Legislature(1995 - 1996)

09/27/1995 09:10 AM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
           HOUSE LABOR & COMMERCE STANDING COMMITTEE                           
                       September 27, 1995                                      
                           9:10 a.m.                                           
                       Anchorage, Alaska                                       
 MEMBERS PRESENT                                                               
 Representative Pete Kott, Chairman                                            
 Representative Norman Rokeberg, Vice Chairman                                 
 Representative Jerry Sanders                                                  
 MEMBERS ABSENT                                                                
 Representative Brian Porter                                                   
 Representative Kim Elton                                                      
 Representative Gene Kubina                                                    
 Representative Beverly Masek                                                  
 COMMITTEE CALENDAR                                                            
 HB 266:    "An Act relating to preferred provider agreements                  
            offered by hospital or medical service corporations."              
            HEARD AND HELD                                                     
 HB 346:  "An Act relating to regulation of telecommunications                 
            HEARD AND HELD                                                     
 WITNESS REGISTER                                                              
 JOHN BJORNTON, Administrator                                                  
 Real Time Images                                                              
 P.O. Box 1144                                                                 
 Girdwood, Alaska  99587                                                       
 Telephone:  (907) 783-2413                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 DAVID WALLACE, Employee Benefit Broker                                        
 Wallace Group Services                                                        
 P.O. Box 91299                                                                
 Anchorage, Alaska  99509                                                      
 Telephone:  (907) 272-0114                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 RICK SOLIE, Marketing and Planning Director                                   
 Fairbanks Memorial Hospital and Denali Center                                 
 1650 Cowles Street                                                            
 Fairbanks, Alaska  99701                                                      
 Telephone:  (907) 458-5307                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 STEVE LEBRUN, Senior Account Manager                                          
 Aetna Health Plan/Aetna Insurance Company                                     
 1501 4th Avenue                                                               
 Seattle, Washington  98119                                                    
 Telephone:  (206) 467-2809                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 KAREN MARCEY, Co-Owner                                                        
 Professional Infusion Pharmacy                                                
 6301 Bubbling Brook                                                           
 Anchorage, Alaska  99516                                                      
 Telephone:  (907) 346-2363                                                    
 POSITION STATEMENT:  Testified in support of HB 266                           
 CHARLIE MILLER, Lobbyist                                                      
 Alaska Regional Hospital                                                      
 P. O. Box 102286                                                              
 Anchorage, Alaska  99510                                                      
 Telephone:  (907) 264-1713                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 MARILYN PATTERSON, Senior Account Executive                                   
 Human Affairs of Alaska                                                       
 4300 "B" Street                                                               
 Anchorage, Alaska                                                             
 Telephone:  (907) 273-9211                                                    
 POSITION STATEMENT:  Testified in opposition to HB 266                        
 DOUGLAS BRUCE, Chief Executive                                                
 Providence Health System in Alaska                                            
 P.O. Box 196604                                                               
 Anchorage, Alaska  99519                                                      
 Telephone:  (907) 261-3055                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 DAVID KILLEBREW, Physician                                                    
 1200 Airport Heights Road                                                     
 Anchorage, Alaska  99508                                                      
 Telephone:  (907) 264-1016                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 ROSEMARIE KALAMARIDES, Assistant Administrator                                
 Alaska Teamster-Employer Welfare Trust                                        
 4300 Boniface Parkway                                                         
 Anchorage, Alaska  99504                                                      
 Telephone:  (907) 269-4305                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 SHIRLEY FRASER, M.D.                                                          
 1200 Airport Heights                                                          
 Anchorage, Alaska   99508                                                     
 Telephone:  (907) 276-3727                                                    
 POSITION STATEMENT:  Testified in favor of HB 266                             
 JERRY L. COLES, M.D.                                                          
 3650 Lake Otis Parkway                                                        
 Anchorage, Alaska  99508                                                      
 Telephone:  (907) 563-3103                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 BARBARA HUFF TUCKNESS, Representative                                         
 Alaska Teamsters 959 and AFL/CIO                                              
 4300 Boniface Parkway                                                         
 Anchorage, Alaska  99501                                                      
 Telephone:  (907) 269-4236                                                    
 POSITION STATEMENT:  Testified on HB 266                                      
 RICK DAVIS, Analyst                                                           
 Providence Hospital                                                           
 Anchorage, Alaska  99519                                                      
 Telephone:  (907)                                                             
 POSITION STATEMENT:  Testified on HB 266                                      
 CHARLES E. MCKEE                                                              
 P.O. Box 143452                                                               
 Anchorage, Alaska 99514                                                       
 POSITION STATEMENT:  Commented on HB 346                                      
 DON SCHORER, Commissioner, Chairman                                           
 Alaska Public Utilities Commission                                            
 Department of Commerce                                                        
   and Economic Development                                                    
 1016 West Sixth Avenue                                                        
 Anchorage, Alaska 99501-1963                                                  
 Telephone:  (907) 276-6222                                                    
 POSITION STATEMENT:  Testified on HB 346                                      
 TOM EDRINGTON, General Manager                                                
 Anchorage Telephone Utility Telecommunications                                
 600 Telephone Avenue                                                          
 Anchorage, Alaska 99520                                                       
 Telephone:  (907) 564-1415                                                    
 POSITION STATEMENT:  Testified on HB 346                                      
 HARRY (CHIP) M. SHOOSHAN                                                      
 Strategic Policy Research, Incorporated                                       
 7500 Old Georgetown Road, Suite 810                                           
 Bethesda, Maryland 20814                                                      
 Telephone:  (907) 718-0111                                                    
 POSITION STATEMENT:  Testified on HB 346                                      
 MARK FOSTER                                                                   
 Anchorage Telephone Utility                                                   
 P.O. Box 200587                                                               
 Anchorage, Alaska 99520                                                       
 Telephone:  (907) 272-0207                                                    
 POSITION STATEMENT:  Testified on HB 346                                      
 JAMES ROWE, Executive Director                                                
 Alaska Telephone Association                                                  
 4341 "B" Street, Suite 304                                                    
 Anchorage, Alaska 99501                                                       
 Telephone:  (907) 264-7876                                                    
 POSITION STATEMENT:  Testified in support of HB 346                           
 TED MONINSKI, Director                                                        
 Regulatory Affairs                                                            
 AT&T Alascom                                                                  
 210 Bluff Drive                                                               
 Anchorage, Alaska 99501                                                       
 Telephone:  (907) 264-7876                                                    
 POSITION STATEMENT:  Testified on HB 346                                      
 JIMMY JACKSON, Regulatory Attorney                                            
 General Communications, Inc.                                                  
 2550 Denali Street                                                            
 Anchorage, Alaska 99503                                                       
 Telephone:  (907) 265-5545                                                    
 POSITION STATEMENT:  Testified in opposition to HB 346                        
 STEVE HAMLEN, President                                                       
 United Utilities                                                              
 5450 "A" Street                                                               
 Anchorage, Alaska 99511                                                       
 Telephone:  (907) 273-5210                                                    
 POSITION STATEMENT:  Testified on HB 346                                      
 PREVIOUS ACTION                                                               
 BILL:  HB 266                                                               
 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                        
 04/24/95              (H)   MINUTE(L&C)                                       
 04/26/95              (H)   L&C AT 03:00 PM CAPITOL 17                        
 04/26/95              (H)   MINUTE(L&C)                                       
 04/26/95              (H)   MINUTE(L&C)                                       
 08/30/95              (H)   L&C AT 09:00 AM                                   
 08/30/95              (H)   MINUTE(L&C)                                       
 09/27/95              (H)   L&C AT 09:00 AM JUNEAU LIO                        
 BILL:  HB 346                                                               
 SHORT TITLE: TELECOMMUNICATIONS UTILITIES                                     
 SPONSOR(S): REPRESENTATIVE(S) MOSES                                           
 JRN-DATE     JRN-PG               ACTION                                      
 05/10/95      2088    (H)   READ THE FIRST TIME - REFERRAL(S)                 
 05/10/95      2088    (H)   LABOR & COMMERCE, FINANCE                         
 08/30/95              (H)   L&C AT 09:00 AM                                   
 08/30/95              (H)   MINUTE(L&C)                                       
 09/27/95              (H)   L&C AT 09:00 AM JUNEAU LIO                        
 ACTION NARRATIVE                                                              
 TAPE 95-58, SIDE A                                                            
 Number 001                                                                    
 The House Labor and Commerce Standing Committee was called to order           
 by Chairman Pete Kott at 9:10 a.m.  Members present at the call to            
 order were Representative(s) Norman Rokeberg and Jerry Sanders.               
 Chairman Kott noted for the record that Representative Porter was             
 out of town on official business, Representative Elton had an                 
 emergency, Representative Masek had something come up at the last             
 minute but would be joining the meeting later on, and he didn't               
 know the whereabouts of Representative Kubina.   Chairman Kott                
 commented this was typical for an interim committee meeting as it             
 is hard to get committee members together.                                    
 HB 266 - HEALTH CARE PREFERRED PROVIDER PROGRAMS                            
 CHAIRMAN KOTT announced the first item of business was HB 266, "An            
 Act relating to preferred provider agreements offered by hospital             
 or medical service corporations."   He stated this legislation had            
 been heard twice by the House Labor and Commerce Committee in                 
 Juneau; at the second meeting the committee opted to refer this               
 bill to a subcommittee of three with Vice Chairman Rokeberg heading           
 up the subcommittee.  Chairman Kott stated he would turn the                  
 meeting over to Vice Chairman Rokeberg for a report of the                    
 subcommittee's actions.                                                       
 REPRESENTATIVE ROKEBERG noted they did not have a quorum and, as a            
 result, they would not be able to adopt the proposed committee                
 substitute (CS) version 9-LS0593\G Ford, 9/18/95, which was                   
 developed and drafted under the direction of the chairman.  He                
 pointed out that copies of the committee substitute and the                   
 sectional analysis were available.  For purposes of his report,               
 Representative Rokeberg said he would like to briefly review the              
 outline of the proposed committee substitute and then hear public             
 testimony and input on the bill.                                              
 REPRESENTATIVE ROKEBERG said version 9, Section 1, is really a                
 housekeeping provision because of references and other statutes               
 that according to the sectional analysis, actually provides for a             
 prohibition against unfair discrimination not applying to preferred           
 provider programs.  He commented his understanding of it is that              
 under a preferred provider program there is, in essence because of            
 a price scheduling, a certain amount of discrimination going on               
 because there is different pricing schemes.  He added however, he             
 thought additional legal advise was needed to clear up some of the            
 confusion.  At any rate, it was his understanding at this juncture            
 that this provision allows for that.  He noted there were other               
 references and pointed out the underlined sections on line 5 are              
 from other statutes, and as a matter of fact, AS 21.42.315 is                 
 Section 2 of this bill.  As a point of clarification,                         
 Representative Rokeberg said that under Alaska Statutes, any                  
 references to "disability insurance" is actually health insurance             
 to the average person.                                                        
 REPRESENTATIVE ROKEBERG continued that Section 2, which is the                
 heart of the bill, provides for preferred provider programs for               
 indemnity insurance-type companies.  He pointed out there are two             
 different sections of the bill:  One is specifically for indemnity-           
 type companies; and the other is for the Blue Cross/Blue Shield               
 type companies, which is provided for in Section 4.  He explained             
 there is a certain amount of redundancy in the legislation because            
 there are two sections under the statute for two different types of           
 insurance companies.  He said page 2, Section 2, lines 4, 5, and 6            
 are really the heart of the bill because they indicate that the               
 provider or hospital, meaning a doctor or an organization willing             
 to meet the terms and conditions of the preferred provider                    
 agreement, may not be excluded from treatment as a preferred                  
 provider.  This is the essence and the heart of the bill that                 
 provides for freedom of choice on the part of any patient that may            
 be enrolled in a program, such as this program, to select his/her             
 own health care provider or institution.  He said that subsections            
 (b)1 and 2 are the result of testimony taken last spring as there             
 were concerns raised about the concept of gatekeeping and the                 
 utilization review.  The discussion and the understanding of the              
 bills at the time were that activities such as these may be                   
 prohibited or adversely affected.  He said in working on the                  
 legislation over the interim, he thought they should be looking at            
 the bill differently.  He felt that a lot of people had an attitude           
 that this bill pits one institution against another, in the                   
 Anchorage area specifically, but he was beginning to believe what             
 they had was a platform for a bill for consumer rights and                    
 individual patient rights in the state of Alaska.  He felt that               
 needed to be looked at.  That is why things such as gatekeeper and            
 utilization review, which are very important concepts at keeping              
 the price of health care down, are things that, as a legislature in           
 public policy, encourage.                                                     
 REPRESENTATIVE ROKEBERG said subsection (c) refers to federal                 
 statutes of the Employment Retirement and Income Security Act                 
 (ERISA) program.  He thought there had been testimony last spring             
 that indicated concerns that this particular legislation would have           
 a negative impact and cause confusion about its administration as             
 it relates to the federal statutes and other retirement and benefit           
 programs that came under ERISA.  He said an argument could be made            
 legally, in terms of draftsmanship, that this provision shouldn't             
 be here.  He said he wanted to make it very clear that they did not           
 legally affect anything that would come under ERISA.                          
 REPRESENTATIVE ROKEBERG stated subsection (d) was a provision for             
 enforcing this law.  It gives some teeth to a person who thinks               
 they are aggrieved in the administration of this particular                   
 statute.  He indicated that to his knowledge, the previous drafts             
 didn't have any enforcement provisions.                                       
 REPRESENTATIVE ROKEBERG continued that Section 3 is an additional             
 housekeeping matter, as is Section 1.  Section 4 specifically                 
 provides for the application to a Blue Cross-type organization.               
 Although it's worded somewhat differently, it has the same basic              
 substance in the language.                                                    
 REPRESENTATIVE ROKEBERG said Section 5 is a very important concept            
 that came up in testimony last spring in terms of the applicability           
 and timing.  This section provides that any existing agreements               
 currently in place would not be affected.  He noted there was a               
 great deal of concern about that in previous testimony.  This                 
 provision provides that any new contracts that are entered into or            
 renewed on or after the effective date of this Act would be                   
 affected by the Act, but not those in place prior to.  He said he             
 thinks additional legal input is necessary.  In the course of                 
 reviewing this particular statute, they took a strong look at the             
 new statute that was enacted by the Arkansas Legislature this last            
 year.  In some of the testimony in Arkansas, there were concerns              
 that an existing contract could be left in place as a contract of             
 perpetuity, which he thought by definition legally, is not                    
 allowable, but concern had been expressed about that.  He said it             
 was something that had been in the testimony in Arkansas, and                 
 certainly something that should be reviewed here in Alaska to make            
 sure that the testimony is such that when a contract is renewed,              
 these provisions would be applicable.  Presumably, and as he                  
 understood it, most of the contracts that may be affected by this             
 do have renewable option provisions.  That would be the trip wire             
 for applicability, but it would negatively impact existing programs           
 that are in place, and that is why this section is so important.              
 Representative Rokeberg said the review of the Arkansas statute and           
 discussions with the people there about the political atmosphere              
 and the issues that were brought up in that state are applicable              
 here.  He added as this piece of legislation matures, he is                   
 considering amending it further to add additional consumer rights-            
 type provisions in it, if the committee agrees.                               
 CHAIRMAN KOTT noted that a committee substitute had previously been           
 adopted by the committee which incorporated some of the ideas from            
 the Division of Insurance such as the gatekeeper, utilization                 
 review and things of that nature.  He noted there was some                    
 testimony which indicated the bill could be construed as                      
 unconstitutional abridgement of contract.  Chairman Kott asked                
 Representative Rokeberg if it was his understanding from                      
 discussions with the Division of Legal Services that the                      
 applicability section had been included to take care of that                  
 REPRESENTATIVE ROKEBERG responded he thought so, but was not 100              
 percent comfortable at this stage; however, that was certainly the            
 CHAIRMAN KOTT asked if a fiscal note would be added to the                    
 legislation since there was a provision for some court action or              
 injunctive relief?                                                            
 REPRESENTATIVE ROKEBERG responded he didn't know if it would or not           
 and added he didn't think a fiscal note had been requested.  He               
 noted this particular provision was taken from the Arkansas                   
 legislation.  He said he thought it would be a civil action and,              
 therefore, didn't know if it would have any fiscal impact.  He                
 reiterated he didn't think it would, but stated they needed to look           
 into it.                                                                      
 CHAIRMAN KOTT noted for the record that there were a couple of                
 teleconference sites on-line; Juneau was listen only and Fairbanks            
 was on-line.   He commented he was going to open the meeting up for           
 public comment, and added this issue was brought to Anchorage                 
 because there was a great number of people desiring to testify                
 during the regular legislative session but were unable to do so for           
 a variety of reasons.  He opened the meeting for public testimony             
 and asked individuals to limit their testimony to five minutes.               
 CHAIRMAN KOTT announced that Roberta Goughnour from the                       
 Municipality of Anchorage was in attendance as an observer only,              
 and noted that written testimony had been submitted by the                    
 Municipality of Anchorage at the last hearing on the measure.                 
 JOHN BJORNTON, Administrator, Real Time Images, testified in                  
 support of HB 266.  He said Real Time Images, an ultrasound lab in            
 Anchorage which has been in business for approximately 15 years,              
 has held kind of a unique position in the medical community, not              
 only in Anchorage but the whole nation, in the sense that they are            
 one of the few independent ultrasound labs around.  This basically            
 has meant to the people in Anchorage, and also anyone who uses                
 their service, a substantial price break because they are not                 
 affiliated with a hospital or a large medical corporation.  Though            
 Real Time Images has assisted people in billing their insurance,              
 they like to keep it clean in the sense that the company does not             
 have any contracts with the insurance companies, but rather the               
 patients have the contracts.  Therefore, if a patient experiences             
 difficulty in getting reimbursed for their bill, Mr. Bjornton will            
 contact the insurance company on behalf of the patient to determine           
 what the problem is.  Real Time Images charges the lowest price in            
 town so if there is a problem, it is generally a contractual                  
 problem between the patient and the insurance company.  Currently,            
 he has two separate provider agreements from insurance companies on           
 his desk asking Real Times Images to jump on board with them.  Mr.            
 Bjornton commented he is hesitant to sign.  The company has gotten            
 by without them for a couple years because their prices were so               
 low.  They were reimbursed at the same rate as the hospitals, who             
 until recently, were charging hundreds of dollars more than Real              
 Time Images.  But now, for instance, Blue Cross has a federal                 
 preferred provider program for their employees which is based on              
 what is actually charged rather than being based on the usual and             
 customary fee for the area.  Mr. Bjornton stated this was good                
 timing for him because they are currently in the process of                   
 deciding whether they are going to jump into this or not and he               
 really likes the idea of having a willing provider being considered           
 for a provider.  He said he does not want to enter into any                   
 contractual agreements with insurance companies to stay in                    
 MR. BJORNTON mentioned there was a lot of work done on health care            
 reform last winter, but the bills addressing the medical                      
 communities seemed to be limited in scope to state-licensed                   
 providers.   While Real Time Images is basically operated by                  
 Registered Diagnostic Medical Stenographers (RDMS), certified                 
 people who are not state licensed, he would like to see some                  
 provisions made so those people would be included in legislation              
 addressing health care reform.  Mr. Bjornton said Real Time Images            
 has a close business relationship with a radiology group in Seattle           
 who has during the last ten years kept him apprised of what is                
 happening in the health care industry in Seattle.  From his point             
 of view, it seems that the best care for the best price has been              
 swept aside in favor of the biggest care for a set price every                
 month.  Though that might be more convenient in some ways for the             
 patient, he felt it was part of the problem which is causing health           
 care costs to spiral up.  He pointed out that he was not totally              
 educated on what powers the Insurance Commission in the state of              
 Alaska can bring to bear on the insurance industry, but he liked              
 the idea of not having to jump into these contractual agreements              
 with the insurance companies.  Mr. Bjornton told Representative               
 Rokeberg that if some provisions to address general insurance                 
 issues could be added to the legislation, he would certainly                  
 support any provisions for portability.  He stressed he feels very            
 strongly about people being able to take their insurance wherever             
 they go.                                                                      
 REPRESENTATIVE ROKEBERG responded that he couldn't agree more,                
 although he thought the scope of this bill was not going to be on             
 omnibus health care reform.  He said there were specific issues               
 that really needed to be addressed.  Representative Rokeberg                  
 inquired what the practical effects would be of the contracts that            
 were on Mr. Bjornton's desk; e.g., how would they affect Real Time            
 Images' business.  Because Mr. Bjornton had expressed some                    
 reluctance to make a decision, Representative Rokeberg asked him to           
 explain his decision making process and some of the pros and cons.            
 MR. BJORNTON said he has explained Real Time Images' procedures to            
 the insurance companies and has asked what they would be reimbursed           
 for because all the contracts basically say to write off what the             
 insurance company doesn't pay.  Historically, the usual and                   
 customary reimbursement for the area has basically been set by Real           
 Time Images because they are the lowest in town.  He mentioned they           
 did raise their prices approximately $10 about a month ago.  Mr.              
 Bjornton said in the past, he's been able to explain to the                   
 insurance companies that their rates are the lowest, so the                   
 insurance company should reimburse their patients.  While that has            
 gotten good results in the past, he doesn't feel he will get the              
 same good results in the future.  He expressed concern that even              
 though their rates are the lowest, many of the claims would be sent           
 to review.  It is a level of bureaucracy that he would rather not             
 get involved in.  His personal belief is that people should have              
 responsibility for their life and the decisions they make.  He said           
 he did not like the idea of Real Time Images being responsible for            
 the insurance decisions a person has made or the policies they have           
 decided to take on.  He said that by signing on to a preferred                
 provider program, he would be in that whole power structure in a              
 way, and he didn't want to be there.  He reiterated that he wanted            
 the patient to be responsible for that and he just wanted to                  
 provide good care.                                                            
 REPRESENTATIVE ROKEBERG asked if Mr. Bjornton did not see lower               
 costs to the consumer as being a part of a preferred provider                 
 MR. BJORNTON responded no.  The insurance company is going to make            
 a profit and while his company makes money also, their main gist is           
 to try to provide the best care for the lowest price.  From his               
 point of view, he doesn't think it serves the patient for his                 
 company to be a preferred provider, except in this one case, which            
 is one of the reasons (indisc.) the Federal Blue Cross Preferred              
 Provider Program because it's based on what they charge rather than           
 the usual and customary fee for the area.  He said that if they               
 could get legislation like this passed, he wouldn't have to get               
 involved with that.                                                           
 REPRESENTATIVE KOTT asked Mr. Bjornton to explain how these                   
 contracts on his desk came about and what kind of dialogue took               
 place between him and the other party, if any.                                
 MR. BJORNTON replied that he first checked into it about two years            
 ago when a patient, a Blue Cross subscriber, inquired if his                  
 company was a preferred provider as it would have a bearing on                
 whether or not the patient came to his business.  Mr. Bjornton                
 called Blue Cross and looked into the program.  At the time, Real             
 Time Images could have signed up for it and they would have been              
 reimbursed 100 percent of what they charged; it would have made no            
 difference to the patient or to the company.  He informed the                 
 patient that in this particular case, it wouldn't make any                    
 difference if they were a preferred provider or not because their             
 fees were reasonable enough that the insurance company would pay it           
 anyway.  He continued to describe an incident where a federal                 
 employee, who was on the Blue Cross Preferred Provider Program,               
 assumed that Real Time Images was a preferred provider because they           
 had been referred by their regular doctor, who was a preferred                
 provider.  After researching it, Mr. Bjornton found out the program           
 was different because it was based on what they charged rather than           
 what they wouldn't.  Because he wanted to provide the family the              
 service, he said they would write off the difference and start                
 looking into getting signed up for the program.  Mr. Bjornton said            
 in both instances, patient input has gotten him involved because              
 they were looking for a better reimbursement.  He stated his                  
 preference would be to give his patients good coverage without                
 being a preferred provider.                                                   
 REPRESENTATIVE ROKEBERG asked Mr. Bjornton to clarify who sets the            
 fees.  He asked if they are subject to the insurance companies or             
 MR. BJORNTON said as a consumer, the way he thought they were set             
 was that the lowest and highest fee was taken for a particular                
 procedure and averaged out.  It was usually based on zip code.  For           
 example, an average of all the first time obstetric ultrasounds for           
 that zip code is determined, and then a percentage of that amount             
 is paid.  Amounts over that will not be paid.  While the insurance            
 companies say that's how it is done,  Mr. Bjornton said in his                
 experience they just take the lowest price and that's it.  They set           
 that as the usual and customary fee and then all the reimbursements           
 are based on that.  The usual and customary fees are updated                  
 sometimes every six months, but sometimes only when you ask for a             
 review of it.  He said that Medicaid does not use the usual and               
 customary fee, they use a history based fee which may be another              
 problem in itself.  He commented that in the past he has seen a lot           
 of attempts to manipulate how procedures are built to maximize the            
 reimbursement.  He referred to the controversy of bundling versus             
 unbundling claims.   For instance, if you billed an insurance                 
 company for the radiological interpretation of an ultrasound                  
 separately from the ultrasound, you could get reimbursed 20 or 30             
 percent more than if you billed it as one procedure.  That is an              
 inequity that still exists with some insurance companies.  He said            
 that is his understanding of how the fees are set, at least from              
 the scope of his business.                                                    
 REPRESENTATIVE JERRY SANDERS referred to the patient Mr. Bjornton             
 had previously mentioned who could have used a preferred provider             
 and that Real Time Images was going to write off the difference and           
 questioned if Real Time Images' rate was higher than the preferred            
 provider was in that instance.                                                
 MR. BJORNTON responded no.  He thought the Blue Cross preferred               
 provider program paid a preferred provider 90 or 95 percent of the            
 fee charged.  However, for a nonpreferred provider, Blue Cross will           
 pay 70 percent of the fee charged.                                            
 REPRESENTATIVE SANDERS asked if that was where the difference comes           
 MR. BJORNTON replied that was where the difference comes in.  So he           
 basically told this patient he didn't know about this program, the            
 patient's regular doctor didn't know about it, so they would write            
 off the difference.  He said he believes that patients should be              
 able to go where they want to go and not have to worry about                  
 negotiating a price.  Although it certainly was his option to say             
 the patient was responsible, he thought it was just good business.            
 REPRESENTATIVE SANDERS asked if Mr. Bjornton could give him some              
 figures where these percentages were being applied.                           
 MR. BJORNTON cited the example where Real Time Images charges $235            
 for a first time obstetric ultrasound; a couple of months ago they            
 charged $225, which is what Blue Cross lists as their usual and               
 customary fee.  Blue Cross can pay 80 percent or 100 percent of               
 that depending on what program the patient is on.  That's how much            
 the patient or the company providing the service would be                     
 reimbursed.  In the case of a patient who is a federal employee who           
 goes to someone that is not a preferred provider, the insurance               
 company will pay the provider 70 percent of that charge and let the           
 provider hold the employer responsible for the balance.  If on the            
 other hand, the employee goes to a preferred provider, the                    
 insurance company would pay 95 percent and the provider would write           
 off the other 5 percent.                                                      
 REPRESENTATIVE SANDERS asked if the patient wouldn't be charged the           
 other 5 percent.                                                              
 MR. BJORNTON responded no, that it was part of the agreement; like            
 Medicaid, you take what they give you.  That's why the normal                 
 preferred provider program that Blue Cross offers hasn't been a               
 problem because it is based on the usual and customary fee rather             
 than what is actually charged.  Mr. Bjornton said it is the federal           
 preferred provider program that's based on the actual fee and that            
 is when it starts having an impact on him and his patients.  It is            
 easy to see how much of a web it becomes in terms of which company            
 does this at what percentage and how often it is updated.  He                 
 reiterated that as a businessman, he was going to do what he needed           
 to in order to take the best care of his patients.  If that means             
 becoming a preferred provider, he would probably do that, but he              
 would much rather be a preferred provider by default for providing            
 a good service.                                                               
 CHAIRMAN KOTT thanked Mr. Bjornton for his testimony and called Mr.           
 Wallace to testify.                                                           
 DAVID WALLACE, Employee Benefit Broker, Wallace Group Services,               
 stated he had been doing business in Alaska since 1972.  He                   
 indicated he was at the hearing to communicate concerns from his              
 employer's standpoint and also the concern for the employees of the           
 corporations.  He said he currently represents about 85                       
 corporations in the state; of those, about 78 participate in a                
 preferred provider medical arrangement or a participating provider            
 arrangement.  The medical preferred provider arrangement (indisc.)            
 with medical hospital facilities began between 1982 and 1983.  He             
 said they approached the hospitals in Anchorage to simply negotiate           
 some way in which they could lower the cost for their employee's              
 benefit plan.  Because the size of their group wasn't quite large             
 enough, they couldn't carry the weight to get the hospitals to                
 negotiate on the terms they needed.  As a result, they ended up               
 aligning with one of the insurance carriers and joined their larger           
 block of business to go in to negotiate with the hospital for some            
 discounted rates.  By doing this, they were able to provide more              
 coverage for their employees at the same dollar cost.                         
 MR. WALLACE continued that as everyone is aware, over the past 20             
 years medical costs have continually spiralled up.  This has been             
 a frustration for employers in trying to continue providing a                 
 strong program for the employees at an affordable price.  Various             
 different things have been thought of and tried to curb the                   
 increase in medical cost, but the majority of them have not worked            
 very well.  He said the preferred program arrangement with                    
 (indisc.) hospitals has saved them a tremendous amount of money.              
 It has also allowed them to provide much greater coverage for their           
 employees.  Mr. Wallace commented that he had researched their cost           
 savings of the preferred provider program versus what they classify           
 as a traditional plan and for the same identical coverage, they are           
 seeing a 9.4 percent lower out-of-corporate dollar cost for their             
 employees for the same coverage.  He said if this bill passes, they           
 will lose that savings over time and, unfortunately, that                     
 additional cost will have to be passed on to their employees or the           
 benefits will have to be lowered.  He pointed out that the people             
 he represents have done just about everything possible to keep                
 their costs down and still maintain a viable medical plan.                    
 MR. WALLACE said the proposed legislation has caused them concern             
 because it means they will have to pass on more of the costs to the           
 employee.  He said one of the problems they have found to be very             
 frustrating is when one of their employees go to the doctor or the            
 hospital for medical services, it is normally under a situation               
 where they are in need of the medical services right now.  Because            
 they are not educated in the medical field, it is difficult for               
 them to shop around.  The preferred provider medical arrangement              
 for the hospitals and the doctors has afforded the employees a way            
 to negotiate for prices that are reasonable.  He conveyed that he,            
 too, is under duress to accept whatever a doctor or hospital tells            
 him needs to be done because, unfortunately, we are not able to               
 evaluate it like we evaluate other familiar commodities.  He stated           
 this affords them, as a corporation, a way in which to help their             
 employees seek out the better care and seek out a dollar cost that            
 is reasonable.  It has been communicated to his employees that when           
 they go to the doctor or hospital, they are spending the                      
 corporation's money.  He wants the employees to be conscious of               
 that and to be responsible, but at the same time still seek the               
 medical attention that is needed.  He just wants them to be aware             
 that it is being paid by their employer, and does impact the                  
 employee because if it is not spent wisely, then more of the cost             
 will end up being passed on to the employee or the benefits might             
 have to be lower.                                                             
 MR. WALLACE concluded that this legislation will undo what they               
 have worked on for the last 15 years, just on the hospital side, to           
 maintain some type of control of the costs that are going out of              
 sight.  He has had arrangements with vision and dental services on            
 a participating provider arrangement, which has also held their               
 cost down and protected the employee from (indisc.) providers that            
 would possibly charge more than what the usual and customary rate             
 would be.                                                                     
 CHAIRMAN KOTT asked Mr. Wallace to elaborate on his statement that            
 over the long run, costs would be increased if this legislation               
 MR. WALLACE said the preferred provider organization arrangement              
 that is seen today in the hospital arena began with Humana Hospital           
 in the mid-80s when they put in their own plan.  When Humana                  
 Hospital put their plan in, Providence Hospital also wanted to                
 compete.  Providence Hospital aligned themselves with certain                 
 insurance companies so they could also be in a competitive                    
 position.  Today, because this adversarial role exists between the            
 two medical facilities, Providence Hospital negotiates on a good              
 faith basis because they know they are in competition with Alaska             
 Regional Hospital, formerly Humana Hospital.  However, if this                
 legislation passes, there is no real reason for Providence Hospital           
 to continue to negotiate for the lower prices if that same price              
 will be paid to Alaska Regional Hospital.  So, over a two or three            
 year period, he believes that instead of it being a 9.4 percent               
 savings, it will be almost zero.                                              
 REPRESENTATIVE ROKEBERG said that Mr. Wallace was talking about the           
 whole economic impact of the legislation and the concept of                   
 preferred providers.  As a member of the business community in                
 Anchorage over the last 37 years, he is very cognizant of the                 
 problems of small businesses, particularly in trying to provide               
 health care coverage for their employees.  The people he represents           
 are really frustrated with the whole health care system and to him,           
 this whole thing speaks to a select group of people that have an              
 advantage.  He has difficulty in understanding how the hospitals              
 can make savings.  Representative Rokeberg asked how many people              
 were encompassed in the 78 corporations who were involved in some             
 kind of a preferred provider organization.                                    
 MR. WALLACE responded about 3,200.                                            
 REPRESENTATIVE ROKEBERG said that was a substantial number of                 
 people in a state as small as Alaska.                                         
 TAPE 95-58, SIDE B                                                            
 Number 000                                                                    
 REPRESENTATIVE ROKEBERG inquired about the negotiation process and            
 what basis is used that they can make a commodity price break to              
 the 3,200 clients represented by Wallace Group Services vis a vis             
 the other 250,000 people in the Anchorage area.                               
 MR. WALLACE said they basically hire the insurance company to                 
 adjudicate the claims and also to tie onto their system.  He gave             
 the example of a group of 2,000 people and inside that group he has           
 two different plans, actually there are five different plans, but             
 two of the plans are identical.  One is classified as traditional             
 where you can go anywhere you want to go, get anything that you               
 want done, as long as it is a state-licensed provider.  The other             
 plan identical to it, is a preferred provider plan where you would            
 go to a certain facility to get full benefits.  Mr. Wallace said at           
 the end of the year, not just one year but over a 15 year period or           
 since the plans were put in, he has seen a difference of about a 12           
 percent spread.  That is looking at actual claims paid out for the            
 same level of benefits for the employees that participate in that             
 area.  He also has the same mirrored coverage for employees that go           
 to the preferred provider facility.  He said he has looked at that            
 to make sure there is not a parity difference; in other words, he             
 wanted to make sure that the claims that were being charged for               
 each individual plan are, in fact, reflective of the liability that           
 the corporation sees.  The insurance company is just somebody who             
 does the claims; provides an accounting function for the                      
 corporation.  Mr. Wallace said if they had to move all their people           
 from the preferred provider program to the traditional program,               
 they would have to pay 9.4 percent more year after year.  He said             
 it has been that way over the last four or five years.  Prior to              
 that, it was approximately 12 percent.                                        
 REPRESENTATIVE ROKEBERG said that was an interesting figure and               
 certainly did accept it, but wanted to know how Mr. Wallace                   
 accounted for that.  He asked if there was an actual fee-driven               
 schedule that was bargained for in advance.  He also asked how that           
 differential was made.                                                        
 MR. WALLACE said the 9.4 percent savings is attributed to the fact            
 that when an employee on the traditional plan goes to the hospital,           
 whatever the hospital charges as long as it is in what is                     
 classified as usual or customary reasonable charge, that is what              
 the insurance company pays on the corporation's behalf for that               
 employee.  If the employee is under the preferred provider plan,              
 the hospital has negotiated a contract with us, the corporation,              
 through the insurance company; we have joined the insurance                   
 company's larger group to negotiate with the hospital for a 15 or             
 20 percent discount on the same services.  That is where it is                
 coming from; that and other cost containments when they go through            
 the hospital.                                                                 
 REPRESENTATIVE ROKEBERG clarified if there was a fixed fee schedule           
 at a point in time, then they bargain for a discount from that                
 fixed fee schedule.                                                           
 MR. WALLACE responded that was correct because they would be                  
 bringing their people to that facility.                                       
 REPRESENTATIVE ROKEBERG said the clients and their employees are              
 well served by the service provided by Wallace Group Service by               
 finding them a better deal.                                                   
 MR. WALLACE said he would like to think so.                                   
 REPRESENTATIVE ROKEBERG commented the Wallace Group Service clients           
 have an advantage over the rest of the people in the community,               
 because they had hired them.                                                  
 MR. WALLACE replied there were a lot of smart brokers who were                
 doing the same thing.                                                         
 REPRESENTATIVE ROKEBERG commended Mr. Wallace for lowering his                
 clients' costs.                                                               
 MR. WALLACE said he would be more than happy to provide additional            
 figures for the committee.                                                    
 REPRESENTATIVE ROKEBERG said he would really appreciate any                   
 information and evidence that would help the committee in their               
 deliberations.  He said he was having a great deal of difficulty,             
 although it's clear from Mr. Wallace's testimony as well as other             
 testimony presented, that this is being bargained for and a                   
 distinct group of people are set up to get a discount vis a vis               
 everyone else in the community.  The question is, "Should we agree            
 to that kind of thing?"                                                       
 MR. WALLACE commented it is working and it has worked since 1985.             
 REPRESENTATIVE ROKEBERG pointed out there is something called a               
 hidden health insurance tax in this country whereby for all the               
 people who have lower rates, there is somebody else paying for it             
 at a higher rate.  So, it is a distribution of who is paying for              
 the service, ultimately.                                                      
 CHAIRMAN KOTT asked why there was a small percentage of                       
 corporations represented by Wallace Group Services who would not              
 participate in the preferred provider organization if there was a             
 20 or 25 percent savings.                                                     
 MR. WALLACE indicated those corporations wanted the choice of where           
 to go and they felt like they wanted to go ahead and pay the price            
 for that choice.  Whereas the other corporations may be cost-based            
 profit corporations, and want to be as cost effective in everything           
 they do in their business.  If they are not cost effective, they              
 are not in business very long, and they are trying to provide the             
 highest level of medical benefits for their employees at a price              
 that is affordable                                                            
 CHAIRMAN KOTT said in other words, they are willing to concede to             
 a 20 percent savings.                                                         
 MR. WALLACE interjected that it was not a 20 percent savings, but             
 rather a 9.4 percent savings.  However, the cost coming from a                
 hospital overall is about 47 percent of the dollar spent (indisc.)            
 being paid to a hospital.  So, that breaks it down to about half,             
 like 7.5 percent, but when other cost containments that are                   
 involved in a managed-type plan are tied in, then that adds another           
 2 or 2.5 percent.                                                             
 REPRESENTATIVE SANDERS said the previous speaker seemed to feel the           
 preferred provider organizations would make the price go up, but              
 Mr. Wallace feels it helps to hold the price down.  He asked Mr.              
 Wallace if he could explain the difference.                                   
 MR. WALLACE said he guesses there could be some situations where              
 someone is charging a low rate and if the UCR comes out to be                 
 higher, then they would have the ability to increase their rate and           
 it would be acceptable.  However, listening to the gentleman's                
 testimony, it sounded as if maybe there are people out there who              
 are charging less than he is.  He continued to say overall, the               
 real problem that employers have is how to control medical costs.             
 Over the last 20 years, he has seen a family rate of $54 per month            
 rise to close to $600 a month.  By combining his small groups with            
 a larger block of business with some of the insurance groups, he              
 and his employers have some control and are able to assist their              
 employees.  He informed the committee he deals with Aetna, Blue               
 Cross, Standard, Delta Dental, Great West and a lot of different              
 companies.  Mr. Wallace stressed that he is independent, represents           
 his employers and is very concerned about the employees in those              
 CHAIRMAN KOTT announced Rick Solie was next to testify via                    
 teleconference from Fairbanks.                                                
 RICK SOLIE, Marketing and Planning Director, Fairbanks Memorial               
 Hospital and Denali Center, stated he had just received the work              
 draft and would like to review it before he made any definitive               
 comments.  He stated he had provided comments on the original                 
 version and at that time, Fairbanks Memorial Hospital opposed HB
 266.  He said a cursory reading of the proposed draft indicated               
 that the provisions for any one provider to enter into a preferred            
 provider agreement are still intact, and while there has been a lot           
 of work done, they would still object to the essence of the                   
 MR. SOLIE read the following prepared comments:                               
      Fairbanks Memorial and Denali Center oppose HB 266.  The bill            
      appears to be anti-competitive and not in the long-term best             
      interest of the health care consumer.  On the surface, this              
      legislation appears to increase consumer choice.  At a deeper            
      level however, the logical doesn't stand the test of time,               
      (indisc.) and in the long run it restricts consumer choice.              
      The legislation would effectively eliminate contracting with             
      hospitals and medical service corporations by putting                    
      resources at risk in a contract subject to another party,                
      piggybacking under the terms that were jointly negotiated.               
      No national company would risk its financial resources under             
      that scenario.  Consequently, few organizations are going to             
      be interested in creating contracts.  Contracting is one of              
      the most predominate ways that the health care industry has              
      responded to control the cost.  Contracting allows the                   
      provider to offer better prices and terms to its customers.              
      Similarly, managed care contracts (indisc.) preferred provider           
      agreements will in the long term offer better prices and terms           
      to the public.                                                           
      Alaska is having to move in the direction of managed care                
      contracts and this bill will deal a severe blow to it.  We               
      ask that you not pass this bill out of committee.                        
 MR. SOLIE said these prepared comments really hit at some basic               
 misconceptions about how preferred provider agreements would work             
 and impact (indisc.) anyone else basically piggyback on a contract.           
 He said he doesn't think that would reduce costs.  He believes it             
 would be a disincentive to hospitals and providers taking a risk to           
 reduce costs.  Mr. Solie reiterated they would like to further                
 review the legislation and work with the committee as it does                 
 appear to contain some objectionable provisions from their                    
 CHAIRMAN KOTT said he thought Mr. Solie was right in his assessment           
 and the committee would welcome any feedback on the current                   
 committee substitute.                                                         
 REPRESENTATIVE ROKEBERG asked Mr. Solie, as a representative of a             
 hospital, why would that institution be reluctant to bargain                  
 contracts for this type of service if this legislation were to                
 pass.  He said he doesn't understand why the incentive would be               
 taken away just because somebody else can piggyback in to it.                 
 MR. SOLIE responded the reason Fairbanks Memorial Hospital would be           
 reluctant to enter into a contract of this nature is that they                
 would have no basis to be able to recoup costs that were basically            
 advertised in a contract.  He said for example, if Sea-Land bids on           
 a route from Anchorage to Fairbanks, their costs are a part of that           
 bid and their volume is predicated on the negotiated contract is              
 plugged into their per forma for that bid.  If someone else comes             
 in and gets half of the volume, suddenly their capital is at risk             
 and it's a bad deal.  He didn't see any difference for the                    
 hospitals and medical service corporations because they would look            
 at their costs, their ability to provide a service for that cost,             
 and negotiate a contract based on that.  If those revenues are cut            
 in half or even 10 percent, it jeopardizes it.  It's another risk             
 factor that would have to be considered.  While they may have the             
 inside track, it needs to be recognized that there is less                    
 incentive to enter into a contract.                                           
 REPRESENTATIVE ROKEBERG asked Mr. Solie to briefly described the              
 competitive situation in the Fairbanks market.                                
 MR. SOLIE replied Fairbanks Memorial Hospital is the sole provider            
 in the Fairbanks area.  They have a hospital and a long term care             
 facility both; they are collocated.  There is an army hospital at             
 Fort Wainwright, there's a Native Health Clinic also collocated               
 with the Fairbanks Memorial Hospital.                                         
 CHAIRMAN KOTT thanked Mr. Solie for his testimony and said the                
 teleconference line would remain open for listening only.  He                 
 announced Steve Lebrun as the next individual to testify.                     
 STEVE LEBRUN, Senior Account Manager, Aetna Health Plan/Aetna                 
 Insurance Company, said he was there to testify in favor of                   
 preferred provider arrangements, their value for employers and                
 employees, and to express concerns about the impact of any willing            
 provider legislation on the significant cost management savings               
 that employers and employees have been able to avail themselves of            
 with preferred provider arrangements.  He stated preferred provider           
 arrangements are both cost management and purchasing (indisc.)                
 vehicles for employers, and in some cases, for collective                     
 bargaining groups or unions, and for business associations that try           
 to manage cost and try to make the best use of planned dollars.               
 Managed care has proven itself to save money in Alaska with Alaska            
 employers, and in the Lower 48 with Lower 48 employers.  Costs are            
 lower than traditional fees for service plans and historically,               
 inflation rates for plan sponsors and their health coverages are              
 percentage points lower than traditional plans.  Often this can be            
 done without shifting cost to employees through other devices such            
 as higher deductibles.  There are a limited number of tools to help           
 manage costs.  He said insurers try to manage their overhead and              
 provide an efficient administration.  There are utilization                   
 management processes in place to help see that the right services             
 are provided.  He commented the other ways honestly are, in the               
 absence of preferred provider arrangements, cost shifting                     
 approaches.  Either an employer absorbs the cost as a business                
 expense, increases payroll deductions to cover health care                    
 inflation, or shifts it back to the employees in terms of higher              
 deductibles.  His company thinks preferred provider arrangements              
 are a way to avoid some of those other less favorable alternatives            
 to benefit the consumer by bringing planned savings to the plan               
 that can either be passed on in the form of higher benefits, or the           
 ability to absorb health care costs without having to pass them on            
 to employees.                                                                 
 MR. LEBRUN pointed out their concern with the any willing provider            
 provision boils down to the question of whether it would be                   
 sustainable over time.  The underlying logic of preferred provider            
 arrangements is an agreement between two parties, and in the case             
 of hospital care, that they, as an insurer or a representative of             
 the employer, are offering a potential volume of patients.  They              
 have a particular market share that they can in turn offer to a               
 facility and ask for preferred pricing in return.  That in a sense,           
 is the contractual win/win situation.  Each party is bringing some            
 consideration to that.  For the facility, obviously it gives the              
 ability to potentially have a higher patient volume.  Facilities              
 have capacity issues, have fixed costs and, in turn, for a plan               
 that would provide some incentives to have patients use their                 
 facilities.  Those facilities, in turn, are willing to give up                
 something between cost and price.  He commented that obviously all            
 commodities have some range between cost and price that allows for            
 Mr. Lebrun continued, "Our concern is that if all providers are               
 allowed in without the ability for us, in a sense, to offer them              
 anything in return - all we are asking for is concessionary pricing           
 - we can't necessarily steer patients their way or not, we have               
 really nothing much to offer them that the viability of whatever              
 discounting we've been able to achieve will melt away over time.              
 Because in a sense, we would get into a situation where we or                 
 employers who might bargain directly, are primarily asking for                
 something for nothing and that there really is no mutual                      
 consideration being given to that contractual relationship.  So,              
 our concern is that any willing provider legislation may in fact              
 undo or blunt the effectiveness of managed care arrangements that             
 are already in place."                                                        
 MR. LEBRUN referred to the issue of choice in access issue and said           
 with preferred provider arrangements, they are not looking at                 
 situations where either go to the preferred provider facility or              
 you pay the bill.  He said we're not in Alaska at this point,                 
 looking at Health Maintenance Organization (HMO) style plans, where           
 it's all or nothing.  Generally, employers do put in some benefit             
 differentials; for instance, a plan may pay 90 percent of a                   
 preferred provider's bill and 80 percent for a nonpreferred                   
 provider's bill.  But in either case, employees are still getting             
 significant protection against catastrophic losses.  Under either             
 type of arrangement, when Aetna underwrites a preferred provider              
 plan regardless of what facilities you chose - although there will            
 be differences in your out-of-pocket outlay - you still have                  
 fundamental productions against the maximum amount you have to pay            
 out in a year and you are still getting significant protection                
 against catastrophic loss.  Admittedly, there will be some                    
 differences in payments, but they are not differences in the                  
 extreme that make health care unavailable.  Mr. Lebrun said in                
 fact, sometimes Aetna is able to offer greater benefits.  One of              
 their preferred provider plans, once they had put that in place,              
 was able to maintain a particular co-insurance level; in this case,           
 they paid half the bill, but were able to increase that                       
 reimbursement level to an 80 percent co-insurance because they                
 passed the savings on to the employees.  Mr. Lebrun noted that when           
 talking about choice in access, one other issue that needs to be              
 addressed is whether without preferred provider arrangements, is              
 access to best pricing being lost for individuals as well as for              
 employers in that if the leverage is lost with preferred providers.           
 That leverage is basically that there are a group of employees who            
 we are willing to provide some encouragement to, some inducement,             
 some limited incentives through the benefit plan, and use that                
 patient volume for some pricing considerations.  We essentially               
 limit the freedom of employees to be part of a plan that offers               
 better pricing for them and lower out-of-pocket costs than they               
 would otherwise be able to achieve as sort of individual                      
 disconnected retail consumers.                                                
 In conclusion, MR. LEBRUN said they feel there are market based               
 solutions that are working, that do maintain honest choice with               
 consumers, that do not lock consumers out from any part of the                
 health care delivery system, that have meaningful bottom line                 
 impacts for employers trying to manage their bills and for                    
 employees trying to manage their health care costs.  He encouraged            
 the committee to not thwart or undo those savings that have been              
 achieved and continue to be achieved.                                         
 CHAIRMAN KOTT thanked Mr. Lebrun for his testimony.  He commented             
 that he understood this issue pretty clearly, but every time he               
 hears something else, it becomes a little more complex.  He                   
 referenced the usual and customary rate and asked Mr. Lebrun to               
 explain what kind of dialogue takes place when entering into a                
 contractual agreement with a provider and the lower amount is used.           
 MR. LEBRUN pointed out there are varying contracting styles.  What            
 Aetna does in one place may be different than what Blue Cross does.           
 There are many ways to reach pricing agreement.  What they                    
 generally do with their pricing, for example with physician                   
 charges, is to look at the prevailing charge patterns.  He                    
 clarified that usual and customary for insurers is generally set              
 between the 80th and the 95th percentile of all charges, so it is             
 not to his knowledge, even a median rate; it is meant to encompass            
 most charges.  He said they would look at the prevailing charge               
 pattern in a particular area, and typically would contract by                 
 developing a fee schedule that would say to a potential                       
 participating provider,  "We would ask you to charge no more than             
 the amount on this fee schedule, or if your current charge is less            
 that amount."  So, it is basically the lesser amount of their                 
 current charge if they happen to be a cost-effective provider and             
 fall within that.  A more expensive provider would be asked to                
 scale back their reimbursement request to that level.  He stressed            
 that attached to that is one very important consumer protection,              
 which is the provider who is asked to scale back their                        
 reimbursement agrees to not balance bill the patient for that                 
 difference.  Under current traditional insurance plans, when an               
 insurance plan says the reasonable and customary amount is a                  
 certain amount, since there is no contractual relationship with               
 providers, the provider can still ask the patient for the                     
 additional amount.  One of the patient protections under the                  
 preferred provider arrangement is that no balance billing beyond              
 the pre-agreed fee schedule is allowed.  That is typically how they           
 would do a physician contracting.  Hospital contracting can be done           
 by setting up by discounts off of charges.  Most commonly what is             
 done, is what is known as per diems; or for various categories of             
 treatment, a maximum allowable daily charge for that patient would            
 be set up.  Things are dealt with in the aggregate so for a                   
 particular patient, depending on the severity of the illness, that            
 may have a different impact on the hospital.  He said he believes             
 one of the key features is that it removes the patient from                   
 additional responsibilities as an agreement has been reached in               
 advance with the provider.                                                    
 CHAIRMAN KOTT said as he understands it, if any one piece of                  
 provider legislation were to pass, there would be no affect on                
 existing contractual arrangements with the providers that                     
 agreements have been entered into.  But based on the testimony,               
 there would be an effect long term.  Chairman Kott asked if there             
 was any rational explanation that would be used to determine                  
 whether or not to enter into a PPO arrangement.                               
 MR. LEBRUN said one of the concerns Aetna would have is that one of           
 the fundamental principles of effective contracting is that it is             
 selective contracting.  It is part of that selectivity as to                  
 whether that exclusivity creates the dynamic by which the savings             
 are real in that a facility can offer savings because they have               
 some potential for some return on that.  Aetna always, in Alaska              
 and elsewhere, looks at their existing contractual relationships,             
 listens to their employers, listens to their employees and                    
 reconsiders contract relationships as an on-going business process.           
 The concern they would have is that when all providers come in on             
 equal terms, that the contractual underpinning is undermined and              
 over time, everything will go back to a retail world of charges;              
 there is no underlying glue anymore to sustain a relationship that            
 would be based on volume discounting and patient volume in return             
 for that.                                                                     
 REPRESENTATIVE ROKEBERG questioned if Aetna, as a rule, didn't                
 specialize in group plans versus individual coverage.                         
 MR. LEBRUN responded that the answer is yes as Aetna is a group               
 insurance company.                                                            
 REPRESENTATIVE ROKEBERG asked if Mr. Lebrun personally just works             
 Alaska or if he has other states.                                             
 MR. LEBRUN replied he has Alaska, as well as Washington State and             
 Oregon customers.                                                             
 REPRESENTATIVE ROKEBERG asked how many people in Alaska does Aetna            
 MR. LEBRUN guessed around 80,000 or so.  A large group of those are           
 state employees and state retirees.  Their other employers include            
 the Municipality of Anchorage, Alyeska Pipeline, ARCO, Alaska                 
 Airlines, and dozens of companies with 10 to 50 employees.                    
 REPRESENTATIVE ROKEBERG asked if Aetna sold any individual                    
 MR. LEBRUN responded they don't.  Nationally, Aetna is just                   
 strictly a group insurance underwriter.                                       
 REPRESENTATIVE ROKEBERG said they don't really get into risk                  
 assessment with individual pre-existing condition type things.                
 MR. LEBRUN commented they underwrite whole groups.  If a group                
 comes to Aetna, they don't say, "We'll cover these five, but not              
 these two."                                                                   
 REPRESENTATIVE ROKEBERG said the reason he asked about Mr. Lebrun's           
 background was because he was curious and was trying to learn more            
 about Alaska's health care delivery system.  One thing that he has            
 discovered is there seems to be a general consensus that Alaska               
 will never have true HMOs or managed care of that style because of            
 the lack of critical mass, the geographic situation, lack of                  
 services here, etc.  He said a concern of his is that these                   
 contracts are very important elements of lowering costs.  He                  
 inquired if these managed care or PPO-type contracts exist in the             
 states where there are HMOs.  He also inquired as to how it works             
 in a larger economic environment.                                             
 MR. LEBRUN said in the Lower 48 the range of managed care offerings           
 is much broader.  In fact, more than half of all residents in the             
 Lower 48 are currently in some kind of managed care plan.  That               
 will probably be 80 percent by the end of the decade according to             
 Aetna's projections.  It may be just a simple preferred provider              
 arrangement or an HMO.  Health Maintenance Organizations can                  
 certainly exist in areas other than the largest metropolitan areas.           
 There are viable HMOs in Spokane, Washington.  Aetna finds when               
 they survey patients and when employers ask their employees that              
 the satisfaction levels are equivalent to the traditional fee for             
 service plans.  Oftentimes an HMO plan, given that it is                      
 essentially a locked in situation, will be offered along side other           
 choices.  He said Aetna finds employers are increasingly interested           
 in HMOs because their alternatives are limited.  They either have             
 to foot additional inflationary costs through their own earnings,             
 ask their employees to pay more for the insurance, or increase                
 deductibles.  Certainly, one of the ways to really impact access is           
 to say  "Here, you have a medical plan but it has $1,000                      
 deductible."  Aetna is seeing an increasing movement.  He commented           
 in the Seattle, Washington office, they have not sold a traditional           
 fee for service plan in approximately three years.  Every plan or             
 every plan sponsor whose coming up and bidding out their plan, they           
 are all universally putting in some kind of managed care.  Many of            
 them are simple PPO arrangements and others are more sophisticated            
 arrangements.  In part, that is because they just cannot                      
 economically walk away from that sort of piece of the value pie, as           
 they try to manage their overall corporate planned health costs.              
 REPRESENTATIVE ROKEBERG clarified that anyone in Alaska who wants             
 to avail themselves of Aetna's services has to be a member of a               
 MR. LEBRUN said Aetna essentially writes contracts with employers,            
 so they are in the employer insurance market.                                 
 REPRESENTATIVE ROKEBERG asked Mr. Lebrun if he thought Aetna would            
 no longer underwrite insurance in the state of Alaska, if this                
 legislation passed.                                                           
 MR. LEBRUN said the answer is no.  He said he thought that                    
 unfortunately Aetna would probably have to disband their preferred            
 provider arrangements and pass on higher costs to their customers.            
 He noted it wasn't a matter of doing business or not doing                    
 business, because all insurers would be put in the same situation.            
 It's a matter of what would be the overall cost to the Alaska                 
 insurance system of losing these savings that had been built into             
 the planned designs.                                                          
 REPRESENTATIVE ROKEBERG inquired why they wouldn't still endeavor             
 to do the best job for their clients and bargain arrangements, not            
 withstanding the provisions of this legislation.                              
 MR. LEBRUN emphasized that Aetna would not unilaterally terminate             
 their plans, but he felt that over time, the value of preferred               
 provider arrangements would diminish.  He stressed they would                 
 certainly do the best they could under the circumstances.  He said            
 it would be their feeling that those circumstances would be less              
 favorable to the overall health cost bottom line for employers and            
 for the state overall.                                                        
 CHAIRMAN KOTT said that Mr. Lebrun had previously mentioned there             
 was a different factor figured in whether or not you use a                    
 preferred provider or one that is not a participant.  He asked if             
 those percentages would still factor into the equation if a                   
 provider charged a lesser amount.                                             
 MR. LEBRUN said typically, Aetna sets up their arrangements such              
 that if a provider is already a very cost effective provider, they            
 would not ask more from them.  In other words, it is not universal.           
 Aetna structures their physician contracts so the most cost                   
 effective providers would be allowed to continue to bill at those             
 rates, but they would set a ceiling beyond which charges would not            
 be allowed.                                                                   
 CHAIRMAN KOTT asked Mr. Lebrun to explain briefly how they enter              
 into contractual arrangements with the providers.                             
 MR. LEBRUN said first they would do an assessment of the market.              
 Obviously, they have data already on charge levels and utilization            
 patterns.  He said if they were to enter into an arrangement, they            
 would talk to the employers to find out where they would like Aetna           
 to focus their efforts.  He said in some cases they might do                  
 competitive bidding, but generally they are going to decide ahead             
 of time and approach particular providers.  That varies from place            
 to place as different business strategies may come into play in               
 different parts of the country.  Sometimes there may be head-to-              
 head bidding, sometimes they might see if they could reach a                  
 reasonable deal with a pre-selected provider.  That, too, will vary           
 from time-to-time.  In Alaska, their first preferred provider                 
 arrangement was when Alaska Regional Hospital was a Humana                    
 facility.  He noted arrangements can change over time.  Aetna                 
 continues to look at the cost effectiveness of the facilities,                
 employee satisfaction, and the value it brings to the bottom line.            
 Generally, what Aetna saves passes on to the employer.  Many of               
 their contracts are for self-funded employers, so they just pay               
 their way on claim costs.  Other contacts are experience rated, so            
 if Aetna saves 15 percent for an employer, that isn't profit to               
 Aetna, that is a surplus that the employer essentially gets to                
 keep.  He added Aetna continues to keep their eyes and ears open.             
 They are always looking at all their suppliers, vendors and all               
 their relationships to make sure they have the best one in place.             
 If they are wrong, the market will quickly tell them.                         
 CHAIRMAN KOTT asked Mr. Lebrun if an entity or organization that              
 had a substantial tax advantage would have an advantage in the                
 competition bidding or the way Aetna would look at that                       
 organization as a potential preferred provider.                               
 MR. LEBRUN said that was beyond his technical knowledge since he is           
 not involved in contracting.  However, he did say they would look             
 at the company's bottom line ability to deliver a service at a                
 particular price, at a certain quality level and overall at a                 
 certain comprehensiveness in the range of services.  He commented             
 that how a particular facility gets to that point is beyond his               
 expertise to address.                                                         
 CHAIRMAN KOTT asked if there were additional questions for Mr.                
 Lebrun.  He announced the committee would take a brief break.                 
 TAPE 95-59, SIDE A                                                            
 Number 000                                                                    
 CHAIRMAN KOTT said the committee would continue to take testimony             
 on HB 266.  He announced that Karen Marcey would be testifying                
 KAREN MARCEY, Pharmacist and Co-owner of Professional Infusion                
 Pharmacy, said she was there to testify as a 15-year resident of              
 Alaska, a pharmacist, and as a small business owner.  When she                
 first came to Alaska, she practiced pharmacy in Southeast Alaska              
 and then moved to Anchorage.  Her business partner practiced in the           
 Public Health Service, specifically the Northern Arctic Regions of            
 Alaska and then moved into health care about six years ago.  She              
 stated both she and her business partner strongly support HB 266.             
 They feel the major problems relating to health care in Alaska,               
 both in terms of quality and cost, have to do with accessibility              
 and availability.  She commented that in looking at HB 266, you               
 can't just think of the two hospitals in Anchorage.  This will                
 affect everybody in the whole state; even towns like Dutch Harbor             
 and Bethel.  She noted Bethel is lucky if they have one physician             
 and they don't even have a retail pharmacy, let alone a hospital.             
 Dutch Harbor has no physicians, no pharmacies and no hospitals.  We           
 need to start looking at transportation costs and how much they               
 affect the health care costs in the state.  Ms. Marcey gave an                
 example of what has happened because Alaska doesn't have this type            
 of legislation.  She said the second largest provider of health               
 insurance in this state recently decided to restrict their                    
 preferred provider network of infusion providers - home health care           
 infusion providers.  Prior to them restricting this, there was a              
 total of six providers in the state of Alaska; four located in                
 Anchorage, one in Soldotna and one in Juneau.  When they restricted           
 this, they limited it down to three providers, all based in                   
 Anchorage and the providers located in Soldotna and Juneau, even              
 when they are willing to meet the assessed rates or the rates that            
 were provided by this medical service corporation, they are not               
 allowed to participate.  Ms. Marcey said they are lucky they are              
 still a provider, but for how long.  She said this will continue to           
 restrict down to the point where there is just one provider in the            
 whole state.  She questioned if it is good for the state of Alaska            
 to start limiting the number of providers.  We already don't have             
 enough medical providers in the state.  People making these                   
 contracts have never been in Alaska and they don't know where                 
 Juneau is or where Soldotna is.  She pointed out this is a big                
 disincentive by not having this legislation to have anybody set up            
 practice anywhere in the state, besides Anchorage.                            
 MS. MARCEY addressed the cost of health care.  She didn't think by            
 allowing participation in a preferred provider program when you are           
 willing to accept those proposed rates is going to increase costs.            
 She said if you are doing business and somebody proposes a rate               
 that is going to make it so that you can't be a viable company, you           
 are not going to accept that rate.  By allowing participation, we             
 are going to allow competition, we are going to have the free                 
 marketplace, activity (indisc.).  She said she feels that quality             
 of health care in Alaska will be severely affected if we have these           
 exclusive preferred provider programs.  As she noted before, health           
 care outside of Anchorage is not much.  There are people that work            
 for the state of Alaska, people who work for the school districts             
 that are going to be in these same insurance programs.  She said              
 what if the only hospital they can go to is located in Anchorage.             
 They will have to get to Anchorage and if an emergency comes up,              
 who is going to take care of them?  When you have multiple                    
 providers, you have patient choice and you have competition that              
 keeps the quality up.  As for choice, without this legislation, a             
 person will have no choice.  Even in Anchorage, there are only two            
 hospitals.  If you limit the number of hospitals that a person can            
 go to by one, they have no choice.  The people outside of Anchorage           
 will have the choice of finding transportation, coming to                     
 Anchorage, going to that preferred hospital, those preferred                  
 doctors.  Then we have to decide who is going to pay for all these            
 transportation costs.  Who is going to pay for these accommodation            
 costs.  She continued that HMOs and restricted preferred provider             
 programs work wonderfully in highly populated, dense areas of the             
 United States where you have lots of hospitals, lots of primary               
 care physicians and many specialists.  They are not going to work             
 in Alaska.  There are more providers needed and more accessibility.           
 She said she feels that if a provider is willing to accept the                
 terms and conditions of a preferred provider agreement, then they             
 should be allowed to participate and provide service.   Based on              
 previous testimony, especially the testimony of Mr. Solie, by                 
 allowing a preferred provider arrangement to exist there, no one              
 can come in there and set up practice, even if they wanted to.  A             
 situation is being created where you cannot create more                       
 competition.  She encouraged the committee to look in all the areas           
 of Alaska and talk with multiple health care providers and see if             
 not allowing equal participation is really what we want in Alaska.            
 CHAIRMAN KOTT asked Charlie Miller to come forward to testify.                
 CHARLIE MILLER, Lobbyist, Alaska Regional Hospital, said he would             
 not go over all his testimony from a previous meeting, but there              
 were a couple of items he wanted to address from previous                     
 testimony.  One of the reasons Alaska Regional Hospital has asked             
 him to look into the recently passed Arkansas legislation was that            
 there is a similarity to the market conditions there that we                  
 experience Alaska.  As a previous testifier indicated, we are a               
 small market state both in the number of patients and in the number           
 of providers.  Mr. Miller said he couldn't agree more with the                
 previous speaker on the fact that this application has to be taken            
 into context of Alaska.  HMOs and PPOs are successful in different            
 markets, but we are dealing with our own market.  It seems that               
 restricting the exclusionary aspect of the contracts does restrict            
 providers.  It will eventually cut down on the number of providers            
 that have access to these large blocks of patients represented by             
 the major payers.  Volume discounting not only deals with these               
 exclusionary contracts, but it also deals with the basic concept of           
 (indisc.) insurance industry.  If you represent 80,000 patients,              
 you will get a discount regardless of whether exclusionary to a               
 particular provider or a network of providers or whether you just             
 negotiate with the provider community in a mechanism that might               
 take a little time to set.  If you embrace this concept, you                  
 wouldn't lose everything.  The state has a pharmaceutical plan that           
 is considered a PPO.  The state sat down with some of the providers           
 and negotiated an acceptable formulary and a rate setting for the             
 drugs.  They then put out a list with the fee structure, indicating           
 this is the formulary to be operated under, and allowed all                   
 pharmacies that wanted to participate, to do so.  He noted this was           
 tough on some of the small "mom and pop" type businesses, but it              
 opened it up.  That kind of system is what his organization                   
 envisions coming out of this if the people were to accept it, if              
 the payers were to accept it, and the provider community were to              
 work with them.  You are not going to represent 80,000 people and             
 not get a discount of some sort.                                              
 MR. MILLER said Alaska Regional Hospital also sees it differently             
 than the speaker from Aetna, who sees it as possibly a small short            
 term change in premiums, but detrimental in the long run.  He                 
 commented Alaska Regional Hospital actually sees it the opposite.             
 They see it as providing for access by the patients and the                   
 providers will promote a healthy provider population which, in the            
 long run, will be cost savings to patients, the payers, the                   
 companies involved and everyone else.  If you exclude providers in            
 an already small provider population, the field will be narrowed.             
 There will be fewer players, and the incentive for discounts and a            
 monopoly cannot be overcome.  If there is only one provider of a              
 certain service, there is no incentive to discount.  In some PPO              
 arrangements, the only benefit you get is a prompt payment clause             
 which says that bills will be paid in a certain time frame and for            
 that, you get a 5 percentage discount.  Mr. Miller said he could              
 envision this happening in a state like Alaska, but couldn't                  
 envision it happening in Los Angeles, San Diego, Puget Sound or               
 Southern Florida where there is a large population base and a large           
 healthy provider base.  Our conditions are unique and we have to              
 look at this legislation from that point.                                     
 MR. MILLER referred to the cost differentials for network or non-             
 network physicians or facilities and said one insurer may have a              
 90/80 split and would allow that money to be used against co-                 
 payments and deductibles.  He noted it is just as likely that other           
 plans in existence would be more of a model and you would have 60             
 percent pay for a non-network physician and no application of co-             
 payment or deductible payments allowed towards your yearly                    
 deductible or your yearly co-payment.  Which is to say that if your           
 yearly co-payment tops out at $1,000 and you pay the 20 percent,              
 most plans have a limit on that.  Some of them don't allow a co-              
 payment to a non-network provider to be applied to that $1,000.               
 Therefore, it would go on indefinitely.  It's more than just a                
 disincentive; it's prohibitive.  It does narrow your choice down.             
 It would be difficult to legislate what is allowable, whether it is           
 a 90/80, or a 80/60, or a co-pay count or not count.  He thinks it            
 would be more trouble than it would be worth to count on that.                
 MR. MILLER mentioned cost shifting and said that several cases are            
 currently being looked at.  It is really an iffy question.  If                
 there are large pools, do those pools' discounts show up in the               
 premiums of individual purchasers?  There are some people who say             
 they do, and others say they don't.  He said there are a lot of               
 people that are concerned about this, because if the small employer           
 who has a five employee pool, had to be saddled with the discount             
 that was given to attract the large group or pool, while it might             
 help the larger company with more economic power, would be hurt.              
 Mr. Miller said he didn't claim to know which side of the question            
 is correct and whether there is that kind of cost shifting                    
 occurring or not.  He thought it would be taken care of under this            
 legislation.  An open-panel-type PPO would provide for access for             
 providers to maintain healthy businesses, discounts would still be            
 available, other managed care mechanisms could be used, and it                
 would apply properly to the market in Alaska.                                 
 REPRESENTATIVE ROKEBERG said earlier testimony indicated that the             
 client represented by Mr. Miller had PPO arrangements and contracts           
 in the past.  He asked if they currently do.                                  
 MR. MILLER responded Alaska Regional Hospital has arrangements that           
 would fall outside of the purview of this legislation.  He noted              
 self-funded programs and ERISA programs would not be affected by              
 this.  He explained that if you are administered by a third-party,            
 an insurance company, but you are a self-funded plan, this would              
 not affect that plan.  He mentioned an arrangement with the                   
 Veterans, but was not familiar with the specifics of that                     
 arrangement.  As for the previous Humana PPOs, he said he not aware           
 of the history of those.                                                      
 REPRESENTATIVE ROKEBERG asked if Columbia Humana or Alaska Regional           
 Hospital specifically, has any kind of corporate policy against               
 entering into negotiations for PPOs.                                          
 MR. MILLER said the answer is no.  He said in the corporate level,            
 most of their markets for the Columbia HCA and the newer                      
 acquisition, Health Trust, are in large market areas.  They do have           
 a facility that was involved with the any willing provider                    
 discussions in Arkansas, where legislation was recently passed, and           
 they actually have an HMO.  It's a small facility specializing                
 mostly in delivery and baby-type care.  They actually supported the           
 legislation even though they had an HMO.  On a corporate level,               
 they will allow a small market state to pursue this kind of                   
 legislation, but they are big participants in managed care                    
 networking and other things in large market areas.  In southern               
 Florida, they probably would not support this legislation because             
 they think the market is more appropriate to do that.  Mr. Miller             
 said their legal department and corporate structure has told them             
 that this market is unique, therefore, they have no objection to              
 supporting this legislation.                                                  
 REPRESENTATIVE ROKEBERG inquired if Mr. Miller was suggesting that            
 there isn't any, to his knowledge, corporate policy about it and it           
 varies with the market.                                                       
 MR. MILLER responded that if you could convince the corporate                 
 office that your market demands special attentions, they will look            
 at it and then allow the hospital to pursue what they feel is                 
 necessary in that market.                                                     
 REPRESENTATIVE ROKEBERG asked Mr. Miller if Alaska Regional, in its           
 now new corporation permutation negotiated, or is their history too           
 short to have been a party to negotiating.                                    
 MR. MILLER interjected that their history was not too short, but              
 his was to address that.  He just wasn't involved with Alaska                 
 Regional back then.  He advised that they actively pursue contracts           
 because they have to deal with what is currently happening.  As far           
 as their success rate or which contracts they are, he just didn't             
 have that information with him, but could get it.                             
 REPRESENTATIVE ROKEBERG thought the committee should have the                 
 information, as there is a certain sour grapes, sour losers type of           
 a cloud drifting around this legislation and it needs to be cleared           
 MR. MILLER said he thought a lot was focused on this particular               
 aspect of the bill, but it is much more far reaching than that.  He           
 said he would be glad to get the information for the committee, and           
 thought they should take it into account in the proper proportion             
 to what the bill will do.  The state of Alaska has a lot more to do           
 with this than the alleged sour grapes over any particular contract           
 between two competing facilities.  He said the bill is much larger            
 than that and it is unfortunate that we remain focused so much on             
 that particular aspect of it.  It is a much broader issue than                
 that.  The health of the system in the state is not being addressed           
 as much as perhaps it should be, because they've taken the time to            
 hire him and the opposing side has taken the time their lobbyist.             
 Some of the small providers and the other people that may be                  
 impacted don't have the time to spend as much time on it.  He                 
 commented he was glad the previous testimony occurred at this                 
 meeting, because it shows the impact of this type of stuff on the             
 smaller providers and the health in the smaller communities.                  
 CHAIRMAN KOTT asked Mr. Miller if he was familiar with a letter               
 from Mr. Michael Wise(Sp.?), Acting Director, Federal Trade                   
 Commission, dated February 4, 1993, to the Attorney General in the            
 state of Montana.  He said the reason for his inquiry was because             
 there had been testimony given that any willing provider mechanism            
 would offer (indisc.) spirit of competition.  Chairman Kott said              
 Mr. Wise wrote in summary, "We believe that any willing provider              
 requirements may discourage competition among providers, in turn,             
 raising prices to consumers and unnecessarily restricting consumer            
 choice of prepaid health care programs without providing any                  
 substantial public benefit."                                                  
 MR. MILLER questioned what agency Mr. Wise was from.                          
 CHAIRMAN KOTT responded that he was a member of the Federal Trades            
 MR. MILLER said that in certain markets it is possible that there             
 is a lot of validity to that.  He said he believes that most of us            
 realize the uniqueness of our market.  He reiterated that the large           
 market applications work very well in the Lower 48 and those                  
 arguments may very well be valid in those markets.  It is their               
 position is that market is not Alaska's market.  He commented they            
 were trying to work with the legislature to get legislation that              
 addresses our market and our problems.                                        
 CHAIRMAN KOTT said he certainly respected his view and Alaska is a            
 unique state.  He commented that in looking at it, you could                  
 certainly discern the notable differences between Alaska and the              
 state of Montana.                                                             
 MR. MILLER said he would get the information to the committee as              
 soon as possible.                                                             
 CHAIRMAN KOTT thanked Mr. Miller for his testimony.  He invited               
 Marilyn Patterson to testify.                                                 
 MARILYN PATTERSON, Senior Account Executive, Human Affairs of                 
 Alaska, said Human Affairs of Alaska has been in business since               
 1979.  They provide employee assistance programs to                           
 customers/companies all across Alaska, where customers/employers              
 offer their employees a prepaid mental health benefit for                     
 confidential counseling from skilled mental health clinicians.                
 This is a free benefit to their employees.  This preventive                   
 approach to helping employees get back on track by resolving                  
 personal and work related problems early on helps to maintain work            
 productivity as well as reduce potential costs for medical and                
 surgical claims later on.  She continued Human Affairs of Alaska              
 has also been providing managed mental health care to Alaskan                 
 employers since 1989.  Some of their customers include the                    
 Municipality of Anchorage, state of Alaska, the Alaska Railroad               
 Corporation and Alyeska Pipeline.  Under their managed mental                 
 health contracts, for instance with the state of Alaska, they have            
 brought the net mental health cost claim per employee from $582 per           
 employer prior to inception of the program in 1993, down to $220              
 net cost per employee in 1994.  This represents a savings to the              
 state of Alaska of over $5.5 million in claims cost since they                
 started managing the mental health benefit.  These savings are                
 possible, partly because of the monitoring, case management and               
 utilization review they do.  The savings are also possible because            
 they use a preferred provider network of physicians, therapists and           
 treatment facilities that meet the high quality clinical standards            
 and with whom they have negotiated discounted rates that are then             
 passed on to the customer, and therefore, to the employees.  She              
 informed the committee members they currently serve over 200                  
 companies and organizations statewide, with more than 50,000                  
 employees and 120,000 covered members in their programs.  She                 
 stated that Human Affairs of Alaska is still strongly opposed to HB
 266.  She noted that as mentioned previously, it looks like a lot             
 of good work has been done on the legislation, but the area about             
 the preferred provider organizations is still of concern.  She                
 stated her organization feels this legislation would potentially              
 restrict their ability to offer managed mental health care plans to           
 their customers currently and in the future.  They feel it would be           
 bad for them, bad for their customers, and bad public policy.  She            
 commented that during these economic times, many of their customers           
 are becoming increasingly interested and aware of the importance of           
 managing health care and in their case, mental health care, but               
 they are very interested in providing a mental health benefit to              
 employees.  Managing that benefit helps to both contain costs for             
 the company, while still providing a valuable benefit to employees.           
 She said they do use the preferred provider network that meets                
 their clinical standards and they contract with providers who share           
 their brief therapy philosophy who are willing to assure compliance           
 with the health plan's requirements.  She added they are able to              
 negotiate these favorable arrangements with providers in return for           
 supplying an increased patient volume.  As previously stated, these           
 savings are passed on to their customers in lower costs and to the            
 employee in lower costs, and often in an enhanced employee benefit.           
 Having preferred provider networks makes it possible for them to              
 monitor provider performance, assure the quality of the treatment             
 people are receiving, and to participate in utilization review more           
 efficiently.  It also helps to minimize the administrative overhead           
 because they are working with a smaller selected number of                    
 providers who they basically choose to work with.                             
 MS. PATTERSON said Human Affairs of Alaska believes HB 266, even in           
 the amended form, clearly 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               
 their business that each preferred provider can expect to obtain,             
 making it less advantageous for these providers to enter into                 
 agreements with Human Affairs of Alaska at discounted rates.  Also,           
 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            
 for them.  Because this would make it possible for all other                  
 providers to free ride on a successful proposal formulation,                  
 providers in the long term would eventually be unwilling to bear              
 the costs of developing proposals.  There would simply be no reason           
 or motivation for them to offer Human Affairs of Alaska discounted            
 rates or to be competitive.  It is their experience at Human                  
 Affairs that competition is a powerful and necessary tool in                  
 controlling costs.  Managed mental health care will only work in a            
 competitive environment containing cost by integrating financing              
 and delivery of health care.  She stated they would agree with the            
 statements made in the letter from the Federal Trade Commission.              
 MS. PATTERSON said in conclusion, Human Affairs of Alaska views HB
 266 as anti-competitive, it will promote increased costs, and                 
 provides no benefit for their company or their customers, or for              
 the thousands of employees they represent across the state of                 
 Alaska who benefit from these contracts with preferred providers.             
 Therefore, it would be extremely detrimental to many Alaskans.  She           
 urged committee members not to pass HB 266 out of committee.                  
 CHAIRMAN KOTT asked Ms. Patterson if she was familiar with the                
 document he had referred to earlier from the Federal Trade                    
 MS. PATTERSON responded she didn't look at it this time, so she               
 doesn't know if it is the specific document referred to by Chairman           
 Kott.  She commented she had seen statements in the past from the             
 Federal Trade Commission.                                                     
 CHAIRMAN KOTT said the document was addressed to the attorney                 
 general of Montana.  He said he was trying to understand the                  
 argument used by Mr. Wise in his conclusion.                                  
 MS. PATTERSON said she would be happy to look at it and give the              
 committee her thoughts on it.                                                 
 CHAIRMAN KOTT said he would appreciate any comments regarding any             
 similarities between the state of Montana and the state of Alaska             
 that Ms. Patterson would have after perusing the document.  He                
 asked how many customers Human Affairs of Alaska had.                         
 MS. PATTERSON responded over 200 in Alaska.                                   
 CHAIRMAN KOTT asked if that was 200 customers or clients.                     
 MS. PATTERSON replied in the mental health business, customers are            
 considered companies and clients are patients.  They have over 200            
 customers which include the Municipality of Anchorage, state of               
 Alaska, Alaska Railroad, Anchorage School District.  She informed             
 the committee there are customers with more than 10,000 employees             
 and some have 11 employees.  She noted they are a nonprofit                   
 organization.  They provide two kinds of programs, assistance                 
 programs and managed behavioral health care.                                  
 CHAIRMAN KOTT asked what Ms. Patterson's thoughts were on cost                
 shifting.  There seems to be some notion that those who are                   
 associated with PPO contractual arrangements are given a                      
 substantial reduction in cost, and the other groups out there are             
 paying a higher premium or picking up the slack, so to speak, thus            
 there being cost shifting.                                                    
 MS. PATTERSON said she didn't view it as cost shifting, but viewed            
 it as part of the free enterprise system where you create                     
 partnerships with people and as a private company, you can go out             
 and get whatever service or product you want.  You negotiate the              
 best rate.  A good company will take those negotiated rates and               
 pass that on to their customers, but anyone would have the                    
 opportunity to try to be competitive and to create a partnership              
 with someone.  Ms. Patterson said she believes the health care                
 system is complex and you have to have people who are willing to              
 work with you as a partner and offer a discounted rate.  It's a               
 win/win kind of situation.  You offer a discounted rate because you           
 are going to then get more volume of people in your business.  She            
 pointed out there are lots of intricacies in the delivery of                  
 service in health care.  In managing mental health care there is              
 monitoring and utilization review, and different types of therapies           
 involved - they are complex.  So, you not only have to have                   
 partners who will not only offer discount rates, but will work with           
 you to provide a high level quality service and monitor what is               
 going on.                                                                     
 CHAIRMAN KOTT inquired if PPO arrangements didn't exist for anyone,           
 would free enterprise take hold and providers at that level would             
 then determine what the market could stand as far as price.                   
 MS. PATTERSON replied she didn't think so.  As we've seen across              
 the nation, costs keep going up and that is what happens.  She said           
 she thinks there has to be incentives for people to hold (indisc.)            
 and to control costs.  In her view, there needs to be some                    
 incentive in competition to encourage people to provide the best              
 costs and the best rates.  It is her personal belief that costs               
 will just keep escalating if you just let it go.  There would be no           
 incentive for people to come up with innovative plans and try to              
 control costs.                                                                
 REPRESENTATIVE ROKEBERG asked if Medicare and Medicaid provides for           
 mental health care.                                                           
 MS. PATTERSON said, "Yes, I believe so, but my understanding is               
 because Medicare and Medicaid, you know like in our states, it's 50           
 percent federal paid, 50 percent state paid and like our state                
 legislature has a -- it's a law, in the statutes, as to how much              
 they, you know, pay and where they are on the list.  But I do know            
 that Medicaid is a major issue and our state is looking at managing           
 - managing Medicaid - the Medicaid mental health care - management            
 as a whole cost containment."                                                 
 REPRESENTATIVE ROKEBERG said the reason for his question was the              
 whole issue of cost shifting.  He said he wasn't sure that mental             
 health care services were provided by those particular areas.  He             
 commented that Ms. Patterson's testimony was in all likelihood,               
 formulated prior to her reviewing the draft committee substitute.             
 Since the testimony and concerns that were presented last spring              
 are to a large degree incorporated into the draft committee                   
 substitute, he asked her to take a hard look at it and offer any              
 suggestions about specific language, etc.   He said notwithstanding           
 the provisions for gatekeeping and utilization review, it sounds              
 like Human Affairs of Alaska has a philosophical problem with the             
 whole bill.                                                                   
 MS. PATTERSON said it was good to see that the utilization review             
 and the gatekeeper components had been added, but it is the                   
 fundamental philosophy about the use of the preferred provider                
 network.  She pointed out it is really critical to their business             
 and customers to be able to get discounted rates.  The thing that             
 is really important is that it doesn't mean that people can't go              
 someplace else or wherever they want, it just means they are going            
 to get an enhanced benefit.  It's going to cost them less money and           
 they are still going to get service if they use this, but if they             
 choose not to use the preferred provider organization or network,             
 they can still go wherever they want and in most cases their                  
 insurance company is still going to pay at some level.  She doesn't           
 see it as taking away from individual choice.  She sees it as a               
 necessary thing to contain costs for companies and manage health              
 care so that people can still get benefits.                                   
 REPRESENTATIVE ROKEBERG asked Ms. Patterson if her testimony had              
 indicated that having a limited number of providers actually made             
 it easier for Human Affairs of Alaska to do the utilization view,             
 MS. PATTERSON said, "That's right.  We're a small company.  We have           
 less than 40 employees and frankly, if we had to have -- if we had            
 to work -- you know, if we owned a real estate company or we owned            
 Sea-Land or whatever company, if you are forced to work with every            
 single person rather seeing -- rather than assessing the                      
 environment, seeing who you are comfortable working with, what kind           
 of partnerships, what's the history there, what kind of rates, and            
 feel that that's the best for your employees or for companies.  You           
 can't afford administratively to be able to do that with everybody.           
 And eventually you end up, you know, having no incentive for -- for           
 having somebody who wants to work with you to do that.  Does that             
 make sense?"                                                                  
 REPRESENTATIVE ROKEBERG asked,  "Ms. Patterson, wouldn't you though           
 as a practical matter, in the conduct of your business, wouldn't              
 you after you did your gatekeeping functions, and looked at the               
 needs of your particular clients -- if I got your terms right -- to           
 refer them to a specific provider more often than not, because of             
 say a specialty or a strength or weakness within the provider's               
 capabilities after your own judgments.  Wouldn't they -- I mean,              
 whether they're on the list or not, I mean what difference does               
 that make?   Wouldn't you still refer them to a particular                    
 MS. PATTERSON responded they have a large number of providers that            
 have various different specialty areas, so they would refer them to           
 the best provider in their network that offers those specific                 
 skills.  She added they have a very extensive network, so they do             
 have services for any type of mental health condition.                        
 REPRESENTATIVE ROKEBERG questioned if they wouldn't be referred to            
 the same providers whether this legislation passed or not.                    
 MS. PATTERSON said that could be true, but if they are the best               
 people and they have previously negotiated discounted rates with              
 them that are then passed on to their customers here in Alaska and,           
 therefore, to the employees, then they have done a tremendous                 
 service in that process because they have gotten the person to the            
 appropriate level of care at a good price.                                    
 REPRESENTATIVE ROKEBERG commented if an individual goes to a                  
 particular provider nine out of ten times after having been                   
 referred by Human Affairs of Alaska, wouldn't you think the                   
 individual would continue to go to that provider.                             
 MS. PATTERSON said you would think so, yes.                                   
 REPRESENTATIVE ROKEBERG asked where the problem lies then.                    
 MS. PATTERSON said, "Well, because -- because that provider -- we             
 have -- say it was -- because we have negotiated rates with that              
 provider.  I mean there are lots and lots of choices, you know."              
 REPRESENTATIVE ROKEBERG stated, "I know, but you still have                   
 negotiated rates and you still have a list and you'd still be able            
 to do exactly what you're -- that's certainly our intention in the            
 CS that (indisc.) do that."                                                   
 MS. PATTERSON said they don't just throw someone at a provider and            
 let go.  It is an intensively case managed process.  The review               
 mechanisms, monitoring, site visits, etc., all need to be in place,           
 so the care can be managed.  That whole administrative mechanism              
 that is set up is very costly to put in place, and it can't be done           
 with everybody.  You have to pick and choose who the best resources           
 CHAIRMAN KOTT remarked that Ms. Patterson had made a good point -             
 that choice is still available; however, at a cost.                           
 DOUGLAS BRUCE, Chief Executive, Providence Health System in Alaska,           
 stated they operate Providence Alaska Medical Center, Providence              
 Extended Care Center, Providence Horizon House, and the Mary Conrad           
 Center.  Mr. Bruce commented he had provided the committee with               
 documentation and would like committee members to follow him in the           
 presentation.  (Please note, this documentation is not available to           
 the secretary transcribing this meeting).                                     
 MR. BRUCE stated the proposed legislative language in HB 266 is to            
 create any willing provider provision, in their opinion, (indisc.)            
 preferred provider contract in Alaska, raises several key issues:             
 1) Without preferred provider programs, there will be no volume               
 discounts; 2) this legislation will increase costs, particularly in           
 Anchorage, the only community where there are competing hospitals;            
 3) this legislation will take away the ability of purchasers,                 
 primarily employers directly or through their agents (insurance               
 companies and brokers) to determine where they purchase services;             
 and 4) why legislate to protect one specific institution that                 
 already has a healthy profit margin.  Mr. Bruce said he would like            
 to address each one of these issues.                                          
 MR. BRUCE addressed the first two issues - no volume discounts and            
 increased costs.  Reiterating their testimony from last spring, the           
 preferred provider concept has been key in reducing the spiraling             
 cost of health care in Alaska.  Competition has lead to volume                
 discounts for employers and insurance companies without lowering              
 the quality of health care.  In response to Representative                    
 Rokeberg's question of why would hospitals offer volume discounts,            
 acute care hospitals have a cost structure about 70 percent fixed             
 and 30 percent variable costs.  They operate on a 24-hour a day               
 basis, three shifts of employees.  Anytime you can have more volume           
 go through any 24-hour period, you contribute toward your fixed               
 costs and you can pass on volume if you know that it is coming.               
 That is the major difference when you have a huge infrastructure in           
 health care that operates on (indisc.) equipment, facilities and              
 services.  Under preferred provider contracts, we have an                     
 obligation to serve and we have to know the number of patients that           
 we are going to serve - nurses have to be hired and trained.  He              
 said if any willing provider is allowed to offer the same                     
 discounts, volume is disbursed and the discounts are impossible to            
 sustain.  The ultimate result will be increased health care costs -           
 a fact already admitted by Alaska Regional Hospital, who has                  
 requested this bill.                                                          
 TAPE 95-59, SIDE B                                                            
 Number 000                                                                    
 MR. BRUCE continued  "...preferred provider contracts with these              
 employers and/or insurance companies, directly or indirectly, and             
 if they were to end and our contracts provide for a 90-day out for            
 any kind of legislative activity such as this to protect our major            
 investment in making these commitments to these insurance and                 
 employers, that our current prices versus what they are paying,               
 Blue Cross would immediately spend $4 million more a year, Aetna              
 $2.4, Sound Health $2.1.  And then employer direct contracts,                 
 anywhere from $152,000 more to the Teamsters $1,100,000 savings, as           
 a result of not having and just going to our fixed price which is             
 what 25 percent of our clients pay who aren't associated with PPOs.           
 Preferred provider contracts have been (indisc.) by employers                 
 because they allow organizations to better manage their health care           
 costs.  In fact, the number of employees covered by those contracts           
 I've just shared with you, over 97,000 Alaskans now part of the               
 preferred (indisc.) would be negatively impacted by this bill.  Any           
 willing provider legislation means that Alaska would not be able to           
 have managed care or HMOs which have been proven effective in                 
 controlling costs of care in other states."                                   
 MR. BRUCE said he wanted to comment on Chairman Kott's reference to           
 other states, specifically Montana.  Mr. Bruce said he lived in               
 Montana and was the administrator of the hospital in Helena.  He              
 commented that Alaska and Montana are very, very parallel.  All the           
 rural hospitals are sole provider community hospitals except for              
 Billings, Great Falls, and Missoula where they have two hospitals             
 competing.  All the others are sole provider communities that are             
 almost identical to what Alaska has.  Knowing that state and                  
 knowing Alaska, he highly supports the conclusions that were shared           
 by the document that Chairman Kott alluded to.  Having lived in               
 Montana, he said he could attest to the similarity to Alaska.                 
 MR. BRUCE continued with a discussion on issue 3.  This legislation           
 takes away the ability of purchasers, usually employers, to                   
 determine where they purchase service for their employees.  He said           
 they believe that as major purchasers of health care, employers               
 should continue to be able to select the health plan of their                 
 choice to offer as an employee benefit.  Under current plans,                 
 employees retain their freedom to choose health care providers and            
 may seek service from others than those listed as preferred                   
 providers.  When exercising this choice, however, the employee must           
 be willing to pay the difference in deductibles to go outside the             
 plan.  The tradeoff that has always been in effect is that by                 
 accepting an employer's health care benefit dollars, the employee             
 also agrees to some limitation in purchasing choices.  Some                   
 physicians provide any willing provider and raise the issue of                
 patient choice of physician.  It is their belief that Lower 48                
 experience indicates benefits to managed care subscribers -                   
 convenience, access, satisfaction - generally offsets concerns                
 regarding some limitations in a choice of physician.                          
 On issue 4, why legislate to protect the institution that is                  
 already the most profitable hospital in the state, MR. BRUCE                  
 commented on the not for profit versus for profit tax issue, small            
 provider versus large provider opportunity to compete.  For profit            
 providers maintain that because they must pay taxes, they cannot              
 compete with not for profit hospitals who do not pay taxes.                   
 Providence Alaska Medical Center maintains that for profit                    
 hospitals have deliberately chosen to be in the business to make a            
 profit, waiving the traditional tax exempt status of hospitals.               
 The state's only for profit hospital, Alaska Regional, reported a             
 profit of $8 million in 1994, even after paying taxes.  According             
 to submissions to the state's Medicaid Rate Advisory Commission,              
 their income per adjusted day is 94 percent higher than Providence.           
 Referring to the documentation he had distributed to committee                
 members, he compared total revenues of $212 million versus $145               
 million; patient days, they have about a third of our volume; and             
 the average daily census, we serve 261 adjusted patients a day, and           
 they serve 97.  He referenced the chart showing the volumes and               
 said the operating income, bottom line after taxes, per adjusted              
 day - adjusted day takes into account outpatient volumes -                    
 Providence shows a net income of $84 and Alaska Regional $228, or             
 172 percent difference; net income per adjusted day average                   
 revenue, Alaska Regional $4,000 versus Providence's $2,234, or an             
 83 percentage difference.  The cost of charge ratio that for 65               
 cents of expense, Providence charges 100 percent; Alaska Regional             
 for every 38 cents of expense, charges 100 percent.  Both                     
 Providence and Alaska Regional have approximately the same number             
 of what is termed "full paying patients" which is about 25 percent.           
 With Medicaid and Medicare being the largest discounted programs              
 and then PPOs getting discounts, about 75 percent of patients at              
 both facilities do not pay charges.  The other 25 percent do.                 
 MR. BRUCE explained that the designation "not for profit" indicates           
 that while an institution such as Providence needs to have annual             
 net revenue exceed expenses, make a profit in order to remain                 
 viable, all their revenues are only reinvested into the                       
 organization or used for charity caring community health needs.               
 What people should understand is that the larger play in this issue           
 is not Providence Alaska Medical Center, it's Alaska Regional                 
 Hospital which is owned by Columbia Health Care Corporation.  It is           
 not only the largest health care corporation in the world, but the            
 most profitable health care delivery corporation in the world.                
 Alaska Regional has not been locked out of the market.  Alaska                
 Regional has preferred provider agreements currently in force with            
 Affordable Health Care, New York Life and ASI Flex.  Those are the            
 three major ones that Providence is aware of.                                 
 MR. BRUCE said they believe Providence's commitment to control                
 costs while still maintaining quality has resulted in their success           
 in obtaining contracts.  Attachment D, provided by the state of               
 Alaska, is a comparison of their results through the Aetna                    
 contract.  Of the top ten hospital providers, the top two are                 
 Providence and Alaska Regional, who served approximately a little             
 less than double the amount of actual patients.  The average cost             
 per day to the state after the discount was provided to the state,            
 Providence's average charge was $1,920 and Alaska Regional was                
 $2,927.  These all have to be adjusted to the kinds of patients,              
 etc., but the mix between the two institutions is very similar.  If           
 Providence charged what Alaska Regional charges per adjusted                  
 patient day, they would have a net operating income of $52 million            
 as opposed to their current amount of almost $8 million, as                   
 depicted in Attachment E.  Providence thinks this is insane; they             
 only need profits in the area of 4 to 6 percent a year to maintain            
 their facility services and while for profits are in the business             
 to make as much as possible and send it to their shareholders, that           
 is not the mission of Providence.  They choose not to do it.  When            
 Providence, Aetna, and Blue Cross surveys the population to find              
 out where they want to go, on the average 60 percent of employees             
 choose Providence, 40 percent choose Alaska Regional.  This is why            
 the insurance companies have come to Providence, which they are               
 lower to start with by a substantial amount, to find out how they             
 can develop programs which help their constituents.  One of the               
 obligations of a preferred provider is not just pricing; you agree            
 to no balance billing, agree to follow care pathways, utilization             
 review procedures, etc.  People have to understand that it is not             
 just a pricing mechanism, but a system that is delivering a                   
 particular product.                                                           
 MR. BRUCE addressed the issue of why it is important for people to            
 know how much volume they are going to have.  Mr. Bruce said the              
 best analogy that he could give is telling your employer that you             
 want $25 per hour for your services, assuming that it would be 40             
 hours a week.  However, if your employer changed that to 30 hours             
 a week, you might renegotiate to $45 per hour if you could not                
 count on 40 hours per week.  Your whole basis for your budget,                
 household expenses, etc., are based on your ability to deliver a              
 product.  Health care is unique in states with fewer providers.               
 It's even more important that you are dealing with a very delicate            
 system, and if you tweak any part of it, it impacts it very much.             
 Mr. Bruce said they could not risk their institution or their                 
 mission, if they did not know how many patients were going to be              
 walking in the door.  They would not make the investment and would            
 not make the discount if they could not count on how many patients            
 they were going to have.                                                      
 MR. BRUCE concluded that Providence certainly believes in managed             
 care if it's done in a proper way, working in concert with their              
 physicians, rather than in a predatory manner.  They believe that             
 working with the state and their physicians, they can deliver                 
 affordable care.  This legislation will do the opposite.                      
 CHAIRMAN KOTT asked if Mr. Bruce saw this legislation as an Alaska            
 Regional versus Providence issue.  He also asked if that is the               
 focus of the legislation.                                                     
 MR. BRUCE responded no.  It is a factor because of Alaska                     
 Regional's concerted sponsorship.  This particular one, because it            
 does not impact the other cities is a different situation in sole             
 provider communities such as Fairbanks.  It impacts them because in           
 Fairbanks, for example, they would compete with other providers and           
 their own physicians for competition.  But in sole provider                   
 communities, it does not have the impact that it has in the one               
 situation in Alaska that has the two largest hospitals in the city            
 of Anchorage.  So, it is different.  He said he personally supports           
 legislation that protects the physician component of this from                
 being on a panel and then not having due process where an insurance           
 company and some other bad practices that have occurred in the                
 Lower 48, from pushing someone out of a panel without due process -           
 or going through a process of notification and saying, "I want to             
 correct my cost situation or my quality issue."  There are some               
 parts of some legislation, but not this one, that should be                   
 incorporated to protect the physician from unduly being treated               
 unfairly.  But, in essence, doing away with preferred provider                
 organizations before Alaska ever enters into managed care - and it            
 never gets to it and that is where the cost savings are - you need            
 volumes, coordinated care, physicians and hospitals working                   
 together to give you the lowest cost.  You can't do that unless it            
 is on a preferred basis.  By its very nature, one of two hospitals            
 gets the contract, otherwise it is not preferred, and the                     
 institutions don't have anything to offer.  They beef up their                
 staffing, provide a service, follow a utilization review                      
 procedures, give triage information to the clients.  You don't do             
 that when you don't know what kind of volume to expect, so you                
 enter into business arrangements, as most businesses do, to ensure            
 that for the volume of services that they are going to delivery,              
 they have the revenues associated with that.                                  
 REPRESENTATIVE ROKEBERG asked if it wasn't true that Sisters of               
 Providence has a hospital on Capital Hill in Seattle.                         
 MR. BRUCE responded yes.                                                      
 REPRESENTATIVE ROKEBERG asked if there weren't 10 or 12 different             
 hospitals who are major providers in Seattle?                                 
 MR. BRUCE replied there are 13.                                               
 REPRESENTATIVE ROKEBERG asked Mr. Bruce if he was saying that they            
 had a more difficult time predicting the volume of patient care in            
 a community with only two major providers versus their sister                 
 organization in Seattle that has 13 to compete with.                          
 MR. BRUCE responded in the affirmative and explained that most                
 contracts in Seattle are based on a contractual relationship on a             
 PPO or a managed care contracting basis.  You know your volume, you           
 know you're competing, you do negotiate for your buying and you               
 adjust your census accordingly.  That is what is done in most                 
 businesses.  Mr. Bruce said, "I arrange for contracts, I size my              
 business, as we all would in running any kind of business,                    
 according to the amount.  But if we should say okay, we'll have 23            
 beds of ICU, and we don't know whether they will be used or not, we           
 will staff for it, no business can afford to do that, particularly            
 a highly expensive, technical-oriented business, as ours is.  It              
 just can't be done.  And it's done the exact same way in the Lower            
 48.  Now there are more dynamics down there, with the populations             
 and the different thing - and Alaska's different, but it's even               
 more so because there would be absolutely no incentive for Alaska             
 Regional or ourselves to enter into a contract where we would have            
 no volume indications, we would have no idea of how many employees            
 to hire to serve those, no idea and you would (indisc.) your                  
 business and if we go out of business -- when I say out of                    
 business, or get a marginal outcome that would not serve the                  
 citizens of Alaska, which has few providers as it is.  But it has             
 sufficient providers to serve the level of population that we have.           
 So, it isn't a case that we have an under-capacity.  I think we               
 have now the right number of physicians in the urban areas; we have           
 insufficient physicians in the rural areas; we have an okay supply            
 - a little bit over in Anchorage - of beds otherwise, and anything            
 -- it would get worse if you had more competition because you're              
 talking about a business that isn't like selling oranges."   Mr.              
 Bruce pointed out that Providence doesn't want to be in a position            
 of charging their preferred provider clients, whose patients would            
 then have the ability to go anywhere, but they would have to                  
 because they wouldn't know where the volume would come from.  They            
 would rather negotiate and work with people, including the state,             
 to address the issues of cost.  They don't think this is the way to           
 do it.                                                                        
 REPRESENTATIVE ROKEBERG commented that he didn't understand Mr.               
 Bruce's answer, perhaps because of his inabilities to grasp the               
 economics of the situation.  He would like to pursue this in                  
 another forum, before he makes a recommendation or a vote.                    
 Representative Rokeberg said he was quite astounded with Mr.                  
 Bruce's declarative statement in his testimony that there will be             
 no volume discounts, if this bill passes.  He asked Mr. Bruce if he           
 was suggesting that the Sisters of Providence aren't going to                 
 bargain deals with their major customers in the Anchorage market              
 such as Blue Cross or Aetna?                                                  
 MR. BRUCE asked why would they?  As they interpret the bill, under            
 any willing legislation they can get their charges until somebody             
 contracts with somebody, and they say fine, we'll do it at that               
 price.  Mr. Bruce said their price is already so much lower than              
 the other competition as it is, so their best position under any              
 willing provider, is to do nothing.  Mr. Bruce said under any                 
 willing provider, if we're willing and able, what we must do is               
 negotiate to get programs and services at a lower cost than we did            
 last year.  We've negotiated with our major clients to have no                
 cases where the cost of health care would be over the Consumer                
 Price Index (CPI).  Health care CPI has always been double what the           
 regular CPI is, but Providence has been able to keep the health               
 care cost of their preferred clients lower than the CPI since they            
 started the major PPO agreements.  He said that Mr. Rasmusson from            
 National Bank of Alaska (NBA) had just shared with him that for the           
 first time in 20 years, since NBA has been on a preferred provider            
 agreement with Blue Cross, their 1100 employees will not have to              
 pay their 50 percent of the premium next month because of the                 
 savings associated with the contracted agreement that NBA has with            
 Blue Cross and Blue Cross has with Providence.  It is going                   
 directly to the recipients who play a part and who are encouraged             
 under preferred provider agreements to think about using the                  
 service and saving money.  The incentive is when employers like NBA           
 are able to say to their employees that because they've helped save           
 money, the employer will help by paying the premium for one month.            
 This is the kind of activity that should be worked on in the state,           
 particularly a state with all sole provider community hospitals;              
 targets should be set with the doctors because they are very good             
 at addressing cost issues when they are focused and working in a              
 planned manner.  He reiterated that is the kind of effort we should           
 be working on - not discount medicine, not cutting costs for no               
 reasons, but working with people who have to deliver to set targets           
 to meet CPI indicators so this state has a slower rate of growth              
 than others.                                                                  
 CHAIRMAN KOTT said, "Let me see if I understand this.  If there's             
 a preferred provider agreement that is even offered -- we're                  
 speculating here, if any willing provider were to pass, whether or            
 not the insurance companies would even offer or enter into a                  
 contractual arrangement with a preferred provider -- let's say that           
 they still would in fact do that, and what we've heard earlier is             
 that there is a number of variables that are entered into the                 
 equation as to which provider they're going to enter into this                
 contract with, it's not per se competitive bidding where they                 
 MR. BRUCE interjected, "... contract.  There's no quid pro quo.  In           
 other words, what they say is I will deliver, through incentives in           
 preferred provider arrangements, so many patients, you will give me           
 a price.  Under any willing provider, you're saying, I want an                
 agreement with you for price.  Just like the $25 an hour and 40               
 hours a week you think you have, and you only work 30.  That's a              
 big difference.  We would not enter into an agreement and say, we             
 will give you a discount because you're going to deliver so many              
 patients, when under any willing legislation, any willing provider            
 who isn't -- who is willing to say today, I am willing to do the              
 surgery on Johnny Jones but that volume isn't associating, and I              
 want to do it at another hospital.  You can't staff and keep a                
 hospital going without knowing what your volume of business is.               
 Any business has to have some idea and you arrange to have some               
 idea of volume by having relationships - like any business."                  
 CHAIRMAN KOTT said according to earlier testimony regarding how               
 this arrangement was promulgated between the insurance company and            
 the provider, Mr. Lebrun had indicated it was based on a number of            
 variables, it is not competitive bidding.                                     
 MR. BRUCE said it was very simple.  They do a market survey asking            
 employers, who in turn ask their employees, where they would like             
 to go if they are hospitalized, how many physicians they would like           
 to have available and what kind of mix of physicians.  Mr. Bruce              
 said, "They get that input, and as I shared with you, they come               
 back and it's like saying, 60 percent are saying I want a Chevrolet           
 - Providence; 40 percent say I want a Huego, whatever.  Why would             
 Aetna or Blue Cross who says I can only choose one of them on a               
 preferred provider, cause otherwise there's no such thing as a                
 preferred provider.  In a community of only two institutions, one             
 has to be the preferred one, otherwise there's -- there's no                  
 preferred relationship and no preferential volume steerage.  So why           
 would they negotiate to develop systems, utilization reviews,                 
 marketing programs, to market a Huego when the people want a                  
 CHAIRMAN KOTT said he understood that concept and referred to a               
 comment made by Mr. Bruce that there was no real impetus for                  
 Sisters of Providence to enter into a PPO agreement; thus                     
 essentially subscribing to the free ride effect.                              
 MR. BRUCE interjected they strongly believe in PPOs, but not under            
 any willing provider.                                                         
 CHAIRMAN KOTT commented that they would not be willing to take part           
 in a PPO arrangement having to do with the any willing provider               
 agreement into effect or in statute.  He asked Mr. Bruce, "Why                
 wouldn't you do that -- determine -- so they come to you and they             
 say, okay, this $100 procedure, if you give it to us for $90,                 
 that's the arrangement.  If you don't do it, then they go to                  
 somebody else who might under bid or undermine what you would bid             
 on it, for 90, for 80..."                                                     
 MR. BRUCE responded, "That's fine.  We would downsize to whatever             
 our volumes -- any business plans on a specific volume.  And as I             
 shared with you, our costs are 70 percent fixed and huge.  Say,               
 these were a $200 million business..."                                        
 CHAIRMAN KOTT said, "So, you would be downsizing your capital                 
 MR. BRUCE stated, "But reducing the risk associated with the                  
 training and the amount of equipment when we don't know -- have any           
 idea that we would make an arrangement, and someone else would take           
 away -- we would do the primary work associated with it and not               
 have the volumes, and be given a product at a marginal cost with              
 the understanding of certain volumes contributing to our fixed                
 expenses.  And if that didn't come about, we couldn't risk the                
 service to Alaskans by saying we're going to -- we would just wait            
 and say, okay, we'll do whatever -- if someone has a contract, ya,            
 I'm willing, and 60 percent of the -- of the patients would prefer            
 to come to Providence.  We know that and it's not because of, you             
 know -- Alaska Regional -- very fine institution, it's just the way           
 it is and it's not anything -- you know, we try hard, but we would            
 just wait and say, okay, we're an any willing provider.  Because              
 then it's no risk.  We know exactly what we're getting for the                
 price that we're achieving."                                                  
 REPRESENTATIVE ROKEBERG asked if you know you're going to get 60              
 percent of the people, all things being equal, what is the problem?           
 He said that Providence has been around for as long as he can                 
 remember and asked Mr. Bruce if he was saying that Providence                 
 couldn't stand the heat of the competitive crucible if....                    
 MR. BRUCE said they believe in competition.  This bill is non-                
 competitive.  Providence believes in competing with Alaska                    
 Regional.  Alaska Regional used to have Aetna; Providence did not             
 have Aetna and they didn't raise their charges to the level of                
 Alaska Regional's charges nor make the profitability of Alaska                
 Regional.  He reiterated if Providence was equivalent to Alaska               
 Regional, they would make $52 million.  Providence chooses not to             
 do that.  That's not their mission.  He said under this bill,                 
 Providence can only make lots of money.  That doesn't make any                
 sense.  Their job is to make sure they (indisc.) what they charge             
 the community, and they have an obligation as a major provider to             
 keep costs down.  PPOs without managed care, and managed care in              
 its full blown state is only achievable through an integrated                 
 delivery system; and an integrated delivery system is only                    
 achievable when a relationship exists with doctors that doesn't               
 exist in the state right now.  In other words, there is a cordial             
 relationship, not an integrated relationship with the physicians.             
 When that occurs, then preferred provider organizations will have             
 a different permeation, but this is the best thing there is                   
 associated.  Mr. Bruce said they can deliver a more cost effective            
 product, knowing the volume and making the investment in the people           
 and the equipment, when volume can be assured and they have the               
 responsibility to provide that at the quality level that the                  
 purchaser can count on.  Any willing provider says I can do it.               
 However, just as Ms. Patterson indicated previously, there are                
 administrative costs associated with finding out if you can do it,            
 and it's not as easy as just being willing and able to do it, but             
 to what degree of ability.  He stressed there would be a very major           
 change if this legislation were to be enacted, and very negative in           
 their view.                                                                   
 REPRESENTATIVE ROKEBERG noted one of his major concerns right now             
 is the fact that there is probably well over 100,000 people in this           
 community that are not covered by any managed care type plan, that            
 aren't in a PPO, that don't have health insurance.  These are the             
 type of people that have been refused health insurance by all these           
 insurance companies.  They are the ones the cost shift is going to,           
 and that is his concern.                                                      
 MR. BRUCE commented that is what we should be working on and stated           
 he agreed with Representative Rokeberg, because more and more                 
 under-insured come to them and Providence picks up the difference             
 through charity care.  More and more working people, even with                
 insurance, are under-insured.                                                 
 REPRESENTATIVE ROKEBERG said, "We're paying 9.4 percent more than             
 the other...."                                                                
 MR. BRUCE interjected, "I would rather see us work on legislation             
 to take that other 25 percent and have them have the ability to               
 access insurance through preferred provider, because you could                
 afford to -- cause the small -- we're talking about mostly smaller            
 businesses -- smaller businesses have problems in that they have so           
 few employees that their experience rating is all over the board.             
 If they could be combined into a major grouping in some way and               
 through legislation that would attack the issue, but the major                
 issue on cost shifting is - Medicaid and Medicare are the major               
 cost shifters.  And until we solve that issue, it isn't going to go           
 REPRESENTATIVE ROKEBERG asked Mr. Bruce to correct him if he was              
 wrong because what he was hearing was very disturbing in that it's            
 as if Mr. Bruce is telling the committee that if this bill were to            
 pass, it would be the policy of Providence to either do nothing               
 and/or refuse to enter into managed care contracts with these                 
 existing insurance companies.  He said it's as if Mr. Bruce was               
 saying that if they can't have it their way, they were going to               
 step away.                                                                    
 MR. BRUCE said no, they will enter into contracts with their                  
 current clients; it would just be under different circumstances.              
 He stressed he never said that Providence would not deal with their           
 REPRESENTATIVE ROKEBERG said the exhibit presented by Mr. Bruce               
 indicates that over $10 million of cost shifting would go                     
 backwards.  That is the implication of the exhibit.                           
 MR. BRUCE pointed out that it would be $52 million if Providence              
 charged what Alaska Regional charges.  Mr. Bruce said he was just             
 showing the committee that the impact of this legislation on their            
 clients would be devastating.  He said, "If our clients could not,            
 as they do now - they say, we will provide the incentives necessary           
 for you to staff accordingly and provide the services to this group           
 of enrollees, and we do that.   We could not commit to that same              
 level at that same cost when we do not know the volume."  He said             
 their mission is to serve Alaska and to serve it the best way they            
 can.  There is no threat in that - there is just the realities that           
 it will be different.  He reiterated they wanted to come up with              
 solutions that hopefully will save $10 million, not give Providence           
 $10 million.  They don't need $10 million more, they only need                
 enough to replace their facilities in Alaska on an ongoing basis              
 over the next 20 years.                                                       
 CHAIRMAN KOTT called Mr. Killebrew to testify.                                
 DAVID KILLEBREW, Physician, testified that he is very much in                 
 support of the legislation.  He stated as a solo practitioner and             
 a small businessman, his business interests were not necessarily              
 identical to those of Aetna, Providence or Alaska Regional                    
 Hospital.  In his practice, he prides the physician/patient                   
 relationship however, in the discussions of the advent of managed             
 care, the physician/patient relationship always seems to come out             
 the loser.   He is personally not involved with a lot of the                  
 considerations raised by the large hospitals; he just wants to be             
 a good doctor.  It would help him be a good doctor to be able to              
 measure up to any of the standards necessary for him to comply with           
 in terms of continuing medical education, insurance, skills and               
 qualifications, utilization review, etc., and to concentrate his              
 efforts on providing patient care.  That is what he does best.  He            
 believes in cost effectiveness and quality control.                           
 DR. KILLEBREW commented on some of the previous discussion and said           
 he understood that in various programs the patient would not                  
 necessarily be frozen out from the choice of physician or other               
 medical coverage if they elected to leave a preferred provider                
 plan.  From his own practical office experience, the number of                
 patients who leave a specific coverage program and go to an                   
 independent physician is not 5 or 10 percent, but more like 30                
 percent.  That is if he performs the exact same services and                  
 surgery with an equal or better outcome.  It just means that he is            
 automatically reimbursed less because he has accepted that patient            
 who has an insurance program that calls for a certain dollar amount           
 of coverage if you go to another licensed-by-the-state physician              
 who is not a preferred provider.  He finds that distasteful and               
 wrong.  He feels he is playing on an unequal playing field, when              
 things like that happen to him.                                               
 TAPE 95-60, SIDE A                                                            
 Number 000                                                                    
 DR. KILLEBREW continued that people will want to come to him as a             
 physician because he does things well, he cares and does things               
 rightly and it is his view, managed care that divides patients up             
 and arbitrarily assigns them to physicians because they've elected            
 to sign on with some program or not, interferes with that.  Dr.               
 Killebrew said he realizes that if he was an insurance broker                 
 running around to different businesses saying if you sign up with             
 me, we can do this for you, that the any willing provider plan                
 would be a threat to him.  He understands the philosophy behind               
 that.  On the other hand, as a private practitioner, just as an               
 example, he would like to be busier all the way around, both at               
 Providence and Alaska Regional Hospital and if he could use the               
 facilities at both hospitals more that would serve his purposes               
 with regard to performing appropriate medical services.  There is             
 a lot of money on the table in terms of profit.  If you say that a            
 certain plan has 9.4 percent greater cost if it is an independent             
 program, but if you negotiate a 15 to 20 percent discount with                
 somebody else, that leaves 15 or 20 percent to consider your own              
 corporate profits.  He remarked there had been a number of articles           
 in the Wall Street Journal that specifically dealt with the amount            
 of money that is involved in managed care.  Also, we read about               
 managed care outfits buying insurance companies just so they can              
 increase their patient flow.  To him, that is not medicine.  That             
 is playing with stocks on Wall Street.                                        
 DR. KILLEBREW said as far as utilization is concerned, he can                 
 understand the viewpoint of the hospitals who want to know how many           
 patients to gear up for or account for.  That makes perfect sense             
 to him and under those circumstances, if he was a hospital                    
 administrator, he would be keen to negotiate with the large                   
 insurance companies, such as Aetna, Blue Cross, etc.  But he said             
 as one single guy in a population of Anchorage, which has plenty of           
 doctors but maybe not more than 200, if he was concerned about                
 patient volume, he would be more concerned about talking to                   
 insurance carriers who have 80,000+ insured, and not a single                 
 practitioner who has 15 patients a day.  That is not where the                
 volume lies.  He questioned if maybe there should be two tiers -              
 a level of legislation such as this any willing provider to deal              
 with the large corporations and the major hospitals who deal in               
 multi-million dollar and thousands of people, and then exempt out             
 as you have ERISA programs, individual physicians and small group             
 practices who only see a few patients.  Speaking as a practitioner,           
 Dr. Killebrew said he liked to be paid fairly for his work.  At a             
 recent medical meeting, he talked to colleagues who lived in states           
 where managed care prevailed and they said it was a real nightmare            
 for them.  They signed up with various numbers of programs and each           
 program had different requirements.  It took a computer to keep               
 track of which program needed what, the paperwork increased, etc.             
 But there is a point to this that may be good; that is you had to             
 ask someone else's permission, but the 1-800 lines were always                
 busy, they had to hire extra personnel just to keep up with the               
 overhead and the bureaucracy of dealing with multiple companies.              
 From a small business person's standpoint, it can be quite                    
 difficult to deal with varied aspects of managed care.  Dr.                   
 Killebrew commented he is a delegate to the House of                          
 Representatives of the State AMA, and there is going to be a                  
 meeting on October 14 where managed care, any willing provider                
 issues will be addressed.  He said if there is any way that he                
 could help by providing the committee with the outcome of the                 
 consensus of Alaska physicians, he would be more than willing to do           
 so.  Also, the Anchorage Medical Society will be having debates on            
 any willing provider issues, too.  Dr. Killebrew said he could only           
 tell committee members that except for some fear on the part of               
 some individual physicians that anti-trust legislation may somehow            
 subject them to individual financial risk, most of the people he              
 knows and a consensus vote in the Anchorage Medical Society, was              
 such that on a philosophical basis is a concept of fairness, that             
 on a physician basis, not speaking as a clinic or a hospital but on           
 a physician, individual or small group practice basis, that any               
 willing provider was a concept that found favor.  And actually that           
 was how the vote came out.  Dr. Killebrew thanked the committee for           
 the opportunity to present the viewpoint and perspective of a very            
 small player in this program.  He said doctors, at the most, get 15           
 percent of the health care dollar; that's gross, not net.  He                 
 thinks that giving the physicians the opportunity to have open                
 competition and unrestricted practices is good for the state of               
 CHAIRMAN KOTT asked Dr. Killebrew how long he had been practicing             
 in Anchorage?                                                                 
 DR. KILLEBREW responded five years.                                           
 CHAIRMAN KOTT asked if Dr. Killebrew would suggest that if this any           
 willing legislation were to pass, it would facilitate a better or             
 a closer relationship between the patient and the doctor?                     
 DR. KILLEBREW said from the standpoint that some of what Mr. Bruce            
 would perhaps wish to see come to pass whereby there would be                 
 gatekeepers, assignments as to who could see whom, and other                  
 managed care provisions, he would say the answer is yes, that                 
 having an any willing provider rule in effect would benefit                   
 patient/physician relationships.  Dr. Killebrew added there are any           
 number of stories whereby when companies decided to sign up with a            
 certain managed care program, there came a day when thousands of              
 patients were told they would have to go to a certain hospital; it            
 didn't matter that the hospital they had been going to was across             
 the street.  Now they had to go across town, because they had                 
 signed up with that program.  Likewise, there have been patients              
 that have been told they can't see their old-time family doctor               
 because he is not on the list anymore.  They now have to go see a             
 new physician, who may be perfectly capable and confident, but who            
 doesn't have the relationship with the family.                                
 CHAIRMAN KOTT said the committee would be very interested in the              
 outcome of the meeting on October 14 regarding the any willing                
 providers legislation and recommendations.                                    
 REPRESENTATIVE SANDERS asked if individual doctors participate in             
 the preferred provider contracts, just like hospitals?                        
 DR. KILLEBREW responded yes, they can.                                        
 REPRESENTATIVE SANDERS asked if Dr. Killebrew had ever participated           
 or is currently participating in preferred provider contracts?                
 DR. KILLEBREW said the answer is no and no.  However, there is one            
 exception in that he accepts Champus assignment.  That's a leftover           
 from the olden days when he was in Great Falls, Montana.                      
 REPRESENTATIVE SANDERS asked Dr. Killebrew why he hadn't.  Had he             
 not pursued it?  Had he never been courted?                                   
 DR. KILLEBREW responded he has received mail inviting him to be a             
 member, but he has always felt it to be disadvantageous in that the           
 impositions of the managed care programs would interfere greatly              
 with his freedom of practice, would increase his overhead, and                
 would require him to hire additional personnel to process the                 
 claims and forms that such a contractual relationship would                   
 generate.  A large part of his decision has been as a result of               
 conversations that he has had with his colleagues who have entered            
 into managed care relationships, and the only reason they did it              
 was because they were deathly afraid that if they didn't, they                
 would be one of the physicians that was cut out, because the large            
 players who control the numbers of bodies like the insurance                  
 companies or the hospitals could say play it my way, or don't play            
 at all.  That really has very little to do with the quality of                
 medical care; that has to do with power politics.                             
 REPRESENTATIVE SANDERS asked if there wasn't a compensating volume            
 that goes along with these?                                                   
 DR. KILLEBREW responded that large employers have certain clout               
 because you have a large number of employees and can negotiate with           
 brokers of managed care of health care programs that involve your             
 employees.  In a situation like Anchorage, there is no extra                  
 volume; Alaska is a small state with only 600,000 or so people.               
 There is no managed care program that can come in here that Dr.               
 Killebrew is aware of that can guarantee him an extra 100 patients            
 a week or something like that if he signs up with their company.              
 The volume is just not available to gift him with as a reward for             
 signing on.                                                                   
 REPRESENTATIVE SANDERS asked how many patients Dr. Killebrew sees             
 in a week.                                                                    
 DR. KILLEBREW said it varies, but approximately 60.                           
 REPRESENTATIVE SANDERS commented that 15 would be a big                       
 improvement; he wouldn't need 100 extra.                                      
 DR. KILLEBREW said bearing in mind that the 15 would maybe be                 
 substantially discounted from his regular office fees, depending on           
 the terms of the contract.  They don't just pay him what he                   
 charges; in return for those extra 15 patients, he would have to              
 take care of them and get a discounted fee.  So, instead of having            
 the benefit of seeing an extra 15 patients per week with the extra            
 work for his secretaries, he might have the benefit of seeing an              
 extra 6 patients a week, because they are discounted in terms of              
 the bottom line.                                                              
 CHAIRMAN KOTT thanked Dr. Killebrew for his testimony and called              
 Rosemarie Kalamarides to testify.                                             
 ROSEMARIE KALAMARIDES, Assistant Administrator, Alaska Teamster-              
 Employer Welfare Trust, said the trust is a partnership between               
 Alaska teamster members and their employers.  The teamsters                   
 negotiate an hourly contribution out of the wage package to fund              
 their health care benefits and the trust administers more than $15            
 million annually, providing health care benefits to more than 8,000           
 teamsters and their families.  Teamster members and those who                 
 employee Alaska teamsters oppose this legislation.  She said their            
 benefit plan is not only saving money through current PPO                     
 arrangements, a recent membership task force informed them that the           
 membership wants them to negotiate more PPO arrangements and more             
 restrictive PPO arrangements to reduce their health care costs even           
 more.  The proponents of this legislation will say that it takes              
 choice away from the consumer.  That is not true.  PPO arrangements           
 are not exclusive; teamsters can choose not to go to the PPO, but             
 the costs are higher, but that's their choice.  She stated this               
 legislation is not about consumer choice.  It is nothing more than            
 attempted regulation of the free market by special interest groups,           
 namely doctors and hospitals, who do not want to compete in the               
 open marketplace.  She asked how this would work in any other                 
 industry?  Can you imagine a construction company who has just                
 successfully bid a construction project being told they have to               
 share that project with other unsuccessful bidders -- any willing             
 construction company?  This legislation destroys competition in the           
 marketplace.  The only reason a provider, provider group, or                  
 hospital enters a PPO arrangement is volume referrals for                     
 discounted costs.  For too long, the medical community has not been           
 held accountable for escalating health care costs.  Insurance                 
 companies pay the bills with little regard to reasonableness of the           
 cost of what was provided.  Employers who have been footing these             
 costs either cannot or will not pay the increasing expense of the             
 employee's medical benefit.  Now the employers and employees are              
 taking control of their health care cost and the quality of these             
 services through PPO and other managed care arrangements.                     
 MS. KALAMARIDES remarked that if the committee passes this                    
 legislation on, then groups similar to the teamsters and their                
 employers cannot enter the marketplace and negotiate a PPO because            
 no provider, provider group or hospital would negotiate reduced               
 fees without some assurance they will receive volume referral in              
 exchange for their discounts.  That means that consumers will be              
 paying more for health care.  Who benefits?  Not the consumer.  Why           
 would a provider agree to discounted fees for services if the                 
 volume isn't sufficient to cover the deep discounts?  They won't.             
 They assume risk when they contract with a PPO.  It's an economies            
 of scale.  Ms. Kalamarides believes this legislation contradicts              
 one of the fundamental philosophies, certainly the Republicans, to            
 protect competition in a free market.  She thinks this is misguided           
 legislation and will only suffocate competition.  She advised the             
 committee that if they pass this legislation you are telling                  
 benefit groups, such as hardworking teamsters or any other                    
 hardworking men and women in the state of Alaska, that they have no           
 right to bid for health care services; they have to pay the rate              
 set by doctors and hospitals - competition be damned.  Consumers              
 will be held captive by the noncompetitive medical community.  She            
 finds it ironic that Alaska Regional Hospital, who one year ago               
 when the teamsters sent out their Request for Proposal (RFP) and              
 Alaska Regional bid on it, told the teamsters that they wanted to             
 be the leader of managed care in Alaska.  They are now supporting             
 anti-managed care legislation.                                                
 MS. KALAMARIDES asked the committee to not pass this legislation.             
 Please do not listen to the proponents who attempt to disguise this           
 legislation as consumer choice law, when in reality this                      
 legislation serves to restrict consumers' ability to negotiate                
 reduced fees.  She said this legislation is costly to those who can           
 afford it least; those are the people who are trying to employ                
 Alaskans and those Alaskans themselves.  With regard to cost                  
 shifting, Ms. Kalamarides does not think there is cost shifting in            
 a PPO arrangement because if the hospital or the provider can get             
 the volume, then there is no fees they have to pass on to their               
 other clients who are not covered by a PPO.  The theory is that if            
 they get enough volume, they will make a profit out of that group.            
 CHAIRMAN KOTT asked if there were no any willing provider                     
 arrangements and no PPO arrangements, there would be strictly                 
 competition in the marketplace which would drive the cost of                  
 service, wouldn't that be the best avenue for free enterprise?                
 MS. KALAMARIDES said it would in a perfect world, but the medical             
 inflation has been double digit over the CPI for the last 20 years.           
 A competition has not worked in the medical marketplace because it            
 is a very complex environment.  As a consumer, Ms. Kalamarides said           
 she could call her doctor and try to negotiate against the doctor             
 across the hall; however, is that really what we want the consumers           
 of health care to do.  Her view is that it makes more sense to have           
 them band into a group, like the teamsters, state of Alaska, and              
 others, to organize these PPO arrangements because it is too                  
 difficult for one individual to do that.  She said it is akin to a            
 bargaining unit - there is power en masse, and these people have              
 banded together and bargained for a discounted rate in return for             
 volume.  It is just a contractual arrangement.  She thinks it                 
 smacks of protectionism if legislation is passed that says that               
 groups can't contract with each other.                                        
 REPRESENTATIVE ROKEBERG, speaking for the Republican majority of              
 the committee, said they would do nothing to create a more                    
 uncompetitive situation, if those facts are indeed facts.  In terms           
 of cost shifting, with the amount of wealth redistribution in this            
 country from our citizens to the medical care profession in its               
 whole permeation, he doesn't think they need to worry about anybody           
 not making a profit in medical care service delivery.  He commented           
 the arguments raised by Ms. Kalamarides are key arguments to this             
 whole legislation, and frankly he doesn't have the answer in his              
 mind yet.  He feels very strongly that the cost shifting is going             
 on in this country, but this legislation is only a part of that.              
 Things like Medicare and Medicaid, which are probably the biggest             
 problems when it comes to cost shifting, need to be looked at.  He            
 thinks it occurs here and he is concerned about the large number of           
 people who aren't covered.  Representative Rokeberg said that Ms.             
 Kalamarides appears to agree with Mr. Bruce's position that you               
 don't think there will be any incentive on the part of a major,               
 almost monopolistic-type of an institution, when there is only two            
 in any single community in the state, that they have no incentive             
 whatsoever to bargain at an arms-length basis with an organization            
 as large as the organization represented by Ms. Kalamarides.  He              
 didn't understand why she would buy into that argument.                       
 MS. KALAMARIDES commented he didn't say that.  She thinks they                
 could still negotiate some reduction in price, but it would not be            
 to the extent they have, because there would be no incentive if the           
 volume couldn't be guaranteed.  She referred to the analogy                   
 previous given of Sea-Land, who bid their rates based on what                 
 volume they expect.  That is exactly what Providence or any PPO               
 does, they bid their rates based on the volume they can expect.               
 They take on a risk and if that volume doesn't come through, they             
 lose money.  Ms. Kalamarides said there has been cost shifting and            
 the cost shifting has been back into the consumer's pocket.                   
 Employers are not willing to pay more and they shouldn't have to              
 because they're paying so much already.  What's happening (and it             
 can be seen in every health group in this state) is the deductibles           
 used to be 5 percent, then they were 10 percent, now they are 20              
 and 30 percent.  The consumer is picking up more and more of the              
 health care dollar.  The doctor is not reducing his charges; the              
 consumer is picking up the difference.  So, if there is any cost              
 shifting going on, it is going back to the consumer.                          
 REPRESENTATIVE ROKEBERG agreed and said that was a very good point.           
 CHAIRMAN KOTT thanked Ms. Kalamarides for her testimony.  He                  
 announced Dr. Shirley Fraser would be testifying next.                        
 SHIRLEY FRASER, M.D., said she would present to the committee an              
 example of why any willing provider will work very nicely.  She had           
 a patient who had a very complicated intracranial problem and at              
 the time Providence Hospital did not have a radiologist of the                
 caliber that Regional Hospital did.  The patient was a member of              
 Providence's PPO program and yet the radiological talent was at               
 Regional Hospital.  So, in talking to the radiologist at Regional,            
 they agreed to reduce the price to match Providence's.  So this               
 patient got the complicated procedure done at Regional Hospital for           
 the same price.  She thinks this illustrates very nicely why a                
 preferred provider will succeed and that is the way it should go.             
 She commented she has been a practitioner in Anchorage for 30 years           
 and she would like to see any preferred provider programs                     
 REPRESENTATIVE SANDERS commented that Dr. Fraser had used the word            
 continued and it was his understanding they were trying to                    
 establish it with this bill.  He asked if it is in effect now?                
 DR. FRASER responded there are PPOs out there.                                
 REPRESENTATIVE SANDERS interjected that Dr. Fraser had said "any              
 preferred provider continued."                                                
 As a point of clarification, DR. FRASER said it was any willing               
 preferred provider and that she wanted to speak for the bill.                 
 CHAIRMAN KOTT asked Dr. Fraser why a hospital or a provider would             
 enter into an agreement if they did not have the expertise,                   
 technical knowledge, or equipment.                                            
 DR. FRASER pointed out that in their contracts it often states                
 where you can get it, when they don't have it.  The person who did            
 the radiology in her example, had exceptional talent in                       
 neuroradiology and worked only at Alaska Regional.                            
 CHAIRMAN KOTT questioned if this was an experience versus                     
 inexperienced issue?                                                          
 DR. FRASER said no, it was just a man who had more knowledge in               
 neuroradiology at that time.                                                  
 CHAIRMAN KOTT remarked that it was someone who had substantially              
 more experience versus someone who didn't have that.                          
 DR. FRASER said absolutely and pointed out that sometimes you will            
 find that.                                                                    
 REPRESENTATIVE ROKEBERG said it is like choosing your cardiac care            
 unit in Anchorage; do you want one that is established or a new               
 CHAIRMAN KOTT thanked Dr. Fraser for her testimony and called Dr.             
 Coles to testify.                                                             
 JERRY L. COLES, M.D., said he is the solo practice of urology and             
 spoke in favor of this legislation.  He echoed Dr. Killebrew's                
 comments and on a individual small practice basis, he agrees with             
 Dr. Killebrew about 99 percent.  Managed care and HMOs are                    
 certainly big business and are very widespread elsewhere; they are            
 not that big nor that widespread here in Alaska.  Alaska has been             
 slow to get them and he feels that has been good for the state and            
 good for the medical practice in the state.  From experience                  
 elsewhere, it seems that a good chunk of the money and a lot of               
 cost shifting actually involves employers and the insurance                   
 companies and the hospitals getting into the managing of all the              
 facilities, rather than actually providing the care or providing              
 the insurance.  He said it is getting to the point where it is                
 necessary to jump through lots of hoops to do a procedure, see a              
 patient, etc.  A lot of time is spent on the telephone getting                
 approvals from insurance companies and in his experience, he has              
 never had anyone who was turned down.  The cost shifting is                   
 present.  Certainly Medicare and Medicaid are huge cost shifters.             
 There is more Medicare than Medicaid in this state since the state            
 does provide fairly well in Medicaid.  However, the cost of these             
 managed care outfits, preferred providers, and HMOs is large and              
 those costs are not going to the insurance, not going to the                  
 patient, not going for care.  He thinks the best case scenario for            
 this country and this state would be to get the third parties out             
 of the managed care business and get them to the point where the              
 employers and the insurance companies are providing information               
 regarding the quality of their insurance product, not out selling             
 it or negotiating it and buying big contracts.  The best thing that           
 could happen to big employers is to get them out of the insurance             
 business, as well; have them in a position where they are providing           
 information to their employees.  For example, these are 10 good               
 policies we've looked at, this policy provides this coverage at               
 this cost, and so forth.  Each individual could then pick out the             
 best cost effective policy for their particular situation and take            
 a cost advantage if they like.  Dr. Coles said this would nicely              
 fit into the medical savings account situation that is being looked           
 at nationally, and should be looked into at the state level as well           
 if it is proved nationally that a medical savings account would be            
 tax deductible, that would be the ideal situation going back to a             
 competitive situation which Dr. Coles said we haven't had in this             
 country for 30 years.  Dr. Coles pointed out that based on                    
 competition, the cost would come down.  Hospitals would start                 
 bidding for patient care for individual procedures on a                       
 per/procedure or per/unit basis.  The figures would be out there              
 for the public to see and the public would start looking at these             
 costs and start buying their health care based on cost and quality,           
 not just where their employer happened to push them.  Dr. Coles               
 commented that if auto insurance was like health insurance, each              
 time we gassed up or had an oil change, we would be submitting a              
 claim to our insurance company.  That is where health insurance has           
 gotten us and we need to get back to the patient and the doctor               
 deciding what is best for them and having cost as a factor; having            
 insurance be real insurance with $1,000 or $2,000 deductible and              
 affordable insurance.  More people would have insurance and would             
 be spending their own money for office visits and things of that              
 nature.  They would become much better buyers of medical care.  Dr.           
 Coles said he tries to talk with most of his patients about costs,            
 especially costs involving procedures, and it is difficult to get             
 passed half of a sentence when they have a low deductible insurance           
 policy.  They are really not interested in talking about it; they             
 want whatever this prepaid medical plan will give them.  It's not             
 insurance, it's prepaid medical care and they want the best because           
 they assume it has already been paid for by somebody else's money             
 and they are not interested in cost.  If we get back to looking at            
 cost, he feels the cost will come down, and competition will occur.           
 Providence has had the lower cost for medical care and they will              
 continue to do well.  We've had any willing provider up until the             
 last two or three years anyway and as far as he can tell both                 
 hospitals have done pretty well.                                              
 CHAIRMAN KOTT said he appreciated Dr. Coles' comments on the                  
 medical savings plan since Chairman Kott was the prime sponsor of             
 the resolution that was submitted to Congress.  He commented he is            
 hopeful that Congress will take some further action on it.                    
 REPRESENTATIVE ROKEBERG asked Dr. Coles to expand on his comment              
 that Alaska had had a de facto any willing provider situation up              
 until a few years ago.                                                        
 DR. COLES said he was not privy to all the negotiations going on              
 between some of the big insurance companies and hospitals, but it             
 was his impression, dealing with patients, that he could take a               
 patient pretty much anywhere he wanted to do a procedure - the                
 Surgery Center, the Alaska Hospital, or Providence Hospital.  He              
 was rarely, if ever, directed to one facility or the other.  He               
 tended to do most of his procedures at Providence - about 70                  
 percent at Providence, 20 percent at the Surgery Center and 5 or 10           
 percent at Alaska Regional, but he was rarely, if ever, told that             
 he could not go to Providence because of an arrangement with Alaska           
 Regional or vic a versa.  That did happen occasionally, but with              
 only one or two patients a year.  The insurance companies were                
 working with the employers buying these big chunks of insurance,              
 but they were not preferred providers to the point that they were             
 directing their patients to use or not use one facility.                      
 REPRESENTATIVE ROKEBERG asked if that had changed in the last                 
 couple of years.                                                              
 DR. COLES responded that it is definitely changing.  They've been             
 told by Providence over the last couple of years that Providence is           
 looking into the managed care situation; they're not going to take            
 any big steps without including the physicians at Providence, but             
 it appears to Dr. Coles that Providence has made a decision to                
 bring on Mr. Bruce who has a lot of experience in managed care and            
 will probably push it on through.  Dr. Coles said he couldn't see             
 why it makes a difference with Mr. Bruce because if Providence is             
 the better facility, if more people prefer them, if the costs are             
 cheaper, why not use that facility if it doesn't cost any more.               
 Mr. Bruce has talked about planning and buying chunks, but Dr.                
 Coles said they weren't doing that a few years ago.  Granted, there           
 are less beds being filled, there are a lot more outpatient                   
 procedures being done.  When Dr. Coles set up his practice in                 
 Anchorage 21 years ago, there were three employees for every bed at           
 Providence Hospital.  Now there are seven employees for every bed             
 at Providence Hospital.  Certainly, they have increased their                 
 outpatient work and there is decreased time spent in hospitals, but           
 a lot of that is jumping through government hoops - both state and            
 federal.  A lot of it is marketing, but in his view a lot of it is            
 pushing this managed care approach.                                           
 REPRESENTATIVE ROKEBERG asked Dr. Coles if he perceived there would           
 be any policies which would exclude a physician from using an                 
 institution if they didn't sign on?                                           
 DR. COLES remarked that right now they are seemingly keeping their            
 hands off the specialists, but the generalists, internists and                
 pediatricians are being brought into their PPO group.  It is just             
 a step, but it is a control measure.  If they can't get the                   
 patients through the traditional way of the past, now they want to            
 buy them in groups.  Dr. Coles said he didn't have any major                  
 problem with that, except that he works at all the facilities.  He            
 does have a problem however, when they start buying up the doctors            
 as well as the hospitals so a patient who has been coming to him              
 for years now has to start going to someone else because Dr. Coles            
 hasn't signed on with this managed care approach.  In his view, he            
 provides a special service, he spends a lot of time with his                  
 patients, and he doesn't charge a lot.  He has two staff in his               
 office and it is a pretty cost effective operation.  He doesn't               
 think he wants to get into the business of discounting service, but           
 he would be happy to publish his fees and discuss his costs on an             
 individual basis and not buy in with managed care and PPOs.                   
 REPRESENTATIVE SANDERS commented that a lot of Dr. Cole's testimony           
 was devoted to the philosophy that the insurance companies and                
 employers should be gotten out of the negotiating process, which              
 would allow doctors to work directly with the patients.  He asked             
 what Dr. Cole's specialty was.                                                
 DR. COLE responded urology.                                                   
 REPRESENTATIVE SANDERS said he couldn't imagine negotiating with              
 Dr. Cole if he had a urological problem.                                      
 DR. COLE said his fees are quoted when a person calls to make an              
 appointment.  A person could certainly call the other urologists              
 and find out what their charges are, so if he starts getting a lot            
 of hang ups, he will certainly adjust his fee.  Also, with regard             
 to the bigger charges - the charges for an x-ray at one of the two            
 hospitals in Anchorage or one of the other facilities or a surgical           
 procedure - then he likes to talk about the cost effectiveness.  He           
 likes to talk to his patients about the cost of various options               
 available.  He thinks the patient should be in the driver's seat as           
 far as determining what direction to go based on his best                     
 recommendation, knowing the cost and also the fact that the patient           
 will have to bear some of the cost because they've got this medical           
 savings account which is their money, not somebody else's money,              
 who they've never seen or heard of because it is covered by their             
 employer insurance company.                                                   
 CHAIRMAN KOTT asked if there was anyone else who wanted to testify            
 on this bill, the any willing provider.  Barbara Huff Tuckness                
 indicated she would like to testify.                                          
 BARBARA HUFF TUCKNESS said she was actually a representative with             
 Teamsters Local 959, but she is present on the behalf of the Alaska           
 AFL/CIO, of which they are a member affiliate.  She said she had              
 been hearing a lot about the little people, and they represent what           
 they believe to be the little people - the workers.  As a                     
 representative of Teamsters 959 and in conjunction with the other             
 affiliate unions they have day-to-day dealings with, one of their             
 daily jobs is bargaining across the negotiating table with                    
 TAPE 95-60, SIDE B                                                            
 Number 000                                                                    
 MS. TUCKNESS referenced state employees and said she believed they            
 had a bill last year to reduce their cost of payroll contributions            
 by 5 percent.  She pointed out they have been dealing in a similar            
 manner with health care cost across the bargaining table.  They get           
 employers sitting across the table from them indicating they are              
 willing to pay $500 per month for a particular premium; any                   
 additional cost comes from the employees.  It has become an issue             
 with them where they have to balance the hourly rate received by              
 the employees in addition to the potential increased costs.  She              
 reiterated she is speaking on behalf of not only the teamster, but            
 other unions throughout the state of Alaska that have been dealing            
 with this particular issue.  From a general perspective, she sees             
 this particular legislation as devastating to the process.  She               
 gave an example of back in 1985 or 1986 when the AMEA, which is               
 affiliated with the Teamsters Local 959, sat down with the                    
 municipality of Anchorage in an effort to reduce those costs.  It             
 was the first union she knows of in the state of Alaska, that went            
 to the employer advising there may be problems, and wanted to                 
 address some of them early on.  She said they were one of the first           
 organizations, jointly with the employer, that basically sat down             
 to look at how the cost issue could be addressed.  They went                  
 through the cost management.  It was the union that brought it to             
 the attention of the municipality that other measures needed to be            
 looked at.  Those cost containment measures were implemented after            
 a year and a half, and by 1987 they had saved over $900,000.  Those           
 were simple cost containment measures.  Unfortunately, it wasn't              
 enough; they had to continue looking.  She mentioned one of the               
 issues being brought up in bargaining is reducing those kind of               
 costs.  Employers are saying they can no longer provide a Cadillac            
 plan; i.e., the employee has the ability to go into Dr. Cole or Dr.           
 Smith and get whatever services at whatever that particular doctor            
 is going to be willing to charge.  The line has had to be drawn               
 because the money isn't there.  She said, "We, representing the               
 workers in this community, not only in Anchorage but throughout the           
 state of Alaska, have been suffering through this."  As they see              
 it, there is an employer, the employees, the insurance companies,             
 and the providers in the community that make up the four parts.               
 Attempts were made back in 1985 when Senator Kelly was President of           
 the Senate and chaired the Alaska State Health Care Cost                      
 Containment Task Force.  Through that process, $15 million was                
 saved by looking at the state of Alaska benefit coverage with                 
 Aetna.  She commented that several things have been done since at             
 least 1985.  Some of the employers such as the city of Anchorage,             
 have just recently realized the importance of being able to put               
 PPOs into place.  The PPOs have not been in existence, but the                
 philosophy has been.  She referenced testimony by previous speakers           
 that Alaska is different.  When cost containment was looked at                
 through the task force, they looked at Montana, Utah, Hawaii and              
 questioned why everyone was saying that Alaska was different and              
 couldn't do what the other states were doing because we have a much           
 smaller population.  Well, other states have been able to address             
 it.  The PPOs have actually saved.  She has seen the premium rates            
 go down without a substantial reduction in the benefit package.               
 She believes that on behalf of not only the teamsters but AFL/CIO,            
 this particular legislation would be devastating for the particular           
 process that has actually started in the state of Alaska.  She                
 commented it is almost like taking the cart before the horse.                 
 Without substantial health care reform legislation in the state of            
 Alaska, this will destroy whatever little has been accomplished in            
 the last five years.                                                          
 CHAIRMAN KOTT again asked if there was anyone else wishing to                 
 RICK DAVIS, Analyst, Providence Hospital, wanted to reiterate a               
 comment that had been made by Dr. Coles.  In an ideal system where            
 the individual patient had the incentive to shop for the cheapest             
 price, this legislation would be valuable.  But the way our                   
 insurance system works, there is no incentive for the individual to           
 go out and negotiate the best price.  He feels this legislation               
 would preclude the insurance company or the employer from going out           
 and negotiating prices for their employees.                                   
 CHAIRMAN KOTT said he would close public testimony at this time and           
 appreciated all the comments.  He or Representative Rokeberg would            
 be willing to meet with anyone individually to further discuss any            
 of the issues that were brought forward.  He commented it was                 
 apparent from the testimony that this was a very complex matter.              
 There are certainly other variables, such as the medical savings              
 account provision that will come into play at some point in the               
 future.  He asked the subcommittee chairman, Representative                   
 Rokeberg, to retain the original committee substitute in committee,           
 and to address some of the issues that were brought forward and to            
 even look at the two-tiered system.                                           
 REPRESENTATIVE ROKEBERG questioned if Chairman Kott was closing the           
 meeting just for the day.                                                     
 CHAIRMAN KOTT said that was correct.  He was closing today's                  
 testimony and they may, in fact, revisit the issue before getting             
 back to Juneau, depending on the findings and recommendations, if             
 any, of the subcommittee.  The issue is still in subcommittee;                
 there is a proposed committee substitute.                                     
 CHAIRMAN KOTT recessed the meeting for approximately 15 minutes.              
 HB 346 - TELECOMMUNICATIONS UTILITIES                                       
 TAPE 95-61, SIDE A                                                            
 Number 000                                                                    
 [Due to a taping malfunction part of the testimony on HB 346 was              
 recorded over]                                                                
 An unidentified speaker referred to local competition and stated              
 there are two very different sets of issues which need to be                  
 addressed.  The first issue relates to letting local competition              
 happen.  The bill does nothing in that regard.  The unidentified              
 speaker said the bill supposedly encourages competition.  You                 
 cannot find those words in the bill.  One would think it would say,           
 "Local phone service competition should be encouraged."  HB 346               
 doesn't even say it should be allowed.  He said there is a host of            
 issues that have to be addressed before local phone service                   
 competition can happen.  The unidentified speaker informed the                
 committee that interconnection is the most basic.  He said if he              
 were in the competitive local phone business and went to committee            
 members to get them to sign up for his business, the committee                
 members wouldn't obviously sign up for his business if they can't             
 call any of the people who remain on Anchorage Telephone Utilities            
 (ATU) system.  You have to have interconnection between the two               
 networks so that the people who sign up with the new provider can             
 call the people who are signed up with the old provider.                      
 Interconnection in this business means much more than that.  There            
 are some details that have to be worked out and the details are               
 totally unaddressed in the legislation.  For instance, one is                 
 called "number portability."  The particular phone number that                
 people have, and particularly the ones that businesses have, is               
 often very important to those businesses.  He noted his parents own           
 a book store and they have the phone number 782-BOOK.  You see a              
 lot of this with 800 numbers.  Frequently, it is because a number             
 describes the business in some way.  There needs to be number                 
 portability as businesses have their number printed on stationary,            
 advertisements, etc.  The unidentified speaker said businesses                
 would have a real problem going to a new customer if they have to             
 change their phone number.  He explained this is something that the           
 long-distance company went through with 800 numbers.  Currently, if           
 you have an 800 number and you change from Alascom to GCI or vice             
 versa, from AT&T to MCI, you keep your same 800 number.  You do not           
 have to give up your number when you change carriers.  That is also           
 necessary at the local level.  The unidentified speaker said there            
 must be something called, "Dialing (indisc.)," so you don't have a            
 situation where if you wanted to use GCI as your long-distance                
 carrier, you would have to dial a long series of numbers as                   
 compared to using Alascom where you only had to dial the seven                
 numbers plus the area code.  He said local phone customers can't be           
 required to dial ten numbers while the existing carriers' customers           
 only dial seven numbers.  That is a major barrier and is something            
 that must be worked out in the interconnection.                               
 The unidentified speaker said these are the kinds of issues which             
 are addressed in legislation of other states.  They say they're               
 going to have full local competition, but you can't have it without           
 addressing these matters.  He explained HB 346, in its current                
 form, doesn't address those issues.  Instead, it addresses only the           
 second set of issues which concerns the changes in the...(End of              
 CHARLES E. MCKEE was next to testify on HB 346.  He noted the bill            
 is also listed on the docket with Alaska Public Utilities                     
 Commission (APUC), dated September 27, 1995, R-399.  He explained             
 he has difficulty with the lawyers that are working with APUC in              
 their determination of the act before the committee, as well as               
 their determination as to when someone can speak on an R docketed             
 document or regulatory process if the person hasn't filed prior to,           
 in writing, stating they wish to make public comment when it comes            
 up on the docket.  Mr. McKee said the reason being is legal counsel           
 working for the state of Alaska has allowed a situation to continue           
 to such an extent that he was forced to file a Claim of Lien which            
 was issued to the Governor, September 21, 1995.  He read the Claim            
 of Lien to the committee.  He informed the committee members that             
 he didn't turn his Claim of Lien into the Department of Law because           
 he would have received a gag order instantly because they are the             
 defendants.  How can they defend themselves if he makes the issue             
 public that they've been skirting justice all these years.  Mr.               
 McKee explained the reason he did this is because he doesn't want             
 to discriminate.  He stated the largest school board in the state             
 passed nondiscriminatory resolutions but yet these individuals and            
 organizations, who are enlarged, wish to discriminate against him.            
 Mr. McKee said one of his interests is to buy Anchorage Telephone             
 Utility (ATU), in conjunction with the trust that is supposed to              
 support the public library structure financially.  He said take               
 that foundation and marriage it with the accounting department of             
 ATU, and also deal with the mining aspect.                                    
 MR. MCKEE explained to the committee he has a 1950 Mining                     
 Regulatory Act that is federal and territorial in the state of                
 Alaska.  He said that is how this state was brought into                      
 recognition as a state, because of the mineral extraction and money           
 made off of the seafood industries.  He noted he has also given the           
 Claim of Lien to the Speaker of the House, the Senate President, as           
 well as other corporations in Anchorage.  Mr. McKee said he would             
 also be happy to give the committee a copy.                                   
 MR. MCKEE said in reference to HB 346, he suspects it deals with              
 pay telephones, of course you're using coins which to a degree,               
 makes it a legal purchase but you're buying time.  Part of his                
 mathematical equation is a conclusion of time as well as the fact             
 that the seal is a original (indisc.) - have the right to stamp.              
 Mr. Mckee said of course when he refers to communist mind, he isn't           
 referring to flesh and blood.  Principalities in high places is               
 what he is referring to.  He said his weapon is not warfare of the            
 flesh, but is powerfully God for overturning strongly and                     
 (indisc.), for we are overturning reasonings and very lofty things            
 that raise up against the knowledge of God.  He continued to read             
 scripture from the Bible and discussed war time and peace time                
 CHAIRMAN KOTT said next person to testify was Don Schorer of the              
 DON SCHORER, Commissioner, Chairman, Alaska Public Utilities                  
 Commission, Department of Commerce and Economic Development, said             
 he was in attendance to respond to questions.  CHAIRMAN KOTT                  
 informed the committee he understands the APUC had a work session             
 the previous Monday.                                                          
 MR. SCHORER said he would like to make a few comments regarding               
 that work session.  He explained the APUC did have a workshop the             
 previous Monday in which ATU, ATA, GCI and AT&T Alascom all                   
 attended.  His noted his main purpose for attending the Labor and             
 Commerce meeting is to answer any questions the committee members             
 may have regarding their fiscal note.  He pointed out Mr. Lohr was            
 also in attendance and is the technician on the bill.  Mr. Schorer            
 said he believes the purpose of the bill is to promote competition            
 and the APUC is in no way opposed to that whatsoever.  The APUC has           
 not formally taken a position as they haven't been asked to.  He              
 noted he would leave the committee members a copy of the tapes from           
 their work session and will forward a transcript when it is                   
 CHAIRMAN KOTT said he believes he heard the sponsor suggest that              
 the bill is to facilitate competition.  He asked if there would be            
 more regulation involving the legislature in order to become a more           
 competitive state.  MR. SCHORER said it depends on the final                  
 outcome.  He referred to the bill, in its present form, and said              
 there is going to be a need for a lot of regulation.  He indicated            
 that at the work session, there was discussion that the APUC would            
 have to develop or enforce some regulations regarding different               
 parts of the bill.  He said he really couldn't give a definitive              
 answer but the way the bill presently reads, there would be more              
 TOM EDRINGTON, General Manager, Anchorage Telephone Utility                   
 Telecommunications, was next to testify.  He noted he is in                   
 attendance with Mark Foster and Chip Shooshan, via teleconference             
 from Bethesda, Maryland.  He informed the committee members he has            
 personally been in the telephone industry for 25 plus years,                  
 retiring as a vice president of Pacific Bell before coming to                 
 Alaska.  His area of expertise is focused on technology evaluation            
 implementation policy impacts.  Mr. Foster has been a commissioner            
 with the APUC and Chip Shooshan has been involved in                          
 telecommunications strategy legislation at the national level for             
 many years.  Mr. Edrington said they are in attendance to talk                
 about HB 346.  He said he would offer some observations about the             
 bill that he believes would be good to remember as hearings                   
 progress.  First, the legislation is necessary and mainstream.                
 Telecommunications policy at the national levels are undergoing               
 profound changes and that legislation, should it pass, will leave             
 wide discretion to the states in its administrative implementation.           
 Alaska needs to be prepared to meet that challenge should the                 
 federal legislation pass.  Secondarily, is to mainstream.  Over 30            
 states currently have similar legislation on the books, the first             
 such legislation being passed in 1983.  Mr. Edrington said this is            
 not a radical proposal, this is a moderate proposal.  The second              
 point to keep in mind is Alaska's scope and scale.  In Alaska, at             
 least two of the companies, GCI and ATU, have net incomes of around           
 $10 million annually.  Much of this legislation was built around a            
 titanic struggle between the Bell operating companies, the baby               
 Bells, and the long-distance carriers, where there are net income             
 streams of a billion dollars a year and hundreds of millions of               
 subscribers.  Mr. Edrington said when you look at Alaska, you do              
 need to make some accounting for the fact that things are different           
 and smaller, both in the way we regulate our long-distance services           
 as well as the way we regulate our local services.  The things that           
 apply on a huge scale don't necessarily work in the small scale of            
 Alaska.  Finally, technology has changed the economics of the                 
 telecommunications industry fairly dramatically.  People just                 
 recently paid over $7 billion for licenses for personal                       
 communications service (PCS) which is a radio frequency capability            
 to communicate directly with customers.  Mr. Edrington said in                
 Alaska, there are two parties who have paid over $1 million for               
 those licenses.  Basically, technology has removed most of the                
 barriers to entry in this market and made entry into the market               
 quite affordable on a number of fronts.                                       
 MR. EDRINGTON said he believes that we need to keep in mind the               
 legislation is mainstream, it's moderate, we do need to keep in               
 mind scale and scope when setting rules.  The technology has                  
 changed the nature of this industry considerably.  Mr. Edrington              
 stated that concludes his remarks.  He said Mr. Shooshan was                  
 waiting to testify.                                                           
 HARRY (CHIP) M. SHOOSHAN, Strategic Policy Research, Incorporated,            
 testified via teleconference.  He said he hopes that in the months            
 ahead when he is in Alaska he has an opportunity to discuss the               
 issues.  He said he would submit the prepared statement, for the              
 record, and would take a few minutes to summarize his views.  He              
 explained he recently searched the Internet and came across a page            
 of facts about Alaska.  It was noted that the state fossil is the             
 Wooly Mammoth.  When recently reading through the APUC code, Mr.              
 Shooshan said he was struck that it could easily be referred to the           
 Wooly Mammoth of utility laws.  It really is a fossil, an artifact            
 of era.  Mr. Shooshan said he understands that some parties may               
 have heard the committee, during the course of these hearings,                
 refer to preserve this fossil - to stick with the status quo.  He             
 suggested dispatching it to the public policy museum.  Mr. Shooshan           
 said he believes Alaska needs new regulatory tools and new public             
 policy direction.  He applauded Chairman Kott and Representative              
 Moses for getting the process started.  He said he believes HB 346,           
 the Alaska Telecommunications Act of 1995, provides a sound basis             
 for revamping the Alaska code to prevent efficient competition and            
 it will help to usher in an era of new opportunities that ATU                 
 suggests.  It's a fundamental principle in our free economy that              
 firms respond to incentives.  Thus, the (indisc.) provided by the             
 marketplace or by regulation, where necessary, as a surrogate for             
 marketplace forces that are important.  He said the legislature has           
 the opportunity to set the direction of public policy in this final           
 sector and to make certain that regulation provides the right                 
 incentives, in this case, incentives to invest, to innovate and               
 supply quality service at appropriate prices.  As competition                 
 intensifies, spurred by federal legislation as well as by actions             
 that are taken in Alaska, regulation must adapt to the new                    
 environment.  Mr. Shooshan said he believes Alaska can and should             
 move ahead without waiting for the enactment of federal                       
 legislation.  He indicated Alaska shouldn't be bound, in any way,             
 by the specific approaches through the various issues taken in that           
 federal legislation or in legislation adopted by other states.                
 MR. SHOOSHAN said he sees the legislation, the proposed act, has              
 having three essential components.  One component is it seeks to              
 provide for fair competition and establishing terms for                       
 interconnections and for access to essential facilities.  It                  
 provides for streamline regulations of new and competitive                    
 services, and while retaining a traditional rate of return                    
 regulation, it modernizes the regulatory treatment of investment              
 and depreciation.  Mr. Shooshan said he would like to address each            
 of the essential components in more detail starting with                      
 interconnection.  First, the obligation to interconnect should run            
 both ways.  That is they should be symmetrically imposed on all               
 competitors, not simply on the incumbent firm.  Second, while some            
 parties will undoubtedly urge the legislature to go further by                
 requiring ATU and other local telephone companies to desegregate              
 their networks, requiring the interconnection of competitors is               
 sufficient to permit local competition.  The legitimate needs of              
 competitors to be determined in part by who they are and by their             
 relative position in all telecommunications markets.  ATU, for                
 example, is not now in the long-distance business, however, it                
 faces competitors who are large formidable players in that business           
 including AT&T, the new arm of Alascom, and GCI with it's partners            
 MCI and British Telecom.  These firms operate successfully in many            
 markets around the world, offer a range of services and possess               
 substantial resources, including substantial expertise in wireless            
 communications.  These resources will facilitate their vertical               
 integration into the provision of local telephone services.  In               
 fact, these firms have the capability to bypass ATU's network                 
 completely to serve a wide range of customers.  Third, the proposed           
 act would require that the cost of any modifications or additions             
 needed to facilitate interconnection are borne by competitors.  Mr.           
 Shooshan said in principle, this is unobjectionable.  Fourth, Mr.             
 Shooshan said he is unclear about the effect of conditioning                  
 interconnections in the absence of, "Injury to the owner or to                
 other users of the facilities," and especially about removing the             
 word, "substantial" which appears in the code today.  If that                 
 language is read to require the APUC to consider whether                      
 competition generally might result in economic harm to a public               
 utility, he is concerned that such language could be used by                  
 incumbent firms to block efficient competitors from obtaining                 
 MR. SHOOSHAN referred to the second element of the bill, the                  
 streamline regulation, and said as competition continues to                   
 develop, it is appropriate to tailor regulations to fit the new               
 circumstances.  This means allowing the incumbent firm to respond             
 when competition exists for a particular service or group of                  
 services.  The proposed act's standards for classifying competitive           
 services appropriately focuses on the availability of a substitute            
 services and not on how many customers may actually choose to buy             
 the substitute services.  That's a form of measuring market share.            
 The problem with the latter approach is it actually penalizes the             
 incumbent firm for being an effective competitor.  It forces the              
 incumbent to lose shares by being unresponsive to consumer's needs            
 in order to gain regulatory flexibility.  He stated it is also                
 important that firms have the incentive to introduce new services             
 by providing for streamline regulation of those services.  The                
 proposed act would encourage regulated public utilities to                    
 innovate.  Establishing a price floor, as the legislation would do            
 based on incremental costs, is well supported in the economic                 
 literature and is consistent with the direction that public policy            
 is going in other jurisdictions.  Mr. Shooshan explained the                  
 purpose of a price floor is to provide regulatory, in addition to             
 antitrust protections, against predatory pricing by a firm with               
 market power.  While competitors can be expected to argue to the              
 legislature that incumbent firms should be kept under tighter rein,           
 Mr. Shooshan believes the legislation should seek to avoid to the             
 extent possible, a regime where the competition sets its prices               
 based on the posted prices of the incumbent and where competitors             
 are able to reprice their services while tying up the incumbent in            
 the regulatory process.  He said a question was asked earlier about           
 whether more regulation may be needed in the interim.  He suggested           
 that the answer to that question is probably yes in that regulation           
 will be required during the transition to competition, but the goal           
 of that regulation should be to protect competition and not to                
 protect competitors from competition.  The full benefits to                   
 competitive markets can only be realized if regulation is                     
 appropriately streamlined.  It is important to make these changes             
 now so the regulatory ground rules are clear for all parties in the           
 future.  The goal after all is to have competitors fight it out in            
 the marketplace rather than in the hearing room.                              
 MR. SHOOSHAN explained the third essential feature of the bill is             
 its treatment of investment and depreciation.  It would make                  
 important changes in the regulatory treatment of the valuation of             
 property and the depreciation of investment made by public                    
 utilities.  He said he believes these reforms are positive and he             
 can support them fully.  They are certainly reflective of the                 
 direction that public policy is going in the federal arena and also           
 in the states around the country where he has had the privilege to            
 MR. SHOOSHAN said in conclusion, overall he believes the Alaska               
 Telecommunications Act of 1995, moves public policy in the right              
 direction.  It provides for incremental rather than radical change            
 and represents a measured approach to modernize telecommunications            
 in Alaska.  As such, the proposed act is certainly consistent with            
 developments elsewhere and with sound public policy.  He thanked              
 the committee and asked if there were any questions.                          
 The following is the written statement Mr. Shooshan submitted for             
 the record:                                                                   
 Testimony of Harry M. Shooshan III on HB 346, "The Alaska                     
 Telecommunications Act of 1995"                                               
 September 27, 1995                                                            
 Mr. Chairman, members of the Committee.  I am Harry M.                       
 Shooshan, a principal in Strategic Policy Research, a                         
 telecommunications consulting firm based just outside of                      
 Washington, D.C.  I am appearing here this afternoon on                       
 behalf of ATU Telecommunications.                                             
 Although my complete bio is attached to this testimony,                      
 I would like to mention at the outset that I had the                          
 opportunity to help develop public policy in                                  
 telecommunications for over a decade as a Congressional                       
 staffer, including six years as chief counsel to what is                      
 now the Telecommunications and Finance Subcommittee in                        
 the United States House of Representatives.  After                            
 leaving the Congress, I have worked on issues of                              
 competition and regulation for a number of clients in                         
 both private and public sectors.  For example, I have                         
 just completed a project for the Iowa Utilities Board                         
 (the equivalent of the APUC) related to implementation of                     
 local competition as mandated by that state's new                             
 statute.  I have also consulted with the regulatory                           
 authority in the United Kingdom.  My private-sector                           
 telecommunications clients have been primarily local                          
 exchange carriers, but I have also done some work with                        
 long-distance companies in the United States and Canada                       
 on pricing flexibility and regulatory modernization.                          
 I am pleased to have been asked to review HB 346, "The                       
 Alaska Telecommunications Act of 1995," and I am                              
 delighted to participate in these hearings on such an                         
 important measure.                                                            
 I intend for this testimony to provide a national                            
 perspective on this legislation.  While I am familiar                         
 with the major players in Alaskan telecommunications, I                       
 do not appear this afternoon as an expert on your state                       
 and its needs.  I consider myself a resource upon which                       
 this committee might draw as you consider the revisions                       
 to the Alaska Code proposed in this new legislation.                          
 On the whole, I believe that "The Alaska                                     
 Telecommunications Act of 1995" provides a sound basis                        
 for revamping the Alaska Code to permit efficient                             
 competition and will help to usher in an era of "new                          
 opportunities" in this state as ATU suggests.                                 
  I.  Introduction                                                             
 The only constant in telecommunications today is change.                     
 In fact, as one observer noted, the world is changing so                      
 fast these days that the person who says it can't be done                     
 is generally interrupted by someone doing it.  We have                        
 come to think of telecommunications, appropriately, as a                      
 form of infrastructure which is as critical to today's                        
 expanding information economy as roads, airports and                          
 shipping channels are to our traditional industrial                           
 economy.  There have been a number of studies in recent                       
 years (some of which I have been privileged to author or                      
 coauthor) that have demonstrated beyond doubt that                            
 telecommunications matters in supplying tools for                             
 economic development.  I note that the Alaska 2001                            
 Advisory Committee, chaired by Lt. Governor Ulmer, has                        
 nearly completed such a study.                                                
 But just as telecommunications matters, so do public                         
 policy and regulation.  This is because so many of the                        
 firms that supply the vital telecommunications                                
 infrastructure are regulated.  It is a fundamental                            
 principle in our free economy that firms respond to                           
 incentives.  Thus, the incentives provided by the                             
 marketplace, or by regulation where necessary as                              
 surrogate for marketplace forces, are important.  As the                      
 legislature, you have the opportunity to set the                              
 direction of public policy in this vital sector and to                        
 make certain that regulation provides the right                               
 incentives; in this case, incentives to invest, to                            
 innovate and to supply quality service at appropriate                         
 prices.  As competition intensifies, spurred by federal                       
 legislation as well as by actions you take here in                            
 Alaska, regulation must adapt to the new environment.                         
 As I see it, in the brave new world, the information                         
 superhighway will not be some monolithic structure, but                       
 rather "a network of networks."  Both wired and wireless;                     
 terrestrial and satellite.  Many of these networks will                       
 ultimately be interconnected, with the public switched                        
 network serving as the backbone of the new information                        
 superhighway system.  The switched network will likely                        
 have an important continuing role to play for many                            
 customers in providing the on-and off-ramps to the                            
 information superhighway.                                                     
 Furthermore, the lines between industries that have                          
 existed in the past as a result of public policy and                          
 regulation will increasingly become blurred or will be                        
 erased altogether.  For example, in the future, the                           
 labels LED, CAP, and INC will be meaningless.  We will                        
 not think of wireline and wireless as being two different                     
 industries, but rather as two different technologies for                      
 delivering essentially the same services.  Similarly, we                      
 are moving to a world where any of a number of companies                      
 will be providing video, voice and data, regardless of                        
 their origins as cable companies or telephone companies.                      
 While the pending federal legislation will speed up this                      
 process, I believe these changes will occur whether or                        
 not we have a new Communications Act.                                         
 Regulatory policy should anticipate these changes and                        
 seek to balance the needs of established providers, new                       
 entrants and users.  In the words of Alaska 2001 Advisory                     
 Committee's draft report to the APUC:  "In markets where                      
 competition is found to be in the public interest, state                      
 statutes and commission regulations should be amended to                      
 provide for an orderly transition to competitive markets                      
 in a manner that is fair to all concerned."                                   
 I couldn't have said it better.                                              
 II.  The National Environment                                                
 The past few years have been marked by a wide range of                       
 activity on the public policy front in                                        
 telecommunications.  This activity includes that                              
 consideration, and now likely enactment, of the first                         
 complete overhaul of federal telecommunications law in                        
 over sixty years.                                                             
 While a rewrite of the 1934 Communications Act is long                       
 overdue, Congress is simply following the lead of a                           
 number of state legislatures that have also enacted                           
 sweeping new telecommunications laws.  These states                           
 include Nebraska, Illinois, Virginia, Tennessee, Florida,                     
 Iowa, Georgia, Hawaii, Minnesota, North Carolina, New                         
 Hampshire, Texas, Utah, and Wyoming.  In addition to                          
 these legislative actions, as large number of state                           
 regulatory agencies have acted on their own to facilitate                     
 the transition to competition.  Notable among these are                       
 New York, Massachusetts, Maryland, Nevada and Washington.                     
 While the details of these initiative may vary, their                        
 goals are the same - to bring regulatory policy up to                         
 date and to provide regulatory agencies with the tools                        
 they need to cope with rapidly changing markets.  The                         
 approaches taken in other jurisdictions range from                            
 radical (e.g., Nebraska which effectively deregulated                         
 telecommunications markets by legislation nearly a decade                     
 ago) to more incremental (e.g., Iowa, which left more                         
 discretion with the regulatory agency).                                       
 The pending federal legislation is far-reaching, although                    
 it would leave a great deal of implementation to the                          
 Federal Communication Commission (FCC) and to                                 
 federal/state joint boards consisting of FCC                                  
 commissioners and state regulator who are selected by                         
 NARUC.  While there are some important differences                            
 between the versions passed by the House of                                   
 Representatives and the Senate (where Senator Stevens has                     
 played a key role in advocating Alaska's unique                               
 interests) which will have to be worked out in a                              
 conference committee, it is striking how much agreement                       
 there seems to be on  the direction in which federal                          
 policy should go.  Both bills remove the lines between                        
 industries and open local and long-distance telephone                         
 markets to additional competition.  Both bills require                        
 the interconnection of new entrants, but also provide for                     
 streamlined regulation of incumbents.  It is also                             
 significant that the bills recognize that there are                           
 important differences among telephone companies.  The                         
 bills provide for waivers or modifications of various                         
 requirements where they are determined to be economically                     
 burdensome or technically infeasible if applied to                            
 smaller companies which are not as diversified as the                         
 Bell Operating Companies and other large holding                              
 companies in terms of geographical coverage or lines of                       
 business.  It is important to note that ATU would qualify                     
 for waivers under either of the two bill; a point to                          
 which I will return later in my testimony.                                    
 Before giving you my thoughts on the proposed                                
 legislation, I want to emphasize the importance of moving                     
 ahead here in Alaska.  In the first place, there are                          
 unique circumstances that exist in this state that should                     
 be reflected in telecommunications regulatory policy.                         
 This Committee is in a far better position that a                             
 Congressional committee in Washington, D.C. (even Senator                     
 Stevens on it) to make certain that these circumstances                       
 are addressed in the transition to competition.                               
 Secondly, as sweeping as the final federal legislation is                     
 likely to be, it retains the concept of dual                                  
 jurisdiction.  The states will continue to play important                     
 roles in developing and administering the competitive                         
 policy set out in the legislation.  In addition, the                          
 states retain complete control in a number of important                       
 areas, such as the setting of rates for local service.                        
 You actually may be better off if you have established                       
 your own policy in terms of minimizing general                                
 Thus, I believe you can and should move ahead without                        
 waiting for the enactment of federal legislation.  Nor                        
 should you be bound in any way by the specific approaches                     
 to the various issues taken in the federal                                    
 legislation...or in legislation adopted by other states                       
 for that matter.  It may be that some of what you do is                       
 ultimately superseded by federal legislation or                               
 regulation.  You cannot determine that outcome.  What you                     
 can determine is whether or not Alaska has the right                          
 public policy for the Information Age.  I think the                           
 legislation which is before you moves things in the right                     
 III.  Putting the Alaska Telecommunications Act of 1995                      
 into Perspective                                                              
 As I see it, the proposed Alaska Telecommunications Act                      
 of 1995 ("the proposed act") has three essential                              
 components.  First, it seeks to provide for fair                              
 competition in establishing terms for interconnection and                     
 for access to essential facilities.  Second, it provides                      
 for streamlined regulation of new and competitive                             
 services.  And third, while retaining traditional rate-                       
 of-return regulation, it modernizes the regulatory                            
 treatment of investment and depreciation.                                     
 The proposed Act also provides for discounted rates to                       
 schools, health care facilities and other institutions.                       
 In nearly every respect, the proposed Act appears to move                    
 Alaska in the direction many other states are already                         
 headed.  In that sense, it is hardly radical.  If                             
 anything the legislation could be characterized as                            
 seeking only moderate or incremental change in the status                     
 quo.  For example, 18 states have abandoned traditional                       
 rate-base rate-of-return regulation for some form of                          
 price regulation.  Another 12 states have paved the way                       
 for the adoption of price regulation plans.  Some states                      
 have adopted even more streamlined regulation than is                         
 proposed here.  While other states have taken different                       
 approaches to facilitating competition, I believe that                        
 the reliance on interconnection in the proposed Act is                        
 sound in light of the circumstances that exist in Alaska.                     
 I would like to address each of these essential                              
 components in more detail.  I will also suggest some                          
 areas in which the proposed Act might be improved,                            
 including a couple of points that concern me and, at a                        
 minimum, should be clarified.                                                 
 A.  Interconnection of Competitors                                           
 The existing joint use and interconnection provisions of                     
 the Alaska Code provide a good starting place for the                         
 implementation of competition.  As I read these                               
 provisions, telecommunications utilities are already                          
 required to provide interconnection to other public                           
 utilities as well as to nonutilities where the APUC finds                     
 that interconnection to be in the public interest.                            
 I would make four observations about his provision of the                    
 code and about the proposed changes to it.                                    
 First, the obligation to interconnect should run both                        
 ways; that is, it should by symmetrically imposed on all                      
 competitors.  If ATU, for example, is obligated to                            
 interconnect with a competitor, then that competitor                          
 should be required to interconnect with ATU.  This                            
 symmetrical treatment is important in order to assure the                     
 interoperability of competing networks and to ensure that                     
 customers of competing providers are able to reach each                       
 Second, while some parties will undoubtedly urge you to                      
 go further by requiring ATU to desegregate its network,                       
 I am not persuaded that circumstances in Alaska warrant                       
 such steps.  The critical requirement necessary to ensure                     
 competition is interconnection.  It is not apparent to me                     
 that you need to go beyond that at this time.   While                         
 other jurisdictions have required unbundling, their rules                     
 apply primarily to the Bell Operating Companies and to                        
 other large vertically-integrated telephone companies                         
 (GTE, Sprint, Frontier, etc.).  As I noted previously, in                     
 pending federal legislation, Congress has provided for                        
 waivers of various interconnection requirements for                           
 smaller companies that are not similarly situated.                            
 ATU, for example, is not now in the long-distance                            
 business.  It faces competitors who are large, formidable                     
 players in that business, including AT&T and GCI/MCI/BT.                      
 These firms operate successfully in many markets around                       
 the world, offer a wide range of services and possess                         
 substantial resources that will facilitate their vertical                     
 integration into the provision of local telephone                             
 service.  In fact, these firms have the capability to                         
 bypass ATU's network completely to serve a wide range of                      
 customers.  The legitimate needs of competitors should be                     
 determined in part by who they are and by their relative                      
 positions in all telecommunications markets.  In the                          
 current environment in Alaska, requiring the                                  
 interconnection of competitors is sufficient to permit                        
 local competition.                                                            
 Moreover, you have to be careful not to destroy what I                       
 would term "the economies of the firm" which might be the                     
 result of requiring ATU to desegregate its local network.                     
 Making "it" easier for competitors to compete may make                        
 "it" harder for the incumbent to respond.  The imbalance                      
 can be even greater where, as here, competitors can rely                      
 on their own  economies of scope.  Removing the legal                         
 barriers to entry providing for access to essential                           
 facilities, and requiring symmetrical interconnection are                     
 the essentials for permitting expanded competition.                           
 Third, the proposed Act would require that the costs of                      
 any modifications or additions needed to facilitate                           
 interconnection are borne by the competitors.  In                             
 principle, this is unobjectionable.  However, to the                          
 extent that the  utility making the modification or                           
 addition may also benefit, then it would be appropriate                       
 for some of the costs to be shared.  For example, local                       
 telephone companies benefitted from deploying the digital                     
 switches necessary to implement fully "equal access" for                      
 long-distance companies.  In addition, this language                          
 should not be seen as a "blank check" that could lead to                      
 increasing the cost of interconnection beyond what is                         
 required by prevailing industry practices.                                    
 Fourth, I am unclear about the effect of conditioning                        
 interconnection on the absence of "injury to the owner or                     
 other users of the facilities" and especially about                           
 removing the word "substantial."  If the intent of the                        
 language is to ensure that interconnection itself does                        
 not produce technical harm to the incumbent, does not                         
 degrade the technical quality of service to consumers and                     
 does not require the incumbent to incur cost for which it                     
 is not compensated, I think the standard is sound.                            
 However, if the language is read to require the APUC to                      
 consider whether competition generally might result in                        
 economic harm to a public utility, I am concerned that                        
 such language could be used by incumbent firms to block                       
 efficient competitors from obtaining interconnection.                         
 This would, in my view, be an unfortunate result and,                         
 perhaps, an unintended result of this language.                               
 However, there is a fundamental problem with the                             
 introduction of competition into a market where incumbent                     
 firms are rate-of-return regulated.  If a regulated                           
 public utility is denied an opportunity to earn a fair                        
 return on its investment as a result of competition, the                      
 regulators have abrogated an essential element of the                         
 traditional social compact.  This dilemma is compounded                       
 if the regulated  public utility is constrained from                          
 restructuring its rates in the face of competition and,                       
 thereby, from making itself whole.                                            
 Other jurisdictions have adopted price regulation as a                       
 means of protecting ratepayers, shifting more of the risk                     
 to shareholders, and giving the regulated firm at least                       
 some latitude to adjust its rates over time.                                  
 B.  Streamlined Regulation                                                 
 The streamlined regulatory framework contained in the                        
 proposed Act is similar to approaches advanced or adopted                     
 in other jurisdictions.  At the heart of the changes is                       
 a recognition that, as services offered by local                              
 telephone companies become competitive, those companies                       
 must be able to price such services in a competitive                          
 The key elements of streamlined regulation in the                            
 proposed Act are:                                                             
 1.  A procedure for classifying services (e.g., as                           
 "subject to competition");and                                                 
 2.  Pricing flexibility (including contract pricing) for                     
 new services and services subject to competition.                             
 I would like to comment briefly on these important                           
 Classification of Services.  As competition continues to                     
 develop, it is appropriate to tailor regulation to fit                        
 the new circumstances.  This means allowing the incumbent                     
 firm to respond when competition exists for a particular                      
 service or group of services.  The proposed Act would                         
 define as service subject to competition as "a service                        
 where a customer may purchase a substitute service from                       
 another entity."  This is an appropriate standard for                         
 classifying competitive services and has been adopted,                        
 and is being successfully implemented in other                                
 jurisdictions (e.g., Illinois).  It focuses on the                            
 availability of a substitute service and not on how many                      
 customers may choose to buy the substitute service (i.e.,                     
 a measure of market share).  The main problem with the                        
 latter approach is that it actually penalizes the                             
 incumbent firm for being an effective competitor; or put                      
 another way, it forces the incumbent to lose share by                         
 being unresponsive to customers' needs in order to gain                       
 regulatory flexibility.                                                       
 As I read it, the proposed Act would also permit a public                    
 utility to file a request with the APUC to reclassify a                       
 competitive service from regulated to deregulated.  The                       
 filing would have to meet requirements established by the                     
 Commission with regard to the treatment of costs and                          
 revenues, and the Commission would have 60 days to review                     
 the filing and either accept or reject it.  This approach                     
 provides an appropriate mechanism for ultimately moving                       
 competitive services "below the line."                                        
 It is also important that firms have the incentive to                        
 introduce new services.  By providing for streamlined                         
 regulation of new services, the proposed Act will                             
 encourage regulated public utilities to innovate.                             
 Moreover, this approach will prevent a competitor from                        
 holding up a new service offering of a rival in order to                      
 gain an advantage.  While the proposed Act does not                           
 define "new service," the term can be presumed to mean a                      
 service that is not now being offered.  One concern with                      
 the classification of new services is that a firm could                       
 withdraw an "old" regulated service that is essential to                      
 either consumers or competitors and attempt to substitute                     
 a new service which it could price as it chooses.  As                         
 long as a public utility cannot withdraw any comparable                       
 existing regulated service without their permission of                        
 the APUC, this concern is mitigated, and streamlined                          
 treatment of new services if fully justified.                                 
 I believe it is also desirable to limit that amount  of                      
 time the APUC has to consider a classification request.                       
 The thirty day period provided in the proposed Act seems                      
 appropriate.  This should give the APUC adequate time to                      
 make its finding without allowing the process to become                       
 bogged down with competitors' objections.  Once the                           
 Commission has begun to administer this new provision it                      
 can be expected to actively monitor developments in the                       
 marketplace.  The Commission should generally be well                         
 aware of the presence of competitive alternatives and,                        
 thus, able to complete its review of a classification                         
 request within 30 days.  The goal is to have competitors                      
 fight it out in the marketplace rather than in the                            
 hearing room.                                                                 
 Pricing Flexibility for New and Competitive Services.                        
 The propose Act would permit a public utility to price                        
 new and competitive flexibility subject to streamlined                        
 regulatory treatment.  Prices could be set at whatever                        
 level the utility-and the market-dictated as long as the                      
 price covers the incremental cost of providing the                            
 service.  Establishing a price floor based on incremental                     
 cost is supported in the economic literature and is                           
 consistent with the direction that public policy is going                     
 in other jurisdictions.  The purpose of a price floor is                      
 to provide regulatory (in addition to antitrust)                              
 protection against predatory pricing by a firm with                           
 market power.                                                                 
 The streamlined regulation of competitive services                           
 includes shorter notice periods for establishing initial                      
 rates (30 days to the Commission and 15 days to the                           
 public), shorter notice for changes to existing rates (10                     
 days to the Commission) and the ability to enter into                         
 special contracts, subject to filing a notice describing                      
 any such contract with the Commission within 10 days                          
 after the effective date of the contract.  The Commission                     
 retains the ability to investigate any rate fling and to                      
 fine a public utility for rates that are determined to be                     
 below the incremental cost of providing the service in                        
 question.  Similar streamlining has been adopted by many                      
 states over the last 10 years.                                                
 While competitors can be expected to argue that incumbent                    
 firms should be kept under tighter rein, I believe the                        
 legislation should seek to avoid, to the extent possible,                     
 a regime where the competition sets its prices based on                       
 the posted prices of the incumbent and where competitors                      
 are able to reprice services while tying up the incumbent                     
 in the regulatory process.  Consider the following                            
 observation about local competition in the region served                      
 by Bell Atlantic made by an executive at Marriott                             
 International, Inc. whom I interviewed earlier this year:                     
 "As I see it, there are two problems with                                   
 (regulation of local competition):  One                                       
 problem is that the competition fixes their                                   
 prices based on the level of Bell Atlantic's                                  
 regulated rates rather than their own costs.                                  
 The second problem is that Bell Atlantic can't                                
 respond competitively to their competition.                                   
 That is certainly a problem.  We have priced                                  
 access nationwide from competitive accedes                                    
 providers for our private-line network...                                     
 Their pricing is almost universally, exactly                                  
 10 percent below the Bell Atlantic price.                                     
 Exactly 10 percent.  We have written a letter                                 
 to the Maryland Public Service Commission in                                  
 which we describe our concerns about these                                    
 competitive failures.  We told the staff of                                   
 the Maryland PSC that its terrifying regime is                                
 a two-edged sword, both edges of which are                                    
 inhibiting competition: the tariffs restrict                                  
 the LEC's ability to compete and they                                         
 simultaneously act as a standard against which                                
 the alternate carriers fix their prices.  We                                  
 want prices based on true competition among                                   
 all suppliers, including Bell Atlantic."1                                     
 This is consistent with the views of nearly 80 private-                      
 and public-sector users whom I have interviewed during                        
 the last 5 years for a number of studies.                                     
 Users want competition.  However, they want the existing                     
 providers to be free to compete as well.  Large users, in                     
 particular, highly value special contracts which permit                       
 them to make the kind of arrangements with their                              
 telecommunications suppliers that they can make with                          
 practically every other vendor with which they deal.                          
 Moreover, these users highly value the ability to move                        
 quickly.  As an executive at Safeway, the large grocery                       
 retailer, put it:                                                             
 "When we want to roll something out, we want                                
 it to be strategic-fast without announcing a                                  
 whole lot to the world and, in particular, our                                
 competitors.  (When our suppliers are                                         
 regulated) everybody in the world ends up                                     
 knowing what you are doing long before you are                                
 actually to do it."2                                                          
 The full benefits of competitive markets will only be                        
 realized if regulation is appropriately streamlined. It                       
 is important to make these changes now so the regulatory                      
 ground rules are clear for all parties in the future.                         
 C.  Regulatory Treatment of Investment and Depreciation                      
 The proposed Act would also make important changes in the                    
 regulatory treatment of the valuation of property and the                     
 depreciation of investment made by public utilities.  The                     
 proposal would establish a rebuttable presumption that                        
 once property has been included in rates, it is presumed                      
 to be allowed for ratemaking purposes.  This approach is                      
 1.   See John Haring and Harry M. Shooshan                                  
 III, Universal competition in the Supply of                                   
 Telecommunications Services: Eight Customer                                   
 Perspectives, February 8, 1995, p. 36                                         
 (interview with Gary L. Helwig, Director of                                   
 Telecommunications Planning and System Design,                                
 Marriott International, Inc.).                                                
 2.  Haring and Shooshan, p.12 (interview with                               
 Gary L. Helwig, Director, Information Systems,                                
 Safeway, Inc.).                                                               
 becoming standard in utility regulation across the                           
 country.  Its purpose is to reduce the likelihood of                          
 disallowances based on retroactive review by regulators.                      
 While it is often said that "hindsight is 20-20," the                         
 fact is that firms will not make investments in new                           
 technology and new services if they risk having those                         
 investments disallowed by regulators after the fact; that                     
 is, once the investment has already been factored into                        
 rates that the utility is lawfully charging.  Given the                       
 heightened risks resulting from expanded local                                
 competition, public utilities that also face the risk of                      
 disallowances will be likely to make only minimal, "safe"                     
 investments.  As a result, consumers who rely on that                         
 utility may find themselves with fewer choices in the                         
 short run and even declining service quality in the long                      
 run.  The proposed language would put the burden of proof                     
 on the Commission if it chose to disallow such investment                     
 for any reason.                                                               
 Regulation has also controlled the rate at which a                           
 utility's investment can be recovered in the prices it                        
 charges consumers.  This has been accomplished through a                      
 set of complicated formulas relating to estimates of how                      
 long plant will be "used and useful."  Because telephone                      
 plant is subject to federal and state regulation (it is                       
 used to provide both interstate and intrastate services),                     
 the depreciation rules that govern telecommunications                         
 utilities in Alaska are set by both the FCC and the APUC.                     
 The proposed Act establishes a rebuttable presumption                         
 that the rates and methodologies accepted by the FCC                          
 should apply to telecommunications utilities in Alaska.                       
 In general, the FCC has moved more quickly than the                           
 states to adopt depreciation rules that are consistent                        
 with changing markets and changing technology.  While I                       
 have not had the opportunity to review the APUC's record                      
 in this area, I believe that taking the necessary steps                       
 to "unify" the regulatory rules relating to depreciation                      
 moves policy in the right direction.  These steps are                         
 important if incumbent firms are to be permitted a                            
 reasonable opportunity to recover the investments they                        
 have already made before competition intensifies.                             
 IV.  Summary and Conclusion                                                  
 Overall, I believe "The Alaska Telecommunications Act of                     
 1995" moves public policy in the right direction.  It                         
 provides for incremental, rather than radical, change and                     
 represents a measured approach to modernizing                                 
 telecommunications regulation in Alaska.  The proposed                        
 Act seeks to achieve fair competition, especially in                          
 light of the relative capabilities of the major players.                      
 It recognizes the need for streamlining regulation and                        
 for ultimately withdrawing it altogether as markets                           
 become increasingly competitive.  As such, the proposed                       
 Act is certainly consistent with developments elsewhere                       
 and with sound public policy.                                                 
 REPRESENTATIVE ROKEBERG asked Mr. Shooshan about his statement                
 relating to pending federal statutory changes and its relationship            
 to HB 346.  He said he recalls Mr. Shooshan indicated he thought              
 the legislature should go ahead on their own regarding this.                  
 Representative Rokeberg said he understands that but is curious               
 about his perspective in what's happening in Washington, D.C., as             
 far as the federal statute.                                                   
 MR. SHOOSHAN said as Representative Rokeberg is probably aware,               
 both the House of Representatives and the U.S. Senate have passed             
 a major telecommunications reform legislation.  He added that,                
 parenthetically, he thinks in the Senate's legislation, Alaska's              
 interests have been extremely well articulated and protected by               
 Senator Stevens.  Senator Stevens has done work on behalf of the              
 state in making sure that special circumstances of Alaska are                 
 addressed in the legislation.  Mr. Shooshan said they are currently           
 waiting for a conference committee to be appointed and then they              
 will proceed to work out the differences in the legislation.  He              
 said his feeling is and the feeling of anyone who has been involved           
 in the legislative process and has spent ten years on Capitol Hill            
 is that we're probably closer than we've ever been to major reform            
 on the federal level.  In terms of the impact on Alaska, it seems             
 that the bill makes major changes in introducing local competition            
 and opening markets to entry.  It still preserves something that              
 was very fundamental in the Communications Act of 1934, which is              
 the federal statute that governs today is the concept of dual                 
 jurisdiction.  That is the fact that we will continue to see both             
 the federal jurisdiction through the FCC and state jurisdiction, in           
 this case by the APUC, is  maintained.  Mr. Shooshan said he thinks           
 that the challenge is to move ahead with modernizing the Alaska               
 statute to pave the way for the inevitable changes that will be               
 coming so that Alaska can be steering the ship as opposed to just             
 being on board when the ship begins to turn.  He said he believes             
 that there will continue to be an important role for the state and            
 the state can begin to prepare for the role by moving to change the           
 code now.  Mr. Shooshan said even if the federal legislation does             
 not pass, he believes that it is long overdue for the legislature             
 to give a thorough review of the code and move forward with reforms           
 to the statute.                                                               
 CHAIRMAN KOTT said he recalls reading in the Wall Street Journal              
 that there was speculation that Congress would not address this               
 matter in the conference committee until the middle of spring.  He            
 asked Mr. Shooshan if he has any comment as to whether or not that            
 is accurate or if it is speculative.  MR. SHOOSHAN said both houses           
 have acted and the margin on the final passage, on most of the key            
 votes, was overwhelmingly in favor of the legislation in terms of             
 final passage.  Mr. Shooshan referred to there being a lot of                 
 jockeying for positions in Congress and said because this is                  
 monumental legislation and because there are so many different                
 aspects and angles involved, there is actually a (indisc.) now to             
 get appointed to the conference committee.  The focus clearly in              
 Congress is working the budget impasse and getting beyond that.  He           
 said he suspects there will be conferee names within the next week            
 or two.  He said he would be very surprised if this is delayed                
 until next spring.  There may be a bill out of the conference                 
 committee before next year and then the question will be, "What               
 does the President do?"  The Administration has threatened a veto             
 but he believes it was largely to gain leverage for some of the               
 concessions in the House/Senate conference.                                   
 CHAIRMAN KOTT said that seems to be what the article was                      
 suggesting, perhaps at the end of the year.  However, it did also             
 mention that there was this commitment to America, i.e., Medicaid             
 reform, welfare reform, those kind of issues that Congress had to             
 urgently take up before the end of the year before they could                 
 pursue the Telecommunications Act.  He said he doesn't know if the            
 President has any fear of an override if he vetoes it.  Chairman              
 Kott said he thought there was concern by the Administration on the           
 existing piece of legislation that passed.  There were some problem           
 areas that he believes the President would like to see worked out.            
 He said he suspects that if there is not a major change, the                  
 President will veto it.                                                       
 MR. SHOOSHAN said his own view is that the President probably won't           
 veto it and we won't have to see an override.  He emphasized that             
 he believes it is appropriate and necessary for the legislature to            
 understand what's going on at the federal level.  Most states have            
 moved forward without waiting for federal legislation to make                 
 necessary changes.  Mr. Shooshan urged the legislature to move                
 ahead in any event.                                                           
 CHAIRMAN KOTT thanked Mr. Shooshan for his comments.                          
 MARK FOSTER, Anchorage Telephone Utility, was next to testify on HB
 346.  He informed the committee members he served on the consumer             
 and engineering seats on the APUC, from 1990 through the end of               
 1993.  Since then, he has been involved in a number of consulting             
 engagements including utilities, natural gas feasibility studies,             
 and electric utilities.  He noted he has done work for GCI, ATU and           
 commercial customers in the telecommunications arena.                         
 MR. FOSTER said overall, HB 346 represents an incremental first               
 step to step away from command and control regulatory structures              
 based on statutes which have remained substantially unchanged since           
 the 1970s with respect to local exchange markets.  It is a step               
 toward the 1990s where telecommunications markets are becoming                
 increasingly competitive and legislators and regulators across the            
 country are streamlining regulations in finding ways to produce               
 incentives for investments.  Mr. Foster said as a former                      
 commissioner, he finds one of the more troubling aspects of                   
 regulations is the question of its cost effectiveness.  He noted he           
 is familiar with many cases at the APUC, where the regulatory                 
 process leads to hundreds of thousands, and in some cases, millions           
 of dollars being spent on staff, consultants and lawyers to fight             
 pitched hearing room battles that ultimately yielded very few                 
 benefits.  This regulatory burden is ultimately paid for by all of            
 us through higher rates and regulatory incentives which discourages           
 innovation and investment.  Mr. Foster said he believes it is                 
 important to find ways to encourage investment and to reduce the              
 reliance on the hearing room as a place to fight out competitive              
 battles.  Given Alaska's unique geography and the increasing                  
 connection to a global economy, reforms aimed at reducing the                 
 regulatory burden in providing a vital and robust                             
 telecommunications sector are vital.  HB 346 takes some important             
 steps along that path in reducing regulatory burdens and allowing             
 the consumers, not the government, to pick the winners and the                
 losers in those competitive markets.  HB 346 does not guarantee               
 competitive outcome.  It reduces regulations and lets the market              
 make that determination.  It does not guarantee that rates will               
 remain unchanged.  As competitive markets emerge, rates that have             
 historically been subsidized are likely to experience upward                  
 pressure.  This legislation provides opportunities for success and            
 failure for both competitors and consumers.  It does change the               
 market structure.  Mr. Foster said he had passed out additional               
 testimony and would like it to be made part of the record.  He also           
 noted he was available for questions.                                         
 CHAIRMAN KOTT said he has Mr. Foster's testimony and it would be              
 included as part of the record.  The following is Mr. Foster's                
 written testimony titled, "Sectional Highlights:                              
 SECTIONAL HIGHLIGHTS                                                          
 Consistent with the legislature's approach in long                           
 distance competition, the proposed legislation provides                       
 the APUC with discretion and flexibility to deal with                         
 changing circumstances.                                                       
 Section 2, Findings                                                        
 These findings are based in part on the findings the                         
 legislature developed in 1990 in conjunction with long                        
 distance competition.  (AS 42.05.800)                                         
 Section 3, Common Carrier                                                  
 This section is amended to make it consistent with other                     
 sections of the statute concerning rates -- the "just and                     
 reasonable" standard.                                                         
 Section 4, AS 42.05.191, Format of Orders                                  
 This amendment requires the commission to format its                         
 orders to clearly state its factual findings and legal                        
 conclusions.  This is common practice at many state                           
 commissions.  It provides the public with a better                            
 understanding of the basis of the Commission's decisions.                     
 Section 6 & 7, AS 42.05.301 & 306, Discrimination in                        
 Service/Discounts for Public Purposes                                        
 Section 301(a) is the general rule against undue                             
 discrimination in service.                                                    
 Section 301(b) allows the utility to offer a new service                     
 on a trial basis to selected customers.  This allows the                      
 utility to do field testing (engineering and marketing)                       
 of new services to target groups prior to any requirement                     
 to provide the new service to all customers.                                  
 Section 306(b) allows the utility to offer reduced rates                     
 to schools, universities, libraries, health care                              
 facilities, museums, public broadcast stations, public                        
 safety facilities, and other public institutional                             
 communications users.                                                         
 I am concerned that the existing statutes effectively                        
 preclude the utility from offering discounts to schools                       
 for Internet access lines.  Keep in mind, that if the                         
 school cannot otherwise afford the service, by offering                       
 the service at a discount, the utility can spread its                         
 fixed overhead over more customers and all ratepayers                         
 Section 8 & 9: AS 42.05.311(a) Joint Use & 311(b)                           
 There are two basic questions in these statutory                            
   1. Under what conditions should joint use and                               
    interconnection be allowed?                                                
   2.   Who should pay for the changes involved?                               
 Who should pay?  The language proposed here in 311(b)                        
 simply copies the existing language from 311(a) and                           
 states that the entity requesting modifications should                        
 pay for those modifications.                                                  
 Under what conditions should joint use and                                   
 interconnection be  allowed?  The proposed amendment                          
 would allow interconnection when the interconnection was                      
 not detrimental to the utility, existing customers or                         
 existing services.                                                            
 Sections 10 & 11, AS 42.05.321  Commission role in                          
 settling interconnection disputes                                            
 In the event of disputes over interconnection, the                           
 Commission may intervene to:                                                  
 - require interconnection when the                                          
 interconnection is not detrimental to the                                     
 utility, its existing customers or existing                                   
 services and                                                                  
 - settle disputes over price.                                               
 Section 12.  AS 42.05.361 Filing and Inspection of                          
 In general, all rates and contracts offered by a utility                    
 are required to be on file with the APUC.  In competitive                     
 markets, this allows competitors to not only see the move                     
 of the regulated utility ahead of time, but allows them                       
 to use the regulatory process to slow down and in some                        
 cases render ineffective legitimate competitive activity                      
 and first mover advantages.                                                   
 The proposed change would allow a utility to negotiate                       
 and execute a contract for competitive services prior to                      
 disclosing the terms and conditions to the APUC and                           
 competitors.  This would allow a practice that is similar                     
 to those in place in Colorado and Wisconsin.                                  
 This is especially important where a regulated utility is                    
 in competition with an unregulated entity.  The                               
 unregulated entity can change prices and negotiate                            
 contracts without any requirement for prior approval by                       
 a third party.  This amendment would bring regulated and                      
 unregulated firms closer to parity in competitive                             
 Section 13.  AS 42.05.391 Discrimination in Rates:                         
 In general, the statute prohibited "undue                                    
 discrimination." This standard allows for "due"                               
 discrimination. i.e., discrimination based on some                            
 defensible rationale.                                                         
 The proposed language explicitly identifies practices                        
 that are considered allowable as "due discrimination."                        
 This section provides explicit statutory authority to the                    
 Commission to support policies developed under the old                        
 "liberally construed" authority which must now be                             
 reexamined under the "reasonably implied" authority                           
 passed last session by the Legislature.                                       
 Service subject to competition                                             
 This establishes the allowable price floor at the                            
 incremental cost of providing service to protect monopoly                     
 customers against cross-subsidy and protect competitors                       
 against predatory pricing.  Examples of this practice                         
 *Homer Electric Association re:  Kenai                                      
 Peninsula Refineries                                                          
 *Alaska Electric Light & Power re: Juneau Area                              
 Mining Projects of Affiliated Interests                                       
 *Alascom re: Private Line and Special Contracts                             
 *Local Exchange Carrier re: Special Access                                  
 *ATU re: competitive services (voice mail,                                  
 In summary, the Commission has historically allowed                          
 utilities to price down to the incremental cost when a                        
 service was subject to competition.  The proposed                             
 language would provide explicit authority for that                            
 New service                                                                
 Where new services are introduced, this would allow them                     
 to be priced at or above their incremental cost.  Under                       
 the old regulatory regime, new services were priced on a                      
 fully distributed cost basis, which may have been too                         
 high to develop a new market.  Consequently new services                      
 may not have reached their full revenue potential or in                       
 some cases even introduced.  By allowing pricing                              
 flexibility, the utility can take advantage of price                          
 points where more customers will purchase the service.                        
 This provides a "win-win" situation for the utility.  It                      
 generates more revenue and a higher contribution toward                       
 common costs which helps keep other rates lower than they                     
 would have been otherwise.                                                    
 This provides the utility with an incentive to introduce                     
 new services and develop new markets.                                         
 Waive the nonrecurring charges                                             
 The Commission has routinely granted requests to waive                       
 the nonrecurring charges for nonessential services as                         
 part of a promotional offering.  Matanuska Telephone                          
 Association has often waived the sign-up fees for custom                      
 calling features (call forwarding) as part of promotion                       
 to get more customers to sign up for these value-added                        
 features.  This amendment would provide explicit                              
 statutory authority for that practice and expand it to                        
 include competitive services.                                                 
 New service on a trial basis to selected customers                         
 This would explicitly provide statutory authority to                         
 allow utilities to offer new services on a trial basis to                     
 selective customers.  This will encourage the                                 
 introduction of new services and products and greater                         
 experimentation by the utility in its efforts to meet the                     
 needs of its customers.                                                       
 Sections 14 & 15: AS 42.05.411 New or revised tariffs for                   
 Services Subject to Competition:                                             
 Firms need flexibility to respond to the marketplace.  To                    
 be provided an opportunity to compete, firms simply                           
 cannot wait for the regulatory process to churn through                       
 paperwork under old outdated time frames.                                     
 The proposed time frames for competitive services provide                    
 modest reductions from existing statutes and are                              
 reasonable in light of what the Commission adopted for                        
 the Alaskan long distance market and what has been in                         
 place in other states since the mid-1980s in some cases.                      
 Section 16.  AS 42.05.421(a): Suspension of tariff                          
 These sections limit the time period that the APUC can                       
 hold a filing in "suspension" before it is either                             
 rejected, modified, or approved.                                              
 The proposed language would limit that period to six                         
 months for rule changes.                                                      
 It would limit revenue requirement and rate design to six                    
 months before the interim requested rate went into                            
 effect, and twelve months before the permanent rate went                      
 into effect.                                                                  
 The basic time frames have not changed in this section.                      
 The Commission's authority to extend the time a filing                        
 can be held in "suspension" is eliminated.                                    
 This is particularly important given the Commission's                        
 history.  Under the existing statutes, the Commission's                       
 authority to suspend a filing five times, constituting a                      
 22-month suspension was upheld in court.  This is an                          
 unreasonable regulatory burden for any firm, especially                       
 in light of the pace of change in telecommunications                          
 markets today.                                                                
 Section 17.  AS 42.05.426  New or Competitive Services                     
 Subject to Competition Determination                                       
 In response to a utility request, the Commission is                          
 required to make its determination about whether a                            
 service is subject to competition within 30 days of the                       
 filing.  If a service is subject to competition, this                         
 still gives competitors at least 30 days notice that a                        
 utility is seeking flexibility in a particular market.                        
 Is this enough time for the Commission to make a                             
 determination?  Based on historic practices, this appears                     
 to be within the reasonable range.                                            
 The Commission has already made determinations about the                     
 competitiveness of telecommunications markets.  Examples                      
 special access, Centrex and voice mail markets.  These                        
 determinations did not take a lot of time.  Keep in mind,                     
 the burden still rests with the utility to make its case                      
 by filing information which demonstrates to the                               
 Commission that a service is subject to competition.                          
 Just and Reasonable Findings                                               
 The Commission still has six months to make its findings                     
 regarding the appropriateness of the terms and conditions                     
 of a new or competitive service.                                              
 Request for Deregulated Treatment                                          
 The utility may file to offer a service that is subject                      
 to competition as a deregulated service.  The Commission                      
 is required to adopt regulations governing the                                
 reclassification of a service from regulated to                               
 Section 18.  AS 42.05.436 RATES for New or Competitive                      
 This section requires that the rate for a new or                             
 competitive shall be at or above the incremental cost of                      
 providing the service to ensure that the service makes a                      
 contribution toward common costs.                                             
 If the Commission, after investigation and hearing, finds                    
 that a rate is below the incremental cost of service, it                      
 is required to ask the utility to defend itself against                       
 a fine for offering the service below cost!                                   
 The risk of fines and public notoriety provides the                          
 utility with a powerful incentive to price services above                     
 their incremental costs; protecting customers from cross-                     
 subsidy and competitors from predatory pricing.                               
 Section 19. AS 42.05.441 Valuation of property                             
 The new subsection (d) establishes a rebuttable                              
 presumption that once property has been included in                           
 rates, it is presumed to be allowable for ratemaking                          
 This provides an incentive for the Commission and                            
 intervenors to make their case about whether a particular                     
 investment should be included in rates when it is first                       
 included in a rate case.  When an item is first included                      
 in a rate case, the utility still carries the burden of                       
 proof to justify the item as reasonable.  After an item                       
 has been allowed into rates, the entity seeking to                            
 exclude an item from rate base carries the burden of                          
 This keeps the utility from continually having to carry                      
 the burden of proof to justify items that it has                              
 previously justified.                                                         
 Section 20. AS 42.05.471 Depreciation Rates                                
 This subsection establishes the rebuttable presumption                       
 that the depreciation rates and methodologies accepted by                     
 the Federal Communications Commission are reasonable.                         
 The costs involved in keeping different books for both                        
 the State and Federal regulators is not likely to be                          
 worth the effort.  Nonetheless, intervenors still have                        
 the opportunity to challenge the FCC regulation and                           
 demonstrate another system will benefit the public.                           
 Section 21. AS 42.05.671 Competitively Sensitive                            
 This explicitly requires cost and marketing information                      
 for new and competitive services to be treated as                             
 privileged records that are not generally available for                       
 public inspection, except for "in camera" review.                             
 Section 22.  AS 42.05.990 Definition of Subject to                          
 A new definition is added to establish the legal standard                    
 for when a service is considered competitive.  When a                         
 customer has an opportunity to purchase a substitute                          
 service from another entity, the service is considered                        
 This is consistent with several Commission decisions:                        
 Alascom Private Line                                                        
 ATU Voice Mail                                                              
 ATU Centrex                                                                 
 In addition, the Commission has allowed rate flexibility                     
 for special access for several LECs.                                          
 Providing flexibility to the Commission to examine                           
 markets as they become competitive is the best way to                         
 meet the goal of drafting legislation that will stand the                     
 test of time and not become obsolete or unduly advantage                      
 one party over another.  Attempts to develop a detail                         
 definition which reflects the fashion of the day are more                     
 likely to generate future requests for statutory                              
 Because telecommunications utilities supply a critical                       
 service for most sectors of the economy, the performance                      
 of the telecommunications sector has an important                             
 influence on the performance of the entire economy.                           
 The performance of the telecommunications sector, in                         
 turn, is influenced heavily by the regulations imposed on                     
 the utility firms.                                                            
 Progress on regulatory reform for telecommunications is                      
 long overdue in Alaska.  Without regulatory reform, the                       
 performance of the entire economy may well be diminished.                     
 Overall, this bill represents an incremental first step                      
 . streamlining regulations                                                 
 .providing positive incentives to the                                      
 industry to invest in new and                                                 
 competitive markets                                                           
 .providing protections for consumers                                       
 and competitors                                                               
 Thank you,                                                                   
 I am happy to answer any questions you may have.                             
 REPRESENTATIVE ROKEBERG referred to Mr. Foster indicating that the            
 rates have been historically subsidized and are likely to                     
 experience separate pressure and asked if that is because of the              
 changing technology or because of the recommended changes in the              
 MR. FOSTER said he would say it's because of conventional wisdom in           
 the industry which is that residential rates have been subsidized             
 historically by a combination of things.  One is that high long-              
 distance access charges have contributed to residential rates.  Mr.           
 Foster said he believes as the markets become more competitive and            
 people seek other alternatives to those access charges, it puts               
 pressure on those subsidies.  He indicated he doesn't think those             
 will be sustained in the long run.  As a result, you'll see                   
 pressure on those kinds of rates that have been subsidized.  It is            
 a combination of things, technology is part of what is driving it             
 and changes in the regulatory structure to allow more competitive             
 markets to develop.                                                           
 REPRESENTATIVE ROKEBERG asked if the subsidy is more unique towards           
 the Alaskan market or if it is nationally.  MR. FOSTER stated he              
 would characterize that as national and indicated Mr. Edrington               
 could speak to that.                                                          
 MR. EDRINGTON said it is a national phenomenon.  He referred to               
 Representative Rokeberg's question regarding technology and said              
 the monopoly nature of this industry has all been obliterated by              
 technology.  As the monopoly nature of an industry is obliterated             
 and moves into more of a free market configuration, the ability to            
 over charge somebody and under charge somebody else disappears over           
 time.  We will face those kinds of transitions.                               
 CHAIRMAN KOTT asked Mr. Edrington if he is prepared to comment on             
 any particular section of the bill.                                           
 MR. EDRINGTON said he is not prepared to comment.                             
 CHAIRMAN KOTT referred to Section 6 which talks about a trial bases           
 to select customers and said that is a new service that                       
 Telecommunications Utility can provide.  He asked what the trial              
 bases would be about as far as the length period and what type of             
 MR. EDRINGTON said he thinks the goal of that provision is to allow           
 the existing regulated telecommunications utilities the opportunity           
 to do market trials, just as their unregulated competitors are able           
 to do today.  With respect to what would constitute a time period             
 or what kind of service would be allowed under that provision, Mr.            
 Edrington said he thinks the Utilities Commission is charged with             
 sort of policing.  He referred to market trials and said it is                
 conceivable that you would have a new service like caller ID.                 
 Rather then giving that new service to everybody at once, some                
 telecommunications utilities offer it on a trial basis so they can            
 try and assess whether or not they can make the investment                    
 profitable if they rolled it out to everybody.  Mr. Edrington said            
 he thinks things along those lines are what is being contemplated.            
 CHAIRMAN KOTT referred to Section 7 and said it deals with the                
 telecommunications utilities offering a discounted service or a               
 reduced rate telecommunications to a number of other entities,                
 generally supported by the political apparatus.  He said we are               
 expanding existing state or federal law.  Chairman Kott said people           
 who receive some kind of social assistance befit pursuant to a                
 means test and are offered some reduction in rate.  MR. EDRINGTON             
 explained that is an existing statute which was passed in 1990.               
 CHAIRMAN KOTT said since the institutions in Section 7 are                    
 generally supported by a governmental body, what would be the                 
 impetus for a telecommunications firm or utility allowing this to             
 expand.  MR. EDRINGTON said it is largely in response to the demand           
 that has been expressed.  In the Alaska 2001 process, there is a              
 great demand, particularly among the schools and education                    
 facilities, for access to improved telecommunications and to                  
 the....(End of tape)                                                          
 TAPE 95-61, SIDE B                                                            
 Number 000                                                                    
 MR. EDRINGTON continued to speak to internal reallocation and said            
 he thinks that process is occurring ever so slowly in the state of            
 Alaska.  Today, we're behind compared to other states in that                 
 process.  What this provision does is allow the state to provide              
 telecommunication companies to offer reduced rates to sort of                 
 assist in the endeavor to have more telecommunications access for             
 those particular groups.  He said he thinks it is a very modest               
 proposal and sort of gets us started down the road.                           
 CHAIRMAN KOTT said in essence, the private rate payers are                    
 subsidizing these institutions.  MR. EDRINGTON said he wouldn't               
 characterize that as a subsidy.  What you're doing is giving them             
 a reduced rate and the presumption is that those reduced rates are            
 still covering their incremental costs.  Your getting a new                   
 customer who otherwise wouldn't have been able to afford that                 
 higher rate - the standard rate.  Because it's covering their                 
 incremental cost, they're likely to be making a contribution to the           
 overhead.  If you didn't pick them up otherwise, then the overheads           
 are still there for everyone else to pick up.                                 
 CHAIRMAN KOTT noted he doesn't have a problem with the provision.             
 He referred to the institutions that are listed such as university            
 schools and said the financial support of those institutions                  
 generally come from some governmental entity.  So shifting that               
 over to the private, so to speak, is good public policy.                      
 REPRESENTATIVE ROKEBERG asked if Mr. Edrington or Mr. Foster could            
 outline the players involved in the state of Alaska and the terms             
 of local exchanges, cellular services in the Anchorage area, the              
 PSCs and any other wireless type of activities, in terms of trying            
 to define what is called the "Info Bond" that we're all focusing              
 on.  He said he would also like to declare that he believes he owns           
 some stock in Nextel.                                                         
 MR. FOSTER said Nextel is an interesting PCS kind of a company.               
 They operate in SMDR.  He said to his knowledge, they do not                  
 operate in the state of Alaska.  The industry in Alaska is composed           
 in the traditional telephone side of basically a number of local              
 exchange carriers who provide local telephone service within a                
 specified geographies under a certificate of convenience and                  
 necessity from the APUC.  These companies range in size from ATU,             
 which currently has about 146,000 lines in 100,000 households, down           
 to companies such as the company Paula Eller runs, the Ruby                   
 Telephone Company, that has 50.  There are probably 23 such local             
 exchange carriers.  There is also a network structure that connects           
 for "long-distance" communications in the state.  The two                     
 facilities base carriers in that duelopoly are GCI and AT&T                   
 Alascom.  Additionally, in the market there are numerous cellular             
 companies owned by the wireline side, the local exchange side, or             
 competitors.  Mr. Foster stated he is not personally familiar with            
 those markets outside of the Anchorage area.  In Anchorage, there             
 are two cellular carriers, Mactel which is owned by ATU in whole,             
 and a company called Cellular One, which is soon to become AT&T               
 wireless, which is owned in whole by AT&T.  Mr. Foster said the               
 other communication players are often overlooked on the Info Bond.            
 We have the cable companies, Prime Cable is an excellent example              
 and they are doing a fine job in the marketplace.  They have                  
 recently upgraded their system to 71 channels and are in the                  
 process of beginning to contemplate offering interactive kinds of             
 information services to the subscribers of their cable system.  Mr.           
 Foster informed the committee there are numerous private networks             
 provided by major oil companies.  BP and ARCO maintain their own              
 networks with their own satellite capabilities up to Prudhoe and on           
 down into Texas.  There is a whole other layer of privately owned             
 networks that customers communicate on and, in many cases, don't              
 use our or the long-distance carriers facilities.  In other cases             
 they use a mixture of their personally owned equipment and our                
 equipment to construct private networks.                                      
 REPRESENTATIVE ROKEBERG questioned the recent bidding relating to             
 PCS.  MR. FOSTER explained there has been recent bidding on PCS               
 licenses.  He noted PCS is a radio frequency service touted to be             
 lower costing than existing methods of reaching customers.  It is             
 built as an alteration of the phone company for the provision of              
 local telephone service.  Two licenses for that have been sold in             
 the state of Alaska in federal auctions.  One was sold to GCI for             
 what he believes to be approximately $1.3 million.  The other was             
 bought by a company that takes its parentage from Thomas Data                 
 System (TDS) and that license was purchased for $1 million.  Mr.              
 Foster indicated there are other licenses yet to be auctioned off.            
 There is a current auction that is undergoing some litigation that            
 should probably clear by the end of the year.  It'll provide a                
 third Alaska wide licensing capability and there are three                    
 additional licenses after that.  Assuming different players                   
 purchased every license available in PCS for Alaska, in Anchorage             
 you could have up to six people offering communication services via           
 PCS to subscribers.  Whether the market could economically support            
 that is a whole other question.                                               
 CHAIRMAN KOTT asked how ATU would benefit from the passage of HB
 346.  MR. FOSTER responded ATU will benefit because it will move              
 from the kind of operation and market it is now in into a                     
 competitive environment.  By moving into a competitive environment,           
 it will become more cost effective, more skilled at serving                   
 customers and it will become a hunting cat.  In many ways, the                
 legislation allows ATU to be sort of a complacent cat if it wants             
 to be.  Mr. Foster said he doesn't believe that's a healthy                   
 condition.  He believes the biggest benefit to ATU is placing ATU             
 and its culture into a competitive marketplace and allow it to                
 learn new skills, add value to the customer.                                  
 CHAIRMAN KOTT announced the next person to testify was Mr. Rowe.              
 JAMES ROWE, Executive Director, Alaska Telephone Association, said            
 he will make comments in support of HB 346.  He said many of the              
 states are facing local competition and have initiated local                  
 competition legislation.  Certainly, the federal government has               
 been looking carefully at federal telecommunications legislation              
 going toward competition for the last two years.  Mr. Rowe said               
 members of ATA have been following and participating in it.  They             
 have been trying to convey to our Congressional Delegation what               
 they think would be in the interest of the citizens of Alaska.  ATA           
 thinks it is important that the state, regardless of what the                 
 federal government does, should move toward a local competition               
 bill that would modernize the regulations regarding                           
 telecommunications legislation.  He said our state is fairly unique           
 in its size, environment, geography and the challenges that we face           
 in bringing telecommunications to all our citizens.  A key aspect             
 is universal service at affordable rates.  Universal service is two           
 things, it is the people they reach and the services that are                 
 available.  Affordable rates are such that our citizens can afford            
 to have that service.  ATA would like to see competition, presumed            
 to be in the public's interest, in large urban markets.  They would           
 like to recognize that competition or regulation are tools to serve           
 the public, either one is a goal.  Mr. Rowe said ATA would like               
 competition to be presumed not to be in the public interest in                
 rural markets and the determination in both of these markets would            
 be up to the state commission.  In markets that are competitive,              
 there must be a level playing field.  Reasonable costs that local             
 exchange providers incur to permit competitors to use the local               
 exchange network should be borne by the competitor.  Regulation in            
 all competitive markets should be minimal.  Mr. Rowe said HB 346,             
 introduced by Representative Moses, is an initial effort, and there           
 will be many parties offering to Representative Moses ideas in the            
 process.  ATA will be looking forward to working with the                     
 legislature and Representative Moses in offering ideas that will              
 make this a more detailed bill.                                               
 CHAIRMAN KOTT referred to number 2 of information Mr. Rowe had                
 given him titled, "Competition is presumed to be public interest in           
 large urban markets," and asked Mr. Rowe how he would qualify or              
 quantify "large."  MR. ROWE said he appreciates the question.  He             
 said they are afraid that people in Washington will look at rural.            
 They don't really have the concept of rural as we experience it in            
 Alaska.  When they think of large markets, they're probably not               
 even thinking of Anchorage.  He said he believes the federal                  
 legislation has the potential to overlook areas that we think are             
 small, they think are nonexistent.  Mr. Rowe said areas like                  
 Wasilla, that we think are at least moderate in size, might not               
 even count.  When they look at rural, he has a feeling that they              
 are looking at the southern part of the Shenandoah Valley and                 
 they're not looking at Kaktovic and Anaktuvuk Pass.  He said he               
 appreciates that the state legislature will look more closely at              
 the harm that can be done if we're cursory in the judgements we               
 make with competition.  Let it serve all our citizens everywhere.             
 It does benefit the public interest.  Mr. Rowe said he thinks it              
 would be up to the state and the APUC to determine what those large           
 markets are.                                                                  
 REPRESENTATIVE ROKEBERG asked what the present status is for the              
 cost or existence of any subsidies to rural Alaska and how that               
 works in terms of long-distance.                                              
 MR. ROWE said as Mr. Foster said, he might describe some things as            
 a subsidy.  It does depend on which side you're looking at.  Some             
 areas of the United States are much easier to serve by a low cost             
 dollar local telephone or long-distance telephone.  You have                  
 economies of scale.  He suggested it is not a subsidy.  The person            
 in Los Angeles, Chicago or New York who wants to call their                   
 grandparent or child in Anaktuvuk Pass is buying part of a larger             
 more valuable network even though they can make a local call                  
 perhaps cheaper than calling Anaktuvuk Pass.  He noted he is                  
 talking about the toll service of long-distance.  It is a subsidy             
 in a sense.  It might cost them $100 to put a customer on the line            
 and there might be a very small share of each phone call that is              
 made long-distance outside that is contributing to the rate beyond            
 the $20, perhaps local phone rate that the person pays just to be             
 on.  Mr. Rowe said they also realize that many people in the small            
 communities and the remote parts of Alaska pay a much higher                  
 percentage of toll because they don't really need to call the 135             
 people in their own community that are available by local service.            
 Many of their calls are going to Fairbanks so they have                       
 proportionately a much higher toll bill then people might have in             
 Lexington, Kentucky.  He said what Senator Rokeberg is calling a              
 subsidy, this fractional part, that if each access charge that is             
 going to defray these rates through the universal service fund and            
 what is called DEM waiting which is called "dial equipment                    
 minutes," that are proportioned higher in small communities that              
 have smaller switches.  It comes from a national source, but it               
 also lets the people in that national network to be able to                   
 participate in a larger network then they would be able to do if              
 they didn't contribute.  They are buying part of the service,                 
 they're purchasing service to reach the high cost areas.  Mr. Rowe            
 said he thinks that is a more appropriate perspective to take.                
 REPRESENTATIVE ROKEBERG asked if grandparents in Los Angeles are              
 actually paying money into the universal service fund which is                
 redistributed to the local exchange.  MR. ROWE said it is being               
 redistributed to the customer for the construction of the                     
 infrastructure to reach the customer.  Representative Rokeberg                
 asked if Anchorage isn't paying more.  Mr. Rowe said the answer is            
 no, they have affordable rates.                                               
 REPRESENTATIVE ROKEBERG referred to there being certain                       
 institutions such as RATNET and asked if it is carried over long-             
 distance telephone lines or if they have separate satellites.  MR.            
 ROWE indicated he didn't know the answer to that question.                    
 CHAIRMAN KOTT referred to Mr. Rowe's fifth statement relating to              
 local exchange providers charging a reasonable cost to competitors            
 for the use of its network and asked him to comment.  MR. ROWE said           
 they are looking at a competitor coming in and wanting access to              
 the customers who are served by wire by the local service provider.           
 There are costs entailed in having that wire go to those homes.               
 There are costs entailed in the records keeping administrative                
 procedures such as the personnel involved in having installed it,             
 having developed it and keeping it running.  If a competitor comes            
 in and has access to some or all of those customers, they need to             
 share in the cost of having that infrastructure built, of retiring            
 the debt of the administrative costs that are entailed in keeping             
 it running and the additional cost of figuring out who is paying              
 for what part of the function of that delivery of the service now.            
 CHAIRMAN KOTT asked if that concern would be more with local                  
 service, long-distance service or equally.  MR. ROWE answered it              
 concerns local service.                                                       
 CHAIRMAN KOTT said the next person to testify was Ted Moninski.               
 TED MONINSKI, Director, Regulatory Affairs, AT&T Alascom, said he             
 had served with Alascom before it became AT&T Alascom in a similar            
 capacity that he is currently working in.  Mr. Moninski said his              
 comments are brief.  He noted he didn't have written comments but             
 intends to give them to the committee members along with additional           
 information he might reference during his testimony.  The committee           
 has heard that there is a fair amount of support for HB 346 from              
 the local exchange industry.  AT&T Alascom doesn't view HB 346 as             
 simply being a local exchange bill.  As its name would suggest, it            
 is a telecommunications bill.  The policies and the specific                  
 components of the bill will affect local exchange, interexchange              
 carriers and the industry as a whole.  Mr. Moninski said generally            
 speaking, AT&T Alascom believes this is an appropriate time to have           
 this discussion.  The committee has heard information about the               
 state of telecommunications throughout the country, pending federal           
 legislation and concepts of competition.  Mr. Moninski said as he             
 has reviewed the proposed legislation and as it has been reviewed             
 by others in his company, they have come to the conclusion that               
 there are some things in the bill that are good, there are some               
 things they have a genuine objection to and some real concerns and            
 MR. MONINSKI referred to a concern relating to the provisions of              
 the bill that talks about interconnection and said the committee              
 has heard some comments from Mr. Shooshan about interconnection.              
 Mr. Shooshan had indicated that we need to have a certain symmetry            
 in the interconnection.  The rules have to be fairly reasonable and           
 they have to cut both ways.  Again, generally speaking AT&T Alascom           
 probably would agree with that.  He said AT&T Alascom agrees with             
 a lot of the conceptual and philosophical comments the committee              
 has heard but when we get down into the detail of the bill, there             
 are some issues.  Interconnection as it applies to companies, new             
 entities or new competitors that want to move into the local                  
 exchange business is a significant issue because currently we know            
 that local exchange companies, generally speaking, throughout the             
 country as well as Alaska function in a monopoly situation.  Mr.              
 Edrington had indicated technology has pretty much broken those               
 barriers down.  Mr. Moninski said he would agree that there is some           
 potential for those barriers to come down, but in the final                   
 analysis when we take a look at the local exchange industry today,            
 we find that local companies control the vast majority of the                 
 access to the end user.  So for competitors and interexchange                 
 carriers, in their normal course of business to reach those end               
 users, you have to come through the local exchange company.  So the           
 interconnection requirements to get to the end user and the                   
 interconnection requirements to become a competitive provider of              
 local exchange services is a significant element.  We can readily             
 recognize and agree that companies are not going to have the                  
 resources to come into Alaska or many of the metropolitan areas in            
 the country and rebuild a local exchange company's plant                      
 facilities.  It would be cost prohibited.  So there has to be ways,           
 as we have experienced on the long-distance side of competitors               
 coming into the marketplace and facing fair and reasonable rates              
 and conditions, in order to resell the services and the facilities            
 of the existing incumbent carrier.  Mr. Moninski said that was true           
 when the long-distance interexchange service entered the Alaska               
 market.  Alascom's facilities, by the rules that were put in place            
 legislatively and by the APUC, must be made available for resale to           
 GCI and other competitors.  That's how competition rolled forward             
 and it's those interconnection specifics that his company has                 
 concerns about.  AT&T Alascom believes that the existing language             
 in HB 346 will make it difficult for competitors to enter those               
 local markets.  It will make it easy for local exchange companies,            
 for fairly undefined reasons in may instances, to simply not allow            
 that interconnection or to slow that interconnection down and then            
 ultimately slow down competition.                                             
 MR. MONINSKI said there are a series of sections that they have               
 concerns about.  One has to do with deregulation of competitive               
 services.  AT&T Alascom is before the committee being a strong                
 component of lessened regulation and being a strong component of              
 increased competition.  He said he doesn't want to suggest that               
 AT&T Alascom thinks deregulation of competitive services is a bad             
 idea.  There is some concern though, again, as you get into the               
 specific provision of the HB 346 that the way you go about doing              
 that operates in a fair and equitable way so that competitors face            
 a level playing field.  He said there have been some comment about            
 having competition that is fair and reasonable, not necessarily to            
 the competitor.  He said he understands that nuance, but in order             
 for competition to produce from it then those specifics - that                
 playing field does have to be fair, reasonable and allow for access           
 to the marketplace.  If you have a situation, whether it's a local            
 exchange company, AT&T Alascom or anybody, that has the ability to            
 sort of, on its own without any real guidelines, deregulate certain           
 products and services.  You will then find an imbalance in that               
 playing field.  You're going to have a situation where, because a             
 company is the incumbent carrier, it will be able to take advantage           
 of that opportunity to drive its prices down to competitively,                
 posture itself in a way that will make it difficult for competitive           
 entry.  He said he believes that is the policy decision that the              
 committee is going to deal with and come to grips with which is how           
 do we establish a framework that allows competition to come into              
 being and to prosper.  Mr. Moninski said they have some concern               
 about the way that competitive deregulation takes place, not the              
 concept of competitive deregulation itself.  He said they believe             
 in that and hopes it happens to the extent that they will work                
 together on the bill as it move through the process.                          
 MR. MONINSKI explained the third thing AT&T is concerned about is             
 a debate which is occurring nationally and even though it's a Lower           
 48 issue at the moment, AT&T Alascom believes it's an issue of                
 Alaska as well.  It has to do with the sequencing of market entry.            
 What comes first?  It is kind of a cart and horse theory.  Do you             
 allow a participant, who effectively operates as a monopoly, to               
 move into competitive markets before that entities own market has             
 become competitive or do you do the reverse?  Do you say, "Lets go            
 to this monopoly market and lets cause competition to come into               
 being and to be demonstrated in that monopoly market, and then                
 we'll allow those entities to move into other preexisting                     
 competitive markets."  Mr. Moninski said that's really what we're             
 facing when you look at local exchange markets and interexchange              
 markets, long-distance markets.  Currently, the local exchange                
 market, in his opinion, is a monopoly market.  The interexchange              
 markets, the long-distance markets, he believes if they are not               
 competitive they are well on their way to being competitive.  He              
 asked if we should allow that local exchange market to remain in              
 sort of monopoly status or near monopoly status and then allow that           
 local company move into long-distance competition while still kind            
 of hanging onto the monopoly, or do we do it in the reverse.  Do we           
 cause the local market to be opened up to become competitive, to be           
 tested to show that it is competitive and then allow the migration            
 into other markets for competition.  Again, nobody is arguing that            
 any of those markets should remain monopolies.  Everybody is                  
 agreeing that all of those markets should become competitive, at              
 least to the extent that the market will allow it to happen.  The             
 question is sequencing, "What happens first?"  AT&T Alascom thinks            
 that the legislature has some options and HB 346 is the first step            
 in the process.  Mr. Moninski pointed out that Mr. Edrington                  
 mentioned that this is not a radicle bill, it's not a new bill,               
 lots of other states have moved in the direction of implementing              
 competitive structures and competitive processes in their states.             
 Mr. Moninski said he agrees with that.  He noted before he came to            
 testify, he managed to get his hands on a copy of Hawaii HB 471.              
 This was a bill recently adopted in Hawaii.  HB 471 produces the              
 balance that AT&T Alascom would advocate and hope for.  It                    
 acknowledges the fact that we need to have a transition plan to               
 competitive markets.  It provides for, over a period of time, the             
 plan to get us there.  It doesn't hold any particular markets in a            
 pure monopoly status for any length of time.  AT&T's opinion is               
 that the bill presents an interesting and useful model that will              
 give some countervailing theories and concepts to HB 346.  He said            
 the Hawaii bill provides for the access to various networks on                
 reasonable terms and conditions for new entrance into the                     
 marketplace.  It provides for a universal service program.  Mr.               
 Moninski said some of the mechanisms that the committee has heard             
 about today are mechanisms that were established and defined many             
 years ago at the time when most of the markets were in a monopoly             
 situation.  So the ability to recover costs and share costs was               
 different than it is today.  The world is changing, the                       
 telecommunications markets are changing.  Mr. Moninski stated it              
 just isn't clear to him that those old mechanisms will continue to            
 function effectively the way that perhaps they once did.  That                
 means we need to take a look at some new ideas and some new ways of           
 reaching those goals.                                                         
 MR. MONINSKI referred to the Hawaii bill and said another thing               
 that it does is it make a fairly clear prescription of events that            
 need to take place, particularly in the local exchange market.  It            
 talks about unbundling services.  The notion that companies must              
 sell their services in piece parts so that what a competitive                 
 entrant may need can be purchased at the levels that they need                
 them.  There are also other issues in the Hawaii bill in terms of             
 access to network, the pricing of networks, fair and                          
 nondiscriminatory access to networks.                                         
 MR. MONINSKI said he believes that Mr. Shooshan mentioned that our            
 current regulatory structure, the current enabling legislation that           
 exists in Alaska today, is probably old.  Mr. Foster mentioned it             
 was put on the books in 1970s.  Does it need to be changed?  Mr.              
 Moninski said he suspects so.  He doesn't think AT&T Alascom is               
 going to sit here and say the statute should be left alone, HB 346            
 should go away.  In fact, some of the changes we think need to                
 happen are not necessarily changes that were driven by HB 346, but            
 are changes that need to occur in the existing statute because of             
 the changing environment that we operate in.  He thanked the                  
 committee for listening to him.                                               
 REPRESENTATIVE ROKEBERG referred to any written comments anyone may           
 have on the bill and said it would be helpful if they were in a               
 sectional analysis format.                                                    
 CHAIRMAN KOTT said that seems to be a reasonable request.  If                 
 anyone has any comments regarding the bill that they want to                  
 provide to the committee members, they should reference the                   
 sections being referred to.                                                   
 The next person to come before the House Labor and Commerce                   
 Committee was Jimmy Jackson.                                                  
 JIMMY JACKSON, Regulatory Attorney, General Communications, Inc.,             
 (GCI), said he would probably agree that there are things in the              
 bill which GCI might agree to.  However, the bill as written, GCI             
 opposes it for the reason it does not encourage competition.  It              
 discourages competition.  The bill puts the cart before the horse,            
 it has the cart hooked up facing the wrong direction and at least             
 one of the wheels on the cart is broken off.  Mr. Jackson said the            
 current trend in telecommunications today is competition at the               
 local level, competition and the service that ATU and the other               
 local phone companies provide.  It's probably in about the state              
 that long-distance competition was maybe 20 years ago with perhaps            
 one major exception.  Many state legislatures and utility                     
 commissions have looked at what competition has done in the long-             
 distance market and in a few other telecommunication markets and              
 have generally realized that competition has done good things.  In            
 the area of local competition, we don't have to fight about it for            
 ten years as that is the time period it took GCI to get in the                
 market in Alaska.  Competition will do good things so we should put           
 it in place and get on with it.  He referred to an article from a             
 trade publication, Telecom Potion Group, regarding state telephone            
 regulation and said the headline of the article read, "New actions            
 make it 21 states that allow full local competition."  He stated              
 that is the degree of the trend.  Currently, there is very little             
 actual competition at the local level.  ATU and other local phone             
 companies face a little bit of competition around the fringes of              
 what they do, but none of us has a real alternative to the local              
 phone company at our homes and businesses in terms of where we're             
 going to get our phone service.                                               
 TAPE 95-62, SIDE A                                                            
 Number 000                                                                    
 MR. JACKSON said it involves making new rules for what is called              
 the "Incumbent carrier," the preexisting carrier, so they can face            
 the competition that's entering their market.  That is really the             
 only aspect that HB 346 addresses and that is way Mr. Jackson says            
 they have the cart before the horse.  The bill essentially says               
 that as soon as a local phone company faces the least little bit of           
 competition, then they can choose to be deregulated, but it doesn't           
 do anything to put the competition in place.  In any event, that is           
 not the way it should work.  The way it should work is the amount             
 of regulation that the incumbent carrier faces should gradually be            
 phased down as the amount of competition increases.  Mr. Jackson              
 said the first problem GCI sees with the bill in its overall                  
 structure is it allows the local phone companies the flexibility to           
 respond to competition without ever putting into place the                    
 prerequisites for competition.                                                
 MR. JACKSON referred the committee to Sections 8 and 9 of the bill            
 and said the existing statutes on interconnection between utilities           
 say that a utility must permit interconnection if it would be in              
 the public's interest and if there would be no substantial                    
 detriment or injury to the utility that is permitting the                     
 interconnection.  The current statute needs to be expanded.  HB 346           
 does the exact opposite and narrows the situation in which                    
 interconnection would be required.  It does that by saying                    
 interconnection cannot be required if there is any injury to the              
 utility permitting interconnection.  Mr. Jackson said a utility               
 that doesn't want to permit interconnection can always show some              
 injury.  The injury may be that they will lose a customer to the              
 competitor.  The way the proposed legislation is set up, there may            
 have been a determination that competition is in the public's                 
 interest but the existing carrier could deny interconnection by               
 showing that there is some small injury.  That is going the wrong             
 way from the way the statute needs to go.                                     
 MR. JACKSON said when you have a regulated local telephone company,           
 even as competition enters the market, the existing monopoly will             
 retain many captive customers who do not have any choice of                   
 carrier.  There is a tremendous ability for such a company to cross           
 subsidize its competitive operations based from the charges that it           
 places on its captive customers.  Mr. Jackson said this means that            
 ATU or any local phone company can offer very low below cost rates            
 to any customers that do have a competitive choice while recovering           
 their cost from the other customers who don't have a choice.  It is           
 cross subsidy.  That enables the existing carrier to kill any                 
 competitive threats.  They would have a tremendous ability to do              
 that under the legislation, as it is proposed, because of the fact            
 that they get to choose their form of regulation for any service              
 for which there is substitute.                                                
 MR. JACKSON informed the committee that those are his main points             
 regarding sort of the competitive interplay that is set up in HB
 346.  There are also a number of sections which are attempts to               
 reverse decisions that the APUC has made over the past few years.             
 One example is that in the field of public utility regulation, the            
 standard is that utilities can recover costs for equipment that is,           
 "Used and useful in providing service."  Mr. Jackson pointed out              
 that not long ago, the APUC decided that almost $20 million of                
 ATU's plant is not used and useful.  Therefore, they decided ATU              
 can no longer recover the cost of that plant from the rate payers             
 because it's not doing the rate payers any good.  That was the                
 APUC's decision.  ATU wants to change the statute so that if the              
 APUC fails to catch such over investment in the very first rate               
 case after the investment is made, the commission can never again             
 look to see if the plan is used and useful.  The statute has been             
 rewritten so that if the local phone company slips it in once, they           
 get to keep it in the rates forever.  This is particularly                    
 inequitable because we now have a system of annual access charge              
 proceedings, which are small rate cases that involve only very                
 quick expedited review of the local phone companies.  Under the new           
 legislation, they could slip it in once through that very quick               
 review, and then it would be there forever.  Rate payers would have           
 pay for it forever, even if it was totally useless.                           
 MR. JACKSON referred to the competitive interplay and said the bill           
 describes the services where ATU can get totally deregulated, if              
 they want to, as services for which there is a substitute.  That is           
 an extremely nebulous standard and one which can be subject to very           
 much abuse.  What is a substitute?  A grilled cheese sandwich is a            
 substitute for a prime rib dinner.  He said ask yourself if                   
 cellular service today is a substitute for local phone service.               
 Mr. Jackson said he doesn't think any of us really considers it a             
 viable substitute for local phone service, but yes, you could get             
 rid of your local phone and just rely on your cellular.  It                   
 wouldn't be as good of a service.  It wouldn't be a economical                
 service.  It wouldn't be a valid substitute but it is a substitute            
 for local phone service.                                                      
 MR. JACKSON said he disagrees with the ATU witness from Washington,           
 D.C.  The witness said don't look at what customers are doing to              
 determine whether or not it's a substitute.  Mr. Jackson said he              
 thinks you have to.  The only way you can tell whether or not it is           
 in fact a viable real life substitute is to look to see if                    
 customers are buying it as a substitute.                                      
 MR. JACKSON referred to his last point and said several witnesses             
 have presented that Alaska is different, Alaska is too small,                 
 competition may be O.K. for the big areas but it won't work in the            
 rural areas.  Mr. Jackson said that is the exact same argument that           
 was used against GCI for many many years to keep them out of                  
 competition with Alascom.  It was first used at the federal level             
 to keep GCI out of the interstate long-distance business when it              
 was flourishing elsewhere with the argument that Alaska is                    
 different.  GCI fought that and finally they got the right to enter           
 the interstate market in Alaska.  GCI then began trying to provide            
 intrastate long-distance service and it took from 1983 until 1990             
 before they were able to get into that market.  Again, Alaska is              
 too small, Alaska is different, competition will be bad if you                
 allow it to happen in Alaska.  Mr. Jackson said it seems evident to           
 them in the long-distance market that those predictions have not              
 come true.  Competition has been good.  Prices have gone down for             
 long-distance service in Alaska, both intrastate and interstate.              
 The service has been better, it has been good.  The argument that             
 some markets are too small and, therefore, you ought to prohibit              
 competition there should be rejected.  If it is too small,                    
 competitors won't go there.  It is not possible for lawmakers or              
 regulators to draw, if there is such a line anywhere, where that              
 line is.  The marketplace can decide where competition is feasible            
 and where it is not feasible.  Mr. Jackson thanked the committee              
 for the opportunity to address the committee.                                 
 CHAIRMAN KOTT announced the next person to testify would be Mr.               
 STEVE HAMLEN, President, United Utilities, was next to address the            
 committee.  He stated United Utilities is a Native owned telephone            
 company which provides local exchange telephone services to 58                
 communities in rural Alaska.  They were incorporated in 1977, and             
 prior to that point, the communities that they provide services to            
 today didn't have local telephone service.  Some of them had no               
 telephone service and some of them had just two telephones, one for           
 the public health service and one of the rest of the community.               
 Mr. Hamlen said he has been in the Alaska telecommunications                  
 industry for over 20 years.  He said when United Utilities first              
 started out, the commission was very cautious.  The commission                
 certificated them in only four communities.  Currently, their                 
 primary shareholder is Hooper Bay, Sealion Corporation of Hooper              
 Bay.  They needed local telephone service and decided it would be             
 a good investment for their community to have local telephone                 
 service.  Several other villages have also acquired stock in them.            
 He said they went before the APUC to be certificated to provide               
 local exchange service in four communities.  Service was                      
 established and then they gradually expanded to 58 communities.  As           
 the system evolved, they found there was a problem with the tow               
 under connection between RCA and United Facilities.  RCA was very             
 reluctant to install facilities in rural Alaska.  In fact the state           
 legislature had to appropriate approximately $5 million to install            
 a number of earth stations just as a threat to get RCA moving along           
 to fulfill its commitment to provide service in rural Alaska.                 
 United Utilities found that those RCA facilities were not adequate            
 and were often installed in stores, schools and places where they             
 were not protected.  Their systems often went down.  RCA had                  
 difficulty in sending a technician out, and being the local                   
 exchange carrier, United Utilities would get the brunt of the                 
 complaints scenario that was happening.  Mr. Hamlen said United               
 Utilities filed a application with the FCC to construct their own             
 satellite earth stations.  They couldn't operate a company,                   
 providing local exchange service to customers, whose primary                  
 purpose of having telephone to rural Alaska was to long-distance              
 calls.  United Utilities got into a debate with RCA, which lasted             
 over six years, over who should own the earth stations in rural               
 Alaska.  The FCC determined that duplicate facilities in these                
 villages were not in the public's interest because there clearly is           
 not enough traffic, and the only reason that they were serving the            
 communities was because it was a public interest question.  They              
 decided they wouldn't allow both of them to build facilities and              
 interconnect them to the network, because that's not in the public            
 interest.  The resolution was that United Utilities would form a              
 joint venture with RCA Alascom and jointly own 46 earth stations,             
 and they would, as a local exchange carrier, have the                         
 responsibility for maintaining the earth stations in the villages.            
 The long lines carrier would have the responsibility for providing            
 a satellite transponder and network management of interfacing the             
 villages into the public network.                                             
 MR. HAMLEN explained that today, they have modern digital switches            
 used to serve all their communities.  They have approximately 4,000           
 access lines or an average of 70 customers in every location.  The            
 way in which his company recovers the cost of providing their                 
 service is through the local rates and net charges that are charged           
 for access through the National Exchange Carriers Association and             
 the Alaska State Carriers Association.  Mr. Hamlen said they charge           
 $19.23 per month for local service into the villages.  Through the            
 access charge mechanism they pool the access charges on a national            
 basis for interstate rates, and on a state basis for state access             
 rates.  That mechanism is what has allowed service to rural Alaska            
 to evolve.                                                                    
 MR. HAMLEN said today they are faced with markets changing, new               
 legislation and competition.  With universal service, the FCC now             
 has a proceeding going on their docket, 8286.  They're reviewing              
 universal service and there are a number of issues which are being            
 hotly contested in that debate.  Mr. Hamlen explained that what               
 happens with the universal service mechanisms in the competitive              
 environment is some of the inter exchange carriers, especially if             
 they have an interest in competing in local markets, have looked at           
 high cost areas in the sharing of cost mechanism and they would               
 like to opportunity to participate to receive high cost assistance.           
 He said if you take a village in rural Alaska, for example, that              
 has 50 to 70 customers and there is the high cost assistance                  
 program that has a significant amount of assistance supporting                
 local rates in that community, one of the proposals that GCI has on           
 the table would force the existing carrier to share that high cost            
 assistance with them based on whatever customers they sign up.  He            
 said his company doesn't believe that's a good idea because you're            
 taking the support they need to support their facilities to the               
 customers that they currently serve and are requiring that it be              
 shared with somebody who is coming in to a market that wouldn't               
 exist if it weren't for that high cost assistance.                            
 MR. HAMLEN said if you look closely at the ATA position on                    
 universal service and competition, their position is it should be             
 encouraged in markets that can sustain competition.  What that                
 means is markets where more than one provider can provide services,           
 and exist and thrive in that market.  If you have markets where               
 there are natural monopolies or the existence of service is                   
 dependent upon a high cost support mechanism, then that clearly in            
 those markets it does not make sense to displace the existing                 
 carrier.  The existing carrier should remain under regulation as to           
 its rates and services by the Public Utilities Commission.  Mr.               
 Hamlen said their concept of universal service, when you stand back           
 and look at what Congress was thinking about in the 1934                      
 Communications Act and also in both HB 1555 and SB 652 that are               
 currently in conference, their universal service is basically                 
 extending a basic level of service to everyone throughout the                 
 country.  This means they are not going to exclude anybody.  When             
 you connect somebody to the public switch network, you're offering            
 value to the entire network whether you call that person or not.              
 By having access to the telephone to the public network, you                  
 enhance the value of our nationwide network.  You're not excluding            
 anybody in that definition of universal service.  It is feasible              
 technically and financially on a nation/statewide bases to connect            
 everybody to the network.                                                     
 MR. HAMLEN said, "Now on the interconnection issues you'll notice             
 that there's the interexchange carriers were both Alascom and GCI,            
 talked extensively about interconnection and are very concerned               
 about interconnection.  They want number portability.  Our                    
 customers want SS7 capability and the interexchange carriers want             
 to be able to come in and have easy access to our offices, not                
 only, you know, every office in the state to be able to configure             
 their networks as they like.  One of the problems we face in rural            
 Alaska -- we just went through this with ten digit dialing is that            
 we're being forced to incur cost to accommodate competition -                 
 facilitate competition in markets that purely are not competitive             
 markets.  In other words, they cannot sustain more than one carrier           
 period and that's obvious.  So we're being faced with an inter                
 (indisc.) competition, having to incur costs to offer ten digit               
 dialing, we'll probably be looking at having to offer number                  
 portability and other features to make sure our network is                    
 comparable to interface with the nationwide network.  Those costs             
 again are essential in our markets necessarily for us to be able to           
 interconnect with the network because, I clean this out because I             
 don't -- to some extent, forcing us to upgrade a switch at Birch              
 Creek where the clear purpose of upgrading that switch is to be               
 able to offer access few multiple carriers may not make sense.  In            
 a lot of cases doesn't make sense."                                           
 MR. HAMLEN referred to the excess capacity language in the bill and           
 said as exchange carriers, they take and plan their facilities in             
 the least cost method over the long-term.  In other words, if he              
 has new housing being built in the village, he will plan, when they           
 extend their outside plant facilities, they consider how many homes           
 there currently are and how many homes are anticipated to be there            
 in the future.  Mr. Hamlen said they may have a requirement for 30            
 cable pairs.  When they go to the expense of placing that cable,              
 they're not going to put in 30 cable pairs.  They need to plan for            
 the future so they may put in a 50 pairs of cable.  What happened             
 with the ATU case is that in his example, the commission said,                
 "Well, he put in a 50 pair cable, you're only using 30 pairs.  We             
 are not going to allow you to recover the cost of those other 20              
 pairs.  You did not make a prudent decision to put that investment            
 MR. HAMLEN informed the committee member that the commission                  
 decision is currently pending in the courts.  It was appealed.  It            
 was not a good decision, it made no sense.  It basically hamstrung            
 ATU and its ability to plan for its facilities in a prudent manner.           
 The interexchange carriers are very interested in increasing their            
 profit margins.  They're very interested and buying a new vehicle             
 for doing that is to get a local exchange business and reduce their           
 access changes.  So they will, in any way, come before you and try            
 to get the legislation structured in such a way to benefit them to            
 be able to improve their profit margins.  He asked the committee              
 members to watch that carefully.                                              
 CHAIRMAN KOTT said if the legislation were not passed, is there a             
 mechanism available that will provide an opportunity for the local            
 carriers to enter into the long-distance service.  He asked if that           
 was conceivable or what would it take.                                        
 MR. HAMLEN said his company has looked into that issue.  He said he           
 can only comment for United Utilities as ATU has a different                  
 situation to some extent.  When the APUC wrote its regulations                
 promoting and providing for competition in the interexchange                  
 market, they specifically laid a whole section on a whole bunch of            
 hurdles.  They basically left it open for everybody else to come              
 in.  Mr. Hamlen said the APUC basically tied United Utilities'                
 hands behind their back in terms of their ability to be able to get           
 in and compete in the interexchange business.  As time goes on and            
 legislation is passed, hopefully those hurdles and barriers are               
 going to come down.  Currently, there are regulatory barriers that            
 are in place that the commission has established that makes it                
 difficult for United Utilities to get into the long-distance                  
 MR. HAMLEN said as time goes on, the committee might want to take             
 note that the difference between interexchange and the local                  
 exchange business is sort of going to blend.  The providing of                
 telecommunication services, whether it's local or long-distance               
 service, in the future because of the way technologies are                    
 developing and markets are merging, you probably won't know the               
 CHAIRMAN KOTT asked if his opinion is that HB 346 would reduce some           
 of those regulatory barriers or barriers in general that will                 
 promote opportunity to venture in.                                            
 MR. HAMLEN answered in the affirmative.  He stated he commends ATU            
 because what they have done is provided an avenue for competition             
 to be developed and an opportunity for the local exchange carrier             
 to adjust and participate.                                                    
 CHAIRMAN KOTT asked if Mr. Edrington or Mr. Foster wanted to                  
 address the same question.                                                    
 AN UNIDENTIFIED SPEAKER said he thinks it might also be productive            
 if Mr. Jackson also had an opportunity to address the question.               
 The unidentified speaker stated that if the bill does not pass, the           
 entry of local exchange carriers into the long-distance market will           
 continue to be governed by the sections that were passed in 1990              
 with respect to long-distance competition, 42.05.800.  Within that            
 context, the commission's order discussing entry of a long-distance           
 carrier into that long-distance market, in state, suggested there             
 were a number of areas that need to be explored with respect to a             
 local company getting into the long-distance business.  He said he            
 believes that is basically the current state of the law and                   
 CHAIRMAN KOTT asked the unidentified speaker if the legislation               
 would then be needed for his company to enter into the local                  
 exchange services.                                                            
 The unidentified speaker responded that he would agree with the way           
 Mr. Foster said the situation currently is.  As far as the in-state           
 long-distance business is concerned, the APUC adopted regulations             
 and in doing so, put significant constraints on whether or not the            
 local phone companies can enter the in-state long-distance                    
 business.  They have to apply and meet certain criteria.  Those               
 criteria are appropriate and necessary criteria.  He continued,               
 "The box that you hear about so much, they are prohibited outside             
 from providing interstate long-distance business.  The reason is              
 that as a long-distance phone company in ninety-nine point                    
 something percent of the cases, we have to go through the local               
 phone company in order to get to the end user.  And the local phone           
 company has what is known as a `bottleneck' because of the fact               
 that we have to go through them.  Now what does that mean is that             
 in many many instances say a bank, NBA or whatever, wants a                   
 specialized long-distance phone service.  The bank comes to us and            
 says we, you know, want a special service - big pipes digital                 
 service.  To get the connection from the bank to GCI, we have to go           
 to ATU and say, `ATU, we need the connection from the bank to us              
 that has to have this -- meet these standards, it has to be of this           
 size, it has to have all this - these particular technical                    
 configurations.'  If ATU is our competitor, what does ATU do when             
 they get that information?  First of all they slorel the dickens              
 out of us in getting that connection from bank to us.  And                    
 secondly, they go to the customer themselves.  That was                       
 historically exactly what AT&T did which is what led to the break-            
 up of the AT&T system in 82, which led to competition.  The way in            
 which we got to long-distance competition was the break-up of AT&T.           
 And what the court said in that decision was that so long as the              
 phone company controls the local in the long-distance, you'll never           
 have competition.  Therefore, you have to prohibit the local                  
 company from providing long-distance business.  That's the                    
 derivation of the reason that locals can provide long-distance                
 service.  It still exists that way today.  The similar rationale              
 was adopted by the APUC.  You also get into considerations, like I            
 mentioned earlier, of cross subsidies of using you monopoly rate              
 payers to subsidize you competitive enterprise and it's what I'll             
 turn to Mr. Moninski at this point.  It's what he talked about in             
 terms of the sequencing of Mark.  As soon as the local business is            
 competitive and we have a choice as to how we get to the bank, then           
 it would be appropriate for the long-distance, excuse me, for the             
 local phone company to be in the long-distance business."                     
 MR. MONINSKI stated he generally concurs with Mr. Jackson's                   
 comments.  Mr. Moninski said he doesn't think that we exist in an             
 environment today in the absence of this proposed legislation or              
 any new legislation that would make it impossible for a local                 
 company to enter the long-distance business.  Not that long ago               
 there was a plan on the table for ATU to do exactly that.  Mr.                
 Moninski said he thinks that the constraints on the interstate side           
 are fairly negligible.  There certainly are some issues before the            
 APUC that ATU or any other local company would have to satisfy to             
 enter the market.  He said he doesn't believe that HB 346 is sort             
 of a necessary condition or a necessary change in the structure to            
 allow local companies to enter the long-distance business.  He said           
 the committee will find that AT&T Alascom's position will be more             
 in the nature of that sequence in common that Mr. Jackson mentioned           
 that regardless of what other constraints exist, he believes there            
 are certain elements that have to be demonstrated that local                  
 competition exists before local companies should enter into the               
 long-distance business.  He said that is what he will advocate in             
 terms of any changes that might be proposed for HB 346.  Mr.                  
 Moninski said currently, he doesn't see any absolute obstacles to             
 local companies entering that market that the bill would remove.              
 An unidentified speaker said one point he didn't address is that he           
 doesn't see where this bill addresses locals getting into long-               
 distance or competitors getting to local at all.  He said he                  
 doesn't see anything about that at all in the bill, one way or the            
 CHAIRMAN KOTT said absent HB 346, is there any prohibition or grand           
 hurdle that would prohibit the long-distance carriers from getting            
 into the local business.  He asked if there any such plan.                    
 An unidentified speaker said if anyone, not just a long-distance              
 carrier, wanted to go into local phone business, they would have to           
 file an application with the APUC for Certificate of Public                   
 Convenience and Necessity.  In order to obtain that, they would               
 essentially have to prove to the APUC that competition would be in            
 the public's interest.  If they proved to the APUC that competition           
 was in the public's interest, which was the item it took GCI eight            
 years to do on the long-distance era, then they could get a                   
 certificate.  The speaker referred to the matter of PCS licenses,             
 which Representative Rokeberg asked about when talking to Mr.                 
 Edrington, which are federally issued licenses for a service which            
 is a wireless service and you do not have to apply to the APUC in             
 order to be able to provide that service.  It is a federally                  
 licensed service.  The FCC has preempted the state from limiting              
 entry of anybody who buys one of those licenses.  The speaker said            
 currently, there is a lot of debate about what PCS is actually                
 going to be.  Some people think it's going to be basically a better           
 cellular service.  Some people think it has the potential of                  
 actually becoming a replacement of the local phone company and that           
 is something which we will know in six or seven years.                        
 MR. MONINSKI said there probably is no absolute prohibition today,            
 with or without this proposed legislation, for long-distance                  
 companies or some other entity to enter the local market.  He said            
 Mr. Jackson made reference to the process that one would have to go           
 through to secure that right.  What we need to remember is we're              
 dealing with an industry that has been historically viewed as being           
 a monopoly industry.  He said he suspects there would be a                    
 substantial burden and substantial opposition in going before the             
 regulator, for example, to gain entry to that market.  It would be            
 a lengthy and a contentious process to do that.  Should we, as a              
 matter of policy, go that route or should we take a look at what's            
 happening all over the country?  Should we look at the federal                
 legislation and should we simply acknowledge the reality and                  
 develop our policies here in the state of Alaska to allow us roll             
 forward in the future with everybody else?  He suggested that it              
 should be the latter.                                                         
 An unidentified speaker said he agrees with Mr. Moninski in that we           
 should clue off of the national legislation and apply it in Alaska,           
 and let ourselves roll forward.  That is not going to be an easy              
 process, but he believes it is going to be a necessary one for all            
 of us.  The speaker referred to the local monopoly bottleneck and             
 said that was a ten year old decision and one of the main reasons             
 for the national legislation was to remove that court decision and            
 set the industry free to compete.  He stated the national                     
 legislation has been extensively debated on this topic and the                
 basic decision is turn the rascals loose and let them have at each            
 other.  The speaker said the only concern in that regard is, "How             
 do you turn that free market loose?"  He said he is sure there will           
 be a lot of debate over that.  As to the bottleneck part, a                   
 specific example of going to the National Bank of Alaska was                  
 sighted.  You could go out and buy a General Electric's 25                    
 gigahertz microwave system and go handily from the NBA building               
 right over to GCI for the grand total of about $25,000 investment.            
 He said they are not standing in the way, technically, of any                 
 anybody legally.  The speaker stated they may be standing in the              
 way of people economically because they are an efficient                      
 competitor.  He said the only reason he can find for anybody not              
 bypassing ATU in  economic theory would be that our price is below            
 their cost advantage.  Otherwise, if they can do something cheaper            
 than he can, why don't they.                                                  
 The unidentified speaker referred to the 99 percent of the                    
 customers his company serves and said be aware that those people              
 are paying a telephone bill of around $9 a month plus a certain               
 overhead which takes their total bill to $14.  That is what they              
 basically pay to be able to access a long-distance carrier.  He               
 urged if any other company can beat that cost, have at it.  The               
 barriers, at this stage, are more emotional and more sequencing               
 into market.  He urged the committee members to be aware of                   
 arguments that don't reflect a free market condition.                         
 REPRESENTATIVE ROKEBERG said looking forward a few years and                  
 looking at the things like PCS cables and this whole new                      
 technological thing that is happening in this world, is there                 
 anything or should there be something in a bill that speaks to the            
 APUC's ability to regulate those types of technological changes in            
 the future.  He referred to someone mentioning PCS and it could be,           
 in essence, another wire type local exchange system.  What if that            
 happens two years from now, are we going to be naked regulatorily             
 because the feds say we can't maintain it.  He said he wants to get           
 an impression of where we're headed in the future.                            
 An unidentified speaker said the federal legislation, as he                   
 understands it, is somewhat intolerant of local regulation at this            
 point.  A number of areas in the bill suggests that local and state           
 regulations be preempted by the federal regulation such as nobody             
 at the local or state level could prevent a telephone company from            
 going into the cable television business and visa versa.  One of              
 the concerns ATU had, and a legitimate for Alaskans, is how much of           
 that should be removed in terms of the structure of Alaska.  He               
 said he will maintain until somebody convinces him otherwise that             
 Alaska is different.  He said he thinks that the state regulation             
 needs some latitude to determine its own future.  Will we be able             
 to do that in all cases?  No.  Will we be able to regulate                    
 technology?  That has been tried countless times and is a short               
 term (indisc.).  People tried to regulate the printing of the Bible           
 which he finds an interesting situation.  There have been a few               
 attempts through time to regulate technology.  All of them                    
 eventually failed with passage of time.                                       
 TAPE 95-62, SIDE B                                                            
 Another unidentified speaker:  "...degree of federal preemption,              
 and one is on the issue we talked about before regarding the box              
 getting the long-distance.  They certainly don't just say that the            
 box automatically start getting into the long-distance business by            
 any means.  There are some competitive standards that have to come            
 first in at least one and I think both bills.  But in any event, on           
 the particular issue I believe that there would be a fair amount of           
 discretion left to state commissions in many areas.  There are some           
 where -- like I mentioned PCS has already been preempted.  Let me             
 confess something else, I've been working at GCI for two years.  I            
 worked for the APUC for nine years before that and I personally               
 believe the APUC should have a fairly good bit of discretion in               
 regulation.  I think that -- I think trying to tie down the APUC              
 too much in terms of exactly what it does is self defeating because           
 they need the flexibility to address - to change for changing                 
 times.  I think that it is entirely appropriate for the legislator            
 - legislature to give the commission directives on certain policy             
 issues like the way in which GCI finally got into the market was              
 the legislature said, `You shall allow instate competition.'  Well            
 the legislature made that decision and said, `You shall allow it              
 and you shall develop regulations by such and such at date,' which            
 flushed it out and state the specific manner in which it should be            
 allowed.  And I think that's the kind of a legislation which is               
 very very helpful to the APUC.  You make the policy cut and leave             
 it up to them to iron out the details.  In terms of regulating the            
 technology, I don't think you can regulate the technology.  I would           
 agree with that.  There are instances like the APUC orders now                
 prohibit cable companies from using their facilities to provide any           
 sort of local phone service.  We think that's not appropriate.  We            
 think that's probably eventually going to fall.  That's the kind of           
 policy cut that the legislature might need to make.  I suspect that           
 the APUC might reverse that on its own if it were presented to them           
 and haven't addressed it in quite awhile.  I'm not trying to                  
 predict what they will do.  I don't know.  They might change it if            
 it was brought to them."                                                      
 REPRESENTATIVE ROKEBERG said it seems to him that there are greater           
 threats to the local exchange.  He questioned if that was the box             
 he was talking about.                                                         
 The unidentified speaker responded, "The box or the big local                 
 exchanged in the Lower 48, the Bell Operating Companies, I'm sorry            
 - acronyms - the baby bells, yes.                                             
 REPRESENTATIVE ROKEBERG said in terms of long-distance, the                   
 wireless technology seems to be a threat to the local exchanges.              
 He questioned if they is any threat to the long-distance carriers             
 or is there a satellite or direct television type of things that he           
 sees as a threat to long-distance.  Representative Rokeberg asked             
 if the local companies are a threat.                                          
 An unidentified speaker said he thinks you currently can pick up a            
 cellular phone and make a call to Homer and not incur any long-               
 distance charges.                                                             
 Another unidentified speaker said you can but you have to pay the             
 regular cellular per minute charge but that is not a long-distance            
 call in the way they're handling it.                                          
 An unidentified said ATU doesn't operate cellular systems in Homer,           
 it is operated by another company that they have for convenience              
 that are customary handoff capabilities.  While one might argue               
 that cellular is not a substitute for wireline, he can make that              
 same argument.  He said he can also make an equal argument that it            
 is.  It is just a different pricing structure in that you have to             
 pay more per minute but on the other hand, you get the long-                  
 distance call free.  He referred to the investments required for              
 long-distance and said he has been out of that game for over a                
 decade and isn't sure what they are.  The unidentified speaker said           
 except in Alaska, most of the long-distance companies in the Lower            
 48 are now fiber optic.  They have very high band width capability            
 between all their towns and cities.                                           
 MR. MONINSKI was next to address the committee.  He said he would             
 like to pull together Mr. Edrington's and Mr. Jackson's comments.             
 What you're seeing is what's happening in the marketplace.  You're            
 seeing the pressures that are beginning to percolate up without               
 regard to legislative changes or without regard to changes in                 
 regulations.  The problem is that while all of these forces are               
 coming to bear and their beginning to make some things happen, the            
 regulatory structure and the legally mandated market structures               
 have not kept up.  We've got this conflict.  We've got issues that            
 are creating strange results.  Mr. Moninski said he doesn't mean to           
 take issue with Mr. Edrington's comment about the efficiency of ATU           
 but he mentioned that is, in a large measure, what allows ATU to              
 charge very reasonable local exchange rates.  He suspects that                
 there certainly is a contribution in that regard.  But another                
 thing that allows that to happen is this arcane structure that we             
 live with has driven costs to other places.  They are costs that              
 perhaps ought to be in one particular accounting bucket but are               
 showing up in another accounting bucket and are being paid for by             
 a different kind of customer.  That allows the rates to remain low            
 in certain segments while it drives rates up in others.  Mr.                  
 Moninski referred to Mr. Foster saying in his comments that what we           
 need to do is let the consumer make these decision.  He said he               
 thinks AT&T Alascom agrees with that but in order to do that, the             
 consumer has to have the correct signals and the right economic               
 information to know how to make those choices.  He said he believes           
 that is basically what HB 346 has the opportunity to do in some               
 respects.  Mr. Moninski referred to the question of future                    
 regulation and said he doesn't think that the legislature can and             
 would want to try and prescribe all of these details.  The                    
 legislature will have to rely on the regulatory structure to                  
 continue to monitor the marketplace and make sure that the public             
 policy goals are being achieved and make adjustments where it is              
 There being no further witnesses to testify, CHAIRMAN KOTT closed             
 public testimony.  He thanked everybody for attending.                        
 CHAIRMAN KOTT adjourned the House Labor and Commerce meeting at               
 4:25 p.m.                                                                     

Document Name Date/Time Subjects