Seven organizations will receive a total of $639 million in federal low-interest loans to launch new, consumer-governed health insurance plans in eight states, the federal government announced Tuesday.

The new plans, authorized by the 2010 health law, are scheduled to open for business in 2014. They will be available on the new state health exchanges, or marketplaces, mandated by the law, and primarily will serve Americans under age 65 in the individual and small-group insurance markets. More loan recipients will be announced in coming months, with the goal of launching at least one nonprofit co-op plan in every state, according to the Centers for Medicare & Medicaid Services, which administers the program.

 

The seven loan recipients are Freelancers CO-OP of New Jersey, New Mexico Health Connections, Midwest Members Health in Iowa and Nebraska, Common Ground Healthcare Cooperative in Wisconsin, Freelancers CO-OP of Oregon, Montana Health Cooperative, and Freelancers Health Service Corporation in New York.

Interest rates will vary between 0 percent and 1 percent, based on the current rate for Treasury securities of similar duration. The loans will be disbursed over time, as plans meet government-set milestones for progress. A CMS official said the agency has an “early warning system” to spot if a co-op plan is facing financial problems and requires intervention.

The new plans are being formed by public health activists, medical associations, business groups, hospital executives, labor unions and others. They’re betting that Americans want a local, consumer-friendly alternative to commercial insurers.

“People from all walks of life are dissatisfied with the status quo, and believe that our health care and health insurance system can be dramatically improved,” said John Morrison, a former Montana insurance commissioner who is on the board of the proposed Montana Health Cooperative and also heads the National Alliance of State Health Cooperatives.

The plans are being started under the health law’s Consumer Operated and Oriented Plan (CO-OP) program. The aim is to increase competition among insurers, potentially reducing premiums and improving health care quality and customer service. In many states, only one or two insurers control the bulk of the health insurance business.

The health reform law originally allocated $6 billion to provide loans to help co-op plans start up and meet state insurance solvency requirements. But Congress last year slashed that funding to $3.4 billion as part of broader budget cuts, raising concerns about how many co-op plans can be funded. Co-op supporters are hoping CMS will commit all the remaining loan money before Congress makes further cuts.

Some experts are skeptical that these fledgling health plans can compete effectively against large, established insurers. They warn of the difficulties of recruiting experienced insurance executives and of quickly signing up a large enough and healthy enough membership to make the plans financially viable. Many nonprofit insurance plans launched under federal initiatives in the past 40 years went bust or were sold or converted to for-profit status.

“It’s comforting to say that existing plans are wasteful and are driving costs up for selfish reasons,” said Peter Kongstvedt, a Virginia-based health care consultant. “The truth is it’s not easy to get costs down. It’s hard for me to believe [co-op plans] can be more efficient and effective.”

Even so, the number of credible organizations that have stepped forward to start co-op plans has impressed others. “I’m really surprised. I thought this would just lie there and it hasn’t,” said Jeff Goldsmith, a veteran health care industry analyst also based in Virginia.

Congressional Democratic leaders crafted the co-op plan program as a political compromise when it became clear that their preferred approach — creating a public insurance plan to compete with private insurers – would derail passage of the health bill.

While consumer-governed health insurers have a long history in the U.S., only a few remain today, covering about 2 million Americans. The largest and best-known survivors are Seattle-based Group Health Cooperative and Minnesota-based HealthPartners. Those plans aren’t necessarily cheaper than other types of health plans, but they are well-regarded in terms of quality and responsiveness.

Richard Popper, the CMS official heading the co-op program, would not disclose how many organizations have applied for loans. The average loan is projected by the government to total $15 million for start-up costs and $100 million for state insurance reserve requirements, with repayment required within five years for the start-up loans and 15 years for the reserve loans. Some of the start-up plans are expected to fail, and the government last year predicted a nearly 40 percent default rate for the loans.

“There will be a large number of casualties in this first crowd, but we need more health plans,” Goldsmith said. “I think this is worth a shot.”

Applicants, Popper said, include physician and hospital groups, community and agricultural organizations, small business coalitions, labor unions and even some large employers. New applications may be submitted throughout 2012, until the $3.4 billion in federal loan money is fully committed.

While the new co-op plans must primarily serve individuals and small groups buying coverage in the exchanges, up to one-third of the new co-ops’ business can be large employer groups and Medicaid beneficiaries. The health insurance industry is pressing to make sure co-op plans are held to all the same rules as other insurers. Our main focus is on maintaining a level playing field,” said Robert Zirkelbach, spokesman for America’s Health Insurance Plans. 

Sponsors of many of the new co-op plans say they aim to encourage teams of physicians and other providers to work closely with plan members to provide coordinated – and less costly – care. That model is called the patient-centered medical home. Co-op sponsors say that unlike most existing insurers, their plans will pay providers to manage patients’ health, with a strong focus on primary care, rather than just paying for individual medical services.

“This is a new model of health insurance because of the principle of the patient-centered medical home,” said Matthew Katz, CEO of the Connecticut State Medical Society, which is co-sponsoring HealthyCT, a proposed co-op.

Some co-op sponsors say their plans will be able to offer lower premiums because they won’t have to generate profits for investors. Under the law, co-op plans must apply any surpluses to lowering rates or improving benefits or quality for their members.

The New York-based Freelancers Union, which received loans to launch co-op plans in New York, New Jersey, and Oregon, already operates a for-profit health insurer in New York with 25,000 members. Sara Horowitz, founder and executive director of the union, said her plan’s rates are 40 percent cheaper than the competition yet the plan still reported surpluses the past two years. “If you don’t have private shareholders or investors, you have the economic infrastructure to break even and be sustainable,” she said.

Republicans on the House Ways and Means Committee criticized the loans made to Freelancers Union-sponsored co-op plans, claiming they violate the law’s provisions that loans cannot be made to any pre-existing insurers or for-profit entities. They also said the Freelancers Union receives state and local government funding in New York and that the law says loan recipients can’t receive such support.
But a CMS spokesman said the Freelancers Union meets the law’s standards for a co-op plan sponsor because the union itself is nonprofit and not an insurer. A Freelancers Union spokeswoman said the co-op boards and executives are distinct and independent from the union’s board and executives, and none of the co-op entities have received state or local government funding.

Some co-op sponsors are plotting innovative ways of negotiating for lower provider prices. Richard Miltenberger, a board member of the Montana Health Cooperative, said if necessary his plan will send members to quality providers in neighboring states that charge lower prices for procedures such as knee replacements. In Maryland, leaders of the proposed Evergreen Project co-op plan want to set up clinics with salaried physicians and other providers, similar to the Group Health Cooperative in Washington.

Some co-op sponsors think they have a market advantage because of their provider affiliations. Dolores Green, executive director of the Riverside County Medical Association, which is co-sponsoring the proposed Pacific Co-op for Health in two Southern California counties, said her organization already has expertise in administering health plans for self-insured employers.

While other co-op plans may struggle to line up a strong provider network, Green’s organization already has a preferred network of 2,000 physicians and other providers.

Green said the physicians want to start a co-op plan because they’re deeply dissatisfied with existing health insurers. “They want to sit down with the community and be able to say, ‘This is our plan. What are the health needs here and what works for our community?’ That’s what’s exciting for the doctors,” she said.

–This story was updated from an earlier version to include more comment and to correct the for-profit status of the Freelancers Union health plan.