Legislature(1995 - 1996)
04/24/1995 03:20 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR & COMMERCE STANDING COMMITTEE April 24, 1995 3:20 p.m. MEMBERS PRESENT Representative Pete Kott, Chairman Representative Jerry Sanders Representative Kim Elton Representative Beverly Masek Representative Norman Rokeberg Representative Brian Porter MEMBERS ABSENT Representative Gene Kubina COMMITTEE CALENDAR HB 251: "An Act relating to Native corporations." HEARD AND HELD HB 238: "An Act excluding certain direct sellers of consumer products from coverage under the state unemployment compensation laws." PASSED OUT OF COMMITTEE HB 266: "An Act relating to preferred provider agreements offered by hospital or medical service corporations." HEARD AND HELD HB 288: "An Act relating to procurement preferences for corporations and partnerships owned by persons with disabilities." SCHEDULED BUT NOT HEARD HB 232: "An Act establishing an economic development tax credit; and providing for an effective date." SCHEDULED BUT NOT HEARD (* First public hearing) WITNESS REGISTER ROD MOURANT, Administrative Assistant to Representative Pete Kott Alaska State Legislature State Capitol Building, Room 432 Juneau, AK 99801 Telephone: (907) 465-3777 POSITION STATEMENT: Gave sponsor statement for HB 238 and HB 266 JOE MARIANO, Vice President Direct Selling Association 1666 "K" Street Washington, D.C. Telephone: (202) 293-5760 POSITION STATEMENT: Testified in support of HB 238(STA) ANN CREWS, Manager Corporate Affairs Mary Kay Corporation Stemmens Freeway Dallas, Texas Telephone: (214) 905-5729 POSITION STATEMENT: Testified in support of HB 238(STA) PAM NEAL, President Alaska State Chamber of Commerce 217 Second Street, Number 201 Juneau, AK 99801 Telephone: (907) 586-2323 POSITION STATEMENT: Testified in support of HB 238(STA) STEVE EGLI, Kirby Sales 9310 Glacier Highway Juneau, AK 99801 Telephone: (907) 790-4446 POSITION STATEMENT: Testified in support of HB 238(STA) DIRK BLOEMENDAAL, Counsel Cooperate Government Affairs Amway Corporation 7575 East Bolton Road Ada, MI 49355 POSITION STATEMENT: Testified in support of HB 238(STA) ED FLANAGAN, Deputy Commissioner Department of Labor P.O. Box 21149 Juneau, AK 99802-1149 Telephone: (907) 465-2700 POSITION STATEMENT: Testified against HB 238 DAVID A. MCGUIRE, Orthopedic Surgeon 4049 Laurel, Suite 202 Anchorage, AK Telephone: (907) 562-4142 POSITION STATEMENT: Testified in support of HB 266 JACK MCRAE, Senior Vice President Blue Cross of Washington and Alaska P.O. Box 327, MS 301 Seattle, WA 98111-0327 Telephone: (206) 670-5757 POSITION STATEMENT: Testified in opposition of HB 266 JERRY REINWAND, Lobbyist Blue Cross of Washington and Alaska 2 Marine Way, Number 219 Juneau, AK 99801 Telephone: (907) 586-8966 POSITION STATEMENT: Testified in opposition of HB 266 STEVEN LEBRUN, Senior Account Manager AETNA Health Plans P.O. Box 91032 Seattle, WA 98111 Telephone: (206) 467-2803 POSITION STATEMENT: Testified in opposition of HB 266 DOUGLAS CARTER SMITH, President Anchorage Medical Society 3240 Seawind Drive Anchorage, AK 99516 Telephone: (907) 345-0728 POSITION STATEMENT: Testified in support of HB 266 GORDON EVANS, Lobbyist Health Insurance Association of America 318 Fourth Street Juneau, AK 99801 Telephone: (907) 586-3210 POSITION STATEMENT: Testified in opposition of HB 266 MARILYN PATTERSON Human Affairs Alaska 4300 B Street, Suite 202 Anchorage, AK 99503 Telephone: (907) 463-4131 POSITION STATEMENT: Testified in opposition of HB 266 CHARLIE MILLER, Lobbyist Alaska Regional Hospital 2801 DeBarr Road Anchorage, AK 99508-3089 Telephone: (907) 264-1713 POSITION STATEMENT: Indicated testimony for HB 266 would be given at the next hearing. DON KOCH, Chief Marketing Surveillance Section Division of Insurance Department of Commerce and Economic Development P.O. Box 110805 Juneau, AK 99811-0805 Telephone: (907) 465-2577 POSITION STATEMENT: PREVIOUS ACTION BILL: HB 251 SHORT TITLE: NATIVE CORPORATIONS SPONSOR(S): REPRESENTATIVE(S) MOSES, MacLean, Williams JRN-DATE JRN-PG ACTION 03/15/95 741 (H) READ THE FIRST TIME - REFERRAL(S) 03/15/95 741 (H) LABOR & COMMERCE 03/27/95 (H) L&C AT 03:00 PM CAPITOL 17 03/27/95 (H) MINUTE(L&C) 03/29/95 (H) L&C AT 03:00 PM CAPITOL 17 03/29/95 (H) MINUTE(L&C) 04/05/95 (H) L&C AT 03:00 PM CAPITOL 17 04/05/95 (H) MINUTE(L&C) 04/10/95 (H) L&C AT 03:00 PM CAPITOL 17 04/10/95 (H) MINUTE(L&C) 04/12/95 (H) L&C AT 03:00 PM CAPITOL 17 04/12/95 (H) MINUTE(L&C) 04/21/95 (H) L&C AT 03:00 PM CAPITOL 17 04/21/95 (H) MINUTE(L&C) 04/24/95 (H) L&C AT 03:00 PM CAPITOL 17 BILL: HB 238 SHORT TITLE: NO UNEMPLOYMENT COMP FOR DIRECT SELLERS SPONSOR(S): LABOR & COMMERCE BY REQUEST JRN-DATE JRN-PG ACTION 03/08/95 641 (H) READ THE FIRST TIME - REFERRAL(S) 03/08/95 641 (H) STATE AFFAIRS, LABOR & COMMERCE 03/23/95 (H) STA AT 08:00 AM CAPITOL 102 03/23/95 (H) MINUTE(STA) 03/28/95 (H) STA AT 08:00 AM CAPITOL 102 03/28/95 (H) MINUTE(STA) 04/06/95 1049 (H) STA RPT CS(STA) 2DP 1NR 2AM 04/06/95 1049 (H) DP: JAMES, OGAN 04/06/95 1049 (H) NR: GREEN 04/06/95 1049 (H) AM: WILLIS, ROBINSON 04/06/95 1049 (H) ZERO FISCAL NOTE (LABOR) 04/12/95 (H) L&C AT 03:00 PM CAPITOL 17 04/12/95 (H) MINUTE(L&C) 04/24/95 (H) L&C AT 03:00 PM CAPITOL 17 BILL: HB 266 SHORT TITLE: HEALTH CARE PREFERRED PROVIDER PROGRAMS SPONSOR(S): LABOR & COMMERCE BY REQUEST JRN-DATE JRN-PG ACTION 03/17/95 778 (H) READ THE FIRST TIME - REFERRAL(S) 03/17/95 779 (H) LABOR & COMMERCE, HES, JUDICIARY 04/12/95 (H) L&C AT 03:00 PM CAPITOL 17 04/12/95 (H) MINUTE(L&C) 04/24/95 (H) L&C AT 03:00 PM CAPITOL 17 BILL: HB 288 SHORT TITLE: PROCUREMENT PREFERENCE/DISABLED PERSONS SPONSOR(S): REPRESENTATIVE(S) JAMES JRN-DATE JRN-PG ACTION 03/29/95 979 (H) READ THE FIRST TIME - REFERRAL(S) 03/29/95 979 (H) LABOR & COMMERCE 04/03/95 (H) L&C AT 03:00 PM CAPITOL 17 04/03/95 (H) MINUTE(L&C) 04/07/95 (H) L&C AT 03:00 PM CAPITOL 17 04/07/95 (H) MINUTE(L&C) 04/21/95 (H) L&C AT 03:00 PM CAPITOL 17 04/21/95 (H) MINUTE(L&C) 04/24/95 (H) L&C AT 03:00 PM CAPITOL 17 BILL: HB 232 SHORT TITLE: ECONOMIC DEVELOPMENT TAX CREDIT SPONSOR(S): REPRESENTATIVE(S) KOTT JRN-DATE JRN-PG ACTION 03/06/95 590 (H) READ THE FIRST TIME - REFERRAL(S) 03/06/95 590 (H) ECD, STA, L&C, FINANCE 03/21/95 (H) ECD AT 09:00 AM CAPITOL 17 03/21/95 (H) MINUTE(ECD) 03/22/95 850 (H) ECD RPT CS(ECD) 6DP 03/22/95 850 (H) DP: KELLY, MOSES, MACLEAN, KOHRING 03/22/95 850 (H) DP: SANDERS, ROKEBERG 03/22/95 850 (H) INDETERMINATE FISCAL NOTE (REV) 03/22/95 850 (H) FISCAL NOTE (DCED) 04/04/95 (H) STA AT 08:00 AM CAPITOL 102 04/04/95 (H) MINUTE(STA) 04/06/95 (H) STA AT 08:00 AM CAPITOL 102 04/06/95 (H) MINUTE(STA) 04/11/95 (H) STA AT 08:00 AM CAPITOL 102 04/11/95 (H) MINUTE(STA) 04/18/95 1345 (H) STA RPT CS(STA) 4DP 2NR 04/18/95 1346 (H) DP: GREEN, PORTER, JAMES, OGAN 04/18/95 1346 (H) NR: WILLIS, ROBINSON 04/18/95 1346 (H) INDETERMINATE FISCAL NOTE (REV) 04/18/95 1346 (H) ZERO FISCAL NOTE (DCED) 04/21/95 (H) L&C AT 03:00 PM CAPITOL 17 04/21/95 (H) MINUTE(L&C) 04/24/95 (H) L&C AT 03:00 PM CAPITOL 17 ACTION NARRATIVE TAPE 95-43, SIDE A Number 000 The House Labor and Commerce Standing Committee meeting was called to order by Representative Pete Kott at 3:20 p.m. Members present at the call to order were Representatives Masek, Elton, Sanders, Rokeberg and Kott. Members absent were Representatives Porter and Kubina. CHAIRMAN PETE KOTT asked that the record reflect that Representative Kubina is with the Governor, and Representative Porter is in a Judiciary Committee meeting. He said the order of business would be HB 251, HB 238, HB 266, and HB 232. He noted HB 288 would be addressed on Wednesday. Chairman Kott said the committee would take an hour break at 5:00 p.m. HB 251 - NATIVE CORPORATIONS Number 061 CHAIRMAN KOTT referred to the last committee hearing on HB 251 and said the committee adopted some amendments. Those amendments have been included in the committee substitute (CS), Version M, dated 4/17/95. He informed the committee there is another CS, Version O, dated 4/24/95. Number 072 REPRESENTATIVE NORMAN ROKEBERG moved the CS for HB 251(L&C), Version 9-LSO662/O, Bannister, dated 4/24/95, be adopted. CHAIRMAN KOTT asked if there was an objection. REPRESENTATIVE KIM ELTON objected for the purpose of a question. He asked if somebody could outline the differences between Versions M and O. CHAIRMAN KOTT referred to Version M and said he would explain what has been deleted. He said there are very few changes, however, Version M was not adopted. He noted the committee did adopt some amendments. Chairman Kott said Section 1 was deleted in its entirety. Section 2 is now Section 1 of Version O. He said the committee had adopted an amendment that provided for a petition holder to come up with 10 percent, 1/10 of all the shares (indisc.) at the meeting. The new CS has raised that to 15 percent. The rest of Section 2 is standard, with the exception of corporation. On line 7, page 3, the 90 days has been increased after filing to 80 days. That was a compromise allowing for additional time. Chairman Kott referred to (o) on line 17, and said the one year was increased to two years. He referred to Sections 3, 4, 5 and 6 of Version M, which dealt mainly with civil and penal application, and said it has been deleted. Section 7 of Version M, the definition of "Native corporation," has been omitted. He said those are the changes between the two versions. REPRESENTATIVE ELTON said there were some things that he felt fairly strongly about in Version M. One of them was the one year versus the two years. He asked what the rational was for going back to two years. CHAIRMAN KOTT said after he spoke with the prime sponsor of HB 251, they decided two years would be more palatable to allow a little more time to ensure the corporation's work was not interrupted. They could carry out the business of the corporation on behalf of the shareholders. It would provide for a little less disruption. REPRESENTATIVE ELTON asked if the committee has correspondence from the Department of Commerce and Economic Development. He noted a constituent of his gave him some correspondence that reports to be from the department with some departmental suggestions. CHAIRMAN KOTT indicated he has a lot of correspondence in his packet. He noted the correspondence Representative Elton referred to doesn't ring a bell. Chairman Kott said he supposes the department, as they are allowed to testify on the new version, may offer some recommendations if they see fit. REPRESENTATIVE ELTON asked if he could copy his information and give it to the committee members. CHAIRMAN KOTT said the committee would take a brief at ease at 3:27 p.m. The meeting was called back to order at 3:33. Number 175 REPRESENTATIVE NORMAN ROKEBERG said he had a concern about the authenticity of the information. REPRESENTATIVE ELTON said what he wanted to do was give everyone a copy, and then ask the department about the information. Number 188 CHAIRMAN KOTT asked if Representative Elton still had an objection to adopting Version O. REPRESENTATIVE ELTON said he would remove his objection. CHAIRMAN KOTT said if there is no further objection, the committee would use work draft, Version O, as the CS. Number 195 REPRESENTATIVE BEVERLY MASEK said it seems to her that the bill is getting more and more complex. She said the committee is receiving more and more information. There was work draft M and now there is work draft O. She asked if the committee will be looking at the letter they were given. CHAIRMAN KOTT said that is correct. He said the department would explain their noted exceptions based on the letter as compared to Version O. REPRESENTATIVE MASEK said it seems to be getting more and more controversial. She made a motion that the bill be held, tabled, until some work can be done on it during the interim. She said it is getting too complex. REPRESENTATIVE ROKEBERG objected to Representative Masek's motion. CHAIRMAN KOTT called a recess at 3:38 p.m. Representative Porter arrived at 3:40 p.m. CHAIRMAN KOTT called the meeting back to order at 4:00 p.m. He said there is a motion pending. REPRESENTATIVE MASEK said she would like to restate her motion to table the bill. CHAIRMAN KOTT said the motion is to table the bill, HB 251. He asked if there was an objection. REPRESENTATIVE ROKEBERG objected. A roll call vote was taken. Representatives Kott and Rokeberg voted against tabling HB 251. Representatives Masek, Elton and Sanders voted in favor of tabling the bill. So HB 251 was tabled. HB 238 - NO UNEMPLOYMENT COMPENSATION FOR DIRECT SELLERS CHAIRMAN KOTT announced the committee would hear HB 238, "An Act excluding certain direct sellers of consumer products from coverage under the state unemployment compensation laws." He said the House Labor and Commerce Committee is the prime sponsor, by request. ROD MOURANT, Administrative Assistant to Representative Pete Kott, said the committee has before them CSHB 238(STA), and read the following statement into the record: "The Department of Labor (DOL) has taken the position that direct sellers are within the coverage of Alaska's unemployment compensation statutes. CSHB 238(STA), should it become law, provides an exemption for direct sellers from such coverage. "Direct sellers are not employees in the common understanding of the term. They are individuals who sell products, with no supervision, directly to their customers. They are not paid a salary, and they are not paid on an hourly basis. Their compensation is based solely on their success in selling the product. Because of these factors, direct sellers are individual contractors and not employees, and therefore, they are outside the underlying purpose of unemployment compensation. "The federal government, for purposes of the Internal Revenue Code, does not consider direct sellers to be employees. CSHB 238(STA) adopts, by reference, the federal standard. Thus, passage of HB 238 conforms Alaska law with the treatment accorded to direct sellers by the federal government and the Internal Revenue." Number 271 The first person to testify was JOE MARIANO, Vice President Direct Selling Association (DSA), located in Washington, D.C. He said DSA is a national trade association that represents companies and the individuals who sell for those companies, which market their products through personal demonstration, primarily, though not exclusively, in the home. Companies like Amway, Avon, the Kirby Company, Mary Kay Cosmetics, Logger Burger Baskets, House of Lloyd, Shakley, Tupperware and Nu Skin, are among DSA's 150 corporate members. There are almost six million people, nationally, who sell for these companies as independent contractors and includes more than 10,000 people in Alaska. MR. MARIANO referred to correspondence from DSA's companies and Alaskan citizens, with regard to HB 238, and said that the bill was offered in an effort to address a current dispute which a specific group of direct sellers in Alaska has had with the DOL about their status under existing law. Most direct sellers have not had a problem under the existing law, but there is a unanimous feeling within the industry and among the people who sell for DSA's companies, that it is very important to pass legislation this year to deal with the problem experienced by the local direct sellers and to avoid the possible misapplication of the law and similar cases in the future. MR. MARIANO said direct sellers are universally treated as independent contractors and not subject to unemployment insurance (UI) coverage. There is no one issue more important to direct sellers than their independent contractor status. He noted this has been true, historically, for the entire industry. Most people who sell direct, enter and exit the business frequently. Most of the 10,000 Alaskan direct sellers operate their small direct sales businesses on a part-time bases for only a few hours every week, perhaps a few weeks or months out of every year. Their earnings are generally quite small and meant to supplement their family's other income. MR. MARIANO said if direct selling was considered to be employment, the state, direct selling companies, as well as individuals, would be swamped by paperwork. Most direct selling companies would go out of business, at least in the form that they currently do business, because of the increased and unnecessary costs. Most individual direct sellers would lose their micro enterprises. Mr. Mariano said in DSA's internal surveys over the last two years, the independent nature of these businesses for these individuals has been sighted by them as the number one reason they get involved in direct sales. MR. MARIANO said approximately 25 states have laws which specifically exempt direct sellers from coverage. In those states which do not, as in Alaska, a more general test, the ABC test, is used to determine unemployment coverage. Direct sellers are found virtually never to be covered under these laws. Unfortunately, the ABC test is subject to somewhat inexact interpretation and occasional administrative decisions have determined that direct sellers are found wrongly to be covered employees. This is what has happened in Alaska with some Kirby direct sellers. As a result, all of the parties, the state, and the individuals involved and the companies, can face lengthy and costly judicial proceedings (indisc.) administrative proceedings to confirm that the direct seller is an independent contractor not covered by the unemployment compensation law. MR. MARIANO said the CS for HB 238(STA), as well as a similar CS for SB 122 which deals with the same issue, will avoid this result by making Alaska's law consistent with the other narrow state laws which define direct sellers. He said the DSA believes that such consistency and reliability is vital for direct sellers and the law, and can be accomplished by the simple referral to be acknowledged in the existing definition of direct selling and direct seller which is used in the federal Internal Revenue Code. Many other states have done just that. Such an amendment would clearly address the current problem. MR. MARIANO explained that the federal language has been in place since 1982, and has proven to be a effective limited definition of direct seller for federal tax purposes, and in those states that use it for their purposes as well. Only true direct sellers, the Avon representatives, Amway distributors, Kirby sales people, etc., have qualified under this definition. He noted the DOL has indicated that it is rarely, if ever, supportive of this type of legislation, but has acknowledged the need and its desire for legislation, in this case, to assist the local Kirby distributors who engaged in the dispute. MR. MARIANO said the DSA feels confident that CSHB 238(STA) is the simplest, most limited and effective manner, of clarifying their status under the law. The original version of the bill, which the department did support, would have done so, unfortunately, in a manner inconsistent with federal and other state laws. For example, the original language would have applied to sellers who make sales in the customer's home. Many direct sellers now sell in the customer's offices, or the home of a third party hostesses. The CS eliminates that problem by adopting the uniform, reliable and acknowledged standard. It is one which the entire industry can support as one that will clarify the existing law and avoid any potential misapplication with regard to any direct sellers in the state. Number 347 ANN CREWS, Manager, Corporate Affairs, Mary Kay Corporation, said she was in attendance on behalf of the Mary Kay Corporation and its sales force in Alaska. She expressed support for CSHB 238(STA). Ms. Crews said there are Mary Kay beauty consultants and sales directors operating throughout the state. She said this direct selling career is a great income earning opportunity, usually a second or part-time job for Alaskans. Mary Kay beauty consultants and other direct sellers are independent small business people and truly value their independence as much as the income they earn. In fact, direct sellers were an integral part of the grass roots process included in the effort to define direct sellers in the federal code in 1982. Ms. Crews said the direct seller definition contained in the bill will give Alaskan Mary Kay beauty consultants and other direct sellers additional security regarding their statutory classification as a non- employee independent contractor. She stated she agrees with the definition. Ms. Crews stated the proposal is revenue neutral as contributions are not currently made to the unemployment compensation fund on behalf of direct sellers. REPRESENTATIVE ELTON asked if there are any Mary Kay direct sellers who have had a problem with the existing state system. MS. CREWS said she isn't aware of any specific problems. Number 399 PAM NEAL, President, Alaska State Chamber of Commerce, said she is in support of CSHB 238(STA). Ms. Neal said the chamber has worked with the DSA, and noted Avon Corporation is a member of the Alaska State Chamber. She said she has worked with Steve Egli with Kirby Corporation to come to an agreement. The Alaska State Chamber of Commerce supports CSHB 238(STA). REPRESENTATIVE ELTON referred to the Juneau Chamber testifying by letter and said their testimony is in support of the Senate version of the bill. He said they noted that with the DOL signing off on the legislation, the bill should be viewed as a piece of housekeeping legislation. MS. NEAL stated the Alaska State Chamber of Commerce feels very strongly that some legislation needs to be passed, either of the versions. She said it seems that the Internal Revenue Service (IRS) is usually known to be very strict and narrow in their interpretations of who could be exempt from anything. She feels that the IRS version really takes away any idea that these aren't direct sellers. They are direct sellers and are independent contractors. She said the Chamber prefers CSHB 238(STA), but supports either bill. It is very important that something be passed. Number 413 STEVE EGLI, Kirby Sales, said his company has been involved in a dispute with the DOL since 1992. Kirby has been involved in half a dozen different disputes with the Alaska DOL. The problem is the current ambiguity of the unemployment statutes, which is commonly referred to as ABC test. Kirby prevailed in 1974. The case that Kirby prevailed, which went to the superior court in Anchorage, was then used against Kirby because they had lost at the departmental level. He said they were audited March 17, 1992. Because they had paid sales people out of their checkbook, the department auditor determined that the sales people were employees with no other bases other than the fact that Kirby sales people had been deemed by the department to be employees. Mr. Egli said for Kirby to defend its position, they spent a tremendous amount of resources. Currently, they are involved with the superior court with more resources being expended for an issue that would probably cost a lot less just to settle with the DOL. He said he is sure the department's costs are probably similar to his and maybe even higher. Mr. Egli said Kirby's sales people want to be treated as independent contractors. Because they are independent contractors, it allows them the opportunity to make a better living. If they don't make a living, it is because they aren't skilled in the art of sales. Most people who aren't skilled in the art of sales aren't going to stay in a sales type of business. These people aren't flocking to the DOL asking for unemployment. He said to the best of his knowledge, Kirby Sales hasn't had an individual file for an unemployment claim. MR. EGLI said legislation needs to be enacted. He said the (indisc.) would work adequately, and the Senate legislation would also be fine. He urged that legislation be passed this session. He said his indications are that the DOL is backing the Senate version. He urged legislation be passed so the ambiguity of the current situation can be changed. Mr. Egli thanked the committee. Number 453 CHAIRMAN KOTT pointed out that both the Senate and House versions of the legislation are identical. Number 457 DIRK BLOEMENDAAL, Counsel, Cooperate Government Affairs, Amway Corporation, testified via teleconference. He said Amway today, on behalf of several thousand independent Alaska Amway distributors, wishes to register very strong support for CSHB 238(STA). Mr Bloemendaal said as he has described in written correspondence to the committee, Amway is a manufacturer and distributor of a wide variety of home and personal care products sold by thousands of independent distributors throughout the country, including several thousand distributors in Alaska. He said the Alaskan Amway distributors sell products to family, friends and neighbors to supplement their family incomes. The sales take place not only in the prospective customer homes, but also in their customers' offices, the distributors' own homes and in many other locations. He noted that there are distributors in Alaska's large cities such as Anchorage, Fairbanks and Juneau, and also in small towns and villages such as Big Lake, Eagle River, North Pole, Palmer, etc. MR. BLOEMENDAAL explained Amway distributors are not employees of Amway Corporation, but are independent contractors whose status as independent contractors is not disputed. CSHB 238(STA) proposes to specifically exempt these direct sellers from the state unemployment compensation law. The language mirrors laws enacted by some 25 U.S. states, which directly tracked the language enacted by the U.S. Congress in 1982. The language is precise, limited in scope, and ensures that legitimate direct sellers are indeed exempt from coverage under the state unemployment compensation law, while ensuring that non-direct sellers are not exempt from the state unemployment compensation law. The bill, therefore, codifies the status of all direct sellers in Alaska and ensures that no misunderstandings or misinterpretations as to their status will arise in the future. No persons, other than legitimate direct sellers selling consumer products in the home, or otherwise in a permanent retail establishment, can qualify under the language. Further, if the bill were enacted, it would help all Alaskan direct sellers and not just a few. MR. BLOEMENDAAL pointed out the Michigan Legislature enacted language in Michigan's unemployment compensation law this session. Because Amway distributors sell products in all 50 states, it is vitally important to Amway that individual state laws be consistent with one another. Companies and their independent direct sellers must be able to rely upon the fact that their status will not change when distributors cross state lines or do business in another state. MR. BLOEMENDAAL said the (indisc.) of the ABC test make it vital that the definition of direct sellers put into Alaska law accurately and correctly describe all direct sellers doing business within Alaska. For these reasons, on behalf of several thousand independent Alaskan Amway distributors, Amway urges the committee to support CSHB 238(STA), and pass it out of committee. Number 500 CHAIRMAN KOTT said he would like to make a correction, for the record, that the Senate bill doesn't match CSHB 238(STA). However, it does match CSHB 238(L&C), dated 4/20/95, which the committee has not yet adopted. Chairman Kott asked Mr. Flanagan to come forward. Number 506 ED FLANAGAN, Deputy Commissioner, Department of Labor, said a cover letter to the Chairman Kott, with a memorandum to the State Affairs Committee, was distributed when the bill was first scheduled in the Labor and Commerce Committee. He said he wanted to correct something that might have given a misperception of the department's position in Mr. Mourant's statement. Mr. Flanagan said the DOL has not determined that direct sellers should be covered under the UI. He said as Ms. Crews stated Mary Kay people have never been caught up in unemployment compensation. They satisfy the ABC test. He referred to Amway and Shakley and said nobody has come forward to say that any of them have ever been found or audited to owe unemployment tax, going back as far as 25 years. Kirby has about six times since 1972. He said Kirby had a problem. Two Alaskans that testified prior to him, the business man who needed a situation addressed and the chamber representative, mentioned that the Senate bill will take care of the situation that needs fixing. For the rest of the sellers, there is a situation where it isn't broke and it doesn't need fixing. MR. FLANAGAN said he finds it ironic that in Alaska, of all states, we're being encouraged to slavishly adopt federal language from, of all places, the IRS Code. He said it boggles the mind. Mr. Flanagan said the DOL doesn't like the federal language. Frankly, the department doesn't care how they do it outside. He said he doesn't think Alaska needs to be the twenty- sixth state to lock step and get in line. There is no vagaries here. Mr. Flanagan said the ABC test is actually a two part test. First, there has to be a master-servant relationship established and then there is the ABC test determining the independent contractor status. There is no problem for any of the direct sellers whether they are selling in the home, in someone's office, or in a church basement. They are independent contractors. The DOL has never audited them and never will. MR. FLANAGAN said Ms. Crews stated the bill is revenue neutral and that is because none of them are currently paying, and nothing in the bill is going to change that. He said Mr. Bloemendaal mentioned the vagaries of the ABC test. There are no vagaries. It is very strict and that is why Kirby has repeatedly been caught up in it. He noted that Kirby prevailed on a point of the ABC test in either 1972 or 1974, and never really did beat it. He indicated Mr. Egli is the requester of the bill. He said the DOL isn't interested in diluting the statute and removing people from coverage from any of their statutes. They aren't voluntary. Mr. Flanagan said the commissioner raised a question about Kirby salesmen, "How do we catch them up in audits and not Amway, Mary Kay, Shakley, Nu Skin, whoever." He said the fact is that the DOL didn't ever trigger audits on them, but did in the case of Kirby and did get the department to look at the situation. Where the Kirby sellers kept getting hung up was with the unique arrangement of where there is a central office that the sellers work with and it has a retail establishment, where Mr. Egli doesn't sell new Kirbys out of it, so they couldn't satisfy the ABC test. Mr. Flanagan said the DOL did try to work out some language. They looked at the federal language. The original direct sellers language, more specifically than the federal, included sales of services. There is no way that the department, and hopefully the legislature, would support that. He said he doesn't think we need to march to the drumbeat of some Washington lobbying organization. The DOL fees they have the responsibility to look out for Alaskan situations. He said he knows that Mary Kay doesn't need additional security. They are already secure in their own independent contractor status. MR. FLANAGAN said the current language in the State Affairs CS threatens the security of other employees out there. Someone will figure out a way to call them direct sellers and they'll be selling services, or they'll be selling from a boiler room operation telephone sales. He said before the DOL would pursue anything for Kirby, they did research and couldn't find a single case where there was a blocked claim. In other words, where an employee had come forward and said, "I worked for Kirby, so I should be eligible for unemployment." He said if the DOL had found one person, they probably wouldn't have even supported the Senate (indisc.). There are other situations where there are people selling directory space, etc. Mr. Flanagan urged the committee either adopt the Senate language as an amendment, or to move the Senate bill. Number 578 REPRESENTATIVE ROKEBERG referred to what is in the Senate bill and said the language still has the IRS reference in subsection 21. MR. FLANAGAN said State Affairs took the Senate bill and stripped out the Senate language and put in the "Teffer" (Sp.?) language. The Senate bill that came over had language that was worked out with the requester, with Senator Kelly's staff and with the DOL, to address the department's concerns. He noted there was also the approval of Kirby, even at the national level. The Direct Sellers Association decided they had a problem with it. There was discussion regarding which version of the bill the committee was addressing regarding a proposed Labor and Commerce CS. There being no further testimony, CHAIRMAN KOTT said he would ask if there is any discussion. Number 593 REPRESENTATIVE ROKEBERG moved that the committee adopt CSHB 238(L&C), 9-LSO871/G, Cramer, 1-20-95, as the working document. CHAIRMAN KOTT asked if there was any objection. Hearing none, Version G was adopted. REPRESENTATIVE ROKEBERG asked if Mr. Mariano could address CSHB 238(L&C). CHAIRMAN KOTT reopened public testimony and asked Mr. Mariano to come forward. REPRESENTATIVE ROKEBERG said there are two different bills. There is the IRS citation as well as Sections (a), (b), and (c), which he assumes is the ABC test. He asked Mr. Mariano to comment on the prior testimony. MR. MARIANO said he has two points of clarification. He said he had not seen the Labor and Commerce Committee CS. The bill that he was voicing strong support for was the State Affairs Committee CS which is basically everything through line 6 of what the committee currently sees. He said what the Labor and Commerce Committee CS does is combines the two versions of the bill. He said frankly, the DSA had suggested this, informally, a week ago as an effort to reach middle ground with the DOL. He said the Labor and Commerce CS is not the preferred route because it is not simple and straight forward and is somewhat convoluted. The straight reference to Section 35.08 of the Internal Revenue Code, which is through line 6 of the CS before the committee, and what came out of State Affairs, is a much simpler and more straight forward version. He said the ABC test in the bill is not the same ABC test which is the more general broad test, which causes the DSA problems. The ABC test in the bill does cause them difficulty standing alone on its own. He understands that it is somewhat complicated and convoluted. REPRESENTATIVE ROKEBERG asked Mr. Mariano if he has a recommendation. MR. MARIANO recommended that the committee adopt CSHB 238(STA). REPRESENTATIVE ROKEBERG asked if there wasn't testimony that the IRS definition tends to be more restrictive. Number 626 MR. MARIANO said DSA's position is that the IRS language is very limited and narrow in its scope, however, it does define differently direct sellers in the original version of the bill, which is supported by the DOL. He said it is broader in the sense that it more accurately defines all direct sellers. He said the DSA believes that it does define, only and exclusively, direct sellers. Number 635 MS. NEIL referred to her statement of it being more restrictive and said she meant that positively. She feels that it covers all the bases and so they are in support of the IRS language. REPRESENTATIVE ELTON said he has a couple of proposed amendments and said the purpose of the amendments is to make the language the same as what is in the Senate bill, which is preferred by the DOL. The first amendment is on line 5,...(end of tape) On line 5 following "who" delete remainder of sentence and all of line 6. REPRESENTATIVE ROKEBERG objected. TAPE 95-43, SIDE B Number 013 REPRESENTATIVE ELTON said what he is trying to do is get rid of the third option and revert to the preferred version that the DOL has testified to which is the Senate version. He said he has two fairly simple amendments to the Labor and Commerce CS. If these amendments are adopted, we would be back to the Senate version that was supported by the representative from DOL. The first amendment gets rid of the onerous IRS provision that is in the House State Affairs version. REPRESENTATIVE ROKEBERG said the onerous IRS division is what the private sector people are saying they support. REPRESENTATIVE ELTON said his interest is that the committee has heard testimony from the affected party, the Kirby Corporation, where they talked about their problem. Representative Elton said we're starting with a fairly discrete problem and if we start adding things to it, he is afraid that what is going to happen is nothing this session. He said what he is proposing is a simple approach that is supported by the department, and is solves the Kirby Corporation problem. He said he would hate to be in a situation where we try to expand the definition of the problem and the way that problem is solved, and have the DOL go to the Governor's Office and end back at ground zero. CHAIRMAN KOTT said he hates to address a particular single issue. He said he isn't going to guess what the Governor might or should do. He said he thinks as long as the committee takes care of a potential problem, it should be done with this vehicle. He said there is another vehicle available which is the Senate version. REPRESENTATIVE ROKEBERG said he still maintains his objection. Number 068 A roll call vote was taken on Amendment 1. Representatives Elton and Masek voted in favor of the amendment. Representatives Sanders, Kott and Rokeberg voted against Amendment 1. So Amendment 1 failed. Number 077 REPRESENTATIVE ELTON said Amendment 2 is on page 12. It restores language that is in the Senate bill under subparagraph (i). After "commissions on sales" insert "or other remuneration directly related to sales or sales performance;". CHAIRMAN KOTT said he would like to amend that amendment. He asked it to be considered a friendly amendment. On line 6, after the word "as amended" insert "." and delete the rest. REPRESENTATIVE ELTON said it is different than his Amendment 2, which related more to the first amendment. He said the question he has is what is the effect. He noted he thinks there is a punctuation problem. CHAIRMAN KOTT said we would have a "." after "as amended". Anything after "as amended" would be deleted. That would take it back to the original bill. REPRESENTATIVE ELTON said the only objection he would have is that there is an amendment pending that isn't anything close to Chairman Kott's amendment. CHAIRMAN KOTT withdrew his amendment and said the committee would deal with Amendment 2. He asked if there was an objection to Amendment 2. Number 123 REPRESENTATIVE ROKEBERG objected. He said he wishes to delete the whole area below it, that it becomes redundant. He said that is why he is objecting. Number 130 A roll call vote was taken on Amendment 2. Representative Elton voted in favor of the amendment. Representatives Rokeberg, Masek, Sanders and Kott voted against the amendment. Amendment 2 failed to be adopted. CHAIRMAN KOTT offered Amendment 3, page 1, line 6, insert a "." after the word "amended" and strike the remaining portion of line 6 as well as lines 7 through page 2, line 5. He moved the amendment. REPRESENTATIVE ELTON objected. He said he has heard from Mr. Egli, who is one of his constituents, that there is a problem. He said the testimony that the committee has heard is from a national professional association and some national and multi- national corporations who don't have a problem that needs fixing. All of a sudden, the committee is fixing a problem for one of his local constituents with language that is being proposed and brought to the legislature from Washington, D.C., from Dallas, Texas, and other points of the globe. Representative Elton said by fixing it in the way they want, he believes that his constituent and the problem is being put at risk. He said he doesn't want the committee to come up with a solution that is a solution for three months until it gets to the Governor's desk, and somebody decides that they're going to listen to the DOL better than the legislature listened to the DOL. He said he objects to this because we're risking some help that will come to one of his constituents. He said the only Alaska input that the committee has received is a sheaf of one sentence letters that all came from the same fax machine in Anchorage. He said, "I don't think that is necessarily the way we help my constituent." CHAIRMAN KOTT said he has a sheaf of additional fax material that has come from all over. REPRESENTATIVE ELTON said he has information from all over too, all over the United States. He said the information he has from Alaska came from one fax number in Anchorage. Number 197 CHAIRMAN KOTT said since the committee sponsored the bill on behalf of Mr. Egli, he thinks the amendment, as proposed, would be all inclusive to cover Mr. Egli's problem. He said by initiating the original bill, it was brought to his attention, that there may be some other potential problems that could be headed off before they occur. Whether or not there is a problem out there remains to be seen. Chairman Kott said, in this particular case, he thinks it would do more good than harm by supporting the bill as it is hopefully going to be amended. REPRESENTATIVE ELTON said if this language is the best approach, he would appreciate some kind of an explanation on why the committee felt that we needed a CS, that was briefly glanced over, and now we're going back to the bill as it came to the committee. There must be something that compelled the committee to change the State Affairs version. He said he hasn't heard what those reasons are. Number 205 CHAIRMAN KOTT said the State Affairs version, as well as the new CS, contains the Internal Revenue Code as part of it. He said he had asked his staff to try and work with the DOL on some language that would address their particular concerns. That was the reason additional language was included. It clarifies specifically the intent. However, it is his understanding that this isn't satisfactory, so the committee will go back to the original State Affairs version of the bill. He said he would object to the motion to adopt Version G. Chairman Kott said he has moved Amendment 3, and asked Representative Elton if he is still maintaining his objection. REPRESENTATIVE ELTON indicated he is maintains his objection. A roll call vote was taken. Representative Sanders, Masek, Rokeberg and Kott voted in favor of the amendment. Representative Elton voted against the amendment. Amendment 3 was adopted. Number 247 REPRESENTATIVE SANDERS made a motion to move CSHB 238(L&C) out of the House Labor and Commerce Committee with individual recommendations, unanimous consent and zero fiscal notes. CHAIRMAN KOTT said there is a motion to move CSHB 238(L&C), Version G, out of committee with individual recommendations. He noted there was a request for unanimous consent. Chairman Kott asked if there was an objection. REPRESENTATIVE ELTON objected. A roll call vote was taken. Representatives Rokeberg, Masek, Sanders and Kott voted in favor of moving the bill. Representative Elton voted against moving the bill. CSHB 238(L&C), Version G, as amended, with a zero fiscal note, was moved out of the House Labor and Commerce Committee. HB 266 - HEALTH CARE PREFERRED PROVIDER PROGRAMS Number 266 CHAIRMAN KOTT announced the next order of business the committee would address would be HB 266, introduced by the House Labor and Commerce Committee. MR. MOURANT came forward to give the sponsor statement: "In the preferred providers bill, which is HB 266 before you, it allows a hospital or a medical services corporation to offer a preferred provider service agreement to a health care provider or a hospital. It prohibits exclusion of a health care provider or a hospital from being treated as a preferred provider if the health care provider or hospital agrees to the terms and conditions of the existing preferred provider agreement." The first person to testify was DAVID A. MCGUIRE, Orthopedic Surgeon. He testified via teleconference from Anchorage. He said he is in support of HB 266. It is clear that the cost of health care has become a major issue for everyone. He said he believes that there is unanimous agreement that we would like to make the provision of health care more affordable and more available for everyone. The question of how to do that is not one on which there is unanimous agreement. An alternative approach has been promulgated by private non-governmental approaches and has been one of so called managed care, preferred providers or HMOs. There have been cost savings affected by these (indisc.) Dr. McGuire said the state of Alaska is a little bit different, in some regards, than down town Los Angeles, New York, or other similar urban environments. The problems that we face in the state of Alaska are one of total numbers of population and geographic distances and, therefore, the availability and the dispersion of health care facilities. DR. MCGUIRE explained the problem is that in the end we've got to remember that the reason health care facilities and health care exists is that we're concerned about providing for the individual needs of the patients. He said there are some specialties in the state that are represented by as few as three or four practitioners. It is clear that there is an exclusive HMO or PTO provider and that arrangements will either have to be made with those practitioners or with the ability to send patients outside for treatment. We advance the proposition that anyone should be free to set up any kind of a program that they like that restricts the total payment for circumstances under which they can be delivered. If any other provider is willing to provide the same service for the same price, same quality, etc., then given the geographic limitations of Alaska, it would be in the best interest, as opposed to having the case that a single dominate provider may be the only one that provides (indisc.) excluding other providers, and in the end reducing or eliminating rather than enhancing competition. DR. MCGUIRE said it is the patient, sometimes, who is (indisc.) being used as the trading chip in order to get a service for a lower price. One of the negotiating strategies is to say that insurance company or another entity will agree to deliver an increased volume of patients to a health care provider in return for a reduction in cost. The problem is that the patients involved don't know that they have been traded in the cost until they come to use the service, then many times, they become aware that they are not able to go to the provider of their choice because of the restriction in their insurance contract of which they may have been unaware. DR. MCGUIRE said he would argue that nobody disputes the need that we should reduce the cost for (indisc.). He said there once was a time when hospitals and doctors provided information about the cost of service in advance to the patient. Dr. McGuire suggested that we go back to that concept. Almost anybody who provides service should at least have a good idea of how much it costs to provide the things that are most commonly provided. He suggested a system be established in which any patient can call a health care provider, whether it be the hospital, the doctor, the nursing home, the pharmacy, etc., and inquire as to the price of a service. That service should be represented as being comprehensive. Once the patient has received that service, the bill should be the same as that which was quoted prior to the patient selecting that provider for the service. DR. MCGUIRE said in the instance in which there are complications or other contingencies that were not foreseen, the provider would have the opportunity to charge more for their services, but would also have to refer to the Division of Insurance that there had been a deviation from their prospective pricing. This puts the power where it should be, in the hands of the patient. They decide who their provider will be and what they are willing to pay for (indisc.) provider. It requires that the provider adhere to an economic (indisc.) that they have not (indisc.) asked to adhere to. He suggested that HMOs are a good deal, but asked where all the money is going to be saved. Mr. McGuire said he would be happy to answer questions. Number 384 REPRESENTATIVE ELTON said if anyone is free to match the terms and conditions of preferred provider service agreements, what is the incentive for a group to come in and bid at a low rate. They may say that they can provide services at a low rate. What is the incentive for them to quote a low price if they know that if they lose the bid, they still get to provide the service anyway by matching what the competitor bid. DR. MCGUIRE said any insurance company is free to provide an insurance policy with a maximum limitation. Of course, the argument goes that if the patient has an insurance policy, they will be subject to the remaining balance should the insurance company not pay it. He said what occurs when that is reality is the patient is infinitely more in tune to the cost of medicine that he/she may choose to have. Dr. McGuire referred to his own office and said they never have screwed someone because of their ability to pay or not pay, so an insurance policy that provides a benefit that is less than some other insurance policy is not very likely to be thrown out the window. He suggested that there is also a competition that can improve with the insurance companies and that is that they can provide a product that says, "For `X' amount of dollars in reduction of monthly benefits, you will have this coverage, and this coverage will pay up to `X' in certain instances. Then there can be built into those policies provisions for catastrophic losses." DR. MCGUIRE explained not much has been said about the paperwork hassles associated with insurance companies. He informed the committee he is a one person practitioner and has an association with a group to be certain. He said he pays the salaries of his staff and has a full-time person doing nothing but (indisc.) authorization on insurance, certification, follow up on claim denials, etc. Dr. McGuire said he would be more than happy to negotiate reductions in rates with insurance companies. The (indisc.) being that they would relieve him of some of the hassle that is associated in provided care for patients. He said there are a lot of incentives out there to reduce health care. DR. MCGUIRE said he would like to remind everyone that he believes in advancing the proposition that these prices ought to be public, posted and accountable. That would give the patient the opportunity to be a deciding consumer of health care by being able to legitimately compare prices between the various providers. REPRESENTATIVE ELTON said there is currently nothing that stops a provider from posting a price. The bill doesn't get to that issue at all. DR. MCGUIRE noted he isn't proposing that one bill will solve the entire health care problem. He is proposing that what is being said by those proponents is that the only tool they have is one that is restrictive, coercive, and in the end, limits the patient's freedom of choice as to what provider they want to have. He doesn't believe that it is right, on behalf of the patient, to be limited as to choice. There are other means of controlling health care. REPRESENTATIVE ELTON said he doesn't see the bill as limiting choice at all. The bill only provides that if you want to go elsewhere, you pay the difference. If there is not a difference, there is no problem with choice. DR. MCGUIRE said he agrees with Representative Elton's last statement completely. Dr. McGuire said what he is saying is that there are those people who would propose that they would limit the patients access by requiring that they would only be able to go to a single provider or else they wouldn't be covered; or, the differences between coverage would be so financially onerous as to be effectively unavailable. Number 456 REPRESENTATIVE ROKEBERG said the effect of the legislation is that a patient may not have (indisc.) to pay that cost differential between what the insurance company is going to provide and what another physician may be charging. He asked if that statement is correct. DR. MCGUIRE referred to so called preferred provider organization plans (PPO) or HMO or other kind of plans, and said there is one in Anchorage where if a patient goes to the designated preferred provider, then they are billed at the standard rate. The insurance pays 80 percent of the charge and they pay 20 percent. However, if they do not go to the designated provider, then the insurance company will only pay 20 percent and the patient has to pay 80 percent. The difference between those two is so financially onerous that very few individuals have the (indisc.) to make up that difference. Passage of this bill would say that if a patient felt strongly that they wanted to go to another provider, the insurance company would be required to pay the same benefit as they would to the first provider. If the insurance company in question wants to limit the total amount that they would pay, there is no restriction on that ability whatsoever. REPRESENTATIVE ROKEBERG asked Dr. McGuire if he thinks the bill would really only affect the Anchorage area. DR. MCGUIRE said he doesn't think that is true. He said we are talking about providers as a group. It isn't too difficult to imagine that in some of the other outlying areas, a hospital could decide that it would only allow certain physicians to provide these services. REPRESENTATIVE ROKEBERG said he appreciates Dr. McGuire's comments about choice, selection, health delivery services, etc. He asked Dr. McGuire if he posts his prices in his office. DR. MCGUIRE said he doesn't, but when anybody asks him, he does give a detailed accounting of what they will be. He said the prices are available to anyone who asks. REPRESENTATIVE ROKEBERG stated that he had asked a surgeon less than twelve months ago what he was going to charge for a major operation. The surgeon had no idea and referred him to his office risk management claims supervisor because he didn't know what he charged. DR. MCGUIRE said he didn't know exactly the history of how that has come to be but believes that has something to do with the contest of a third party payer. When the consumer is not really going to pay the price of service of product (indisc.) ordered, than there becomes less pressure to ask the provider exactly how much it is going to be. That is one thing that can be done to encourage more cost awareness on the part of everyone. Number 516 CHAIRMAN KOTT referred to Dr. McGuire statement that, if someone asked, he would give the cost of what a particular surgery might be. He asked Dr. McGuire if he is fairly accurate in his cost estimates based on no complications. DR. MCGUIRE said he tries to be accurate. There has been instances where the patient comes back and says that wasn't the cost. He said he reviews the bill and tries to find out where any misunderstandings occur. That is the way it should be. Number 528 JACK MCRAE, Senior Vice President, Blue Cross of Washington and Alaska, was next to testify in opposition to HB 266. He read his statement into the record: "We are very concerned about the concept of any willing provider and we strongly believe that if passed, HB 266 will increase health care costs for our members and other Alaskan citizens. As you are aware, health care costs have decreased over the last year. They are not down to rate of inflation nationally, but are lower by half of what most economists predicted for 1994. A major factor in this decline is managed care and HB 266 will take a step backwards if passed. "Blue Cross of Washington and Alaska's goal is to keep health care costs down and to provide the highest quality of health care costs to our members. Under the present concept of managed care, we're able to offer the highest quality health care costs at the lowest cost. "Now I'd like to comment on specific concerns with the bill itself. The language that states, `A subscriber's contract containing a preferred provider program must provide for payment for a service provided by a non-preferred provider or hospital.' Our interpretation is that that could mean that we have to pay any bill that comes to us if this law were to pass, and we're very concerned about the cost that will be accelerated under the willing provider concept. "We're also concerned about the 90 day implementation portion of the bill. We believe it's going to be very very difficult to change computer systems and a variety of things that are in the 90 day implementation schedule. It doesn't seem workable from our perspective. "We are also concerned about the constitutionality of the state legislature modifying contracts between private parties. I understand there have been court rulings in Alaska pertaining to that subject. "The next area I would like to cover are the positions that the national associations have taken on the concept of any willing provider. The National Association of Insurance Commissioners, the National Governors Association, and the Federal Trade Commission have all opposed the concept of any willing provider and we have some documentation we'll hand out pertaining to those positions they've taken. These organizations and many state organizations have recognized the inflationary and quality problems created by implementing what is in HB 266. I will not quote from the above organizations because we've submitted all the information for testimony. "In conclusion, we believe that it would not be in the best interest of our members in Alaska if HB 266 were to become law. We believe health care costs will go up if HB 266 passes and the quality of the care could go down. "I want to thank the committee for taking the time today to listen to Blue Cross and if you have any questions, I will be more than willing to try to answer those." Number 563 REPRESENTATIVE ROKEBERG said, "Assuming the worst case scenario from Mr. McRae's perspective, is there a time frame that would be workable?" MR. MCRAE said it would take until 1996 at least. He noted his company is currently in the process of adding new computer programs, they would all have to be modified. It would be much longer than 90 days. But noted he couldn't give a specific answer. REPRESENTATIVE ROKEBERG referred to having caps on particular procedures and said Mr. McRae suggested that he would be in a position where he would have no control whatsoever. He asked Mr. McRae if he internally provides some maximum caps in terms of what they pay on all procedures to all policy holders. MR. MCRAE said they are able to do that because they go into an area and negotiate with preferred providers. They tell the preferred providers that they will bring them a volume of business and that this is what they'll pay for a certain service. He said that is a way that costs can be held down. If there weren't any negotiations and everyone is free to send Blue Cross the bills even though they have put a cap on it, there is not leverage to go into a specific area and negotiate because everyone is in the same playing field. There is not a preferred provider concept. Mr. McRae said they currently go to one block of providers, clinics or hospitals and say, "Do you want to accept our rate for this process and, in turn, we'll bring you a volume which is greater than you have now." In a lot of cases, they say yes. Number 592 JERRY REINWAND, Lobbyist, Blue Cross of Washington and Alaska, said part of the testimony was directed at the last sentence of the bill, "What is the net effect of that sentence? It would appear that anybody who submits a bill who is a non-preferred provider, we'd have to pay the bill. I think that was the issue Mr. McRae was trying to raise." Number 599 STEVEN LEBRUN, Senior Account Manager, AETNA Health Plans, testified via teleconference from Seattle, Washington. He said AETNA is an insurance and managed care company that offers most traditional medical benefit programs and managed care programs that include preferred provider arrangements. He said he is in opposition to HB 266. Preferred provider programs are a tool for employers and collective bargaining groups, in many cases, to help manage benefit costs. Managed care saves money and these savings are passed on to employers in the form of lower premium rates. Perhaps more importantly, you can (indisc.) in the form of lower co-payments and out of pocket costs. Currently, many thousands of Alaska residents are enrolled in preferred provider arrangements sponsored by AETNA, both in the public sector and private sector employer groups. MR. LEBRUN said AETNA feels they need to encourage and not thwart a market based solution that leverages competition and provides for lower costs while not compromising the quality of care. Preferred provider networks involve appropriate and beneficial collaboration between insurance companies and provider groups. AETNA feels that the results of these collaborations are in the public interest of providing cost effective quality care. MR. LEBRUN referred to the issue of choice and said there has been testimony relating HMOs and excluding providers. He said he would like to clarify and said he isn't talking about HMO (indisc.) plans, with regard to HB 266, that they require special regulatory authorization. Under preferred provider arrangements, providers are not excluded nor are individual unable to see providers. Under AETNA sponsored plans, there are still meaningful and significant reimbursements available regardless of the provider chosen. Most typically, AETNA's plans provide a 10 to 20 percent benefit differential and that occurs within the context of still providing a very reasonable overall out of pocket limit for any individual in any calendar year. MR. LEBRUN said the problems AETNA has with any willing provider is that it removes incentives for contracting and removes the leverage that they have with providers. That is the trading of patient volume for preferential pricing and, therefore, being able to construct networks or provider relationships that are suitably sized to take advantage of competitive market dynamics. In addition, the ability to contract selectively also allow AETNA to maximize their ability to work with providers in the areas of quality assurance, performance standards and the like. MR. LEBRUN referred to the value to consumers and said as part of AETNA's contracting with preferred providers, they do negotiate prices with providers and do not allow balance billings. It does provides consumers of health care a certainty that the percentage they pay of the bill will be their only obligation and all other payment requirements will be fully met by the insurance company. This would avoid the situation with non-preferred arrangements of having reasonable and customary limits that create a balance billing situation for individuals. MR. LEBRUN said AETNA feels that any willing provider provisions like those in HB 266 threaten to blunt the effectiveness of managed care plans to control costs and manage quality. AETNA finds that in Alaska and the lower 48, where managed care is in much broader acceptance, that rates of inflation are lower then they are with traditional plans. Costs are often 10 to 20 percent lower than traditional (indisc.) service plans, at the same time that managed care plans promote and provide extensive benefits for wellness and Medicare and avoid the imposition of large up-front deductibles. TAPE 95-44, SIDE A Number 000 MR. LEBRUN said he is available to answer any questions the committee may have. REPRESENTATIVE ROKEBERG referred to AETNA being the provider for state of Alaska employees and asked if they provide any kind of policy like that to an individual person in the private sector with a non-group basis. MR. LEBRUN stated AETNA only operates in the group insurance market in Alaska and elsewhere. Their health insurance is employer based. REPRESENTATIVE ROKEBERG asked if it would be a fair proposition to say that the savings that you realize when you negotiate a preferred provider (indisc.) contract is passed along to the policy holders within AETNA's groups. MR. LEBRUN said, "Certainly, we prepare reports that show the value of the managed care arrangements that are in place." Number 051 DOUGLAS CARTER SMITH, President, Anchorage Medical Society, testified via teleconference. He said he represents 211 physicians in Alaska. Mr. Smith said he is in support of the preferred provider bill. HB 266 protects or preserves the autonomy of the doctor/patient relationship. The health consumer would be able to continue with the care of his/her chosen position regardless of who becomes the third party payer. When the hospital or medical service corporation selected by Alaskan employers is switched, that person would not have to switch physicians. When Alaskans change jobs and find themselves under a new health care program, they would not be forced (indisc.) to achieve this new position. Some have argued that potential hazard exists if this bill goes into effect. They say that the motivation for offering services at a savings would be lost if a specific (indisc.) patient population cannot be guaranteed to the same physician or hospital provider. This could be the stance taken by some physicians or hospitals. He said he suspects it is more likely the competition and free market encouraged by HB 266 will result in the offering of services at the lowest possible prices. Mr. Smith said providers would understand that to get and keep more patients, they would have to offer services at a minimum cost with maximum (indisc.) The Anchorage Medical Society supports the preferred provider concept such as described in HB 266. Number 082 REPRESENTATIVE ELTON asked Mr. Smith to explain a little more about his organization. MR. SMITH said the Anchorage Medical Society is from the Municipality of Anchorage and includes all specialties. The 211 physicians who are current members represent a majority of all physicians in the area. Number 100 GORDON EVANS, Lobbyist, Health Insurance Association of America (HIAA), testified in opposition to HB 266. He said HIAA is a trade association of the nation's leading commercial health insurers which provides health insurance for approximately 55 million Americans. He said the bill would essentially allow hospitals or medical service corporations to offer a preferred provider service agreement to a provider or hospital licensed in Alaska. Currently, Alaska doesn't have a statute directly authorizing the operation of PPOs in the state. He noted there is a model PPO Act drafted by the National Association of Insurance Commissioners which has not been adopted in Alaska. HB 266 would not serve the same purpose as a true PPO Act. HB 266 is nothing more than a badly disguised provider mandate. The consequences would increase the costs and reduce the efficiencies of managed care. An integral part of managed care is the provider network. When a managed care plan such as a PPO, enters into a contract with a particular provider it seeks to accomplish several purposes. One is to establish a long-term relationship with that provider that enhances the plan's market attractiveness and its ability to provide access to quality health care. A second purpose of the plan is to establish a method of reimbursement with the provider that improves the plan's ability to manage its health care costs effectively. Managed care plans attract providers by guaranteeing access to a specified pool of enrollees. If all providers in a community are required to be included in a plan, as the second sentence in HB 266 would require, there is no economic incentive for any provider to enter into an alternative delivery or reimbursement system. Any willing provider laws erode savings since the costs of a plan increase, savings can no longer be passed to the consumers. The value of the plan for consumers is lost. MR. EVANS said HIAA believes that managed care systems should be able to limit their networks of providers and to alter reimbursement systems to reward efficient providers in their network. Insurers should be free to negotiate reimbursement schedules with providers to contain health care expenditures. HIAA is opposed to legislation that would restrict the ability of an insurer or other entity to contract with providers and which would require the insurer to accept any provider in a particular service agreement. The Federal Trade Commission has determined that any willing provider mandates are anti-consumer and, "may discourage competition among providers, in turn, raising prices for consumers and unnecessarily restricting consumer choice in prepaid health care programs without providing any substantial public benefit." Mr. Evans urged the committee to reject HB 266. Number 178 MARILYN PATTERSON, Human Affairs Alaska, said her organization has been in business since 1979, when the owner pioneered the concept of employee assistance programs in Alaska. They provide employees an employer prepaid mental health benefit. The preventive approach for helping employees to get back on track by resolving their personal or work related problems early, helps to maintain workplace productivity and other job performance indicators as well as reduce potential costs later for medical and surgical claims. Ms. Patterson said they also provide managed behavioral health care programs since 1989. They are the largest of employee assistance programs and are the leading provider of managed mental health care. She noted they serve over 200 companies and organizations, have more than 50,000 employees and with 120,000 covered members. Their offices are in Fairbanks, Juneau, Wasilla and Anchorage. Ms. Patterson noted they are strongly opposed to HB 266, or any other amendment or legislation that would potentially restrict their ability to offer managemental health care programs. MS. PATTERSON said many of their customers are interested in providing a mental health benefit to their employees, but managing this benefit helps to contain costs for the company while still providing a valuable service to the employee. Human Affairs Alaska uses a preferred provider network of physicians, therapists and treatment facilities that meets their clinical standards and they contract with providers who share their brief therapy - problem - resolution behavioral management philosophy assuring compliance with the health plan's requirements. They are able to negotiate favorable financial arrangements with providers in return for supply and increased patient volume. Having preferred provider networks makes it possible for them to monitor provider performance, ongoing quality assurance and utilization management programs more efficiently. It helps to minimize administrative overhead in monitoring the treatment patterns by maintaining the electronic connectivity. Ms. Patterson said she believes HB 266 discourages competition among providers of health care. Requiring that programs be open to all providers wishing to participate on the same terms, reduces the portion of her business that each preferred provider can expect to obtain. This makes it less advantageous for providers to enter into agreements at discounted prices, since any provider would be entitled to contract on the same terms as other providers, gives little incentive for providers to compete in developing attractive innovative and cost containing proposals. Because this would make it possible for all providers to free ride on a successful proposal formulation, providers would likely be less willing to bear the costs of developing a proposal. There would be no reason or motivation for them to be competitive. MS. PATTERSON said she understands that the Federal Trade Commission's staff, in response to requests from officials in other states considering legislation that requires managed care plans to contract with any willing provider that wants to beat the health plan terms and conditions, has issued opinion letters stating that this type of legislation discourages competition among providers of health care and may promote increased costs. MS. PATTERSON said HB 266, in its current form, applies only to Blue Cross at the moment, could easily be expanded to cover Human Affairs. If applied to them, the legislation would eliminate their ability to offer managed health care programs to their customers. She said it is their experience that competition is a powerful and necessary tool in controlling costs. Managemental health care will only work in a competitive environment, which contains costs by integrating financing and delivery of health care. MS. PATTERSON said her company believes HB 266 is anti- competitive, will promote increased costs and provides no benefit for her company, customers, or the thousands of employees they serve across the state who benefit from their contracts with preferred providers. She asked that HB 266 not be passed out of committee in any form. Number 265 REPRESENTATIVE ROKEBERG asked Ms. Patterson who she works for. MS. PATTERSON said she works for Human Affairs Alaska. She said they contract with individual companies and organizations across the state to provide employee assistance programs for their employees. REPRESENTATIVE ROKEBERG asked if they are already under an insurance program. MS. PATTERSON indicated they could be under AETNA, Blue Cross, etc. REPRESENTATIVE ROKEBERG asked if Human Affairs Alaska is compensated from the individual's existing group policy or are they selling another type of service which requires an additional premium. MS. PATTERSON said they are compensated by the organization they contract with. She said they are organizations from the Municipality of Anchorage, the Alaska Railroad, Aleyska, British Petroleum, small little non-profits, etc. She explained the Employee Assistance Program is a gatekeeping means for the managemental health care that Human Affairs does, but many organization just have the Employee Assistance Program. REPRESENTATIVE ROKEBERG asked how the bill would make things less competitive for her organization. MS. PATTERSON said her organization negotiates with preferred providers. They have a partnership with them where they agree to work with them in managing the mental health care of somebody who comes in for service. For example, if an employee decided they wanted a psychiatrist and picked one out of the "Yellow Pages." She said by coming to Human Affairs Alaska, they could assess what their needs are and a psychiatrist could be a very inappropriate level of service for what they need. So they work with Human Affairs Alaska, go through counseling and, if necessary, they are sent to the appropriate level of care. HB 266 would eliminate competition. She said they have partnerships with various people who are in agreement with the type of behavioral health care that they do. They have negotiated discounted rates for them. Number 343 CHARLIE MILLER, Alaska Regional Hospital, indicated that his organization would give testimony at the next meeting on HB 266. He noted that the person who was going to give testimony had become ill. DON KOCH, Chief, Marketing Surveillance Section, Division of Insurance, Department of Commerce and Economic Development, said they have some challenges with the bill as it is currently structured. He said the department would like to suggest an alternative that they believe accomplishes what the committee intends. MR. KOCH said HB 266 only impacts a medical or hospital service corporation that has been formed under AS 21.87. The service corporations are not insurers in the normal sense. He referred to the solvency of these two types of organizations, an insurance company versus a service corporation. With an insurance company, you base your solvency on capital, surplus and reserves. In order for an insurance company to operate in the state, they have to have a certain level of capital and surplus. Generally, it is fairly high. In addition, they are subject to a guarantee fund so that if an insurance company goes down, all of the other companies in the state writing that kind of business pick up the ticket. A service corporation, formed under Chapter 87, is dependent upon the contracts it enters into as the basis of their solvency. They use two contracts. The first one is called a service agreement. That is what they enter into with their provider, the hospital or doctor. That is the basis of their solvency. Blue Cross, Blue Shield or a medical or hospital service corporation is not required under the statutes to have a capital surplus kind of structure because it basically is accomplished through these contracts. Mr. Koch said in order to provide service, they use a second contract which is a subscriber's contract. What the subscribers contract does is it offers access to the service agreements that they have with hospitals. He explained that is distinct from the way an insurance company does it. When they offer a policy, they offer an indemnity contract. Mr. Koch said as of Friday, they have the Attorney General's opinion that says preferred provider arrangements are legal in the state of Alaska without specific authorization. This means that an insurance company could enter into a preferred provider arrangement and have side contracts that basically have doctors or hospitals agreeing to provide the indemnity provisions under the insurance policy at certain levels. MR. KOCH said the problem the department has with HB 266 in its current form is they believe it disturbs the structure of a Chapter 87 service corporation. He said it needs to be clearer that the service agreement is still in place. That is the solvency picture for these kinds of service corporations. Mr. Koch referred to the language the department provided and said the second sentence clarifies the fact that a service agreement still needs to exist. It also makes a distinction between the service agreement at a participating level and a preferred provider agreement. It says that anybody who can meet those terms and conditions, of either the participating agreement or the preferred provider arrangement, can do so. Nobody will be excluded from the opportunity to become a preferred provider if they will meet the terms and conditions and enter into a service agreement. They have to be able to enter into a service agreement. Another thing the language does is it provides three conditions under which services would have to be paid if provided by somebody who is not in one of these service agreements. For example, if you're traveling outside of Alaska, you have an emergency, and you can't get to a hospital or doctor in the state of Alaska to take care of an emergency service, you have to indemnify for that kind of service. MR. KOCH said another provision is that if you are a preferred provider, you must, under that contract, allow service by a participating provider in the area. You could have two levels of service, the preferred and the normal participant. The language says that while those may have different levels of benefit, the person who is receiving care has the option of which one he goes to. MR. KOCH said if you're in Alaska, in an area of the state without the medical service corporation or the hospital service corporation, you have to also be allowed to go to somebody who can provide the care who is in that area. Number 440 REPRESENTATIVE ELTON referred to the last three provisions in the language he gave committee members and said absent this language, what would happen if the committee doesn't adopt HB 266. MR. KOCH said absent any action at all, a medical service corporation or a hospital service corporation presently can enter into preferred provider arrangements. That is clear from the Attorney General's opinion. Mr. Koch said the statute currently provides that they may provide these other indemnification kinds of services for the out of state emergency or the in state emergency. It says they may. He explained there is not a real strong incentive for them to provide this to a great extent because, again, we're talking about their solvency base. This is a clarification of what currently exists. He noted that in the current statutes do not specifically address preferred versus non-preferred providers and the fact that you have to allow options for both. That is voluntary. MR. KOCH said currently they can enter into these kinds of agreements. Typically, they provide the out of state or out of area emergency care. The one thing that isn't particularly addressed is in the area of the non-participating kind of thing. Number 464 REPRESENTATIVE ELTON asked Mr. Koch if he has ever heard of a problem that makes him think that the language is necessary. MR. KOCH said there is currently an issue that tends to suggest there may be a problem. That is primarily in the Anchorage bowl where there are two public hospitals and a contract with only one. He said he thinks that is part of the reason there is legislation like HB 266. REPRESENTATIVE ELTON said some of the testimony says that preferred provider plans typically decrease the cost to an employer and employee. He said if somebody doesn't have a financial oar in this water, what has his experience been. Do preferred provider plans, as presently constituted, typically provide a savings to the consumer or the employer? MR. KOCH said he has not explored that. Currently, the department doesn't have rate authority on health care insurers with the exception of hospital medication service corporations. So, we don't see the kinds of numbers that tell use that there is a difference. He said he doesn't know the answer. CHAIRMAN KOTT referred to the Attorney General's opinion and asked if the opinion was rendered last Friday. MR. KOCH said it is dated April 21. Chairman Kott asked that he make the opinion available to the committee. Number 485 REPRESENTATIVE ROKEBERG referred to testimony about there being some concerns about the fact there weren't any caps on payments and asked Mr. Koch if his suggested language addresses that issue. MR. KOCH indicated it does not address that issue. He said there are other provision in statute that tend to address it, particularly with hospital and medical service corporations. This doesn't extend to anything but those kinds of organizations. Mr. Koch noted there are only two, Blue Cross and Alaska Vision Services. There are other features in that statute that deal with rates and contract structure. There are some components of Chapter 87 that basically provide some minimum guidance for what has to be in the contract. He said the department uses some subjectivity when they are reviewing forms to the degree that the contract is not a negotiated situation between the employer and the (indisc.). Mr. Koch said they don't get too involved in areas where there is clearly negotiations going on. He explained there are a number of cost control features in place and the department has the ability to review those through examination. Number 516 REPRESENTATIVE ROKEBERG asked which types of organizations AS 21.87 refers to. MR. KOCH said they are called service corporations. They're either a hospital service corporation or a medical service corporation. Blue Cross is both of these. REPRESENTATIVE ROKEBERG asked what Providence, Humana and Alaska Regional are. MR. KOCH said those would be people that a service corporation contracts with to provide services under its subscriber contracts. REPRESENTATIVE ROKEBERG said HB 266 doesn't affect other private insurers that may be issuing policies in the state of Alaska. MR. KOCH said that is correct. HB 266 is aimed strictly at service corporations. REPRESENTATIVE ROKEBERG asked if AETNA would qualify. MR. KOCH explained AETNA is an insurance company and is not affected by the bill. Number 529 CHAIRMAN KOTT said intention is to hold HB 266 over in order to offer the public an additional opportunity to testify. CHAIRMAN KOTT noted HB 260 would be held until the following Wednesday. ADJOURNMENT Number 545 CHAIRMAN KOTT adjourned the House Labor and Commerce Standing Committee meeting at 6:00 p.m.