Consumer Operated and Oriented Plan (CO-OP) Program: Frequently Asked Questions
Released: 2016-07-13T00:00:00

T he Consumer Operated and Oriented Plan (CO-OP) program was established under the Patient Protection and Affordable Care Act (ACA; P.L. 111-148 , as amended). The purpose of the program is to foster the creation of CO-OPs—nonprofit, member-run health insurance issuers that sell health plans in states in which they are licensed.

The CO-OP program is intended to increase competition and improve choice in private health insurance markets. It does so by creating new nonprofit issuers that are required to reinvest their profits to reduce premiums, enhance benefits, or improve the health care delivered to CO-OP members. In addition, CO-OPs are intended to be "one vehicle for providing higher quality care that is affordable and uses innovative care models in the exchanges starting in 2014."

The ACA appropriated $6.0 billion of federal funds for the CO-OP program. Subsequent legislation rescinded funds from the program, leaving it with about $1.1 billion of the original appropriation. The Secretary of Health and Human Services (HHS) used the appropriated funds to finance low-interest loans to eligible organizations. CO-OPs could apply for two types of loans: (1) start-up loans to hire staff, secure a state license, and carry out other functions and (2) solvency loans to help meet state requirements that they maintain a certain amount of capital in order sell insurance. The loans must be repaid with interest.

The Centers for Medicare & Medicaid Services (CMS), which administers the CO-OP program, has awarded loans to 24 CO-OPs since 2012. One of the 24 was unable to secure a state license to operate and was dropped from the program prior to offering coverage. CMS awarded about $2.4 billion to the remaining 23 CO-OPs. Seven of the 23 CO-OPs are operational as of the date of this report. The other 16 either have ceased operations or are in various stages of winding down operations. The fact that more than half of the CO-OPs have failed has prompted questions about the program's design, administration, and funding and about the operations of the CO-OPs.

Through a series of questions and answers, this report describes the CO-OP program, outlines program requirements, and explains the terms of the loans. In addition, the report provides information about the loan amounts awarded and the current operating status of the CO-OPs. The information in this report is taken from Section 1322 of the ACA, its implementing regulations, guidance, and loan documents.

Program Overview

The ACA requires the HHS Secretary to establish the CO-OP program according to the parameters outlined in Section 1322 of the ACA. Final regulations on the CO-OP program were issued in December 2011, and CMS began awarding start-up and solvency loans in 2012. All loans were to be awarded by July 1, 2013.

What Was the Process for Awarding Loans?

The HHS Secretary considered the following factors when awarding loans:

recommendations from an advisory board established under the ACA statute; priority to CO-OP loan applicants that offered plans on a statewide basis, used integrated health care models, and had significant support from the private sector; and sufficient funding for the establishment of at least one CO-OP issuer in each state.

If no issuer applied for a CO-OP loan in a given state, the HHS Secretary had the authority to award grants to encourage the establishment of CO-OPs within that state or the expansion of a CO-OP from another state to the state with no applicants.

The Comptroller General established the CO-OP advisory board and made board appointments by June 23, 2010. The advisory board provided recommendations about the criteria that should be considered in awarding CO-OP loans and the process for doing so. CMS issued a CO-OP loan funding opportunity announcement (FOA) in July 2011 and obtained the services of a contractor to assist with reviewing the applications. CMS began awarding CO-OP loans in 2012 ( Table 2 includes all loan award dates).

Which Entities Were Eligible for a CO-OP Loan?

To be eligible for a CO-OP loan, an entity had to be organized under state law as a nonprofit member organization.

Certain entities were explicitly prohibited from receiving CO-OP loans. Any entity that was, had a relationship with, or was the predecessor of a preexisting health insurance issuer or related entity was ineligible. Any entity that received 25% or more of its total funding (excluding loans received from the CO-OP program) from one of the types of entities noted above likewise was ineligible for CO-OP loans. In addition, an entity that was sponsored by a state or local government or any political subdivision thereof, or by any instrumentality of the political subdivision, was ineligible for CO-OP loans.

What Standards Must CO-OPs Meet to Maintain Eligibility for the Program?

CO-OPs must meet the following standards to maintain eligibility for the program.

State R equirements. Health insurance issuers are primarily regulated at the state level. CO-OPs are required to comply with all the requirements that similar health insurance issuers must meet in each state in which the CO-OP is licensed. These requirements include solvency and licensure standards, provider payment rules, network adequacy standards, rate and form filing requirements, assessments on premiums, and any other applicable state laws or regulations.

Governance S tandards. CO-OPs are to "implement policies and procedures to foster and ensure member control of the organization." All CO-OPs must be governed by a board of directors, the majority of whom are elected by a majority vote of a quorum of CO-OP members. CO-OPs must have conflict-of-interest and ethics standards in governing documents to protect against insurance industry interference, and they must operate with a strong focus on consumers, including responsiveness, timeliness, and accountability to members, in accordance with regulations promulgated by the HHS Secretary.

Plan S tandards. At least two-thirds of health plans offered by a CO-OP must be offered in the non-group (individual) and small-group markets. In addition, CO-OPs must meet statutory requirements with respect to offering plans through the health insurance exchanges. (See the question " Do CO-OPs Have to Offer Plans Through Health Insurance Exchanges? " for more details.)

Use of P rofits. CO-OPs must use any profits to reduce premiums, enhance benefits, or improve the health care delivered to CO-OP members.

Terms O utlined in L oan A greement. CO-OPs are required to comply with the terms of their loan agreements with CMS according to the specified deadlines. The terms include, but are not limited to, complying with reporting requirements and meeting the agreed-upon milestones to draw down loan funds.

Are CO-OPs Tax Exempt?

CO-OPs qualify for federal tax exemption under Section 501(c)(29) of the Internal Revenue Code (IRC), provided the CO-OPs comply with requirements in the ACA and the IRC and with the terms of any CO-OP loan agreement. Whether CO-OPs qualify for state tax-exempt status is determined at the state level. CO-OPs do not need state tax-exempt status to be eligible for the CO-OP program.

Do CO-OPs Have to Offer Plans Through Health Insurance Exchanges?

CO-OPs must offer some plans through health insurance exchanges. Within the earlier of three years following the initial drawdown of a start-up loan or one year following the initial drawdown of a solvency loan, CO-OPs must offer non-group health plans at the silver and gold benefit levels through every health insurance exchange that serves the geographic region in which the CO-OP is licensed to sell plans. In addition, if the CO-OP chooses to offer at least one plan in the small-group market, the CO-OP must commit to offering small-group plans at the silver and gold benefit levels through every Small Business Health Options Program (SHOP) exchange that serves the geographic region in which the CO-OP is licensed to sell plans.

CMS will deem CO-OP health plans certified for exchanges, provided the health plans comply with all CO-OP requirements. In general, exchanges have the authority to determine which plans to offer; however, exchanges must offer all CMS-certified CO-OP health plans.

According to the Government Accountability Office, 22 of the 23 CO-OPs offering health plans in 2014 offered health plans through exchanges in 22 states. (The CO-OP in Ohio offered plans outside the exchange but did not participate in the exchange for the 2014 plan year.) At the beginning of the 2015 plan year, all 23 CO-OPs offered coverage through exchanges in 25 states. In that year, the CO-OP in Ohio began offering plans through the exchange and three CO-OPs expanded to additional states. At the beginning of the 2016 plan year, 11 CO-OPs offered plans through exchanges in 13 states. (For additional information about the CO-OPs in 2016, see the question, " What Is the Current Operating Status of Each CO-OP Issuer? " in this report.)

How Is the CO-OP Program Funded?

The ACA appropriated $6.0 billion of federal funds for the CO-OP program. Subsequent legislation passed in CY2011 rescinded $2.6 billion from the program, leaving it with $3.4 billion in appropriations. In CY2012, CMS awarded about $2.0 billion in loans to CO-OPs.

The American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240 ) was enacted on January 2, 2013. ATRA rescinded all but 10% of the CO-OP funds that were unobligated at the end of 2012. The unobligated balance was $2.5 billion, so ATRA rescinded 90% of that amount (i.e., $2.3 billion). Overall, Congress rescinded a total of approximately $4.9 billion, leaving about $1.1 billion of the original $6.0 billion CO-OP program appropriation.

The remaining 10% of unobligated funds that were not rescinded under ATRA were to be put in a contingency fund to "provide assistance and oversight" to CO-OPs that received loans prior to the enactment of ATRA. In guidance, CMS indicates that providing additional loan funds to existing CO-OPs is a permitted use of the monies in the contingency fund. CMS also indicates that the contingency fund is to be used for the CO-OP program's administrative costs.

Because the CO-OP program uses direct loans, the appropriated amounts for CO-OPs represent the total expected cost to the government over the life of the loans, rather than the total amount of loans that CMS can award. In general, loans and other federal credit programs are scored in the budget in accordance with their subsidy costs . A loan's subsidy cost equals the net present value of expected future receipts (loan principal and interest repayment) less expenditures (loan disbursements). Increases in the risk of default—the failure to repay a loan—reduce expected receipt totals, which increases the subsidy costs of a program. Given a certain budgetary cost, more loans can be issued when the likelihood of default decreases and when interest payments on the loan increase. Total loan disbursements therefore exceed the budgetary costs of the program in many cases.

Historical data presented in recent President's budget submissions indicate that the budgetary cost of CO-OP loans totaled $979 million from FY2012 through FY2015. In the FY2017 President's budget, the Office of Management and Budget estimated that a total of $2.085 billion in loan disbursements was made to CO-OPs over the same time period.

What Challenges Are Associated with Estimating the Budgetary Cost of the CO-OP Program?

Estimating the budgetary cost of federal credit programs over the life of the loans is dependent upon a number of factors that may pose unique challenges. Changes in interest rates due to shifts in economic conditions or other factors may lead to changes in the expected subsidy costs of a federal program. Moreover, the projected default rates of loans may fluctuate significantly in response to both economic changes and shifts in the market conditions of relevant industries. Default rate estimates may be particularly uncertain for new programs (such as the CO-OP program) with little evidence of what market demand will be and how industry may respond. The expected budgetary cost of loans made under federal credit programs is reestimated each year to take into account updated conditions and assumptions. Revisions made to the original subsidy cost of CO-OP loan and contingency fund disbursements have increased their estimated budgetary cost by $601 million.

Loans

The CO-OP program provides start-up and solvency loans to qualified nonprofit issuers (CO-OPs). The terms of the loans are described in statute, regulations, the FOA, and the terms of the loan agreements between CO-OPs and CMS (the administrator of the loans). In general, CO-OPs that received loans are expected to repay the loans with interest according to the terms of the loan agreement.

How Can CO-OPs Use the Loan Amounts?

The start-up loans are to be used for costs associated with setting up a health insurance issuer. For example, eligible costs include hiring employees, renting space for operations, and developing information technology systems. Start-up loans are not to be used for brick-and-mortar construction or clinical costs (e.g., payments to providers for clinical services).

The solvency loans are to be used to assist the CO-OP issuers in meeting state solvency requirements. Each state has requirements related to the amount of capital an issuer must maintain to remain licensed to sell insurance in the state. The funds provided under the solvency loans are intended to help CO-OP issuers meet those requirements.

Statute prohibits the start-up and solvency loans from being used for "carrying on propaganda, or otherwise attempting, to influence legislation; or for marketing." The FOA further restricts the use of loans by prohibiting the use of loan funds for meeting matching requirements of other federal programs, providing "excessive executive compensation," and "funding activities unrelated to CO-OP planning and establishment, including but not limited to staff retreats and promotional giveaways."

How Are the Loan Amounts Disbursed to CO-OPs?

Start-up and solvency loan awards are disbursed to a CO-OP according to the terms of the CO-OP's loan agreement with CMS. In applying for CO-OP loans, entities submitted a business plan that included milestones to be met for corresponding drawdowns of loan funds. These milestone and drawdown plans were finalized in the loan agreement between the entity (the CO-OP) and CMS. The award amounts a CO-OP is able to draw down at any given time are subject to the agreement and to any modifications to the agreement made by CMS.

What Are the Repayment Terms for the Loans?

In general, the start-up and solvency loans must be repaid with interest in accordance with the requirements in statute, regulations, and the terms of the loan agreement. Table 1 presents an overview of those requirements.

What Happens If a Loan Agreement Is Terminated?

Loan agreements between CO-OPs and CMS may be terminated under various circumstances. CMS may terminate a loan agreement because the CO-OP is not in compliance with program requirements or the terms of its loan agreement or because CMS has cause to believe the CO-OP has engaged in criminal or fraudulent activities. If CMS terminates an agreement under these circumstances, the CO-OP must pay a penalty in the form of repaying 110% of the aggregate amount of start-up and solvency loans received. In addition, the interest rate on the amount for the period in which the loans were outstanding is to be increased.

CMS may approve a CO-OP's request to terminate its loan agreement, or CMS may initiate a loan termination to which a CO-OP consents. Under these circumstances, the CO-OP will not be subject to the penalty or the increased interest rate in place for other types of terminations.

In all terminations, a CO-OP is expected to comply with the terms of termination outlined in its loan agreement. These terms include complying with any state regulations that are relevant to the termination and repaying to CMS any unused loan funds and other loan amounts owed. In the event of a termination, no additional loan disbursements will be made to the CO-OP. CO-OPs subject to CMS-initiated terminations may appeal the decision within 30 days of receiving the notice of termination.

Program Status

How Many Entities Received CO-OP Loans? How Much Was Awarded?

CMS has awarded loans to 24 CO-OPs. One of the 24, the Vermont Health CO-OP, was denied state licensure to sell health insurance plans in 2013 and was dropped from the CO-OP program. The loans awarded to the other 23 CO-OPs total about $2.4 billion. These 23 CO-OPs and the amounts they were awarded are shown in Table 2 .

What Is the Current Operating Status of Each CO-OP Issuer?

As of the date of this report, seven CO-OP issuers are operational. For purposes of this report, a CO-OP issuer is considered operational if it currently offers health plans and there are no indications that the CO-OP issuer will stop renewing or offering health plans in the future. The seven operational CO-OP issuers offer health plans in nine states for the 2016 plan year (see Figure 1 ).

The other 16 CO-OPs (of the 23 that ever offered health plans) are considered non-operational, which means either they are not offering health plans in 2016 or there is an indication that they will not renew or offer health plans in the future. State insurance commissioners are the primary regulators of the business of insurance. As state-licensed health insurance issuers, CO-OPs must adhere to all applicable requirements in the state(s) in which they are licensed. One of the oversight responsibilities of state insurance commissioners is to monitor the financial health of issuers. If a state insurance commissioner determines that an issuer is, or is at risk of becoming, undercapitalized or insolvent, the state insurance commissioner may conduct additional reviews of the issuer's financial situation and operations; subject the issuer to a rehabilitation plan; or declare the issuer insolvent and subject it to a state-administered insolvency proceeding. The 16 non-operational CO-OPs are in various stages of these procedures due to their troubled financial conditions.

Although each of the 16 non-operational CO-OP issuers has its own unique reasons for its troubled financial conditions, some factors that could have played a role include the challenges associated with being a new entrant in health insurance markets; the CO-OP program's statutory and regulatory requirements; decisions made by federal policymakers during implementation of the program; and poor or misfortunate business decisions.

What Happens When a CO-OP Fails?

As noted, of the 23 CO-OPs that ever enrolled individuals in health plans, 16 are in various stages of winding down their operations. These failures have led to a variety of questions, particularly regarding what happens to coverage for individuals enrolled in health plans offered by failed CO-OPs, what happens to the health care providers to whom failed CO-OPs owe payments; and what happens to the federal money lent to failed CO-OPs.

Answers to these questions vary based on a number of factors. One factor is the laws and regulations of the state(s) in which the CO-OP is licensed. Health insurance issuers are primarily regulated at the state level; therefore, what happens when a health insurance issuer fails (including a CO-OP) is largely a matter of state law. Answers to these questions also are affected by Section 1322 of ACA and its implementing regulations, the terms of the CO-OP's loan agreement with CMS, and the CO-OP's financial condition.

What Happens to Members When a CO-OP Fails?

When a health insurance issuer, including a CO-OP, is declared insolvent, the relevant state insurance commissioner typically will be appointed as a receiver to liquidate the issuer in an orderly fashion. The individual health insurance policies of the failed issuer generally will either be transferred to and assumed by a different (and solvent) issuer or transferred to a state guaranty association (GA).

GAs, which have been established in all 50 states and the District of Columbia, protect customer insurance policies issued by insolvent insurance companies, subject to certain benefit limits and various exclusions specified by state law. A GA could either maintain the insolvent issuer's policies or issue new policies to supplant the failed issuer's policies. Health insurance GAs protect policyholders and health care providers who may be owed payments, but GAs do not provide financial protection to issuers. While all states have health GAs, not all types of health issuers or health insurance plans are covered.

What Happens to Health Care Providers When a CO-OP Fails?

The aforementioned GAs also may protect health care providers by covering the cost of certain medical services provided to policyholders of the failed CO-OPs. As with individuals, the protection offered to health care providers by a GA is dependent on how the GA is designed and its application to a failed CO-OP.

Additionally, health care providers, similar to other creditors, may file claims against the estate of a failed CO-OP. How much, if any, providers would recover for valid claims against the estate would depend on the financial condition of the CO-OP, the liquidation value of the CO-OP's assets, and the liquidation payment priority scheme established by relevant state law.

What Happens to Loan Repayments to the Federal Government When a CO-OP Fails?

All CO-OPs are contractually obligated to adhere to the repayment schedule detailed in their loan agreements and other supporting documents, regardless of a CO-OP's operational status or whether its loan agreement with CMS is terminated. CMS may use any remedies available under the law to collect monies owed. However, CMS's ability to collect from failed CO-OPs will be complicated by the fact that each CO-OP is subject to the state insurance receivership proceedings that are discussed above. In testimony given February 25, 2016, a CMS official indicated that "it was too early to tell how much money may be recovered [from the 12 CO-OPs that had failed by the date of the testimony]."