Key changes for ACA CO-OP boards: a look at new regulations taking effect this week

On May 6, 2016, the US Department of Health and Human Services (HHS) released an interim final rule with comment (IFC) to bolster the viability of the remaining Consumer Operated and Oriented Plans (CO-OPs). Notably, the IFC takes effect almost immediately, on May 11, 2016. The following provides an overview of the IFC's key changes to existing CO-OP regulations.


Section 1322 of the Patient Protection and Affordable Care Act (ACA) created a loan program to fund the establishment of CO-OPs—not-for-profit, consumer-driven health insurance issuers intended to compete with established commercial insurers. The ACA initially appropriated $3.8 billion for the CO-OP loan program, however much of this funding was later rescinded by Congress, contributing  to the demise of a number of CO-OPs with serious solvency concerns. While 23 CO-OPs initially received funding under the ACA, only 11 remained operational by the end of 2015. 

This high failure rate has been attributed to a number of causes, among them: the decrease in available federal solvency loan funding, the lack of funding for the federal "risk corridor" payments, the disproportionately negative impact of the federal "risk adjustment" program on newer and smaller carriers, the failure to price products appropriately, and the ACA-based governance, capital and business restrictions that put CO-OPs at a disadvantage vis-à-vis their commercial competitors. The IFC specifically addresses this competitive disadvantage.

In particular, the IFC modifies three critical rules applicable only to CO-OPs: 1) the restrictions on the make up of the board regarding experience or expertise in the industry; 2) the prohibition on a CO-OP's ability to raise private capital; and 3) the requirement that "substantially all" CO-OP business be focused on the individual and small group markets. Each revision is summarized below.

Board Membership

The existing regulations limit CO-OP board membership by prohibiting representatives of pre-existing issuers or governmental entities from participating. The stated goal of the restriction, set forth at 45 C.F.R. 156.515(b)(2), was to avoid the inherent conflicts of interest associated with "industry" board members. However in practice, the effect was to restrict member participation to individuals with limited knowledge and insurance expertise, despite their participation in a highly regulated industry.

The IFC addresses the CO-OPs' requests for increased flexibility with respect to board membership. Specifically, it amends the definitions of "pre-existing issuer" and "representative," included in 45 CFR 156.505, to allow certain identified individuals with industry experience to participate as qualified CO-OP board members:

  • The definition of "pre-existing issuer" is amended to apply only to state-licensed health insurance issuers that participated in the individual and small group commercial health insurance markets on July 16, 2009. This modification now only excludes issuers that compete in the individual and small group market, therefore allowing employees for all other issuers to participate as CO-OP board members.
  • The definition of "representative" is amended by the IFC to apply only to senior executives of an organization or high level representatives of Federal, state or local governments. This modification now allows other employees of organizations and governments to participate as CO-OP board members.

Employees of insurance companies that do not participate in the individual or small group markets and companies that do not market insurance plans to the general public, in addition to representatives of organizations that only provide Medicare, Medicaid or other products that do not compete in the individual and small group market, may participate on a CO-OP board under the IFC. According to HHS, these modifications maintain the original policy goal of avoiding conflicts of interest while allowing the participation of experienced industry professionals. 

Access to Capital

In addition to depriving CO-OP boards of industry experience, the existing regulations essentially foreclosed CO-OPs' access to private capital.

Importantly, the existing regulations required that positions on a CO-OP board reserved for individuals with "specialized expertise, experience, or affiliation cannot constitute a majority of the board," even if such individuals are members of the CO-OP. See 45 CFR 156.515(b)(2)(iv). The IFC revokes this requirement. In doing so, HHS stated that the additional flexibility given to the CO-OP board would only increase a CO-OP's ability to pursue new and strategic business partners and would not impact the overall fundamental goal that the CO-OPs be member-driven and member-governed.

In addition, the IFC amends certain governance standards included in 45 CFR 156.515(b)(1) by revising the requirement that all CO-OP boards of directors must be elected by a majority of its members and removing the requirement that a majority of the voting directors must be members of the CO-OP. As a result, CO-OP boards may mirror their private sector competitors, by including representatives of financial entities offering loans, investments and services. This change will allow CO-OPs to seek out private investments and broader business opportunities, and to benefit from the new members' background in and knowledge of the industry's regulatory framework, product design, solubility reserves and premium pricing, among other things.

Individual and Small Group Focus

Finally, the IFC softens the requirement in 45 CFR 156. 515(c)(1) that at least two-thirds of the policies issued by a CO-OP must be sold in the individual or small group insurance market. This requirement is based on the ACA provision requiring that "substantially all" of the CO-OPs' activities involve the issuance of qualified health plans in the individual and small group markets. Notably, Section 1322 of the Affordable Care Act further requires loan repayment if a CO-OP fails to (1) comply with the "substantially all" standard and (2) correct such failure within a reasonable period of time. In the IFC, HHS clarifies that failure to comply with the requirement in a given year may not trigger immediate repayment as long as the CO-OP (1) offers a qualified individual and small group plan in every market in which it is licensed; (2) has a plan and timeline in place for meeting the two-thirds requirement; and (3) demonstrates diligence and good faith efforts in attempting to comply with the two thirds standard. 

Looking Ahead

Although the IFC will take effect on May 11, 2016, comments are being accepted through Tuesday, July 5, 2016. HHS noted in the IFC that delaying its implementation would be contrary to public interest. As noted earlier, half of the originally established CO-OPs have already ceased operations and eight of the remaining eleven are reportedly financially strained. This IFC is one way in which HHS is hoping to restore fiscal viability to the surviving CO-OPs beyond 2016. We will continue to watch for further revisions to CO-OP governance standards as well as other regulatory changes being considered for CO-OPs, such as risk adjustment issues, detailed here and here.

Contact the authors of this article Jenifer Healy, Kate Morgan and Claire Bornstein


Noteworthy links from the past two weeks


  • In a wide-ranging interview, NAIC President and Missouri Insurance Director discussed international group capital standards and the potential for a US-EU "covered agreement" [InsuranceERM]
  • The US Treasury Secretary expressed confidence in Financial Stability Oversight Council appeal of a trial court ruling overturning the designation of MetLife as a Systemically Important Financial Institution [LifeHealthPRO]

Property and Casualty

  • Virginia joined the growing list of states that have moved to limit insurers' use of "price optimization" techniques [A.M. Best]

Long-Term Care Insurance

Life and Health

  • MetLife agreed to pay $25 to settle FINRA allegations that it misled retirement investors about product replacements [The Wall Street Journal]
  • Iowa sued the federal government over the failed Affordable Care Act Co-Op that covered participants in Iowa and Nebraska [The Des Moines Register, Nebraska Radio Network]
  • The National Association of Insurance Commissioners is considering risk-based capital rule changes that would make pension de-risking products more expensive [The Wall Street Journal]
  • UnitedHealthcare's exit will leave a single on-exchange health insurer in a number of jurisdictions [Governing]