![](media/image1.wmf){width="1.96875in" height="1.19375in"}

> [Report to the FCC]{.smallcaps}
>
> [\
> ]{.smallcaps}Evaluation of the Rural Health Care Program
>
> ● Suggested Improvements\
> ● Anticipated Demand\
> ● Revised Administrative Expenses
>
> March 5, 1999

Universal Service Administrative Company

RURAL HEALTH CARE DIVISION

**Evaluation of the Rural Health Care Program**

Universal Service Administrative Company

583 D'Onofrio Drive, Suite 201

Madison, WI 53719-2055

Phone 608-827-8872 ● Fax 608-872-8893

Home Page: http://www.universalservice.org

2120 L Street, N.W., Suite 600

Washington, D.C. 20037

Phone 202-776-0200 ● Fax 202-776-0800

###### Table of Contents

Table of Contents [i](#table-of-contents)

SECTION I [1](#__RefHeading___Toc445198135)

Purpose of Review [1](#purpose-of-review)

SECTION II [2](#__RefHeading___Toc445198137)

Summary of Findings and Recommendations for Administrative Improvements
and Reductions to Administrative Expenses
[2](#summary-of-findings-and-recommendations-for-administrative-improvements-and-reductions-to-administrative-expenses)

Recommendations for Improvements in the Program
[3](#__RefHeading___Toc445198139)

Process Improvements [4](#__RefHeading___Toc445198140)

Outreach Improvements [5](#__RefHeading___Toc445198141)

Demand [6](#__RefHeading___Toc445198142)

Reductions in Administrative Costs [7](#__RefHeading___Toc445198143)

SECTION III [8](#__RefHeading___Toc445198144)

History of the Program Administration
[8](#history-of-the-program-administration)

Structure of the Independent Administrator
[9](#__RefHeading___Toc445198146)

Administrative Processes Established to Meet the Program Design
Specifications [10](#__RefHeading___Toc445198147)

Current Process [10](#__RefHeading___Toc445198148)

Web Site [10](#__RefHeading___Toc445198149)

Handling of Applications [11](#__RefHeading___Toc445198150)

Customer Outreach, Education, and Eligible RHCPs
[12](#__RefHeading___Toc445198151)

Current Level of RHCD Administrative Costs (Actual 1998 and Budgeted
1999) [16](#__RefHeading___Toc445198152)

Operational Results in 1998 and the Status of Outstanding Issues
[19](#__RefHeading___Toc445198153)

SECTION IV [22](#__RefHeading___Toc445198154)

Industry Benchmarks for Comparable Organizations
[22](#industry-benchmarks-for-comparable-organizations)

Description of Comparable Group [22](#__RefHeading___Toc445198156)

Summary of Benchmark Analysis [23](#__RefHeading___Toc445198157)

SECTION V [27](#__RefHeading___Toc445198158)

Customer and Stakeholder Feedback
[27](#customer-and-stakeholder-feedback)

Customer Groups [27](#__RefHeading___Toc445198160)

Feedback from Selected ETCs Involved in Process Development of the
Program [27](#__RefHeading___Toc445198161)

ETCs Focus Group Feedback (Conducted by NTCA, 2/10/99, San Antonio)
[28](#__RefHeading___Toc445198162)

Feedback from Selected Non-ETCs [28](#__RefHeading___Toc445198163)

SECTION VI [29](#__RefHeading___Toc445198164)

Identification and Quantification of Barriers to Efficient Operation and
Recommendations for Improvement
[29](#identification-and-quantification-of-barriers-to-efficient-operation-and-recommendations-for-improvement)

Administrative Barriers [29](#__RefHeading___Toc445198166)

Outreach [29](#__RefHeading___Toc445198167)

Forms and Instructions [31](#__RefHeading___Toc445198168)

Responsiveness of PwC and RHCD to Applicants and Vendors
[32](#__RefHeading___Toc445198169)

Effectiveness of Outsourced Services [32](#__RefHeading___Toc445198170)

Calculation of Urban Rate Differential
[32](#__RefHeading___Toc445198171)

Lack of Effective Communications [34](#__RefHeading___Toc445198172)

Lack of Program Consolidation [34](#__RefHeading___Toc445198173)

Policy Barriers [35](#__RefHeading___Toc445198174)

ETC Requirement [35](#__RefHeading___Toc445198175)

Third-Party Billing [35](#__RefHeading___Toc445198176)

Posting/Contracting Requirement [35](#__RefHeading___Toc445198177)

Level of Money Available per Site [35](#__RefHeading___Toc445198178)

Types of Services Included in Program [36](#__RefHeading___Toc445198179)

RHCPs Do Not Include Rural Nursing Homes, Hospices, Emergency Medical
Service Facilities, Community Health Centers, or Long-Term Care
Facilities [36](#__RefHeading___Toc445198180)

Complexity of the Urban-Rural Rate Differentials
[36](#__RefHeading___Toc445198181)

Resale Prohibitions [36](#__RefHeading___Toc445198182)

The Hawaii Problem [37](#__RefHeading___Toc445198183)

Other Barriers [37](#__RefHeading___Toc445198184)

RHCPs Not Interested or Not Informed [37](#__RefHeading___Toc445198185)

RHCPs Do Not Have Equipment Necessary for Telemedicine
[37](#__RefHeading___Toc445198186)

POTS May Provide Adequate Level of Service
[37](#__RefHeading___Toc445198187)

Telecommunications Providers Not Supportive
[38](#__RefHeading___Toc445198188)

RHCPs Have Toll-Free Internet Access [38](#__RefHeading___Toc445198189)

Not Worth the Effort to RHCPs [38](#__RefHeading___Toc445198190)

Infrastructure Not Available Today [38](#__RefHeading___Toc445198191)

Lack of Local Competition [38](#__RefHeading___Toc445198192)

Limited Patient Volume and Demand [39](#__RefHeading___Toc445198193)

Lack of Physician Interest [39](#__RefHeading___Toc445198194)

Lack of Medicare Reimbursements for Telemedicine Consultations Limits
Interest in Telemedicine Investment [39](#__RefHeading___Toc445198195)

SECTION VII [40](#__RefHeading___Toc445198196)

Analysis of Demand and Administrative Costs
[40](#analysis-of-demand-and-administrative-costs)

Demand [40](#__RefHeading___Toc445198198)

Administrative Costs [43](#__RefHeading___Toc445198199)

Outsourcing [44](#__RefHeading___Toc445198200)

Billing and Collections [45](#__RefHeading___Toc445198201)

Compensation [45](#__RefHeading___Toc445198202)

Outreach [47](#__RefHeading___Toc445198203)

SECTION VIII [49](#__RefHeading___Toc445198204)

Conclusion [49](#conclusion)

APPENDIX A [50](#__RefHeading___Toc445198206)

Estimated Administrative Costs for 1999
[50](#estimated-administrative-costs-for-1999)

Appendix B [53](#__RefHeading___Toc445198208)

Letter from Mr. Jonathon Linkous [53](#letter-from-mr.-jonathon-linkous)

[]{#__RefHeading___Toc445198135 .anchor}SECTION I

###### Purpose of Review

The Federal Communications Commission (Commission) proposed that the
Universal Service Administrative Company (USAC), pursuant to its
obligations as administrator:\
(1) reduce the administrative expense associated with the rural health
care support mechanism to an amount that is commensurate with the size
of the support mechanism; (2) evaluate ways to improve opportunities for
eligible rural health care providers to take advantage of the support
mechanism; and (3) evaluate anticipated demand for 1999. USAC is
required to submit revised administrative expenses for the rural health
care support mechanism and an evaluation of the Program by March 5,
1999. This report meets those requirements by focusing on the
opportunities for improvement in the administration of the rural health
care fund, including proposals for reducing administrative costs, and
forecasting anticipated demand for the Program.

[]{#__RefHeading___Toc445198137 .anchor}SECTION II

###### Summary of Findings and Recommendations for Administrative Improvements and Reductions to Administrative Expenses

This report includes an analysis of the policy and administrative
barriers identified by the stakeholders that were surveyed. Consistent
with the role and mission of USAC, our recommendations focus on
administrative improvements and the interpretation of the Commission's
rules in the administration of the Program. Rural health care and
industry experts have provided USAC with several recommendations for
addressing the policy barriers that would require the Commission to
re-evaluate its approach, reexamine policy determinations, and in some
instances, seek statutory change. These recommendations are included in
**Appendix B** to this report.

This report provides a history of the Rural Health Care Program
(Program) (Section III), benchmark information regarding administrative
costs of other non-profits for comparison purposes (Section IV), and an
overview of the customer groups that were surveyed about the Program
(Section V). These sections of the report and the feedback from the
stakeholders provide the background and basis for the recommendations in
the report.

The report recommends simplification of the Program to increase
participation (especially for small rural health care providers (RHCPs)
and small rural telecommunications carriers) and to decrease the
administrative costs. Absent simplification, the report recommends other
options for reducing administrative costs. These recommendations are
primarily found in Section VI, Identification and Quantification of
Barriers to Efficient Operations and Section VII, Analysis of Demand and
Administrative Costs.

The report includes the following:

-   Recommendations for improvements in the Program

    -   Simplify the urban--rural rate calculation

    -   Recognize that one component of the urban--rural rate
        differential is distance

    -   Simplify the forms

    -   Target outreach efforts

    -   Refocus outreach efforts to partner with additional associations
        and federal and state agencies

    -   Consolidate Program functions

    -   Extend the funding cycle for the first year by 6 to 12 months,
        delay the opening of the second application cycle, and
        significantly change the Program for the second application
        cycle.

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-   Estimates of 1998 and 1999 application year demand

    -   \$3,115,000 for 1998

    -   \$9,290,000 for 1999

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-   Recommendations for reductions in Program administrative expenses

    -   2^nd^ Quarter 1999

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-   Reallocate USAC support (Compensation)

-   Reallocate the support position 100 percent to the USAC support

-   Eliminate the President position

    -   For the Period July 1 -- December 31, 1999

        -   Reduce outside contract costs

        -   Reallocate billing and collections costs

        -   No renewal of the PricewaterhouseCoopers LLP (PwC) contract.
            If the Commission extends the first year and delays the
            start of the second application cycle, provide for a
            transition to complete any remaining first year applications
            and process all new applications in‑house.

    -   After January 1, 2000 -- without simplification of the Program

        -   Consolidate like functions with other programs

        -   Consider bringing functions in-house and/or re-bid the
            contract

    -   After January 1, 2000 -- with simplification of the Program

        -   Bring all operations in-house and consolidate wherever
            possible

[]{#__RefHeading___Toc445198139 .anchor}Recommendations for Improvements
in the Program

The primary barrier to a more efficient program is the design that was
intended to accommodate a larger number of participants and level of
support per participant. However, it appears that existing state and
federal universal service policies have minimized any urban‑rural rate
differential for basic switched services. The best current estimates
show that this Program is not likely to exceed \$10 million in annual
support level in the near term. If this had been the assumption at the
onset, a less complex infrastructure likely would have been established.
Removal of this barrier for the existing Program will involve
simplifying the rate calculations, changing the distance calculations,
simplifying the forms required from the RHCPs and the carriers, and
consolidation of application handling, customer support, web site
maintenance, and support invoicing with other USAC programs.

Other major barriers are the completion of the pre-commitment audit and
a few unresolved issues of interpretation. The resolution of these
issues should be concluded shortly.

While outreach itself is not a significant barrier, the actual measure
of its effectiveness is a barrier to designing future outreach programs
that are more effective. Feedback from applicants on outreach should be
incorporated into the customer service representatives' contact with
applicants. Outreach plans for future years should include special
emphasis on regions with the highest potential to receive benefits under
the Program. The first step in improving outreach must be the continual
development of a reliable database of eligible providers beginning with
the successful 1998 group of RHCPs.

[]{#__RefHeading___Toc445198140 .anchor}Process Improvements

It is critically important that USAC do whatever it can to get this
Program on solid footing. In that regard, USAC should work closely with
the Commission to implement programmatic changes as quickly as possible.
USAC is concerned that the current Program is in serious jeopardy
because the level of frustration of RHCPs is high, the level of demand
is low, and the level of administrative costs for the Program currently
may exceed the support that is provided to RHCPs.

The most important process improvement needed at this time is the
simplification of the rate calculation process. The time spent on this
function is vastly out of proportion to the benefit. The most
straightforward solution, which can be accomplished within the bounds of
the Telecommunications Act of 1996 (Act of 1996), is simplification of
the urban‑rural rate differential calculation. One method for
accomplishing that would be to calculate a statewide average discount
for eligible services. This discount could simply be applied to all
distance‑based services including T‑1 and fractional T‑1. If program
changes are also made that allow a different approach for identifying
the urban‑rural rate difference, such as mileage or long-distance
charges, a simple discount can apply to all services. The mileage
component or the long-distance charges could be a surrogate for the
urban‑rural rate difference. The mileage discount would be based on the
charge for the mileage from the rural provider to the outer bounds of
the nearest urban area. This would be simple to calculate and apply. It
would not involve calculating a hypothetical urban rate for comparison
and would not involve a maximum allowable distance calculation. This
recommendation holds the most promise for administrative expense
reduction.

Another simplification available to the Commission would be for it to
recognize, like the Commission recognized for access to the Internet,
that long-distance charges represent a rate difference between urban and
rural service.

Internally, USAC will look to consolidate the rural health care
processes into processes that are being performed for other universal
service programs. For example, client assistance could be consolidated
for the Schools and Libraries and Rural Health Care Programs once
current contracts expire.

This Program is important to rural communities and to the provision of
health care to those communities. USAC is committed to working with the
Commission, RHCPs, and carriers to make this Program work. Because of
the concern for the viability of the Program, USAC recommends that the
Commission consider delaying the opening of the second round of
applications and extending the funding period for the first application
cycle. This would eliminate the need for RHCPs to reapply for support
beginning July 1,1999. Going forward, it would eliminate the need to
continue to use the current system, which is burdensome and costly; it
would give the Commission time to implement changes to the Program; it
would provide industry experts with time to provide the Commission with
specific recommendations on how to implement these improvements; and it
would allow USAC to decrease administrative costs. Delaying the opening
of the second application cycle would also ensure that RHCPs would know
what funding they will receive prior to filing their next application.
USAC recommends that the extension be limited to 6 -- 12 months and that
the Commission immediately establish a Task Force to work out the
details of a simplified program that implements the recommendations in
this report. USAC is committed to working with the Commission, RHCPs,
the carriers, and other government agencies to complete the task in this
time frame.

The rural health care experts have said that, "the application process
as it exists today is burdensome, complicated, causes substantial
hardship on applicants, and creates a barrier on getting the Program
benefits out to the intended beneficiaries."[^1] The current process is
also very costly for USAC to administer. Without significant changes in
the process, USAC will continue to incur administrative costs
significantly above comparable benchmarks and above those costs that
serve the public interest.

USAC realizes that there are potential disadvantages to this
recommendation: it may be viewed as but one more delay in the Program,
and RHCPs that do not file a Form 465 by May 15, 1999, will have to wait
until they can file for Year 2. Because of concern for the current
vulnerability of the Program and our desire to get it on solid footing
as soon as possible while reducing the costs to administer the Program,
USAC puts forward this recommendation as an additional option for
Commission consideration.

[]{#__RefHeading___Toc445198141 .anchor}Outreach Improvements

Continued working relationships with the National Telephone Cooperative
Association (NTCA) and the National Organization of State Offices of
Rural Health (NOSORH) are important to maintain broad awareness of the
Program. However, it is not necessary to award contracts again for the
1999 year. Efforts of the Rural Health Care Division (RHCD) should be
concentrated on continuing to develop an accurate database of RHCPs
based on the applicant pool, to target additional efforts to regions
that have the highest possibility of receiving support, and to
coordinate efforts with the NTCA, NOSORH, and other associations.
Outreach plans should also include partnering with associations,
government agencies, the telecommunications industry, and the other
universal service programs. A community-based approach working with
carriers, community leaders, school and library officials, and other
government agencies to outreach should be considered. Associations,
government agencies, and industry should also continue to be used as a
resource for identifying the eligible RHCPs. In addition, some RHCD
outreach should be specifically targeted to the beginning of the new
Program year to maximum available months of support.

[]{#__RefHeading___Toc445198142 .anchor}Demand

Demand will not increase significantly without major changes in the
Program (such as increases in the type of health care providers that
qualify and the services that are covered) and the removal of some of
the health care industry barriers. Absent changes, demand is not likely
to exceed \$10 million in annual support next year. Over time, demand
will increase from this amount with simplification of the Program, with
the growth of telemedicine[^2] networks, and if Alaska can develop a
model to overcome the ETC barrier (as discussed in Sections III and VI
of this report).

[]{#__RefHeading___Toc445198143 .anchor}Reductions in Administrative
Costs

Reductions in administrative costs are necessary to bring Program costs
in line with demand for support. Some reductions in administrative costs
are possible in the short term; however, changes in the Program are
necessary to bring costs to a level that is consistent with the public
interest. Administrative costs should move toward comparable benchmark
figures for government foundation groups. This report examines benchmark
administrative costs for three groups of grant-giving organizations. The
government foundation group shows a top level of administrative costs of
26 percent of Program size. The RHCD should take steps immediately to
move toward this goal in the short term. The organization should work to
bring administrative costs within the five to ten percent ranges in the
long term.

The 1998 and 1999 budgets are comprised primarily of four cost
categories: outsourcing, billing and collections, compensation, and
outreach. Each of these categories will need to be reduced in the short
term to make significant movement toward the benchmarks. There are three
contracts currently in place: one with PwC until June 1999, and two
outreach contracts (NTCA and NOSORH) that should be concluded within a
few months.

The following chart summarizes the range of proposed cost reductions.

> **Summary of Proposed RHCD Cost Reductions for 1999 (Annualized
> Estimates)**

  ----------------------------------- -----------------------------------
  **Cost Item**                       **Range of Net Reductions**

  Outsourcing: PwC                    \$569,940

  Billing and Collection              \$736,100

  Compensation                        \$10,000 to \$298,000

  Outreach                            \$24,500

  Total                               Up to \$1,628,540
  ----------------------------------- -----------------------------------

If all of these cost reductions were implemented, administrative costs
allocated to the RHCD would be lower for the 1999 plan year. However,
the majority of these savings would only be realized for the second half
of the year. Estimated 1999 administrative costs---assuming the current
first quarter budget, a revised second quarter budget adjusted for
compensation savings, and six months of cost savings identified
above---would be approximately 35 percent of the projected 1999 funding
level. Reductions in costs at or slightly below the high range of the
benchmark study contained herein can be made through consolidation of
functions with other programs. However, significant reductions can only
be accomplished if the proposed Program simplification is implemented.

Another way to reduce administrative costs significantly in the short
term is to extend the current funding cycle and delay the opening of the
second application cycle until the Program is simplified.

[]{#__RefHeading___Toc445198144 .anchor}SECTION III

###### History of the Program Administration

On February 8, 1996, the Telecommunications Act of 1996 (the Act of
1996) was enacted into law as an amendment to the Communications Act of
1934. Section 254(h) of the Act of 1996 require that all public and
non-profit health care providers have access to telecommunications
services necessary for the provision of health care services at rates
that are comparable to rates paid in urban areas for comparable
services.

Specifically, the Act of 1996 states:

> A telecommunications carrier shall, upon receiving a bona fide
> request, provide telecommunications services which are necessary for
> the provision of health care services in a State, including
> instruction relating to such services, to any public or nonprofit
> health care provider that serves persons who reside in rural areas in
> that State at rates that are reasonably comparable to rates charged
> for similar services in urban areas in that State. A
> telecommunications carrier providing service under this paragraph
> shall be entitled to have an amount equal to the difference, if any,
> between the rates for services provided to health care providers for
> rural areas in a State and the rates for similar services provided to
> other customers in comparable rural areas in that State treated as a
> service obligation as a part of its obligation to participate in the
> mechanisms to preserve and advance universal service.[^3]

The May 8, 1997, Commission Order[^4] (Order) defined services to be
supported by the universal service programs, including rural health
care. It defined support mechanisms and made changes to Commission rules
to implement the Act of 1996. According to the Commission Order, support
is available for telecommunications services with a maximum bandwidth of
1.544 Mbps and for long-distance charges to access an Internet service
provider. It also delineated how the health care provider would be
classified as rural. Support is generally equivalent to the differential
between the rural rate and the nearest urban rate for a comparable
eligible service. This support is available only to public and
not-for-profit organizations that contract with an eligible
telecommunications carrier (ETC). Individual state commissions designate
ETC status. The Program was designed based on the best information
available regarding telemedicine programs, the need for
telecommunications assistance, and the number of eligible RHCPs.

The National Exchange Carrier Association (NECA) was appointed as the
temporary administrator of the universal service programs in the May 8
Order, and was provided administrative rules in the Second Order on
Reconsideration on July 18, 1997.[^5] USAC was created in 1997 as a
subsidiary of NECA. The independent Rural Health Care Corporation (RHCC)
was established in September 1997 and funds were first available for the
Program on January 1, 1998. The newly elected RHCC Board hired a CEO on
January 27, 1998. Three other employees were hired shortly thereafter.

The RHCD of USAC now administers the Rural Health Care Universal Service
Program pursuant to its appointment by the Commission. The mission of
the RHCD is to administer the Program in an efficient and effective
manner as directed by the Commission.

[]{#__RefHeading___Toc445198146 .anchor}Structure of the Independent
Administrator

On January 1, 1999, the Rural Health Care Corporation and the Schools
and Libraries Corporation were merged into USAC. As part of the merger,
USAC created the Rural Health Care Division to oversee the
administration of the Rural Health Care Universal Service Program.

Prior to the merger, the RHCC had four full-time employees. The
President was Lee Bailey who was responsible for the management and
operation of the corporation and for program and application process
administration, accounting, regulatory, legal, outreach, and personnel.
Melvin Blackwell, Vice President, has been responsible for outreach to
rural health care providers, telephone service providers, industry
associations, and media to promote the Program. Mr. Blackwell was also
responsible for program development and implementation, education, and
responding to inquiries from Congress.

William England was the Director of Corporate Systems and Policy. His
responsibilities included the day-to-day management of the RHCC
application process, telecommunications provider invoicing and payment
systems, general data management and processing, and program statistics.
He was also responsible, in part, for outreach and information
dissemination. Donna Faunce was the Executive Assistant, responsible for
procurement, supervision of accounting, employee benefits, and
scheduling. She also provided administrative and clerical support to all
employees.

RHCC received bids from potential contractors to perform the customer
help desk and application processing functions as well as web site
development. In February 1998, RHCC selected PwC as the lowest cost
bidder to perform these functions. As part of the contract, PwC
employees have also been involved in calculating the urban-rural rate
differentials and have worked closely with RHCC employees in problem
solving and process development.

The merger has allowed USAC to consolidate and take advantage of
redundant functions of the three corporations. Accordingly, the
responsibilities of some of these employees have been adjusted and
reallocated. Mr. Blackwell and Ms. Faunce have added responsibilities
for all of the programs and a portion of their time is allocated to the
three other programs rather than 100 percent to the new RHCD. In
addition, management employees of USAC now have overall responsibilities
for this Program as well as the other three. Mr. Bailey is now President
of the RHCD and Mr. England is Director of RHCD Operations and Systems.
Mr. Blackwell is now Vice President of External Communications for the
entire USAC organization and Ms. Faunce is now Executive Assistant for
Programs reporting to the President of the High Cost Low Income (HCLI)
Division and the President of the Schools and Libraries Division (SLD)
in addition to Mr. Bailey. Sixty percent of Ms. Faunce's time is
currently allocated to the Rural Health Care (RHC) Program and the
balance is allocated to the other programs. However, the total
allocation of salaries and full-time equivalent (FTE) employees to the
RHC Program has not changed significantly.

[]{#__RefHeading___Toc445198147 .anchor}Administrative Processes
Established to Meet the Program Design Specifications

[]{#__RefHeading___Toc445198148 .anchor}Current Process

The mechanism for requesting support is a series of forms, which can be
downloaded from an Internet site. The first form, 465, is filled out by
the RHCPs and indicates interest in acquiring support for
telecommunications service for new or existing telemedicine program.
Form 465 also determines whether a rural health care provider (RHCP) is
eligible to receive funds from the Program. Funds may be distributed up
to \$400 million on an annual basis.

Following the review of Form 465, the RHCD and its contractor, PwC,
determine eligibility of the RHCP and post the request for service on a
web site with the intention of attracting bids for that service. The
rural health care provider selects the service and a carrier and
notifies the RHCD via Form 466 after the posting period is expired. The
eligible telecommunications provider also supplies information to the
RHCD via Form 468. The RHCP then files Form 467 to certify that the
services are being provided. The RHCD commits the funds to the
telecommunications provider on a monthly basis. Finally, the
telecommunications provider provides the credit to the RHCP.

[]{#__RefHeading___Toc445198149 .anchor}Web Site

The RHCD web site is the center of information sharing between the RHCD
and providers: *rhc.universalservice.org*. The development of the
current site was contracted to PwC after the RHCC Board rejected an
initial attempt by another firm. The PwC site has been up and running
for approximately 10 months. The site has two primary functions. One
function is to share information about the Program with any interested
party. The second purpose is to facilitate the application process.
Forms can be downloaded and then filed on paper. Form 465 can be
uploaded when complete but must be filed on paper with a valid signature
as well.

In addition, the web site contains useful information for RHCP and
telecommunications providers, such as links to state regulators and a
list of eligible telecommunications carriers (ETCs) by state to help
participants determine which telecommunications providers are eligible
to participate in the Program. USAC is responsible for maintaining the
list of ETCs.

A PwC Webmaster handles development and maintenance of the web site.
This includes updates to current information on the site, process
enhancements, and form updates in accordance with Commission-approved
changes.

[]{#__RefHeading___Toc445198150 .anchor}Handling of Applications

PwC employees handle the actual processing of all forms according to
direction given from the RHCD staff. Where interpretation of specific
provider information or Commission rules is needed, PwC consults with
RHCD staff. RHCD has consulted with the Commission on numerous
occasions, although only two requests for clarification were filed
formally with the Secretary. There have also been many informal, written
requests addressed to the Commission staff. PwC has also consulted with
the Commission directly. While this has added time to the process, it is
necessary to ensure that the RHCD is administering the Program
consistent with the Commission Orders and rules and it also helps to
avoid incorrect interpretations, which are more difficult to correct at
the end of the process.

The application process can be roughly divided into three phases:
confirmation of eligibility and posting of request for services;
verification and calculation of rates and discounts; and approval of
funding and arrangement of credits for providers. The first two phases
have been completed for many of the 1998 plan-year applicants; however,
given the current hold on commitments, the final phase has not yet been
implemented. Any comments herein on the third phase are not based on any
actual experience to date.

To initiate the first phase of the application process, the RHCP
completes Form 465, [Description of Services Requested and Certification
Form]{.underline}. Upon receiving this form, the customer service
representative (CSR) of PwC must confirm eligibility and post the
request for new service (or existing tariff service) on the web site. An
applicant who meets the tests for eligibility is deemed "approved." This
does not mean, however, that the applicant is approved to receive
support. At this stage there are no commitments either from RHCD or from
the RHCP that telemedicine is being used (or planned to be used) or that
support will be forthcoming.

The CSR must also calculate the MAD to be used in calculating
distance-sensitive rate differentials.

The Internet posting is required for 28 days before a provider can be
selected and before the next form can be filed. For pre-existing
services under contract, the 28-day period is waived. The next step for
the RHCP is to contract with the telecommunications provider that
provides the most cost-effective services considering their needs. The
Commission designed this Program with the expectation that
telecommunications providers would bid to provide the services
requested. The RHCP can also seek bids independent of the web site.
Neither RHCD nor PwC get involved in the bid process itself.

Once an ETC is selected, the applicant completes Form 466, [Services
Ordered and Certification Form]{.underline}. (As discussed elsewhere in
this report, in most instances there is only one ETC to choose from at
this time.) The purpose of this form is to identify the types of
services ordered and to certify that the most cost-effective provider
was selected. Only ETCs are eligible to receive discounts. A circuit may
contain an ETC and a non-ETC, but the portion provided by the non-ETC
will not be supported.

In parallel, the telecommunications provider completes Form 468,
[Telecommunications Support Form]{.underline}. The functions of this
form are to verify the services offered and to calculate the rural and
urban rate differential for this provider. An "optional" worksheet is
offered to assist with the rate calculation. Although the form is
"optional," carriers have found it is a necessary tool for completing
the form.

The final step in the process is the commitment of funds by the
RHCD.[^6] After the RHCP is notified of its support amount, it submits
Form 467, [Service Confirmation Form]{.underline}, to verify that
service is being provided. This will ensure that those services
contracted for are actually received during the Program year.

The 1998 plan year was originally a calendar year but has been extended
to June 30, 1999, making it an 18-month cycle. Applications for the 1999
year have been accepted since March 1, 1999. The 1999 plan year will
begin July 1, 1999, and end on June 30, 2000. An applicant who wants to
apply for the 1999 year must follow the process outlined above. All
health care providers seeking Universal Service Fund (USF) support for
the second year must apply regardless of whether they applied in 1998.

[]{#__RefHeading___Toc445198151 .anchor}Customer Outreach, Education,
and Eligible RHCPs

Customer Outreach and Education activities have been carried out by
employees of the RHCD, Board members, and two contractors (NTCA and
NOSORH) hired to assist with disseminating information about the
Program.

As a first step in identifying a target market for the Program, staff
obtained a list of eligible health care providers. However, staff
quickly learned that while the list from the American Hospital
Association contained 12,000 hospitals, many were not eligible to
participate in this Program because they were either urban or
for-profit. Staff then continued to work to develop a comprehensive list
of potentially eligible health care providers.

RHC staff contacted the following resources in an effort to secure their
databases, mailing lists, membership rosters, or any other information
which would help identify and reach out to rural, non-profit, health
care providers:

-   American Hospital Association

-   National Association of County Health Centers

-   National Rural Health Association -- list of members

-   Rural Health Clinics -- membership list of 3,000

-   American Association of Medical Colleges

-   Rural Roundtable

-   HCFA-- rural health clinics and Medicare hospitals

-   American Psychology Association

-   American Academy of Family Physicians

-   American Medical Association

-   American Academy of Physician Assistants

-   American College of Nurses

-   American Nurse Practitioners

-   Office of Migrant Health, HHS

-   National Association of Community Health Centers

-   National Rural Mental Health Association

-   Bureau of Primary Care, Office of Rural Health Policy

-   State Offices of Rural Health

-   Centers for Disease Control and Prevention

-   State and Territorial Public Health Directors

-   Local Public Health Directors

-   Local Boards of Health

These contacts did not provide a comprehensive list of eligible RHCPs.
In light of this, staff used a broad list as the basis for its initial
mailing. Through this approach, non-health care providers, urban
providers, and for-profit providers learned about the Program. The
informational mailing went to over 20,000 potential applicants. From
this mailing effort, over 1,400 responses were received and in turn each
were sent an information packet and application.

In addition, efforts of the staff of the RHCC and the newly formed RHCD,
and Board and Committee members of the same, have included a number of
varied activities. Between March 1998 and February 1999, the RHCC and
RHCD were directly involved in approximately 40 different conferences,
events, exhibits, workgroups, seminars, and workshops in the following
states:

-   Alabama

-   California

-   Colorado

-   Florida (3)

-   Maryland

-   Mississippi (2)

-   Nebraska

-   New Jersey (2)

-   New Mexico

-   New York (2)

-   North Carolina (3)

-   Ohio

-   Oregon

-   Texas (2)

-   Utah

-   Virginia (2)

-   Washington

-   Washington, DC (9)

RHC staff participated in audio and video call-in seminars, which have
had a broader reach. One teleconference covered Alaska. RHC staff has
created a broadcast-training program, which was broadcast to 48
locations and viewed over the Internet by over 1,000 people. About 350
people additional people have viewed the videotape created from this
training session. Other outreach activities include regular e-mail
updates to a group of 100 interested parties and participation in three
ongoing workgroups.

The NOSORH contract proposed to issue mini grants to State Offices of
Rural Health (SORH) for a variety of outreach activities. The SORH will
suggest outreach activities in their applications for the mini‑grants.
The activities will include: defining telemedicine, exploring benefits
of using telemedicine in rural areas, providing increased understanding
of infrastructure needs associated with telemedicine, and identifying
resources available for paying for telemedicine including the USF. As of
February 19, 1999, 30 projects have been approved for funding through
the NOSORH contract. These projects represent about \$100,000. The cost
reporting and evaluation method for these projects is still in the
development stage so there are no specific measurable results to report
to date. Most projects are scheduled to be completed by April 1999. No
payments have been made to date.

NOSORH outreach activities will take place primarily in spring of 1999.
This clearly will not materially affect the results for the 1998 plan
year. This schedule appears to be behind that agreed to in the contract
due to an extension of time to file for grants. The SORH are required to
update the NOSORH web site with information on grant activities. The web
site is *www.ruralcenter.org/nosorh*; however, it does not have specific
information about the individual grant programs or general tips for how
to apply. Finally, the SORH must fill out an evaluation and cost report
to be reimbursed by NOSORH.

The NTCA contract promised to deliver 100 or more applications to the
RCHD by December 31, 1998, and to educate all 500 NTCA member phone
companies, rural development organizations, the medical industry, and
18,000 "eligible" RHCPs about the Program. A November 5, 1998, report on
the progress of this contract indicates a significant volume of outreach
activity over the period, including a training session for the NTCA
staff, publication of articles in the popular and trade press, and
workshops and briefings at industry meetings. In addition, NTCA has
developed e-mail lists, conducted surveys, and made site visits to rural
carriers. The objective cited in the original contract is that NTCA
would bring 100 more applications. NTCA reported on the number of
outreach activities but indicated that its goal of having the carriers
submit written commitments was not possible. The Program is running
behind its original schedule and NTCA has asked if the time can be
extended so that it can continue to participate in outreach
opportunities. An extension will put the outreach into the second
Program year.

The NTCA also held a focus group session for telecommunications
providers in San Antonio, in February 1999.

In addition, RHCD, at the direction of the former RHCC board, contacted
a number of academics and professionals in the field of telemedicine to
get better information on the pool of eligible health care providers.
Those experts indicated that the market was far smaller than originally
estimated. This was due in part to a recognition that recent changes in
telecommunications technology, as well as information technologies in
the health care field, have resulted in an apparent trend away from the
T-1 type, point-to-point service to lower cost switched offerings and
Internet based applications. Further investigation also confirmed that
the growth in hub/spoke network development was slow largely due to the
need for outside funding to support the networks, and due to the fact
that telecommunications costs are but a small piece of the overall
network.

Data collected by American Telemedicine Service Providers (ATSP) for
1998 reported 157 networks covering 1,345 sites for 1998. Academic
medical centers and hospital/health networks make up the bulk of the
programs. Grants, internal funding, and state contracts/subsidies are
the primary source of the funding. The majority of the programs report
that their systems are used primarily for clinical uses; however, a
number of the respondents were for profit or private and a number of
respondents were in urban areas. Only about 40 percent of the
respondents used T-1 type point to point telecommunications service that
would receive Program support. While the ATSP survey does not provide a
list of eligible participants, it is the best data there is on
telemedicine participation and confirms the view that the market for the
subsidy is relatively small.

There has been no effort to create an exact count or database of
potentially eligible RHCPs that would supplant the original estimate of
12,000 used by the Commission.

[]{#__RefHeading___Toc445198152 .anchor}Current Level of RHCD
Administrative Costs (Actual 1998 and Budgeted 1999)

Actual administrative costs for 1998 represent development costs
associated with startup and implementation of a new program. The costs
for 1998 also reflect systems designed for a \$400 million program with
12,000 applicants. The system was set up to handle accurate tracking and
to handle the anticipated volume, to be consistent with Commission rules
and to protect against waste, fraud, and abuse.

In 1999, start-up costs should be eliminated, but the ongoing
maintenance costs for systems, which were set up with high-volume
expectations, remain until program simplifications are adopted.
Preliminary figures for actual 1998 costs show that \$4,612,360 was
spent in calendar year 1998. Projections for 1999, which reflect the
merger of RHCC with USAC, show that expected administrative costs are
\$4,184,200. This is a reduction of \$428,160 or about 9 percent
compared to 1998.

The UASC Board of Directors approved the quarterly 1999 budget
projections in January 1999; however, it recognized that significant
changes to administrative costs would need to be made as part of this
evaluation and report. The following table shows the budget estimates
provided to the Commission for RHC Program administration.

> **Projections for 1999 RHCD Administrative Costs Prior to the
> Adjustments Recommended in this Report (Thousands of Dollars)**

  -----------------------------------------------------------------------------------------
  **Item**                   **99 Q1**    **99 Q2**    **99 Q3**   **99 Q4**   **99 Total**
  -------------------------- ------------ ------------ ----------- ----------- ------------
  Compensation               100          100          100         100         400

  Travel                     5            5            5           5           20

  Mailings                   3            3            2.4         2.4         10.8

  Audit                                   40                                   40

  Tel                        5            5            5           5           20

  Taxes                      2            2            2           2           8

  Misc.                      6            6            6           6           24

  PwC                        504          558          492         492         2046

  Outsourcing Outreach       200          150          10.5        35          395.5

  Total Direct               825          869          622.9       647.4       2964.3

  USAC Support               120.6        121.7        120.4       118.1       480.8

  Billing and Collection     183.1        182.8        187.8       185.4       739.1

  **Total RHCD**             **1128.7**   **1173.5**   **931.1**   **950.9**   **4184.2**
  -----------------------------------------------------------------------------------------

A straightforward comparison of the total 1998 administrative costs and
the total 1999 budget is difficult due to the startup nature of 1998 and
due to the new corporate structure in 1999. Instead, it makes more sense
to focus attention on the four items that represent the most significant
percent of both years: Outsourcing to PwC, Billing and Collection,
Compensation (direct and indirect allocations), and Outsourcing for
Outreach. These items represented 90 percent of administrative expenses
in 1998 and 91 percent in 1999. The following table summarizes the
projected levels of these items for 1999.

> **Budget Focus on Key Administrative Costs for RHCD 1999 (Thousands of
> Dollars)**

  -------------------------- ------------- ------------- ----------- ----------- -------------
  **Item**                   **1Q99**      **2Q99**      **3Q99**    **4Q99**    **Total 99**

  Outsource: PwC             504           558           492         492         2046

  Billing & Collection       183.1         182.8         187.8       185.4       739.1

  Compensation               153[^7]       153           153         153         612

  Outsource: Outreach        200           150           10.5        35          395.5

  **Total**                  **1,040.1**   **1,043.8**   **843.3**   **865.4**   **3,792.6**
  -------------------------- ------------- ------------- ----------- ----------- -------------

The **Outsource: PwC** figures are the most significant budget item both
in 1998 and 1999. The first task of the RHCC's newly hired staff was to
review proposals submitted in response to its RFP for performing the
functions of web site development and maintenance, customer service, and
application processing. It received three proposals. The proposal
submitted by PwC was the least expensive bid, with an estimated cost of
\$6.4 million for up to four years. The RHCC management and the Board
determined that the quality and cost of this proposal was superior to
the other bids and entered into a service contract with PwC.

The original estimate for web site development was \$464,000. As of
February 15, 1999, additional web development and maintenance costs have
totaled approximately \$307,000.

During the first six months of the contract, the average monthly cost
for PwC services was \$239,267. This included web site maintenance,
forms processing, customer service, outreach, form revision, urban rate
development and multiple bill circuit assistance, development of the
invoicing system, and project management. In August, RHCC recognized
that the scope of the Program was significantly different than what the
Commission had anticipated. The RHCC and PwC entered into a contract
modification that, among other things, reduced the average monthly
billings by 29 percent, or in fixed price terms, \$170,000 per month
through February 1999. This cost cutting exercise brought in-house to
RHCC certain analytical and reporting activities, significantly reduced
PwC's outreach and training activities, and reduced the customer service
representatives from five to three. Staffing on the help desk was
reduced to accommodate this reduction.

In December 1998, recognizing that the scope of the Program was even
smaller still than anticipated, but also recognizing that the complexity
of the application process as well as the number of packets being
received consumed far greater customer service time than expected, RHCC
and PwC again renegotiated the contract for the period from March 1
through June 30, 1999, at a flat rate of \$186,000 per month. The
increase from \$170,000 to \$186,000 per month is due to the need to
increase the customer service representatives from three to six in order
to review 1998 Form 466/468 packets as well as to process the
applications expected to be received in the new year that begins March
1, 1999.

PwC has been very willing to adjust the contract to reflect changed
circumstances. Since the contract currently extends to June 30, 1999,
the contract will again need to be revisited in a few months. Even with
the modifications to the PwC contract, the relative size of the PwC
contract compared to the projected support amounts is disproportionate

The **Billing and Collection** amounts reflect a system of cost
allocations among the four USAC programs. Specifically, the expense for
billing and collections (and some distribution costs) is divided evenly
between the programs since each provider must be billed and the cost of
billing is not affected by the size of the bill. This equal division
allocates a relatively large amount of costs to the Program when
compared to the projected support amounts for the Program.

The amounts for **Compensation** have stayed relatively constant over
the life of the Program. There were four FTE employees in 1998 and 2.6
directly assigned in 1999 following the merger. The other 1.4 FTE
employees have been allocated to the USAC organization. The merger has
reallocated some time from other USAC staff to RHCD, which effectively
brings the number of staff back to the four FTE employees.

The **Outsource: Outreach** expense figures are not significant relative
to the items discussed above and these costs will decrease significantly
in the third and fourth quarters.

[]{#__RefHeading___Toc445198153 .anchor}Operational Results in 1998 and
the Status of Outstanding Issues

Operational results for 1998 are difficult to assess since no awards or
credits have been made at this time. The 1998 plan year was extended
through June 30, 1999. The 1999 plan year will begin on July 1, 1999,
and end on June 30, 2000. This means that the awards for 1998 could span
as much as 18 months for those who had existing contracts for
telecommunications services for telemedicine. A review of the current
data shows only a few applicants will qualify for 18 months of support.
Actual support commitments are awaiting a predisbursement audit of PwC.
There are also some outstanding interpretation issues at the Commission
that might increase the level of funding for eligible applicants. The
outstanding issues include the following:

**Predisbursement Audit.** The Commission has not signed off on the
predisbursement audit contracted for by the RHCC because it was not
complete, and the Commission could not confirm that procedures are in
place to guard against waste, fraud, and abuse. Those procedures must be
in place and the Commission must be confident that they are in place
before any commitment letters can be issued and before and funds can be
provided. On January 29, 1999, USAC was directed to take immediate steps
to engage an auditor to complete the review and submit it to the
Commission. RHCD has not contacted applicants but will need to as soon
as USAC knows how long the second audit will take. If the initial audit
had been approved and had demonstrated that adequate procedures were in
place, as of today approximately 105 sites would qualify for funding of
\$605,000.

**Contract/Tariff Issue.** In June 1998, the RHCC asked the Commission
whether a contract that refers to a tariff should be treated as a
tariffed purchase. This interpretation of the definition of a contract
results in any negotiated arrangement or service contract, which
referred to a tariff number, to be denied the ability to receive
retroactive funds for the eligible service.

Many state commissions require, as a matter of law, that all services
are offered under a tariffed rate. However, as competition created
pressure for individually negotiated rates, one preferred Band-Aid
approach was a shell tariff that allowed individually contracted rates
as long as the tariff number was cited. Alternatively, individually
negotiated rates are given a unique tariff number for the sake of the
state requirement. In actuality, these negotiated agreements are much
more like contracts than they are like a generally available tariffed
service.

Commission staff has confirmed to RHCD staff that the intent of the
distinction drawn in the Commission Order was for arrangements that
appear in all respects like a contract and should be considered a
contract, and that retroactive awards would be possible for 1998. This
distinction is consistent with the situation in most states as discussed
above. RHCD staff estimates that the current interpretation will
increase current year commitments by \$990,000. This issue should be
resolved quickly; however, it will require a recalculation of support
for the applications already processed.

**ETC Support Calculation**. The requirement that support is only
available to ETCs limits the support available to RHCPs, as non-ETC
service is not part of the calculation of the urban-rural rate
differential. Because the inter-exchange carrier (IXC) which provides
service that crosses a LATA is often not an ETC, the reimbursement of
the rural rate differential must not include the cost of the IXC piece.
The comparable urban rate does not have any long-distance component, so
the entire long-distance portion should be eligible for support, if it
is offered by an ETC. However, many ETCs do not provide long-distance
service, and some are legally barred from providing it at this time.
Similarly, many inter-exchange carriers (IXCs) have not filed to become
an ETC.

Absent the adoption of a different definition of ETC, or clarification
that non‑ETCs may provide discounted service to RHCPs for the
long-distance portion of service, the limited use of resale of
long-distance service by non-regional Bell operating company (RBOC) ETCs
results in less support for the RHCPs than they otherwise should
receive. The Commission is currently examining this issue.

**The Alaska Reimbursement Timing Problem.** For any ETC, the Commission
rules state, that the carrier may receive direct reimbursement if the
total amount of support owed the carrier exceeds its obligation,
"calculated on an annual basis." This has been interpreted to mean that
the carrier must wait until the end of the year to receive the
additional amount. USAC is examining with the Commission whether a
carrier's obligation "calculated on an annual basis" could allow for
direct reimbursement based on a month-by-month calculation of a
carrier's annual obligation.

In some situations in Alaska where the maximum allowable distance (MAD)
is exceptionally high, this rule can lead to a significant cash flow
problem for a small utility. Out of 50 packets (representing 230 sites)
for an Alaska location, the average MAD is 402 miles and the median MAD
is 475 miles. The maximum value of the MAD is 1,110 miles. The monthly
credit for a single site can run several thousand dollars.

In addition to exploring the month-by-month calculations of a carrier's
annual obligation, the Commission has suggested that the carriers apply
for a waiver. If a waiver of the Commission rule is not provided, the
telecommunications providers may be reluctant to participate in the
Program. There have been 230 Form 465s filed for sites in Alaska. Many
have not yet filed Forms 466 and 467 due to the uncertainty of the cash
flow for the local exchange carrier (LEC).

**The Alaska Resell Issue.** A solution to the ETC issue has been
proposed in Alaska. Almost all service in Alaska would be provided by
non-ETCs. Since Alaskan non-RBOC ETCs can resell non-ETC service, RHCPs
can receive support for non-ETC circuits. This resale option would be
available to all ETCs other than RBOCs in locations outside of Alaska.
Alaska has found, however, that the resale solution is difficult to put
into practice. Only one network has put this plan in place as of the
date of this report.

**The Third-Party Billing Issue**. The third-party billing issue refers
to the common practice for rural health care providers to receive
telecommunications services at one site and have the bill sent to
another site or another entity for payment. The issue is how to ensure
that the credits, which are not directly received by the RHCPs,
translate into a direct telecommunications credit or benefit to the
RHCPs. This issue may affect more than 50 percent of the applications.
The RHCD and Commission staff are close to a resolution of this issue.

**The Per-Location Funding Limit Problem.** The per-location funding
level cannot be greater than the T-1 rate. In some locations, the
comparable T-1 rates for rural and urban locations are the same, but 56k
lines may have a greater cost in the rural area. The outstanding
question is, does the lack of T-1 rate differential determine that no
credit can be given? The RHCD staff has asked the Commission for a
written interpretation of this issue. A related issue occurs when the
services have no circuit distance and might result in zero support based
on the standard calculations. This issue does not effect a large number
of applicants based upon the applications that have been reviewed to
date.

[]{#__RefHeading___Toc445198154 .anchor}SECTION IV

###### Industry Benchmarks for Comparable Organizations 

[]{#__RefHeading___Toc445198156 .anchor}Description of Comparable Group

To assess the RHCD administrative costs with comparable funds and
charities, data collected on administrative expenses, total Program
expenses, and full-time equivalent (FTE) staff levels were reviewed.
Sample data from 45 funds were extracted from *The Foundation Center's
Database on CD-ROM.* Comparable data for 18 large charities was
extracted from the *Internet Nonprofit Center Library*. The third
comparable group consists of 10 organizations created primarily by
Federal government agencies. Information on this group was collected
from Internet web sites and from personal telephone interviews with
staff. The group with Federal government ties, for the most part,
reported to the Office of Management and Budget (OMB) and the government
agency to which it is attached.

Public and private funds were chosen for the benchmarking process that
were either endowed or received directly from a corporate organization.
No fund raising activities are included in these organizations. This
makes them more comparable to RHCD than those that spend significant
resources on fund raising. The sample population of large charities was
chosen to provide a corroborative perspective. The organizations created
by Federal government agencies provide insight into the cost of adhering
to Federal government reporting and infrastructure requirements. For
organizations of like size, the RHCD is more like agencies created by
the Federal government than private foundations.

The funds selected from *The Foundation Center's Database on CD-ROM*
produced a population that ranged in annual giving from \$5-120 million
and the charities from the *Internet Nonprofit Center Library* ranged
from about \$1‑100 million. The overall quasi-government group ranged in
size from \$2 million to \$262 billion, but a smaller group was used for
the benchmark analysis spanning a program size of \$2-19 million. The
fund sample was weighted more heavily in the \$5-50 million range to be
more representative of the RHCD distribution range. Funds under \$5
million were not included because those funds most often did not list
staff or administrative expense and the upper end of the range was
limited to \$100 million for trending purposes. The trend lines in these
charts are second degree polynomial fits to the data.

Subtracting Total Funds Given from Fund Expenditures creates the measure
of Administrative Expenses. The Percent Administration is calculated as
the Administrative Expense divided by the amount of Funds Given times
100. The Weighted Staff is the sum of full time professional and support
staff plus half the part time professional and support staff.

These calculations are straightforward and do not look at finer
gradations in expenses. Data for this study was limited to that which is
publicly available. While this may cause some imperfect category
comparisons, USAC believes that the results are reasonable and generally
reliable. No graphs are provided for the governmental group since the
sample size of comparable groups is too small.

[]{#__RefHeading___Toc445198157 .anchor}Summary of Benchmark Analysis

The trend analysis for charities is plotted for administrative expenses
vs. distribution and for the ratio of administrative expenses to
distribution. Staffing data for these charities were not available.

**Fund Administrative Expense for Fund Sample.** Fund administrative
expense appears to grow with fund size, but as the fund size decreases
the administrative cost approaches the \$1-2 million range.

> ![](media/image2.wmf){width="5.0in"
> height="3.3958333333333335in"}**Ratio of Administrative Expense to
> Funds Given**

![](media/image3.wmf){width="5.0in" height="3.3958333333333335in"}The
ratio of Administrative Expense to the Fund Giving Size appears to be
more or less constant across the range of fund sizes, and about 20
percent for funds in the \$5-100 million range.

> The staff supporting a fund increases with fund size, but as the fund
> decreases the staff size levels out around seven weighted staffers
> (full-time + ½ part-time).
>
> ![](media/image4.wmf){width="5.0in" height="3.422222222222222in"}

**Administrative Expenses for Large Charities Sample.** For large
charities elimination of the two outlying charities over \$100 million
indicates a trend leveling off around \$1-2 million at the low end which
is consistent with the fund analysis above.

![](media/image5.wmf){width="5.0in" height="3.2006944444444443in"}

The ratio of administrative expenses to the size of the distribution for
the large charities indicates a relatively constant ratio with an
average of about 13 percent for the charities with distributions less
than \$100 million. This is slightly lower than the trend for the funds
displayed above.

![](media/image6.wmf){width="5.0in" height="3.0in"}The following table
compares these trends in administrative loading.

> **Benchmark Data Summary**

+---------------+-----------+------------+------------+--------------+
|               | **Fu      | **Large    | **         | **Current    |
|               | nds**[^8] | Chari      | Government | RHCD**       |
|               |           | ties**[^9] | Ori        |              |
|               |           |            | gin**[^10] | **1999**     |
+---------------+-----------+------------+------------+--------------+
| Ratio of      | 18% - 20% | 11% - 12%  | 10% - 26%  | 50%          |
| Expense to    |           |            |            |              |
| Fund Size     |           |            |            |              |
+---------------+-----------+------------+------------+--------------+
| Staff         | 8 - 10    | NA         | 1 - 34     | 17[^11]      |
+---------------+-----------+------------+------------+--------------+

While staff levels are not unreasonable when compared with the benchmark
standards, the ratio of administrative expense to fund size is. The RHCD
may be more comparable to government grant programs because of
government rules and regulations. The operating procedures for RHCD were
developed to implement the specifics of the Act of 1996 and the
stringent requirements associated with prevention of waste, fraud, and
abuse. However, the benchmarks for the funds and large charities are
also useful comparisons.

[]{#__RefHeading___Toc445198158 .anchor}SECTION V

###### Customer and Stakeholder Feedback

USAC surveyed customers and stakeholders. The comments and
recommendations are incorporated into the analysis of barriers and the
recommendations for improvement.

[]{#__RefHeading___Toc445198160 .anchor}Customer Groups

To reach current customers and potential customers of the RHC Program,
three distinct RHCP groups were surveyed:

**Group 1:** RHCPs that have not participated in the Program

**Group 2:** RHCPs that have submitted Form 465 but [not]{.underline}
Form 466

**Group 3:** RHCPs that have submitted both Form 465 [and]{.underline}
466

The surveys were conducted by telephone and represented random samples
of all three groups. The universe of respondents for Group 1 included
the 20,000 entities that were mailed information but did not file a Form
465, so care was taken to call only potential rural locations. The
sample sizes for Groups 1, 2, and 3 were 14, 18, and 22, respectively.

Many of those interviewed in Group 1 had not heard of either the RHCD or
the Universal Service Program. Group 2 was outspoken about the need to
define the Program to meet the "real needs" of the RHCPs. Most were not
going to continue the application process because the support they
needed did not qualify for funding. Group 3 was the most articulate
group of interviewees. Their overriding themes were as follows: (a) this
is potentially a great program; (b) the Program needs some modifications
based on the realities of rural telecommunications; and (c) incentives
are needed to encourage service providers to participate in the
applications process.

[]{#__RefHeading___Toc445198161 .anchor}Feedback from Selected ETCs
Involved in Process Development of the Program

B.  

This group of ETCs is comprised of several companies who were actively
involved in creating the process for this Program. These companies have
spent a significant amount of time to make this project work. They have
participated in workgroups and committees with USAC, SLD, and RHCD to
develop a feasible plan to integrate their processes into the Rural
Health Care and Schools and Libraries support programs.

The ETCs contacted said that the telephone industry has been working
hard to make this project work. They have participated in workgroups and
committees with USAC to develop a feasible plan to integrate their
processes into the support programs. On their own, the telephone
industry has met with the Commission to discuss barriers to success and
to present recommended changes to make the Program workable with respect
to Commission rules and the wording of the Act of 1996. They indicated
that they have expended significant time and resources in an effort to
make the Program a success.

[]{#__RefHeading___Toc445198162 .anchor}ETCs Focus Group Feedback
(Conducted by NTCA, 2/10/99, San Antonio)

Ten persons representing telecommunications companies attended the NTCA
session on Telecommunications Discounts for Rural Health Care Providers
presented at the NTCA Annual Meeting and Exposition in San Antonio. All
of the attendees at the session stayed for the focus group immediately
following. USAC staff observed the focus group responses.

[]{#__RefHeading___Toc445198163 .anchor}Feedback from Selected Non-ETCs

RHCD contacted non-ETCs to obtain their input with respect to their
exclusion from the Program and gave them the opportunity to comment on
any other issues related to the Program. As the Program stands today,
the RHCPs cannot apply for subsidies offered by non-ETCs. The non-ETCs
stated, that while there may be some missed opportunity for
communications business, rural health care demand is small and any
potential revenue would be more than offset by the burdensome procedures
and inordinate amount of time and resources to implement and maintain
the Program as it is configured today.

[]{#__RefHeading___Toc445198164 .anchor}SECTION VI

###### Identification and Quantification of Barriers to Efficient Operation and Recommendations for Improvement

The stakeholder groups identified the barriers that are listed below. In
some instances, various stakeholder groups did not always agree with the
items identified by another stakeholder group as a barrier. The
identification of these barriers and proposed solutions will help frame
the discussion. The Commission can further refine these solutions with
additional input from stakeholders. The Commission may want to convene a
technical advisory group to provide this input.

[]{#__RefHeading___Toc445198166 .anchor}Administrative Barriers

[]{#__RefHeading___Toc445198167 .anchor}Outreach

While outreach has not proven to be a significant barrier to the success
of RHCD, it has been difficult to design an outreach program that will
effectively reach the beneficiaries because the actual target market
size and location is not known with certainty. Outreach efforts on the
part of the contractors and on the part of the RHCD staff have been
numerous, with presentations at conventions, meetings, and call-in
seminars as well as via videoconferencing. RHCD staff has participated
on three work groups related to the Program and distributed
approximately 20,000 direct mail pieces during the early part of 1998.

Two contracts were awarded to assist with outreach. The contract with
NTCA represents an ongoing effort with broad geographic coverage. The
contract with NOSORH, also has broad geographic coverage but has not yet
come to full fruition for the 1998 Program year. The results of both
contracts will not be fully known until the final status reports are
submitted.

The NTCA had a very specific and well-defined plan for outreach in its
July 1998 contract. The NTCA status report enumerates each outreach item
promised. The Program is running behind its original schedule and NTCA
has asked that the term be extended so that it can continue to take
advantage of outreach opportunities. The only concern with this type of
an extension is that, by the end of the NTCA contract, the NTCA
presenters would need to be updated on changes that have occurred in the
Program for the second Program year.

The original contract with NOSORH provided a lot of flexibility in
creating programs. However, the plan as outlined in the contract was not
specific enough to make a quantitative measure of success. Further, with
no specific status report, even qualitative measures of success are not
possible at this time.

Geographically, between the RHCD efforts and those of NOSORH and NTCA,
much of the United States has been, or will be, covered. In some
instances, the target market has been contacted multiple times.
Depending on how some outstanding issues are resolved for Alaska
applications, additional outreach should be targeted to this state. The
RHCPs in Alaska appear to have the largest urban‑rural differentials in
telecommunication rates for telemedicine. The RHCD should be sure that
these entities benefit from the Program to the highest extent possible
by continuing to work closely with the Alaska Public Utilities
Commission and other consultants in Alaska to reach the providers. If
Alaska is successful, their approach may also be helpful to other large
rural states.

If the Commission was to simplify the mileage calculation, there may
also be opportunities for Hawaii, other islands, and several Eastern
states to participate in the Program.

Targeted mailings or association conference presentations in states that
have the highest potential to benefit may also result in increased
awareness of the Program by telecommunications providers. Other rural
states should be the target for workshops and concentrated activity.
Some large rural states were included in the first year of activity;
however, some key, large, rural states were not.

Outreach plans should also include partnering with associations, federal
and state agencies, the telecommunications industry, and other universal
service programs. A community-based approach working with carriers,
community leaders, school and library officials, and other government
agencies to outreach should be considered. Associations, government
agencies, and industry should also continue to be used as a resource for
identifying the eligible RHCPs.

In addition, some RHCD outreach should be specifically scheduled to
coincide with the beginning of the Program year application period to
increase average months of support and to assist providers with the
application process. Much of the NOSORH work, and some of NTCA's work,
will correspond with the opening of the 1999 application acceptance
period. Coordination of outreach with the beginning of the plan year
will help increase the number of eligible months of support. However, it
is not clear that those efforts will be targeted or focused on Year Two.

Any future outsource arrangements should be specific and the success of
their efforts should be measurable.

The RHCD staff should request that customer service representative at
PwC ask each applicant how he or she heard about the Program. This can
be added to the data file for 1999 applicants and this would provide
feedback about which outreach activities have been the most successful.

Outreach efforts must also focus on those RHCPs that have filed a
Form 465 to provide assistance in the subsequent phases of the process.
Based on the feedback of some applicants, the phased approach was
confusing. Some RHCPs that filed Form 465 did not do anything until the
28-day window expired and some were confused when they were "Approved"
but received no dollars. "Approved" at this stage only means that the
RHCP is eligible; this terminology has been confusing to some
stakeholders and should be changed for the next application year.

[]{#__RefHeading___Toc445198168 .anchor}Forms and Instructions

The current forms and instructions are a major barrier to interest and
willingness to persevere by the RHCPs and the ETCs. While much of the
complexity is necessarily tied to the calculation of the urban‑rural
differential, the forms---with the exception of Form 465---are still
burdensome from the viewpoint of the RHCPs and ETCs. The RHCPs do not
seem to understand the phased nature of the application process. They do
not understand who is responsible for each step and the purpose of the
posting. The most direct approach to handling this is to simplify the
[process]{.underline} so that the forms can be simplified. It would also
be helpful to provide an overview of the entire process, including who
is responsible for each step and how to resolve issues. However, it will
be counterproductive to try to simplify the forms themselves and to risk
not getting all information necessary to complete the application
process under current rules. Outreach and follow-up is needed during and
after the 28-day posting so that the RHCP knows what to do next. Some
applicants were in a perceived state of limbo waiting for a call from
the RHCD. RHCPs should be encouraged to work with telecommunications
providers to discuss services and issues prior to the close of the
28-day window. This will help the RHCPs be prepared for the next step.

The most important change in form administration from the RHCP
perspective would be to shift the burden for application and rate
calculation to the local telecommunications service provider. While this
may seem like a shell game where the responsibility for filling out a
complex form is just shifted to another, the reality is that much time
is wasted by the RHCP waiting for the ETC to do its part and then to
notify the RHCP. The ETC is more sophisticated about telecommunications
matters than is the RHCP. A one-step approach with the actual
calculations performed by the ETC rather than RHCD or PwC would be a
significant improvement in the Program. The ETC would have to determine
the comparable urban service and make some judgment about how to
calculate the difference. Simplification of the calculation should be
done regardless of whom has the burden to fill out the forms.

It is possible to identify several form improvements on the electronic
system, such as a prefill function for past filers or a download and
upload feature for all forms. Unfortunately, the ratio of benefits to
costs for such enhancements is very low and would serve only as a
Band-Aid approach to solving the program and calculation complexity
problem.

[]{#__RefHeading___Toc445198169 .anchor}Responsiveness of PwC and RHCD
to Applicants and Vendors

There is evidence that PwC and RHCD have worked with and listened to the
concerns of stakeholders. There have been many issues and problems to
resolve in this first Program cycle. The next application cycle should
be easier for those who participated in the first round and it should be
easier for the staff. The Program director should have the
responsibility to create awareness of the Program and to work
effectively with stakeholders.

[]{#__RefHeading___Toc445198170 .anchor}Effectiveness of Outsourced
Services

**PwC**

PwC appears to be performing its job as required. The staff appears well
trained and is helpful according to survey respondents. The real issue
with PwC is whether RHCD should continue with such a complex program and
infrastructure and whether some of the functions could be brought
in-house and accomplished less expensively. The barrier to PwC issuing
commitment letters at this time is the pending predisbursement audit to
determine whether its procedures are adequate to prevent against waste,
fraud, and abuse.

**NOSORH**

The effectiveness of the NOSORH outreach outsourcing is still uncertain
pending its report. The only barrier that can be identified thus far is
the timing of the efforts represented in the mini-grants. Because of the
late start date of the mini-grants, the effects of this outreach will be
minimal for 1998. The benefit to using NOSORH for outreach is its broad
reach to the rural community.

**NTCA**

The NTCA outreach effort appears to be adequate and in line with the
contract expectations, even if a little behind schedule. Again, timing
may be the only barrier with the NTCA effort. NTCA has informed the RHCD
that it will not be able to deliver 100 commitments from eligible
telecommunications providers.

[]{#__RefHeading___Toc445198171 .anchor}Calculation of Urban Rate
Differential

The urban-rural rate differential calculation consumes a significant
amount of resources and if changed would result in significant
efficiencies in the Program. The current method is too complex, too time
consuming, and is not as precise as one might expect given the effort
that goes into it. Solutions that uphold the mission of the Act of 1996
are the following:

a.  Calculate rate differential based on mileage differential between
    rural and urban location. Apply a discount to mileage based part of
    rate. For satellite or other non-mileage based service, calculate
    actual differential.

b.  Assign the calculation of the differential to the ETC and require
    the ETC to report on the results, subject to random audits. Since
    the ETCs are already required to complete Form 468 and the
    worksheet, the increased level of effort should not be great
    compared to the timesaving for the RHCPs, the RHCD, and PwC. The
    ETCs may not support this change but this change would distribute
    the effort to the organizations that are best equipped to make these
    calculations.

c.  Have the RHCD and PwC create a proxy percentage discount for each
    state based on the average differences in rural and urban rates for
    representative services in that state. Then apply the discount to
    all services that qualify. This percentage would have to be reviewed
    annually for each state.

d.  Request the assistance of the state commissions to calculate the
    statewide average rate differences.

[]{#__RefHeading___Toc445198172 .anchor}Lack of Effective Communications

USAC and its divisions have an obligation to work closely with the
Commission and to supply information on an ongoing basis. Effective
communications between the Commission and USAC is critically important.
The RHCD and the Commission staff should work together to identify
methods for decreasing the amount of time taken to resolve issues,
recognizing the constraints of the regulatory process. The process of
identifying issues in the first Program year has been ongoing. The RHCD
was not able to identify all Program issues until applications were
processed and problems came to light. This led to a steady stream of
requests for clarification over the year. It is anticipated that there
will be fewer issues in the second year since unknown problems are less
likely to surface, and other clarifications should be minor if the
Program is unchanged; however, if the Program is changed significantly
as recommended in this report, there may be several clarification
requests. Any issues that arise should be identified and all information
or data related to the issue should be supplied to the Commission as
soon as possible. Effective communication between Commission staff and
RHCD is absolutely essential to success in resolving issues and in
awarding support. Improved communication should be a top priority. There
are also barriers to effective communication within the RHCP system. At
several rural health care facilities resources are stretched so thin
that there is often little time to become familiar with the complexities
of the Program and to share information about the Program.

Effective communication is not only necessary between the Commission and
USAC; it is also vital between the Commission, USAC, the intended
beneficiaries of the Program, RHCPs, and ETCs. It is important to
continue to strengthen the lines of communication between all of these
entities. Additionally, the RHCPs should continue to build on the
communication network they have established within the rural health
community regarding this Program. A communication network about the
Program that works at the national level and the local RHCP level is
necessary. All parties working together can help ensure that the best
program possible is made available for RHCPs.

[]{#__RefHeading___Toc445198173 .anchor}Lack of Program Consolidation

Consolidation of programs with similar processes could reduce
administrative expenses and may serve customers better. This should be
explored after current contracts expire.

[]{#__RefHeading___Toc445198174 .anchor}Policy Barriers

[]{#__RefHeading___Toc445198175 .anchor}ETC Requirement

The current ETC requirement was mentioned by some participants in our
survey as a barrier to receiving adequate support to make their
participation worthwhile. This is most acute in Alaska. There has been a
solution proposed for this barrier in Alaska. If this solution works it
may also be helpful in other states. To the extent the Commission is
able to extend support to services provided by non-ETCs, it would
increase services funded and would help broaden participation in the
Program. Although the impact of a change in ETC status does not
significantly impact demand projections for 1999, the issue may increase
the number of applicants. The RHCD estimates that as many as 35 percent
of RHCPs may be adversely affected and therefore they do not complete
the application process when they realize that the non-ETC support
cannot be included. This may explain some of the difference between Form
465 filings and Forms 466/468 submissions.

[]{#__RefHeading___Toc445198176 .anchor}Third-Party Billing

The original Program design did not allow payment to third parties,
although the Act of 1996 did contemplate it. Over the course of the
Program year, the RHCD found that this affected a significant portion of
RHCPs. This barrier is in the resolution stage.

[]{#__RefHeading___Toc445198177 .anchor}Posting/Contracting Requirement

The posting requirement was included in the Program to take advantage of
the competitive providers of telecommunications services for RHCPs.
However, competition has not penetrated many rural areas. There is no
evidence that the posting has led to competitive offers to date, with
the exception of the resale of long-distance for the Alaska sites.

[]{#__RefHeading___Toc445198178 .anchor}Level of Money Available per
Site

Some survey respondents cited the level of support as a barrier to
participation. They were interested in support for the IXC portion of
their bills and for terminal equipment and computers. Support for the
IXC portion is related to the ETC requirement as discussed above as most
long-distance companies are not ETCs. The Program was not originally
intended to support terminal equipment. Given the low level of demand
the concern about limiting the amount per site may not be as critical as
originally believed. Changes to this policy that would include terminal
equipment and other issues raised by RHCPs would be a major departure
from the original Program but would increase participation.

[]{#__RefHeading___Toc445198179 .anchor}Types of Services Included in
Program

While a number of services are included in the Program such as plain old
telephone service (POTS), ISDN, Frame Relay, T-1, 56k, Centrex, and toll
charges for Internet service providers, actual support is limited to the
portions of those services with a mileage component which is provided by
the ETCs. RHCD staff has found that POTS rates are generally the same in
rural and urban areas and consequently are not eligible for support
under this Program. Support for ISDN, Frame Relay, and Centrex is
limited to the mileage-based link extension. In the case of Internet
service providers, service is generally provided on a toll‑free basis,
so actual support is minimal.

Given the goals of the Act of 1996 to put RHCPs on an equal footing with
urban counterparts with respect to telecommunications rates, it seems
that rates are more equal than anticipated, at least regarding basic
service. This could be interpreted by concluding that the current access
charge policy and the High Cost Universal Service Program have helped to
achieve this goal. Alternatively, it could be viewed as an opportunity
to expand the reach of the Program given the unanticipated availability
of unused funds.

[]{#__RefHeading___Toc445198180 .anchor}RHCPs Do Not Include Rural
Nursing Homes, Hospices, Emergency Medical Service Facilities, Community
Health Centers, or Long-Term Care Facilities

RHCPs identified this as a barrier to more widespread participationn in
the Program. Given the current size of the Program, the addition of
these facilities would not jeopardize funding for other eligible
providers. The issue is whether these facilities qualify within the
current statutory framework. RHCPs argue that the Commission has too
narrowly defined rural health care clinics and that a broader definition
would be consistent with the Act of 1996 and would qualify more
facilities as RHCPs.

[]{#__RefHeading___Toc445198181 .anchor}Complexity of the Urban-Rural
Rate Differentials

This is one of the most significant barriers in the current Program and
should be considered carefully. The cost of making the calculations is
significant especially compared to the individual awards which result
and the precision achieved. Simplification that meets the intent of the
Act of 1996 should be accomplished as soon as possible. A decision on
this item should be made prior to any rebid for outsource services.

[]{#__RefHeading___Toc445198182 .anchor}Resale Prohibitions

RHCPs in rural states may bring the only advanced telecommunications
network to their communities. As a result, the health care provider may
receive requests throughout the year from entities that want to utilize
the network for their own use (for example, the National Guard for
training workshops, the state Girl Scout office for outreach, and the
University for classes). Unless the RHCPs identify all of the "users" as
part of a consortium up front, they may not pass along any portion of
the costs of using their network to these other entities because it is
considered "resale." The RHCPs do not know up front who the users may be
throughout the year, so it is impossible to identify each of them in the
consortium.

The RHCPs recommend that the Commission develop an accounting mechanism
that would allow RHCPs to identify these community needs and costs (and
distinguish them from a telecommunications resale definition) and allow
the RHCPs to subtract out these non-eligible service costs without
losing the ability to get funding.

[]{#__RefHeading___Toc445198183 .anchor}The Hawaii Problem

Many states such as Hawaii, other islands, and some Eastern states will
not receive much, if any support, under the current Program rules. These
states have rate structures in place which limit urban‑rural rated
differentials for basic service and distance sensitive charges fall
within the MAD and are thus not supportable. Also, like Alaska,
satellite services are often ineligible because they are not provided by
a ETC.

[]{#__RefHeading___Toc445198184 .anchor}Other Barriers

[]{#__RefHeading___Toc445198185 .anchor}RHCPs Not Interested or Not
Informed

Even where RHCPs may have been included in outreach, the message did not
always reach the decision-maker or there was no action due to lack of
interest. Some of the lack of interest is linked to the lack of progress
on a telemedicine program or to a small staff stretched too thin to
think about telemedicine. This lack of interest may also be attributable
to the complexity of the Program. In other instances, the outreach
efforts may not have reached interested RHCPs.

[]{#__RefHeading___Toc445198186 .anchor}RHCPs Do Not Have Equipment
Necessary for Telemedicine

Because equipment purchases for telemedicine can be a major investment,
some smaller sites simply cannot afford to acquire equipment without a
grant or other support. The monthly cost of telecommunications service
may not be as significant a barrier as the initial outlay for equipment.
Partnering with other organizations that have money available for
equipment could help to remove this barrier.

[]{#__RefHeading___Toc445198187 .anchor}POTS May Provide Adequate Level
of Service

While POTS can be supported, it is less likely to have an urban‑rural
rate difference than other services. For some RHCPs, POTS is providing a
basic level of telemedicine service but the service receives no support.
Other RHCPs have identified that POTS is not adequate and that there is
a need for advanced services and high speed Internet access. (See the
items below on Infrastructure and Internet Access.)

[]{#__RefHeading___Toc445198188 .anchor}Telecommunications Providers Not
Supportive

The evidence for this barrier is primarily from survey respondents who
complained about slowness or non-responsiveness of their provider. The
carriers may not see much benefit in participating. However, other
carriers indicated that they have spent an enormous amount of time and
money to work with the RHCPs. In fact, some stated that they must also
change legacy computer systems to handle this Program with no recovery
of the costs.

[]{#__RefHeading___Toc445198189 .anchor}RHCPs Have Toll-Free Internet
Access

Toll-free Internet access is a goal of the Program. RHCPs who have
toll-free access could be viewed as a success because of industry
deployment of local access to the Internet. However, some providers
include other, non-toll based charges to the monthly bill, which cannot
be supported. While this may be a minor barrier to use of the Internet,
it appears that in most areas of the country Internet access is not a
barrier to telemedicine programs. Many telemedicine applications are
possible over the Internet with additional bandwidth. The most
significant barrier to getting additional bandwidth to rural locations
is the current infrastructure and the cost.

[]{#__RefHeading___Toc445198190 .anchor}Not Worth the Effort to RHCPs

The small size of the some of the survey respondents led RHCPs to
believe that filling out the forms was not worth the effort. Process and
form simplification could address this.

[]{#__RefHeading___Toc445198191 .anchor}Infrastructure Not Available
Today

The telecommunications infrastructure for rural telemedicine is not
universally available. Where it is not, the level of support from the
current Program is not sufficient to spur that development in many
areas. This is a barrier to the use of the Internet for many
applications.

[]{#__RefHeading___Toc445198192 .anchor}Lack of Local Competition

This is a barrier that was not anticipated at the time of the Act of
1996. The posting requirement, has not resulted in bringing additional
competition to rural areas, however it has helped limit the cost of
resold long-distance in Alaska. Posting could be waived where there is
no ability to resell (currently only RBOC territories) and where there
are no competitive local exchange carrires (CLECS), so that support can
be initiated sooner.

[]{#__RefHeading___Toc445198193 .anchor}Limited Patient Volume and
Demand

Many patients may be unaware of telemedicine and, where there is
knowledge and interest, there may be insufficient volume to justify
investment in equipment.

[]{#__RefHeading___Toc445198194 .anchor}Lack of Physician Interest

Some physicians may resist change and adoption of telemedicine. Some may
be uncomfortable with new technology.

[]{#__RefHeading___Toc445198195 .anchor}Lack of Medicare Reimbursements
for Telemedicine Consultations Limits Interest in Telemedicine
Investment

Resolution of this issue will provide an incentive for more growth in
telemedicine. Effective January 1, 1999, Medicare began coverage for
teleconsultation in rural health professional shortage areas (about 20
percent of "all" rural areas as covered by this Program), and 11 states
now cover some aspect of telemedicine in their Medicaid programs.
Although Medicare coverage may increase demand for the Program, several
health care professionals suggested that relatively few
teleconsultations will qualify for reimbursement under the Medicare
rules, and the majority of demand for Medicaid reimbursement will be in
urban areas. Near-term impacts appear to be minimal, though more
ubiquitous coverage for telemedicine will increase the demand for the
Program. USAC and the Commission should work with private insurers as
well.

[]{#__RefHeading___Toc445198196 .anchor}SECTION VII

###### Analysis of Demand and Administrative Costs 

[]{#__RefHeading___Toc445198198 .anchor}Demand

Although the RHCD does not have a database of eligible rural and
non-profit providers, the data collected by ATSP for 1998 reported 157
networks covering 1,345 sites for 1998. Academic medical centers and
hospital/health networks make up the bulk of the networks. Grants,
internal funding, and state contracts/subsidies are the primary source
of the funding. The majority of the networks report that their systems
are used primarily for clinical uses. Several of the respondents were
for-profit or private and a number of respondents were in urban areas.
Only about 40 percent of the respondents used T-1 type, point‑to‑point,
telecommunications service that would be eligible to receive Program
support. While the ATSP survey does not provide a list of available
participants, it is the best data there is on telemedicine
participation. The only other data available is the fact that 2,466
sites filed a Form 465 in the first year; however, most of those sites
did not complete the application process, and many are duplicate
applications.

Outreach efforts in the second Program year may help to reach those
providers that are eligible and have not participated. Outreach should
include targeted mailings to 1998 RHCPs who filed Form 465s. Many did
not continue with the other forms for a variety of reasons. One reason
that was repeated by many of those surveyed for this report was that
they were not quite ready yet with their telemedicine program or with
terminal equipment. A letter of encouragement to participate in the
Program with information about program changes and about actual awards
such as number of total awards, average award, and awards by state might
encourage renewed interest and encourage some growth in the Program.

**Estimated Demand for Rural Health Care Program: Year One -- 18 months\
(January 1, 1998 - June 30, 1999)**

  --- ------------------------------ ----------- ----------- ----------- -----------------
      Applicant Pool                 **Form      **Sites**   **466/468   **Support
                                     465**                   Packets**   Amount**

      **Form 465 applications        **1,058**   **2,466**   **N/A**     **Not estimable**
      received and posted as of                                          
      2/15/99**[^12]                                                     

  1   Support amounts as of 2/15/99              105         113         \$605,000[^14]
      based on 466/468 packets                                           
      reviewed[^13]                                                      

  2   Estimated support amount based             225         290         \$830,000
      on 466/468 packets in review                                       
      but incomplete[^15]                                                

  3   Estimated support amount based             155         200         \$570,000
      on 466/468 packets estimated                                       
      to be received between 2/15/99                                     
      and 6/30/99[^16]                                                   

  4   Estimated support amount                                           \$990,000
      increment for RHCPs with                                           
      existing service acquired                                          
      under a contract allowing                                          
      retroactive support prior to                                       
      posting[^17]                                                       

  5   Estimated Alaska 466/468                   12          20          \$120,000
      completed packets by                                               
      6/30/99[^18]                                                       

      **TOTAL**                                  **497**     **623**     **\$3,115,000**
  --- ------------------------------ ----------- ----------- ----------- -----------------

The data clearly show that while in the first year applicants were
represented by 2,466 sites, only 497 sites appear to be qualified to
receive support. Based on discussions with RHCPs, many filed Form 465s
just to get their foot in the door, in case their telemedicine programs
were ready in time to receive support. Others filed the Form 465 and
found later that the potential level of support did not make further
participation worthwhile and some simply lost track of the application
process through staff turnover or lack of interest.

The Year 1 Estimated Program Demand table builds the estimate of total
support to be paid out according to estimates of packets to be reviewed,
packets to be filed, resolution of the contract tariff issue, and
resolution of issues in Alaska. If the contract issue were resolved
favorably from the point of view of the RHCPs, additional retroactive
support of \$990,000 would be expected. Resolution of issues specific to
Alaska will require an additional \$120,000 in support in the 1998
Program year. The bottom line is that the Program estimate of 1998
support is \$3,115,000 for 500 sites, or an average of \$6230 per site
for the 18‑month period.

For the 1999 plan year, similar estimates can be made based on the 1998
experience. The following chart shows the applicant and support
estimates of the second plan year.

**[Estimated Program Demand for Rural Health Care Program: Year Two - 12
months (July 1, 1999 -- June 30, 2000)]{.underline}**

  --- --------------------- ------------ ----------- ----------- -----------------
      **Applicant Pool**    **Form 465** **Sites**   **466/468   **Support
                                                     Packets**   Amount**

  1   Lower 48 States[^19]  535          535         690         \$3,210,000

  2   Alaska[^20]           175          175         200         \$4,800,000

  3   ETCs[^21]             214          214         275         \$1,280,000

      **TOTAL**             **924**      **924**     **1165**    **\$9,290,000**
  --- --------------------- ------------ ----------- ----------- -----------------

The projections for the 1999 plan year represent a major increase over
the 1998 estimates. This is driven, in large part, by activity in Alaska
and on the additional support that would be required if the ETC
requirement is modified. It also represents some modest growth over the
number of sites in the lower 48 states that participate in the Program.
Without the ETC change or a working model for resale, the Program will
provide about \$8 million in support. If the ETC requirement is relaxed,
the total Program could reach \$9 million. Because the Alaska estimates
are the most sensitive to incorrect estimations due to lack of data, the
Program could be higher or lower than that shown above. The sites and
Form 465 estimates are equal due to a 1999 Program change that requires
each consortium to file a separate Form 465.

Absent modification of current Commission policy, demand growth will
come from small rural providers that will benefit from the
simplification of the forms and the process and from the natural growth
in networks thereby increasing the base of eligible providers.

[]{#__RefHeading___Toc445198199 .anchor}Administrative Costs

Reductions in administrative costs are necessary to bring Program costs
in line with Program demand. Some reductions are possible in the short
term; however, changes in the Program are necessary to bring costs to a
level that is consistent with the public interest. Administrative costs
should move toward comparable benchmark figures for government
foundation groups. The government foundation group shows a top level of
administrative costs of 26 percent of program size. The RHCD should take
steps immediately to move toward this goal in the short term. Long-term,
the organization and the Commission should work to bring administrative
costs within the one to five percent ranges. This recognizes that a
minimum level of administrative costs is necessary regardless of fund
size. The benchmark data indicates a base level of \$1‑2 million.

Because there is a fundamental difference in the infrastructure created
for a \$400 million program serving approximately 12,000 applicants and
a program that is less than \$10 million serving approximately only
1,000 applicants, it will take time and rule changes to modify the
current system and to replace it with a simpler method, while at the
same time not further disrupting the functions of the Program.[^22] For
1998, it is very likely that the administrative costs will be higher
than the support payments. If this is a \$10 million dollar program
going forward, 25 percent or about \$2.5 million should be a cost cap.
Based on the 1998 budget and the initial 1999 budget a movement to the
25 percent benchmark would require a budget cut of about 56 percent. It
is not possible to reach this level of reduction in the short term and
still comply with the rules that are in place today. However, USAC will
decrease expenses wherever possible.

The only way administrative costs can be reduced significantly in the
short term is to extend the current funding cycle and delay the opening
of the second application cycle until the Program is simplified. We have
shown estimated administrative costs for each quarter with and without
this option.

The 1998 and 1999 budgets are comprised primarily of four cost
categories. The effort to reduce costs should focus on those four areas
that contribute approximately 90 percent of total costs: Outsourcing,
Billing and Collections, Compensation, and Outreach. These costs will
have to be cut to make significant movement toward the benchmarks. There
are three contracts in place in the short-term: the contract with PwC
that runs until June 1999 and two outreach contracts (NTCA and NOSORH)
that will be concluded within a few months.

[]{#__RefHeading___Toc445198200 .anchor}Outsourcing

The PwC contract represents almost 50 percent of total Program costs.

There are several cost cutting options that could be taken from\
July 1, 1999, to December 31, 1999:

####### PwC Reductions in Annual Expense:

  -------------------------- --------------------------- ----------------
  **Expense category**       **Option**                  **Annual Cost
                                                         Saving**

  Web site maintenance       USAC performs @ \$6,000/mo. \$180,000
                             Compared to the current     
                             \$22,000/mo                 

  Invoicing                  Drop ½ time team lead       \$138,000

  Forms Processing           Drop analysts               \$193,800

  Urban rates                Drop analyst                \$ 58,140

  **Total**                                              **\$569,940**
  -------------------------- --------------------------- ----------------

When the current contract expires on June 30, 1999, the RHCD should take
the web site development and maintenance in-house and share USAC
resources. This could save \$180,000 on an annual basis beginning in
July.

The invoicing system created for the Program, RIBS, is very costly to
operate. USAC should consider whether it is cost effective to eliminate
this Program even though a significant amount of money has been spent on
its development. USAC should eliminate the half-time PwC team leader for
this function once development is completed and this would save
approximately \$138,000 on an annual basis.

After the 1998 and 1999 Program year overlap is complete in July,
consideration should be given to decreasing PwC analysts dedicated to
handling applications for estimated savings of \$193,800.

Prior to any simplifications to the calculation of urban--rural rates,
part of an analyst could be cut on the rate calculation function for
annual cost savings of \$58,140.

The \$569,940 savings are almost 25 percent of the current contract, and
there may be tradeoffs in quality. This analysis is also subject to PwC
agreeing to such a modification. PwC has not indicated whether it would
be willing to go forward after June 30 under the above scenario.
Alternatively, the RHCD could evaluate what activities can be handled
in-house by USAC and re-bid the activities to be outsourced.

If the process is not simplified, USAC, at a minimum, should consider
every opportunity to consolidate RHCD functions with other programs.
USAC has combined some functions as a result of the merger; however,
additional program and process consolidation could save additional money
by combining similar process infrastructures. This may include
consolidation of vendor support for web site maintenance, provision of
help desk services, application handling, and outreach. These
consolidations should be considered as soon as possible. In fact, the
best course of action may be to start with process consolidations where
competitive bidding and comparison to bringing processes in-house can be
used to optimize outsourced services for two or three divisions.

If the process is simplified outside vendors should be eliminated. RHCD
could operate the entire Program in-house with additional resources that
will be more cost effective than PwC resources. These positions would
not require high level salaries. It is estimated that this approach
would allow USAC to bring administrative costs to within five to ten
percent of total costs of the Program.

[]{#__RefHeading___Toc445198201 .anchor}Billing and Collections

The Commission Order approving the creation of USAC established an
allocation factor for billing, collections, and a portion of
disbursement costs as a simple 25 percent. This allocation is not
unreasonable and may have been the best allocator based on development
costs for 1998 and early 1999; however, on a going-forward basis, it may
make sense to consider a different allocator that is based on the actual
realized program size. Equal allocations for the balance of 1999 will
allocate too much cost to the Program. This portion of the allocations
should be revised to one that is based on volume of disbursements. While
this will not result in a reduction in overall USAC expenses, it will
more accurately reflect cost causation among the programs. If
allocations were based on program size for all four programs, the RHCD
represents a 0.1 percent of the total USAC programs. Using this figure
to allocate costs would reduce the charges from \$739,100 to \$3,000, an
annual saving of about \$736,100. This would increase the level of
billing and collection costs allocated to each of the other three
universal service programs proportionate with their size.

[]{#__RefHeading___Toc445198202 .anchor}Compensation

Compensation must be reviewed with the other major costs in order to
decrease administrative costs. With the merger, RHCD's directly assigned
staff fell from 4.0 to 2.6 FTE. Personnel were moved to the corporate
level to provide services to all four programs. These personnel along
with other personnel that moved to the corporate level are allocated
indirectly to each of the four programs. This allocation of USAC support
raises the comparable FTE for the Program by 1.4 FTE. Currently, the
compensation costs charged to the Program include the President, the
Director of Operations and Systems, a portion of the Chief Executive
Officer, a portion of the Vice President of Operations, a portion of the
Vice President of External Communications, a portion of the Public
Information Manager, and a portion of other support positions.

Given the expected size of the Program, three changes in compensation
should be considered. First, the indirect allocation should be reviewed
to see if another allocation method would be more consistent with the
level of resources dedicated to this Program. One method would be to
assign the percentage of shared staff to RHCD based on its Program size
relative to the others or based on its number of participants compared
to the other programs. This would result in less indirect costs
allocated to the Program. Currently 24 percent of common compensation
costs are allocated to the Program and if fund size were used as the
allocator that would be reduced to 0.1 percent. This does not reduce
USAC expenses but it may more equitably assign costs among programs.
Second, USAC should reassign the support position that is allocated 60
percent to the Program to USAC corporate. This position would then be
allocated to the RHCD based on the allocator discussed above. These two
recommendations will reduce the level of compensation allocated to the
Program by \$70,000.

The salaries and benefits of the division president and the director
make up the balance of the compensation. USAC will eliminate the
position of President of the RHCD.

In reviewing the current structure, USAC is set up with three program
divisions and an operational division. The three program divisions are
Rural Health Care (RHCD), Schools and Libraries (SLD), and High Cost Low
Income (HCLID). SLD manages one program with a current cap of \$1.3
billion and 30,000 applicants. HCLID manages two programs with a total
cost of \$1.7 billion for High Cost and 1,400 carriers, and \$500
million for Low Income and about 1,400 carriers also. The RHCD manages
one program with a total budget of \$14 million and service to 924
sites. USAC cannot afford the level of management assigned directly to
the RHCD given the level of demand and the need to reduce administrative
costs. Additional resources may be necessary, but these resources should
be middle-level professionals rather than top‑level management. This
analysis supports the decision to elimate the position of President and
reduce compensation and benefit costs by approximately \$180,000.

The value of all these reductions would provide a salary reduction of
\$298,000 per year if the allocation changes were made and if one
position were eliminated.

If processes are consolidated, it makes sense to merge the RHCD into one
of the other divisions. The two possibilities are to combine RHCD with
either SLD or HCLID. Currently the SLD has processes that are most
similar to RHCD; however, if the process is significantly simplified in
the future, it may look more like the Low Income Program. Based on the
current structure of the Program, the most logical combination is likely
to be the SLD and the RHCD. Both are set up to benefit public
institutions that are dependent on telecommunications services.
Philosophically, the two could be combined and processes would benefit
from the synergies of dealing with similar issues and questions.
Helpdesk service could be combined and web site development could be
developed and maintained in parallel. This would eliminate the need for
a Division President and would allow for the combining of other
resources. However, if there are major simplifications to the Program,
it may be more similar to the Low Income Program and the HCLID may be
the most logical combination.

The Board recognizes the importance of the success for all programs and
understands that an ineffective program reflects poorly on all USAC
programs. The costs allocated to the Program as a result of having a
separate Rural Health Care Committee are insignificant and it is
recommended that the separate Committee be retained. Keeping the Rural
Health Care Committee of the Board will help to provide visibility for
the Program at the Board level, and will help to mitigate the impact of
any division consolidation.

[]{#__RefHeading___Toc445198203 .anchor}Outreach

No further contracts should be awarded to outsource the outreach effort.
Outreach should now be performed in-house and should continue to
collaborate with outside organizations, private and public. This effort,
however, will not save much money in the 1999 year since no further
contracts were contemplated.

The budget for the fourth quarter should be reduced to the level of the
third quarter. Care should be taken to make sure those efforts produce
measurable results. A plan should also be put in place for outreach
during the 1999 plan year.

> The following chart summarizes the range of proposed cost reductions
> for the July 1, 1999, to December 31, 1999.

####### Summary of Proposed RHCD Cost Reductions for 1999 (Annualized Estimates)

+------------------------------------+---------------------------------+
| > **Cost Item**                    | > **Range of Net Reductions**   |
+------------------------------------+---------------------------------+
| > Outsourcing: PwC                 | > \$569,940                     |
+------------------------------------+---------------------------------+
| > Billing and Collection           | > \$736,100                     |
+------------------------------------+---------------------------------+
| > Compensation                     | > \$10,000 to \$298,000         |
+------------------------------------+---------------------------------+
| > Outreach                         | > \$24,500                      |
+------------------------------------+---------------------------------+
| > Total                            | > Up to \$ 1,628,540            |
+------------------------------------+---------------------------------+

> If all of these decreases were implemented, it would bring
> administrative costs allocated to the RHCD to a much lower level for
> the 1999 plan year. However, a majority of these savings would only be
> realized for the second half of the year. Estimated 1999
> administrative costs, assuming the current first quarter budget, a
> revised second quarter budget adjusted for compensation savings, and
> six months of cost savings identified above, would be approximately 35
> percent of the projected 1999 funding level.
>
> Additional reductions in costs at or slightly below the high range of
> the benchmark study contained herein can be made only if
> simplification steps are taken.
>
> USAC will continue to look for methods for consolidating functions to
> save money and to help serve customers better and for methods to
> simplify the process within the current rules of the Program. In order
> to significantly reduce costs, USAC recommends the process changes
> included in this report and requests that the Commission considers
> delaying the start of the second application cycle until improvements
> are made.
>
> The estimated administrative costs for 1999 are included as **Appendix
> A**.

[]{#__RefHeading___Toc445198204 .anchor}SECTION VIII

###### Conclusion

The demand for this Program in the near term, without significant policy
revision, will likely not exceed \$10,000,000. Administrative costs must
be brought in line with the size of the Program and simplification of
the Program is needed to accomplish that goal.

In hindsight, the structure of the Program and the systems developed may
have been "overkill," given a successful annual application rate of less
than 1,000 sites. However, the actions taken by the Commission in the
design of the Program and by the original RHCC Board to create a
program, which could handle the anticipated volume of applicants, the
anticipated level of funds, and the requirements of the invoice and
billing system, were reasonable and prudent at the time they were made.

[]{#__RefHeading___Toc445198206 .anchor}APPENDIX A

###### Estimated Administrative Costs for 1999

# Option 1

> **Projections for 1999 RHCD Administrative Costs to the Program
> without Simplifications and without a Delay of the Second Year Funding
> Cycle (Thousands of Dollars)**

  --------------------------------------------------------------------------------------------
  **ITEM**                    **99 Q1**    **99 Q2**    **99 Q3**    **99 Q4**    **99 TOTAL**
  --------------------------- ------------ ------------ ------------ ------------ ------------
  Compensation                100          100          100          100          400

  Travel                      5            5            5            5            20

  Mailings                    3            3            2.4          2.4          10.8

  Audit                                    40                                     40

  Tel                         5            5            5            5            20

  Taxes                       2            2            2            2            8

  Misc.                       6            6            6            6            24

  PwC                         504          558          492          492          2046

  Outreach                    200          150          10.5         35           395.5

  **Total Direct**            **825**      **869**      **622.9**    **647.4**    **2964.3**

  USAC Support                120.6        121.7        120.4        118.1        480.8

  Billing and Collection      183.1        182.8        187.8        185.4        739.1

  **Total RHCD Prior to       **1128.7**   **1173.5**   **931.1**    **950.9**    **4184.2**
  Adjustments**                                                                   

                                                                                  

  Change in allocation of                  (7.7)        (7.8)        (7.7)        (23.2)
  USAC Support (Compensation)                                                     

  Reassignment of the Support              (9.8)        (9.8)        (9.8)        (29.4)
  Position to USAC Support                                                        

  Elimination of the                       (47.5)       (47.5)       (47.5)       (142.5)
  President Position                                                              
  (Compensation)                                                                  

  Adjust Travel based on                   \(3\)        \(3\)        \(3\)        \(9\)
  Elimination of President                                                        

  Adjust Telephone based on                \(3\)        \(3\)        \(3\)        \(9\)
  Elimination of President                                                        

  Adjust Miscellaneous based               (3.5)        (3.5)        (3.5)        (3.5)
  on Elimination of President                                                     

  Change in Allocation of                               \(184\)      \(184\)      \(368\)
  Billing and Collection                                                          

  PwC                                                   (142.5)      (142.5)      \(285\)

  Outreach                                                           (24.5)       (24.5)

  Adjustment to Tax Estimate  \(1\)        \(1\)        \(1\)        \(1\)        \(4\)

  TOTAL Revised               **1127.7**   **1098**     **529**      **524.4**    **3279.1**
  Administrative Costs                                                            

  **Percent Change**          **-**        **(6.4)**    **(43.2)**   **(44.9)**   **(21.6)**
  --------------------------------------------------------------------------------------------

# Option 2

> **Projections for 1999 RHCD Administrative Costs to the Program with
> Simplifications and without a Delay of the Second Year Funding Cycle
> (Thousands of Dollars)**

  --------------------------------------------------------------------------------------------
  **ITEM**                    **99 Q1**    **99 Q2**    **99 Q3**    **99 Q4**    **99 Total**
  --------------------------- ------------ ------------ ------------ ------------ ------------
  Compensation                100          100          100          100          400

  Travel                      5            5            5            5            20

  Mailings                    3            3            2.4          2.4          10.8

  Audit                                    40                                     40

  Tel                         5            5            5            5            20

  Taxes                       2            2            2            2            8

  Misc.                       6            6            6            6            24

  PwC                         504          558          492          492          2046

  Outreach                    200          150          10.5         35           395.5

  **Total Direct**            **825**      **869**      **622.9**    **647.4**    **2964.3**

  USAC Support                120.6        121.7        120.4        118.1        480.8

  Billing and Collection      183.1        182.8        187.8        185.4        739.1

  **Total RCHD Prior to       **1128.7**   **1173.5**   **931.1**    **950.9**    **4184.2**
  Adjustments**                                                                   

                                                                                  

  Change in allocation of                  (7.7)        (7.8)        (7.7)        (23.2)
  USAC Support (Compensation)                                                     

  Reassignment of the Support              (9.8)        (9.8)        (9.8)        (29.4)
  Position to USAC Support                                                        

  Elimination of the                       (47.5)       (47.5)       (47.5)       (142.5)
  President Position                                                              
  (Compensation)                                                                  

  Adjust Overhead based on                 (9.5)        (9.5)        (9.5)        (28.5)
  the Elimination of the                                                          
  President[^23]                                                                  

  Change in Allocation of                               \(184\)      \(184\)      \(368\)
  Billing and Collection                                                          
  Costs                                                                           

  PwC                                                   (142.5)      (312)[^24]   (454.5)

  Outreach                                                           (24.5)       (24.5)

  Adjust to Tax Estimate      \(1\)        \(1\)        \(1\)        \(1\)        \(4\)

  Cost to Bring the Web site                                         18           18
  in House                                                                        

  Additional Staff and                                               50[^25]      50
  Miscellaneous Expenses to                                                       
  Process Applications in                                                         
  House                                                                           

  Start up costs for new                                             300          300
  program                                                                         

  **TOTAL Revised             **1127.7**   **1098**     **529**      **722.9**    **3477.6**
  Administrative Costs**                                                          

  **Percent Change**          **-**        **(6.4)**    **(43.2)**   **(24.0)**   **(16.9)**
  --------------------------------------------------------------------------------------------

# Option 3

> **Projections for 1999 RHCD Administrative Costs to the Program with
> Simplifications and with a Delay of the Second Year Funding Cycle
> (Thousands of Dollars)**

  --------------------------------------------------------------------------------------------
  ITEM                        **99 Q1**    **99 Q2**    **99 Q3**    **99 Q4**    **99 Total**
  --------------------------- ------------ ------------ ------------ ------------ ------------
  Compensation                100          100          100          100          400

  Travel                      5            5            5            5            20

  Mailings                    3            3            2.4          2.4          10.8

  Audit                                    40                                     40

  Tel                         5            5            5            5            20

  Taxes                       2            2            2            2            8

  Misc.                       6            6            6            6            24

  PwC                         504          558          492          492          2046

  Outsourcing Outreach        200          150          10.5         35           395.5

  **Total Direct**            **825**      **869**      **622.9**    **647.4**    **2964.3**

  UASC Support                120.6        121.7        120.4        118.1        480.8

  Billing and Collection      183.1        182.8        187.8        185.4        739.1

  **Total RCHD Prior to       **1128.7**   **1173.5**   **931.1**    **950.9**    **4184.2**
  Adjustments**                                                                   

                                                                                  

  Change in allocation of                  (7.7)        (7.8)        (7.7)        (23.2)
  USAC Support (Compensation)                                                     

  Reassignment of the Support              (9.8)        (9.8)        (9.8)        (29.4)
  Position to USAC Support                                                        

  Elimination of the                       (47.5)       (47.5)       (47.5)       (142.5)
  President Position                                                              
  (Compensation)                                                                  

  Adjust to Overhead[^26]                  (9.5)        (9.5)        (9.5)        (28.5)

  Change in Allocation of                               \(184\)      \(184\)      \(368\)
  Billing and Collection                                                          
  Costs                                                                           

  PwC                                                   (312)[^27]   \(492\)      \(804\)

  Outreach                                                           (24.5)       (24.5)

  Adjust tax estimate         \(1\)        \(1\)        \(1\)        \(1\)        \(4\)

  Cost to Bring the Web site                            24           24           48
  in House                                                                        

  Additional Staff and                                  50[^28]      50           100
  Miscellaneous Expenses to                                                       
  Process Applications in                                                         
  House                                                                           

  Start up costs for new                                             300          300
  program                                                                         

  **TOTAL Revised             **1127.7**   **1098**     **427.5**    **542.9**    **3196.1**
  Administrative Costs**                                                          

  **Percent Change**          **-**        **(6.4)**    **(54.1)**   **(57.1)**   **(23.6)**
  --------------------------------------------------------------------------------------------

[]{#__RefHeading___Toc445198208 .anchor}Appendix B

###### Letter from Mr. Jonathon Linkous

March 4, 1999

Mr. William Kennard Ms. Cheryl Parrino

Chairman CEO

Federal Communications Commission Universal Services Administrative
Corporation

445 12^th^ Street, SW 583 D'Onofrio Drive

Washington, DC 20554 Suite 201

> Madison, WI 53719

Dear Chairman Kennard and Ms. Parrino:

The groups indicated below provide these comments regarding the Rural
Health Care program that is being administrated by the Universal
Services Administrative Corporation (USAC). These groups represent a
wide variety of individuals and institutions from across the United
States who are involved in the provision of health care,
telecommunications services, telehealth and telemedicine. We have a
strong interest in the implementation of the Rural Health Care program
that maximizes the benefits for patient care in rural America. These
comments reflect a level of frustration with the limitations of the
program that have become apparent over the first year of implementation.

Our comments are divided into two areas. First, we include proposed
actions that can be made by the FCC, which are critical in order to
improve the current program operations. These are:

1.  The Commission should take steps to notify all approved applications
    and start the discounts immediately. Current applications now before
    USAC have been pending for many months. Approvals for these
    applications have been held up for months for reasons that are not
    clear. This delay has caused undue hardships on the rural health
    providers, who are operating on very narrow financial margins
    already. Continued delay is unconscionable.

2.  The application process as it exists today is burdensome,
    complicated, causes substantial hardship on applicants, and creates
    a barrier on getting the program benefits out to the intended
    beneficiaries. The process should be streamlined in two ways.

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a.  The Commission should reconsider the requirement that all
    applications are required to enter into a 28-day posting period, at
    least for areas where there is no existing competition for local
    service. To date, there have been no competing bids proposed for any
    application, nor are any competing bids anticipated. The
    applications are typically for services to very remote locations
    where no alternative service providers are available. We understand
    and sympathize with the desire of the Commission to promote
    competition. However, this has led to additional delays and costs
    placed on the backs of rural health care providers and delayed the
    provision of health services for rural Americans.

b.  The Commission should streamline the application process. We suggest
    that the Commission eliminate the complicated process of requiring
    the local exchange carrier to make calculations of specific charges
    to be discounted. Instead a simplified process should be put into
    effect whereby the approved rural health care provider simply
    submits their paid phone bill for eligible broad band (T1) services
    with distance line charges spelled out to USAC. USAC would reimburse
    the carrier for the discounted distance line charges on the bill.
    The carrier would pass on the money in the form of a discount on the
    next bill. The discounts should be based on an average cost for
    communications services to rural areas versus urban areas in
    existence for each state.

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3.  The Commission should consider reimbursement for other costs
    associated with providing telecommunications services for rural
    health care that have higher costs for rural areas. Such costs
    include connection fees for ISDN and switched services, and toll
    charges for connections to urban areas.

4.  The rural health program is supposed to serve public health
    agencies, which provide essential services to rural communities.
    However, very few of these agencies currently have applications
    pending. The Commission should assess the reasons for this
    non-participation, identify specific program elements needed to
    increase participation and set targets for improving participation.

Second, we include a set of recommendations that may require statutory
amendments to the governing legislation. These are based on the
experience gained in the program over the past year where obvious
deficiencies have become apparent. Given the current under utilization
of estimated funding of the rural health program, the approval of these
changes would have minimal impact on the size of the rural health
program as originally envisioned. These are:

1.  The program should include discounts for all forms of communications
    services when used in the delivery of health care to rural health
    care providers. As currently designed, services eligible for the
    rural health care program are effectively limited to a T1 line,
    largely because of the use of distance costs associated with this
    service. However, advancements over the past few years in technology
    and communications have enabled health care providers to transmit
    and receive information at speeds lower than that required of T1
    lines. Although lower in cost, this still remains an impediment to
    many health providers due to the few resources available in support
    of rural health care.

2.  The existing regulatory framework requiring additional agreements
    between multiple local and long distance carriers should be
    resolved. Establishing links between many applicants and urban
    centers require crossing LATA boundaries, due to the large
    distances. The ETC requirement has either precluded support for
    rural health care providers or led to unnecessary complications
    between local and long distance carriers in the development of
    applications by eligible health providers. Coordination between
    multiple telecommunication companies requires the rural provider to
    rely on employees of the companies to help complete forms and
    develop adjusted rate schedules. This adds time and complexity to
    the application process.

3.  The rural health care program, unlike the school and library
    program, does not cover associated costs with the establishment of
    high-speed communications connections. The health care program
    should be changed to mirror those services that are currently
    eligible in the school and library program.

4.  The rural health care program should be changed to foster
    collaboration among all eligible institutions where appropriate and
    allow the rural health provider to collaborate with public health
    agencies in the implementation of the program. In many rural
    communities the health care institution and the local school and
    library are located in very close proximity. However, the programs
    operated by USAC do not allow a combined effort by health, school,
    and library facilities. In many areas this leads to unnecessary
    duplication of communication services. In addition, local public
    health agencies can be an important partner with the rural health
    care providers.

5.  The program should consider all rural health institutions under the
    program without regard to tax status as eligible for receiving
    discounted services. In many areas, particularly the many different
    Health Professional Shortage Areas, the only health provider serving
    rural residents does not happen to be a non-profit institution.

6.  The legislation ignores three other important health care
    institutions serving rural America: long-term care facilities, home
    health agencies and skilled nursing facilities. These facilities
    should be made eligible for support under the program.

American Telemedicine Association

American College of Nurse Practitioners

Association of Telemedicine Service Providers

National Rural Health Association

[^1]: *See* Appendix B.

[^2]: The term "telemedicine" is used throughout this report as the
    broad term to apply to all applications as described in the
    Commission *Order*: "For purposes of this *Order*, we consider the
    terms 'telemedicine,' 'telehealth,' 'telemedicinal applications,'
    and 'telemedicine-related services' to be interchangeable. The Joint
    Working Group on Telemedicine defines 'telemedicine' as 'the use of
    telecommunications and information \[service\] technologies for the
    provision and support of clinical care to individuals at a distance
    and the transmission of information needed to provide that care.' It
    defines 'telehealth' as including clinical care, but additionally
    encompassing the related areas of 'health professionals\' education,
    consumer health education, public health, research and
    administration of health services.' See JOINT WORKING GROUP ON
    TELEMEDICINE, TELEMEDICINE REPORT TO THE CONGRESS at 90, U.S.
    Department of Commerce (1997) (Joint Working Group Report)."

[^3]: *See* 47 U.S.C. § 254(h)(1)(A).

[^4]: Federal-State Joint board on Universal Service, *Report and
    Order*, CC Docket No. 96-45, FCC 97-157, 12 FCC Rcd 8776 (rel. May
    8, 1997) (*Order*).

[^5]: Changes to the Board of Directors of the National Exchange Carrier
    Association, Inc. and Federal-State Joint Board on Universal
    Service, *Second Report and Order and Second Order on
    Reconsideration*, CC Docket Nos. 97-21 and 96-45, 12 FCC Rcd 18400
    (*USAC Order*).

[^6]: The Commission has required that an independent audit firm review
    the procedures and internal controls and provide an opinion that
    procedures are in place to protect against waste, fraud, and abuse.
    This audit must be completed and the RHCD must receive a letter from
    the Commission Chairman agreeing with the audit findings. The
    sign-off from the Chairman, indicating that he is confident that
    adequate procedures are in place, must be received before commitment
    letters can be issued by the RHCD. The RHCD is in the process of
    having this audit redone, as the Commission did not accept the first
    review.

[^7]: Direct compensation costs for RHCD staff for each quarter in 1999
    are \$100,000. USAC common compensation costs of 24 percent
    (\$53,000) are also allocated to the RHCD for total compensation
    costs of \$153,000.

[^8]: Based on a \$10-20 million fund estimate.

[^9]: Based on a \$10-20 million fund estimate.

[^10]: ^?^Based on a \$2-19 million fund estimate.

[^11]: The RHCD has four FTE positions allocated directly or indirectly;
    in addition, it has contracted with PwC who employees 13 people.
    This estimate does not include any staff for the Billing and
    Collection function.

[^12]: Between 5/1/98 and 2/15/99, 1,425 RHCPs filed Form 465 (covering
    3,127 sites). Of these applications, 1,058 (2,466 sites) were posted
    for telco bids on the RHCD web site, 215 (392 sites) are currently
    "under review" by RHCD. Issues affecting status include impact of
    ETC requirement, missing or incomplete information, staff changes at
    RHCPs, etc. If issues are resolved, these applications could be
    posted. Applications for 40 RHCPs (46 sites) were denied because
    they were not rural or were not eligible health care provider types.
    One hundred twelve applications covering 223 sites are considered
    inactive because they were duplicates or aborted electronic
    submissions. Of the 1,058 posted applications, 897 were from
    single-site RHCPs, while 161 were from consortiums, which
    represented 1,569 total sites, an average of about 10 sites per
    consortium.

[^13]: Forms 466/468 Packets are required to be submitted by the RHCPs
    (466) and the telcos (468) for each billed segment of a circuit.
    Thus, RHCD may receive multiple 466/468 packets for a single site.

[^14]: Assumes most RHCPs acquired service under a tariff and support
    began on day 29 after posting.

[^15]: Assumes 65 percent of packets are for T-1 type service at an
    average monthly support amount of \$555 and 35 percent are non‑T‑1
    type service at an average monthly support amount of \$76. This is
    consistent with the experience for applications that have been
    reviewed.

[^16]: Assumes historical average of 40 466/468 packets received by RHCD
    per month times 4 ½ months in balance of RHCD 1998 Fund Year
    equaling 177 plus 23 packets received after June for a total of 200
    packets at the average rate.

[^17]: Assumes 85 percent of 1998 packets (excluding Alaska) receive an
    additional five months of support at a weighted average.

[^18]: As of 2/15/99, Form 465s covering 224 sites have been posted for
    Alaska. To date, nine 466/468 packets have been received covering
    seven sites. Only one packet contains complete support information,
    which is \$11,000 per month. This support amount is included in line
    2. RHCD assumes 20 completed packets by March 30, 1999, from Alaska
    allowing 3 months of 1998 support. In addition, it assumes Universal
    Service cash flow to ETC resolved. New service in Alaska is
    primarily satellite based and, therefore, not directly mileage
    sensitive. Hence, the subsidy is derived from the difference between
    the urban rate set by RHCD and the rate charged for the service.
    RHCD expects no more than 20 T-1 type circuits costing approximately
    \$13,000 per month offset by an urban rate of approximately \$900
    per month. Based on applications received to date and discussions
    with the Alaska PUC, RHCD believes that the balance of services in
    Alaska will be dedicated or frame relay circuits with a bandwidth of
    56k to 128k. These services will have a rural rate of approximately
    \$500 to \$3,000 and an urban rate of approximately \$130 to \$500.
    Therefore, RHCD estimates \$2,000 as the average monthly support
    amount in Alaska.

[^19]: Assumes historical average cost and service type mix. Assumes
    growth in packets of 15 percent over 1998 year.

[^20]: Assume a total of 175 sites (200 packets) from Alaska in 1999 at
    historical average cost and service type cost.

[^21]: RHCD does not have data to calculate the impact that eliminating
    the ETC requirement would have on either the number of eligible
    RHCPs who would apply for support or dollars of support. This
    information is not contained on Form 465 and applicants affected by
    the requirement likely do not submit 466/468 packets. However, based
    on the Universal Service Fund Assessment Results listserv managed by
    the University of Missouri Health Sciences Center, 71 percent of the
    21 responding telemedicine programs felt that exclusion of the
    long-distance companies from the USF program would affect their
    programs, 10 percent were not sure how this would impact their
    program, and 19 percent said the exclusion of the IXCs would have no
    impact. Eighty-five of the 139 T-1 lines reported being serviced by
    long-distance companies. RHCD believes this data overstates the
    program since the respondents may over-represent T-1 dependent
    networks that are more likely to utilize IXCs than switched service
    offerings. To be conservative, the percentage of services by IXCs
    was reduced from 60 to 40 percent. Assuming 40 percent of the
    existing support in the lower 48 (\$3.210 million), RHCD estimates
    an additional \$1.28 million could be provided to new applicants
    currently affected by the ETC requirement. It was assumed that the
    "Alaska solution" is operable for ETC requirement. USAC is aware of
    several large networks totaling over 40 sites that would be eligible
    this year but for the ETC requirement.

[^22]: The best information available at that time indicated that
    approximately 12,000 RHCPs would be eligible with a demand of
    approximately \$400 million. *Order*, 12 FCC Rcd 8776, para. 706.

[^23]: Overhead adjustments are detailed under Option 1.

[^24]: Assumes a transition to complete the review of first year
    applications at \$60,000 per month.

[^25]: Assumes four analysts at \$35,000 plus overheads. This also
    assumes a simplified application and invoicing process.

[^26]: Overhead adjustments are detailed under Option 1.

[^27]: Assumes a transition to complete the review of first year
    applications at \$60,000 per month.

[^28]: Assumes four analysts at \$35,000 plus overheads. This also
    assumes a simplified application and invoicing process.