In announcing the rules, HHS said it 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, and would then award $3.2 billion to help ensure that the new products have enough capital on hand to cover unexpected claims.

The HHS funds are being provided to help ensure that CO-OPs meet the same solvency standards that apply to traditional for-profit insurance companies.

The HHS proposal estimates a default rate of 40% for the planning loans and 35% for the solvency loans.

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.

Start-up loans must be paid back within five years and solvency loans within fifteen, but repayment need not begin until a cooperative actually enrolls members, according to the regulation.

To satisfy state solvency requirements, the obligation of a cooperative to repay loans is secondary to its obligation to pay claims and maintain reserve requirements under state law.  Cooperatives are prohibited from converting to non-profit or for-profit status.

In a conference call with reporters, Steve Larsen, deputy director for Oversight, Office of Consumer Information and Insurance Oversight (CCII), in the Centers of Medicare and Medicare Services (CMS), discounted that cost.

"There is that back-end estimate, for conservatism's sake," he said.

The law bars existing health insurers from becoming into cooperatives.

It bars an organization from participating in the coop program "if the organization or a related entity (or any predecessor of either) was a health insurance issuer on July 16, 2009."  A cooperative may also not be sponsored by state or local government.

The rule interprets the prior insurer limitation as permitting an organization to apply for the CO-OP program event though the applicant was:

• Sponsored by a nonprofit that was not an issuer but controlled an existing issuer if the existing issuer did not share the same chief executive or board of directors with the applicant organization;
• A self-funded, church, or Taft-Hartley plans; or
• An organization that purchased assets or services from a preexisting issuer in an arm's length transaction where neither party was in a position to exercise undue influence over the other.

The regulation also proposes that state university medical centers and their hospitals and physician practices should not be able to sponsor a cooperative.

The proposed regulation permits the creation of a "formation board" to get the cooperative under way, but requires the election of an "operational board" by the members of the cooperative no later than one year after the organization begins to provide coverage.

Under the rule, the operational board must be elected by cooperative members on a one member-one vote basis and a majority of the voting board members must be members of the cooperative. The proposal requires that elections must be contested.  Members must comply with strict conflict-of-interest and disclosure requirements to protect against insurance industry involvement and interference.

Under the rules, at least two-thirds of the health insurance policies and contracts issued by a cooperative in each state must be for qualified health plans offered in the individual and small group market.

This will allow provider sponsors of cooperatives to enroll their own employees and also allow cooperatives to participate in Medicaid and Children's Health Insurance Program, industry officials said.

Each cooperative must at least offer one silver and one gold plan in the individual market in the region in which it is licensed to provide coverage.  Exchanges must certify qualified cooperatives to participate.

Robert Zirkelbach, a spokesman for America's Health Insurance Plans (AHIP), says AHIP is still reviewing the proposed regulations

AHIP believes in principle that "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," Zirkelbach says.

More coverage of health exchanges from BenefitsPro:

• Health exchanges: Where do brokers fit in?
• HHS unveils health exchange rules
• Living with health exchanges
• Questions linger about health exchanges
• NY health exchange bill preserves broker role