Earlier this month, the Centers for Medicare and Medicaid Services (CMS) passed an interim final rule that amends regulations governing Consumer Operated and Oriented Plans (Co-ops) and tightens restrictions on special enrollment period (SEP) eligibility in the Health Insurance Marketplace. Of the 23 co-op plans established through the Affordable Care Act (ACA), only 11 are still in operation. The new provisions intend to support the financial viability of the remaining co-ops by allowing access to private sector investments.

The rise and fall of health insurance co-ops

Co-ops are non-profit, consumer-owned organizations that offer health insurance plans on and off the exchanges. Introduced as an alternative to the controversial public option, section 1322 of the ACA established the co-op program in 2010 to bring competition and choice to the individual and small-group market.

Under the ACA, co-ops could only receive outside funding through Federal taxpayer loans. With the goal of establishing co-ops in all 50 states, the ACA dedicated $6 billion in funding for the co-op program. Sponsors (e.g. consumer groups, membership associations, unions) that formed a co-op could apply for federal taxpayer loans to cover startup costs and repayable grants to meet state solvency requirements. Critical of the program since its inception, Congress cut program funding in 2011 and 2013 by a total of $4.9 billion, effectively eliminating access to federal funding for issuing new loans.

Through the 2015 open enrollment period, over one million people were enrolled across 23 co-ops. By the end of 2015, more than half of enrollees would have to switch plans: facing inadequate premium revenue paired with a sicker than expected risk pool, 12 co-ops shut down.

A second chance at financial viability

In an effort to secure funding for the failing co-op program, CMS passed the following changes to go into effect on May 11th:

  • Co-ops may now seek funding from private investors to build capital
  • Members must elect the majority of the co-op board of directors, eliminating the requirements that (1) all directors are elected by members and (2) the majority of directors are co-op members
  • Co-ops that fail to provide at least two-thirds of their plans in the individual or small group market (employee groups <100) can avoid penalties by demonstrating efforts to meet the standard in future years

According to CMS, these changes “provide co-ops with flexibility common among private market health insurance issuers, and will support the financial viability of co-ops.” By eliminating existing barriers to private capital, co-ops can regain access to essential funds to cover startup costs and meet state solvency requirements. Changes to board requirements also allow co-ops to recruit directors with greater expertise who can facilitate private sector investments.

Critics argue that co-ops are not likely to attract many investors. Meanwhile, those that do secure funding will not necessarily be unable to recover from the past two years of poor performances. A March 2016 GAO report indicates that so far in 2016, only seven operating co-ops have secured 25,000 enrollees, the minimum number that CMS believes indicates financial solvency.

Still, there is reason to be optimistic. Previously prohibited from using federal loans for marketing purposes, co-ops can now use private capital to fund marketing initiatives. Under the new rules, co-ops are better positioned to attract a sufficient number of healthy enrollees to help balance premium revenue and claims payments.

Cracking down on special enrollment abuse and misuse 

The interim rule also narrows down SEP eligibility to six conditions: (1) losing other qualifying coverage, (2) changes in household size (e.g. marriage or birth), (3) changes in residence, with significant limitations, (4) changes in eligibility for financial help, with significant limitations, (5) defined types of errors made by Marketplaces or plans, and (6) other specific cases (e.g. cycling between Medicaid and the Marketplace, leaving AmeriCorps coverage).

SEPs are periods outside of open enrollment when eligible individuals can purchase health insurance. People who enroll during SEPs tend to remain covered for shorter amounts of time and have higher costs of care than those who enroll during the open enrollment period. Insurers argue that SEPs allow beneficiaries sign up for plans when they encounter health problems, only to drop coverage when the health issue is resolved.

Moving forward, CMS is confident the modifications to SEP eligibility will ensure that beneficiaries are using special enrollment appropriately.