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HHS Launches Co-op Rulemaking, Financing Amid Doubts About Their Survival

By John Reichard, CQ HealthBeat Editor

July 18, 2011 -- The Centers for Medicare and Medicaid Services (CMS) released a 56-page proposed rule that aims to help launch new consumer-oriented health plans in every state.

These cooperative plans are supposed to give customers better value for their dollar than existing for-profit insurance companies.

Within days, CMS also expects to announce the availability of $600 million in loans to help start the "consumer operated and oriented plans" (co-ops), along with another $3.2 billion to help keep them solvent.

Officials estimated that roughly 57 entities could be funded with the $3.8 billion, but they cautioned against assuming that would be the final number. They said actual loan amounts will depend on the size of plans and how much risk they are willing to take on.

But insurance industry insiders say the loan money, which must be fully repaid, is not nearly enough for co-ops be able to survive against big insurance companies. That's because of the leverage big companies have to hold down costs through bulk purchasing and their power to command lower rates from providers by steering more customers their way.

The proposed rule implicitly acknowledges the struggles some co-ops will have surviving, predicting that the federal government won't be repaid for 35 percent of the solvency loans and 40 percent of the start-up loans.

Uncle Sam would lose $230 million from 2012 to 2013, based on what the proposal calls a "high estimate" of costs to the federal government from defaults on loans and the loss of interests involved in those defaults. A CMS spokesman said the projections on the non-repayment of loans are "an absolute worse case scenario. " He emphasized that the loans would be carefully monitored and that if a co-op had problems repaying its loan, "we fill figure out a repayment schedule that fits to keep you viable."

Steve Larsen, director of the Center for Consumer Information and Insurance Oversight (CCIIO), said in a press call that he doesn't expect the rate of non-payment to actually be that high. The figures are high in the proposed rule because CMS is being "conservative," he said.

Championed by Sen. Kent Conrad, D-N.D., the CO-OP Program was created under the health care law (PL 111-148, PL 111-152) in an effort to appease those disappointed that the overhaul did not include a "public option" to cover the uninsured.

Officials said in the telephone news briefing that the money can only go to new entities. Under the health care law, loans may not go to insurance companies in existence as of July 2009. "CO-OPs will use any profits to benefit ... members, including actions to lower premiums, improve health benefits, improve the quality of members' health care, expand enrollment, or otherwise contribute to the stability of coverage for members," CMS said in a news release.

The rule describes the qualifications the new entities must meet to qualify for the $3.8 billion in repayable loans the law authorized. The rule specifies that the loans will only be made to "private, nonprofit entities that demonstrate a high probability of becoming financially viable,'' according to a written statement from CMS officials.

Larsen announced the release of the proposed rule at the National Alliance of State Health Co-ops' first conference in Washington.

The rule says the goal is to have at least one co-op in every state.

"I think it's a little early right now to speculate," on how many states will actually end up with such entities, Larsen said. But he predicted that a number of states would.

"There are many people represented here,'' Larsen said at the meeting, adding that "as the word gets out now that we have the funding and regulatory structure in place, that will generate a lot of interest as well.''

John Morrison, chairman of the new group, said that there are people in 15 states working on creating co-ops. Morrison wouldn't say how many of those he believes will make it. Morrison said given the $3.8 billion the federal government will allocate to help get co-ops up and running, he believes they will happen.

CMS in its news release sought to allay skepticism about co-op survival by noting that they are not experimental. "Several successful health insurance cooperatives currently exist around the country, covering nearly 2 million individuals," the news release said. The two are Group Health Cooperative Puget Sound in Washington state and HealthPartners in Minnesota and Wisconsin, officials said.

The health overhaul law originally allocated $6 billion for co-ops, but Congress stripped $2.2 billion of that in the 2011 continuing resolution.

During his remarks, Larsen gave several examples of areas in which providers have expressed interest in forming co-ops, including doctor groups in Rhode Island, Connecticut, and Illinois; primary care providers in Maine; physicians in Maryland who are interested in managing patients with chronic diseases; and a large multispecialty group in Arizona.

Asked how long it would take to get a co-op up and running, Larsen noted that there are 18 months before the first open enrollment period begins for health insurance exchanges under the law. The co-ops will be an option in the exchanges. "That's an aggressive time frame, no question," he added. Larsen said that the tight schedule is "doable" but it doesn't leave much time for "noodling."

"Hopefully, we will be able to have these co-ops center the market on consumers,'' Larsen said. The reason behind starting the co-ops was to have consumer-run plans available alongside corporate-run plans.

Also in the proposal, CMS officials said they adopted many of the recommendations of a federal advisory board that stressed that the new co-ops should make consumer involvement a priority.

Morrison said his organization would help co-ops by jointly purchasing services, such as claims and asset management, actuarial, and reinsurance, among others.

An attorney in private practice and Montana State insurance commissioner from 2001 to 2008, Morrison served as chairman of the health insurance committee of the National Association of Insurance Commissioners in 2005. Previous leaders include Health and Human Services Secretary Kathleen Sebelius and Larsen.

Under the rule, co-ops will be able to sell insurance policies through the general state health benefit exchanges as well as the Small Business Health Option Programs (SHOP Exchanges).

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