By Taylor Burke

Background

The Centers for Medicare and Medicaid Services (CMS) issued its final rule implementing the Consumer Operated and Oriented Plan (CO-OP) Program on December 13, 2011.^[1] This rule finalizes the notice of proposed rulemaking (NPRM)^[2] issued by CMS on July 20, 2011, and takes into consideration the numerous comments received during the public notice and comment period ending September 16, 2011. Established by §1322 of the Affordable Care Act (ACA), the CO-OP program develops and creates new private, non-profit health insurance issuers to offer qualified health plans (QHPs) through state Exchanges as an alternative for consumers to traditional, for-profit plans. CO-OP plans are consumer-run, and accountable to their individual membership in a way that most traditional for-profit health plans typically are not. The ACA requires HHS to award funds for start-up loans and solvency grants to eligible CO-OP applicants in order to enable each state to have at least one CO-OP. In making these awards, HHS must take into account recommendations from the Advisory Board^[3] created by ACA §1322(b)(2). Two previous Implementation Briefs provided an overview of the CO-OP program and set forth the key provisions of the proposed rule; this update describes significant changes to the proposed rule as codified in the final rule.

Recent Agency Action: Final Rule

“Substantially All” Requirement

The ACA requires that “substantially all” health insurance issued by a CO-OP must be in the individual and small group markets. The NPRM proposed that to meet this requirement, at least two-thirds of all insurance contracts issued by a CO-OP must be QHPs offered in the individual and small group markets, and furthermore proposed that the two-thirds threshold must be met by the CO-OP no later than 54 months following initial draw-down of a Start-up Loan or no later than 18 months following initial draw-down of a Solvency Loan. The final rule maintains the two-thirds requirement as calculated by contracts or policies issued as opposed to total lives covered, but it significantly extends the time period for compliance with this requirement to no later than five years following initial draw-down of a Start-up Loan or no later than three years following initial draw-down of a Solvency Loan.^[4]

CO-OP Governance

The final rule made several CO-OP governance modifications from the proposed rule, acknowledging that experienced and efficient governance of CO-OPs will facilitate their success. First, while the final rule maintains that the first elected directors of the CO-OP’s operational board must be in place no later than one year after enrollment begins, the final rule extends the time period to two years after enrollment begins for the entire operational board to be elected and allows for staggered elections.^[5] Second, the final rule permits the operational board to fill vacancies mid-term due to death, resignation or removal without a contested election.^[6] And third, the final rule clarifies that only those CO-OP members over the age of 18 may vote in operational board seat elections.^[7]

Eligible Participants and Sponsors

To address concerns that the proposed rule left certain loopholes allowing for pre-existing issuer influence and control over CO-Ops, the final rule added certain entities to the list of those excluded from participation in the CO-OP program. In addition to the entities excluded from participation as listed in the proposed rule, the final rule adds the following excluded groups: (1) foundations established by a pre-existing issuer; (2) holding companies that control pre-existing issuers; (3) trade associations comprised of pre-existing issuers; (4) organizations sponsored by pre-existing issuers; and (5) organizations that receive more than 25% of their total funding (not including loans under the CO-OP program) from pre-existing issuers or foundations, holding companies or trade associations of the type described above.^[8]

Additionally, the final rule clarifies that physician-hospital organizations, private non-profit hospitals or other organizations that receive funding from a state or local government are not considered instrumentalities of the state or local government, and are therefore eligible to participate in the CO-OP program, provided that: (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 compromise the majority of the CO-OP board of directors. The final rule also permits CO-OP loan 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.^[9]

Ethics and Conflict of Interest Protections

The proposed rule included strong ethics and conflict of interest protections that a CO-OP and its board of directors must follow. In addition to these provisions, the final rule added the requirement that each member of the board of directors shall act in the interests of the CO-OP’s local geographic community as appropriate.^[10]

Start-up and Solvency Loans

The proposed rule allowed some flexibility for the modification of certain loan terms if the loan recipient was unable to pay. The final rule reflects that a loan modification or workout may be executed if HHS determines that a loan recipient is unable to repay its loan under the original agreement without destabilizing the loan recipient’s target market.^[11]

Additionally, the final rule adds provisions clarifying that the interest rate for start-up loans “is equal to the greater of the average interest rate on marketable Treasury securities of similar maturity minus one percentage point or zero percent”^[12] and the interest rate for solvency loans “is equal to the greater of the average interest rate on marketable Treasury securities of similar maturity minus two percentage points or zero percent.”^[13] The final rule also codifies the requirement in the ACA that if a loan recipient fails to meet any of the provisions of the CO-OP program or its loan agreement and has not corrected such failure within a reasonable period of time as established by CMS, the organization must repay an amount equal to 110 percent of the total loans received plus interest.^[14]

Deeming of CO-OP QHPs

For the ease of Exchange administration, the proposed rule stated that health plans offered by a CO-OP loan recipient may be deemed certified as a CO-OP QHP to participate in the Exchange for up to ten years following the life of any loan awarded. The final rule scales back this flexibility, specifying that loan recipients are deemed to be certified to participate in the Exchange for two years and may be re-certified every two years for up to ten years following the life of their loans.^[15]