SENATE RULES COMMITTEE April 17, 2000 4:37 p.m. MEMBERS PRESENT Senator Tim Kelly, Chair Senator Loren Leman, Vice Chair Senator Mike Miller Senator Johnny Ellis MEMBERS ABSENT Senator Drue Pearce COMMITTEE CALENDAR CS FOR SENATE BILL NO. 256(FIN) "An Act relating to allowing physicians to collectively negotiate with a health benefit plan that has substantial market power." -HEARD AND HELD PREVIOUS SENATE COMMITTEE ACTION SB 256 - See HESS minutes dated 2/21/00 and 2/23/00 and Finance Report dated 4/7/00. WITNESS REGISTER Senator Pete Kelly Alaska State Capitol Juneau, AK 99811-1182 POSITION STATEMENT: Sponsor of SB 256. Mr. Mano Frey President of Alaska AFL-CIO Address Not Provided POSITION STATEMENT: Opposed to CSSB 256(FIN). Ms. Julia Coster Assistant Attorney General, Commercial Section Civil Division Department of Law 1031 West 4th Avenue, Suite 200 Anchorage, AK 99501 POSITION STATEMENT: Opposed to CSSB 256(FIN). Mr. Bob Lohr Director of the Division of Insurance P.O. Box 110805 Juneau, AK 99811-0805 POSITION STATEMENT: Opposed to CSSB 256(FIN). Mr. Gordon Evans Health Insurance Association of America 211 4th Street Juneau, AK 99801 POSITION STATEMENT: Opposed to CSSB 256(FIN). Mr. Michael Haugen Executive Director of Alaska Physicians & Surgeons Association 4120 Laurel Street #206 Anchorage, AK 99501 POSITION STATEMENT: Commented on CSSB 256(FIN). Mr. Jack McCrae 107 Bell Street Edmonds, WA 98020 POSITION STATEMENT: Opposed to CSSB 256(FIN). ACTION NARRATIVE TAPE 00-11, SIDE A CHAIRMAN KELLY called the Senate Rules Committee meeting to order at 4:37 p.m. Present were Senators Tim Kelly, Leman, Miller, and Ellis. The first order of business to come before the committee was CSSB 256 (FIN). SB 256-PHYSICIAN NEGOTIATIONS WITH HEALTH INSURER MS. JULIA COSTER, Assistant Attorney General for the Commercial Section, Department of Law (DOL), stated DOL has serious legal and policy concerns about CSSB 256(FIN). CSSB 256(FIN) may cause substantial harm to consumers by increasing health care costs and decreasing health care options. In addition, it is questionable whether the State active supervision provision in CSSB 256(FIN) under the State Action Doctrine will be sufficient to immunize physicians from federal prosecution under federal anti-trust laws. The proposed reason for the legislation is that an imbalance of power between health benefit plans and physicians has adversely affected patient care. DOL has not seen reports or data that substantiate that Alaska consumers have been adversely affected by such an imbalance. That raises the question of whether there is a demonstrable need for CSSB 256(FIN) which would require the state to override the national policy which favors competition. The second issue is whether CSSB 256(FIN) provides for sufficient state supervision to immunize physicians from federal prosecution. Currently, collective negotiations by physicians on price terms are considered price fixing. It is a per se violation of federal and state anti-trust laws. Under the State Action Doctrine, a state may override the national policy favoring competition by allowing certain segments of its economy to be governed through regulation as opposed to free trade. A state may not, however, grant immunity by fiat; it must replace competition with active and continuous supervision of the conduct. According to federal court rulings, a state must exercise independent judgment and control over the details of the prices and rates so that the terms are the result of state intervention as opposed to just a meeting of the minds by the parties. If the state does not set or review the prices, there will be no state active supervision. Several aspects of CSSB 256(FIN) raise the question of whether or not it would meet the State Action Doctrine. For instance, CSSB 256(FIN) requires the Attorney General to review and approve all proposed negotiations. The independent third party who will conduct negotiations is not required to provide the Attorney General with the information that is necessary for the Attorney General to make a logical determination. CSSB 256(FIN) also imposes on the Attorney General the requirement that it review and approve or disapprove all proposed contracts within 30 days of submission. It does not, however, require the parties to provide the Attorney General with the information necessary to make that decision. Furthermore, it does not provide the Attorney General with the investigative authority to obtain the information from third parties if necessary and it does not provide the public with a mechanism to provide any evidence for the arguments related to the cost and benefits of the proposed contracts. Those limitations will prevent the Attorney General from exercising independent judgment and control which is necessary under the State Action Doctrine. It also prevents the Attorney General from engaging in a review of the reasonableness of the negotiations. For these reasons, physicians may be prosecuted under federal anti- trust laws. The proposed purpose of CSSB 256(FIN) is to level the playing field between health benefit plans and physicians. CSSB 256(FIN) creates an imbalance in favor of physicians that will allow physicians to exercise market power and raise prices above competitive levels. A proposed amendment by the sponsor might increase the imbalance of power even more. [SENATOR PETE KELLY'S proposed amendment (1-LS 1291\K.1) reads as follows.] A M E N D M E N T OFFERED IN THE SENATE BY SENATOR PETE KELLY TO: CSSB 256(FIN) Page 4, lines 10 - 11: Delete ", or a particular physician type or specialty" Page 4, line 15: Delete "and" Insert a new paragraph to read: "(7) the attorney general may limit the percentage of practicing physicians represented by an authorized third party; however, the limitation may not be less than 30 percent of the market of practicing physicians in the geographic service area or proposed geographic service area; when determining whether to impose a limitation described under this paragraph, the attorney general shall consider the provisions described under (h), (i), and (j) of this section; this paragraph does not apply if the market of practicing physicians in the geographic service area or proposed geographic service area consists of 40 or fewer individuals; and" Renumber the following paragraph accordingly. CHAIRMAN KELLY asked Ms. Coster how she would propose to fix the amendment. MS. COSTER stated the legislation contains no limit on the number of physicians who can negotiate with the health care plan that has five percent or more of the market share. That could result in a scenario where 100 percent of the physicians in a geographic service area could negotiate against a plan that only has five percent of the market share, and that create a true imbalance in power. Senator Pete Kelly's proposed amendment allows the Attorney General to impose a limit on the number of physicians who can negotiate with a health benefit plan, but it limits the number to 30 percent. This does not resolve the problem. The amendment does not allow the Attorney General to impose a limit on particular physician types or specialties. A physician group may comply with the 30 percent limit, but within the 30 percent limit it may contain 100 percent of specialty groups (cardiologists, vascular surgeons, etc.). Substantial market power will give the group the ability to raise prices above the competitive level and that could be potentially harmful to the consumer. To fix the amendment, DOL would retain, on line 2, "or a particular physician type of specialty" so that requirement would remain in the bill. In addition, the phrase "in a particular physician type or specialty" should be inserted after the word "physicians" on line 7. This would allow the Attorney General to limit the size of a specialty group of physicians to the 30 percent level. CHAIRMAN KELLY asked Ms. Coster to put that language in writing to be used as another proposed amendment. MS. COSTER agreed and added that another aspect of Senator Pete Kelly's amendment creates a problem and that is the that the limit exemption does not apply to geographic service areas where there are fewer than 40 physicians. In rural areas such as Sitka, Ketchikan, Kenai or Barrow, 100 percent of the physicians could be a part of negotiations against health plans that are 5 percent or larger, creating an imbalance of power. CHAIRMAN KELLY asked if that provision is part of Senator Pete Kelly's amendment. MS. COSTER said it is and it begins on line 11. CHAIRMAN KELLY asked Ms. Coster to put in writing what DOL would do with the proposed amendment as opposed to the entire bill. MS. COSTER agreed. MR. MANO FREY, President of the Alaska AFL-CIO, and the business manager of the Anchorage laborers union, said in his business manager capacity he served as a trustee for the laborers union health care plan. He noted that Ed Bergen (ph), the laborers union consultant for its health care plan, communicated with Senator Pete Kelly specific language necessary to meet the union's concern. He said, as a health care fund trustee for 18 years, he has been waiting for the situation to arise in which physicians or dentists felt the union was browbeating them. He has not yet seen that. He is also involved with the Health Care Coalition of several trust funds and health care plans who have had tough negotiations with two major hospitals in Anchorage. He has had different kinds of negotiations between competing physicians' groups. He stated, for the record, that he strongly believes that physicians need to get together and collectively bargain and be represented. Some groups have gotten together across the nation and are now represented by the AFL-CIO and he applauds and encourages that action but he does not see the need for this legislation in Alaska. He has heard of no horror stories coming out of the physicians' community that show a need for this bill. SENATOR LEMAN commented that he shares Mr. Frey's belief that there is a lack of urgency for these groups to organize. MR. FREY responded that this bill sticks the Attorney General's nose into this issue and he does not understand why the state should be involved. Number 285 MR. BOB LOHR, Director of the Division of Insurance (DOI), stated the primary issue DOI looked at is the cost to the public of collective negotiations by physicians. At the national level, comparable legislation is pending (HR 1304). Mr. Lohr referred to the Charles River Associate Study for the Health Insurance Industry Association (HIAA). It estimated that the cost of giving physicians the ability to collectively negotiate with health insurance companies would equal 5 to 13 percent of premiums. The U.S. congressional budget office also estimated that passage of HR 1304 would increase the cost to the federal government and to private health plans, resulting in higher private health insurance premiums as well. As in the case of any important legislation, there are experts on both sides of the issue. Mr. Lohr referred to a study sponsored by the American Medical Association which concluded that costs would increase, but it came up with a significantly lower percentage figure than the Charles River Associate study predicted. The American Medical Association's study is full of errors; the Charles River Associate Study is more accurate and is considered at the federal level to be the best analysis. The sponsor of HR 1304, Representative Thomas Campbell, considered that the bill would increase health care premiums and concluded that the increase should come out of the profits of health insurance companies. That is not a ready source, however, and nationally speaking, HMOs are going under daily, one reason being that their profit margins are so low. It defies conventional economic theory that a significant gain in physicians' rates can be taken from the profits of health insurance companies. Typically, 50 percent of the total cost of providing health services is the cost of the health professionals. In Alaska, health insurance premiums have increased significantly over the last several years because of increases in cost and health care utilization. These increases have led employees to drop coverage, increasing the number of uninsured Alaskans. CSSB 256(FIN) would increase health care costs for Alaskan consumers and further increase the number of uninsured Alaskans. CSSB 256(FIN) contains a five year sunset provision but the bill can be reversed if it is not working. Trying to reverse the effects of CSSB 256 would be very difficult, if not impossible, to accomplish. Rolling back gains is unlikely. At best, the rate of increases might be controlled. SENATOR ELLIS asked what the impact would be on small health care providers in Alaska. MR. LOHR replied specific assessments by group have not been conducted. The market for individuals for health care costs has increased the most dramatically. It depends on the market power which defines the relevant markets according to the physicians' groups interested in negotiating. That would depend on the percentages for a given specialization negotiating with a health care program with respect to how much those groups would be able to obtain at the table when negotiating. The assessments will be case by case. The purpose of CSSB 256(FIN) is to provide physicians with more clout at the table and, if it succeeds, it will increase costs, some of which will be passed through to customers. SENATOR ELLIS remarked that this bill leads to higher premiums and as premiums go up people will drop coverage. He asked Mr. Lohr if he knows of any way to ameliorate those negative affects. MR. LOHR said he believes there are many schemes dealing with government regulation on nationalization of health care that would make many more problems than they will solve. Number 375 MR. GORDON EVANS, HIAA, stated HIAA opposes CSSB 256(FIN) for two reasons. First, giving physicians an anti-trust waiver would deny consumers a choice, quality, and affordability. Second, health care costs would increase significantly for the public and private sectors. Significant debate at both the federal and state levels has occurred about physician collective bargaining or physician anti-trust waivers in the past. HIAA believes the argument is based on poor facts that are incontrovertible. Quality is not the driving force behind collective bargaining for physicians, it is economics. Despite the physicians' claims that it is about giving physicians some leverage to prevent the intrusion of a giant third party into the sacred physician-patient relationship, HIAA believes the relationship may be sacred, but physicians do not turn down payments from third parties. Legitimate mechanisms already exist within the boundaries of current anti-trust law under which health care providers can and do collaborate and negotiate with health plans and patients. Consolidation among health plans has been subject to rigorous anti-trust scrutiny at state and federal levels. HIAA believes that anti-trust waiver legislation is anti- competitive and would raise costs for health care programs. Total annual personal health care spending nationally could rise to approximately $80 billion. These added health care costs would be paid by consumers, employers, and tax payers without any improvement in the quality of health care. Physicians are already among the nation's highest paid professionals, and they are among the least likely Americans to need the benefits of unionization. Over the last decade, as managed care has grown, physician incomes have increased more than 77 percent for a median net income in Alaska in 1997 of $250,000. MR. JACK MCCRAE, Senior Vice President of Premier/Blue Cross Insurance, stated CSSB 256(FIN) will not improve health care or the confidence of people in their health care systems. CSSB 256(FIN) has the potential to be the most costly bill in Alaska, in terms of rate increases, and a need for the bill has not been shown. If physicians negotiate in one block, insurance companies will not have a choice and will be forced into paying that fee. MR. MCCRAE pointed out that Alaska has higher rates for health care than any other state that Blue Cross deals with. He highlighted a study conducted by the Alaska Department of Health & Social Services. Alaska's Medicaid program reimbursement rates for physician services averages 245 percent higher than Oregon's Medicaid rate, 230 percent higher than Washington's Medicaid rate, and 190 percent higher than Idaho's Medicaid rate. The specialty classes in Alaska show a 315 percent higher rate than the average in Region 10. CSSB 256(FIN) will put pressure on physicians to raise rates; this bill is strictly a rate issue. MR. MIKE HAUGEN, Executive Director of the Alaska Physicians and Surgeons Association (APSA), stated the issue of cost has raised a concern, as well as the fact that the whole process would be voluntary. The State oversight function requires that the Attorney General look into the reasonableness of the prices. It is not the intention of the physicians that belong to APSA to raise rates. What led to CSSB 256 was an investigation by the Federal Trade Commission (FTC) of a group of Fairbanks' physicians who were talking to specific carriers of health insurance. The FTC was alerted that the physicians involved were trying to boycott or price fix. CSSB 256 is a mechanism for physicians to discuss, as a group, financial and non-financial items with a carrier without triggering an FTC investigation. CSSB 256 would level the playing field between health care carriers and physicians, and APSA supports CSSB 256 (FIN). SENATOR LEMAN pointed out that the rates quoted by Mr. McCrae about Alaska Medicaid rates are incorrect, for example, Alaska's rates are 2.30 percent higher than Washington's, not 230 percent. SENATOR PETE KELLY, sponsor of SB 256 and the proposed amendment, stated that DOL" concerns about CSSB 256, expressed throughout the legislative process, were addressed by the Division of Legal Services. DOL sent him a memo outlining its concerns which he asked the Division of Legal Services to respond to. The Division of Legal Services essentially answered DOL's questions and surmised that the "sky was not falling" as DOL had claimed. Regarding statements made about the Charles River study and its conclusion that this type of legislation will result in price increases, the Charles River Study was specific to a national bill. In addition, the methodology of that study is in question. SENATOR PETE KELLY said the problem the bill intends to address is as follows. First, nationally, insurance companies are getting larger and fewer which will put Alaskan physicians in a difficult situation. That was foreseen by the U.S. Supreme Court and is the reason the State Action Doctrine was brought forth. The State Action Doctrine is somewhat of a preemptive strike. Physicians may not be browbeaten now but they will be in the future. The first glimpse of that occurred in Fairbanks when the Independent Physicians Association (IPA) tried to get together to talk solely about quality issues, not prices. That group received a letter from the FTC telling it to stop. To the FTC, quality issues and fee items are the same. Eventually, physicians will need to discuss quality terms and economic terms, and the State will need oversight when that time comes. TAPE 00-10, SIDE B SENATOR PETE KELLY continued. Another issue is that physicians should not be put in a position of having to choose between the requirements that a large insurance company may put on them and their ethics. Currently, Alaska has no "Gag Rule" but other states do, and the physicians don't want that to happen in Alaska. Senator Kelly stated other states have enacted the same bill because they see this as a potential problem. There may not be a problem in Alaska now, but CSSB 256(FIN) will prevent the possibility of it arising. Senator Kelly referred to the Charles River Study and noted the doctors who are forcing the price increases are primarily dentists. CHAIRMAN KELLY stated major concerns have been expressed about CSSB 256. He noted it is the intent of the committee to move a bill to the Senate floor this year for a vote. Chairman Kelly asked Ms. Coster to submit her proposed amendment in writing the following morning so that the committee will have the option of choosing which proposal it wants to adopt. SENATOR LEMAN asked Senator Pete Kelly if he would work with Ms. Coster to address her concerns. SENATOR PETE KELLY agreed. CHAIRMAN KELLY stated the Senate Rules Committee will make a decision on CSSB 256 the following day after the DOL proposal has been submitted. There being no further business to come before the committee, CHAIRMAN KELLY adjourned the meeting at 5:10 p.m.