Patient Protection and Affordable Care Act; Establishment of Consumer Operated and Oriented Plan (CO-OP) Program, 43237-43250 [2011-18342]

Agencies

• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 76, Number 139 (Wednesday, July 20, 2011)]
[Proposed Rules]
[Pages 43237-43250]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18342]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 156

[CMS-9983-P]
RIN 0938-AQ98


Patient Protection and Affordable Care Act; Establishment of 
Consumer Operated and Oriented Plan (CO-OP) Program

AGENCY: Department of Health and Human Services.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement the Consumer Operated and 
Oriented Plan (CO-OP) program, which provides loans to foster the 
creation of consumer-governed, private, nonprofit health insurance 
issuers to offer qualified health plans in the Affordable Insurance 
Exchanges (Exchanges). The purpose of this program is to create a new 
CO-OP in every State in order to expand the number of health plans 
available in the Exchanges with a focus on integrated care and greater 
plan accountability.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on September 16, 
2011.

ADDRESSES: In commenting, please refer to file code CMS-9983-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to https://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address only:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-9983-P, P.O. Box 8010, Baltimore, MD 
21244-8010.

    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address only:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-9983-P, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.

    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments only to the following addresses prior to 
the close of the comment period:
    a. For delivery in Washington, DC--

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue, SW., Washington, DC 20201.

    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    If you intend to deliver your comments to the Baltimore address, 
call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the

[[Page 43238]]

``Collection of Information Requirements'' section in this document. 
Comments erroneously mailed to the addresses indicated as appropriate 
for hand or courier delivery may be delayed and received after the 
comment period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Anne Bollinger, (301) 492-4395 for 
issues related to eligibility and CO-OP standards. Catherine Demmerle, 
(301) 492-4156 for issues related to conversions and program integrity. 
Meghan Elrington, (301) 492-4388 for general issues and issues related 
to loan terms.

SUPPLEMENTARY INFORMATION:

Acronym List

    Because of the many terms to which we refer by acronym in this 
proposed rule, we are listing the acronyms used and their corresponding 
meanings in alphabetical order below:

CCIIO Center for Consumer Information & Insurance Oversight
CMS Centers for Medicare & Medicaid Services
CO-OP Consumer Operated and Oriented Plan
FACA Federal Advisory Committee Act
HHS Department of Health and Human Services
OIG Office of Inspector General
OMB Office of Management and Budget
PHS Act Public Health Service Act
QHP Qualified Health Plan
RFC Request for Comment
SHOP Small Business Health Options Program

    Executive Summary: The Patient Protection and Affordable Care Act, 
Public Law 111-148, enacted on March 23, 2010 and the Health Care and 
Education Reconciliation Act of 2010, Public Law 111-152, enacted on 
March 30, 2010, are collectively referred to in this proposed rule as 
the ``Affordable Care Act.'' The Department of Defense and Full-Year 
Continuing Appropriations Act, 2011, Public Law 112-10, which amended 
the Affordable Care Act, was enacted on April 15, 2011. Section 1322 of 
the Affordable Care Act created the Consumer Operated and Oriented Plan 
program (CO-OP program) to foster the creation of new consumer-
governed, private, nonprofit health insurance issuers, known as ``CO-
OPs.'' In addition to improving consumer choice and plan 
accountability, the CO-OP program also seeks to promote integrated 
models of care and enhance competition in the Affordable Insurance 
Exchanges established under sections 1311 and 1321 of the Affordable 
Care Act.
    The statute provides loans to capitalize eligible prospective CO-
OPs with a goal of having at least one CO-OP in each State. The statute 
permits the funding of multiple CO-OPs in any State, provided that 
there is sufficient funding to capitalize at least one CO-OP in each 
State. Congress provided budget authority of $3.8 billion for the 
program.
    This proposed rule: (1) Sets forth the eligibility standards for 
the CO-OP program; (2) establishes some terms for loans; and (3) 
provides certain basic standards that organizations must meet to 
participate in this program and become a CO-OP. The overall approach 
and intent of this proposed rule is to provide flexibility for 
organizations to develop and create a CO-OP. Acknowledging the 
significant variation in market conditions and populations served that 
CO-OPs will face, CMS encourages diversity in the organizational design 
and approach.
    Starting in 2014, individuals and small businesses will be able to 
purchase private health insurance through State-based competitive 
marketplaces called Affordable Insurance Exchanges. Exchanges will 
offer Americans competition, choice, and clout. Insurance companies 
will compete for business on a level playing field, driving down costs. 
Consumers will have a choice of health plans to fit their needs. 
Exchanges will give individuals and small businesses the same 
purchasing clout as big businesses. The Departments of Health and Human 
Services, Labor, and the Treasury (the Departments) are issuing 
regulations implementing Exchanges in several phases. The first in this 
series was a Request for Comment relating to Exchanges, published in 
the Federal Register on August 3, 2010. Second, Initial Guidance to 
States on Exchanges was published issued on November 18, 2010. Third, a 
proposed rule for the application, review, and reporting process for 
waivers for State innovation was published in the Federal Register on 
March 14, 2011 (76 FR 13553). Fourth, on July 15, 2011, two proposed 
regulations were published in the Federal Register to implement 
components of the Exchange and health insurance premium stabilization 
policies in the Affordable Care Act including one entitled, ``Patient 
Protection and Affordable Care Act; Establishment of Qualified Health 
Plans and Exchanges,'' hereinafter referred to as ``Exchanges proposed 
rule.'' Fifth, additional regulations, including this one, are being 
published in the Federal Register to implement Exchange related 
components of the Affordable Care Act.
    Submitting Comments: Comments from the public are welcome on all 
issues set forth in this proposed rule to assist CMS in fully 
considering issues and developing policies. Comments should reference 
the file code CMS-9983-P and the specific section on which a comment is 
made.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period as soon as possible 
after they have been received, on the following Web site: https://www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received in a timely manner will also be available for 
public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, phone 1-800-743-3951.

Table of Contents

I. Background
    A. Overview
    B. Statutory Basis for the Consumer Operated and Oriented Plan 
(CO-OP) Program
    C. Purpose of the Consumer Operated and Oriented Plan (CO-OP) 
Program
    D. Request for Comment
    E. Structure of the Proposed Rule
II. Provisions of the Proposed Regulation
    A. Basis and Scope (Sec.  156.500)
    B. Definitions (Sec.  156.505)
    C. Eligibility (Sec.  156.510)
    1. General
    2. Exclusions from Eligibility
    D. CO-OP Standards (Sec.  156.515)
    1. General
    2. Governance Requirements
    3. Requirements to Issue Health Plans and Become a CO-OP
    E. Loan Terms (Sec.  156.520)
    1. Overview of Loans
    2. Repayment Period
    3. Interest Rates
    4. Failure to Pay
    5. Deeming of CO-OP Qualified Health Plans
    6. Conversions
III. Collection of Information Requirements
IV. Response to Comments
V. Regulatory Impact Analysis
    A. Introduction

[[Page 43239]]

    B. Statement of Need, Health Insurance Markets, and CO-OP Plans
    C. Anticipated Costs
    D. Anticipated Benefits
    E. Alternatives Considered
    F. Accounting Statement
VI. Other Requirements for Analysis of Economic Effects Regulations 
Text

I. Background

A. Overview

    The CO-OP program provides Federal loans to foster and encourage 
the creation of new consumer-run, private health insurers in every 
State that will provide consumers and small businesses with greater 
choice in the Exchanges starting in 2014. These new consumer-run, 
private, nonprofit insurers will be a vehicle for providing higher 
quality care that is affordable, coordinated, and responsive.

B. Statutory Basis for the Consumer Operated and Oriented Plan (CO-OP) 
Program

    Section 1322(a) of the Affordable Care Act directs CMS to establish 
the CO-OP program to foster the creation of member-governed qualified 
nonprofit health insurance issuers to offer CO-OP qualified health 
plans in the individual and small group markets in the States in which 
they are licensed to offer such plans.
    Section 1322(b)(1) of the Affordable Care Act provides that CMS 
shall provide two types of loans to organizations applying to become 
qualified nonprofit health insurance issuers: Start-up Loans and 
repayable grants (Solvency Loans). Start-up Loans will provide 
assistance with start-up costs and Solvency Loans will provide 
assistance in meeting solvency requirements in the States in which the 
organization is licensed to issue CO-OP qualified health plans.
    Section 1322(b)(2) provides that in making awards, CMS must take 
into account the recommendations of the Advisory board further 
described in section 1322(b)(4) of the Affordable Care Act and give 
priority to applicants that offer CO-OP qualified health plans on a 
statewide basis, use integrated care models, and have significant 
private support.
    Section 1322(b)(2) of the Affordable Care Act also directs CMS to 
ensure that there is sufficient funding to establish at least one 
qualified nonprofit health insurance issuer in each State and the 
District of Columbia. It permits CMS to fund additional qualified 
nonprofit health insurance issuers in any State if the funding is 
sufficient to do so. If no entities in a State apply, CMS may use funds 
to encourage the establishment of a qualified nonprofit health 
insurance issuer in the State or the expansion of another qualified 
nonprofit health insurance issuer from another State to that State.
    Section 1322(b)(2) of the Affordable Care Act also directs any 
organization receiving a loan to enter into an agreement to meet the 
standards to become a qualified nonprofit health insurance issuer and 
any other terms and conditions of the loan awards.
    Section 1322(b)(2)(c)(iii) of the Affordable Care Act provides 
that, if CMS determines that an organization has failed to meet any 
provisions of the loan agreement or failed to correct such failure 
within a reasonable period of time, the organization must repay an 
amount equal to the sum of:
     110 percent of the aggregate amount of loans received; 
plus
     Interest on the aggregate amount of loans for the period 
the loans were outstanding starting from the date of drawdown.
    CMS must notify the Department of the Treasury of any determination 
of a failure to comply with the CO-OP program standards that may affect 
an issuer's tax-exempt status under section 501(c)(29) of the Code.
    Under section 1322(b)(3), Start-up Loans must be repaid within 5 
years, and Solvency Loans must be repaid within 15 years. Repayment 
terms in the award of loans must take into consideration any 
appropriate State reserve requirements, solvency regulations, and 
requisite surplus note arrangements that must be constructed by a 
qualified health insurance issuer in a State to receive and maintain 
licensure.
    Section 1322(c)(1) of the Affordable Care Act defines ``qualified 
nonprofit health insurance issuer'' as an organization that:
     Is organized under State law as a private, nonprofit, 
member corporation;
     Conducts activities of which substantially all consist of 
the issuance of CO-OP qualified health plans in the individual and 
small group markets in each State in which it is licensed to issue such 
plans; and
     Meets the other requirements in subsection 1322(c) of the 
Affordable Care Act.
    Section 1322(c)(2) of the Affordable Care Act states that an 
organization is not eligible to become a qualified nonprofit health 
insurance issuer if the organization or a related entity (or any 
predecessor of either) was a health insurance issuer on July 16, 2009. 
In addition, an organization cannot be treated as eligible to apply for 
a loan under the CO-OP program if it is sponsored by a State or local 
government, any political subdivision thereof, or any instrumentality 
of such government or political subdivision. A CO-OP must be a private, 
nonprofit health insurance issuer.
    Section 1322(c)(3) of the Affordable Care Act establishes 
governance requirements for a qualified nonprofit health insurance 
issuer. To ensure consumer control, the governance of the organization 
must be subject to a majority vote of its members. The organization's 
governing documents must incorporate ethics and conflict of interest 
standards to protect CO-OP members against insurance industry 
involvement and interference. To ensure consumer orientation, the 
organization is required to operate with a strong consumer focus, 
including timeliness, responsiveness, and accountability to members.
    Section 1322(c)(4) of the Affordable Care Act directs the 
organization to use any profits to lower premiums, improve benefits, or 
for other programs intended to improve the quality of health care 
delivered to its members.
    Section 1322(c)(5) of the Affordable Care Act directs that the 
organization must meet all the State standards for licensure that other 
issuers of qualified health plans must meet in any State where the 
issuer offers a CO-OP qualified health plan, including solvency and 
licensure requirements and any other State law described in section 
1324(b) of the Affordable Care Act.
    Section 1322(c)(6) of the Affordable Care Act prohibits a qualified 
nonprofit health insurance issuer from offering a health plan in a 
State until that State has in effect (or CMS has implemented for the 
State) the market reforms outlined in part A of title XXVII of the 
Public Health Service Act (as amended by subtitles A and C of title I 
of the Affordable Care Act) including but not limited to, the 
requirements for guaranteed issue and limitations on premium variation.
    Section 1322(e) of the Affordable Care Act prohibits 
representatives of any Federal, State, or local government (or of any 
political subdivision or instrumentality thereof), and representatives 
of an organization that was an existing issuer or a related entity (or 
predecessor of either) on July 16, 2009, from serving on the board of 
directors of the qualified nonprofit health insurance issuer or a 
private purchasing council established under section 1322(d) of the 
Affordable Care Act.

[[Page 43240]]

    Together, these provisions form the statutory basis for the CO-OP 
program established under this rule.

C. Purpose of the Consumer-Operated and Oriented Plan Program

    Section 1322 of the Affordable Care Act established the CO-OP 
program to provide loans to foster the creation of new consumer-
governed nonprofit health insurance issuers (referred to as CO-OPs) 
that will operate with a strong consumer focus. The statute divides the 
loans into two types: loans for start-up costs to be repaid in 5 years 
(``Start-up Loans'') and loans to enable CO-OPs to meet State insurance 
solvency and reserve requirements to be repaid in 15 years (``Solvency 
Loans''). Section 1322(b)(2)(A) of the Affordable Care Act directs CMS 
to ensure that there is sufficient funding to establish at least one 
CO-OP in each State and to give priority to organizations capable of 
offering CO-OP qualified health plans on a Statewide basis. To further 
ensure the presence of CO-OPs in the Exchanges, section 1301(a)(2) of 
the statute deems CO-OP qualified health plans offered by a qualified 
nonprofit health insurance issuer eligible to participate in the 
Exchanges.
    The CO-OP program also seeks to promote improved models of care. 
Existing health insurance cooperatives and other business cooperatives 
provide possible models for the successful development of CO-OPs around 
the country. One major barrier to continued development of this model 
has been the difficulty of obtaining adequate capitalization for start-
up costs and State reserve requirements. The CO-OP program is designed 
to help overcome this major barrier to new issuer formation by 
providing funding for these critical activities.
    Pursuant to section 1322(b)(4) of the Affordable Care Act, the 
Comptroller General announced the appointment of a 15 member CO-OP 
Program Advisory Board to make recommendations to CMS on awarding loans 
on June 23, 2010. Section 1322(b)(2)(A) directs the Secretary to 
consider the recommendations of the Advisory Board when awarding loans 
under the CO-OP program. After taking comments in three day-long public 
hearings from January through March, 2011 and written comments, the 
Advisory Board approved its final recommendations and report on April 
15, 2011. The Advisory Board's final report is available at: https://cciio.hhs.gov/resources/files/coop_faca_finalreport_04152011.pdf. 
The Advisory Board generally advised the Department to develop flexible 
criteria that recognize the diversity of market conditions around the 
country to enable the development of various CO-OP models and allow 
different types of sponsorship. It also strongly encouraged the 
Department to provide technical assistance at all stages of the process 
in order to enhance the viability of individual CO-OPs and the success 
of the program.
    The Advisory Board developed four major principles for awarding 
loans. CMS concurs with those principles:
    (1) Consumer operation, control, and focus must be the salient 
features of the CO-OP and must be sustained over time;
    (2) Solvency and the financial stability of coverage should be 
maintained and promoted;
    (3) CO-OPs should encourage care coordination, quality and 
efficiency to the extent feasible in local provider and health plan 
markets; and
    (4) Initial loans should be rolled out as expeditiously as possible 
so that CO-OPs can compete in the Exchanges in the critical first open 
enrollment period.
    CMS also concurs with the Advisory Board in recognizing that 
potential CO-OPs will initially present different capabilities and 
levels of development. This proposed rule incorporates the principles 
endorsed by the Advisory Board by allowing diversity among CO-OPs and 
maintaining the vision outlined in the Advisory Board Final Report. The 
CO-OP program will offer an entry point to eligible organizations that 
seek to provide more consumer-focused coverage and create additional 
competition for insurance that will make high-quality care more 
affordable. By creating more health plan choices, CO-OPs can benefit 
all consumers.

D. Request for Comment

    On February 2, 2011, CMS published a Request for Comment (RFC) in 
the Federal Register (76 FR 5774) seeking public comment on the rules 
that will govern the CO-OP program. The comment period closed on March 
4, 2011. CMS has considered and incorporated the comments received in 
developing specific regulatory proposals.
    The public response to the RFC yielded 55 unique comment 
submissions. A total of 65 unique entities submitted comments, 
including entities that submitted stand-alone comments and multiple 
individuals who signed onto one comment submission. The 65 total unique 
commenters included consumers and consumer advocacy organizations, 
medical and health care professional trade associations and societies, 
health insurers and insurance trade associations, health benefits 
consultants, and actuaries. The majority of the comments related to the 
types of organizations that would likely become successful CO-OPs and 
the criteria CMS should use in awarding loans.

E. Structure of the Proposed Rule

    The regulations outlined in this Notice of Proposed Rulemaking will 
be codified in the new 45 CFR part 156 subpart F. The major subjects 
covered in this proposed rule under subpart F of part 156 are described 
below.
     Section 156.500 describes the statutory basis of the CO-OP 
program and the scope of this proposed rule;
     Section 156.505 sets forth definitions for the terms 
applied in subpart F;
     Section 156.510 specifies the criteria to be eligible for 
a loan under the CO-OP program;
     Section 156.515 sets forth the standards for a CO-OP; and
     Section 156.520 sets forth the terms for loans awarded 
under the CO-OP program including repayment terms and interest rates.

II. Provisions of the Proposed Regulations

A. Basis and scope (Sec.  156.500)

    Section 156.500 specifies the general statutory authority for and 
scope of standards proposed in subpart F. The CO-OP program fosters the 
creation of qualified nonprofit health insurance issuers to offer CO-OP 
qualified health plans in the individual and small group markets. 
Subpart F establishes certain governance requirements for CO-OPs and 
the terms for loans awarded under the CO-OP program. Applicants may 
apply for loans to help fund start-up costs and meet the solvency 
requirements of States in which the applicant seeks to be licensed to 
issue CO-OP qualified health plans.

B. Definitions (Sec.  156.505)

    Section 156.505 sets forth definitions for terms that are used 
throughout subpart F. Many of the definitions presented in Sec.  
156.505 are taken directly from the Affordable Care Act, but new 
definitions were created when necessary. All definitions proposed are 
intended to apply only to subpart F.
    Several of the terms used in subpart F are defined elsewhere in 
Parts 155 and 156, which have been proposed previously (76 FR 41866). 
The terms ``individual market,'' ``small group market,'' ``SHOP,'' and 
``Exchange'' are defined in Sec.  155.20. ``Individual market'' is 
defined as the market for health insurance coverage offered to

[[Page 43241]]

individuals other than in connection with a group health plan. ``Small 
group market'' is defined as the health insurance market under which 
individuals obtain health insurance coverage (directly or through any 
arrangement) on behalf of themselves (and their dependents) through a 
group health plan maintained by a small employer. ``SHOP'' is defined 
as a Small Business Health Options Program operated by an Exchange 
through which a qualified employer can provide its employees and their 
dependents with access to one or more QHPs. ``Exchange'' is defined as 
a governmental agency or non-profit entity that meets the applicable 
requirements of this part and makes QHPs available to qualified 
individuals and qualified employers. Unless otherwise identified, this 
term refers to State Exchanges, regional Exchanges, subsidiary 
Exchanges, and a Federally-facilitated Exchange.
    CMS proposes that a ``CO-OP qualified health plan'' means a health 
plan that has in effect a certification that it meets the standards 
described in subpart C of part 156, which has been previously proposed 
(76 FR 41866), except that the plan can be deemed certified by CMS or 
an entity designated by CMS as described in 156.520(e).
    ``Applicant'' is defined as an entity eligible to apply for a loan 
described in Sec.  156.520.
    A ``qualified nonprofit health insurance issuer'' is a loan 
recipient, which satisfies or can reasonably be expected to satisfy the 
standards in section 1322(c) of the Affordable Care Act and Sec.  
156.515 within the time frames specified in this subpart, until such 
time as CMS determines the loan recipient does not satisfy or cannot 
reasonably be expected to satisfy these standards. This ensures that 
loan recipients can receive the benefits of section 1322(h), addressing 
the tax exemption for qualified nonprofit health insurance issuers, at 
the appropriate time, as determined by the Internal Revenue Service. 
CMS proposes that the term ``consumer operated and oriented plan (CO-
OP)'' means a loan recipient that satisfies the standards in section 
1322(c) of the Affordable Care Act and Sec.  156.515 within the time 
frames specified in this subpart. Thus, to be considered a CO-OP, a 
loan recipient must meet the governance and health plan issuance 
standards described in Sec.  156.515 within the timeframes established 
in this subpart. In addition, the loan recipient must comply with State 
insurance laws and State insurance reforms and ensure that revenues in 
excess of expenses inure to the benefit of its members in accordance 
with section 1322(c)(4) of the Affordable Care Act.
    We define a ``nonprofit member corporation'' (also referred to as a 
``nonprofit member organization'') as a nonprofit, not-for-profit, 
public benefit, or similar membership entity organized as appropriate 
under State law. For the purposes of this subpart, as defined in 
section 1304(d) of the Affordable Care Act, ``State'' means each of the 
50 States and the District of Columbia. CMS proposes that in order for 
an organization to be eligible for CO-OP loans (and become an 
``applicant'') it would first have to meet the definition of a 
nonprofit member organization.
    CMS proposes to adopt the Advisory Board's recommendation to use 
the terms ``formation board'' and ``operational board'' when discussing 
the governance requirements for a CO-OP. The term ``formation board'' 
means the initial board of directors of the applicant or loan recipient 
before it has begun accepting enrollment and conducted an election to 
the board of directors. ``Operational board'' means the board of 
directors elected by the members of the CO-OP after it has begun 
accepting enrollment. A ``member'' is an individual covered under 
health insurance policies issued by a CO-OP.
    Section 1322(c)(2)(A) of the Affordable Care Act prohibits an 
organization from participating as a ``qualified nonprofit health 
insurance issuer'' in the CO-OP program ``if the organization or a 
related entity (or any predecessor of either) was a health insurance 
issuer on July 16, 2009.'' Consistent with section 1551 of the 
Affordable Care Act, we propose that an entity is an ``issuer'' under 
this subpart if it satisfies the definition in section 2791(b)(2) of 
the Public Health Service Act: an insurance company, insurance service, 
or insurance organization (including a health maintenance organization) 
which is licensed to engage in the business of insurance in a State and 
which is subject to State law which regulates insurance. Additionally, 
``pre-existing issuer'' means (for the purposes of this subpart) a 
health insurance issuer that was in existence on July 16, 2009. We seek 
comments on this definition.
    CMS proposes the definition of ``related entity'' to mean an 
organization that shares common ownership or control with a pre-
existing issuer or a trade association whose members consist of pre-
existing issuers, and satisfies at least one of the following 
conditions: (1) Retains responsibilities for the services to be 
provided by the issuer; (2) furnishes services to the issuer's 
enrollees under an oral or written agreement; or (3) performs some of 
the issuer's management functions under contract or delegation. Thus, 
CMS would permit a nonprofit organization that is not an issuer or the 
representative of an issuer but shares control with an existing issuer 
to ``sponsor'' or facilitate the creation of a CO-OP if the applicant 
(and resulting CO-OP) and the existing issuer do not share the same 
chief executive or any of the board of directors. We seek comment on 
this interpretation.
    ``Sponsor'' is defined as an organization or individual that is 
involved in the development, creation, or organization of the CO-OP or 
provides financial support to a CO-OP. We propose that a 
``predecessor'' means any entity that participates in a merger, 
consolidation, purchase or acquisition of property or stock, corporate 
separation, or other similar business transaction that results in the 
formation of the new entity.
    Section 1322(b)(1) of the Affordable Care Act directs CMS to award 
to applicants loans to provide assistance in meeting start-up costs and 
any State solvency requirements in the States in which the applicant 
seeks to be licensed to issue CO-OP qualified health plans. ``Start-up 
Loan'' means a loan provided by CMS to a loan recipient for costs 
associated with creating and developing a CO-OP. The term ``Solvency 
Loan'' means a loan provided by CMS to a loan recipient in order to 
meet State solvency and reserve requirements.

C. Eligibility (Sec.  156.510)

    Section 156.510 outlines the minimum standards that an organization 
must meet to be eligible to receive a loan from the CO-OP program to 
create a new private consumer-operated insurer.
1. General
    In paragraph (a), we propose that the applicant declare its 
intention to become a CO-OP. Since the loan recipient may not meet all 
of the conditions to be considered a CO-OP at the time of the 
application, it is important that the organization intend to meet all 
of the standards and demonstrate the likelihood of being able to meet 
such requirements by the time periods established in this subpart 
before the award is made, especially those related to consumer focus 
and consumer governance of the organization.
    Consistent with the recommendation of the Advisory Board, CMS 
proposes the applicant have formed a nonprofit

[[Page 43242]]

member organization under State law prior to applying for a loan. This 
means that the new nonprofit member corporation, and not an 
organization that is sponsoring the creation of a CO-OP, would be the 
applicant for and recipient of a loan.
2. Exclusions From Eligibility
    Paragraph (b) codifies the conditions in section 1322(c)(2) of the 
Affordable Care Act under which an organization will not be eligible to 
participate in the CO-OP program. Paragraph (b)(1)(i) codifies that if 
an organization is a pre-existing issuer, a related entity, or any 
predecessor of either, it is not eligible for loans under the CO-OP 
program and therefore, cannot become a CO-OP. In addition, an 
organization is not eligible for the CO-OP program if the organization 
or a related entity (or any predecessor of either) is a trade 
association whose members consist of pre-existing issuers. We seek 
comment on this interpretation.
    Paragraph (b)(1)(ii) codifies that, if an organization is sponsored 
by a State or local government, any political subdivision thereof, or 
any instrumentality of such government or political subdivision, it is 
not eligible to be a CO-OP and cannot apply for a loan under the CO-OP 
program. CMS considered whether this prohibition should apply to 
provider organizations that are associated with State university 
medical centers and concluded that medical centers, physician 
practices, hospitals, and other organizations that are part of a State 
university system are instrumentalities of the State. We believe that 
the prohibition against sponsorship by State or local government, and 
their political subdivisions and instrumentalities, must also apply to 
medical centers that are part of State or local governments and to 
medical practice groups that are created and overseen by a medical 
center owned by State or local government. This prohibition would not 
apply to Indian tribes. We invite comment on these interpretations.
    As incorporated in section 1551 of the Affordable Care Act, section 
2791(b)(2) of the PHS Act defines a ``health insurance issuer'' as ``an 
insurance company, insurance service, or insurance organization * * * 
which is licensed to engage in the business of insurance in a State and 
which is subject to State law which regulates insurance (within the 
meaning of section 514(b)(2) of the Employee Retirement Income Security 
Act of 1974).'' CMS believes that the following types of entities are 
examples of organizations that are not ``issuers'' and would be 
eligible to sponsor applicants for loans under the CO-OP program 
provided that they otherwise meet the requirements for eligibility:
    (1) A prospective applicant not licensed by its State as a health 
insurance issuer on July 16, 2009, but which has subsequently achieved 
a State license,
    (2) Self-funded and Taft-Hartley group health plans, and
    (3) Church plans that were not licensed issuers on July 16, 2009, 
and
    (4) Three-share or multi-share programs not licensed by their State 
insurance regulator.
    CMS invites comment on how these organizations and others like them 
would sponsor an applicant.
    Taking into account comments received on the RFC and the 
recommendations of the Advisory Board, in paragraph (b)(2)(i) CMS 
proposes that a nonprofit organization that is not an issuer but that 
currently sponsors an issuer would remain eligible to sponsor an 
applicant for a CO-OP loan in certain circumstances. Specifically a 
nonprofit non-issuer organization that currently sponsors a pre-
existing issuer and meets other eligibility parameters may sponsor an 
applicant for a CO-OP loan provided that the pre-existing issuer does 
not share any of the board or the same chief executive with the 
applicant. We seek comment on this interpretation.
    In paragraph (b)(2)(ii), we are further proposing that an 
organization that has purchased assets from a preexisting issuer in an 
arm's-length transaction where neither party was in a position to exert 
undue influence on the other is eligible to apply for a CO-OP loan. 
Therefore, an organization is eligible for CO-OP loans if it contracts 
for services, including health provider network access, premium 
billing, and case management from a health insurance issuer that 
existed on July 16, 2009, as long as the existing issuer has no control 
over the new private nonprofit issuer. Conversely, an applicant and a 
pre-existing issuer could have common control by a non-issuer 
organization. The applicant and pre-existing issuer would not be 
related entities unless the pre-existing issuer also provided the CO-
OP's services or management functions.

D. CO-OP Standards (Sec.  156.515)

1. General
    A CO-OP must satisfy the standards set forth in all statutory, 
regulatory, or other requirements as applicable. CMS proposes 
additional standards that a CO-OP must meet in Sec.  156.515, many of 
which are recommendations made by the Advisory Board in the final 
report dated April 15, 2011. We invite comment on these proposed 
standards, which are set forth below.
2. Governance Requirements
    In response to the RFC, provider organizations submitted comments 
that suggested that providers may be in the best position to sponsor 
CO-OPs and encouraged CMS to impose no additional standards related to 
governance beyond those in the statute. In contrast, other commenters 
suggested that CMS set specific standards for the composition of the 
governing body, such as those to avoid conflicts and to encourage 
diverse representation on governing bodies that are representative of 
the local population. Other commenters expressed concern that in some 
markets providers could create a CO-OP and control pricing in the 
market.
    Section 1322(c)(3)(C) of the Affordable Care Act directs the 
Secretary to promulgate regulations requiring the organization to 
operate with a strong consumer focus, including timeliness, 
responsiveness, and accountability to members. Pursuant to this 
authority and taking into account the comments, CMS proposes additional 
governance requirements in paragraph (b). These proposed standards 
reflect the recommendations of the Advisory Board.
    Paragraph (b)(1) proposes that a CO-OP implement policies and 
procedures to foster and ensure member control of the organization. 
Section 1322(c)(3) of the Affordable Care Act states that the 
governance of the organization be subject to a majority vote of its 
members. Paragraph (b)(1)(i) proposes that the organization be governed 
by an operational board with each of its directors elected by a 
majority vote of its members. In paragraph (b)(1)(ii), we propose that 
every member of the CO-OP be eligible to vote for each director of the 
CO-OP during the elections described in (b)(1)(iv). In paragraph 
(b)(1)(iii), we propose that each member of the organization have one 
vote in the elections of directors.
    Paragraph (b)(1)(iv) proposes that the first election of the 
operational board of directors occur no later than one year after the 
effective date on which the CO-OP provides coverage to its first 
member. The Advisory Board recommended that this election should take 
place within the first year after enrollment begins or when a certain 
designated membership level is reached, but should occur no later than 
two years after the organization enrolls its first

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member, recognizing that a certain level of membership is necessary for 
meaningful elections. CMS is concerned that the Advisory Board's 
recommendation of an election date of the start-up period plus two 
years after enrollment will delay the introduction of consumer 
governance beyond a point where it can have an impact on the strategic 
direction of the CO-OP. We do not believe that holding an election one 
year after coverage begins will burden the formation board or CO-OP 
operations since the formation board will have the full start-up period 
plus one year to plan for this transition. We solicit comments on the 
proposed timeline.
    Paragraph (b)(1)(v) proposes that the elections for the board of 
directors of the organization be contested and that there be more 
candidates for open positions on the board than there are positions. We 
are not specifying the mechanism by which the CO-OP will achieve this 
standard, but we believe that the CO-OP's bylaws should address this 
standard, most likely by creating a nominating committee that will 
ensure that this standard is met. This standard will help ensure that 
consumer members of the organization have a choice of candidates for 
the board of directors, provide an opportunity for a change in 
directors, and help prevent a group of directors from exerting 
disproportionate control over the organization. CMS believes that the 
operation of contested elections will provide safeguards against the 
long-term entrenchment or undue influence of any individual director 
while protecting the members' choice of directors.
    Consistent with the recommendations of the Advisory Board and 
commenters to the RFC, paragraph (b)(1)(vi) proposes that a majority of 
the voting directors must be members of the organization. While all 
directors must be elected by the members, a CO-OP may want to reserve 
positions for directors who have certain types of expertise that are 
essential to the governance of the organization, such as providers or 
individuals with experience in health care operations or finance. CMS 
recognizes that it may not be possible to find members of the CO-OP 
with the desired expertise who are willing to serve as directors. The 
purpose of this provision is to recognize the need to allow for 
directors who are not members, but to ensure that members who are 
consumers of the services of the organization are the majority of the 
board of directors and that the governance of the organization is 
accountable to consumers.
    Standards for the operational board of directors, consistent with 
the recommendations of the Advisory Board are included in (b)(2). 
Paragraph (b)(2)(i) specifies that each director must meet ethical, 
conflict-of-interest, and disclosure standards. Specifically, each 
director must act in the sole interest of the CO-OP and its members, 
avoid self-dealing, and act prudently and consistently with the terms 
of the CO-OP's governance documents and applicable State and Federal 
law.
    Paragraph (b)(2)(ii) specifies that each voting director has only 
one vote on matters before the board. This standard also recognizes 
that a CO-OP may choose to have directors who provide expertise but do 
not vote. Non-voting directors must bring specific expertise or be 
members of the management team of the CO-OP, whose participation in the 
board of directors is considered essential.
    Paragraph (b)(2)(iii) acknowledges that positions on the board of 
directors may be designated for individuals with certain types of 
expertise or experience. The type of expertise that is needed may vary 
over time and the CO-OP may choose to enlist candidates for the board 
with certain types of expertise through its nominating process.
    Paragraph (b)(2)(iv) specifies that positions on the board that are 
designated for individuals with specialized expertise, experience, or 
affiliation (for example, providers, employers, labor representatives) 
cannot constitute a majority of the operational board even if the 
individuals serving in designated seats are members of the CO-OP. This 
standard should be addressed in the bylaws of the CO-OP, in the 
conflict of interest standard for board members, and in the nominating 
procedures of the CO-OP.
    Paragraph (b)(2)(v) codifies the limitation in section 1322(e) of 
the Affordable Care Act that no representative of any Federal, State or 
local government (or of any political subdivision or instrumentality 
thereof) and no representative of any organization described in Sec.  
156.510(b)(i) may serve on the board of directors.
    Paragraph (b)(3) codifies the provision that an organization must 
have governing documents that incorporate ethics and conflict of 
interest standards protecting against insurance industry involvement 
and interference. At a minimum, the standards must establish procedures 
for identifying potential conflicts of interest and addressing any 
violation of the standards.
    Paragraph (b)(4) codifies the provision that the CO-OP must operate 
with a strong consumer focus, including timeliness, responsiveness, and 
accountability to members. Finally, the CO-OP must demonstrate 
financial viability and the ability to meet all other statutory, legal, 
or other requirements.
3. Requirements to Issue Health Plans and Become a CO-OP
    In paragraph (c)(1), CMS codifies section 1322(c)(1)(B) of the 
Affordable Care Act that provides that substantially all of the 
activities of the CO-OP consist of the issuance of CO-OP qualified 
health plans in the individual and small group markets in each State in 
which it is licensed to issue such plans. CMS proposes that a CO-OP 
will satisfy this standard if at least two-thirds of the contracts for 
health insurance coverage issued by a CO-OP are CO-OP qualified health 
plans offered in the individual and small group markets in the States 
in which the CO-OP operates. An organization must continually meet this 
requirement to be considered a CO-OP. Members of the Advisory Board 
noted that State insurance regulations generally refer to the contracts 
for insurance, not the number of lives covered under each contract, 
when referring to policy issuance. The Advisory Board therefore 
recommended that: the interpretation of ``substantially all'' refer to 
contracts issued; the proportion of contracts that must meet the 
``substantially all'' test be interpreted to provide CO-OPs maximum 
flexibility; and CO-OPs be allowed to meet that standard over time to 
build enrollment gradually in the individual and small group market. 
Consistent with the Advisory Board recommendations on this issue and 
public comment received in response to the RFC, CMS interprets the 
statute to mean that each insurance policy or contract that an issuer 
sells constitutes a single activity. We solicit comments on whether 
two-third is the appropriate threshold for this standard.
    This proposed standard would allow providers wishing to sponsor CO-
OPs to enroll their own employees in the CO-OP and thereby encourage 
provider participation. It would also permit CO-OPs to participate in 
Medicaid and Children's Health Insurance Program (CHIP), which would 
enable individuals and families to remain with the same health 
insurance issuer and providers if they move between the Exchange and 
these programs.
    In paragraph (c)(2), CMS proposes that a CO-OP applicant receiving 
a Start-up Loan or Solvency Loan offer at least one CO-OP qualified 
health plan at both the silver and gold benefit levels, as defined in 
section 1302(d) of the Affordable Care Act, in every individual

[[Page 43244]]

market Exchange that serves the geographic market in which it is 
licensed and intends to provide health care coverage (market area). In 
addition, CMS proposes that if a CO-OP chooses to offer coverage in the 
small group market outside the Exchange, a CO-OP must commit to 
offering at least one CO-OP qualified health plan at both the silver 
and gold benefit levels in the SHOP of any market area where the CO-OP 
is licensed. Note that it is a choice for a CO-OP to offer coverage in 
the small group market, but if it does so, it must also offer coverage 
through SHOP to prevent adverse selection against SHOP. These standards 
are consistent with section 1301 of the Affordable Care Act providing 
that health insurance issuers that participate in the Exchanges offer 
qualified health plans at both the silver and gold benefit levels.
    In paragraph (c)(3) CMS proposes that within the earlier of thirty-
six months following the initial drawdown of a Start-up Loan or six 
months following the initial drawdown of the Solvency Loan, a loan 
recipient be licensed in a State and offer at least one CO-OP qualified 
health plan at the silver and gold benefit levels (as defined in 
section 1302(d) of the Affordable Care Act) in an individual market 
Exchange and, if offering a health plan in the small group market, in a 
SHOP. Thus, the loan recipient must satisfy the requirements of title 
XXVII of the Public Health Service Act applicable to health insurance 
coverage in the individual market and small group market, if applicable 
and comply with all standards generally applicable to qualified health 
plan issuers. To continue offering CO-OP qualified health plans in the 
Exchanges, a CO-OP must continue to meet these standards.
    Due to concerns regarding the ability of a CO-OP to establish 
sufficient enrollment to make its health plans viable, CMS proposes 
that when offering a CO-OP qualified health plan in an Exchange for the 
first time, loan recipients may only begin to offer health plans and 
accept enrollment during an open enrollment period for the applicable 
Exchange. We seek comment on this proposal.
    In paragraph (d), CMS proposes that a loan recipient must satisfy 
the requirements of section 1322(c) of the Affordable Care Act and 
Sec.  156.515 and become a CO-OP within fifty-four months following the 
first drawdown of a Start-up Loan or eighteen months following the 
initial drawdown of a Solvency Loan.
    These provisions will ensure that loan recipients actively work 
toward becoming a CO-OP that offers CO-OP qualified health plans in the 
Exchanges. Commenters to the RFC indicated that it could take from 6 
months to 3 years for a new CO-OP to become operational and begin 
accepting enrollment, with most commenters stating that 18 to 24 months 
would be needed to become operational. CMS believes that the proposed 
timeframes provide sufficient time for a loan recipient to offer CO-OP 
qualified health plans in the Exchanges and become a new CO-OP that 
meets all of the governance requirements of the CO-OP program. We 
request comment on these proposed standards.

E. Loan Terms (Sec.  156.520)

1. Overview of Loans
    Paragraph (a)(1), proposes that organizations that meet eligibility 
standards according to Sec.  156.510 can apply for Start-up Loans and 
Solvency Loans (pursuant to a separate CO-OP program Funding 
Opportunity Announcement (FOA)). Organizations may apply for Start-up 
Loans to assist with start-up costs associated with establishing a CO-
OP. In addition, CMS proposes that organizations that meet the 
eligibility standards may apply for Solvency Loans to assist in meeting 
the solvency requirements of States in which the applicant seeks to be 
licensed to issue CO-OP qualified health plans.
    Section Sec.  156.520 outlines the terms of the loans awarded under 
the CO-OP program. Other than the 5-year and 15-year repayment periods, 
the statute leaves the specific terms of the loans to CMS's discretion 
but requires that CMS take into consideration State solvency 
requirements. Accordingly, CMS proposes loan terms that are consistent 
with the goals of the CO-OP program, most likely to encourage 
successful CO-OPs, and protect the Federal investment.
    The Advisory Board strongly recommended that CMS begin awarding 
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 to compete for membership and gain the level of 
enrollment needed to be viable. Commenters to the RFC generally agreed 
that it is important for CMS to provide startup funding to CO-OPs as 
soon as possible. Accordingly, we intend to begin awarding CO-OP loans 
in this timeframe.
    As a condition of licensure as a health insurer, State insurance 
departments require that an insurer maintain an amount of capital that 
is consistent with its size and risk profile. This measure of reserve 
is called risk-based capital (RBC). State law establishes a variety of 
required regulatory actions if an insurer's RBC falls below established 
levels or percent of RBC. These regulatory interventions can range from 
a corrective action plan to liquidation of the insurer if it is 
insolvent. Solvency and the financial health of insurers is 
historically a State-regulated function.
    Solvency Loans are intended to help loan recipients meet the 
reserve requirements, solvency regulations, and requisite surplus note 
arrangements in each State. Since Solvency Loans must be repaid to the 
Federal government within 15 years, the Advisory Board expressed a 
concern that they will be treated by States as debt rather than capital 
that satisfies State solvency and reserve requirements.
    A loan is considered a liability and typically would not assist an 
organization in meeting solvency requirements, since the liability 
would have to be subtracted from the calculation of reserves in order 
to determine the net protection afforded to enrollees. In order to 
assist CO-OPs in meeting State solvency requirements, the loans will be 
structured so that premiums would go to pay claims and meet cash 
reserve requirements before repayment to CMS. The goal of this 
provision is to satisfy the reserve requirements of the individual 
insurance department in the States in which each CO-OP seeks licensure. 
The Advisory Board proposed that CO-OPs discuss the appropriate 
mechanisms with their insurance regulators for structuring the loans to 
meet reserve requirements and include a description of those mechanisms 
in their applications so that loan and repayment terms for that 
applicant conform to the State's requirements.
    CMS proposes in Sec.  156.520(a)(3) to structure Solvency Loans to 
each loan recipient in a manner that meets State reserve and solvency 
requirements so that the loan recipient can fund its required capital 
reserves. This ensures that they are recognized as contributing to 
State reserve and solvency requirements in the States in which the 
applicant intends to offer CO-OP qualified health plans. We request 
comment on this provision.
2. Repayment Period
    Section 1322(b)(3) of the Affordable Care Act states that loans 
awarded must be repaid within 5 years and 15 years respectively, taking 
into consideration any appropriate State reserve requirements, solvency 
regulations, and requisite surplus note arrangements that must be 
constructed in a State. This standard is codified in Sec.  156.520(b).

[[Page 43245]]

    Loan recipients must make loan payments consistent with the 
repayment schedule approved by CMS and agreed to by the loan recipient 
until the loans have been paid in full. Recognizing that it would be 
difficult for a loan recipient to begin repaying the loans before it 
has enrolled members and received premiums, the Advisory Board 
recommended that loan repayment begin after the loan recipient has 
begun receiving enrollment. Commenters to the RFC generally recommended 
repayment schedules for loans that are flexible. Most commenters 
indicated that preventing the failure of a CO-OP should take priority 
over repayment because insolvency of a CO-OP would harm its members and 
create disruption in insurance markets.
    CMS agrees with the commenters and believes that a flexible 
repayment approach would promote the growth of CO-OPs, serve the 
interests of the CO-OP members and the public, and enhance the 
likelihood of full repayment. Flexibility in the repayment schedule 
helps address the diversity in each CO-OP's local market conditions, 
projected member risk profiles, business strategy, and projected 
enrollment size. CMS proposes to permit individualized repayment 
schedules to be submitted with the application with features such as a 
grace period, graduated repayments, or balloon payments at the end of 
the repayment period.
    The Advisory Board recommended an enhanced oversight process for 
cases where a loan recipient is not meeting the terms and conditions of 
its loan but where CMS has concluded that discontinuing funding is not 
in the best interest of the members, the public, or the government. 
Consistent with the Advisory Board's recommendation, CMS may execute a 
loan modification or workout when a loan recipient is having difficulty 
making loan repayments. If a loan recipient is unable to (1) make 
repayments or meet other conditions of the loan without adversely 
affecting coverage stability, member control, quality of care, or the 
public interest generally or (2) meet State reserve and solvency 
requirements, CMS would have the option to execute a loan modification 
or workout.
3. Interest Rates
    In Sec.  156.520(c), CMS proposes that loan recipients pay an 
interest rate benchmarked to the average interest rate on marketable 
Treasury securities of similar maturity. These interest rates are tied 
to prevailing market conditions while providing low cost loans that are 
consistent with the statute's direction to foster the development of 
viable private nonprofit CO-OPs. CMS is considering reductions to the 
benchmarked rate for Start-Up Loans and Solvency Loans to make it 
easier for new CO-OPs to repay their loans.
    Section 1322(b)(2)(C)(iii) of the Affordable Care Act states that 
if CMS determines that a loan recipient has failed to meet any of its 
contractual obligations, or has used Federal funds in a prohibited or 
improper manner, the loan recipient must repay to CMS 110 percent of 
the aggregate amount of loans received under this section, plus 
interest. This provision is codified in Sec.  156.520(c) so that if a 
loan recipient's loan agreement is terminated by CMS, the loan 
recipient would be charged the statutory penalty and an interest rate 
equal to the average interest rate on marketable Treasury securities of 
similar maturity. We request public comment on the proposed interest 
rates and the structure of the debt instrument.
4. Failure to Pay
    In Sec.  156.520(d), CMS proposes to use any and all remedies 
available to it under law to collect loan payments or penalty payments 
if a loan recipient fails to make payments consistent with the 
repayment schedule in its loan agreement or in a loan modification or 
workout.
5. Deeming of CO-OP Qualified Health Plans
    In Sec.  156.520(e) we codify the ``deeming'' provisions of section 
1301(a)(2) of the Affordable Care Act. To be deemed certified to 
participate in an Exchange, we propose that a loan recipient must be in 
compliance with the terms of the CO-OP program, the Federal standards 
for CO-OP qualified health plans set forth pursuant to section 1311(c) 
of the Affordable Care Act and State standards. CMS or an entity 
designated by CMS will make a determination regarding whether or not a 
loan recipient meets these standards based on evidence provided by the 
loan recipient. CMS or its designee will notify the Exchange in which 
the loan recipient proposes to operate that the loan recipient is 
deemed certified to participate. Similarly, if a loan recipient loses 
its deemed status for any reason, CMS or its designee will provide 
notice to the applicable Exchanges.
    A loan recipient that is deemed certified to participate in the 
Exchange would be exempt from the certification procedures for each 
applicable Exchange. However, the loan recipient must still meet any 
standards established by CMS for all qualified health plans 
participating in an Exchange, along with all State requirements in the 
case where a State is operating the Exchange.
6. Conversions
    The Advisory Board expressed a concern about the potential for 
successful CO-OPs to become targets for conversion to for-profit, non-
consumer operated entities. Such an outcome could reduce consumer 
control, limit choice, and weaken competition in the insurance 
marketplace. Accordingly, the Advisory Board recommended imposing 
conditions on conversions that would create strong disincentives for a 
company to acquire a CO-OP and for a CO-OP to pursue such offers. 
Because allowing conversions to a for-profit or non-consumer operated 
entity would be contrary to the goals of the CO-OP program, CMS 
proposes to prohibit such conversions. This prohibition on conversions 
and sales to for-profit or non-consumer operated entities would ensure 
that loans awarded under this program are used to sustain program goals 
over time.
    CMS recognizes the potential for changes in CO-OP governance in 
circumstances other than conversions and sales to for-profit or non-
consumer-operated entities. Since the goals of the CO-OP program are to 
make available new consumer-governed private nonprofit health plans and 
expand competition in the Exchanges, CMS proposes to prohibit any 
transaction by a CO-OP that would result in a change to a governance 
structure that does not meet the standards in Sec.  156.515 or any 
other program standards. We request comment on these prohibitions.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before an information collection request is submitted to the 
Office of Management and Budget (OMB) for review and approval. We will 
solicit comments on the information collection request in association 
with the implementation of the CO-OP program (for example, application, 
reporting) in one or more future 60-day notices.

V. Regulatory Impact Analysis (RIA)

A. Introduction

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic,

[[Page 43246]]

environmental, public health and safety effects, distributive impacts, 
and equity). An RIA must be prepared for rules with economically 
significant effects ($100 million or more in any 1 year). This proposed 
rule is economically significant. Accordingly, the Office of Management 
and Budget has reviewed this proposed rule.

B. Statement of Need, Health Insurance Markets, and CO-OP Plans

    The Affordable Care Act established the Consumer Operated and 
Oriented Plan (CO-OP) program. Section 1322(b)(3) of the Affordable 
Care Act requires CMS to promulgate regulations to implement this 
program. The purpose of this program is to create a new CO-OP in every 
State in order to expand the number of qualified health plans available 
in the Exchanges with a focus on integrated care and greater plan 
accountability.
    Only a few States offer insurance choices sponsored and managed by 
entities primarily focused on meeting the health insurance needs and 
preferences of consumers, as determined directly by consumers or their 
elected representatives. Currently, we believe that there are four 
issuers in the country that meet this standard, located in the States 
of Washington, Idaho, Minnesota, and Wisconsin. While these issuers 
cover in excess of one million lives, their market share is only about 
one percent of private insurance coverage.
    Congress has provided budget authority of $3.8 billion to assist 
sponsoring organizations in creating such plans and to do so with 
enough capital and reserves to become licensed and ultimately effective 
competitors in State insurance markets. These funds will enable CO-OPs 
to use Federal government loans (``Solvency Loans'') to meet the 
requirements for risk-based capital that State insurance commissions 
impose on health plans to ensure that they will be able to finance the 
services they have contractually promised their enrollees.
    The Affordable Care Act, as implemented through this regulation, 
prohibits issuers that existed prior to July 16, 2009 from 
participating in the CO-OP program but allows CO-OPs to use experienced 
managers and health care organizations to manage the functions they 
have to perform in providing health insurance. Further, as indicated 
throughout the preamble to this proposed rule, the CO-OP Advisory Board 
in its advice to the Secretary, and the Department in its