Final Rule for CO-Ops – “A New Competitive Presence” In The Insurance Marketplace
Monday, December 12, 2011

The Centers for Medicare and Medicaid Services (CMS) released the Final Rule produced by the Department of Health and Human Services (HHS) to establish the Consumer Operated and Oriented Plan (CO-OP) Program under Section 1322 of the Patient Protection and Affordable Care Act (PPACA) on December 8, 2011.

The CO-OP program is designed to foster the creation of new consumer-governed, private, nonprofit health insurance issuers, known as CO-OPs, that will offer plans under the Affordable Insurance Exchanges (Exchanges). HHS hopes that the CO-OP Program will improve the quality and cost of integrated care by creating “a new competitive presence” in the insurance marketplace.

HHS made noteworthy modifications to the proposed rule in an effort to further these goals and to ensure the flexibility for and improve the potential viability of the CO-OP Program by making it easier for larger employers to participate, recognizing provider sponsorship in governing the formation and transition boards, and ensuring CO-OPs will be operated by participants who are truly “new” to the market. 

“Substantially All” Requirement 

The Final Rule confirms that many larger employers will be able to participate in CO-OPs by permitting up to one-third of all CO-OP contracts to be purchased by such large employers. It provides that Section 1322’s requirement that “substantially all” health insurance issued by the CO-OP is placed in the individual and small group markets is satisfied where two-thirds of its contracts are in those markets. The Final Rule confirms also that the two-thirds standard applies to all of the activities in the CO-OP, an interpretation that HHS believes properly encourages providers who may want to offer a CO-OP option to their employees to participate in CO-OP provider networks. 

In response to concerns regarding extensive State licensure requirements and in an attempt to provide flexibility for and ensure the viability of CO-OP providers, the Final Rule significantly extends the timeline when CO-OPs are required to be offering qualified health plans (meeting the “substantially all” requirement). As a result of this change, a loan recipient will now have two years from the solvency loan draw down dates to begin providing health care coverage in the Exchanges and to meet all minimum CO-OP requirements

Sophisticated provider organizations and small business organizations have shown significant interest in CO-OP formation. These entities are strong applicants as they are, according to HHS, “likely to be viable [as CO-OPs] because of their private support, healthcare experience, and business expertise.” 

CO-OP Governance 

The Final Rule extends the transition period from the formation to the operational board from one to two years after the CO-OP enrollment begins, permits the staggered election of the operational board, and permits the formation board to fill its vacancies, without a contested election. Additionally, providers are prohibited from composing a majority of the CO-OP board of directors unless, as will sometimes be the case, the provider-board members purchase the product themselves, in which case they can serve as board members in their capacity as CO-OP members. These governance modifications acknowledge the reality that efficient and experienced governance of a CO-OP will permit, rather than hinder, a consumer-focused initiative. 

Eligible Participants and Sponsors 

Under the proposed rule, the following were listed as not eligible to apply for or receive a loan under the CO-OP program: (1) pre-existing insurance issuers; (2) trade associations whose members consist of pre-existing issuers; (3) entities related to pre-existing issuers; (4) predecessors of pre-existing issuer or related entity; and (5) organizations sponsored by a State or local governments. The Final Rule addressed concerns regarding loopholes in the proposed rule that would permit pre-existing issuer influence and control over CO-OPs by modifying the eligibility requirements to exclude from participation, in addition the entities listed in the proposed rule: (1) foundations established by a pre-existing issuer; (2) holding companies that control pre-existing issuers; (3) organizations sponsored by pre-existing issuers; and (4) organizations that receive more than 25% of their total funding (not including loans under the CO-OP program) from pre-existing issuers. 

The Final Rule clarifies that private non-profit hospitals and physician hospital organizations, or other organizations that receive financial support from a State or local government are not instrumentalities of a State or local government, and are therefore eligible CO-OP participants, so long as: (1) the entity is not a government organization under State law; (2) no employee of State or local government acting in his or her official capacity serves as a senior executive; and (3) State or local government employees acting in their official capacities do not comprise the majority of the CO-OP board of directors. Additionally, the Final Rule permits applicants to receive up to 40% of CO-OP funding from a State or local government without being considered an instrumentality of such government entity. 

For more background on CO-OPs, see the July 25, 2011 and Aug. 3, 2011 Barnes & Thornburg LLP Healthcare Department Alerts, “Regulations Issued for Funding of Regional Insurance Program Under PPACA” and “U.S. Announces Process for $3.8B in CO-OP Funds.” Additional information about provider-sponsored CO-OPs and a simplified guide to understanding the program can be found by clicking here. 


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