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.