Legislature(1995 - 1996)
09/27/1995 09:10 AM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 utilities." 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 Telephone: 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 SHORT TITLE: HEALTH CARE PREFERRED PROVIDER PROGRAMS SPONSOR(S): LABOR & COMMERCE BY REQUEST JRN-DATE JRN-PG ACTION 03/17/95 778 (H) READ THE FIRST TIME - REFERRAL(S) 03/17/95 779 (H) LABOR & COMMERCE, HES, JUDICIARY 04/12/95 (H) L&C AT 03:00 PM CAPITOL 17 04/12/95 (H) MINUTE(L&C) 04/24/95 (H) L&C AT 03:00 PM CAPITOL 17 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 problem. REPRESENTATIVE ROKEBERG responded he thought so, but was not 100 percent comfortable at this stage; however, that was certainly the intent. 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 business. 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 program. 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 what? 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 in. 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 passed. 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 corporations. 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 legislation. 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 perspective. 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 negotiation. 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 insure. 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 policies? 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 group. 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 next. 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 up. 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 Commission. 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 Commission. 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, etc. 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 provider? 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 are. 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 go.... 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 Chevrolet." 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 investment..." 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 away." 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 clients. 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 Alaska. 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 continued. 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 one? 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 various... 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 testify. 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 testimony). 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 currency. CHAIRMAN KOTT said next person to testify was Don Schorer of the APUC. 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 completed. 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 regulation. 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 interconnections. 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 work. 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 preemption. 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 direction. 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 other. 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 fashion. 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 features. 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 benefit. Section 8 & 9: AS 42.05.311(a) Joint Use & 311(b) Interconnection: There are two basic questions in these statutory provisions: 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 Contracts: 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 markets. 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 include: *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, centrex) 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 practice. 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 filings. 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 deregulated. Section 18. AS 42.05.436 RATES for New or Competitive Services. 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 purposes. 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 proof. 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 Information 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 Competition 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 competitive. 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 modifications. SUMMARY 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 toward: . 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 statute. 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 service. 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 reservations. 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. Hamlen. 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 in." 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 business. 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 difference. 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 regulation. 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 other. 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 necessary. There being no further witnesses to testify, CHAIRMAN KOTT closed public testimony. He thanked everybody for attending. ADJOURNMENT CHAIRMAN KOTT adjourned the House Labor and Commerce meeting at 4:25 p.m.