendly and high-quality health insurance options.”

CO-OPs operate differently from traditional insurance companies. More than half of the Board of Directors must be the customers or members of the CO-OP, and all directors must be elected by a majority vote of the members, improving accountability and transparency. Profits gained by a CO-OP must go directly back to their enrollees, to be used to lower premiums, expand benefits, or improve quality.

Although “most of the insurance industry probably only briefly read this section and assumed there was a low probability of any CO-OPs actually emerging. As the implementation of exchanges gets closer and becomes a reality, CO-OPs may have a role in changing the health insurance paradigm,” Milliman’s paper on the subject said. 

Indeed, health insurance lobbyists and others in Washington, perhaps feeling the heat from potential competitors, have started privately criticizing these CO-OPs, their lack of expertise in the field of healthcare and their funding. The CO-OPs will compete directly with insurers selling products inside exchanges, as a report by Milliman states.

“I am not suggesting any particular issue there, but I do think the Federal government is pissing away quite a bit of money here,” said said one health insurance lobbyist.  ”I know it is a ‘loan,’ but I also know the Obama Administration expects that some of these will succeed and some will fail. I am not saying I smell a rat, but the Federal government is tossing $638 million in loans to some interesting groups and organizations in a quixotic quest to create a new and better health plan.”

Most recently, Republicans on the House Energy and Commerce Committee are asking for evidence that organizers of the new “CO-OP” program cooperative health insurers can pay back CO-OP startup and solvency loans.

The Republican committee leaders sent a letter asking for documents relating to the Consumer Operated and Oriented Plan (CO-OP) to  Tavenner, back in April.

A program table indicates that “the loan subsidy percentage, or expected losses percentage, is about 43% of the face amount of $7.25 billion for all the loans,” the Republican committee leaders say.

The expected loss ratio is higher than the 35% expected loss ratio that HHS  included in a proposed rule published in July 2011, the lawmakers say.

Allison Bell contributed to this report.