Health Plan CO-OPs

From Janae Schaeffer of Lockton Companies, great discussion on the viability of health plan co-ops.

Health Plan CO-OPs: A New Choice for Consumers, But Will They Be Viable?


The Department of Health and Human Services has issued proposed regulations on a forgotten aspect of last year’s federal healthcare reform law: Consumer Operated and Oriented Plans (CO-OPs). CO-OPs are designed to be health insurance plans for individuals and small businesses, and operate as private, non-profit health insurers with boards of directors predominately made up of the members they insure. Only time will tell whether they will realize their goal as a cost-effective health insurance option for uninsured Americans.


The CO-OP concept is a sort of compromise on the part of Congressional advocates of the so-called “public option,” that is, a federally-subsidized health insurance coverage option that would have competed alongside private insurance companies. Many proponents of last year’s healthcare reform bill wanted a “public option,” but in the end could not garner adequate Congressional support for the notion.

As a compromise, the law authorized the creation of not-for-profit CO-OPs, in the hopes that a new, non-profit insurance option, run by members for members, would create enough competition in the individual and small-group insurance marketplace to drive down the cost of coverage underwritten by traditional insurance companies.

How They’ll Work

CO-OPs are designed to give their enrollees direct voices in their health plans. Members of the CO-OP elect the CO-OP’s board of directors, the majority of whom must be enrolled in the CO-OP’s health plan. CO-OPs are required to use their profits to lower premiums, improve health benefits and the quality of healthcare, and expand enrollment. The health reform law sets aside several billion dollars to loan to CO-OPs, to capitalize them or otherwise shore up their solvency. However, federal authorities will only make CO-OP loans to organizations that demonstrate a high probability of becoming financially viable. The loans must be repaid with interest.

Individuals will be able to purchase coverage from the CO-OP through state health insurance exchanges. Small business owners can access CO-OPs through what’s known as “SHOP” exchanges, that is, health insurance exchanges for small businesses similar to the exchanges that will be available to individuals for the purchase of individual policies (“SHOP” stands for “Small Business Health Option Program”). CO-OPs exist independently of the exchanges, but can sell their coverage through the individual exchanges and through the SHOP exchanges if the CO-OP’s insurance product complies with the applicable state and federal requirements for insurance and exchange-based coverage.

But before they can sell health plans through an exchange, CO-OPs will have to meet standards similar to those met by other health insurers in the state (presumably, benefit mandates, reserve requirements, etc.), as well as satisfy solvency, licensing and network adequacy standards that must be met by other insurers looking to sell policies through an exchange. CO-OPs will also have to demonstrate that premiums and any start-up federal loans are being used for the benefit of enrollees.

The proposed regulation requires that CO-OPs have a management team with expertise in health insurance. However, the regulation bans representatives of any federal, state or local government and representatives of an existing insurance company from serving on the board of directors.

In addition, in order to qualify as a CO-OP, at least two-thirds of the insurance contracts issued by the organization must be qualified health plans offered in the individual and small group markets in the states in which the CO-OP does business. This requirement must be continually met by the organization.

Who Can Create a CO-OP?

The following entities may form CO-OPs:
A non-profit organization that is not a health insurance company (the organization may, however, share control with an existing health insurance company to sponsor or facilitate the creation of a CO-OP if the non-profit organization and the existing insurance company do not share the same chief executive or any of the board of directors);
Self-funded and Taft-Hartley group health plans;
Church plans that were not licensed health insurance companies on July 16, 2009; and
A prospective applicant who was not licensed by its state as a health insurance issuer on July 16, 2009, but has subsequently obtained a state license.

Certain entities may not form CO-OPs, including:
Organizations or related entities that were health insurance companies on July 16, 2009;
An organization sponsored by a state or local government or any political subdivision of either; and
Medical centers, physician practices, hospitals and other organizations that are part of a state university system.

The Centers for Medicare and Medicaid Services (CMS) will try to ensure that there is sufficient funding to establish a least one CO-OP in each state. If there is available funding, multiple CO-OPs may be established in each state.

The proposed regulations include provisions to protect against fraud and abuse. CO-OPs that receive loans will be subject to audits and reporting requirements for the length of the loan repayment period, plus 10 years.

Appropriations enacted by Congress in April 2011 canceled more than one-third of the funds allocated for CO-OPs.

What Coverage Must CO-OPs Offer?

You may recall that health insurance exchanges are required to offer a variety of levels of coverage (e.g., bronze, silver and gold coverage options, with decreasing levels of co-insurance and out-of-pocket expense). If a CO-OP receives a start-up or solvency loan from the government, it must offer at least one qualified health plan at both the silver and gold benefit levels. CO-OPs will also be permitted to participate in Medicaid and the Children’s Health Insurance Program (CHIP), to enable individuals and families to remain with the same health insurance company and provider if they move between the exchange and these programs.

CMS intends to begin awarding CO-OP loans in late 2011 or early 2012, to provide sufficient time for CO-OPs to become operational and accept enrollment during the first exchange open enrollment period, starting in October 2013.


CO-OPs don’t appear to be terribly different than traditional Blue Cross and other not-for-profit plans. To compete with private insurers favorably, they’ll require substantial expertise, a claims payment platform, provider networks, and all the other accoutrements of a contemporary, sophisticated insurer. Not just anyone will be able to establish a CO-OP, given that the entities must satisfy complex financial, licensing and other requirements. It will be interesting, over the following months, to see which entities take the CO-OP plunge, and to watch the CO-OP marketplace evolve over time.

Janae Schaeffer, JD
Health Reform Advisory Practice

About thebenefitblog

Eric is a Producer at Lockton Insurance Brokers, Inc., the world’s largest privately held commercial broker. Eric has over 23 years of experience in the insurance industry and has spent the last 11 years with Lockton. Eric specializes in Health & Welfare Benefits, Retirement Planning, and Executive Benefits. Eric's clients utilize his expertise in the areas of Plan Due Diligence, Transaction Structure, Fiduciary Oversight, Investment Design, Compliance and Vendor negotiation to improve the operational & financial outcome for each client. The Benefit Blog is a place to share that expertise and industry news.
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