The Benefits and Challenges of CO-OPs: Where Do They Fit in Healthcare Reform?

For hospital executives, it may be hard to imagine a world where hospitals, physicians and health insurance plans all coexist with nary a dispute. In fact, that's one of the main criticisms of the U.S. healthcare system: that each sector — and components within the sectors — are too fragmented and siloed.

However, healthcare reform is trying to change that. Nestled within the voluminous Patient Protection and Affordable Care Act rests Section 1322 (pdf): the Consumer Operated and Oriented Plan program.

CO-OPs are rarely discussed in the grand scheme of the healthcare reform law — the individual mandate and Medicaid expansion provisions have grabbed a significant amount of the spotlight — but if organized correctly, CO-OPs could be a game changer in eliminating those silos.

The CO-OP background

CO-OPs, in their most basic form, are non-profit health insurers. They are consumer-governed entities and can offer qualified health plans in state health insurance exchanges when the exchanges go live in 2014. Consumers that want to go out-of-network can do so, and out-of-network rules would work exactly like other non-profit health insurers, such as Kaiser.

"Consumer-governed" is a key phrase, says Bill Mohlenbrock, MD, chief medical officer of Verras, a healthcare analytics company. Hospitals and physicians are viewed as healthcare consumers, so they too have the ability to create health plans to compete directly with the traditional health insurers like UnitedHealthcare and BlueCross BlueShield. "Initially, it appeared [lawmakers] didn't appreciate hospitals and physicians being viewed as consumers, but they may be the ideal solution to creating a CO-OP," Dr. Mohlenbrock says. "Consumers who are not healthcare providers don't have a lot of knowledge to gather together a network of physicians and hospitals."

One of the most recent and notable groups of providers to sponsor a CO-OP involves Boston-based Tufts Medical Center, Nashville, Tenn.-based Vanguard Health Systems (which owns two hospitals in Massachusetts), and the New England Quality Care Alliance (Tufts' non-profit physician network with 1,600 physicians). Together, those groups started the Minuteman Health Initiative and received an $88.5 million CO-OP loan from CMS.

In theory, these non-profit, provider-sponsored CO-OPs sound like a panacea to the omnipresent payor problem. They provide a competitive health insurance product to consumers, which could lower premiums and the cost of care, all while aligning physicians and hospitals to work for the same plan. However, how could a CO-OP gain market share in the many areas that are already heavily dominated by traditional health insurers?

Wendell Potter, a columnist at The Center for Public Integrity and a former Cigna executive, had those same concerns. In May, he wrote a column for CPI, saying he initially had his doubts regarding CO-OPs because they would have a hard time solidifying a member base among the bigger insurers. "It is almost impossible to grow your membership if you have to price your premiums higher than your competitors," Mr. Potter wrote. "It's a chicken-and-egg thing and why we have seen such rapid consolidation in the insurance industry."

However, Mr. Potter noted the PPACA offsets this challenge with a big perk: affordable loans from the federal government. A CO-OP can be created through start-up or solvency loans, and organizations interested in starting a CO-OP must submit appropriate requests for funding to HHS along with their proposed board structures and business plans. Start-up loans, which must be repaid within five years, help with the start-up costs associated with establishing a CO-OP. Solvency loans, which must be repaid within 15 years, help CO-OPs meet requirements, regulations and other state-specific arrangements associated with offering health insurance.

As of Aug. 31, CMS has awarded roughly $1.56 billion to 20 different CO-OPs throughout the country, and there is still $2.24 billion left in CO-OP loans to be allocated. The government hopes to start CO-OPs in all 50 states by 2014. "In fact, CO-OPs could be one of the sleepers in the healthcare reform law that truly transforms how care is financed and delivered in this country," Mr. Potter wrote. "That's because of the financial assistance that eligible non-profit groups are getting from the federal government."

Given this backdrop, could hospitals and physician conceivably be part of, or even start, their own CO-OP with success? That requires a look at potential benefits and challenges of the program.

Potential benefits of CO-OPs

Dr. Mohlenbrock of Verras immediately saw the benefits of CO-OPs when the idea began to permeate throughout the broader healthcare environment. He is an orthopedic surgeon who has practiced for several years at Scripps Memorial Hospital in La Jolla, Calif., and he says CO-OPs can be successful competitors to the traditional health insurer model if both hospitals and physicians understand what CO-OPs can do for them.

"For physicians, this is a dream come true to have their own insurance product," Dr. Mohlenbrock says. "When physicians increased their cost efficiencies, the financial rewards went only to the third-party payor or the hospital. With a CO-OP, for the first time, physicians' cost efficiencies will produce a net saving that the board will share between the physicians, the hospital and the patients in the form of lower premiums.

"But hospitals have never seen themselves in collaboration with the other hospitals in the region with whom they have been in a death struggle, competitively," he adds. "However, when they realize the savings that will accrue when physicians treat their own hospital's Medicare and Medicaid patients more efficiently, the net effect will be to make collaboration quite appealing. Hospitals will have every incentive to assist their physicians in achieving the highest-quality, most cost-efficient clinical and financial outcomes for all patients."

Traditionally, hospitals in the same geographic area market themselves differently and are in direct competition for the same patients. With provider-sponsored CO-OPs, hospitals will be a part of the same harmonious group. Similar to regular CO-OPs, provider-sponsored CO-OPs would also be a "statewide" initiative, Dr. Mohlenbrock says. They can start locally, but they will eventually become a widespread healthcare delivery model across the state.

In addition, instead of competing against each other, hospitals will compete against insurance companies and HMOs — the parties they have been collaborating with in the past to gain market share. "Hospitals are going to have their own non-profit insurance company, and [most] have never really run an insurance company before — and that scares them," Dr. Mohlenbrock says. "However, there will be many third-party administrators who will be anxious to participate and provide the necessary, nonclinical resources that providers will need."

In this scenario, hospitals would have to worry less about hospital-vs.-hospital competition and health insurer rate battles. Rather, hospitals would be able to focus more on prevention and primary care — a staple of healthcare reform — and the ability to line up the interests of all stakeholders in a healthcare transactions (patient, family, physician and hospital staff). Perhaps most importantly for hospital executives, CO-OPs are contracting directly with patients and employers — that means no more health insurer middlemen, and all profits would be used to either increase benefits or lower premiums for consumers and reinvest into the hospitals and physicians.

Eric Beyer, president and CEO of Tufts Medical Center, says his hospital saw a golden opportunity to create the Minuteman CO-OP and redefine care in the state. Instead of hospitals competing against each other for the best rates and money, a CO-OP will redirect profit to both the providers and the patients.

"Minuteman will give physicians and members great opportunities: lower administrative costs, easier access to medical records and smart, state-of-the art patient software," Mr. Beyer says. "It will also reinvest surpluses into reducing premiums or increasing benefits, and it will be like no other plan in Massachusetts. Physicians will be able to focus on care in new and more effective ways, and members will enjoy high-quality care without confusing billing and onerous administrative hurdles."

Dr. Mohlenbrock says the benefits could extend even further in the community by helping employers ratchet down their health premiums. "When you start talking to employers about actually being able to contract with a non-profit insurance company that is run by consumers, physicians and hospitals that have same, identical incentives — improving quality and cost efficiencies — as their company, they're going to sign on," Dr. Mohlenbrock says.

Jason Hwang, MD, an internal medicine physician and co-founder and executive director of the healthcare practice at Innosight Institute, also sees the rewards in CO-OPs. He points to an Innosight case study involving Bloomington, Minn.-based HealthPartners, the largest consumer-governed, non-profit healthcare organization in the country. The CO-OP-like system has roughly 1.4 million members and affiliations with a 780-physician medical group and four hospitals.

Dr. Hwang says the medical costs for patients treated by HealthPartners Medical Group are 38 percent below the national average, attributing much of the savings to the CO-OP-like structure.

In addition, the lower administrative costs associated with CO-OPs due to the lack of a health insurer playing as middlemen also lead to savings in premiums. "CO-OPs do tend to have lower administrative costs," Dr. Hwang says. "And you want to keep administrative costs as low as possible on behalf of the membership. It's not that different from an integrated health system."

Potential challenges of CO-OPs

Hank Osowski, co-founder and managing director of Strategic Health Group, a healthcare consulting firm, has more than 30 years of experience in the healthcare industry, mostly with health insurers and physician groups. Now, he is more involved with integrated delivery systems, and he sees the positives around HHS and CMS spurring innovation in the healthcare system with initiatives such as CO-OPs. "CO-OPs have the opportunity to provide some transparency and clarity around the connection of pricing and quality care," Mr. Osowski says. "That's a very positive thing, and I believe that's going to occur anyway under other accountable care proposals."

However, the inherent challenge with CO-OPs is that these organizations — especially if they are led by providers — are not used to being insurers. They may not have the skill set to manage risk, and they will have to be pretty aggressive to gain market share away from the existing commercial payors. "Importantly, during the new plan's early years, CO-OP leadership will face the fiduciary responsibility to focus on building a sustainable enterprise and paying back the loans, not returning profits to hospital and physician participants," Mr. Osowski says."

"The other critical piece I saw missing in the CO-OP model is the financial wherewithal to sustain an adverse period," Mr. Osowski adds. "I worry that the small plans don't have the complete view of what the future is and how to protect their assets. I know they are borrowing money from the federal government, but it ultimately has to be paid back. I fear one or two catastrophic years could put them out of business."

Dr. Mohlenbrock believes the biggest question mark associated with CO-OPs is a similar one associated with bundled payments: How will hospitals and physicians that create a CO-OP divvy up the profit? For example, if a CO-OP delivers $20 million in net savings and the board allocates $10 million to reduce premiums for its consumers, how much of the remaining $10 million should each hospital or physician practice receive as a reinvestment or bonus? What percentage of dollars should go to medical staff? What percentage should each hospital's clinical services (surgeons, cardiologists, primary care, etc.) receive?

"If you don't have objective metrics that define which hospitals and physicians have improved their quality and financial outcomes and by how much, how can you say Hospital A should have $3 million and Hospital B should have $1 million?" Dr. Mohlenbrock says. "If you don't have the objective and transparent answers to these questions, it's going to be day one of Gettysburg."

A sustainable future for CO-OPs?

In order for CO-OPs to work, Dr. Mohlenbrock believes the right leadership must be in charge, and CO-OPs must use clinical services data to find out which hospitals and physicians are producing the highest-quality care while controlling costs. Those foundational pieces could also help non-profit health insurers serve as viable alternates in the insurance exchanges.

"The provider-sponsored CO-OP model is arguably the most efficient, effective and predictable public-private healthcare delivery system ever devised," Dr. Mohlenbrock says. "It aligns the incentives of patients, physicians and hospitals as well as financially rewards them for quality outcomes."

Mr. Osowski reiterates the importance of a CO-OP having the right aim. If a CO-OP is only looking to be a market force, it will not succeed, he says. Instead, it has to be focused on reinvesting in its community through the principles of the Triple Aim.

"The real question, strategically, is this: Can you pull together the right resources in your community for population-based care?" Mr. Osowski says. "A lot depends on clinical strength. If CO-OPs are formed only to capture market share, I would say don't waste the time or energy. But if it's about delivering high-quality care at a competitive price, then I think it should be strongly considered."

More Articles on CO-OPs:

Vanguard Health Systems, Tufts Medical Center to Start CMS-Backed CO-OP

HHS Issues Final Rule for CO-OP Program

CMS Releases Proposed Standards for CO-OP Insurance Plans

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