Everyone is familiar with the local farmer’s market or grocery co-op; a group of people with a common business interest forming a market place for their goods or services. One of the hidden gems in the Health Care Reform legislation (PPACA) was the creation of regulations and start-up funding for Consumer Operated and Oriented Plan (CO-OP) program.

This has the potential to significantly change the health insurance market place landscape. Michael Meulemans, About.com Guide, has done a nice job of providing a high level overview of the CO-OP’s. 

How to Launch a Health CO-OP Plan

The Internal Revenue Service (IRS) has released on its website details on how people who want to set up a new type of nonprofit, member-owned health insurer a CO-OP plan can dot it. The means is through a 501(c)(29) entity.

The IRS this week released the instructions about how to do so.

The IRS describes the procedures organizers of qualified nonprofit health insurance issuers (QNHIIs) in IRS Revenue Procedure 2012-11. The IRS developed the revenue procedure to help with implementation of the Consumer Operated and Oriented Plan (CO-OP) program described in Section 1322 of the Patient Protection and Affordable Care Act of 2010 (PPACA).

Members of Congress added the CO-OP section to the PPACA in an effort to increase and differentiate the competition in the health insurance market after the public plan option was nixed.

Under the Consumer Operated and Oriented Plan (CO-OP) program, the ACA authorized $6 billion in grants and loans to support non-profit organizations in developing, marketing, and maintaining health insurance plans in the private marketplace. Given the failings of the rural private health insurance market where access is often limited to one or two plans, some have envisioned the CO-OP program as an opportunity for expanding access to affordable coverage in rural areas.

CO-OP Structure Details

To be treated as a qualified nonprofit health insurance issuer under the CO-OP program, the governance of the organization must be subject to a majority vote of members, and plans are required to maintain a strong consumer focus by ensuring accountability to plan participants.

CO-OP plans must be governed in ways that protect against insurance industry involvement, including the establishment of a code of ethics that precludes individuals with ties to the industry from serving on CO-OP boards. Any profit made by the organization must be used to lower premiums, improve benefits, or sustain programs intended to enhance the quality of health care delivered to members.

To increase cost efficiencies for qualified nonprofit health insurance issuers participating in the CO-OP program, the ACA allows for the establishment of private purchasing councils through which plans may enter into collective purchasing arrangements to procure items and services at a lower cost, such as health information technology, claims administration, and actuarial services. However, private purchasing councils are not permitted to engage in contract negotiations or rate setting with health care facilities or providers.

Price Advantage

In theory, if new CO-OP plans were able to constitute themselves so as to serve rural areas, they could help to alleviate problems endemic to rural health insurance coverage and health care delivery. To begin with, CO-OP plans might introduce greater competition in highly concentrated rural health insurance markets by offering better value. For example, some argue that because these plans would pay no brokers‟ fees and would face comparatively low overhead, they could enjoy premium pricing advantages of 8 to 10 percent over insurers offering similar coverage

The QNHIIs that participate in the CO-OP program must make “substantially all” of their sales to individuals and small groups taking advantage of the PPACA’s individual mandate. The QNHIIs in the CO-OP program are hoping to split $3.8 billion in federal PPACA CO-OP startup loans.

Revenue Procedure 2012-11 explains how the IRS will go about issuing determination letters and ruling on whether QNHIIs can become 501(c)(29) organizations.

A would-be QNHII should send a letter application and a Form 8718 determination letter request form to an IRS office in Cincinnati, officials say.

The application should include a copy of the QNHII’s by-laws, a balance sheet and other financial reports, and a narrative statement describing the QNHII’s past and proposed activities, officials say.

Organizers must promise that they abide by CO-OP program rules, such as rules that forbid QNHII’s from lobbying or participating in political campaigns.

Forecasting the impact of CO-OPs on the greater health insurance market is difficult at this point but given their advantages on price and non-profit status they could make big rural inroads to improved health care access.

HHS Drafts PPACA CO-OP Rules

The U.S. Department of Health and Human Services (HHS) has recently released 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 PPACA envisioned that 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” and other politicians who favored a more market-oriented approach.

The PPACA provided HHS with funding that will provide two rounds of loans to help CO-OPs get off the ground and operational for 2014. $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. According to National Underwriter, HHS wants the loans to help CO-OPs meet the same solvency standards that apply to traditional for-profit insurance companies.

Because this effort is innovative and therefore risky, it should not be a surprise that HHS is estimating a default rate of 40% for the planning loans and 35% for the solvency loans. Becuase of this HHS plans on a case-by-case basis to manage individualized repayment schedules for each loan.

The CO-OP provision of the PPACA is designed to create a federal program that will provide startup loans and will begin selling qualified health plans through the new health insurance exchanges that are set to open for business in 2014.

During the PPACA’s lengthy years-long negotiations the CO-OP provision was adeed in an effort to bridge the gap between Democrats who wanted to create a single-payer, “Medicare for all program” and other politicians who favored a more market-oriented approach.

The point of the loan repayment program is to create CO-OPs as similar entities with the same solvency standards that apply to traditional for-profit insurance companies.

HHS is estimasting 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.

CO-OPs have several provisions slated under the PPACA that create innovative health plan structures. These include the following:

• CO-OP regulations do not allow any entity that was selling insurance in 2009 from becoming a CO-OP,
• CO-OPs are also prohibited from converting to for-profit status,
• 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 allows 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.
• 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.