The widely discussed "public option" is not included in the Patient Protection and Affordable Care Act ("PPACA"), which became law on March 23, 2010. Many considered the public option or some similar alternative to be essential to provide necessary competition to the private health insurance market, while others considered it to be something far different. As a compromise in the public option debate, Section 1322 of PPACA provides for a Federal program to assist in the establishment and operation of nonprofit, member-run health insurance issuers.1
In general, the Secretary of Health and Human Services ("Secretary") is tasked with establishing the Consumer Operated and Oriented Plan ("CO-OP" program") to carry out the purposes of Section 1322. The purpose of the CO-OP program is to foster the creation of qualified nonprofit health insurance issuers. Examples of plans similar to CO-OPs envisioned by PPACA exist in certain markets.2 If successful, the combination of potential federal funding and HHS rules will make CO-OPs unique.
WHAT IS A QUALIFIED NONPROFIT HEALTH INSURANCE ISSUER?
The term ''qualified nonprofit health insurance issuer'' is defined in Section 1322 as a health insurance issuer that is an organization that meets several requirements. First, the organization must be organized under state law as a nonprofit, member corporation. Second, substantially all of the activities of the organization must consist of the issuance of qualified health plans in the individual and small group markets in each state in which it is licensed to issue such plans. The organization also must meet other requirements described below.
An organization will not be treated as 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, 2009.3 No organization sponsored by a state or local government, any political subdivision thereof, or any instrumentality of such government or political subdivision will be treated as a qualified nonprofit health insurance issuer. Additionally, no representative of any Federal, state, or local government (or of any political subdivision or instrumentality thereof), and no representative of an entity that was a health insurance issuer on July 16, 2009, may serve on the board of directors of a qualified nonprofit health insurance issuer.
An organization will not be treated as a qualified nonprofit health insurance issuer unless the governance of the organization is subject to a majority vote of its members. The governing documents of the organization must incorporate ethics and conflict of interest standards protecting against insurance industry involvement and interference. Pursuant to regulations to be promulgated by the Secretary, the organization must operate with a strong consumer focus, including timeliness, responsiveness, and accountability to members. Any profits made by the organization 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.
Finally, the organization must meet all the requirements that other issuers of qualified health plans are required to meet in any state where the issuer offers a qualified health plan, including solvency and licensure requirements, rules on payments to providers, and compliance with network adequacy rules, rate and form filing rules, any applicable state premium assessments and any other consumer protection and market conduct type state laws.4
LOANS AND GRANTS TO ASSIST WITH START UP COSTS AND SOLVENCY REQUIREMENTS
The Secretary is to provide through the CO-OP program for the awarding of loans and grants to persons applying to become qualified nonprofit health insurance issuers. The loans are to provide assistance in meeting start-up costs. The grants are to provide assistance in meeting any solvency requirements of states in which the qualified nonprofit health insurance issuer seeks to be licensed.
Congress appropriated $6 billion to carry out the CO-OP program. The Secretary is to award the loans and grants under the CO-OP program and begin the distribution of amounts awarded not later than July 1, 2013.
In awarding loans and grants under the CO-OP program, the Secretary is to take into account the recommendations of an Advisory Board (discussed below). The Secretary is to give priority to applicants that will offer qualified health plans on a statewide basis, utilize integrated care models, and have significant private support.
Not later than July 1, 2013, and prior to awarding loans and grants under the CO-OP program, the Secretary is required to promulgate regulations with respect to the repayment of such loans and grants in a manner that is consistent with state solvency regulations and other similar state laws that may apply. In promulgating these regulations, the Secretary must provide that such loans shall be repaid within five (5) years and such grants shall be repaid within 15 years, taking into consideration any appropriate state reserve requirements, solvency regulations, and requisite surplus note arrangements that must be constructed in a state to provide for such repayment prior to awarding loans and grants.
The Secretary is to ensure that there is sufficient funding to establish at least one qualified nonprofit health insurance issuer in each state. However, the Secretary is not prohibited from funding the establishment of multiple qualified nonprofit health insurance issuers in any state if the funding is sufficient to do so. If no health insurance issuer applies to be a qualified nonprofit health insurance issuer within a state, the Secretary may use amounts appropriated for the awarding of grants to encourage the establishment of a qualified nonprofit health insurance issuer within the state or the expansion of a qualified nonprofit health insurance issuer from another state to that state.
REQUIRED AGREEMENT WITH SECRETARY
Any person receiving a loan or grant under the CO-OP program must enter into an agreement with the Secretary. The agreement must require such person to meet (and to continue to meet) any requirement under Section 1322 for such person to be treated as a qualified nonprofit health insurance issuer. The agreement also must require such person to meet (and to continue to meet) any requirements contained in the agreement for such person to receive federal loans or grants.
The agreement must include a requirement that no portion of the funds made available by any loan or grant under Section 1322 may be used for carrying on propaganda, or otherwise attempting, to influence legislation. The agreement also must include a requirement that no portion of the funds made available by any loan or grant under Section 1322 may be used for marketing.
If the Secretary determines that a person has failed to meet any of these requirements and has not corrected such failure within a reasonable period of time from when the person first knows (or reasonably should have known) of such failure, such person must make repayments to the Secretary. Specifically, such person must repay to the Secretary an amount equal to 110 percent (110%) of the aggregate amount of loans and grants received under Section 1322. In addition, such person must repay to the Secretary interest on the aggregate amount of loans and grants received under Section 1322 for the period the loans or grants were outstanding.
FEDERAL TAX EXEMPTION
Section 1322 of PPACA amended Section 501(c) of the Internal Revenue Code ("IRC"), relating to the list of tax exempt organizations, by adding a new subsection 29. IRC Section 501(c)(29) provides tax exempt organization status to any qualified nonprofit health insurance issuer (within the meaning of Section 1322 of PPACA) which has received a loan or grant under the CO-OP program, but only with respect to periods for which the issuer is in compliance with the requirements of Section 1322 and any agreement with respect to the loan or grant.
Tax exempt organization status under IRC Section 501(c)(29) is subject to several conditions. The organization must have given proper notice to the Secretary of Treasury that it is applying for recognition of its tax exempt status under IRC Section 501(c)(29). Except as provided in Section 1322(c)(4) of PPACA, no part of the net earnings of the organization may inure to the benefit of any private shareholder or individual.5 No substantial part of the activities of the organization may be used for carrying on propaganda, or otherwise attempting, to influence legislation. Finally, the organization may not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
IRC Section 6033, relating to tax returns to be filed by exempt organizations, was amended by Section 1322 of PPACA to require a tax-exempt CO-OP to include certain information on its tax return regarding (a) the amount of the reserves required by each state in which the CO-OP is licensed to issue qualified health plans, and (b) the amount of reserves on hand. In addition, IRC Section 4958(c)(1) was amended to provide that the tax on excess benefit transactions will apply to IRC Section 501(c)(29) tax exempt organizations.
PRIVATE PURCHASING COUNCIL
Qualified nonprofit health insurance issuers participating in the CO-OP program may 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. However, the private purchasing council may not set payment rates for health care facilities or providers participating in health insurance coverage provided by qualified nonprofit health insurance issuers.
ADVISORY BOARD
The Advisory Board will assist and advise the Secretary and Congress through the Department of Health and Human Services Office of Consumer Information and Insurance Oversight ("OCIIO") on the strategy to foster the creation of qualified nonprofit health insurance issuers. The Advisory Board is to consist of fifteen (15) members appointed by the Comptroller General of the United States from among individuals with national recognition for their expertise in among other things health finance and economics, health plans and integrated delivery systems, reimbursement of health facilities and providers.6 Additionally, individuals appointed to the Advisory Board must meet ethics and conflict of interest standards protecting against insurance industry involvement and interference.
HHS will provide funding and administrative support for the Advisory Board. Management and oversight for support services provided to the Advisory Board will be the responsibility of OCIIO, and staff will be assigned to support the activities of the Advisory Board.7 The Advisory Board shall terminate on the earlier of the date that it completes its duties or December 31, 2015.
LIMITATIONS ON THE SECRETARY
Certain limitations are placed upon the Secretary. The Secretary may not participate in any negotiations between one or more qualified nonprofit health insurance issuers (or a private purchasing council) and any health care facilities or providers, including any drug manufacturer, pharmacy, or hospital. Additionally, the Secretary may not establish or maintain a price structure for reimbursement of any health benefits covered by such issuers. Furthermore, nothing in Section 1322 is to be construed as authorizing the Secretary to interfere with the competitive nature of providing health benefits through qualified nonprofit health insurance issuers.
GAO STUDY AND REPORT
The Comptroller General of the General Accountability Office is required to conduct an ongoing study on competition and market concentration in the health insurance market in the United States after the implementation of the reforms under PPACA. The Comptroller General also is required, not later than December 31 of each even-numbered year (beginning with 2014), to report to the appropriate committees of Congress the results of such study, including any recommendations for administrative or legislative changes the Comptroller General determines necessary or appropriate to increase competition in the health insurance market.
CONCLUSION
Only time will tell whether qualified nonprofit health insurance issuers can be established under the parameters of Section 1322 and function as effective competition in the private health insurance market. As a result of the outcome of the recent Congressional elections the CO-OP program could be jeopardized by efforts to repeal or amend PPACA. Without significant private support, the financial barriers to entry into the market are significant. It may also prove difficult to attract capable, experienced talent from existing health insurers to provide needed operational abilities. The CO-OP program might represent real change, or it might simply represent failed idealism.