Featured Health Business Daily Story, March 16, 2012

First Round of Federal Seed Money Could Help CO-OPs Take Root in State Exchanges (with Table: Freelancers Union Gets Large Share of CO-OP Loans)

Reprinted from INSIDE HEALTH INSURANCE EXCHANGES, a hard-hitting monthly newsletter with news and strategic insights on the development and operation of state and private exchanges.

By Steve Davis, Managing Editor
March 2012Volume 2Issue 3

On Feb. 21, CMS awarded $638 million in low-interest loans to seven nonprofit groups that intend to launch Consumer Operated and Oriented Plans (CO-OPs) in eight states (see table, p. 3). This first round of seed money could help cultivate a new breed of not-for-profit health insurers that will compete against established players beginning in 2014. But some industry observers are dubious that the non-profit entities will be more effective at keeping costs down.

In its announcement, CMS referred to the new entities as “more affordable, consumer-friendly and high quality health insurance options.”

The CO-OPs will be allowed to sell in markets outside of the exchanges. While the reform law envisions a CO-OP in every state, it’s uncertain how many there will be. Moreover, the feds last year predicted a 40% default rate for the loans.

Courtney White, a consulting actuary at Milliman, predicts that the majority of states — though not all — will have a CO-OP in place by 2014. He tells HEX that the start-up companies will have “a unique opportunity” to build enrollment in 2014 when a large pool of underinsured and uninsured people gain access to health coverage and federal premium assistance through state insurance exchanges. Milliman has helped more than 30 CO-OPs complete their applications to HHS.

CO-OP sponsors say they’re optimistic that having a clean slate and no pressure to turn a profit or appease shareholders will give them an edge over more established health insurers (see interview, p. 3). “Unlike traditional insurance companies, [CO-OP] profits must go to improving quality, benefits and premium affordability,” says Sara Horowitz, founder and executive director of Freelancers Union, which will use the federal loans to sponsor CO-OPs in three states. She tells HEX that her organization’s goal is to provide coverage to almost 200,000 people in New York (100,000), New Jersey (60,000) and Oregon (35,000).

But Freelancers Union, which received the bulk of the loans, appears to be ineligible to operate the CO-OPs, according to the Republican-led House Ways and Means Committee. In a prepared statement, the committee notes that Freelancers Union offers health insurance to union members and their dependents in New York through Freelancers Insurance Company, a for-profit company that it owns. Under the reform law, entities that issued health coverage before July 16, 2009, are ineligible to operate a CO-OP.

The reform law allocated $6 billion in loans, but Congress whittled that figure down to $3.8 billion last year. This first round of funding will be used to get CO-OPs up and running. In December, HHS issued its final rule, which set standards for the new nonprofit, member-run entities. Of the available funding, HHS estimates about $600 million will go toward five-year start-up loans, while the remaining $3.2 billion will be dedicated to solvency loans that will need to be paid back within 15 years.

In accordance with the exchange law, the CO-OP will offer at least a “silver” and a “gold” coverage option. Identical products will be available outside of the individual and small-employer exchanges.

While seven applicants received loans, seven others were asked to supply more information and several were rejected. One of those asked to provide more detail was The Evergreen Group, a CO-OP venture in Maryland (HEX 8/11, p. 4). Peter Beilenson, M.D., health officer for Howard County, Md., who is heading the group, says HHS wanted more detail about how the group would build the neighborhood-based clinics (dubbed “team-lets”) that are at the heart of its closed-panel model. “They wanted to know if we could get enough primary care doctors, so we were able to give a good amount of info about how we would do that,” he says. Evergreen intends to target working-class families with annual incomes of between 133% and 400% of the federal poverty level (FPL) — between $28,000 and $88,000 for a family of four.

Based on an actuarial study conducted by Milliman, Beilenson estimates the CO-OP will need about $50 million in federal funding to get up and running, and about 20,000 members in the first year to sustain the business model. It also is seeking about $10 million in private funding to help it build the team-lets. HHS doesn’t allow the federal loans to be used for clinical purposes.

CO-OPs Must Build Scale, Networks

But the new entities could find it difficult to build scale, create provider networks and compete against well-established, deep-pocketed health insurers. They also must reach certain milestones on an aggressive timeline leading up to 2014 when health insurance exchanges become operational.

One of the most significant challenges for CO-OPs will be in building provider networks in a relatively short time. And they’ll need to try to sign contracts that are competitive with those of the largest carriers in each state, says White. “Since contracting leverage is primarily based on volume or members and the CO-OPs do not have any yet, they will need to help the providers fully understand the vision and mission of the CO-OP,” he says. “They need to differentiate themselves from the traditional insurance carriers.”

And attracting members won’t be easy. White says CO-OPs will need “a strong marketing force that can explain their story and demonstrate the benefits of a CO-OP over a traditional insurance company.”

They’ll also need to make sure they’re ready to sell coverage by the time state exchanges begin their open-enrollment period on Oct. 1, 2013. Missing that initial wave of uninsured could be detrimental to the success of a CO-OP, says White.

And there will be hurdles in becoming licensed insurance companies or HMOs in their states. Moreover, HHS intended for the solvency loan “to be subordinated debt” on the balance sheet. That means that the state would not consider it as debt, but rather equity for the purpose of measuring solvency, White explains. “While preliminary discussions about the subordinated debt have taken place with states, these conversations need to continue to ensure proper licensing.”

Loans Will Help CO-OPs Meet Reserve Levels

Larry Turney, the project officer at the Montana Health Cooperative (MHC), estimates that it will cost about $6.7 million to get that CO-OP up and running. To be successful, it could need as much as $51 million in loans to meet reserve requirements. He tells HEX that disbursements for the first and second quarter arrived in the mail on Feb. 28. Future disbursements will be tied to reaching various milestones, he says.

Prior to joining MHC, Turney was director of strategic planning and projects at Blue Cross and Blue Shield of Montana, where he spent 19 years. Turney says the CO-OP’s model will be to outsource as much as it can and “try to be as paperless as possible.” He anticipates the CO-OP will be able to keep its administrative costs below 10%. “Since our governance is member-controlled, the consumer will have much more say in how we operate the CO-OP. We believe this will result in insurance plans better tailored to meet the needs of Montanans.”

MHC, he says, hopes to work closely with the Montana Primary Care Association, and intends to forge partnerships that could lead to the creation of more free-standing clinics in the state. Montana has a population of about 1 million, and Turney anticipates being able to enroll about 10,000 people in 2014. While he doesn’t think insurance carriers are worried yet about the new competition, Turney does say they appear to be “very interested in what we’re doing.”

Editor’s note: To read the House Ways & Means letter about Freelancers Union’s loan, visit http://waysandmeans.house.gov/News/DocumentSingle.aspx?DocumentID=281380.

Freelancers Union Gets Large Share of CO-OP Loans

On Feb. 21, CMS said it had approved the first seven CO-OPs (Community Operated and Oriented Plans) and awarded $638 million to those entities with its first round of low-interest loans. The reform law, which envisions having a CO-OP in each state, allocated $3.8 billion in loans for the new insurers.

CO-OP Name

Service Area

Loan Amount

Common Ground Healthcare Cooperative


$56.4 million

Freelancers CO-OP of New Jersey

New Jersey

$107.2 million

Freelancers CO-OP of Oregon


$59.5 million

Freelancers Health Service Corporation

New York

$174.4 million

Midwest Members Health

Iowa and Nebraska

$112.6 million

Montana Health Cooperative


$58.1 million

New Mexico Health Connections

New Mexico

$70.4 million

SOURCE: CMS, February 2012

Courtney White of Milliman and Jordan Battani of CSC’s Global Institute of Emerging Healthcare Practices Group will speak at AIS’s April 17 webinar, The Rise of CO-OPs: Can Streamlined Processes and New Payment Models Help CO-OPs Woo Members From Established Insurers? Get more information and register at the AIS Marketplace.

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