Patient Protection and Affordable Care Act; Establishment of Consumer Operated and Oriented Plan (CO-OP) Program, 77392-77415 [2011-31864]

Agencies

• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 76, Number 239 (Tuesday, December 13, 2011)]
[Rules and Regulations]
[Pages 77392-77415]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31864]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 156

[CMS-9983-F]
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: Final rule.

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SUMMARY: This final rule implements 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 goal 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: These regulations are effective February 13, 2012.

FOR FURTHER INFORMATION CONTACT:
Meghan Elrington, (301) 492-4388 for general issues and issues related 
to loan terms and governance standards.
Anne Bollinger, (301) 492-4395 for issues related to definitions and 
eligibility.
Ilana Cohen, (301) 492-4371 for issues related to CO-OP standards.

SUPPLEMENTARY INFORMATION: The Patient Protection and Affordable Care 
Act, (Pub. L. 111-148), enacted on March 23, 2010, and the Health Care 
and Education Reconciliation Act of 2010 (Pub. L. 111-152), enacted on 
March 30, 2010, are collectively referred to in this final rule as the 
``Affordable Care Act.'' The Department of Defense and Full-Year 
Continuing Appropriations Act, 2011 (Pub. L. 112-10), which amended 
Section 1322 of 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) to foster the creation of new 
consumer-governed, private, nonprofit health insurance issuers. 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 (Exchanges) 
established under the Affordable Care Act.
    The statute authorizes the Secretary to make loans to capitalize 
eligible prospective CO-OPs with a goal of having at least one CO-OP in 
each State. It also 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. There is $3.8 billion in appropriations for 
the program.
    All CO-OP loans must be repaid with interest, and loans will only 
be made to private, nonprofit entities that demonstrate a high 
probability of becoming financially viable. The CO-OP program contains 
extensive provisions to protect against fraud, waste, and abuse. Loan 
recipients are subject to strict monitoring, audits, and reporting 
requirements for the length of the loan repayment period plus 10 years 
and CO-OPs must meet a series of milestones before drawing down 
disbursements, as described in their loan agreements.
    This final rule--(1) Sets forth the eligibility standards for the 
CO-OP program; (2) establishes terms for loans; and (3) provides basic 
standards that organizations must meet to participate in this program 
and become a CO-OP. This rule is intended to provide flexibility for 
eligible organizations to encourage diversity in the organizational 
design and approach while ensuring that the statutory goals are met.
    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). 
Insurance companies will compete for new business on the basis of price 
and value and consumers will have a choice of health plans to fit their 
needs. The Departments of Health and Human Services, Labor, and the 
Treasury (the Departments) are seeking public input, providing 
guidance, and issuing regulations implementing Exchanges in several 
phases. A Request for Comment relating to Exchanges was published in 
the Federal Register on August 3, 2010. Initial Guidance to States on 
Exchanges was published on November 18, 2010. 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). On July 15, 2011, two proposed regulations were

[[Page 77393]]

published in the Federal Register to implement components of the 
Exchange: ``Establishment of Exchanges and Qualified Health Plans'' and 
``Standards Related to Reinsurance, Risk Corridors and Risk 
Adjustment.'' On August 17, 2011, three proposed regulations were 
published in the Federal Register: ``Eligibility Changes Under the 
Affordable Care Act of 2010,'' ``Exchange Functions in the Individual 
Market: Eligibility Determinations; Exchange Standards for Employers,'' 
and ``Health Insurance Premium Tax Credit.'' Additional regulations 
will be published in the Federal Register to implement Exchange related 
components of the Affordable Care Act.

Table of Contents

I. Background
    A. Overview of the Consumer Operated and Oriented Plan (CO-OP) 
Program
    B. Statutory Basis for the Consumer Operated and Oriented Plan 
(CO-OP) Program
    C. Structure of the Final Rule
II. Summary of the Proposed Provisions and Responses to Comments on 
the CO-OP Proposed Rule
    A. Basis and Scope (Sec.  156.500)
    B. Definitions (Sec.  156.505)
    C. Eligibility (Sec.  156.510)
    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
    F. Comments Beyond the Scope of the Final Rule
III. Collection of Information Requirements
IV. Regulatory Impact Analysis
    A. Introduction
    B. Summary and Need for Regulatory Action
    C. Costs
    D. Transfers
    E. Benefits
    F. Alternatives Considered
    G. Accounting Statement
V. Other Requirements for Analysis of Economic Effects
Regulations Text

Acronym List

    Because of the many terms to which we refer by acronym in this 
final 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
ERISA Employee Retirement Income Security Act
FACA Federal Advisory Committee Act
FOA Funding Opportunity Announcement
FQHC Federally Qualified Health Center
HHS U.S. Department of Health and Human Services
MLR Medical Loss Ratio
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

I. Background

A. Overview of the Consumer Operated and Oriented Plan (CO-OP) Program

    Section 1322 of the Affordable Care Act directs the Secretary to 
establish the CO-OP program to provide loans to foster the creation of 
new consumer-governed nonprofit health insurance issuers, referred to 
as CO-OPs, in every State. These new consumer-run, private, nonprofit 
insurers will be one vehicle for providing higher quality care that is 
affordable and uses innovative care models in the Exchanges starting in 
2014.
    The statute divides the CO-OP 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 that can offer these CO-OP 
qualified health plans on a Statewide basis, provide integrated care, 
and have significant private support. 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. By 
creating more health plan choices, the CO-OP program can benefit all 
consumers.
    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 
in the health insurance market has been the difficulty of obtaining 
adequate capitalization for start-up costs and State insurance reserve 
requirements. The CO-OP program is designed to help overcome this 
barrier to new issuer formation by providing loans specifically 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 on June 23, 2010 to make recommendations to CMS 
on awarding loans. Section 1322(b)(2)(A) directs the Secretary to 
consider the recommendations of this Advisory Board when awarding loans 
under the CO-OP program. After taking testimony from experts and 
comments in 3 day-long public hearings from January through March 2011 
and examining written comments, the Advisory Board approved its final 
recommendations and submitted its public report on April 15, 2011. This 
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 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 recommended four major principles for awarding 
loans. CMS concurs with these 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.
    This final rule and the Funding Opportunity Announcement (FOA) for 
the CO-OP program incorporate these four principles endorsed by the 
Advisory Board.
    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 public comments received in 
response to the RFC were considered in the development of the proposed 
rule published in the Federal Register on July 20, 2011 with a comment 
period that ended on September 16, 2011 (76

[[Page 77394]]

FR 43237). In addition, a Funding Opportunity Announcement (FOA) for 
the CO-OP program, available at www.grants.gov (CFDA Number 93.545), 
was published on July 28, 2011 (and amended on September 16, 2011) and 
provides detailed information regarding the application and award 
administration process for the CO-OP program.

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.
    Section 1322(b)(1) of the Affordable Care Act directs CMS to make 
two types of loans available 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 of State regulators in the 
States in which the organization is licensed to issue CO-OP qualified 
health plans. Although the statute refers to Solvency Loans as 
``grants,'' they are loans because they must be repaid.
    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) 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) 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) 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. Under section 1322(b)(2)(C)(ii), the agreement must 
provide that no portion of the loans be used for propaganda purposes, 
attempts to influence legislation, or marketing.
    Section 1322(b)(2)(C)(iii) 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 (including the 
provisions of a loan agreement) that may affect an issuer's tax-exempt 
status under section 501(c)(29) of the Internal Revenue Code of 1986 
(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(b)(3) provides that, not later than July 1, 
2013 and prior to awarding loans, CMS must promulgate these 
regulations, ``with respect to the repayment'' of the loans. Legal 
obligations regarding repayment as well as other obligations required 
for program compliance will be included in loan agreements.
    Section 1322(c)(1) 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).
    Section 1322(c)(2) 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 a State or local government, any political subdivision 
thereof, or any instrumentality of such government or political 
subdivision sponsors it.
    Section 1322(c)(3) 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) 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) states 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).
    Section 1322(c)(6) 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).
    Section 1322(d) enables qualified nonprofit health insurance 
issuers to establish a private purchasing council to enter into 
collective purchasing arrangements for items and services that increase 
administrative and other cost efficiencies including claims 
administration, administrative services, health information technology, 
and actuarial services. The private purchasing council is prohibited 
from setting payment rates for health care facilities or providers that 
contract with qualified nonprofit health insurance issuers.
    Section 1322(e) 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

[[Page 77395]]

purchasing council established under section 1322(d).
    Together, these provisions form the statutory basis for the CO-OP 
program established under this rule.

C. Structure of the Final Rule

    The regulations outlined in this final rule will be codified in 45 
CFR part 156 subpart F. The major subjects covered in this final rule 
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. Summary of the Proposed Provisions and Responses to Comments on the 
CO-OP Proposed Regulation

    The proposed rule was published in the Federal Register on July 20, 
2011 with a comment period that ended on September 16, 2011 (76 FR 
43237). In addition, a Funding Opportunity Announcement for the CO-OP 
program, available at https://www.grants.gov (CFDA Number 93.545), was 
published on July 28, 2011 (and amended on September 16, 2011) and 
provides detailed information regarding the application and award 
administration process for the CO-OP program. We received approximately 
45 public comments that addressed many topics in the proposed rule. 
Interested parties that submitted comments included private citizens, 
organizations interested in applying to the CO-OP program, State 
Departments of Insurance, health insurance issuer trade associations, 
medical associations, provider and hospital associations, and advocacy 
groups. In this preamble we provide a summary of each proposed 
provision, a summary of the public comments received, our responses to 
them, and any changes to the CO-OP program that we are implementing in 
the final regulation as a result of comments received. At the end of 
the comment and response sections of this preamble, we also reference 
comments we received that were outside the scope of the provisions set 
forth in the proposed rule. Several of these comments pertain to the 
provisions of the Funding Opportunity Announcement and will be 
addressed in program guidance or in loan agreements. Loan recipients 
will be subject to legal obligations outlined in the loan agreements. 
Those obligations are not reiterated here.

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 awards 
loans to foster 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 eligibility, 
governance, and health plan issuance standards for CO-OPs as well as 
certain 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 a CO-OP qualified health plan.
    Comment: One commenter opposed implementation of the CO-OP program 
and indicated that no government loan program can bring meaningful 
resolution to the lack of consumer choice in the health insurance 
market. The commenter stated that the likelihood of failure will be 
higher for these start-up organizations than it otherwise would be in 
the market because the organizations with the best prospects of being 
able to repay loans, pre-existing health insurance issuers, are 
excluded from the CO-OP program. The commenter recommended that CMS 
delay awarding loans. Another commenter expressed concern that the 
funding appropriated for the CO-OP program will be reduced by the 
Congress.
    Response: We recognize that loan recipients will face challenges 
entering highly concentrated health insurance markets. This is true for 
any new market entrant. However, the CO-OP program is responsive to 
these barriers. The CO-OP program offers resources, in the form of 
loans, to responsibly capitalize new, private, consumer-oriented 
issuers by increasing the availability of adequate reserve funding and 
boosting the ability of CO-OPs to compete in a brand new, broader 
insurance marketplace. Insurance markets will change and expand 
considerably in 2014 with the implementation of Exchanges. In order to 
obtain a loan and be successful, CO-OPs must demonstrate the ability to 
gain sufficient enrollment and revenue to sustain their organization. 
Therefore, it is important that CMS begin awarding loans consistent 
with current law and the Advisory Board's recommendation to give loan 
recipients sufficient time to become operational and begin accepting 
enrollment during the first Exchange open enrollment period in the Fall 
of 2013.
    We have considered the comments received regarding the basis and 
scope of the CO-OP program and are finalizing the provisions of Sec.  
156.500 as proposed.

B. Definitions (Sec.  156.505)

    Section 156.505 sets forth definitions for terms that are used 
throughout subpart F and are not intended to apply to other subparts of 
section 156. Many of the definitions presented in Sec.  156.505 of the 
proposed rule were taken directly from the Affordable Care Act, but new 
definitions were created when necessary. Some of the definitions 
presented in Sec.  156.505 of the proposed rule have since been revised 
based on the comments received, including: ``qualified nonprofit health 
insurance issuer,'' ``related entity,'' and ``sponsor.'' We originally 
proposed that a ``qualified nonprofit health insurance issuer'' be 
defined as a loan recipient that 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. 
Generally, an entity that has received a loan and has met program 
requirements for the loan is reasonably expected to satisfy these 
standards. This definition was proposed to ensure that loan recipients 
can receive the benefits of section 1322(h), addressing the Federal 
income tax exemption for qualified nonprofit health insurance issuers, 
at the appropriate time as determined by the Internal Revenue Service.
    We proposed the definition of ``related entity'' be 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 proposed permitting 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. In the proposed

[[Page 77396]]

rule, ``sponsor'' was 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. The comments we received on 
these proposed definitions and our responses are provided below.
    Comment: Several commenters requested that the definition of 
``qualified nonprofit health insurance issuer'' be revised so that 
qualified nonprofit health insurance issuers may access multiple forms 
of investment and philanthropic capital (including debt, equity or 
equity-equivalent, grants, bonds, etc.) in a manner that does not 
compromise their primary commitment to mission.
    Response: Although other legal requirements, including state 
nonprofit corporation laws and tax rules applicable to tax-exempt 
grantors and CO-OPs seeking tax-exempt status, may limit the 
availability to CO-OPs of certain kinds of investments, section 1322 of 
the Affordable Care Act and the proposed definition of a ``qualified 
nonprofit health insurance issuer'' do not impose limitations on the 
capital that may be invested in a ``qualified nonprofit health 
insurance issuer.'' However, the organization's surplus funds (that is, 
revenue in excess of expenses) must be ``used to lower premiums, to 
improve benefits, or for other programs intended to improve the quality 
of health care delivered to its members.'' In addition, as stated in 
the FOA and recommended by the Advisory Board, CO-OPs may also use 
their surplus funds to conduct marketing, repay loans awarded under the 
CO-OP program, meet State solvency requirements, and provide for 
enrollment growth, financial stability, and stable coverage for its 
members. The proposed rule does not prohibit but encourages private 
investment that can be demonstrated to meet this standard on the 
application of profits. Therefore, it is not necessary to revise the 
definition of ``qualified nonprofit health insurance issuer'' to allow 
CO-OPs to access investment. Other legal requirements applicable to 
investments in CO-OPs are outside the scope of this rulemaking.
    However, in the definition of ``qualified nonprofit health 
insurance issuer,'' we have replaced the phrase ``loan recipient'' with 
the word ``entity.'' Because only a loan recipient can satisfy the 
standards in section 1322(c) and Sec.  156.515, we do not view this as 
a substantive change from the proposed rule. It is being made to ensure 
flexibility in determining when entities qualify for the Federal income 
tax exemption.
    Comment: Several commenters requested that the definition of 
``member'' be revised to include only those covered lives who are at 
least 18 years old.
    Response: We agree that voting rights should be limited to covered 
lives who are at least 18 years old, and we have revised Sec.  156.515 
accordingly. However, this change to the proposed rule does not 
necessitate a revision to the definition of member, and we are 
finalizing the definition as proposed.
    Comment: Several commenters requested clarification on whether the 
definition of ``member'' includes dependents, and some commenters 
requested that the definition of ``member'' be limited to one adult 
covered life within each family plan.
    Response: The term ``member'' includes all individuals covered 
under health insurance policies issued by a loan recipient, including 
dependents. As discussed above, we have also limited voting rights to 
members over 18 years old. We understand the commenter's concern that 
allowing adult dependents in family coverage to vote will create an 
imbalance in the representation of different member interests on the 
board. However, the statute provides no basis for discriminating among 
covered lives on the basis of the source of coverage. The limitation 
proposed by the commenter would prevent certain adults receiving health 
care coverage under a CO-OP from participating in the organization's 
governance. As indicated in the testimony from existing health 
insurance cooperatives, all adults in existing health insurance 
cooperatives have voting privileges regardless of family or employment 
status. Therefore, we have concluded that every adult covered by the 
CO-OP must be eligible to vote and serve on the board of directors in 
order to ensure that decisions are made in the best interest of all 
covered lives consistent with both the statute and the traditional 
model of a cooperative.
    Comment: Several commenters requested clarification as to what the 
term ``representative'' means.
    Response: We understand the need for clarification of this term and 
have included a definition of ``representative'' in this final rule. 
``Representative'' means an individual who stands or acts for an 
organization or group of organizations through a formal agreement or 
financial compensation such as a contractor, broker, official, or 
employee.
    Comment: Due to the statutory prohibition on the use of loan 
funding for ``marketing,'' several commenters requested guidance as to 
what activities are considered ``marketing.'' Several commenters 
indicated that the description in the FOA released on July 28, 2011 
that described marketing as ``activities that promote the purchase of a 
specific health care plan or explain a product's benefit structure, 
whether targeted at new or current members'' is overly broad, 
prohibiting CO-OPs from using loan funds to educate their members. In 
the Request for Comment (RFC), several commenters recommended that CMS 
define ``marketing'' narrowly to allow loan recipients to use loan 
funds to conduct community outreach and member education.
    Response: Marketing was not discussed in the proposed rule and 
therefore, is outside the scope of this rule. Please see the amended 
FOA, released on September 16, 2011, for additional guidance regarding 
the activities included in the term marketing.
    Comment: Several commenters supported the proposed definition of 
``issuer'' because it prohibits insurance companies that were in 
existence prior to July 16, 2009, from participating in the CO-OP 
program. One commenter requested that reinsurers be categorized as a 
qualified sponsor under the term ``issuer.''
    Response: The intent of the proposed definition was to prohibit any 
insurance companies that were in existence prior to July 16, 2009, from 
participating in the CO-OP program, consistent with the statutory 
directive. Reinsurers are typically licensed as issuers under State 
law, and therefore are generally captured under the definition of 
``issuer.''
    Comment: One commenter requested that multiple employee welfare 
arrangements (MEWAs) and their affiliates be included within the class 
of entities that are excluded from the definition of ``issuer.''
    Response: MEWAs and their affiliates are typically not licensed by 
States as ``issuers'' and, therefore, would appear to be eligible for 
loans if they meet all other eligibility criteria. The definition of 
``issuer'' clearly states that an entity is an ``issuer'' if it is 
``licensed to engage in the business of insurance in a State and which 
is subject to State law which regulates insurance.'' Consistent with 
the statute, if a MEWA is not a pre-existing issuer and otherwise meets 
the eligibility criteria, it would be eligible to apply for CO-OP 
loans.

[[Page 77397]]

    Comment: Several commenters concurred with the proposed definition 
of ``pre-existing issuer'' but requested clarification on whether it 
prevents existing consumer run healthcare organizations from providing 
expertise and assistance to prospective CO-OPs. One commenter requested 
that a new term be used in place of ``pre-existing issuer'' because it 
is easily confused with a health insurance issuer that excludes 
coverage for ``pre-existing conditions.''
    Response: Section 156.510(b)(2)(i) of this subpart allows a CO-OP 
to purchase assets and contract services from a ``pre-existing issuer'' 
as long as it is an arm's length transaction in which each party acts 
independently of the other and has no relationship with the other. 
Although we understand and appreciate the commenter's concern, we do 
not find it necessary to replace the term ``pre-existing issuer.'' 
Given differences in context, we do not believe that this term will be 
confused with the term ``pre-existing conditions.''
    Comment: We received comments expressing concern that holding 
companies (companies that exist primarily to own stock in other 
companies) that control pre-existing issuers are typically not licensed 
as issuers and therefore, would be eligible to participate in the CO-OP 
program.
    Response: We agree with this concern and have modified the 
eligibility criterion in Sec.  156.510(b) to exclude holding companies 
that control pre-existing issuers, foundations established by pre-
existing issuers, and trade associations comprised of pre-existing 
issuers whose purpose is to represent the interests of the health 
insurance industry. Through its inclusion in the eligibility criteria, 
this provision will ensure that entities controlled by or serving the 
interests of pre-existing issuers are unable to participate in the CO-
OP program or sponsor a CO-OP. Therefore, no changes to the definition 
itself of pre-existing issuer are necessary.
    Comment: Several commenters supported the proposed definition of 
``related entity.'' Some commenters requested that the definition be 
expanded in order to ensure that CO-OPs are truly independent of pre-
existing health insurance issuers. Specifically, one commenter 
recommended that the term ``related entity'' be expanded so that 
neither preexisting issuers nor related entities would be permitted to 
become or sponsor a CO-OP. Conversely, several commenters recommended 
that a nonprofit organization that is not an issuer but shares control 
with a pre-existing issuer should be allowed to sponsor or facilitate 
the creation of a CO-OP.
    Response: The primary goal of the CO-OP program is to foster new 
consumer-governed, private, nonprofit health insurance issuers. The 
statute expressly prohibits the participation of issuers, related 
entities, or the predecessors of either, in the CO-OP program. We 
believe that the intent of this prohibition is to encourage the 
participation of sponsors that can create a new competitive presence in 
the marketplace. We agree with the commenters' concerns that the 
proposed definition did not foreclose avenues of influence that the 
statute intended to prohibit. Accordingly, we have revised the 
definition of ``related entity'' to reflect that organizations that 
share a common governance structure with a pre-existing issuer (for 
example, their management team or board of directors) are ineligible 
for the CO-OP program if they also provide services or management 
functions to the pre-existing issuer.
    In addition, we agree that the statute prohibits pre-existing 
issuers from sponsoring a CO-OP. However, nonprofit, not-for-profit, 
public benefit, or similarly organized entities that do not sell 
insurance as their primary purpose or mission but share control with a 
pre-existing issuer should be permitted to sponsor a CO-OP. For 
example, a religious organization that is not a health insurance 
issuer, but is affiliated with one to help its members obtain health 
insurance would be able to also sponsor a CO-OP to offer a health plan 
in the Exchanges. This is permitted because all pre-existing issuers 
are prohibited from sharing control or having undue influence over the 
governance of the CO-OP itself. Therefore, we have expanded the 
exclusions from eligibility in Sec.  156.510(b)(1)(i) to exclude 
organizations sponsored by a pre-existing issuer. Due to this addition, 
no further changes to the definition of ``related entity'' are 
necessary to reflect that pre-existing issuers are not permitted to 
sponsor a CO-OP. A nonprofit, not-for-profit, public benefit, or 
similarly organized entity that is not an issuer but shares common 
control or governance with a pre-existing issuer would not be 
considered a ``related entity'' and hence, excluded from sponsorship of 
a CO-OP, unless it--(1) Retains responsibilities for the services to be 
provided by the pre-existing issuer, (2) furnishes services to the pre-
existing issuer's enrollee under contract, or (3) performs some of the 
pre-existing issuer's management functions under contract or 
delegation.
    Comment: One commenter stated that the term ``related entity'' 
unnecessarily limits the types of associations allowed to sponsor a CO-
OP and requested that all nonprofits regardless of board composition be 
able to sponsor a CO-OP because to do otherwise would limit the 
experience and financial support available to a prospective CO-OP to 
create a working, stable insurance entity.
    Response: It is important for a CO-OP to have adequate financial 
support and an experienced management team and governing board in order 
to be viable in the market. However, the statute expressly prohibits 
``related entities'' from becoming qualified nonprofit health insurance 
issuers and without this prohibition, a CO-OP becomes vulnerable to 
undue influence from pre-existing issuers, which would undermine the 
statutory goals of this program. As set forth in Sec.  156.515(b) of 
this subpart, CO-OPs may contract for services with experienced 
entities and include individuals with expertise on their board of 
directors to gain the benefit of experience.
    Based on the comments received, we are finalizing the definitions 
proposed in Sec.  156.505 of the proposed rule, along with the 
exception of revisions to the definitions of ``qualified nonprofit 
health insurance issuer'' and ``related entity,'' described in our 
responses above and revisions to the definitions of ``sponsor'' and 
``Start-up Loan'' discussed in the Eligibility and Loan Terms sections 
of the preamble, respectively. In addition, we have added a definition 
for ``representative'' in response to the comments received. We define 
``representative'' as an individual who stands or acts for an 
organization or group of organizations through a formal agreement or 
financial compensation such as a contractor, broker, official, or 
employee.
    Because the proposed rule ``Establishment of Exchanges and 
Qualified Health Plans'' (76 FR 41866) has not yet been finalized, we 
have revised the definitions for the terms ``individual market,'' 
``small group market,'' ``SHOP,'' ``Exchange,'' and ``CO-OP qualified 
health plan'' to remove references to this rule. We also include 
definitions of ``group health plans,'' ``health insurance coverage,'' 
``small employer,'' ``qualified employer,'' and ``qualified health 
plan'' as they were proposed in ``Establishment of Exchanges and 
Qualified Health Plans'' (76 FR 41866), because those terms are 
referred to within other definitions used in this

[[Page 77398]]

subpart. Once the ``Establishment of Exchanges and Qualified Health 
Plans'' rule has been finalized, the definitions in this subpart will 
be revised in the final ``Establishment of Exchanges and Qualified 
Health Plans'' rule to incorporate the definitions adopted in the new 
part 155.

C. Eligibility (Sec.  156.510)

    Section 156.510 of the proposed rule outlined the minimum standards 
that an organization must meet to be eligible to receive a loan from 
the CO-OP program in order to create a new private consumer-operated 
insurer. We proposed codification of 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. 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 also proposed codification of the 
requirement 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.
    Under Sec.  156.510(b)(2)(i) of the proposed rule, 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, we proposed that such an 
organization could 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. In Sec.  156.510(b)(2)(ii), we 
further proposed that an organization that has purchased assets from a 
pre-existing issuer in an arm's-length transaction where each party 
acts independently of the other and has no other relationship with the 
other is eligible to apply for a CO-OP loan. We also proposed that 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.
    The comments we received on the proposed eligibility criteria and 
our responses are provided below.
    Comment: Several commenters requested that CMS expand the 
eligibility criteria to allow the participation of for-profit consumer-
oriented health insurance issuers. Conversely, a few commenters 
suggested that CMS bar entities affiliated with pre-existing issuers--
such as organizations that sponsor pre-existing issuers, foundations 
established by pre-existing issuers, holding companies that control 
pre-existing issuers, or associations that represent pre-existing 
issuers--from sponsoring a CO-OP. One commenter suggested that CMS 
evaluate whether applicants have previously competed in insurance 
markets before awarding any funding.
    Response: As stated in section 1322 of the Affordable Care Act, the 
goal of the CO-OP program is to ``foster the creation of qualified 
nonprofit health insurance issuers.'' Accordingly, eligibility is 
limited to nonprofit member organizations as previously defined. In 
response to concerns about permitting entities that are controlled by 
or serve the interests of pre-existing issuers from participating in 
the CO-OP program or sponsoring a CO-OP, we modified the eligibility 
criteria in Sec.  156.510(b) to exclude (1) Holding companies that 
control pre-existing issuers, foundations established by pre-existing 
issuers, and trade associations that are comprised of pre-existing 
issuers and whose purpose is to represent the interests of the health 
insurance industry (2) organizations sponsored by a pre-existing 
issuer, and (3) organizations that receive more than 25% of their total 
funding (excluding any loans received from the CO-OP program) from pre-
existing issuers. This modification would allow applicants to receive 
limited funding from pre-existing issuers (up to 25% of their total 
funding excluding any loans received from the CO-OP program) to help 
with application costs and other expenses while ensuring that pre-
existing issuers are not providing a level of funding that would give 
them meaningful control of each CO-OP. We believe that these exclusions 
from eligibility are consistent with the intent and direction of the 
statute as written. These exclusions will help to ensure that CO-OP 
loans are provided to new organizations and are not used to further 
develop plans offered by current health insurers.
    Comment: Two commenters expressed support for our statement that 
the prohibition against sponsorship of a CO-OP by a State or local 
government would not apply to Indian tribes because a tribe is neither 
a State nor local government.
    Response: We agree with the commenters that this prohibition would 
not apply to Indian tribes.
    Comment: Several commenters requested that CMS clarify whether 
private non-profit hospitals and physician hospital organizations, 
State-affiliated academic medical centers, three-share and multi-share 
programs, and other organizations that receive grant funding and other 
financial support from a State or local government would be eligible to 
participate in the CO-OP program.
    Response: Recognizing that the term ``instrumentality'' does not 
effectively distinguish among the organizations that could arguably be 
classified as related to a State or local government, we are revising 
the eligibility criterion in Sec.  156.510(b)(1)(ii) to provide 
additional guidance regarding the types of organizations that would be 
excluded from eligibility as instrumentalities of a State or local 
government. Specifically, an organization would not be considered an 
instrumentality of a State or local government and therefore, would be 
eligible to sponsor a CO-OP if:
     The entity is a not a government organization under State 
law;
     No employee of a State or local government acting in his 
or her official capacity serves as a senior executive (for example, 
President, chief executive officer, or chief financial officer) for the 
organization; and
     Fewer than half of the organization's directors are 
employees of a State or local government acting in their official 
capacities.
    Thus, an organization, such as an academic medical center, that has 
received funding from a State or local government but has a governance 
structure that satisfies all three of these criteria and otherwise 
meets the eligibility criteria in Sec.  156.510 and the FOA would be 
eligible to sponsor a CO-OP. A private organization that receives 
disproportionate share hospital payments or grants from State-
appropriated funds but has a governance structure that satisfies the 
three criteria listed above and is otherwise qualified could sponsor a 
CO-OP. In addition, a three-share or multi-share program that accepts 
funding from State-appropriated funds in the course of a business 
relationship with a State would not be considered an instrumentality of 
the State as long as it meets these criteria.
    In addition, we are revising the definition of ``sponsor'' in Sec.  
156.505 of this subpart and the eligibility criteria in Sec.  
156.510(b)(1) to allow organizations that receive funding from pre-
existing

[[Page 77399]]

issuers or State or local governments to participate in the CO-OP 
program, provided that the pre-existing issuers or State or local 
governments are not involved in the applicant's development, creation, 
or organization, and that pre-existing issuers do not contribute more 
than 25 percent of the organization's funding (excluding any loans 
received from the CO-OP program) and no single State or local 
government contributes more than 40 percent of the organization's 
funding (excluding any loans received from the CO-OP program). We have 
established a lower limit on funding from pre-existing issuers than 
grants and other funding provided by State and local governments to 
ensure that CO-OPs are free from any undue influence that may result 
from receiving substantial funding from pre-existing issuers. We 
believe that applicants may receive greater levels of funding from 
State and local governments without serving as an actor or 
instrumentality of the government.
    Comment: Many commenters asked CMS to clarify the entities that are 
eligible to receive loan funding. Two commenters suggested that CMS 
impose additional prohibitions on the relationship between a CO-OP and 
a sponsor. One commenter suggested that any entity that shares common 
leadership with a pre-existing issuer be barred from sponsoring a CO-
OP; another suggested that CMS prohibit sponsors and CO-OPs from 
sharing any financial interest. Finally, two commenters suggested CMS 
further consider eligibility for specific types of applicants, such as 
those that have previously participated in the issuance of health 
insurance.
    Response: We appreciate the concern that permitting entities with 
financial or organizational ties to pre-existing issuers to sponsor CO-
OPs could allow de facto conversions of pre-existing issuers and 
conflict with the statutory intent to foster the creation of new market 
entrants. However, the statute excludes from eligibility only those 
organizations that were existing issuers on July 16, 2009, and their 
related entities and predecessors. An organization that was not 
licensed to issue health insurance policies on July 16, 2009; is not a 
foundation established by a pre-existing issuer; is not a holding 
company that controls a pre-existing issuer; is not a trade association 
that is comprised of pre-existing issuers and whose purpose is to 
advocate for the interests of pre-existing issuers; and is not a 
related entity or predecessor to a pre-existing issuer would be 
eligible to participate in the CO-OP program provided that it meets all 
other eligibility criteria. CMS believes that permitting such 
organizations to sponsor CO-OPs maintains the appropriate balance 
between preventing the flow of program funds to entities that are not 
new market entrants and promoting the success of CO-OPs by permitting a 
variety of sponsorship and partnership arrangements.
    Comment: One commenter asked CMS to clarify how antitrust rules may 
affect providers who wish to develop CO-OPs and expressed concern that 
antitrust and self-referral laws may limit provider participation in 
the development and sponsorship of CO-OPs.
    Response: We believe that it is possible for providers to create 
viable CO-OPs within the boundaries of existing anti-trust and self-
referral laws. Promoting competition within the health insurance 
marketplace is a key goal of the CO-OP program, but the statute does 
not give us authority to waive or exempt CO-OPs from anti-trust or 
self-referral laws. Therefore, it is the responsibility of each 
applicant to assess the relevant laws and regulations and ensure 
compliance.
    Comment: While several commenters supported CMS' proposal to permit 
CO-OPs to purchase assets from or contract with existing issuers, some 
commenters were concerned about the potential for issuers to exert 
undue influence on CO-OPs. For example, one commenter suggested that 
CO-OPs be prohibited from contracting with pre-existing issuers that 
represent more than five percent of the local market. Similarly, 
another commenter suggested specific requirements around the purchase 
of reinsurance; for example that reinsurance be purchased at a fair 
market price.
    Response: Under the rule, loan recipients and CO-OPs may purchase 
assets and services, such as premium billing services, from pre-
existing issuers through arm's length transactions. Based on the 
comments received, we are further clarifying ``arm's length 
transaction'' to mean a transaction in which the buyer and seller act 
independently and have no relationship to one another. We believe that 
applying the arm's length standard prevents loan recipients from 
entering into agreements or transactions that could jeopardize member 
control while maintaining flexibility for recipients to enter into the 
business agreements that best meet their needs. In addition, pursuant 
to Sec.  156.515(b)(3), each CO-OP must have procedures in place to 
protect against insurance industry interference and address any 
conflict of interests, such as those between the CO-OP and its 
sponsor(s).
    We have considered the many comments received regarding eligibility 
and are finalizing the provisions in Sec.  156.510 of the proposed rule 
with the exception of the revisions described above and the revision to 
Sec.  156.510(b)(2)(i) discussed in the Definitions section of the 
preamble. Specifically, Sec.  156.510(b) is revised to exclude 
foundations established by a pre-existing issuer, holding companies 
that control pre-existing issuers, organizations sponsored by pre-
existing issuers, and organizations that receive more than 25% of their 
total funding (not including loans under the CO-OP program) from pre-
existing issuers from eligibility for the CO-OP program. Section 
156.510(b)(1)(iii) is revised to clarify that organizations that 
receive funding from a State or local government but are not government 
organizations under State law and are not governed or controlled by a 
State or local government may be eligible for the CO-OP program. 
Section 156.510(b)(2)(i) is revised to clarify that certain nonprofit, 
not-for-profit, public benefit, or similarly organized entities that 
are also a sponsor for a pre-existing issuer are permitted to sponsor a 
CO-OP provided that the pre-existing issuer does not share any of its 
board or the same chief executive with the CO-OP. Section 
156.510(b)(2)(ii) is revised to clarify that an ``arm's length 
transaction'' consists of a transaction between two parties in which 
neither party is in a position to exert undue influence on the other.

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 proposed 
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 requested public comments on these 
proposed standards.

2. Governance Requirements

    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, CMS proposed governance standards in Sec.  156.515(b) of the 
proposed rule that reflect the

[[Page 77400]]

recommendations of the Advisory Board. We proposed that the 
organization be governed by an operational board with each of its 
directors elected by a majority vote of its members. We also proposed 
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 to protect against delaying the 
introduction of consumer governance beyond a point where it can have an 
impact on the strategic direction of the CO-OP.
    Section 156.515(b)(2)(v) of the proposed rule codified 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 a pre-existing issuer, a trade association whose members consist of 
pre-existing issuers, a related entity, or a predecessor of either may 
serve on the board of directors.
    The comments we received on these proposed governance standards and 
our responses are provided below.
    Comment: While several commenters expressed support for the 
proposed governance requirements as written, several commenters 
suggested that CMS extend the period of transition from the formation 
board to the operational board to two years after enrollment begins and 
to permit staggered election of the operational board over the two-year 
period. Commenters also suggested that CO-OPs be permitted to fill 
director positions vacated due to resignation, death, or removal except 
removal by the CO-OP members.
    Response: We agree that staggered elections over a longer period 
will provide additional flexibility for loan recipients and will allow 
operational boards to retain important expertise and experience gained 
during formation. Allowing CO-OPs to fill vacant director positions in 
the specific circumstances outlined above will permit efficient 
operation and governance of the CO-OP without compromising the consumer 
role.
    Therefore, we have revised Sec.  156.515 of the regulations to 
provide that a loan recipient may implement a staggered transition from 
the formation board to the operational board over a period of two 
years. The transition to a member-elected operational board must begin 
within one year of a loan recipient first providing coverage to its 
first enrollee. The operational board must be in place in its entirety 
two years after the loan recipient begins providing coverage to its 
first enrollee. Additionally, in the case of resignation, death, or 
removal, CO-OPs may fill vacant director positions for the remainder of 
the relevant term without conducting a contested election.
    Comment: One commenter requested clarification regarding whether a 
loan recipient may begin the loan process with an initial management 
team that will transition to a permanent management team as dictated by 
the organization's board of directors. The commenter indicated that 
many potential long-term management candidates are currently employed 
and cannot quit their jobs to join a CO-OP until they know it will be 
funded.
    Response: Under the proposed rule, loan recipients may establish an 
initial management team that will transition to a permanent management 
team. Loan recipients should clearly outline their process for 
identifying and transitioning to a permanent management team in their 
applications.
    Comment: Several commenters supported CMS' decision to permit 
designated seats on the board of directors. However, one commenter 
suggested that CMS strike or modify this provision due to the potential 
difficulty of classifying directors based on designated seat categories 
(for example, provider, employer). Commenters also asked CMS to clarify 
the role of non-members on the board of directors and to clarify 
whether representatives or officers of certain entities, such as 
sponsors or employers, may sit on the board.
    Response: It is important to balance meaningful member governance 
with experienced management. Some of the skills and expertise necessary 
to administer a CO-OP successfully may be unavailable among the 
membership. Therefore, we are finalizing the proposal to permit a CO-OP 
to designate certain seats on its operational board for individuals 
with specified areas of expertise and backgrounds. How each CO-OP 
identifies the designations--for example, providers, employers, or 
representatives from the CO-OP's sponsoring organization--to best serve 
the needs of the members is a business decision for the CO-OP. We note, 
however, that seats designated for individuals with specialized 
expertise, experience, or affiliation cannot comprise the majority of 
the operational board.
    Comment: Several commenters asked that CMS clarify the meaning of 
``contested'' with respect to elections of the board of directors. One 
commenter suggested that CMS permit the establishment of member 
classes, each of which would represent a specified share of votes. 
Several commenters recommended that CMS permit CO-OPs to elect 
directors based on a majority of a quorum of the CO-OP's members. 
Finally, one commenter requested that CMS clarify that each member may 
vote for each contested seat in an election.
    Response: The proposed rule stated that ``there must be more 
candidates for open positions on the board than there are positions.'' 
This requirement applies to all positions open during a particular 
election, and not to individual open positions. We have revised Sec.  
156.515(b)(1) of the regulation to clarify this requirement.
    The establishment of member classes could jeopardize the role of 
members in governance by permitting one type of member to exert 
disproportionate influence on the direction of the organization. Also, 
the establishment of member classes conflicts directly with the 
principle of one member, one vote, which we believe is critical to 
protecting the voice of consumers and the accountability of a CO-OP to 
its membership. Further, as indicated in testimony before the Advisory 
Board, existing successful health insurance cooperatives do not 
classify their members.
    We agree that it may be burdensome or logistically impossible for 
all members of a CO-OP to participate in each election for the board of 
directors. Therefore, we have revised Sec.  156.515(b)(1) to allow CO-
OPs to conduct elections for the board of directors based on a quorum 
of members and to clarify that members may vote for each seat during an 
election.
    Comment: Several commenters suggested that CMS clarify additional 
features of board operations. One commenter suggested that CMS 
expressly allow boards to include members-at-large; another suggested 
that CMS direct CO-OPs to impose term limits. Another commenter 
suggested that CMS strengthen its proposed requirement on disclosure of 
financial relationships and require recusal in certain circumstances.
    Response: Beyond the minimum requirements to ensure that members of 
the CO-OP are a majority of the operational board, CO-OPs have 
substantial flexibility in the structure and operation of the board of 
directors. At its option, a CO-OP may choose to have designated seats 
or non-voting directors, or impose term limits or additional disclosure 
requirements on board members. Decisions of this type should be made by 
individual CO-OPs based on their expected business needs. In addition, 
each CO-OP is responsible for establishing procedures for

[[Page 77401]]

identifying and addressing potential conflicts of interest, including 
conflicts arising from financial relationships.
    Comment: One commenter recommended that there be an active 
structure supported by the CO-OP board to incorporate geographic and 
ethnic diversity into their policies and decisions based on the State's 
demographics. Another commenter sought additional guidance on the 
relationship between sponsors and CO-OP boards and whether issues 
between these two parties will be addressed in the contracts between 
sponsors and CO-OPs. The commenter indicated that sponsors investing 
significant amounts in a prospective CO-OP need assurance that the 
board of directors has sufficient expertise to fulfil