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Watchdog: CMS is giving 4 CO-OPs' finances extra attention

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The Centers for Medicare & Medicaid Services (CMS) has taken formal action in response to concerns about the finances of four of the new nonprofit, member-owned CO-OP health plans, according to the U.S. Department of Health and Human Services Office of Inspector General (HHS OIG).

CMS, an arm of the U.S. Department of Health and Human Services (HHS), has also given two CO-OPs formal warnings about low enrollment levels, HHS OIG officials say in a new report on the CO-OP program. HHS OIG is a watchdog agency that keeps tabs on HHS.

In related news, the Center for Consumer Information & Insurance Oversight (CCIIO)the arm of CMS in charge of programs that affect the commercial health insurance market, has posted the first draft of a guidance manual aimed at CO-OPs and CO-OP regulators.

The Patient Protection and Affordable Care Act of 2010 (PPACA) provided billions of dollars in startup loan funding for the Consumer Operated and Oriented Plan (CO-OP) carriers. Drafters of the law complicated CO-OP finances by forbidding the member owners from getting cash from traditional health insurers, or from ever selling the companies. The PPACA restrictions have sharply limited the CO-OPs’ ability to get cash from conventional investors.

A CO-OP that operated in Iowa and Nebraska shut down in late 2014, and a CO-OP in Louisiana has announced plans to shut down in December.


Maine Community Health Options, the CO-OP in Maine, earned $5.8 million in net income for 2014 on $168 million in premium revenue, and it ended 2014 with 39,742 enrollees, compared with original enrollment projections of 15,486.

The 21 other CO-OPs that were still in business at the beginning of the year all lost money in 2014, with net losses ranging from about 2 percent of premium revenue, for the CO-OP in Montana, to more than 100 percent of premium revenue for the CO-OPs in Arizona, Connecticut, Illinois, Maryland, Massachusetts, Michigan, and Tennessee, and for one of the CO-OPs in Oregon, according to HHS OIG officials.

See also: Inspectors insist CO-OPs are policed

Many companies lose money during their first year of operation, but 13 of the CO-OPs ended 2014 with far fewer enrollees than they had hoped, and five ended up with less than 10 percent of the enrollment levels originally projected.

Poor performance “might limit the ability of some CO-OPs to repay startup and solvency loans and to remain viable and sustainable,” HHS OIG officials conclude.

For new insurers, unexpectedly fast growth can also be a risk factor. HHS OIG officials found that, like the CO-OP in Maine, the CO-OP carriers in New York, South Carolina and Wisconsin all ended up with enrollment that was at least 200 percent of the originally projected enrollment figure. The New York CO-OP ended up with more than five times as many enrollees as it had expected.

The CO-OP manual

In the new draft CO-OP guidance manual, CCIIO officials have focused mainly on monthly, quarterly and semi-annual reporting rules; the quarterly funding disbursement schedule; and executive compensation rules.

See also: Analysts: Traditional health players pricing more defensively

The drafters have included space for sections on governance, program monitoring and loan agreement administration but have not yet posted the content for those sections.

The drafters have posted a section on risk-based capital (RBC) requirements.

Insurance regulators use the RBC system to try to compare insurers’ financial resources on an apples-to-apples basis. Insurers get the most credit for having assets stored in what regulators classify as safe vehicles, such as cash or Treasury securities, and less for having what regulators classify as relatively high-risk vehicles, such as ordinary common stock.

Section 7.2(b) of the CMS CO-OP loan agreement requires a CO-OP to have an RBC level equal to at least 500 percent of the level that would normally trigger action by a state’s insurance regulators, CCIIO officials say in the draft manual.

“If a CO-OP falls more than 10 percent below this level, of 450 percent of RBC, the CO-OP is out of compliance with Section 7.2(b) of the loan agreement,” officials say. 

See also: Failed health plan had $2,400 in unpaid claims per enrollee

If CMS thinks a CO-OP with an RBC level under 450 percent can resolve its problems, CMS can let the CO-OP enter into an improvement period, but, otherwise, non-compliance with the minimum RBC requirement could become an “event of default,” officials say.

A CO-OP that believes its RBC level will fall below 450 percent should tell CMS as soon as possible, and it should send CMS a corrective action plan within 30 days after sending the low-RBC-level notice, officials say.

Officials do not say how CMS will proceed if a CO-OP appears to be incapable of resolving its problems.

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