The Beam Blog

Funding the CO-OP Enterprise

posted Mar 26, 2011, 2:00 PM by Terry Shilling   [ updated Mar 26, 2011, 2:03 PM ]

Any prospective CO-OP sponsor must recognize the costs and risks inherent in the effort of starting a Health Plan.

The good news is the successful applicant will have  most of the funding of the initiative borne by the federal government. The direct outlay by an initial sponsor or steering committee revolves around the use of consultants and other professional advisers to prepare the feasibility studies and the initial application.

The real costs are in development and ongoing capital needs for a new CO-OP, as the $6 billion authorized by the Affordable Care Act (ACA) will be used to provide loans for start-up costs.

The steering committee can minimize operating costs by renting existing expertise and including the expense in the premium payable by the prospective individual or small group. These costs are generally paid per member and on a volume sensitive, multi-year basis. Health Plans do this today to a greater or lesser degree.

Further, the start-up costs will be largely limited to the professional services noted above, plus the requirements of the application process to show significant private support for the venture (individuals, employers, and providers).

These start-up costs would likely need to be advanced by the steering committee until the CO-OP's application to the federal government is accepted, but the CO-OP might then reimburse this advance from the funds received from the federal government.

Alternatively, funds from those interested in the CO-OP concept, such as community foundations as well as individual or employer donations could help defray some of those up-front expenses. This level of support would be a significant indication of the community involvement the government seeks in determining the award of grants under the ACA.

Any loans that the CO-OP receives from the federal government for start-up expenses would need to be repaid to the federal government within five years of operation from premium cash flow. The amount of development cost would vary substantially by location, but generally the steering committee should expect a seven-figure number as the pre-opening development cost.

The funds for reserves will be even more substantial. Unless the final regulations published come out differently, these reserves will need to be repaid over a 15-year period. The amount needed for these funds will be a product of the feasibility study and business plan projections. The state insurance regulator will certainly have substantial interest in the amounts designated as reserves.  However, the treatment of these reserve funds is far different from a loan to a new business.

Business loans generally come with an interest rate, require collateral or other security, have terms reflecting the risk assumed by the lender and must be treated by the borrower as a liability.

Not so in this case. The grants in this program are specifically required in the ACA to be treated as "surplus notes" and thus none of the attributes of normal business loans apply.

No security will be required and the note is treated as an investment in the enterprise, in much the same way an investor or business owner would contribute equity. The government is funding the program as the 100 percent "owner". The only operating control subsequently exerted would be the regulations associated with the public good attached to the program) and full repayment is required only in the event the operation survives 15 years. Otherwise, like any other investor, the government will simply lose its initial funding grant to the degree that the operation ceases to exist. Further, the repayment to the federal government would be subject to the need for ongoing reserves designed to maintain solvency required by the state regulator.

Rent a Plan - March 21, 2011

posted Mar 21, 2011, 6:36 AM by Terry Shilling

Development of a CO-OP need not be overwhelming to an interested provider group.

A CO-OP, like any Health Plan, has essential operating needs consisting of the following functions:

·      Claim processing and payment;

·      Provider network development and contracting;

·      Sales and Marketing;

·      Underwriting and Actuarial projections.

·      Medical Administration

·      Management of Strategy and Operations

Here’s the Good News: A CO-OP sponsored by a provider organization can obtain these functions by buying services a la carte. Outsourced services such as consultants, management services organizations (MSOs) or third-party administrators (TPAs) already do work of this type for insurance companies and the self-funded plans of larger employers.

These organizations have already developed the skill set of benefit plan design, administration, claim processing and marketing. The aforementioned organizations are ready and motivated to lease such services to a fledgling CO-OP. Consulting Actuaries are available as well to advise on plan design issues, and lawyers and consultants would be available for network evaluation or other contract assistance to the CO-OP.

In fact, the Affordable Care Act (ACA) envisioned that, over time, CO-OPs from around the country might come together to purchase these and other services by means of collaborative agreements permitted in the law.

Here’s the Bad News: Outsourced services have disadvantages as well.

1.     They are less expensive in start up mode, but tend to be more expensive should the organization have some success.

2.     Contracting with and coordinating a multitude of outsourced services requires significant skill and effort in itself. Outsourced organizations may or may not fully share the CO-OP vision.

More Bad News: Not only this, Governance, Organizational Culture and Strategy can generally not be outsourced. Advisors exist to support these efforts but the CO-OP Board has the ultimate responsibility. The law itself and the expected regulation will place a significant burden to fulfill the public good envisioned in managing these activities.

Bottom Line: While the development of a Health Plan seems formidable, the fact is that, for providers, much of the cost and infrastructure of operations can be defined in various agreements for services, and the start of payment for services on such an agreement can be deferred in large measure until actual operations. These services can be priced for less than the cost to build comparable in house arrangements. However, extreme caution is warranted in going through the maze of selection of advisors and outsourced components.


Competition in Health Insurance - March 20, 2011

posted Mar 20, 2011, 9:21 AM by Terry Shilling   [ updated Mar 20, 2011, 12:45 PM ]

In preparation for a speaking engagement, I had an opportunity to review the most recent Competition in health insurance study published by the American Medical Association (AMA). Even as a person who has been involved in health care for a long time on both the payer and provider sides, I find the results of the study quite remarkable. 

The authors of the study conclude the following:
"Virtually all commercial health insurance markets in the United States are highly concentrated. These markets are ripe for the exercise of health insurer market power, which is detrimental to society."

It doesn't matter if you agree with the comment regarding whether an oligopoly per se is detrimental to society, it's easy to see why the AMA is concerned. Below is a table showing the top 15 most concentrated States. Data is from January 1, 2008 and includes both HMO and PPO products.

State Largest Insurer Market Share %
Alabama BCBS AL 93
Alaska Premera 77
Iowa Wellmark 77
Hawaii BCBS HI (HI Med Serv) 75
Illinois BCBS IL (HCSC) 72
Tennessee BCBS TN 70
Idaho BC ID 69
Rhode Island BCBS RI 69
Michigan BCBS MI 68
South Carolina BCBS SC 67
Mississippi BCBS MS 66
Nebraska BCBS NE 66
Arkansas BCBS AR 57
Massachusetts BCBS MA 57
Virginia WellPoint 57


Please let me know what you think. The entire study is available for purchase from the AMA.


Comments regarding the CO-OP Program - March 20, 2011

posted Mar 19, 2011, 2:03 PM by Terry Shilling   [ updated Mar 19, 2011, 2:13 PM ]

CMS recently requested comments regarding the provisions of the Consumer Operated and Oriented Program (CO-OP). Beam Partners LLC submitted a length response to various provisions relating to the CO-OP Program and practical considerations relating to the establishment of these entities. The Federal Register notice and the Beam Partners LLC response are attached.


Providers are Consumers, aren't they? - March 20, 2011

posted Mar 19, 2011, 12:49 PM by Terry Shilling   [ updated Mar 19, 2011, 2:14 PM ]

Providers are the perfect Consumer Sponsor of a CO-OP

Those interested in the evolving nature of the Accountable Care Act (ACA) have been generally not quick to recognize the potential for Consumer Operated and Oriented Plans (CO-OPs). The sponsors of the ACA gave birth to the concept, funded it, and then generally left the details to others. but were not prescriptive about what type of individuals or groups would do the heavy lifting necessary to make the concept a reality.

The problem is this: most would-be members consumers lack the ability to organize themselves. In large chunks, the potential sponsor must:

  • Create a non-profit company,
  • Assess feasibility,
  • Develop a business plan, 
  • Seed the organization with money without an initial return, 
  • Shepherd a highly regulated and intricate idea through to a (hopefully successful) end.
All of this must be done in a spirit of altruism.  It seems, however, that health care providers (particularly if they are working together now in Group Practice, Integrated Systems, or ACOs) have shown just this ability to organize. 

All that leads to my main point: providers are consumers too. Providers need and manage to buy health insurance in individual and group markets for themselves and their dependents or employees. Larger provider groups tend to use ASO arrangements and thus self insure their health coverage. The ability, and perhaps need to take this ASO approach may become less clear as we move toward 2014. Thus, providers are ideally situated as the consumers described in the ACA to support a CO-OP: In fact, nothing says commitment better than consuming a product of your own making.


Why Providers should Consider CO-OPs - March 19, 2011

posted Mar 19, 2011, 5:41 AM by Terry Shilling   [ updated Mar 19, 2011, 2:10 PM ]

The Affordable Care Act (ACA), as many of you know, is a massive piece of legislation, and contains many far-reaching provisions. One of the less well-known aspects of the ACA is the seed money to establish Consumer Operated and Oriented Plans (CO-OPs).

What are CO-OPs? Simply put, they are health plans, but with a twist. They are Non-Profit, Member-Run Health Insurers focused on individuals and small groups. These newly formed organizations are expected to operate within the State-run Health Exchanges currently being established throughout the United States. The ACA has allocated $6 Billion in loans and grants to foster creation of these organizations, an average of $120 Million for each state.

How are they different from other Health Insurers? These organizations will concentrate their efforts on, and be regulated by, the state in which they operate. No decisions will be made in Minnesota or Connecticut. Instead, these Health Plans will be local operators, with local boards who have a vested interest only in the success of the local organization.

Why should a Provider Organization be interested in promoting and sponsoring a CO-OP?

·      As Providers are no doubt aware, the purchase of Health Insurance is an oligopoly in most states. Few choices exist for most consumers. The markets for individuals and small groups have even fewer options than larger commercial entities. As an example, the top two commercial Health Plans in Virginia have a 69% market share. In the Roanoke MSA, the top two commercial Health Plans have an 80% market share.

·      The Non-Profit status of the CO-OP tends to align more closely with the value systems of many individuals and organizations that operate to deliver health care. A specific example of the advantages Non-Profit status brings is the reduction in pressure to bring ever-higher earnings to Wall Street. Medical Expenditure Ratios for Non-Profit Commercial Health Plan tend to be materially higher than their For-Profit counterparts. The focus will be on maintaining solvency, not maintaining the value of stock options.

·      The local emphasis of these organizations provides a greater opportunity to focus on the development of close, collaborative relationships instead of the winner take all approach often apparent in the negotiation between yourself and most Health Insurers.

·      The consumer orientation of these organizations generates further positive alignment with the goals of patient-centric systems such as Medical Homes or Accountable Care Organizations.

·      Early, initial support to foster the creation of the organizations allows a provider to be a positive sphere of influence in their development, such as location of the organization, initial service area, etc.

What Risk does a provider take on in supporting the CO-OP effort? Simply, a provider could be supporting a venture that fails to thrive in the post reform world. This is not an insignificant risk, but one that is likely to be lessened by the regulatory focus on development and operation at both the federal and state level.

Stay tuned for more posts like this. Attached is a copy of the relevant section of the Affordable Care Act.


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