Legislature(1995 - 1996)
09/27/1995 09:10 AM House L&C
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE LABOR & COMMERCE STANDING COMMITTEE
September 27, 1995
9:10 a.m.
Anchorage, Alaska
MEMBERS PRESENT
Representative Pete Kott, Chairman
Representative Norman Rokeberg, Vice Chairman
Representative Jerry Sanders
MEMBERS ABSENT
Representative Brian Porter
Representative Kim Elton
Representative Gene Kubina
Representative Beverly Masek
COMMITTEE CALENDAR
HB 266: "An Act relating to preferred provider agreements
offered by hospital or medical service corporations."
HEARD AND HELD
HB 346: "An Act relating to regulation of telecommunications
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.
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