Healthcare CO-OPs: Opportunities and challenges
One of the most contentious issues during the Congressional debate over the Patient Protection and Affordable Care Act (PPACA) in late 2009 was whether or not to include a public option (a government-administered healthcare program). Congress rejected the public option but accepted a compromise proposal, offered by Democratic Senator Kent Conrad of North Dakota, a prairie state with a long tradition of agricultural cooperatives. The resulting act that was passed and signed into law by President Obama in 2010 included a provision authorizing the creation of what are called "Consumer Operated and Oriented Plans " (CO-OPs). According to the Centers for Medicare and Medicaid Services (CMS) website HealthCare.gov:
The Affordable Care Act creates a new type of non-profit health insurer, called a Consumer Operated and Oriented Plan (CO-OP). These insurers are run by their customers. CO-OPs are meant to offer consumer-friendly, affordable health insurance options to individuals and small businesses.
According to the legislation, the federal government will provide funds in the form of loans (not grants) as seed money for qualifying groups to start healthcare CO-OPs. The CO-OPs are meant to serve as nonprofit issuers of health insurance, governed by the plan’s membership. The assumption behind the
CO-OPs is that if there are more players in the healthcare marketplace, especially players that are nonprofit and created and managed for the benefit of consumers, then the additional competition will lead to a more efficient and less costly health insurance market.
The law explicitly states that existing health plans may not form or operate CO-OPs (nor may they “interfere with” a CO-OP's development). In other words, companies such as Blue Cross and United Healthcare cannot start a CO-OP. Approved CO-OPs must be governed by a board of directors elected by their membership.
To date, the U.S. Department of Health and Human Services (HHS) has approved funding for more than 20 CO-OPs, and those groups are now hustling to put everything in place for accepting members on January 1, 2014. In fact, the effective date for new CO-OPs to have their operational details in place is October 1, 2013, if they want to take part in the state exchanges as of January 1, 2014. This means that newly funded CO-OPs need to apply to their state’s insurance department for an insurance license (Certificate of Authority) as soon as possible, because rate filings will need to be happening very soon. As a practical matter, it would be advisable to submit rate filings soon—say, by the end of first quarter 2013—because many of the state agencies are going to be swamped with new filings, not only by CO-OPs but by every existing insurance plan as well, because all must be in compliance with the new PPACA requirements by 2014.
The time remaining is short. Approved CO-OPs must make many decisions and act quickly to put their administration processes in place. For example, they must:
- Choose between building their own organizations from scratch and contracting with outside vendors
- Design their benefit plans, including pricing
- Enlist physicians, hospitals, and other provider entities for working with prospective CO-OP plan members
- Plan their marketing strategies
It’s a lot to do in a few months’ time.
To help the new CO-OPs that are approved through the application process get up and running, HHS is offering low-interest loans of two types: a start-up loan to cover the costs of building a new health plan from scratch, and a solvency loan to help CO-OPs meet their states’ solvency and reserve requirements.
Start-up loans will be treated as ordinary debt, repayable over a five-year period at an interest rate equal to that of U.S. Treasury securities minus 1% (but not less than 0%). At current rates, this amounts to an interest-free loan.
Like other health insurers, CO-OPs must meet minimum capitalization requirements set by the state in which they are licensed. The federal solvency loans are meant to provide the new CO-OPs with enough capital that they will be not only in compliance with the statutory minimums, but well in excess, enabling them to thrive as businesses. A solvency loan is repayable over a 15-year period at Treasury minus 2%. This, too, is close to interest-free at current rates.
The solvency loans are surplus notes—contingent debt, structured in such a way that a CO-OP doesn’t have to repay anything until its net worth exceeds a certain threshold. Typically, CO-OP solvency loans have set that threshold based on National Association of Insurance Commissioners (NAIC) risk-based capital (RBC) requirements, namely, a multiple of the authorized control level (ACL). Under statutory accounting principles, surplus notes can be legally counted as equity—an important factor in a CO-OP's accounting. Because the solvency loans are not treated as debt on the balance sheet, the repayment is accounted as a payment out of surplus rather than an expense.
If everything works according to plan, the CO-OP remains a nonprofit, member-owned, and member-operated entity under a member-controlled board. But, at least in its initial phases, it must continue to generate surplus—i.e., make a “profit”—in order to repay its start-up and solvency loans.
As a result, even as nonprofits, in many respects CO-OPs will have to be managed in ways similar to other health plans. Any insurance enterprise must generate revenues sufficient to pay members’ claims; and to ensure solvency, surplus must be large enough to assure the ongoing viability of the enterprise. A well-run insurance company manages its surplus to levels well in excess of statutory minimums. Moreover, the larger the insurance enterprise, the more surplus it needs, because it’s taking on more risk. Thus, as the CO-OPs grow, they will have to generate increasing surpluses that match their rates of growth. That, in turn, means a need to have an increasing net worth on the balance sheet.
A key distinction between CO-OPs and for-profit healthcare plans is that CO-OPs will not be under pressure to satisfy investor shareholders by maximizing profits. Nevertheless, CO-OPs will have a vital incentive to generate internal surpluses in order to repay the government solvency loans and fund growth. If they do not do this, they will struggle to survive over the long term.
Every start-up healthcare plan faces a formidable set of challenges—challenges of capitalization, operational complexity, governance, and critical mass—that, if unmet, can spell failure.
Compared with other start-up healthcare plans, CO-OPs have a big advantage because the government will provide their initial capitalization . On the other hand, the CO-OP is at a disadvantage compared with an existing plan that has had years of operations to build up its surplus. For-profit healthcare plans have another advantage that is not available to CO-OPs: access to the capital markets via stock issue.
Existing healthcare plans have had years to develop their claims payment systems, personnel, and expertise; their utilization management personnel and expertise; and their information technology (IT) infrastructures—IT is a huge component of a health plan’s expenses. On top of all this, there are the usual accounting, financial, and provider relations issues, as well as customer relations functions. The operational complexity of building all of that from scratch in a short time and being prepared to compete with long-established national health plans is a daunting task.
The people who have been founding HHS-approved CO-OP plans spend a lot of time and energy on the project. They often do this primarily for reasons other than personal gain, and on behalf of future CO-OP members who will ultimately be the owners and consumers of their health plans. Some of these founders are people who, while not running healthcare companies, have already been involved in the industry as third-party administrators, network managers, or in some other way. Some are principals in businesses who find that a CO-OP can help serve a strategic function for them. And some are idealists who want to form a healthcare CO-OP simply because they believe it is a social or humanitarian good.
When the CO-OP is up and running, however, the founders will have to turn its governance over to a board of directors who are beholden to the members; a majority of the board, in fact, must be CO-OP members. How this process plays out will be crucial to the long-term success of the CO-OP.
Critical mass: Efficiency and clout
The final challenge that a CO-OP will face is critical mass. Any new healthcare plan needs to grow for the purposes of risk management, administrative efficiency, and market clout. The CO-OP will need a premium base large enough to pay for the organization’s fixed investments; the bigger it becomes, the more efficient its operations are likely to be. In order to offer plans at competitive premium rates and still remain solvent, membership will need to grow quickly to a size at which the organization is not hemorrhaging capital to excessive administrative costs.
Market clout represents the biggest hurdle facing the CO-OPs nationally. A health plan’s competitiveness in the marketplace is in large part a function of provider contracting: how large a discount can a health plan negotiate with its physicians and hospitals? Every dollar that a carrier saves on a claim is one less dollar that it doesn’t have to collect in premiums. Health insurance is a very price-sensitive market; people switch plans for small changes in prices, and in fact healthier members are the most price-sensitive.
CO-OPs will need to contract with hospital systems and physician groups at rates that are competitive with the rates these providers offer the largest healthcare plans, those that can drive the highest utilization to the provider facilities. For a fledgling CO-OP negotiator with no current membership to show—only hopes for the future—this will be a difficult case to make. CO-OP developers will have to be very creative and selective in the development of their provider networks—and very persuasive at the negotiating table.
Difficult—but not impossible
Presenting these challenges is meant as a cautionary note, not a condemnation of the CO-OP approach. Anyone who sets out to create a CO-OP must understand that the task is complicated and the obstacles to success are great in a healthcare market that is characterized by powerful and highly competitive commercial players. How can CO-OPs break into that market?
Partnership, not confrontation
Many of the new CO-OPs are pursuing the strategy of partnering with like-minded organizations that can offer them access to provider networks the CO-OPs might not otherwise be able to reach. One example is a CO-OP that teams up with an existing nonprofit plan within its market, such as a Medicaid plan, to ensure continuity of care between Medicaid and the private marketplace—an interesting possibility because there is a persistently high “churn,” or turnover, in the Medicaid populations as people become eligible for Medicaid, receive care, and then lose their eligibility. Previously, many such people couldn’t afford health insurance after they lost their Medicaid eligibility, but PPACA, when fully rolled out, will enable them to obtain subsidized insurance through state health exchanges. If a CO-OP partners with a Medicaid plan, these people could find it simple to move from Medicaid to the CO-OP and maintain the same providers and care-management protocols.
Another model might be that of a partnership between a CO-OP and a provider organization, such as a large hospital system, that does not currently operate in the insurance space but might want to bring in patients who will now have coverage thanks to PPACA. For example, the safety-net hospital in a metropolitan area that routinely treats the uninsured population might especially want to keep these people as patients now that they will have insurance coverage.
Thus, for many of the emerging CO-OP plans, the pathway to success might well be partnership with other organizations whose interests align with their own.
It is far too early to judge how the new CO-OPs are likely to fare in the era of healthcare reform. The hurdles to success are high, and a great deal will depend on the skill of CO-OP leadership in both the founding and maturing stages of member self-governance.
Another factor is the question of how widely the CO-OP movement will spread, which will in large part determine the CO-OPs’ market clout. Will sufficiently large numbers of people be attracted to CO-OP membership? So far, there are some glaring gaps, particularly in the most heavily populated states; as of this writing, for example, no new CO-OPs have been approved in California, Texas, or Florida. In that sense, the CO-OPs are not fully meeting the policy goals of the enhanced marketplace.
Healthcare reform has thus far survived serious challenges, including a U.S. Supreme Court ruling and a presidential election. At this point we don’t know what will happen with ongoing budget negotiations between the White House and Congress; it is conceivable that certain provisions of PPACA may be modified, reduced, or eliminated as part of the process. On the other hand, if the reform process continues intact, the CO-OP provision of PPACA offers the possibility of a new, long-term entry into the American healthcare market─if CO-OPs can overcome the difficult challenges they face ahead.
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