[Federal Register Volume 76, Number 239 (Tuesday, December 13, 2011)]
[Rules and Regulations]
[Pages 77392-77415]
From the Federal Register Online via the Government Publishing 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: http://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 http://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 fulfill its fiduciary 
responsibilities and will be held accountable so that the sponsor can 
meet its own fiduciary responsibilities
    Response: CO-OPs must abide by the governance standards set forth 
under Sec.  156.515 to ensure that they operate with a strong consumer 
focus, including timeliness, responsiveness, and accountability to 
members. Decisions on how to ensure that a CO-OP's governing board has 
sufficient expertise are best made by the individual CO-OP based on its 
market, enrollment, and business plan. CO-OPs have the flexibility to 
make additional requirements and/or decisions on their governance 
structure beyond these rules, including how they define the ability to 
have designated seats on the board or promote diversity among board 
members.
    Comment: One commenter asked CMS to clarify whether directors may 
consider interests other than those of the CO-OP--such as the interests 
of the local community or of the organization's employees--when making 
decisions.
    Response: We agree that considering the interests of a CO-OP's 
local geographic community and acting in the interest of the CO-OP are 
not mutually exclusive.
    Comment: One commenter stated that the governance requirements in 
Sec.  156.515 may conflict with State nonprofit governance requirements 
and recommended that CMS give deference to State laws and regulations 
regarding governance of nonprofit risk bearing entities.
    Response: Loan recipients must comply with all applicable State 
laws and should apply organizational structures that will minimize the 
potential for conflicting governance requirements.
    We have reviewed and considered the comments received and are 
finalizing the standards set forth in Sec.  156.515(b) of the proposed 
rule with the exception of the revisions described above and the 
revisions to the governance provisions in Sec.  156.515(b)(1) discussed 
in the Definitions section of the preamble. We have modified the 
governance provisions in Sec.  156.515(b)(1) to limit voting to members 
over the age of 18 and provide loan recipients with greater flexibility 
in electing directors and transitioning from a formation board to an 
operational board. We have also modified Sec.  156.515(b)(2) and Sec.  
156.515(b)(3) to permit a loan recipient's board of directors to 
consider the interests of the loan recipient's local community.
3. Requirements To Issue Health Plans and Become a CO-OP
    Section 156.515(c)(1) of the proposed rule codified section 
1322(c)(1)(B) of the Affordable Care Act that provides that 
substantially all of the activities of the CO-OP 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. CMS proposed that a CO-OP will satisfy this standard if at least 
two-thirds of the contracts for health insurance coverage issued by a 
CO-OP are CO-OP qualified health plans offered in the individual and 
small group markets in the States in which the CO-OP operates. An 
organization must continually meet this requirement to be considered a 
CO-OP. Each insurance policy or contract that an issuer sells 
constitutes a single activity. We requested public comments on whether 
two-thirds is the appropriate threshold for this standard. This 
proposed standard would allow providers wishing to sponsor CO-OPs to 
enroll their own employees in the CO-OP and thereby encourage provider 
participation and would also permit CO-OPs to participate in Medicaid 
and the Children's Health Insurance Program (CHIP). CO-OP participation 
in public programs would enable individuals and families to remain with 
the same health insurance issuer and providers if family income 
fluctuates.
    In paragraph (c)(2), CMS proposed that a CO-OP applicant receiving 
a Start-up Loan or Solvency Loan offer at least one CO-OP qualified 
health plan at both the silver and gold benefit levels, as defined in 
section 1302(d) of the Affordable Care Act, in every individual market 
Exchange that serves the geographic market in which it is licensed and 
intends to provide health care coverage (market area). In addition, if 
a CO-OP chooses to offer coverage in the small group market outside the 
Exchange, a CO-OP must commit to offering at least one CO-OP qualified 
health plan at both the silver and gold benefit levels in the SHOP of 
any market area where the CO-OP is licensed.
    Within the earlier of 36 months following the initial drawdown of a 
Start-up Loan or 6 months following the initial drawdown of the 
Solvency Loan, we proposed that a loan recipient must be licensed in a 
State and offer at least one CO-OP qualified health plan at the silver 
and gold benefit levels (as defined in section 1302(d) of the 
Affordable Care Act) in an individual market Exchange and, if offering 
a health plan in the small group market, in a SHOP. Thus, the loan 
recipient must satisfy the requirements of title XXVII of the Public 
Health Service Act applicable to health insurance coverage in the 
individual market and small group market, if applicable, and comply 
with all standards generally applicable to qualified health plan 
issuers. To continue offering CO-OP qualified health plans in the 
Exchanges, a CO-OP must continue to meet these standards.
    Due to concerns regarding the ability of a CO-OP to establish 
sufficient enrollment to make its health plans viable, CMS proposed 
that when offering a CO-OP qualified health plan in an Exchange for the 
first time, loan recipients may only begin to offer health plans and 
accept enrollment during an open enrollment period for the applicable 
Exchange when they can attract the largest and most diverse enrollment. 
This limitation does not affect when a CO-OP may offer plans in the 
market outside the Exchanges.
    We proposed that a loan recipient must also satisfy the 
requirements of section 1322(c) of the Affordable Care Act and Sec.  
156.515 and become a CO-OP within fifty-four months following the first 
drawdown of a Start-up Loan or eighteen months following the initial 
drawdown of a Solvency Loan. These provisions were intended to ensure 
that loan recipients actively work toward becoming a CO-OP that offers 
CO-OP qualified health plans in the Exchanges.
    The comments we received on these proposed standards and our 
responses are provided below.
    Comment: A few commenters asked CMS to clarify that CO-OPs must 
become licensed before issuing any health insurance policies inside or 
outside of any Exchange.
    Response: As stated in the proposed rule and Sec.  1322(c)(5) of 
the Affordable Care Act, loan recipients under the CO-OP program must 
satisfy all requirements and comply with all standards that generally 
apply to qualified health plan issuers including State insurance laws 
and regulations. Accordingly, loan recipients must be

[[Page 77402]]

licensed by the relevant State agency before issuing any individual or 
small group health insurance policies regardless of whether they are 
offered inside or outside of the Exchanges.
    Comment: One commenter requested clarification regarding licensure 
for CO-OPs that operate in multiple States. The commenter recommended 
that CMS require licensure in one State and allow operation in 
additional States through a multi-state agreement or licensure provided 
to a foreign-domiciled issuer.
    Response: The statute requires that a CO-OP be licensed in each 
State in which it operates and licensure is controlled by State law. No 
carrier may conduct business in a State market without appropriate 
licensure approved by the applicable State insurance department. CO-OPs 
have the same options for licensure as other health insurers that 
operate in multiple States. For example, CO-OPs may establish a State 
of domicile for licensure and file expansion applications to achieve 
licensure in other States.
    Comment: Two commenters disagreed with the proposed interpretation 
of ``activity'' when applying the substantially all requirement under 
section Sec.  156.515(c)(1). These commenters stated that defining 
``activities'' in terms of contracts or policies rather than the number 
of covered lives diminishes the focus on individual and small group 
coverage. However, most other commenters on this issue and the Advisory 
Board recommendation supported the interpretation that each insurance 
policy or contract that an issuer sells constitutes a single activity. 
Commenters in support of this interpretation felt that it provides 
flexibility that is essential in the development of successful CO-OP 
models. They indicated that this flexibility would lead to better 
health care coverage for patients, particularly low-income working 
families and individuals in the individual and small group markets.
    Response: We considered alternative methods to evaluate the 
definition of ``activity'' but concluded that the final rule will 
maintain the proposed policy that each insurance policy or contract 
that an issuer sells constitutes a single activity, consistent with the 
proposed rule. Alternatives would unreasonably burden enrollment 
operations for CO-OPs by requiring ongoing counting of covered lives as 
family size or number of employees change, could violate guaranteed 
issue requirements by placing caps on the number of members that could 
be accepted from different groups that do not apply to other issuers, 
and may result in disruptions of coverage. Such a requirement may 
create a competitive disadvantage for CO-OPs that is not required by 
the statute and a significant ongoing administrative burden. Also, the 
CMS interpretation of ``activity'' is consistent with the 
interpretation generally used by State regulators in measuring issuer 
activity, which typically includes the following: Number of plans in 
the individual market, number of plans in the small group market, and 
number of plans in the large group market. Moreover, in using the term 
``activities consisting of the issuance of plans,'' the statute makes 
no reference to enrollment or covered lives. This definition will 
provide the flexibility needed for CO-OPs to become viable in the 
health care market and ensure repayment of loans.
    Comment: CMS received several comments in response to Sec.  
156.515(c)(1) which states that a CO-OP will satisfy the 
``substantially all'' standard at section 1322(c)(1) if at least two-
thirds of the contracts for health insurance coverage issued by a CO-OP 
are CO-OP qualified health plans offered in the individual and small 
group markets in the States in which the CO-OP operates. The Advisory 
Board recommended that CMS apply the most flexible standard possible in 
interpreting ``substantially all.'' Most commenters on this issue 
stated that measuring two-thirds of the contracts for the substantially 
all standard was an appropriate level, was easy to measure, and would 
give CO-OPs the needed flexibility to implement successful health 
plans. Two commenters felt that the two-thirds standard was too low and 
should be raised to 80-90 percent to ensure that CO-OPs operate 
primarily in the individual and small group markets. Other commenters 
felt that measuring two-thirds of the contracts was too high a standard 
and should be lowered to 50 percent. One commenter recommended that CMS 
explore ways to allow CO-OPs to participate in other markets, such as 
providing coverage for large employers or State employees.
    Response: In order for these new health insurers to be viable, CO-
OPs must achieve a minimum level of enrollment as soon as possible. 
Therefore, we believe that measuring two-thirds of the contracts when 
applying the substantially all requirement is an appropriate threshold.
    The two-thirds standard for the issuance of health plans applies to 
all of the activities of the CO-OP, including plans issued outside of 
the Exchanges. This interpretation allows CO-OPs to have a stable base 
of enrollment that will enhance a CO-OP's long-term success in the 
individual and small group market and ensure repayment of loans. It 
will also encourage providers who may want to offer a CO-OP option to 
their employees to participate in CO-OP provider networks and permit 
CO-OPs to participate in the Medicaid and CHIP program.
    The two-thirds standard used in this rule is consistent with other 
regulations in which CMS has interpreted the term ``substantially 
all.'' An example is the mental health parity regulations for group 
health plans and group health insurance coverage under section 712 of 
the Employee Retirement Income Security Act of 1974 (ERISA), section 
2726 of the PHS Act, and section 9812 of the Code.
    Comment: Several commenters recommended that section Sec.  
156.515(c) be modified to permit CO-OPs to market themselves and accept 
enrollment before an Exchange open-enrollment period or prior to market 
reform rules having been implemented in a State.
    Response: Section 1322(c)(6) of the Affordable Care Act explicitly 
prohibits a CO-OP from ``offer[ing] a health plan in a State until that 
State has in effect (or the Secretary has implemented for the State) 
market reforms required by part A of title XXVII of the Public Health 
Service Act.'' Therefore, a loan recipient cannot offer health coverage 
in a State until market reforms under the Affordable Care Act have been 
put into effect in the State. Once reforms have been put into effect in 
a State and a CO-OP satisfies State requirements such as licensure, a 
CO-OP may offer coverage in that State.
    Comment: One commenter requested clarification regarding the 
difference between a loan recipient and a CO-OP.
    Response: A loan recipient is any organization that has received a 
loan under the CO-OP program. As defined in Sec.  156.505, a CO-OP is a 
loan recipient that has established a member elected operational board, 
is offering CO-OP qualified health plans at the gold and silver benefit 
levels in the Exchanges serving the CO-OP's target markets, and meets 
the other requirements in Sec.  156.515.
    Comment: Several comments addressed the timelines for beginning to 
offer CO-OP qualified health plans and for becoming a CO-OP. One 
commenter recommended that the deadline for meeting the ``substantially 
all'' and other standards to become a CO-OP under Sec.  156.515(c) be 
48 months from Start-up loan drawdown rather than 54 months. Other 
commenters recommended that this deadline be extended because it will 
be difficult for

[[Page 77403]]

CO-OPs as new entities to conform to these requirements within 54 
months.
    Response: Given the process and requirements for achieving 
licensure in each State, we agree that the deadline to meet the 
requirements under section Sec.  156.515(c) should be extended. 
Therefore, we have revised the final rule. A loan recipient must meet 
the standards set forth under Sec.  156.515(c)(3) within 36 months 
following the initial drawdown of the Start-up Loan (as indicated in 
the proposed rule) or one year following the initial drawdown of the 
Solvency Loan as opposed to the initially proposed timeframe of six 
months. In addition, since we have extended the timeframe for a loan 
recipient to transition from a formation board to an operational board 
from one year to two years, we have extended the timeframe for a loan 
recipient to become a CO-OP. Specifically, we have changed the 
timeframe from within the earlier of 54 months following the initial 
drawdown of the Start-up Loan or 18 months following the initial 
drawdown of the Solvency Loan to within 5 years and 3 years 
respectively. This policy generally gives a loan recipient two years 
after it begins providing health care coverage through the Exchanges to 
fully implement its member elected operational board and meet all of 
the CO-OP minimum standards. We do not anticipate that these changes 
will affect when a loan recipient can offer coverage either through the 
Exchanges. This change will simply allow loan recipients to receive 
Solvency loans earlier, which will provide them with more time to 
ensure licensure before offering coverage.
    Comment: Two commenters requested modifications to Sec.  156.515(d) 
that would exempt health plans sponsored by Indian tribes from State 
insurance standards and provide Indian tribes flexibility in setting up 
and operating a CO-OP. Commenters also recommended that CO-OP 
enrollment eligibility criteria allow for a CO-OP to focus on a defined 
subset of the population.
    Response: Pursuant to section 1322(c)(5) and (c)(6) of the 
Affordable Care Act, a loan recipient must comply with all standards 
required under applicable State insurance laws and regulation in the 
State in which the CO-OP operates as well as the market reforms 
required by part A of the title XXVII of the Public Health Service Act. 
These standards include the requirement that qualified health plans 
abide by guaranteed issue and other State insurance laws in order to 
maintain a level playing field with health insurance issuers. 
Therefore, loan recipients cannot offer qualified health plans to only 
a defined subset of enrollees in their target area. The statute does 
not provide authority to modify these requirements.
    We have reviewed and considered the comments received and are 
finalizing the standards set forth in Sec.  156.515(c) and Sec.  
156.515(d) of the proposed rule with the exception of the revisions 
described above. We have modified the standards in Sec.  156.515(c)(3) 
and Sec.  156.515(d) to provide additional time for loan recipients to 
begin offering CO-OP qualified health plans and become a CO-OP.

E. Loan Terms (Sec.  156.520)

1. Overview of Loans
    Organizations that meet the eligibility standards in Sec.  156.510 
and the CO-OP program FOA may apply for two types of loans: Start-up 
Loans and Solvency Loans. Start-up loans assist with the start-up costs 
associated with establishing a CO-OP. Solvency Loans are intended to 
help loan recipients meet the reserve requirements, solvency 
regulations, and requisite surplus note arrangements in each State in 
which the applicant seeks to be licensed. We proposed that all loans 
awarded under the CO-OP program must be used in a manner that is 
consistent with the FOA, loan agreement, and all other statutory, 
regulatory, or other requirements established by CMS.
    Solvency and the financial health of insurance issuers is 
historically a State-regulated function. As a condition of licensure as 
a health insurance issuer, State insurance departments require that an 
issuer maintain an amount of capital that is consistent with its size 
and risk profile. This measure of reserve is called risk-based capital 
(RBC). A loan is considered a liability and typically would not assist 
an organization in meeting solvency requirements, since the liability 
would have to be subtracted from the calculation of reserves in order 
to determine the net protection afforded to enrollees. Since Solvency 
Loans must be repaid to the Federal government within 15 years, the 
Advisory Board expressed concern that they will be treated by States as 
debt rather than capital that satisfies State solvency and reserve 
requirements.
    Per section 1322(b)(3) of the Affordable Care Act, the standards 
for the repayment of loans awarded under the CO-OP program must take 
into consideration ``any appropriate State reserve requirements, 
solvency regulations, and requisite surplus note arrangements that must 
be constructed in a State.'' Therefore, in Sec.  156.520(a)(3) of the 
proposed rule, CMS proposed to structure Solvency Loans to each loan 
recipient in a manner that meets State reserve and solvency 
requirements so that the loan recipient can fund its required capital 
reserves. In order to assist CO-OPs in meeting State solvency 
requirements, the loans will be structured so that premiums would be 
used to meet cash reserve requirements before repayment to CMS. This 
ensures that the Solvency Loans are recognized as contributing to State 
reserve and solvency requirements in the States in which the applicant 
intends to offer CO-OP qualified health plans. We requested public 
comment on this provision.
    The comments received on the loan terms in Sec.  156.520(a) of the 
proposed rule and our responses are provided below.
    Comment: One commenter requested clarification regarding whether 
the terms of each CO-OP's Solvency Loan will be tailored to the 
specific requirements of each State in which the CO-OP intends to offer 
health care coverage. Several commenters supported our proposal to 
structure Solvency Loans so that they are recognized as contributing to 
State reserve and solvency requirements. They acknowledged the concern 
discussed in the proposed rule that solvency requirements vary across 
States and that loans are typically considered debt rather than capital 
for the purposes of State reserve requirements. Generally, commenters 
agreed that Solvency Loans should be structured so that each CO-OP's 
premium revenue is applied towards paying claims and meeting cash 
reserve requirements before loan repayments to CMS. However, some 
commenters indicated that such a structure would be insufficient. They 
explained that Solvency Loans must be structured as surplus notes as 
they are the only types of loans that State insurance regulators will 
recognize as assets rather than debt. One commenter advised against 
creating a new Federal requirement that States treat Solvency Loans as 
``capital.'' It was also recommended that CMS coordinate with NAIC to 
establish a means for CO-OPs to meet State solvency and reserve 
requirements.
    Response: We will work with each loan recipient to structure their 
Solvency Loans in a manner that will contribute towards meeting State 
reserve and solvency requirements consistent with State insurance 
regulation. States are not required to take action that would be 
inconsistent with State insurance regulation. Therefore, loan 
recipients must work with State insurance regulators to

[[Page 77404]]

identify loan structures that will meet State requirements. Significant 
flexibility is afforded to loan applicants in structuring their 
Solvency Loans to meet State standards. Applicable loan structures may 
include but are not limited to structuring a Solvency Loan as a surplus 
note or responsibly structuring a Solvency Loan so that premium revenue 
is applied towards paying claims for covered services to enrollees and 
meeting cash reserve requirements before loan repayments to CMS.
    Comment: One commenter asked what actions can be taken if a State 
is unwilling to recognize a loan recipient's Solvency Loan as meeting 
State reserve and solvency requirements. The commenter recommended that 
CMS exercise flexibility in structuring and, if necessary, re-
structuring Solvency Loans if a State revises its reserve and solvency 
requirements.
    Response: It is incumbent upon applicants to work with their State 
insurance regulators to identify appropriate loan structures that will 
meet the requirements of their State insurance department.
    Comment: One commenter requested clarification regarding whether 
CMS will provide loan recipients with sufficient funding to meet State 
solvency requirements in the initial distributions of loan funds. In 
addition, commenters including State Departments of Insurance requested 
clarification regarding whether additional loan funding will be made 
available if a loan recipient requires additional Solvency Loans after 
2012 and recommended that loan funding remain available after 2012.
    Response: The full amount of Solvency Loans anticipated should be 
requested in the loan application. Loan disbursements will be made 
available to loan recipients on a timetable based on the business plan 
and milestones proposed and approved in their applications after we 
review the loan recipient for compliance. The initial solvency 
disbursements received by loan recipients should allow a loan recipient 
to meet their applicable State solvency and reserve requirements. 
Applicants should consider the potential needs for funding due to 
unforeseen market changes or changes in State regulatory requirements 
as well as unforeseen enrollment and benefit cost growth. These will be 
considered in the size of the initial award. A loan recipient may draw 
down on the Start-up Loans and Solvency loans to the extent such 
conditions exist, consistent with the terms of the loan agreement.
    Comment: One commenter recommended that CMS prohibit loan 
recipients from using their loan funding to pay claims or subsidize 
reimbursements to providers in any way that would give them an 
advantage over existing health insurance issuers.
    Response: Under the Affordable Care Act, loan recipients are 
permitted to use their loan funds to assist with their start-up costs 
and State solvency requirements, provided that the funds are not used 
to conduct propaganda, or otherwise attempt to influence legislation, 
or for marketing. The purpose of State reserve requirements is to 
preserve the financial viability of carriers and enable the payment of 
claims when provider costs exceed premium revenue. A CO-OP that fails 
to maintain appropriate reserves or surplus may be subject to 
regulatory action, seizure, or liquidation. Such a prohibition would 
therefore not only defeat the purpose of the loans but would be 
contrary to the framework of State regulation. Furthermore, the statute 
does not prohibit these costs. Given that these loans must be repaid to 
us in full and that CO-OPs should structure their premiums, claims, and 
administrative costs to ensure sustainability, we do not believe that 
the use of loan funds to pay claims would give CO-OPs an advantage over 
existing health insurance issuers. Existing health insurance issuers 
may use their reserves to pay claims under equivalent circumstances.
    We have considered the comments received and are finalizing the 
provisions set forth in Sec.  156.520(a) of the proposed rule.
2. Repayment Period
    Section Sec.  156.520(b) of the proposed rule codified the standard 
in section 1322(b)(3) of the Affordable Care Act that Start-up Loans 
and Solvency Loans awarded must be repaid within 5 years and 15 years 
respectively, taking into consideration any appropriate State reserve 
requirements, solvency regulations, and requisite surplus note 
arrangements that must be constructed in a State. Loan recipients must 
make loan payments consistent with the repayment schedule approved by 
CMS and agreed to by the loan recipient in the loan agreement until the 
loans have been paid in full. CMS proposed to permit individualized 
repayment schedules to promote the growth of CO-OPs, ensure compliance 
with the laws of different States, serve the interests of the CO-OP 
members and the public, and enhance the likelihood of full repayment. 
Flexibility in the repayment schedule helps address the diversity in 
each CO-OP's local market conditions, projected member risk profiles, 
business strategy, and projected enrollment size. The repayment 
schedule is submitted with the application and may include features 
such as a grace period, graduated repayments, or balloon payments at 
the end of the repayment period.
    The Advisory Board recommended an enhanced oversight process for 
cases where a loan recipient is not meeting the terms and conditions of 
its loan but where CMS has concluded that discontinuing funding is not 
in the best interest of the CO-OP's members, the public, or the 
government. Consistent with the Advisory Board's recommendation, a loan 
modification or workout may be executed when a loan recipient is having 
difficulty making loan repayments. If a loan recipient is unable to (1) 
Make repayments or meet other conditions of the loan without adversely 
affecting coverage stability, member control, quality of care, or the 
public interest generally or (2) meet State reserve and solvency 
requirements, CMS would have the discretion to execute a loan 
modification or workout if appropriate, or terminate the agreement and 
recoup the loans in accordance with the loan agreement.
    The comments received on the repayment periods described in Sec.  
156.520(b) of the proposed rule and our responses are provided below.
    Comment: Most commenters expressed support for our flexibility in 
allowing applicants to propose individualized repayment schedules 
consistent with their business plans. They indicated that loan 
recipients will likely need time to build enrollment and revenue before 
beginning their loan repayments. Some commenters recommended that CMS 
not permit CO-OPs to wait until the end of their repayment period to 
make a balloon payment. They stated that instead CO-OPs should be 
required to make payments at regular intervals in order to reduce the 
cost of the program and ensure that CO-OPs are factoring loan 
repayments into their premium pricing.
    Response: Flexible repayment schedules promote the growth of each 
CO-OP and improve each CO-OP's ability to fully repay its loans. We 
agree that CO-OPs must factor loan repayments into their premium 
pricing; however, we do not believe that it is necessary to require 
repayment at uniform intervals among all CO-OPs. As described in the 
FOA, all loan applicants must demonstrate their ability to repay their 
loans and describe

[[Page 77405]]

their process for determining accurate and appropriate premium pricing.
    Comment: One commenter requested guidance regarding whether a 
repayment schedule can be established on a per member per month basis.
    Response: Applicants have flexibility in proposing a responsible 
repayment schedule. A loan may have a repayment schedule on a per 
member per month basis, provided that each loan is fully paid within 
the repayment period and the proposed repayment schedule is supported 
by the CO-OP's business plan. CMS will consider the applicant's 
proposed schedule and has discretion in determining a responsible 
repayment schedule that will be approved and established in the loan 
agreement.
    Comment: One commenter recommended that we add ``market 
competition'' to the list of considerations for modifying loan terms. 
The commenter stated that terminating a functioning CO-OP due to loan 
repayment issues could significantly reduce competition and harm the 
enrollees in areas with few active health plans.
    Response: We have added ``market stability'' as a consideration for 
executing a loan workout or modification.
    We have considered the comments received and are finalizing the 
provisions set forth in Sec.  156.520(b) of the proposed rule with the 
exception of the revisions described above. Specifically, we have 
revised Sec.  156.520(b)(3) to reflect that a loan modification or 
workout may be executed if we determine that a loan recipient is unable 
to repay its loans under its original loan agreement without 
destabilizing the loan recipient's target market.
3. Interest Rates
    In Sec.  156.520(c), we proposed that loan recipients pay an 
interest rate benchmarked to the average interest rate on marketable 
Treasury securities of similar maturity. In the FOA, we specified that 
the interest rate for Start-up loans is the average interest rate on 
marketable Treasury securities of similar maturity minus one percentage 
point and the interest rate cannot be less than zero percent. In 
addition, we specified that the interest rate for Solvency loans is the 
average interest rate on marketable Treasury securities of similar 
maturity minus two percentage points and the interest rate cannot be 
less than zero percent. These interest rates are tied to prevailing 
market conditions while providing low cost loans that are consistent 
with the statute's direction to foster the development of viable CO-
OPs.
    The comments we received on the interest rates described in Sec.  
156.520(c) of the proposed rule and our responses are provided below.
    Comment: Commenters supported establishing low interest rates for 
loan recipients to give CO-OPs the best chance of success, to protect 
the Federal investment, and to encourage new market entrants to provide 
coverage to medically underserved communities. Lastly, one commenter 
stated that the interest rates for Start-up Loans and Solvency Loans 
could determine, in large measure, the ability of CO-OPs to 
successfully compete with other health insurers.
    Response: We agree with the commenters and therefore, are codifying 
the interest rates announced in the FOA in Sec.  156.520(c) of this 
final rule. These interest rates will encourage and promote the success 
of CO-OPs.
    Comment: One commenter requested guidance regarding whether loan 
recipients may be charged a lower interest rate during their initial 
years of operation.
    Response: The interest rates for Start-up Loans and Solvency Loans 
will be determined based on the date of award and will be fixed for the 
life of the loan. If an applicant anticipates difficulty making 
repayments during the initial years of operation, it may request a 
repayment schedule where repayments begin later in the loan repayment 
period.
    Comment: Pursuant to section 1322(b)(2)(C)(iii) of the Affordable 
Care Act, if an organization fails to meet any provisions of the loan 
agreement or has not corrected such a failure within a reasonable 
period of time established by CMS, the organization must repay an 
amount equal to 110 percent of the total loans received plus interest. 
One commenter recommended that we codify this provision in the final 
rule in addition to the FOA in order to give this penalty more weight 
and ensure greater compliance.
    Response: We agree with the commenter and therefore, are codifying 
this provision of the Affordable Care Act as described in the FOA in 
Sec.  156.520(c) of this final rule.
    Comment: One commenter expressed support for the proposed interest 
rates and asked if CMS could take any additional steps to reduce the 
financial barriers that CO-OPs face when entering a concentrated health 
insurance market. Another commenter indicated that CMS should encourage 
States to offer CO-OPs the lowest possible premium rates or a tax-free 
status because State taxation requirements may create significant 
barriers for CO-OPs. Commenters also recommended that CMS develop 
national purchasing pools or mechanisms to assist CO-OPs in adequately 
spreading their risk (for example, with a national CO-OP risk pool, 
Federally-funded stop-loss insurance, or Federally-funded reinsurance), 
particularly in the first few years of operation.
    Response: In addition to providing low-interest loans with tailored 
repayment schedules to assist with start-up cost and State reserve 
requirements, the Affordable Care Act reduces the financial barriers 
for CO-OPs by creating a new Federal income tax exemption under 
501(c)(29) of the Internal Revenue Code for qualified nonprofit health 
insurance issuers that have received loans under the CO-OP program. 
These measures provide CO-OPs with significant assistance in overcoming 
financial barriers to entering a health care market while maintaining a 
level playing field with other issuers. We do not have the authority to 
require States to offer CO-OPs tax-exempt status or the lowest possible 
premium tax rates. CO-OPs, like other health insurers that participate 
in the Exchanges, will benefit from premium and risk stabilization 
programs, risk adjustment, risk corridors, and reinsurance programs 
operating under sections 1341, 1342, and 1343 of the Affordable Care 
Act. In addition, CO-OPs may purchase reinsurance and other 
administrative services individually or through a private purchasing 
council.
    Comment: One commenter recommended that CMS give deference to State 
statutory interest rate caps on Solvency Loans.
    Response: The interest rates for Solvency Loans are below market 
rates. We do not anticipate that they will exceed any interest rate 
caps established by a State regulation. However, loan recipients must 
comply with all applicable State insurance laws.
    We have considered the comments received and are finalizing the 
provisions set forth in Sec.  156.520(c) of the proposed rule. We have 
also added provisions (1) To reflect that the interest rate for Start-
up Loans equals the greater of the average interest rate on marketable 
Treasury securities of similar maturity minus 1 percentage point or 0 
percent; (2) to reflect that the interest rate for Solvency loans 
equals the greater of the average interest rate on marketable Treasury 
securities of similar maturity minus 2 percentage points or 0 percent; 
and (3) to codify the penalty described in 1322(b)(2)(C)(iii) of

[[Page 77406]]

the Affordable Care Act. If a loan recipient fails to meet any 
provisions of the CO-OP program or their loan agreement and has not 
corrected such failure within a reasonable period of time established 
by CMS, the organization must repay an amount equal to 110 percent of 
the total loans received plus interest.
4. Failure To Pay
    In Sec.  156.520(d), CMS proposed to use any and all remedies 
available to it under law to collect loan payments or penalty payments 
if a loan recipient fails to make payments consistent with the 
repayment schedule in its loan agreement or in a loan modification or 
workout.
    The comments we received on the failure to pay provisions described 
in Sec.  156.520(d) of the proposed rule and our responses are provided 
below.
    Comment: One commenter stated that the terms of a loan recipient's 
obligations in the event of a loan default or failure to meet loan 
requirements seems overly punitive.
    Response: A loan recipient's obligations in the event of a loan 
default or failure to meet loan requirements are consistent with the 
provisions in section 1322(b)(2)(C)(iii) of the Affordable Care Act and 
are appropriate to protect Federal investment in the CO-OP program. We 
will work with loan recipients experiencing difficulty making timely 
repayments and will provide the option to request a loan workout. 
Furthermore, organizations that fail to meet program requirements, 
depending on the nature of the failure, may be given sufficient 
opportunity (as determined by CMS) to take corrective action.
    Comment: One commenter recommended that CMS not hold a loan 
recipient's incorporators and formation board liable for loan repayment 
unless they engaged in fraud or any other prohibited conduct. The 
commenter indicated that such an assurance would encourage additional 
participation in the CO-OP program.
    Response: Under the rule, loan applicants are incorporated or 
organized entities under State law. Therefore, the liability of the 
loan recipient's incorporators and formation board will, in part, be 
determined by the organizational vehicles, including corporations or 
other limited-liability organizations, the applicants use under State 
law.
    We have considered the comments received and are finalizing the 
provisions set forth in Sec.  156.520(d) of the proposed rule.
5. Deeming of CO-OP Qualified Health Plans
    Section 156.520(e) of the proposed rule codified the ``deeming'' 
provisions of section 1301(a)(2) of the Affordable Care Act. A loan 
recipient that is deemed certified to participate in the Exchanges 
would be exempt from the certification procedures for each applicable 
Exchange. To be deemed certified to participate in an Exchange, we 
proposed that a loan recipient must be in compliance with the terms of 
the CO-OP program, the Federal standards for CO-OP qualified health 
plans set forth pursuant to section 1311(c) of the Affordable Care Act, 
and State standards that are applicable to all insurers. CMS or an 
entity designated by CMS will make a determination regarding whether or 
not a loan recipient meets these standards based on evidence provided 
by the loan recipient. CMS or its designee will notify the Exchange in 
which the loan recipient proposes to operate that the loan recipient is 
deemed certified to participate. Similarly, if a loan recipient loses 
its deemed status for any reason, CMS or its designee will provide 
notice to the applicable Exchanges.
    The comments we received on the ``deeming'' provisions described in 
Sec.  156.520(e) of the proposed rule and our responses are provided 
below.
    Comment: Several commenters recommended that CMS subject CO-OPs to 
the same standards, operational requirements, and certification 
processes as other health insurance issuers participating in the 
Exchanges including any competitive bidding process or selective 
contracting process in order to maintain a level playing field. State 
regulators requested that CMS defer to the relevant Exchange for 
certification. Commenters indicated that States are in the best 
position to assess whether a CO-OP meets the standards of an Exchange. 
Two commenters welcomed a prominent Federal role in the ``deeming'' of 
health plans offered by CO-OPs and indicated that such a role would 
remove a potential barrier to the sponsorship of CO-OPs by Indian 
tribes and ensure that Indian tribes are not subjected to State-
specific attempts to regulate their CO-OP plans.
    Response: CO-OPs must comply with all of the same requirements as 
other qualified health plans. CO-OPs will be subject to the same State 
and Federal standards as other health insurance issuers to ensure a 
level playing field. However, to ensure CO-OPs are not held to 
standards that it is not possible for them to meet as CO-OPs, we have 
revised the final rule to clarify that to be deemed as certified, loan 
recipients must meet all State-specific standards established by an 
Exchange except for those State-specific standards that operate to 
exclude loan recipients due to being new issuers or based on other 
characteristics that are inherent in the design of a CO-OP. Enforcing 
such standards would defeat the statutory purpose of the CO-OP program. 
CMS (or an entity designated by CMS) will work with each CO-OP to 
ensure that they are meeting the applicable standards, including 
program standards.
    The goal of the CO-OP program is to provide additional options for 
consumers in the Exchanges that are consumer governed and consumer 
focused. The ``deeming'' provision of section 1301(a)(2) of the 
Affordable Care Act is pursuant to this goal and ensures that qualified 
health plans offered by CO-OPs are made available to consumers in the 
Exchanges.
    Comment: One commenter requested confirmation that CO-OPs will 
participate in the reinsurance, risk corridors, and risk adjustment 
programs envisioned by the Affordable Care Act and thus are subject to 
the same taxes, assessments, and costs as other qualified health plans.
    Response: CO-OPs will participate in the reinsurance, risk 
corridor, and risk adjustment programs implemented under sections 1341, 
1342, and 1343 of the Affordable Care Act as issuers in the individual 
and small group markets. They are responsible for the same costs as 
other qualified health plans.
    Comment: Commenters expressed concern that deeming CO-OPs for up to 
10 years following the life of their loans would remove incentives for 
CO-OPs to perform at the market standard, harm meaningful competition 
in the Exchanges, and potentially put consumers at risk. Two commenters 
recommended that CMS clarify when the 10-year period would begin and 
that CMS exempt CO-OPs sponsored by an Indian tribe, tribal 
organization, or an Indian-controlled Managed Care Entity from this 
time limit so that they could be deemed as certified to participate in 
the Exchanges indefinitely. Commenters also requested additional 
information regarding the deeming process.
    Response: Based on comments received, we are revising the final 
rule to implement a recertification process for all loan recipients 
including CO-OPs sponsored by an Indian tribe, tribal organization, or 
an Indian-controlled Managed Care Entity. Loan recipients will be 
deemed as certified to participate in the Exchanges for two years and 
may apply to CMS for ``deeming'' recertification every two

[[Page 77407]]

years for up to a total of 10 years following the date their loans have 
been fully repaid. To be deemed as certified or recertified to 
participate in the Exchanges, a loan recipient must provide evidence to 
CMS (or an entity designated by CMS) that it complies with the 
applicable Federal and State standards for qualified health plans. If a 
loan recipient fails to provide sufficient evidence that it is in 
compliance with Federal and State standards, the organization will no 
longer be deemed as certified to participate in the Exchanges. 
Additional information regarding the deeming process will be provided 
in program guidance.
    Comment: One commenter requested clarification regarding whether 
CMS intends to designate an entity to deem qualified health plans 
offered by CO-OPs as certified to participate in the Exchanges. In 
addition, the commenter requested the specific criteria for selecting a 
designated entity.
    Response: Additional information regarding the deeming process will 
be provided in program guidance.
    Comment: One commenter requested confirmation that loan recipients 
must be accredited as required under section 1311(c)(1)(D)(i) of the 
Affordable Care Act and recommended giving loan recipients a maximum of 
18 months to complete accreditation. The commenter also recommended 
granting provisional accreditation status, for fulfilling some, but not 
all, accreditation requirements.
    Response: Consistent with section 1322(c)(5) of the Affordable Care 
Act, loan recipients must meet the same requirements as other similarly 
situated issuers including rules regarding network adequacy, solvency, 
and guaranteed issue. Therefore, loan recipients will be subject to the 
same standards as other health insurers in the Exchanges and must meet 
the same applicable accreditation requirement.
    We have considered the comments received and are finalizing the 
deeming provisions set forth in Sec.  156.520(e) of the proposed rule 
with the exceptions described above. Specifically, we have revised the 
provisions in Sec.  156.520(e) to clarify that loan recipients are 
deemed as certified to participate in the Exchanges for 2 years and may 
be recertified every 2 years for up to 10 years following the life of 
their loans. We have also revised the provisions in Sec.  156.520(e) to 
clarify that loan recipients will be subject to all State-specific 
standards established by an Exchange except for those State-specific 
standards that operate to exclude loan recipients due to being new 
issuers or based on other characteristics that are inherent in the 
design of a CO-OP.
6. Conversions
    Due to concerns that successful CO-OPs may become targets for 
conversion to for-profit, non-consumer operated entities, we proposed 
to prohibit such conversions. Conversions would likely reduce consumer 
control, limit choice, and weaken competition in the insurance 
marketplace and would be contrary to the goals of the CO-OP program. We 
also proposed to prohibit any transaction by a CO-OP that would result 
in a change to a governance structure that does not meet the standards 
in Sec.  156.515 or any other program standards. These prohibitions 
would ensure that loans awarded under this program are used to sustain 
program goals over time.
    The comments we received on the conversion prohibitions described 
in Sec.  156.520(e) of the proposed rule and our responses are provided 
below.
    Comment: Several commenters expressed strong support for the 
proposed prohibition on conversions to for-profit or non-consumer 
operated entities. They indicated that such a conversion would be 
contrary to the legislative intent and that organizations receiving 
Federal funding to develop a CO-OP should not be permitted to abandon 
the mission of the CO-OP program. Commenters requested additional 
guidance regarding this prohibition and any exceptions to the 
prohibition. Some commenters recommended allowing CO-OPs to convert to 
a different organizational structure under certain circumstances, such 
as to preserve plan coverage, avert plan insolvency, or respond to 
subsequent changes in the Affordable Care Act. One commenter 
recommended establishing penalties for CO-OPs that convert to a for-
profit or non-consumer governed entity.
    Response: We believe that successful CO-OPs may be targets for 
conversions and agree with commenters that such conversions would be 
inconsistent with the legislative intent. As a result, we are not 
implementing any exceptions to this policy. CO-OPs are not permitted to 
convert to a for-profit or non-consumer operated entity at any time or 
to partake in any activities that have the effect of such a conversion 
(for example, selling a substantial portion of its enrollment to a for-
profit entity), even after they have fully repaid their Start-up Loans 
and Solvency Loans. In the potential case of insurer financial 
distress, a CO-OP follows the same process as traditional issuers and 
must comply with all applicable State laws and regulations.
    We have considered the comments received and are finalizing the 
provisions set forth in Sec.  156.520(f) of the proposed rule.

F. Comments Beyond the Scope of the Final Rule

    In response to the proposed rule, many commenters chose to raise 
issues that are beyond the scope of the proposed rule. Several of these 
comments pertain to the provisions of the Funding Opportunity 
Announcement (FOA) and will be addressed in subsequent program 
guidance. These comments are summarized below.
    Comment: One commenter requested that this final rule prohibit 
discrimination in the operation of the CO-OP program. In addition, the 
commenter requested that State law prevail over the minimum protections 
codified in the CO-OP rules if a State provides additional protections 
to consumers.
    Response: Loan recipients must comply with applicable Federal law 
regarding discrimination. In addition, we intend to include provisions 
in the loan agreement with each loan recipient that will prohibit 
discrimination. Under section 1322(c) of the Affordable Care Act, a CO-
OP must meet all State standards for licensure under the market reforms 
outlined in the Affordable Care Act. Per Sec.  156.520(e) of this 
subpart, CO-OPs must also comply with the standards for CO-OP qualified 
health plans set forth pursuant to section 1311(c) of the Affordable 
Care Act, all State-specific standards established by an Exchange that 
apply to all qualified health plans, and the standards of the CO-OP 
program.
    Comment: One commenter expressed concern that the Governance and 
Licensure criteria in the FOA do not sufficiently emphasize the 
importance of the licensure requirements. The commenter recommended 
that licensure requirements account for up to five points in the 
application reviews.
    Response: The review criteria for CO-OP loan applications are 
addressed in the Funding Opportunity Announcement. We recognize that 
establishing a reasonable strategy for achieving licensure is critical 
for the success of every prospective CO-OP.
    Comment: One commenter suggested that this final rule explicitly 
require Federally Qualified Health Centers (FQHCs), or at least 
``safety net providers,'' to be included in the provider networks of 
all CO-OPs since FQHCs already demonstrate and will ensure that the CO-
OP program succeeds in its purpose of providing care coordination, 
quality, and efficiency.

[[Page 77408]]

    Response: Section 1311(c)(1)(C) of the Affordable Care Act governs 
the inclusion of safety net providers for issuers that participate in 
the Affordable Insurance Exchanges.
    Comment: Commenters requested clarification regarding whether CO-
OPs are required to operate statewide. Two commenters recommended that 
CMS permit CO-OPs to limit their service areas to regions primarily 
comprised of Indian reservations and other tribally controlled land. 
One commenter recommended that an applicant's feasibility study dictate 
how quickly a CO-OP expands its service area. Another commenter 
requested clarification regarding whether an applicant can receive 
preference in the application reviews if they plan to offer coverage 
initially in a local service area and then expand to statewide.
    Response: Loan recipients are not required to offer coverage 
statewide. For CO-OPs that intend to provide coverage across an entire 
State, we recognize that depending on local market conditions, it may 
be more prudent for a CO-OP to offer coverage in a locally defined 
service area first and then expand coverage to the entire State. 
However, applicants should define a potential service area in 
conjunction with the State insurance department, as they must comply 
with all applicable State laws. Accordingly, as indicated in the FOA, 
applicants will be awarded points toward their application review based 
on their ability to operate statewide over time. Applicants may also 
receive points towards their application review by providing evidence 
of private support or submitting a reasonable plan to provide 
integrated or coordinated care.
    Comment: One commenter recommended that CMS encourage all 
applicants to build expenses related to networking and information 
sharing into their financial projections and business plans.
    Response: Networking and information sharing between CO-OPs will be 
beneficial for CO-OPs. Reasonable expenses related to information 
sharing may be eligible costs funded through Start-up Loans.
    Comment: One commenter recommended that CMS re-invest funds that 
have been paid back by loan recipients to capitalize future CO-OP 
applicants.
    Response: We are not authorized under the statute to award 
additional loans using repaid loan amounts.
    Comment: One commenter recommended that we increase the $100,000 
limit on the retroactive reimbursement of costs associated with 
preparing a feasibility study and business plan for the CO-OP loan 
application.
    Response: See section IV.E. of the FOA for more information 
regarding the start-up costs eligible for retroactive reimbursement. We 
recognize that there are other costs that applicants may incur in 
developing their applications. Therefore, applicants are encouraged to 
solicit private support (for example, grants and in-kind services) to 
assist with these costs.
    Comment: We received a comment regarding whether we envision CO-OPs 
competing with one another if their service areas overlap.
    Response: The statute permits us to award loans to multiple 
applicants in a State if there is sufficient funding. Loans will be 
awarded, in part, based on the feasibility of an applicant developing a 
viable CO-OP given existing and expected market conditions. We will 
examine the service areas in evaluating CO-OP applications and 
implementation to ensure actuarial viability of the CO-OPs.
    Comment: One commenter requested additional information regarding 
the technical assistance that CMS will offer to applicants and loan 
recipients. Another commenter recommended that CMS identify other 
organizations to provide technical assistance, if CMS does not intend 
to perform this function.
    Response: As stated in the FOA, technical assistance and support 
will be provided to applicants and loan recipients as available and 
when deemed appropriate. Information regarding available technical 
assistance will be provided in subsequent program guidance.
    Comment: One commenter requested that CMS permit CO-OPs to 
outsource administrative functions to organizations such as private 
purchasing councils.
    Response: Under section 1322(d)(1) of the statute, CO-OPs may 
establish private purchasing councils to enter into collective 
purchasing arrangements for administrative services to increase 
administrative and cost efficiencies. As described in the FOA, the 
costs associated with establishing a private purchasing council are 
eligible costs for Start-up Loans.
    Comment: One commenter requested guidance regarding whether CO-OPs 
must provide additional reporting demonstrating compliance with Federal 
law. Another commenter recommended that CMS establish an autonomous 
body, with the power to issue sanctions, to monitor CO-OPs and ensure 
that the goals of the CO-OP program are met.
    Response: As described in the FOA, CMS will closely monitor and 
assess the performance of each loan recipient in complying with Federal 
law, the requirements of the CO-OP program including its reporting 
requirements, and the specific terms of its loan agreement.
    Comment: One commenter stated that CO-OPs offer a unique 
opportunity for providers to foster emerging models of integrated 
delivery systems, improve quality and health outcomes, and reduce 
costs. When reviewing CO-OP loan applications, the commenter 
recommended that CMS consider an applicant's plan to collect 
quantifiable health outcomes data, their willingness to adjust clinical 
behavior based on the informatics collected, and the likelihood that 
they will minimize costs and achieve improvements in patient outcomes 
through reliance on quantifiable data metrics. The commenter provided 
specific examples of questions that should be asked of CO-OPs in order 
to ensure the most efficient patient outcomes.
    Response: We share the commenter's goals of improved patient care 
and improved health outcomes. The extent to which an applicant intends 
to monitor quality of care and use information technology to evaluate 
and improve care outcomes are components of the operational criteria 
used in the evaluation of CO-OP loan applications as described in the 
FOA.
    Comment: Several commenters suggested that CMS allow CO-OPs to use 
or implement new care models, systems, and products over time such as 
value-based insurance design (VBID) products.
    Response: CO-OPs have the flexibility to implement care models, 
systems, and products that best serve the needs of their members as 
long as the CO-OP abides by the standards and requirements set forth in 
this final rule, the FOA, the loan agreement, and other program 
guidance. In accordance with the statute, care models that improve the 
integration or coordination and value of care will receive points 
contributing to the overall score of their application in the award of 
loans.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection

[[Page 77409]]

should be approved by OMB, section 3506(c)(2)(A) of the Paperwork 
Reduction Act of 1995 requires that we solicit comment on the following 
issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency;
     The accuracy of our estimate of the information collection 
burden;
     The quality, utility, and clarity of the information to be 
collected; and
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We solicited comments on the extension of the information 
collection requests associated with the implementation of the CO-OP 
program (for example, application, reporting) currently approved under 
0938-1139 in a 60-day notice that was published in the Federal Register 
on August 5, 2011 (76 FR 47591). OMB previously reviewed and approved 
the Information Collection Request under emergency processing according 
to 5 CFR 1320.13. We did not receive any public comments regarding this 
extension and therefore, are finalizing the information collection.

IV. Regulatory Impact Analysis (RIA)

A. Introduction

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). An RIA 
must be prepared for rules with economically significant effects ($100 
million or more in any 1 year). This final rule is economically 
significant. Accordingly, the Office of Management and Budget has 
reviewed this final rule.

B. Summary and Need for Regulatory Action

    The Affordable Care Act established the CO-OP program and requires 
CMS to promulgate regulations to implement this program. The purpose of 
this program is to create a new CO-OP in every State to expand the 
number of qualified health plans available in the Exchanges with a 
focus on integrated care and greater plan accountability.
    Only a handful of insurance choices are available that are 
sponsored and managed by entities primarily focused on meeting the 
health insurance needs and preferences of consumers, as determined 
directly by consumers or their elected representatives. There are four 
issuers in the country that meet this standard, located in the States 
of Minnesota, Washington, Idaho, and Wisconsin. The combined membership 
for these four health insurance cooperatives is approximately 2.1 
million, meaning that the current CO-OP market share is a little over 
one percent of the total enrollment in the private insurance market.\1\
---------------------------------------------------------------------------

    \1\ The membership counts for Health Partners, Group Health 
Cooperative, and Group Health Cooperative of Eau Claire are based on 
their testimony to the CO-OP program Advisory Board available at 
http://cciio.cms.gov/resources/co_op/index.html. The membership 
count for Group Health Cooperative of South Central Wisconsin is 
based on its annual report available at https://ghcscw.com/Media/Annual_Report_2010/annual_report_2010_web.pdf.
---------------------------------------------------------------------------

    There are $3.8 billion in appropriations for loan subsidy and 
program administration costs to assist sponsoring organizations in 
creating such plans and to do so with enough capital and reserves to 
become licensed and ultimately effective competitors in State insurance 
markets. These funds will enable CO-OPs to use Federal government loans 
(``Solvency Loans'') to meet the requirements for risk-based capital 
that State insurance departments require of health plans to ensure that 
they will be able to meet future obligations they have contractually 
promised their enrollees.
    The Affordable Care Act, as implemented through this regulation, 
prohibits issuers that existed on July 16, 2009 from participating in 
the CO-OP program but allows CO-OPs to use experienced managers and 
health care organizations to manage the functions they have to perform 
in providing health insurance. Further, as indicated throughout the 
preamble to this final rule, the CO-OP Advisory Board in its advice to 
the Secretary and the Department has consistently favored provisions 
that would give CO-OPs flexibility, within the statutory boundaries, in 
setting up and operating these plans. At least two-thirds of a CO-OP's 
activities must consist of the issuance of policies in the individual 
and small group market.

C. Costs

    There will be costs involved in administration of the program, and 
we currently estimate that these could be approximately $10 million a 
year on an annualized present value basis, as shown in the Accounting 
Statement. Actual administrative costs may be higher or lower, and are 
expected to vary over time.

D. Transfers

    As previously explained, the Congress has provided $3.8 billion to 
assist sponsoring organizations in creating CO-OPs with enough capital 
and reserves to become licensed and ultimately effective competitors in 
State insurance markets.\2\ The capital requirements for CO-OPs would 
be financed, in part, by member premiums and in part by the $3.8 
billion appropriation.
---------------------------------------------------------------------------

    \2\ We note that these capital requirements are not ``costs'' 
for the purpose of calculating the benefits and costs of this 
Federal program. Costs, in the context of this program, are the 
resources spent on applying for and complying with the terms of the 
loans.
---------------------------------------------------------------------------

    The net Federal subsidies provided through CO-OP Start-up and 
Solvency Loans are referred to as ``transfers.'' These transfers result 
from (1) Assessing below-Treasury interest rates over the relevant 5-
year (Start-up Loan) and 15-year (Solvency Loan) periods assuming full 
and timely repayment and (2) losses due to delayed repayment in 
accordance with the loan terms designed to comply with State insurance 
regulations, failure to repay in accordance with the loan contract 
(losses due to default net of loan recoveries), and other factors that 
affect the cash flows to and from the Federal government resulting from 
these loans. Actual subsidy costs for these loans will be determined 
per the requirements of the Federal Credit Reform Act of 1990, as 
amended (FCRA). The cost to the Federal government of these subsidies 
is the net present value of all cash flows to and from the Federal 
government resulting from the loans, excluding administrative costs, 
and will be recorded at the time they are incurred. These costs and 
associated transfers will reflect the terms and conditions of the loans 
as well as the performance of the loans. The business plan, 
disbursement schedule, and repayment terms will vary for each loan 
recipient. As such, these transfers are uncertain, and will vary from 
loan to loan. In the Accounting Statement in Table 1 below, the 
analysis reflects annualized estimated transfers associated with below-
Treasury interest rates over the anticipated repayment period for a 
notional borrower with $115 million in CO-OP loans ($15 million for 
start-up funding and $100 million for solvency funding). This analysis 
assumes full and timely repayment. Consistent with the final rule, we 
use one percent below the current yields for 5-year U.S. Treasury bonds 
as the repayment interest rate on Start-up Loans and two percent below 
the current yields for U.S. Treasury

[[Page 77410]]

Bonds with a similar maturity to the repayment terms for the Solvency 
Loans. There will be additional transfers due to delayed repayment in 
accordance with the loan terms designed to comply with State insurance 
regulations, failure to repay in accordance with the loan contract 
(losses due to default net of loan recoveries), and other factors that 
affect the cash flows to and from the Federal government resulting from 
these loans. These transfers may vary significantly between different 
loans and borrowers. The actual credit subsidy costs will recognize 
these costs at the time they are incurred, pursuant to FCRA.

E. Benefits

    CO-OPs also offer a unique opportunity to foster and spread 
emerging models of integrated delivery systems, both to improve health 
outcomes and to lower health costs (see, for example, testimony of Sara 
Collins before the Advisory Committee, The Consumer Operated and 
Oriented Plan (CO-OP) Program Under the Affordable Care Act: Potential 
and Options for Spreading Mission-Driven Integrated Delivery Systems, 
at http://www.commonwealthfund.org/~/media/Files/Publications/
Testimony/2011/Jan/Collins--CoOp%20testimony--11311.pdf). CO-OPs can 
adopt new models and new arrangements that are more patient-centered 
than the current fragmented delivery system. Improved delivery systems 
may provide better health outcomes due to coordinated care, better 
chronic disease management, and improved quality of care.
    In addition, by adding competition to State markets, CO-OPs have 
the potential to promote efficiency, reduce premiums and/or premium 
growth, and improve service and benefits to enrollees. By their nature, 
traditional cooperatives, on which the CO-OP program is modeled, focus 
on responsiveness to their members and accountability to member needs, 
which may create flexibility to reduce administrative costs. Direct 
savings could be substantial after the initial start-up period. 
Resulting attempts to maintain or regain market share by traditional 
insurance issuers competing with CO-OPs could lead to system-wide 
savings across millions of enrollees.

F. Alternatives Considered

    Throughout this final rule, we have presented and analyzed 
alternatives, including not only those originally proposed, but also 
useful options presented in the public comments. In this final rule, we 
have sought to choose implementation options that would best enable 
newly formed CO-OPs to offer CO-OP qualified health plans, as this is 
the primary goal of the program.
    The most important alternatives to our originally proposed 
standards would be to impose either a higher or lower interest 
repayment on loans. Among the Federal programs providing financial 
assistance to this sector, many make grants that are not required to be 
repaid. The Federal government also provides financial assistance 
through loan programs. Borrower interest rates, in some cases, are 
higher than Treasury rates, while in other cases rates are subsidized 
by the Federal government (see the estimates in the Federal Credit 
Supplement volume of the Budget of the United States Government for FY 
2012, at http://www.gpoaccess.gov/usbudget/fy12/cr_supp.html). As 
discussed elsewhere in the preamble, generally commenters agreed with 
our proposed interest rates and this final rule codifies the proposed 
interest rates.
    We received no comments directed specifically at the Regulatory 
Impact Analysis. Several commenters did, however, raise the question of 
potential insolvencies. Specific issues related to reducing the risk of 
insolvency or managing insolvency are discussed elsewhere in the 
preamble, as are many issues related to strengthening the ability of 
CO-OPs to survive in the market for health insurance. We believe that 
the changes we have made to the proposed rule improve the potential 
viability of CO-OPs. Most of those who have expressed interest in the 
program are provider organizations and small business organizations 
that are likely to be viable because of their private support, 
healthcare experience, and business expertise.

G. Accounting Statement

    As required by OMB Circular A-4, we have prepared an accounting 
statement. We have provided a quantitative estimate for one 
hypothetical CO-OP receiving both a Start-up loan of $15 million and a 
Solvency loan of $100 million, assuming repayment of both in full. The 
transfers shown are notional estimated costs resulting from below 
Treasury interest rates over the relevant 5-year (Start-up Loan) and 
15-year (Solvency Loan) periods. As previously explained, the notional 
estimates in Table 1 are not subsidy cost estimates under FCRA and do 
not include transfers due to delayed payment, defaults net of 
recoveries, or other losses. Transfers will vary from borrower to 
borrower and each type is not included in the notional estimate because 
of uncertainty. Pursuant to FCRA, the lifetime estimated cost will be 
recorded up front as they are incurred.
    Table 1 also reflects estimates of $200 million total for program 
administration over the first 20 years of the program. Consistent with 
the final rule, we use 1 percent below the current yields for 5-year 
U.S. Treasury bonds as the repayment interest rate on Start-up loans 
and 2 percent below the current yields for the average of 10-year and 
20-year U.S. Treasury Bonds as the repayment rate for the Solvency 
Loans (see http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield). The figures shown are 
the annualized estimated Federal administrative costs for the entire 
program and estimated means of financing transactions for one notional 
loan, as described above.

                  Table 1--Accounting Statement: Classification of Estimated Costs and Savings
                                                 [$ in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                       Units
                                                      Primary    -----------------------------------------------
                    Category                         estimate                                         Period
                                                                   Year dollars    Discount rate     covered*
----------------------------------------------------------------------------------------------------------------
                                                    Benefits
----------------------------------------------------------------------------------------------------------------
Qualitative: New CO-OP enrollees served may experience better care. There are also potential cost savings system-
 wide from competitive effects on other health care plans. Net benefits will depend on the extent to which CO-OP
 plans augment or substitute for other health care insurance and services.
----------------------------------------------------------------------------------------------------------------

[[Page 77411]]

 
                                                      Costs
----------------------------------------------------------------------------------------------------------------
Qualitative: Costs include administrative burdens associated with applying for and complying with the terms of
 the loans and program oversight.
----------------------------------------------------------------------------------------------------------------
Quantified, Annualized Program Oversight and                 $10            2012              7%         2011-31
 Administration for all loans...................
                                                             $10            2012              3%         2011-31
----------------------------------------------------------------------------------------------------------------
                                                    Transfers
----------------------------------------------------------------------------------------------------------------
Qualitative: Amounts below reflect means of financing transfer related only to charging below-Treasury rate
 interest on CO-OP loans to one notional borrower. There are expected transfers in addition to those quantified
 below that may result from variations in size of loan, delayed repayment, defaults net of loan recoveries, and
 other potential losses. These transfers vary between loans and borrowers. The full, estimated effects of all
 such transfers will be recorded up front as costs are incurred, pursuant to FCRA.
----------------------------------------------------------------------------------------------------------------
Quantified, Annualized Federal Government Loan               $5*            2012              7%         2012-31
 Interest Subsidies for 1 notional joint Start-
 up Loan and Solvency Loan......................
                                                             $1*            2012              3%         2012-31
----------------------------------------------------------------------------------------------------------------
* Reflects notional estimate of transfers related to interest subsidies for one performing loan.
Actual costs to the Government will vary loan by loan.

V. Other Requirements for Analysis of Economic Effects

    The Regulatory Flexibility Act (RFA) requires agencies to determine 
whether final rules would have a ``significant economic impact on a 
substantial number of small entities'' and, if so, to prepare a 
Regulatory Flexibility Analysis to identify options that could mitigate 
the impact of the proposed regulation on small businesses.
    All CO-OPs established under the program will be private nonprofit 
organizations and qualify as small entities under the RFA. CMS 
interprets the requirement as applying only to regulations with 
negative impacts but routinely prepares a voluntary Regulatory 
Flexibility Analysis for regulations with significant positive impacts.
    The positive economic impacts of the program on CO-OPs will clearly 
be ``significant,'' particularly in the effects on thousands of small 
businesses that are likely to purchase insurance through the Exchanges 
and would benefit from the lower premium costs that CO-OPs will likely 
create. Moreover, small businesses will have the opportunity to create 
consortia to help sponsor CO-OPs and may actively pursue these savings. 
In light of the benefits to these small entities, the Department has 
prepared a voluntary Regulatory Flexibility Analysis. The preceding 
economic analysis, together with the remainder of this preamble, 
constitutes that analysis.
    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits before issuing any 
rule whose mandates on State, local, or tribal governments in the 
aggregate, or on the private sector, require spending in any 1 year of 
$100 million in 1995 dollars, updated annually for inflation. This 
final rule would impose no such mandates. Accordingly, no analysis 
under UMRA is required.
    Executive Order 13132 on Federalism establishes requirements that 
an agency must meet when a proposed rule imposes substantial costs on 
State and local governments, preempts State law, or otherwise has 
Federalism implications. This final rule does not trigger these 
requirements.

List of Subjects in 45 CFR Part 156

    Administrative practice and procedure, Advertising, Advisory 
committees, Brokers, Conflict of interest, Consumer protection, Grant 
programs--health, Grants administration, Health care, Health insurance, 
Health maintenance organization (HMO), Loan programs--health, 
Organization and functions (Government agencies), Medicaid, Reporting 
and recordkeeping requirements, State and local governments, Sunshine 
Act, and Technical Assistance.

    For the reasons set forth in the preamble, the Department of Health 
and Human Services amends 45 CFR subtitle A, subchapter B by adding 
part 156 to read as follows:

PART 156--HEALTH PLAN REQUIREMENTS UNDER THE PATIENT PROTECTION AND 
AFFORDABLE CARE ACT, INCLUDING REQUIREMENTS RELATED TO EXCHANGES

Subparts A-E--[Reserved]
Subpart F--Consumer Operated and Oriented Plan Program
Sec.
156.500 Basis and scope.
156.505 Definitions.
156.510 Eligibility.
156.515 CO-OP Standards.
156.520 Loan terms.

    Authority: Secs. 1301-1304, 1311-1312, 1321, 1322, 1324, 1334, 
1342-1343, and 1401-1402, Pub. L. 111-148, 124 Stat. 119 (42 U.S.C. 
18042).

Subparts A-E--[Reserved]

Subpart F--Consumer Operated and Oriented Plan Program


Sec.  156.500  Basis and scope.

    This subpart implements section 1322 of the Affordable Care Act by 
establishing the Consumer Operated and Oriented Plan (CO-OP) program to 
foster the creation of new consumer-governed, private, nonprofit health 
insurance issuers, known as ``CO-OPs.'' Under this program, loans are 
awarded to encourage the development of CO-OPs. Applicants that meet 
the eligibility standards of the CO-OP program may apply to receive 
loans to help fund start-up costs and meet the solvency requirements of 
States in which the applicant seeks to be licensed to issue CO-OP 
qualified health plans. This

[[Page 77412]]

subpart sets forth the eligibility and governance requirements for the 
CO-OP program, CO-OP standards, and the terms for loans awarded under 
the CO-OP program.


Sec.  156.505  Definitions.

    The following definitions apply to this subpart:
    Applicant means an entity eligible to apply for a loan described in 
Sec.  156.520 of this subpart.
    Consumer operated and oriented plan (CO-OP) means a loan recipient 
that satisfies the standards in section 1322(c) of the Affordable Care 
Act and Sec.  156.515 of this subpart within the timeframes specified 
in this subpart.
    CO-OP qualified health plan means a health plan that has in effect 
a certification that it meets the standards established by CMS pursuant 
to section 1311(c) of the Affordable Care Act, except that the plan can 
be deemed certified by CMS or an entity designated by CMS as described 
in Sec.  156.520(e).
    Exchange means a governmental agency or non-profit entity that 
meets the applicable requirements established by CMS, pursuant to 
sections 1311 and 1321 of the Affordable Care Act, and makes qualified 
health plans available to qualified individuals and qualified 
employers. Unless otherwise identified, this term refers to State 
Exchanges, regional Exchanges, subsidiary Exchanges, and a Federally-
facilitated Exchange.
    Formation board means the initial board of directors of the 
applicant or loan recipient before it has begun accepting enrollment 
and had an election by the members of the organization to the board of 
directors.
    Group health plan has the meaning given to the term in Sec.  
144.103 of this subchapter.
    Health insurance coverage has the meaning given to the term in 
Sec.  144.103 of this subchapter.
    Individual market means the market for health insurance coverage 
offered to individuals other than in connection with a group health 
plan.
    Issuer means an insurance company, insurance service, or insurance 
organization (including a health maintenance organization) which is 
licensed to engage in the business of insurance in a State and which is 
subject to State law which regulates insurance.
    Member means an individual covered under health insurance policies 
issued by a loan recipient.
    Nonprofit member organization or nonprofit member corporation means 
a nonprofit, not-for-profit, public benefit, or similar membership 
entity organized as appropriate under State law.
    Operational board means the board of directors elected by the 
members of the loan recipient after it has begun accepting enrollment.
    Predecessor, with respect to a new entity, means any entity that 
participates in a merger, consolidation, purchase or acquisition of 
property or stock, corporate separation, or other similar business 
transaction that results in the formation of the new entity.
    Pre-existing issuer means a health insurance issuer that was in 
existence on July 16, 2009.
    Qualified employer means a small employer that elects to make, at a 
minimum, all full-time employees of the employer eligible for one or 
more qualified health plan (QHPs) in the small group market offered 
through a small business health options program (SHOP). Beginning in 
2017, if a State allows large employers to purchase coverage through 
the SHOP, the term ``qualified employer'' shall include a large 
employer that elects to make all full-time employees of such employer 
eligible for one or more QHPs in the large group market offered through 
the SHOP.
    Qualified health plan or QHP means a health plan that has in effect 
a certification that it meets the standards established by CMS pursuant 
to section 1311(c) of the Affordable Care Act issued or recognized by 
each Exchange through which such plan is offered pursuant to the 
process established by CMS pursuant to sections 1311(d) and 1311(e) of 
the Affordable Care Act.
    Qualified nonprofit health insurance issuer means an entity that 
satisfies or can reasonably be expected to satisfy the standards in 
section 1322(c) of the Affordable Care Act and Sec.  156.515 of this 
subpart within the time frames specified in this subpart, until such 
time as CMS determines the entity does not satisfy or cannot reasonably 
be expected to satisfy these standards.
    Related entity means an entity that shares common ownership, 
control, or governance structure (including management team or Board 
members) with a pre-existing issuer, 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.
    (3) Performs some of the issuer's management functions under 
contract or delegation.
    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.
    Small employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 1 but not more than 100 employees on business days 
during the preceding calendar year and who employs at least 1 employee 
on the first day of the plan year. In the case of plan years beginning 
before January 1, 2016, a State may elect to define small employer by 
substituting ``50 employees'' for ``100 employees.''
    SHOP means a Small Business Health Options Program operated by an 
Exchange through which a qualified employer can provide its employees 
and their dependents with access to one or more qualified health plans.
    Small group market means the health insurance market under which 
individuals obtain health insurance coverage (directly or through any 
arrangement) on behalf of themselves (and their dependents) through a 
group health plan maintained by a small employer.
    Solvency Loan means a loan provided by CMS to a loan recipient in 
order to meet State solvency and reserve requirements.
    Sponsor means an organization or individual that is involved in the 
development, creation, or organization of the CO-OP or provides 40 
percent or more in total funding to a CO-OP (excluding any loans 
received from the CO-OP Program).
    Start-up Loan means a loan provided by CMS to a loan recipient for 
costs associated with establishing a CO-OP.
    State means each of the 50 States and the District of Columbia.


Sec.  156.510  Eligibility.

    (a) General. In addition to the eligibility standards set forth in 
the CO-OP program Funding Opportunity Announcement (FOA), to be 
eligible to apply for and receive a loan under the CO-OP program, an 
organization must intend to become a CO-OP and be a nonprofit member 
organization.
    (b) Exclusions from eligibility. (1) Subject to paragraph (b)(2) of 
this section, an organization is not eligible to apply for a loan if:
    (i) The organization or a sponsor of the organization is a pre-
existing issuer, a holding company (an organization that exists 
primarily to hold stock in other companies) that controls a pre-
existing issuer, a trade association comprised of pre-existing issuers 
and whose purpose is to represent the interests of the health insurance 
industry, a foundation

[[Page 77413]]

established by a pre-existing issuer, a related entity, or a 
predecessor of either a pre-existing issuer or related entity;
    (ii) The organization receives 25 percent or more of its total 
funding (excluding any loans received from the CO-OP Program) from pre-
existing issuers, holding companies (organizations that exists 
primarily to hold stock in other companies) that control pre-existing 
issuers, trade associations comprised of pre-existing issuers and whose 
purpose is to represent the interests of the health insurance industry, 
foundations established by a pre-existing issuer, a related entity, or 
a predecessor of either a pre-existing issuer or related entity; or
    (iii) A State or local government, any political subdivision 
thereof, or any instrumentality of such government or political 
subdivision is a sponsor of the organization. The organization receives 
40 percent or more of its total funding (excluding any loans received 
from the CO-OP Program) from a State or local government, any political 
subdivision thereof, or any instrumentality of such a government or 
political subdivision.
    (2) The exclusions in paragraphs (b)(1)(i) and (b)(1)(ii) of this 
section do not exclude from eligibility an applicant that:
    (i) Has as a sponsor a nonprofit, not-for-profit, public benefit, 
or similarly organized entity that is also a sponsor for a pre-existing 
issuer but is not an issuer, a foundation established by a pre-existing 
issuer, a holding company that controls a pre-existing issuer, or a 
trade association comprised of pre-existing issuers and whose purpose 
is to represent the interests of the health insurance industry, 
provided that the pre-existing issuer sponsored by the nonprofit 
organization does not share any of its board or the same chief 
executive with the applicant; or
    (ii) Has purchased assets from a preexisting issuer provided that 
it is an arm's-length transaction where each party acts independently 
and has no other relationship with the other party.
    (3) The exclusion of any instrumentality of a State or local 
government in paragraph (b)(1)(iii) of this section does not exclude 
from eligibility or sponsorship an organization that:
    (i) Is not a government organization under State law;
    (ii) Has no employee of a State or local government serving in his 
or her official capacity as a senior executive (for example, President, 
Chief Executive Officer, or Chief Financial Officer) for the 
organization; and
    (iii) Has a board of directors on which fewer than half of its 
directors are employees of a State or local government serving in their 
official capacities.


Sec.  156.515  CO-OP standards.

    (a) General. A CO-OP must satisfy the standards in this section in 
addition to all other statutory, regulatory, or other requirements.
    (b) Governance requirements. A CO-OP must meet the following 
governance requirements:
    (1) Member control. A CO-OP must implement policies and procedures 
to foster and ensure member control of the organization. Accordingly, a 
CO-OP must meet the following requirements:
    (i) The CO-OP must be governed by an operational board with all of 
its directors elected by a majority vote of a quorum of the CO-OP's 
members that are age 18 or older;
    (ii) All members age 18 or older must be eligible to vote for each 
director on the organization's operational board;
    (iii) Each member age 18 or older of the organization must have one 
vote in the election of each director of the organization's operational 
board;
    (iv) The first elected directors of the organization's operational 
board must be elected no later than one year after the effective date 
on which the organization provides coverage to its first member; the 
entire operational board must be elected no later than two years after 
the same date;
    (v) Elections of the directors on the organization's operational 
board must be contested so that the total number of candidates for 
vacant positions on the operational board exceeds the number of vacant 
positions, except in cases where a seat is vacated mid-term due to 
death, resignation, or removal; and
    (vi) The majority of the voting directors on the operational board 
must be members of the organization.
    (2) Standards for board of directors. The operational board for a 
CO-OP must meet the following standards:
    (i) Each director must meet ethical, conflict-of-interest, and 
disclosure standards including that each director act in the sole 
interest of the CO-OP and, as appropriate, the health and wellbeing of 
its local geographic community;
    (ii) Each director has one vote unless he or she is a non-voting 
director;
    (iii) Positions on the board of directors may be designated for 
individuals with specialized expertise, experience, or affiliation (for 
example, providers, employers, and unions);
    (iv) Positions on the operational board that are designated for 
individuals with specialized expertise, experience, or affiliation 
cannot constitute a majority of the operational board even if the 
individuals in those positions are members of the CO-OP. This provision 
does not prevent any individual from seeking election to the 
operational board based on being a member of the CO-OP; and
    (v) Limitation on government and issuer participation. No 
representative of any Federal, State or local government (or of any 
political subdivision or instrumentality thereof) and no representative 
of any organization described in Sec.  156.510(b)(1)(i) may serve on 
the CO-OP's formation board or operational board.
    (3) Ethics and conflict of interest protections. The CO-OP must 
have governing documents that incorporate ethics, conflict of interest, 
and disclosure standards. The standards must protect against insurance 
industry involvement and interference. In addition, the standards must 
ensure that each director acts in the sole interest of the CO-OP, its 
members, and its local geographic community as appropriate, avoids self 
dealing, and acts prudently and consistently with the terms of the CO-
OP's governance documents and applicable State and Federal law. At a 
minimum, these standards must include:
    (i) A mechanism to identify potential ethical or other conflicts of 
interest;
    (ii) A duty on the CO-OP's executive officers and directors to 
disclose all potential conflicts of interest;
    (iii) A process to determine the extent to which a conflict exists;
    (iv) A process to address any conflict of interest; and
    (v) A process to be followed in the event a director or executive 
officer of the CO-OP violates these standards.
    (4) Consumer focus. The CO-OP must operate with a strong consumer 
focus, including timeliness, responsiveness, and accountability to 
members.
    (c) Standards for health plan issuance. A CO-OP must meet several 
standards for the issuance of health plans in the individual and small 
group market.
    (1) At least two-thirds of the policies or contracts for health 
insurance coverage issued by a CO-OP in each State in which it is 
licensed must be CO-OP qualified health plans offered in the individual 
and small group markets.
    (2) Loan recipients must offer a CO-OP qualified health plan at the 
silver and gold benefit levels, defined in section 1302(d) of the 
Affordable Care Act, in every individual market Exchange that serves 
the geographic regions in which the organization is licensed and 
intends to provide health

[[Page 77414]]

care coverage. If offering at least one plan in the small group market, 
loan recipients must offer a CO-OP qualified health plan at both the 
silver and gold benefit levels, defined in section 1302(d) of the 
Affordable Care Act, in each SHOP that serves the geographic regions in 
which the organization offers coverage in the small group market.
    (3) Within the earlier of thirty-six months following the initial 
drawdown of the Start-up Loan or one year following the initial 
drawdown of the Solvency Loan, loan recipients must be licensed in a 
State and offer at least one CO-OP qualified health plan at the silver 
and gold benefit levels, defined in section 1302(d) of the Affordable 
Care Act, in the individual market Exchanges and if the loan recipient 
offers coverage in the small group market, at the silver and gold 
benefit levels, defined in section 1302(d) of the Affordable Care Act, 
in the SHOPs. Loan recipients may only begin offering plans and 
accepting enrollment in the Exchanges for new CO-OP qualified health 
plans during the open enrollment period for each applicable Exchange.
    (d) Requirement to become a CO-OP. Loan recipients must meet the 
standards of Sec.  156.515 no later than five years following initial 
drawdown of the Start-up Loan or three years following the initial 
drawdown of a Solvency Loan.


Sec.  156.520  Loan terms.

    (a) Overview of Loans. Applicants may apply for the following loans 
under this section: Start-up Loans and Solvency Loans.
    (1) Use of loans. All loans awarded under this subpart must be used 
in a manner that is consistent with the FOA, the loan agreement, and 
all other statutory, regulatory, or other requirements.
    (2) Solvency loans. Solvency Loans awarded under this section will 
be structured in a manner that ensures that the loan amount is 
recognized by State insurance regulators as contributing to the State-
determined reserve requirements or other solvency requirements (rather 
than debt) consistent with the insurance regulations for the States in 
which the loan recipient will offer a CO-OP qualified health plan.
    (b) Repayment period. The loan recipient must make loan payments 
consistent with the approved repayment schedule in the loan agreement 
until the loan is paid in full consistent with State reserve 
requirements, solvency regulations, and requisite surplus note 
arrangements. Subject to their ability to meet State reserve 
requirements, solvency regulations, or requisite surplus note 
arrangements, the loan recipient must repay its loans and, if 
applicable, penalties within the repayment periods in paragraphs 
(b)(1), (b)(2), or (b)(3) of this section.
    (1) The contractual repayment period for Start-up Loans and any 
applicable penalty pursuant to paragraph (c)(3) of this section is 5 
years following each drawdown of loan funds consistent with the terms 
of the loan agreement.
    (2) The contractual repayment period for Solvency Loans and any 
applicable penalty pursuant to paragraph (c)(3) of this section is 15 
years following each drawdown of loan funds consistent with the terms 
of the loan agreement.
    (3) Changes to the loan terms, including the repayment periods, may 
be executed if CMS determines that the loan recipient is unable to 
repay the loans as a result of State reserve requirements, solvency 
regulations, or requisite surplus note arrangements or without 
compromising coverage stability, member control, quality of care, or 
market stability. In the case of a loan modification or workout, the 
repayment period for loans awarded under this subpart is the repayment 
period established in the loan modification or workout. The revised 
terms must meet all other regulatory, statutory, and other 
requirements.
    (c) Interest rates. Loan recipients will be charged interest for 
the loans awarded under this subpart. Interest will be accrued starting 
from the date of drawdown on the loan amounts that have been drawn down 
and not yet repaid by the loan recipient. The interest rate will be 
determined based on the date of award.
    (1) Start-up Loans. Consistent with the terms of the loan 
agreement, the interest rate for Start-up Loans is equal to the greater 
of the average interest rate on marketable Treasury securities of 
similar maturity minus one percentage point or zero percent. If the 
loan recipient's loan agreement is terminated by CMS, the loan 
recipient will be charged the interest and penalty described in 
paragraph (c)(3) of this section.
    (2) Solvency Loans. Consistent with the terms of the loan 
agreement, the interest rate for Solvency Loans is equal to the greater 
of the average interest rate on marketable Treasury securities of 
similar maturity minus two percentage points or zero percent. If a loan 
recipient's loan agreement is terminated by CMS, the loan recipient 
will be charged the interest and penalty described in paragraph (c)(3) 
of this section.
    (3) Penalty payment. If CMS terminates a loan recipient's loan 
agreement because the loan recipient is not in compliance with program 
rules or the terms of its loan agreement, or CMS has reason to believe 
that the organization engages in, or has engaged in, criminal or 
fraudulent activities or activities that cause material harm to the 
organization's members or the government, the loan recipient must repay 
110 percent of the aggregate amount of loans received under this 
subpart. In addition, the loan recipient must pay interest on the 
aggregate amount of loans received for the period the loans were 
outstanding equal to the average interest rate on marketable Treasury 
securities of similar maturity.
    (d) Failure to pay. Loan recipients that fail to make loan payments 
consistent with the repayment schedule or loan modification or workout 
approved by CMS will be subject to any and all remedies available to 
CMS under law to collect the debt.
    (e) Deeming of CO-OP qualified health plans. Health plans offered 
by a loan recipient may be deemed certified as a CO-OP qualified health 
plan to participate in the Exchanges for two years and may be 
recertified every two years for up to ten years following the life of 
any loan awarded to the loan recipient under this subpart, consistent 
with section 1301(a)(2) of the Affordable Care Act.
    (1) An Exchange must recognize a health plan offered by a loan 
recipient as an eligible participant of the Exchange if it is deemed 
certified by CMS or an entity designated by CMS.
    (2) To be deemed as certified to participate in the Exchanges, the 
plan must comply with the standards for CO-OP qualified health plans 
set forth pursuant to section 1311(c) of the Affordable Care Act, all 
State-specific standards established by an Exchange for qualified 
health plans operating in that Exchange, except for those State-
specific standards that operate to exclude loan recipients due to being 
new issuers or based on other characteristics that are inherent in the 
design of a CO-OP, and the standards of the CO-OP program as set forth 
in this subpart.
    (3) A loan recipient seeking to have a plan deemed as certified to 
participate in the Exchanges must provide evidence to CMS or an entity 
designated by CMS that the plan complies with the standards for CO-OP 
qualified health plans set forth pursuant to section 1311(c) of the 
Affordable Care Act, all State-specific standards established by an 
Exchange for qualified health plans operating in that Exchange, except 
for those State-specific standards that operate to exclude loan 
recipients due

[[Page 77415]]

to being new issuers or based on other characteristics that are 
inherent in the design of a CO-OP, and the standards of the CO-OP 
program as set forth in this subpart.
    (4) If a plan offered by a loan recipient is deemed to be certified 
to participate in the Exchanges or loses its deemed status and is no 
longer certified to participate in the Exchanges, CMS or an entity 
designated by CMS will provide notice to the Exchanges in which the 
loan recipient offers CO-OP qualified health plans.
    (f) Conversions. The loan recipient shall not convert or sell to a 
for-profit or non-consumer operated entity at any time after receiving 
a loan under this subpart. The loan recipient shall not undertake any 
transaction that would result in the CO-OP implementing a governance 
structure that does not meet the standards in this subpart.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: October 25, 2011.
Donald Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: November 29, 2011.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2011-31864 Filed 12-8-11; 4:15 pm]
BILLING CODE 4120-01-P