Health reform implementation

HHS to loan $4B for health co-ops, says one-third might default

The Obama administration on Monday rolled out nearly $4 billion in loans for a program established by the healthcare reform law, but said roughly one-third of those loans could end in default. 

The loans will help establish insurance co-ops, a nonprofit model created by the reform law. The Health and Human Services Department on Monday released the first proposed regulation for co-ops.
Co-ops are nonprofit insurance carriers governed by consumers. They represent an altogether new product, since any entity that sold insurance as of 2009 is legally barred from becoming a co-op. HHS is providing two rounds of loans to help co-ops get off the ground.
The department said it would provide $600 million in loans to help would-be co-ops develop business models. It will then award $3.2 billion to help ensure that the new products have enough cash on hand to cover unexpected claims. The money will help co-ops meet the same solvency standards that apply to traditional for-profit insurance companies.

HHS’s proposed rule on co-ops, released Monday, estimates a default rate of 40 percent for the planning loans and 35 percent for the solvency loans.
Steve Larsen, the director of the HHS office overseeing implementation of the healthcare reform law, said he doesn’t expect the default rate to ultimately be that high.
“There is that back-end estimate, for conservatism’s sake,” Larsen said on a conference call with reporters.
The regulation itself says HHS landed at the 35 and 40 percent estimates after analyzing an optimistic scenario in which only 20 percent of the loans end in default, as well as a gloomier projection in which just half of the loans are repaid.
Even if 35 percent of recipients default on their solvency loans, that doesn’t necessarily mean HHS will lose 35 percent of the money it’s making available. The department doesn’t have a strong prediction of how many entities will apply for the funding or how much each applicant might receive.
The regulation says HHS will work out individualized repayment schedules for each loan. If a co-op is having trouble making its payments, the rule says, keeping the plan solvent is more important than recovering the loan money.
Sen. Kent Conrad (D-N.D.) originally conceived co-ops as an alternative to the much-maligned public option — a government-run plan that would compete alongside private insurers. But there are major differences between the two, including the fact that co-ops cannot be run by a state or local government.
Monday’s regulation also says two-thirds of co-ops’ business must come from selling plans to individuals or small businesses, rather than large groups. They must be structured as a nonprofit and reinvest their revenues into either lowering premiums or improving quality.
Insurance companies have pressed HHS not to give co-ops special treatment or a break from existing regulations to help them get started. The industry was still reviewing HHS’s proposed rule Monday, but reiterated that co-ops have to be held to the same solvency standards as traditional insurers.
“There must be a level playing field where all companies providing insurance, including co-ops, are required to abide by the same rules and regulations,” a spokesman for America’s Health Insurance Plans said in a statement.


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