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Implementing Health Reform: Insurance Cooperatives



July 19th, 2011
by Timothy Jost

The exchange and the reinsurance, risk adjustment, and risk corridor (3R) proposed regulations released by HHS on July 11 were only the first two in a series of exchange-related notices of proposed rulemakings (NPRMs) that will be rolled out in the coming weeks and months.  A third NPRM dealing with the Consumer Operated and Oriented Plan (CO-OP) program was released on Monday, July 18. This post describes it briefly.

Cooperatives of various sorts are very common throughout the United States, particularly in rural areas.  Cooperatives brought electricity and telephone services to large parts of the United States, while agricultural marketing and supply cooperatives continue to assist farmers to increase their market power in buying and selling agricultural products.  Credit unions provide an alternative to commercial banking in many American communities, while food co-ops provide an alternative to chain grocery stores.

Insurance cooperatives were once common in the rural United States.  During the 1930s and 1940s, the New Deal Farm Security Administration encouraged the formation of health cooperatives, which eventually served 600,000 rural Americans.  The movement was opposed by organized medicine, however, and after the federal government removed its support in 1947, the cooperatives collapsed.  Only a few health insurance cooperatives continue to exist, primarily in Washington, where the Group Health Cooperative of Puget Sound is perhaps the best-known exemplar, and in the upper Midwest, where several cooperatives survive.

As the public option debate festered in the summer of 2009, Senator Kent Conrad of North Dakota proposed the addition of a health insurance cooperative program to what became the Affordable Care Act to provide a different alternative to standard for-profit health insurance.  The public option concept was eventually dropped from the legislation, but the cooperative idea stayed in and was adopted as section 1322 of the final ACA, which creates “nonprofit health insurance issuers,” referred to here as cooperatives. The hope is that nonprofit cooperatives will be accountable and responsive to their consumer members and model better coordination of care, while introducing competition into local and state markets.  The goal is to establish at least one cooperative in every state.  The program includes $3.8 billion for start-up loans over the next five years.

Under its statutory authority, HHS appointed a Federal Advisory Board on the CO-OP program which held a number of hearings and issued a report in April.  This NPRM is the next step in the process, which, it is hoped, will begin to make start up loans available for health insurance cooperatives late this year or early next.

What The Regulations Focus On

The ACA provides a fairly detailed set of standards for the new cooperatives.  The regulations primarily elaborate on three issues:  Who is eligible to form a cooperative?  How should cooperatives be governed?  And, on what terms will federal funds be loaned to the cooperatives?

Who can form cooperatives? The ACA prohibits existing health insurers from morphing into cooperatives.  Specifically, it prohibits an organization from participating in the CO-OP program “if the organization or a related entity (or any predecessor of either) was a health insurance issuer on July 16, 2009.”  A cooperative may also not be sponsored by state or local government.

The NPRM interprets the prior insurer limitation very technically and narrowly.  Thus, the preamble to the rule would permit an organization to apply for the CO-OP program event though the applicant was:
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  • Sponsored by a nonprofit that was not an issuer but controlled an existing issuer if the existing issuer did not share the same chief executive or board of directors with the applicant organization;
  • A self-funded, church, or Taft-Hartley plans; or
  • 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

On the other hand, the NPRM proposes that state university medical centers and their hospitals and physician practices should not be able to sponsor a cooperative.

How should cooperatives be governed? The ACA requires that the governing board of a cooperative be elected by the members.  That creates a chicken and egg problem since a cooperative cannot have any members until it is formed, but needs a governing board to form.  The NPRM permits the creation of a “formation board” to get the cooperative under way, but requires the election of an “operational board” by the members of the cooperative no later than one year after the organization begins to provide coverage.  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.  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 cooperative in each state must be for qualified health plans offered in the individual and small group market.  This will allow provider sponsors of cooperatives to enroll their own employees and also allow cooperatives to participate in Medicaid and CHIP.   Each cooperative must at least offer one silver and one gold plan in the individual market in the region in which it is licensed to provide coverage.  Exchanges must certify qualified cooperatives to participate.

How will federal funds be loaned to coopearatives? The program will offer a total of $3.8 billion in loans, of which approximately $600 million will go to start-up loans to help cooperatives get underway and $3.2 billion for solvency loans to assist cooperatives in meeting state solvency requirements. Start-up loans must be paid back within five years and solvency loans within fifteen, but repayment need not begin until a cooperative actually enrolls members.  To satisfy state solvency requirements, the obligation of a cooperative to repay loans is secondary to its obligation to pay claims and maintain reserve requirements under state law.  Cooperatives are prohibited from converting to non-profit or for-profit status.

Insurance markets throughout the United States lack competition.  The concept of a member-owned and oriented nonprofit cooperative alternative is attractive.  There has apparently been quite a bit of interest expressed in this program.  Whether the loans provided under this program will provide enough incentive to get cooperatives organized remains to be seen.  The fact that the NPRM states that HHS expects that only 60 percent of the start-up loans and 65 percent of the solvency loans will be repaid underlines that getting these alternative organizations underway is not going to be easy.

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1 Response to “Implementing Health Reform: Insurance Cooperatives”

  1. Jeff Goldsmith Says:

    There is no detectable support for this idea in the health system. As Tim suggests, it was a fig leaf to cover the dropping of the public option. Most of the money allocated to support CO-OP health plans will go unused. The best possible outcome would be to amend ACA and broaden this provision of the law to support starting up provider-sponsored health plans in communities where 2 or more plans have more than two-thirds of the commercial (group and non-group market). The bias toward nonprofit enterprises in ACA, not just in this provision, was palpable and troublesome, and the governance requirements for CO-OPs virtually assure limited interest. This is an obsolete health plan model.

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