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CMS Plans to Help Health Insurance CO-OPs Attract Investment

By Kerry Young, CQ Roll Call

January 21, 2016 – Centers for Medicare and Medicaid Services (CMS) officials intend to make it easier for private firms to invest in the survivors among two dozen insurance cooperatives (CO-OPs) created through the Affordable Care Act. But a leader in the fledgling industry argues changing rules on a federal program that shifts funds among insurers would be more help.

About half of the new CO-OPs have failed. Many Republicans say that Congress never should have authorized the Centers for Medicare and Medicaid Services to spend $2.4 billion in taxpayer-funded loans to try to bring competition to the insurance industry. In defending the CO-OPs, Democrats point to federal rules that put the start-ups at a disadvantage, such as limits on marketing.

CMS, looking to shore up the CO-OPs, is responding to complaints about the hurdles in securing additional funds for the startups. The agency plans to issue guidance soon to address financing for the CO-OPs, according to acting CMS Administrator Andy Slavitt, a former banker, entrepreneur, and insurance executive.

"We need to make it easier for CO-OPs to attract outside capital or a merger partner if the board chooses," Slavitt told the Senate Finance Committee at a Thursday hearing.  "We need to level the playing field and lengthen the runway for these small businesses."

Slavitt didn't provide further detail on what steps CMS might take, and stressed that the agency is seeking to maintain close oversight of the CO-OPs.

The initiative that offered federal loans to start CO-OPs was in the health overhaul as a concession to Democrats, many of whom were dismayed when plans for a public coverage option were dropped from the measure. The nonprofit CO-OPs were meant to spark new competition in the insurance marketplace, incentivizing established firms to lower their prices. Many consumers were attracted by the chance to work with an insurer that was designed to use any excess profit from health insurance payments to benefit their customers.

On Thursday, Slavitt stressed that the success of the CO-OPs will depend on whether their managers adapt rapidly to the competitive market.

"As small companies, they need to rapidly mature the fundamentals of their operations, and in particular, their financial systems, which are vital to the ability of any insurance company to predict, manage, and control costs," he said.

CMS so far hasn't addressed what the CO-OPs see as their most pressing need, which are changes in the risk adjustment program that was in the law, said Peter L. Beilenson, chief executive of Evergreen Health, the Maryland CO-OP, in an interview after the hearing. This is one of three programs-risk adjustment, risk corridors and reinsurance- designed to aid both established insurers and the CO-OPs in the early days of the new federal and state health marketplaces.

The risk corridor and risk adjustment programs are intended to balance out funds among insurers, helping those whose members' medical care proved more costly by taking from those whose members' treatments were less of a financial burden.

The risk adjustment program also deeply affects the CO-OPs. The industry asked CMS last year to consider exempting new and fast-growing insurance plans with relatively healthy customers for three to five years from having to pay into the risk adjustment program.

Beilenson on Thursday said CMS also could help by capping payments from the CO-OPs into the risk-adjustment program at 2 percent of premium revenues. Under current rules, the startup CO-OPs may have to pay 15 percent or more of their premiums into the risk adjustment program, with the money often flowing to larger competitors, he said.

The current rules for the risk adjustment program favor more established insurers who often have more knowledge about their customers and thus can take more advantage of assistance to plans that insure people with serious medical conditions, Beilenson said.  Newly founded CO-OPs may not be getting full credit yet for covering people with serious diseases, and thus would benefit from a "circuit breaker," or a pause or limit to the CO-OPs' participation, in risk adjustment, he said.

"It will be much harder to get capital coming in unless we fix the risk adjustment," Beilenson said. "The reasons why it is skewed toward the large carriers are very significant."

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