U.S. GOVERNMENT PRINTING OFFICE

58–724 WASHINGTON : 1999

MEDICARE PROVIDER-SPONSORED

ORGANIZATIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

APRIL 24, 1997

Serial 105–76

Printed for the use of the Committee on Ways and Means

(

(II)

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH

BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut

JIM MCCRERY, Louisiana

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

PHILIP M. CRANE, Illinois

AMO HOUGHTON, New York

SAM JOHNSON, Texas

FORTNEY PETE STARK, California

BENJAMIN L. CARDIN, Maryland

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

XAVIER BECERRA, California

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.

(III)

C O N T E N T S

Page

Advisories announcing the hearing ........................................................................ 2

WITNESSES

Health Care Financing Administration, Kathleen Buto, Associate Administrator for Policy .................................................................................................... 11

Physician Payment Review Commission, Hon. Gail R. Wilensky, Ph.D., Chair;

accompanied by David C. Colby, Ph.D., Deputy Director ................................. 31

American Hospital Association, John Brownlow ................................................... 61

American Medical Association, Richard F. Corlin, M.D ....................................... 83

Blue Cross and Blue Shield Association, Mary Nell Lehnhard ........................... 71

Florida Hospital Healthcare System, John Brownlow .......................................... 61

National Association of Insurance Commissioners, and Wisconsin Commissioner of Insurance, Josephine W. Musser ......................................................... 41

SUBMISSIONS FOR THE RECORD

American Association of Homes and Services for the Aging, Sheldon L. Goldberg, statement ..................................................................................................... 106

Association of Managed Healthcare Organizations, Gordon B. Wheeler, letter . 116

Premier, Inc., James L. Scott, statement .............................................................. 118

(1)

MEDICARE PROVIDER-SPONSORED

ORGANIZATIONS

THURSDAY, APRIL 24, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HEALTH,

Washington, DC.

The subcommittee met, pursuant to notice, at 1:40 p.m., in room

1100, Longworth House Office Building, Hon. Bill Thomas (chairman of the subcommittee) presiding.

[The advisories announcing the hearing follow:]

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Chairman THOMAS. The subcommittee will come to order.

Today’s hearing is the 12th subcommittee hearing this year, and

this particular hearing will focus on Medicare provider-sponsored

organizations. PSOs were among the private health plan options at

the heart of the Republican’s plan during the 104th Congress to reform the Medicare program. While the Balanced Budget Act, which

contained those physician-sponsored organizations, was vetoed by

President Clinton, I am pleased to see that in the President’s proposal he has embraced PSOs as well.

I do strongly believe that doctors and hospitals should be encouraged to join together and offer private health plans directly to

Medicare beneficiaries. Health plans owned and controlled by doctors and hospitals can provide a unique opportunity for providers

to furnish high-quality health care plans at affordable costs, particularly in rural America.

At the same time, however, we obviously need to assure beneficiaries and taxpayers that these health plans are not only the

highest quality, but also are financially sound. It’s easier to say

that than to figure out a structure under current knowledge to do

it at a very high comfort level.

While we should reduce obstacles that may deny doctors and hospitals the opportunity to compete in the Medicare marketplace, we

obviously can’t lower the bar so far that Medicare beneficiaries and

the Medicare Trust Fund are exposed to excessive financial risks

and disruptions in crucial health services.

Reasonable people can differ. There are a number of reasonable

bills in. What we want to do is to try to find as high a commonlyaccepted approach as we possibly can. I believe, over the last several years, everyone has gained a better understanding of whether

or not what they initially assumed to be true was true or not.

That’s why I look forward to today’s testimony. I know it will help

guide us in creating a policy which balances these competing goals.

The gentleman from California.

Mr. STARK. Thank you, Mr. Chairman. I thank you for holding

this hearing.

I guess I could sum it up by saying that PSOs make me nervous.

It escapes me as to why we should take a rather loosely defined

group of providers and give them special exemption from the laws

that seem to be working throughout the country.

The New York Times documented abuses in a major national

hospital system’s fee-for-service type operation, and I don’t know

how we prevent those under capitated PSOs. I worry about rural

areas, where suddenly all of the resources may come under one

provider group and not refer out cases that may be beyond the

competence of, say, primary care or family physicians.

Then the question is, why did we consider overriding State law?

PSOs are happening. I don’t know that they need special regulations. I don’t know that the regulations are more onerous when applied to professionals of higher skill.

I have trouble deciding whether one doctor in a chain of hospitals

makes it a physician PSO, or one hospital and a group of physicians makes it a hospital PSO. But we do have regulations that

seem to be working. I guess I have to be shown that there is something intrinsic in just saying you can take a group—I mean, it

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would be a lot easier for any managed care group to say ‘‘I want

to become a PSO.’’ How do they do it? Do you get one doctor on

the group, or do you get 10 or 20 percent? I don’t know how that

would work.

I would like to ask that we include in the record a letter from

a group of 11 health care and consumer groups who are concerned

about this, and make that complete my statement.

Chairman THOMAS. Without objection.

Mr. STARK. I thank the Chairman.

[The following was subsequently received:]

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Chairman THOMAS. Just let me briefly respond, that all of your

questions are questions that I find interesting. Obviously, we’re

going to have to find answers to them.

Just from a quick personal experience in the community of

Ridgecrest, that has one hospital and 34 doctors, through a HCFA

waiver we’ve been able to create a PSO. The key there was bringing in a third party to deal with many of the financial arrangements between the doctors and the hospital. This is evolving.

I think all of the gentleman’s questions need to be responded to

and hopefully answered at a level that will give the gentleman

some comfort, but certainly responded to.

Does the gentlewoman from Connecticut want to make a statement?

Mrs. JOHNSON. Thank you, Mr. Chairman.

I would just like to take a moment to mark this hearing as a significant event. In the 104th Congress, a group of Republicans spent

many, many hours on a very significant Medicare reform bill that

addressed many of the underlying problems in our health care system, both for seniors and nonseniors. As you will recall, we

changed the way medical education was funded, to provide longterm strength to our medical centers, and we also wrote the first

PSO law, to try to assure that the managed care market would embody a competition focused on quality.

We do have to answer all the questions that my colleague, Mr.

Stark, posed. But there is some reason to believe that providersponsored organizations will help the competitive market focus on

and be accountable for quality, all actors in it.

This is a hearing and a discussion and a consideration that we

should have been able to have in the last Congress. As one elected

official in this Nation who felt particularly strongly about the deception of reducing the Medicare debate to cutting spending, as

many did, including our President, I would just have to say that

today is a very important occasion, because it is a time now in

which we’re beginning to talk about the real structural reforms

necessary to enable Medicare to offer better benefits, a more modern benefit package, to our seniors, and at the same time constrain

the rate of growth of costs. Not only will we do that in our market,

but we will strengthen the under-65 market if we do this right.

I congratulate the chairman on holding this hearing, and I congratulate the administration for, now that the political debate is

over, supporting a discussion that is extremely important to seniors

in America, because it’s the only avenue through which they’re

going to get better benefits at reasonable cost, and also joining us

in a difficult discussion that ought to be fruitful at the end of the

course.

Thank you, Mr. Chairman.

Chairman THOMAS. I thank the gentlewoman.

Now, if we might hear from Kathleen Buto, the Associate Administrator for Policy, Health Care Financing Administration. Any

written testimony you may have, Kathy, will be made a part of the

record, and you can address us in any way you see fit.

I note that the testimony is dated April 24th, 1997. To underscore the gentlewoman from Connecticut, it would have been exciting had it been ’95 or ’96. But, better late than never.

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Thank you very much.

STATEMENT OF KATHLEEN BUTO, ASSOCIATE ADMINISTRATOR FOR POLICY, HEALTH CARE FINANCING ADMINISTRATION

Ms. BUTO. Thank you, Mr. Chairman. I am very pleased to be

here and have an opportunity to discuss the Administration’s proposals.

I am going to specifically focus on the similarities and differences

regarding PSOs in the President’s 1998 budget proposals, the Balanced Budget Act of 1995, and a bipartisan bill introduced by Representatives Greenwood and Stenholm, which is very similar to a

bill introduced by Senators Frist and Rockefeller. I will also

present our experience to date with PSOs in the Medicare Choices

demonstration program.

Let me start with areas of agreement. With the goal of increasing

managed care choices, all three proposals would permit PSOs to

contract directly with Medicare to enrolled beneficiaries. We believe

the PSO option, coupled with revisions to managed care payment

methodologies, will have an important and positive impact on increasing managed care enrollment for Medicare beneficiaries in

areas where enrollment is low, including rural areas.

There is also agreement in all three bills, with a few exceptions,

that PSOs should be required to meet the same standards as Medicare HMOs. Under the President’s budget, PSOs would be held to

all of the same standards related to quality, access, marketing,

beneficiary liability, benefits, and appeals and grievances, as Medicare HMOs. This is also true of the Balanced Budget Act and the

Greenwood-Stenholm bill.

There are differences, and let me focus on these. The proposals

have different approaches in four areas: fiscal soundness and solvency, private enrollment requirements, State licensure requirements for PSOs, and the ability of the PSO to offer a point-of-service option. It is important that we have a forum such as this hearing to discuss these issues and the concerns of all stakeholders. In

developing consensus on these issues, I believe that we would all

agree that our primary focus should be what is best for the beneficiary.

Let me start first with fiscal soundness and solvency. Under all

three proposals, PSOs would be subject to different fiscal soundness and solvency standards than HMOs because of differences between the delivery systems. Under the President’s budget and the

Balanced Budget Act, HCFA would develop these standards

through regulation. The Greenwood-Stenholm bill; however, establishes detailed standards in statute. The Administration would prefer that these standards be developed in regulation so that we

could receive extensive input and consultation with other parties

on this complex issue.

The second issue is private enrollment requirements. The President’s budget would maintain the 50–50 rule until a new quality

measurement system is finalized, with additional waiver authority

in the interim. This 50–50 rule applies to all managed care plans

involving commercial enrollment. Under the Greenwood-Stenholm

bill, PSOs would be deemed to meet the 50–50 rule if they had exVerDate 29-OCT-99 12:00 Nov 10, 1999 Jkt 010199 PO 00001 Frm 00014 Fmt 6633 Sfmt 6602 E:\HEARINGS\58724 txed01 PsN: txed01
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perience providing coordinated care and met special quality standards that we believe are substantially similar to our current statutory regulatory requirements for Medicare HMOs.

The Balanced Budget Act would repeal altogether the 50–50 rule

for managed care plans, including PSOs. The Administration believes that the 50–50 rule should not be completely eliminated

until it can be replaced by quality measurement systems.

The President’s budget would maintain current law minimum

commercial enrollment requirements, which neither the Balanced

Budget Act nor the Greenwood-Stenholm bill would require. The

PSOs have experience managing risk for commercial enrollees before they enroll Medicare beneficiaries.

The third issue involves licensure. The Administration wants to

ensure that PSOs would not face unreasonable barriers to entering

the managed care marketplace, while also ensuring that PSOs are

financially sound entities. We do not believe that a broad preemption of State licensing is necessary and that preemption of State licensing requirements should be limited as much as possible.

Under the President’s budget, PSOs would be required to obtain

State licensure once the State certification and monitoring program

for PSOs had been approved by the Secretary. To be approved, the

State’s program would have to be substantially similar to Federal

standards. After the year 2000, however, the State could impose

more stringent standards, but before the approval of the State’s

program licensing requirements would be preempted.

The Balanced Budget Act utilizes a different approach; however,

I do not plan to address this in detail. Both the Balanced Budget

Act and the Greenwood-Stenholm bill provide for an approach that

essentially requires identical standards which the States hold to

the Federal standards. However, we believe that substantially

equivalent or similar criteria in the President’s budget is more reasonable and more flexible.

Before the year 2002, in the Greenwood-Stenholm bill, PSOs

would not need to be licensed by the States at all, and the State

law would be preempted, regardless of the relationship of these

laws to Federal standards. After 2002, PSOs would be required to

have a license only if they are identical.

The last issue is the point-of-service option. Under the President’s budget, we would prohibit PSOs from offering a point-ofservice option. We believe that, essentially, if a PSO wants to offer

such an option, it essentially becomes more like an insurance product and really does fall under the purview of the States and ought

to be regulated as an insurance product, rather than have the special provisions that we have set forth for PSOs.

I see that my time is running short. Let me just conclude by

mentioning our Medicare Choices demonstration sites. These sites

total 17, and 11 sites are PSOs. We have already learned that

there is capability in PSOs to conduct enrollment and to process

claims. Many of the functions that we anticipated PSOs would be

able to handle, PSOs are handling.

One of our Florida PSOs, which has been in operation the longest, has already enrolled 4,000 beneficiaries and enrolls more every

day. We expect that these demonstrations will give us a good inVerDate 29-OCT-99 12:00 Nov 10, 1999 Jkt 010199 PO 00001 Frm 00015 Fmt 6633 Sfmt 6602 E:\HEARINGS\58724 txed01 PsN: txed01
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sight as to how some of the provider-sponsored organizations operate.

I would just note that the Choices demo was designed to reach

areas where we do not have managed care plans, and it appears

that PSOs have really been the entities that have stepped up to the

plate.

Let me just conclude by saying that, while there are differences,

I am very confident that, working together, we can accomplish the

important objective of bringing these organizations into the Medicare program.

Thank you.

[The prepared statement follows:]

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Chairman THOMAS. Thank you, Miss Buto.

In your testimony you talk about the 50–50 rule as a proxy for

quality—and I think we’re all familiar with the history of it. But

I guess my argument would be that, as long as you maintained a

solid front that this was our substitute for quality, and everybody

honored the 50–50 rule as our substitute for quality, that argument

at least had some merit by being consistent.

When we now start saying that in certain areas you’re not going

to have to follow the 50–50 rule, but in other areas you are, in essence, you’re competing. Then, don’t we really erode the argument

for maintaining a 50–50 standard anywhere?

Ms. BUTO. Let me address that in two parts.

The different rule, I believe that you are referring to a situation

in which we would allow PSOs to count, instead of commercial enrollees, individuals which are at risk, and meet the 50–50 rule, we

would not repeal it. We would broaden it so that PSOs can count

individuals for whom PSOs have borne the risk.

The reason for that is PSOs do not have licenses to actually be

HMOs, so PSOs are unable to have individuals as enrollees now

and to bear risk. We were looking for a way to recognize PSOs’ experience in managing commercial enrollees for another HMO or for

another plan.

Mr. JOHNSON of Texas. Will the gentleman yield?

Chairman THOMAS. If that was your rationale, then why couldn’t

you take somebody who was required to follow the 50–50 rule and

look at a history, and if they had—pick a year—a three year, five

year, ten year, twenty year history in dealing with that same universe of people, you could begin to feel that you had a belief that

they also would——

Ms. BUTO. Our proposal would provide for exemptions from the

50–50 rule, even as we are moving to the quality measurement approach and would eliminate it all together. Our proposal would include provisions for plans with good track records to obtain an exemption, as well as plans in rural areas. Therefore, we do broaden

the exception for these plans.

Chairman THOMAS. I understand. But some folks get to fly by

definition and others have to bump along the ground with exceptions. It just seems to me that we have reached the point—and it’s

not necessarily a contentious one. It’s one, I think, of a maturing

understanding of what’s going on, fully understanding why the 50–

50 rule went in in the first place, and that hopefully, in later testimony, or shortly, we’ll get some experiential assistance in dealing

with risk adjustment and other factors that will help us get a comfort level in moving away from what are agreed arbitrary methods

of attempting to substitute quality.

The gentleman from Texas.

Mr. JOHNSON of Texas. Thank you, Mr. Chairman.

I believe a couple of those organizations in your test unit have

State HMO licenses anyway. Are they meeting the 50–50 rule?

Ms. BUTO. You’re talking about the Choices demonstration sites?

Mr. JOHNSON of Texas. Yes.

Ms. BUTO. A number of these do. I think four of the eleven have

HMO licenses.

Mr. JOHNSON of Texas. Are they meeting the 50–50 requirement?

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Ms. BUTO. A number of the sites are not meeting the 50–50 requirement.

Mr. JOHNSON. But they’re still functioning in good shape. That’s

what he’s talking about.

I totally agree with you, Mr. Thomas.

Ms. BUTO. If I could just comment on that, I agree that what we

basically want to do is to move away from a proxy measure to real

measures of quality. I think we have plans in the legislation to

issue a set of specific quality requirements next year in rulemaking

that would actually lay out alternatives for replacing the 50–50

rule all together. I believe this is the direction we wish to pursue

for all plans.

Mr. JOHNSON of Texas. Thank you, Mr. Chairman.

Chairman THOMAS. Certainly.

I appreciate, even if it’s just a brief review, of the various models

and the way in which I think you fairly treated the work product,

BBA, yours, and the Greenwood-Stenholm bill.

The one thing I would focus on, though—I don’t know whether

it has intrinsic value—but the BBA proposal for approval of the

PSOs was subjected to a very extensive discussion between the

House and the Senate. Since folk would sit at the table with a

priori beliefs about whether or not PSOs and HMOs were a distinction without a difference and, therefore, should have to meet the

same solvency standards, or that because of the uniqueness of the

structure, they may not have to, and if States traditionally play the

role, to what extent would the Federal Government intervene, if at

all, and if so, when, or, in fact, should it be primarily Federal

versus State.

As the gentlewoman from Connecticut said, we spent hours and

hours discussing this and came up with a proposal which was predisposed to stay with the States, unless an evidentiary level would

bring it to the Federal level.

The President’s plan, as I think you rightly describe it, is kind

of the other way around. It presupposes a Federal involvement

which creates a series of preemptions and decisions and standards

by fixed dates. In my opinion, if these are going to be as successful

as we want them to be, that is a fairly extensive additional administrative responsibility that’s going to be placed on HCFA.

What level of assurance can you give us that, in creating the pattern that you did, different than the one we did, you were fully cognizant and willing to assume the additional administrative responsibilities and burdens that would be placed on HCFA if the President’s plan was to go forward, notwithstanding whether it’s the appropriate way to go or not?

Ms. BUTO. We have certainly considered that, and we have had

a little experience—although I do not think it is entirely parallel—

where the Federal Government had a role both with the Medigap

standardization and with the HCFA rules involving, if you will, the

setting of some Federal standards and having the States then come

in and either meet these standards or show equivalence. Therefore,

we have had some experience in this area.

We have certainly considered it. If a State already has identical

standards, we would immediately defer to the State and require

that the PSOs be licensed by the State. We have this provision beVerDate 29-OCT-99 12:00 Nov 10, 1999 Jkt 010199 PO 00001 Frm 00024 Fmt 6633 Sfmt 6602 E:\HEARINGS\58724 txed01 PsN: txed01
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cause we recognize that many States are moving fairly quickly in

this area. We consider this provision as a more limited preemption.

Our experience has been that States move very quickly to standardize and to meet the requirements, so that states can, in fact, go

ahead and license new entities and new models of care.

Chairman THOMAS. Thank you.

One concern, before I move on to others, is the belief that I think

is shared by all of us, that if we could get a structure in place that

made sense, in terms of hospitals and doctors creating, in essence,

a local HMO, it would provide a better and more affordable service

for rural areas.

You folks in your proposal have grappled with the AAPCC adjustments for low payment counties, which pretty obviously has as

one of its components the medical use aspect in the area. We all

agree that the AAPCC is an imperfect instrument, and then we

look around for something that won’t do more damage, skewing it

in one direction or another, and we wind up with the AAPCC.

You folks have now suggested moving to a level, which was the

balanced budget act level, of $350. Our rural friends have moved

to a different approach, with a different formula. But regardless of

how you determine it, it’s clear that the decision is to move relatively significant amounts of money very quickly into rural areas.

I think there’s no question that, over time, that will create—especially in combination with provider-sponsored organization

enablement—an opportunity to provide what you say you want to

provide in your testimony.

My concern is that if you bump a rural county in Iowa from $221

a month to $350 a month, notwithstanding your willingness to

move rapidly at the Federal level, how can we give any assurance

to those folk who believe they’re going to be receiving something

approximating $1,500 a year additional benefits by virtue of the increase that these dollars will actually flow through the system?

How can we, with our data, in terms of adjusting the community

rate within that structure dealing with non-Medicare enrollees and

the other factors of determining costs, be focused on, at the same

time we change two of those moving parts, increase the AAPCC

significantly, provide for provider-sponsored organizations, and

make the statement that people in rural areas are going to get

more of this increased benefit?

Do you understand my question? I know you’ve looked at it, but

I didn’t see it anywhere in the testimony, of how we’re actually

going to deliver what we say and think we’re going to deliver in

rural areas, other than simply increasing the take-home pay of the

physicians who are there.

Ms. BUTO. I understand what you are saying: more benefits, increased quality of care, and better access.

What has been very good about one of the aspects of the AAPCC

is the requirement that extra benefits be provided, where the payments, under the Medicare law, exceed what it actually costs to deliver care in that area. That difference will increase. It will be larger in rural areas than it is now. Currently, people would argue that

there is very little available at all, which will actually require plans

to offer extra benefits or other kinds of enhancements to beneVerDate 29-OCT-99 12:00 Nov 10, 1999 Jkt 010199 PO 00001 Frm 00025 Fmt 6633 Sfmt 6602 E:\HEARINGS\58724 txed01 PsN: txed01
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ficiaries who use the plan. This is something that we monitor and

carefully consider.

A second point is that we are reconsidering the ACR to determine how to calculate the costs to deliver this package of services.

However, ultimately, the increased payment to rural areas should

go back to the beneficiaries in the form of additional benefits.

Chairman THOMAS. I prefaced all my remarks on in what way

are you going to be able to do that. That’s my concern. Saying it

ought to go back and having a mechanism in which we can show

that, in fact, it’s flowing through, when we don’t have sufficient

data on the non-Medicare enrollees, and coupling it with the suggested problems with the 50–50, I’m just saying there is a lot of

moving parts in there——

Ms. BUTO. There are.

Chairman THOMAS [continuing]. And I don’t have a comfort level

that we can, to the degree we would like to make a statement to

people in the rural areas, say we have increased the amount and

they will receive, in essence, a flow through of that increased

amount. I just don’t see it right now.

Ms. BUTO. I think the key really is, as you pointed out, getting

better data and being able to actually track the use of the additional money. That is something that we very much want to do.

Chairman THOMAS. But nobody’s talking about in 1998 a better

data structure. We don’t have a substitute quality measure for the

50–50 rule. You know, three years down the road we have built in

increased structures there and I don’t want to play catch up when

we’ve taken quite a bit of money, in a very limited time, and

pumped it into areas where I don’t yet see a high chance of gaining

our return on our investment in providing these folks with quality

care at cheaper prices and in choice structures.

We’re going to have to work on that——

Ms. BUTO. That is a good point.

Chairman THOMAS [continuing]. And saying it doesn’t make it so.

Ms. BUTO. I agree.

Chairman THOMAS. I hate to put money in an area and hope the

weeds grow. I would much rather make sure the ground is cultivated and the flowers grow.

Ms. BUTO. I agree.

Let me just make one point about Provider Sponsored Organizations that is slightly different in that regard. Since PSOs are provider based, many collect data. We have data on use by physicians

of services and a basis for developing a way of reviewing an increase in access or services.

Chairman THOMAS. You don’t have to sell us on PSOs. I like especially the idea in the rural area, where it is the doctor moving

to the new structure, rather than the patient having to find a new

doctor in the new structure. That, to me, is the beauty of the ability of the rural doctors and hospital in creating a PSO, to minimize

the fear and concern of the patients. So all of that makes sense to

me.

I just have not seen how we’re going to require a different computation of the ACR based upon the way the world has changed.

That, to me, is an important part of any understanding of how this

is going to occur.

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I guess it’s just a criticism of the fact that if we’re really this

close, then I’m going to start looking at the items that we don’t

have nailed down, because it would be a shame to agree to put in

a structure and then find out it isn’t doing what we wanted, because we don’t have the data, we didn’t plan for it, and we didn’t

structure it in a way to make it happen.

The gentleman from California.

Mr. STARK. Thank you, Mr. Chairman.

Miss Buto, I guess I’m concerned as to why we find a need to

have a different regulation and standard for PSOs than we already

have in place. I don’t think you can define a PSO. I want to start

the other way and ask you to define for me an entity which provides medical care now that wouldn’t qualify as a PSO?

It sounds to me that what you’re doing here, with very little adjustment, is basically removing any and all regulations from what

are loosely called managed care providers.

Ms. BUTO. Not any entity would qualify because——

Mr. STARK. Name an entity that would not.

Ms. BUTO. Well, you have to be able to provide both hospital and

physician services in order to——

Mr. STARK. All right. PHOs, MSOs, IDSs all qualify, right?

Ms. BUTO. Well, again, one of the things—There is not just a definition. There is the issue of do PSOs meet the solvency requirements, will PSOs they meet the quality requirements, et cetera.

Mr. STARK. I read here that all you have to have is a hospital,

or group of hospitals, and physicians. That’s basically your definition. Yes, there are some loose constrictions here on financial stuff,

but not much. You don’t define financial soundness. I mean, you

have one paragraph. ‘‘The entity meets requirements for fiscal

soundness and provision against insolvency developed by the Secretary.’’

Ms. BUTO. You also have to have experience managing risk, although it is experience managing the risk under a capitation agreement with HMOs and other entities.

Mr. STARK. How does a new one have experience if you organize

a new one? The AMA is in here salivating at the thought of having

a bunch of doctors organize these things and they’ve had no experience managing risk. They’re doctors.

What I’m suggesting to you is—let me come back. I don’t think

you can name an entity that is now contracting generally with the

public to provide health care services that wouldn’t qualify. Name

one.

Ms. BUTO. Well, I am unable to, because we have not yet defined

the solvency standards. Until you do——

Mr. STARK. Leave solvency aside. That’s something for the ‘‘bean

counters’’ to deal with. It may or may not have a lot to do with

quality.

Suggest to me a kind of organization that doesn’t qualify for a

PSO and, therefore, has been deregulated.

Ms. BUTO. All right. A physician group practice that does not

have direct arrangements with a hospital, or any arrangements

with affiliated providers, would not meet the requirement.

25

Mr. STARK. They don’t qualify under your plan, so you’re saying

a group of physicians can’t do it unless they affiliate with a hospital. You say here, if they affiliate.

So you’ve got to have a doctor and a hospital, at a minimum,

right?

Ms. BUTO. At a minimum——

Mr. STARK. Tell me a plan that doesn’t have a doctor and one

hospital, or one hospital and one doctor, that wouldn’t qualify.

Ms. BUTO. Would meet the definition of who could be considered,

but you have to also meet these other requirements of managing

risk, solvency, having the other arrangements that are needed to

provide care.

Mr. STARK. Come on. You can’t define those.

Ms. BUTO. That is what the statutes do.

Mr. STARK. There’s nobody who wouldn’t qualify.

The States have been wrestling with this for some time, and

some States have done a better job than others. Why not let them

continue?

Ms. BUTO. I believe that we very much want the states to continue. That is why we have written the statute the way we have,

with basically the States taking over as quickly as the states’

standards can be found to be substantially equivalent to the Federal standards.

Mr. STARK. You don’t have standards that are half as good as

California’s now. Why should California catch up with you? That’s

like a rush to the bottom.

Now, there may be some States that don’t have standards. New

York has very good standards. You’re going to wait until you catch

up to New York, or until New York catches up to you? I don’t

know.

Ms. BUTO. I do not think we want to be in that position. What

we are trying to do is to establish some basic standards. Since

Medicare is a national program, we want to make sure that entities

meet basically the same standards.

Mr. STARK. I read this as you’re removing the standards. I mean,

heavens sake, why would you exempt all these people from State

standards?

Ms. BUTO. Let me try to answer that by saying that the reason

we put this in was, when we drafted the legislation last year, many

of these entities were unable to obtain State licenses.

Mr. STARK. Ah. Why?

Ms. BUTO. For reasons that we thought were worth considering

an alternative set of standards for, having to do with solvency, and

differences in their delivery systems. They also directly deliver

care, and reasonable standards could be applied to these

organizations——

Mr. STARK. So you mean you’re weakening the State standards?

Ms. BUTO [continuing]. These standards do not currently exist.

Mr. STARK. You found State standards that these guys couldn’t

qualify for, right?

Ms. BUTO. They were trying to obtain, in some cases, HMO licenses, that they believed——

Mr. STARK. And they couldn’t.

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Ms. BUTO. The witnesses who will testify after me will probably

testify at greater length—that they believed that these were inappropriate for their kind of system. So it is a delivery system——

Mr. STARK. So what you want to do is replace State standards

that you perceive as being too tough with no standards at all?

Ms. BUTO. We are wanting to recognize these entities as——

Mr. STARK. You don’t know who they are.

Ms. BUTO [continuing]. As different entities from HMOs.

Mr. STARK. Hey, I can recognize them. I can recognize every

schlock, shyster, in the delivery business, and you’re going to qualify him with one bill which says we don’t have any more State

standards. Come on.

Ms. BUTO. No, we are not interested in that, either.

Mr. STARK. But you’re creating that. Why don’t you allow the

States to continue to regulate them? You have in your own bill

where you define—I mean, you turn over to the States—here, the

term physician. I’m quoting from the Social Security Act. It is defined as ‘‘is authorized to practice medicine and surgery by the

State in which he performs such function.’’

Are you going to relieve the State’s authority to recognize a physician?

Ms. BUTO. No.

Mr. STARK. Okay. So you’re relying on the States for that much.

Ms. BUTO. We currently rely on the States for the basic standards under the Medicare HMO program. We intend to do that with

PSOs as well.

Mr. STARK. Then why don’t you continue to do that under this

program?

Ms. BUTO. I believe that the legislation definitely says we want

to do that. We want their laws to govern——

Mr. STARK. Why don’t you come back to us when you have a set

of standards, when you can define for me what the financial standards are, what the quality standards are, how many doctors they

have to have? When you can do that——

Mrs. JOHNSON [presiding]. If the gentleman will conclude.

Mr. STARK. My time has expired, but I would just close, Madam

Chairman, by suggesting that this is an administration that is illprepared to regulate anything. They might as well allow those

States who are doing a good job to continue.

I find this not worthy of HCFA. It is just throwing away what

has been a pretty good regulation. I certainly hope this kind of

stuff doesn’t see the light of day.

Mrs. JOHNSON. I will yield my time to myself as the next questioner.

I certainly disagree with my colleague, Mr. Stark, in many ways,

so in a sense I want to take the question he has raised from a completely different angle.

I was struck by your comment, Miss Buto, that you don’t want

to allow the point-of-service option to an HMO because it would

make it an insurance product. I don’t understand why we would

not want seniors in America to have the option of the variety of insurance products, as long as those insurance products provided all

Medicare benefits and, you know, met the standards of solvency

and quality that States have chosen to impose on their own MediVerDate 29-OCT-99 12:00 Nov 10, 1999 Jkt 010199 PO 00001 Frm 00029 Fmt 6633 Sfmt 6602 E:\HEARINGS\58724 txed01 PsN: txed01
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care systems and that we have chosen to impose on Medicare risk

contracts.

Why wouldn’t we want them to have that option when the market has demonstrated over and over again that the options will be

varied, will offer a far greater range of benefits than anything

Medicare is going to be able to offer in the foreseeable future and

so on and so forth? Why wouldn’t we want seniors to have the option of an insurance product, as long as that product very simply

provided all Medicare benefits and met the solvency standards that

the State imposes for other HMOs in their territory, and the general qualification standards that we have set for HMO risk contracts?

Ms. BUTO. Let me say that we very much support point-of-service. As you know, Medicare risk plans now offer I believe a number

of—there is something like 30 plans which currently offer a pointof-service option.

The reason is fundamentally tied to the way that we are proposing Provider Sponsored Organizations——

Mrs. JOHNSON. Let me get that clear. You say that already there

are Medicare programs offering the point-of-service option?

Ms. BUTO. Medicare risk programs.

Mrs. JOHNSON. But the legislation that you’re proposing will not

allow HMOs that aren’t Medicare risk contractors to offer the

point-of-service option?

Ms. BUTO. No. I am sorry. Our legislation on PSOs does not

allow the point-of-service option for PSOs.

Mrs. JOHNSON. Why?

Ms. BUTO. The reason is——

Mrs. JOHNSON. They’re just another form of an HMO. They have

a different delivery system.

Ms. BUTO. Let me describe for you one of the real rationales—

and this is an issue where clearly there are differences of opinion—

for the Provider Sponsored Organization being able to preempt

State law, whether it is for a short time or having that option preempted for a longer time, as under the Greenwood-Stenholm bill.

This rationale involves fundamentally the plant, the equipment,

the sweat equity of these entities which guarantee that the care

provided will be there, and that the solvency requirement should

recognize that and should allow for other liquidity to cover the outof-plan services.

Point-of-service is an option that says fundamentally that beneficiaries can go outside the plan under a variety of different

arrangements——

Mrs. JOHNSON. Exactly, a variety of different arrangements, and

presumably, someone who qualified for a POS option would have

that reflected in the standards that they were required to meet in

terms of solvency.

Ms. BUTO. The solvency question gets much more complicated, if

they get into point-of-service, and out——

Mrs. JOHNSON. Of course. But that is one of the issues that a

State licensure group would look at.

Are you going to be a narrow PSO that only serves within, or are

you going to be a provider service organization that also offers an

out-of-network option? Then you would have different solvency reVerDate 29-OCT-99 12:00 Nov 10, 1999 Jkt 010199 PO 00001 Frm 00030 Fmt 6633 Sfmt 6602 E:\HEARINGS\58724 txed01 PsN: txed01
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quirements. But why would we, at the Federal level, say you can’t

offer this option if you can meet the regulatory standards to offer

it?

Ms. BUTO. I am just saying that, from our standpoint, it undercuts the basic point of having the preemption for the PSOs to have

really what are regulated insurance products as part of their entire

business.

Mrs. JOHNSON. Why do we need to preempt?

Ms. BUTO. I am sorry. That really does seem to be an issue

where the States really ought to be regulating these products, not

the Federal Government through a preemption, limited though it

might be, by statute.

I understand your point.

Mrs. JOHNSON. I don’t think that this is an irreconcilable problem. My time has expired, but I do think this is a far longer discussion about how we work out Federal and State authority in this

area.

My goal, in working those issues out, is to assure that seniors

have the maximum insurance type products possible, in the freest

market to develop options possible. Because I think that serves

their interest. We have already seen that.

Those are the products that expanded the Medicare benefit program, not the Medicare HMOs, not the Federal Government. So in

looking at this issue, I’m looking for maximum flexibility, because

I think seniors will benefit under that.

Ms. BUTO. I understand your point. Thank you.

Mrs. JOHNSON. Mr. Kleczka.

Mr. KLECZKA. Thank you, Madam Chair.

I don’t necessarily agree with the line of questioning of my good

friend and colleague, Pete Stark, but I would like to re-ask his

same question, just to clarify something in my mind.

Let’s say I run Kaiser, and I have doctors, I have hospitals, I

have experience, I have all the criteria for a PSO/PSN. However,

do you know what I don’t like? I don’t like the regulation in the

solvency standards of the State of California. Like my own home

State of Wisconsin—we’re going to hear from our Commissioner—

they’re tough. So I’m going to go shopping around for a regulator

who is not as tough.

I see that a part of the BBA includes that the Department of

HHS will come up with regulations for solvency and the like, so I’m

going to bet that it’s not going to be as tough as California and I’m

going to become a PSN.

So Pete’s question is, why can’t Kaiser flop, call themselves

something else, and go shopping for some decent regulations, or

easier regulations?

Ms. BUTO. Kaiser could do that.

Mr. KLECZKA. That was his point.

Ms. BUTO. However, I believe that the way we have structured

our proposal it would not be in their interest to change over to a

PSO regulation and to meet PSO standards in reporting. As soon

as we certify that the State of California has a program to certify

PSOs, Kaiser could return to the State of California. I am not sure

that changing to a PSO regulation makes sense. However, it is an

issue, obviously, and one that we are concerned about.

29

The reason why——

Mr. KLECZKA. So the answer to Pete’s question is that any organization that has those components, like a Kaiser, can become a

PSN? They would have to decide whether or not it’s in their interest or what they’re looking for, but that’s the point he tried to

make and——

Ms. BUTO. That is right.

Mr. KLECZKA [continuing]. And I think he was correct.

Ms. BUTO. Our objective is to make sure that the standards we

set are standards that meet all the solvency and quality requirements, which that we would want in any plan of——

Mr. KLECZKA. Okay. But we’re betting on that because the bill

does not set those forth. It says they’re going to be developed,

right? So I don’t know how long, when, et cetera.

Let me let you know where I’m coming from. The question in my

mind is not when we’re going to get PSOs, but how. I have no opposition to the creation of these entities. However, we had the issue

before this committee last session, and the question came about as

to who was going to regulate, who’s going to license these types of

entities. I produced an amendment, at the behest of the Governor

of my State, and the Commissioner, and lost miserably on a roll

call vote before the committee, because those who are promoting

this new entity don’t want State regulation.

However, under the Medicare program now, we have HMOs

doing business with us, right?

Ms. BUTO. Right.

Mr. KLECZKA. Who licenses those HMOs and who provides the

regulation for the current HMOs in the Medicare program?

Ms. BUTO. Well, first of all, Medicare certifies HMOs, but they

must be licensed by the State. HMOs must also meet Medicare’s

requirements, and we certify HMOs. But we require——

Mr. KLECZKA. Okay. But they are also licensed like any other insurer, by the State that they’re organized in, right?

Ms. BUTO. That is correct.

Mr. KLECZKA. So that begs the question, why do we need a whole

new set of Federal rules and regulations on solvency and regulation

when we already depend on the States to give us that for the

HMOs currently doing business with the same program that PSOs

are going to do business with?

Ms. BUTO. The answer is that the current State regulation goes

to the HMO licensing. PSOs have made a case, and we at least

agree with PSOs that there is a good case to be made, that PSOs

can provide directly these kinds of services under risk, under capitation agreement, and have different solvency requirements.

Mr. KLECZKA. Why would they be different than any other organization serving the medical needs of my constituents?

You see, what we’re talking about here is consumer protection,

okay?

Ms. BUTO. I understand that.

Mr. KLECZKA. Because once the PSN pledges the building and

blows the building, that person has to go somewhere for that insurance coverage. That’s the problem that I possibly foresee in the future. So the bottom line to my logic here is that, if it’s good enough

for the Medicare HMOs, it should be good enough for these groups.

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Let me tell you, the proponents of the legislation are the first

ones that I’ve ever experienced that are looking for Federal regulation. Every other business entity in the country and the world

wants to stay as far away from Washington, DC, as possible, and

wants the regulators closer to them—i.e., in the States. Then, all

of a sudden, for this particular type of entity, the Federal Government is going to offer a better deal. I question that and I’m very

concerned about that.

Ms. BUTO. The recently enacted ‘‘Health Insurance Portability

and Accountability Act of 1996’’ provides that the Federal Government sets standards. Therefore, I do not believe this is entirely

without precedence.

Mr. KLECZKA. Again, let me finish by saying, if it’s good enough

for the HMOs in the Medicare program, it should be good enough

for these new entities.

Thank you, Madam Chair.

Mrs. JOHNSON. Thank you.

Mr. McCrery.

Mr. MCCRERY. Thank you, Madam Chair.

This is a most interesting discussion. Mr. Stark, Mr. Kleczka,

and perhaps their Democratic colleagues, argue in favor of devolution of power to the States.

Mr. KLECZKA. Would the gentleman yield?

Mr. MCCRERY. Sure, I would be glad to.

Mr. KLECZKA. I have learned well over the last two years, that

all the knowledge and power rests in the States, and we’re trying

to push everything to the States. Eventually we’re going to push

the fiscal liability, but the Governors don’t know that yet. [Laughter.]

Mr. MCCRERY. But, besides the fact that this is great fun, we

have raised a lot of good questions today. I want to commend the

Administration for at least putting forth a proposal on this subject.

It’s a very important subject, I think one that deserves a lot more

discussion.

Many of these questions, many of these same concerns, were

raised last year and the year before, and although we did reduce

our thinking to legislation, as you know, and the President chose

to veto it, much of what we had in our legislation is reflected in

your proposal. There are some differences.

I look forward to working with the administration and with my

colleagues with different views, to work out a suitable proposal to

allow the market to offer this different kind of delivery system to

seniors.

Thank you, Miss Buto.

Ms. BUTO. Thank you.

Mrs. JOHNSON. Mr. Johnson I think is next.

Mr. JOHNSON of Texas. No questions.

Mrs. JOHNSON. Mr. Ensign, Mr. Christensen?

Okay. Thank you very much, Miss Buto. I know this is the beginning of a long and extensive conversation, but I do hope that this

year it will come to fruition, as I think it’s an important issue.

Thank you.

Ms. BUTO. Thank you so much.

31

Mrs. JOHNSON. If the next panel will come forward, we have Gail

Wilensky, Chair of the Physician Payment Review Commission, accompanied by David Colby, Deputy Director of the Commission;

and Josephine Musser, Chair of the Special Committee on Health

Insurance, and President of the National Association of Insurance

Commissioners, and Commissioner of the Office of the Commissioner of Insurance, State of Wisconsin.

I would have to say this was an extremely important source of

information as we discussed these issues two years ago, and very

helpful as we wended our way through. I know you will be an important consultant as we move forward. Of course, Dr. Wilensky

has long contributed to the work of this committee and of the Executive branch as well, and we welcome the panel.

Mr. KLECZKA. Madam Chair, if I might have a moment to also

extend a welcome to the Commissioner of Insurance from the State

of Wisconsin. Commissioner Musser is the one who got me in trouble on this issue last year, and I’m going to ask her, in her comments, to get me out of trouble now. I look forward to her testimony. It’s good to see you here.

Ms. MUSSER. I’ll try.

Mrs. JOHNSON. Dr. Wilensky.

STATEMENT OF HON. GAIL R. WILENSKY, PH.D., CHAIR, PHYSICIAN PAYMENT REVIEW COMMISSION; ACCOMPANIED BY

DAVID C. COLBY, PH.D., DEPUTY DIRECTOR, PHYSICIAN PAYMENT REVIEW COMMISSION

Ms. WILENSKY. Thank you, Madam Chair. I appreciate the opportunity to present the views of the Physician Payment Review Commission on provider-sponsored organizations. This is an area that

we have looked at and commented on in the last two reports, including the one that was issued about three weeks ago to you.

The view of the Commission is that PSOs represent both opportunities and challenges, and we have come to some recommendations with regard to how they may be treated.

The opportunities are that they present a way to increase the

availability of private plan options in areas that have had some difficulties. Those are particularly some of the rural areas and some

of the smaller urban areas, but, of course, they may make a difference in larger urban areas as well, and, in general, because they

offer options that have not previously been available to seniors, and

we applaud that.

There are some challenges, however, that the Commissioners

have been concerned about. In particular, it is to make sure that

the seniors are protected, protected both from potential plan failure

and also protected in the sense of making sure that quality health

care is provided in these plans, and finally, as a matter of equity,

to make sure that there are not advantages created for certain

kinds of plans relative to other kinds of plans.

When the Balanced Budget Act was passed in the last session of

Congress, there was a waiver of the usual requirements of State licensure and some new Federal standards with regard to solvency.

The staff of PPRC attempted to assess how much change has occurred in the last two years, and what effect that might have on

the need for new regulations and legislation.

32

As best they could tell, there appears to be substantial growth

and changes going on in the States, in terms of how they are attempting to deal with the PSOs. There also appear to be a number

of PSOs that have come forward indicating that there perhaps may

be fewer barriers and obstacles to the development of PSOs than

appeared to be the case in 1995.

The basic position of PPRC is that it is important to apply the

same standards to all plans, but that it is also important to have

some flexibility in terms of the establishment and the enforcement

of these standards. In addition, it is very important to find direct

measurements for quality and to get rid of or replace the 50–50

rule, which has not been a good way to assure quality and has also

stopped the development of some of the plans that could provide

health care.

In terms of the main policy options, there are really three questions that you need to deal with. The first is, should the PSOs be

subjected to the same standards. We believe the answer to that is

yes. We think there is a general consensus when it comes to quality assurance. The big debate has been whether or not there should

be the same standards when it comes to financial reserves, deposit

requirements, and to the minimum enrollment.

The question that I think the Congress needs to answer for itself

is, whether there is a way to really guarantee the provision of contractual obligations in the case of financial failure or bankruptcy?

If there could be, that might allow a lot more leeway.

The second issue is to find direct measures so that you can replace the 50–50 rule, that would allow the development of a lot of

plans that are specifically geared toward the Medicare population,

although we don’t expect that that would be all plans by any

means.

Then the third is the issue that you were discussing at the end

of the last witness, which is who ought to be enforcing and developing the standards, the State or the Federal Government.

As you know, historically it’s been the States. Our position is

that it ought to continue as it has been, perhaps relying on NAIC

to set a model that would have some consistency, since there is legitimate concern that some States have not been nearly as well developed in terms of their standards and may, in fact, have created

barriers.

I personally—and I’m speaking for myself and not the Commission—would suggest that you consider an intermediate option as

well. That is the use of provisional certification and licensure, if

one of two occurrences happen. The first is if you have a Medicare

only plan once you’ve allowed that now to occur by replacing the

50–50 rule. It would seem to me reasonable to allow for a Federal

certification in that case, or secondly, if a plan can show unreasonable barriers, which I assume the other witness will assure us

won’t occur. But if it could be shown, then to have a temporary or

provisional licensure, while that problem is eliminated, seems to

me to be a reasonable intermediate position. Again, I would like to

stress that is my personal opinion and not the opinion of PPRC.

Thank you.

[The prepared statement follows:]

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Chairman THOMAS [presiding]. Thank you, Gail. I’m sorry I

wasn’t here to welcome you. I have your testimony and I read it

and appreciate it.

Next we’ll turn to Josephine Musser, who has been a stalwart

companion on this march to understanding. We appreciate your

willingness to testify before us. Any written testimony you have

will be made a part of the record, and you can address us in any

way you see fit.

STATEMENT OF JOSEPHINE W. MUSSER, CHAIR, SPECIAL

COMMITTEE ON HEALTH INSURANCE, AND PRESIDENT, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS;

AND COMMISSIONER OF INSURANCE, STATE OF WISCONSIN

Ms. MUSSER. Thank you, and good afternoon, Mr. Chairman, and

members of the subcommittee.

I am Jo Musser, President of the National Association of Insurance Commissioners, and the Commissioner of Insurance for the

State of Wisconsin. I am here today on behalf of the members of

the NAIC Special Committee on Health Insurance, which is 42

member States.

As Chair of the committee, I want to thank you for the opportunity to speak, but I also would like to speak on behalf of my

membership, to say how much we appreciate your leadership on

health care issues, which are of great importance to the States.

The State insurance regulators play a key role in safeguarding

consumers across the Nation. An important part of that role is encouraging competition. This maximizes choices for consumers. We

do that by adapting to changing markets, changing markets in all

lines of insurance. We are adapting to the evolving market in

health care insurance and delivery systems which are presently

emerging in the market.

To meet the needs of that market, the States have initiatives

well underway for a framework design to oversee health insuring

organizations by the function that they perform and not by the acronym they might use.

You are being asked to consider special treatment for risk-bearing provider organizations serving the Medicare managed care program. These proposals would deprive our most vulnerable population, the elderly and the disabled, of crucial consumer safeguards.

Approving these proposals will also have a far-reaching impact on

the entire insurance marketplace.

Protecting the consumers is the primary responsibility of State

insurance regulators. We meet this responsibility with tools developed over years of experience. We approve organizations for licensure to engage in the business of insurance, including an application of time-tested financial requirements. We also continually

monitor an organization’s ongoing financial condition and market

conduct through extensive examinations and financial analysis.

We have the authority to act quickly to supervise and rehabilitate any of these organizations they show signs of financial distress. We maintain sophisticated financial data bases for auditing

and exchanging information within the State and among the States

through the NAIC.

42

Having just enumerated some of the expertise of the State insurance departments, I would like to emphasize that the individual

pieces of State insurance regulation form a comprehensive and integrated whole. The individual components are important regulatory tools, but their effectiveness is only achieved by their use

with complementary and interdependent components.

As you can see, the State insurance regulation is a great deal

more than merely verifying an organization’s initial net worth. To

provide the same level of consumer protection, the Federal Government would need to duplicate the States’ existing regulatory framework. We feel it is a costly and unnecessary duplication, not to

mention the total burden to the health care system.

The States are major purchasers of health benefits as well, and

a competitive marketplace is advantageous to the States just as it

is to the Federal Government and other large employers. The

States strongly favor increasing consumer choices. A healthy and

competitive marketplace, with its myriad of consumer choices, can

be achieved through the integrated regulatory framework already

established by the States. The regulatory oversight provided by the

States is both vital and necessary, especially to community-based

organizations, because a more highly competitive environment increases the risk and the magnitude of insolvency.

The States are keenly aware of and constantly adapting to the

rapidly evolving health insurance market. State insurance regulators are comprehensively evaluating the range of issues which

are presented by the diversity of organizations in today’s marketplace. Organizations that are sponsored by providers participate in

and make an important contribution to the health insurance market today. The current regulatory structures do not impose a barrier to the entry of different types of organizations operating in the

marketplace. This is because the States have been responsive to

the changing market needs.

This is borne out by the active presence of licensed organizations

owned and controlled by providers in many States. In fact, it is reported by the PPRC and others that approximately 15 to 20 percent of the existing HMOs in this country are organizations sponsored by providers.

In my own State of Wisconsin, as you’ve heard a number of

times, the majority of the HMOs, 18 of the 26, were originally organized and sponsored by physicians and hospitals. Wisconsin offers

an example of the States adapting to the environment and the

evolving marketplace. In the late 1980s, my department saw the

bankruptcy of several independent practice associations, or IPA,

physician networks. To help prevent these failures in the future,

Wisconsin solvency standards were increased in 1987 to reflect the

financing necessary for the level of risk that was being assumed by

the organizations.

Health insuring organizations, with all shapes and varying forms

of ownerships and affiliations, are licensed by the States because

of the insurance function that they perform, not according to

whether or not they are sponsored by providers. To better meet the

needs of emerging health insuring organizations, the States, working through the NAIC, are developing a uniform model for health

insuring organizations as part of the CLEAR effort, Consolidated

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Licensure of Entities Assuming Risk. This effort seeks to protect

consumers and promote a more competitive marketplace by ensuring that entities that perform the same or similar functions are

subject to a level regulatory playing field, regardless of their acronym.

The Ohio Insurance Department, which has proposed uniform licensure to govern all health insuring organizations, offers an example of the CLEAR initiative. The States recognize that some of the

organizations and arrangements in today’s market may warrant

flexibility in regulatory standards.

The NAIC’s risk-based capital, or RBC, formula for managed care

organizations is the most notable component of the CLEAR initiative. This recognizes the structural differences among organizations. The formula sets minimum capital requirements according to

the level of risk being assumed by the organization and provides

consumer assurances that services promised will be services delivered.

The States are an essential part of the overall framework that

governs Medicare managed care. We are committed to protecting

all the consumers, while adapting to the regulatory environment.

The States can do this best by continuing to license health organizations, including provider-sponsored organizations.

Thank you.

[The prepared statement follows:]

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Chairman THOMAS. Thank you, Jo. The ‘‘$64,000 question’’ from the time we’ve begun this process

is, if there is a distinction, is it a distinction that makes a difference. I’m waiting for the ‘‘silver bullet.’’ I just have to tell you,

when you say the same or similar, you don’t give me any comfort

level, because that means there’s a difference, and is the difference

enough to create a different standard. That’s what I’m hoping

you’re going to provide to us as you go through this study.

But I want to get some understandings, and I guess, Gail, you’re

the one who would be most likely to try to respond to this.

The American Hospital Association, in testimony before us a

short time ago, in talking about PSOs versus HMOs and creating

an argument that PSOs are better than HMOs, the points they

made in terms of why they’re better is, one, in their testimony,

AHA said ‘‘They put clinical decisions in the hands of those most

capable of balancing efficiency and patient care.’’ Another quote:

PSOs are more likely ‘‘to focus on improving the health of the entire community.’’ A third quote, ‘‘Economic and patient care incentives for PSOs are all aligned.’’

Do you have any credible study or any evidence that you could

provide this subcommittee that PSOs actually provide those advantages to enrollees or beneficiaries beyond traditional HMOs?

Ms. WILENSKY. I think it——

Chairman THOMAS. Outside of any pamphlet or brochure that

might otherwise claim to be——

Ms. WILENSKY. I think basically it would be impossible to do so.

In the first place, they’re very new entities. To be able to assess

the impact would mean they would have had to have been around

for a while and then assessed.

But even beyond that, the fact is you have provider-sponsored

HMOs. You know that. And Wisconsin is a very good example.

Therefore, the notion that there is something that would distinguish the motivation just on that basis just makes no sense.

In terms of enrollment and the number of years that they have

been going on, it is very clear that PSOs, in general, are just

younger entities. So I think that anyone who seriously wanted to

do a study would have to wait a while. But you can at least raise

a question on that because of all of the provider-sponsored HMOs.

Chairman THOMAS. My argument would be let’s get them up and

running, with reasonable and appropriate structures, and let people vote with their feet. That’s my preferred way to always resolve

who’s better.

On page 15 you talk about the various approaches, and that in

the balanced budget amendment we took what you call a stopgap

measure. It was taken simply because we didn’t have adequate information, nor was anyone able to provide us with a relatively solid

evidentiary position that we should leave it entirely to the States

or that we should move it to the Federal level.

It seems to me, if we can get a model that we can use, all we

need to do at the Federal level is say this is a pretty good model

and, you know, the old business of Federal preemption, that if

States don’t follow up, we’ll do it. But we didn’t have that. So I

thought what I came up with was, one, something that the House

and the Senate could agree to, but I guess I would ask you again.

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Can you give me any level of confidence that there would be no

artificial barrier placed in front of any PSO in any State?

Ms. WILENSKY. No, I certainly can’t, and the presumption is that

in some States there will be obstacles or barriers of some kind,

which is why I think having the safety valve of being able to appeal to the Federal Government is attractive.

Chairman THOMAS. Additionally in your statement, on page 2,

you talk about the same standard should apply to all the plans participating in Medicare, and then you go on to say, however, you’ve

got to understand the differences in plan design and some flexibility might be appropriate in establishing and enforcing these

standards. So if you’re going to have the same but maybe some

flexibility, it’s kind of like same or similar.

What types of different standards do you think should be applied

to PSOs? What rationale can you provide for the need to handle it

differently? I know that doctors argue that they have, in essence,

professional sweat equity that they bring to the table. This takes

us back two or three years ago, with all the discussions that we

had.

I guess the question is, by your making this statement, do you

believe there are differences that would require handling them differently?

Ms. WILENSKY. We think there are differences, if the seniors are

protected, that are worth taking into account. The issue is not only

the solvency requirement but what kind of assets you might want

to use to count toward solvency.

With regard to the sweat equity issue, the question is, if you

have an organization that declares bankruptcy or is otherwise financially insolvent, is there a way to assure the seniors that the

individuals or the institution, if there’s a hospital attached, will

continue to provide services through the plan, even in the presence

of a bankrupt organization. If there is a way to write a contractual

obligation that did that, that was the kind of flexibility that we had

in mind. If it’s not possible, and if the arrangement is only with

the organization, per se, then once it’s bankrupt, the assurances

don’t mean anything and you haven’t resolved the problem.

So it was really a matter of principle that we thought was important to put in place. How you would actually carry it out, as you’re

indicating, gets very tricky.

Chairman THOMAS. Obviously, we wouldn’t be carrying on these

hearings, nor would we have different approaches, if we had a

yardstick for solvency that we could lay beside any different model

to determine the level of coverage necessary.

I guess, asking the same question the other way around, Jo, do

you have a comfort level that there is no State currently placing

unnecessary barriers in front of the approval of PSOs that would

warrant us not talking about a fallback that we had in the BBA,

to allow for someone, if they made the case, to deal with some entity other than a State, if the State was blocking them?

Ms. MUSSER. I can’t guarantee you, no, that every State will

never pose any kind of what may be presented to you as an unreasonable barrier. I can tell you that, in looking at the States, how

they calculate admitted assets, how they calculate risk-based capital or capital requirements, and their licensure process and how

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long that takes, the other financial filing requirements, their auditing requirements, in the current setup, whether it’s CISNs in Minnesota or ODSs in Iowa, or HMOs in Wisconsin, or PSOs in Georgia. There are many States who are well underway to accommodate

provider-owned organizations.

My question, in part, is—and my HMOs are owned by physicians. They address a number of the points that were made by the

hospital association, and now——

Chairman THOMAS. Jo, we’re pinched for time. Everybody else

has left to vote. I think some members want to hear your response

to this, and an additional one. So the subcommittee will stand in

recess until I get back.

Ms. MUSSER. Thank you.

[Recess.]

Chairman THOMAS. The subcommittee will reconvene.

When we last talked, just to let the subcommittee members

know, I asked two unfair questions and they were answered appropriately. One to Dr. Wilensky, could she assure me there would be

no need for a relief, a safety valve structure, in case States, for

whatever reason, would not play the game fairly, in essence, and

then the reverse question to Jo Musser, could she assure me—and

she began her discussion by saying she can’t guarantee.

To a certain extent, we’re right back to where we started. I don’t

want to create a Federal approval structure unless someone tells

me that’s the only option. I don’t have a comfort level that we just

leave it to the States, because we don’t know whether there is sufficient sophistication, willingness, cooperation, understanding, to

deal with the approval of PSOs in unhindered fashion. That’s why

we wound up with the structure we had in the BBA, and until I

get a comfort level otherwise, that’s the structure that I’m going to

look at.

What I would ask you, Dr. Musser, if you can’t guarantee me

that no State wouldn’t, will you guarantee me that you’re going to

give me a work product in your stated time frame which begins to

shed light on the experiences out there, to the best of our current

experential knowledge, on some kind of a yardstick for the question

of solvency risk.

Ms. MUSSER. Yes, sir, I can. We have been working on the fast

track, to be sure, on our risk-based capital standard. It is moving

along beautifully.

The risk-based capital standard is a calculation that determines

the level of working capital necessary to start up a business like

this, and it takes into account a variety of managed care credits,

including equity arrangements, compensation arrangements,

whether there are withholds or capitation or partials. It takes into

account buildings and equipment, takes into account reinsurance

agreements, and it is, again, by function, not acronym, so it doesn’t

apply to any specific entity, which we would argue against, but,

rather, whatever the States chooses to call it.

It starts out with a risk level, and then, as an organization lays

off risk through its structure—whether it’s reinsurance or capitation, partial capitation or equity—it gives credit toward that capital

requirement and reduces it through these various credits.

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That formula, as I said, is on the fast track. I’m very, very

pleased with its development. I told you that we would have it done

by June, and if things continue to go as they are going, we will.

Chairman THOMAS. Thank you very much. That’s of some comfort. Beginning or end of June? [Laughter.]

Ms. MUSSER. Well, our national meeting is actually June 6–13,

so if things continue to go well, it will be presented there.

Chairman THOMAS. I appreciate that. Often in the movie industry they have a preview of coming attractions. If we might be able

to take a look at it prior to any formal structure, just to begin to

get some ideas—because our timetable may not be able to just

await your arrival at the national meeting and the official send off.

Ms. MUSSER. I’ve been preparing a document that explains it in

plain English, and it covers these various credits. We’ve got a draft

document that I will give to you as soon as we can get it cleaned

up.

Chairman THOMAS. Thank you very much.

Mr. Stark.

Mr. STARK. Well, I would like to thank the witnesses for their

input.

What I’m hearing, Ms. Musser, from you, is that we should allow

the State commissioners to continue to do what they seem to do

very well.

I did understand that Glenn Pomeroy, who I suspect is the brother of our own Earl—it keeps running in the family. There’s a lot

of nepotism among these insurance commissioners, huh? He testified that, in his 39-State survey, 27 States have processed PSO applications in an average turnaround time of 90 days.

Now, nobody gets away with that kind of bragging without somebody criticizing him. But you’re not doing so bad. It was Columbia

Hospital who said it takes 18 to 24 months, and I can understand

that. Maybe it ought to take 18 years for them. [Laughter.]

So what Glenn would suggest to us that it isn’t so bad having

the States continue to try and protect the consumers and keep

these organizations solvent.

Gail, I guess what you’re saying is that we might have some

problems if we just remove the regulations, and admittedly, there

are different kinds of entities, and we maybe ought to be more

flexible in how we apply regulations, but we ought to try and have

uniform regulations for all providers. Is that a fair——

Ms. WILENSKY. Yes, and to keep it basically at the State level,

perhaps with an appeal, but to have the State remain the main

line of defense.

Mr. STARK. In support of your testimony, I’m going to suggest

something to my colleagues, and it may suggest to them that perhaps we ought to keep this uniform and not start making special

exceptions for special groups.

I know, Dr. Wilensky, that you’re familiar with physician reimbursement laws, are you not?

Ms. WILENSKY. Yes.

Mr. STARK. And I know you’re aware of the angst that has

caused among medical providers and in the industry, and that

there have been more lawsuits and more investigations and more

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exceptions and more ways to try to get around the referral and

kickback laws, or conform with them in creative ways.

I’m suggesting that once we start having all different levels of

providers of managed care, we’re going to get into that same box

again. We’re going to create a whole cottage industry of lawyers

trying to figure out how to shoehorn insurance companies and qualify them as PSOs and we’re not going to have much time to do anything else.

Is that a fair analogy, just to suggest that what we have is working—okay, it needs improvement—and if there are going to be new

types of providers, let’s try and just keep one standard as we have

now.

Ms. WILENSKY. I think the enforcement provisions of the State,

in the best States, is much more extensive, as you had mentioned

earlier, than what we’re likely to get at the Federal level.

My personal opinion—again, it was not a PPRC recommendation—is that one of these entities could appeal to the Secretary. If

the Secretary agrees in that there’s a problem, provide provisional

licensure or certification.

Mr. STARK. Yeah. That makes more sense to me, if the——

Ms. WILENSKY. But not write a separate law.

Mr. STARK. Thank you very much. I want to thank both you and

Ms. Musser for enlightening us.

Chairman THOMAS. The gentlewoman from Connecticut.

Mrs. JOHNSON. Thank you.

Actually, that’s pretty much the structure that was in the Balanced Budget Amendment in the Medicare reform of the 104th

Congress. I think it does give us some pretty good guidance as we

start this debate now.

I want to turn to a different aspect. The administration said

there were four controversial areas, one of them being quality assurance. You know, the 50–50 rule is 15 years old. Surely, with all

the technological advances that have taken place in that time, we

can do better than that. I don’t understand why, when the National

Commission on Quality Assurance has developed the HEDIS system, and now has three years of reporting under their belt—this

is a system that was specifically developed to look at quality across

all kinds of plans, regardless of whether they were HMOs or managed cares or whatever. Now we have three years of data reported

under this system.

Why can’t we use that system and require that these plans be

approved by either an NCQA approval process for quality, a quality

assurance process, or something along that line? Why does the Federal Government rely on a 50–50 rule that is basically irrelevant

instead of at least moving that far to an NCQA quality assurance

standard based on HEDIS’ experience?

Ms. WILENSKY. I think the answer is the Federal Government

can and should. Kathy Buto mentioned that HCFA was planning

to have regulations, I think, in 1998. It might be helpful to have

a sense of the Congress or a directive to have those, indeed, issued

in 1998. I think the 50–50 rule is a proxy that was excusable in

the 1980s, but the work that has been done really ought to supersede 50–50.

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Under HEDIS now, and under Medicare’s requirement to report

HEDIS information for Medicare managed care plans, which is now

going into effect, there is just reporting but there is no mechanism

in place to audit and take action based on the information that’s

reported. That’s what HCFA needs to do as the next step, but I

think it needs to do it now.

Mrs. JOHNSON. Why wouldn’t it be reasonable to require that

these plans meet the NCQA standard and then, by ’98, HCFA have

a specific standard from this data? I mean, even in an interim

sense, their standard is more quality focused and does more about

quality care in a network setting than 50–50 rules do.

Ms. WILENSKY. NCQA has two functions. One is an accreditation

function, and the second is that it establishes a data system. So the

issue for HCFA now is, when the information is reported in the

HEDIS format, if there are measurements that are not met, what

happens next. That’s really the issue, the ongoing measurement,

the ongoing quality assurance, and the steps that need to be development to remedy any failures.

Mrs. JOHNSON. But given those two different functions, why

couldn’t we use their certification program until the Federal Government evaluates the data and either alters or adjusts it for Medicare, or perhaps doesn’t, depending on what they find?

Ms. WILENSKY. I think the less-than-perfect state of HEDIS is

far better, in my mind, than the 50–50 rule, personally.

Mrs. JOHNSON. Thank you very much.

Thank you, Mr. Chairman.

Chairman THOMAS. The gentleman from Nebraska.

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

Mrs. Musser, I wanted to find out from you what enforcement

provisions you have in place for those PSOs that might be in noncompliance?

Ms. MUSSER. If I understand your question correctly, do you

mean noncompliance with financial?

Mr. CHRISTENSEN. Yes.

Ms. MUSSER. I see. Okay.

In Wisconsin, we don’t have PSOs. We have HMOs, which are

the same structure as you’re talking about. So first I will address

Wisconsin.

We have financial reporting requirements; we have auditing requirements. Upon audit and financial analysis, and the submission

of their quarterly and annual financial statements, if they’re approaching a level of surplus or solvency that troubles us, as soon

as we decide that it becomes troublesome, we go in and work with

management. We can help them find additional sources of capital.

We can recommend—in fact, strongly recommend that they change

management, if that’s the problem. We can have them sell off

pieces of lines of their business, et cetera. We have a surplus level

that is required, and if they fall below that level, we can put them

into liquidation.

We in Wisconsin have very few liquidations because we get involved much earlier, and we try to preserve the integrity of the organization. Other States are very similar as it relates to how they

regulate for solvency, in all lines of insurance. In fact, what I just

told you applies to all lines of insurance.

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Mr. CHRISTENSEN. I may have misunderstood you. Did you say

you have no PSOs in Wisconsin?

Ms. MUSSER. We have no PSOs in Wisconsin. We have HMOs in

Wisconsin, which are owned by doctors and hospitals.

Mr. CHRISTENSEN. How would you separate the two—if you

wanted for lack of a better definition, I think you probably may

have PSOs and HMOs. How would you describe the difference in

Wisconsin?

Ms. MUSSER. Well, you know, it’s confusing to me. I must be very

honest with you. Eighteen of our 26 HMOs were founded and

owned, initially started up by physicians, large specialty clinics

owned by physicians, sometimes with hospitals. They, in fact, make

the medical decisions, they make the utilization review decisions,

they hire an outside firm to do claims management, a third party

administrator. They have a licensed company, called an HMO in

Wisconsin.

We do have reduced solvency requirements for HMOs than indemnity insurers. Ours are a million five for HMOs, or three percent of premium. If they choose to go into the point-of-service business, they have to come up to ten percent. So we do regulate by

function now, and you could call them really whatever you want.

We happen to call them HMOs.

Mr. CHRISTENSEN. So if you’re putting a little T-bar chart together on the differences between an HMO and, say, a PSO, a

quasi-PSO, in the State of Wisconsin, do you have anything on the

right side of the chart?

Ms. MUSSER. No. I mean, there are no barriers for providers

owning and operating risk-bearing entities in Wisconsin. They put

together a million five, they file a business plan, we approve their

licensure and their geographic service area, we have 26 HMOs covering virtually every part of the State, rural and urban. You could

call them PSOs. Iowa would probably call them ODSs. Minnesota

would call them CISNs. You know, it’s just a matter of terminology

or acronym, as I said earlier.

Depending on the function or the level of risk they take, we do

have varying levels of capital requirement. The risk-based capital

formula I think will improve on that dramatically. It’s a very dynamic formula that really gets at many more of the different structures that we’re seeing emerging now.

Mr. CHRISTENSEN. Thank you.

Chairman THOMAS. The gentleman from New York?

Mr. HOUGHTON. No questions.

Chairman THOMAS. I thank both of you. Gail, I’m sure you’ll be

back here fairly soon, continuing to do a good job.

Jo, when I next see you, I expect to have something in your hand

for us. If I don’t see you before then, good luck in bringing it about.

Ms. MUSSER. Thank you.

Ms. WILENSKY. Thank you, Mr. Chairman.

Chairman THOMAS. We would ask the next panel to come forward. John Brownlow, Vice President and Chief Operating Officer,

Florida Hospital Healthcare System, Orlando, Florida, on behalf of

the American Hospital Association; Mary Nell Lehnhard, Senior

Vice President, Office of Policy and Representation, Blue Cross and

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Blue Shield; and Dr. Richard Corlin, Speaker of the House of Delegates, American Medical Association.

I want to thank all of you for your willingness to testify. If you

have a written statement, it will be made a part of the record. You

may inform us, in the time you have, any way you see fit.

We will start with Mr. Brownlow and work to you folks on his

left.

STATEMENT OF JOHN BROWNLOW, CHIEF OPERATING OFFICER AND VICE PRESIDENT FOR MANAGED CARE, FLORIDA

HOSPITAL HEALTHCARE SYSTEM, ON BEHALF OF THE

AMERICAN HOSPITAL ASSOCIATION

Mr. BROWNLOW. Thank you.

Mr. Chairman and members of the committee, my name is John

Brownlow. I am Vice President and Chief Operating Officer of Florida Hospital Healthcare System, a provider-sponsored organization

located in Orlando, Florida.

Our provider-sponsored organization is made up of 648 physicians, five hospitals, 13 walk-in medical centers, and 14 ancillary

providers.

I am pleased to be here today on behalf of the American Hospital

Association and its diverse members, 5,000 hospitals, health systems, networks, and other health care providers.

Before I begin with our experience, I would like to say we greatly

appreciate the work of Chairman Thomas, in trying to make PSOs

a Medicare option through his drafting of the original legislation

reported out of this committee in 1995, and we commend Representatives Greenwood and Stenholm for introducing bipartisan

PSO legislation in this Congress. AHA strongly supports this legislation.

I want to briefly share with you some of our firsthand experiences as a provider-sponsored organization that has entered into a

Medicare risk contract with HCFA under the Medicare Choices

demonstration project. We believe we have a valuable story to tell

about the real life experience of a PSO.

The name of our health plan for seniors is called Florida Hospital

Premier Care. We determined that it was important to include the

name ‘‘Florida Hospital’’ in the health plan name, since Florida

Hospital has been in the community for over 80 years and currently serves almost half of the traditional Medicare population in

the greater Orlando market, which is comprised of about 140,000

Medicare beneficiaries. Currently, 30 percent of Medicare beneficiaries receive benefits from Medicare risk HMOs in our market.

This is a level that has been relatively flat in recent years.

After receiving approval from HCFA on December 26th to be a

PSO in the demonstration project, we ran the first announcement

of our new plan in the newspaper on December 31, and again on

New Year’s Day. The response to our early marketing efforts has

been tremendous. On the first day our newspaper ad ran, we received over 500 calls from interested Medicare beneficiaries. On

January 2, the first business day after the New Year, our staff

were overwhelmed from the 2,500 responses that were received.

FHHS’s early marketing results have shown that 60 percent of

our enrollees have come from traditional fee-for-service Medicare,

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and 40 percent have left their Medicare HMO to join a health plan

locally owned and operated.

I would like to point out some of the differences between our

health plan versus a traditional and typical Medicare risk HMO,

some of which HMOs have been in the market for over five years.

First, our roots are in the local community and we’re there to

stay. We’re enrolling Medicare beneficiaries that have grown to

trust the hospital and physicians in the community based on providing compassionate and quality health care. We know that by

sponsoring and putting our name on the health plan, we are relying on a reputation that the hospital and physicians have spent

decades developing.

Based upon a survey of our current members, over 80 percent of

the individuals mentioned that the hospital’s reputation in the

community, and the fact that the plan was sponsored and owned

by a local community hospital, was the basis for their decision.

Second, we bring health care decisions back to local providers.

We believe that physician leadership is critical in any high-quality

health care delivery system. That means having decisions made by

local providers with the first-hand knowledge that a beneficiary

needs.

Our affiliated physicians have freely given hundreds of hours

each month over the last three years participating in the administration of the organization, developing the medical management

process, policies and procedures, reviewing patient care, and providing input on how to make the managed care process better by

putting the patient first.

Many of the primary care physicians that are in our network had

never experienced or participated in a Medicare risk plan before

because of all the ‘‘hassle’’ they experienced with commercial HMOs

in the past. Not until they had a say and were engaged in the process of managing a PSO did they choose to participate in the Medicare risk plan.

Additionally, PSOs will help pull down health care costs by directly managing both the use of services and the cost of producing

these services. PSOs will reduce administrative expenses that will

both save Medicare dollars and increase the percentage of health

care dollars going to patient care and member health improvements.

To ensure PSOs are a viable option for seniors, Medicare should

enter into contracts only with PSOs that provide coordinated care,

accept financial risk, and meet Medicare’s risk contracting standards.

Thank you.

[The prepared statement follows:]

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Chairman THOMAS. Thank you very much.

Miss Lehnhard.

STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE PRESIDENT, OFFICE OF POLICY AND REPRESENTATION, BLUE

CROSS AND BLUE SHIELD ASSOCIATION

Ms. LEHNHARD. Mr. Chairman, members of the committee, I am

Mary Nell Lehnhard, Senior Vice President for the Blue Cross and

Blue Shield Association, and I’m here today representing all the

Blue Cross and Blue Shield plans.

I would say at the outset that we welcome competition from

PSOs and we believe absolutely that they should be a choice for

Medicare beneficiaries. We do not believe they should be exempt

from State licensure. Under current Medicare law, any organization that accepts Medicare capitation and signs a Medicare risk

contract must meet all Medicare standards and be licensed by the

State as meeting all local consumer protection laws.

This rule applies to HMOs and PSOs. This rule assures that

Medicare beneficiaries get the strongest possible set of protections,

all State laws and all Federal Medicare rules. It is not necessary,

nor is it good public policy, to waive this important requirement for

PSOs to be in the program, and I would like to make four brief

points.

First, PSOs can meet State standards. Many PSOs are already

operating under State licensure laws, and many are in the process

of approval. The NAIC risk-based capital will provide a more sophisticated way to set financial standards for these organizations.

In fact, according to AHP, 14 percent of Medicare risk plans already are PSOs. I would repeat that. Fourteen percent of Medicare

risk plans are PSOs.

Secondly, timeliness is not a barrier. The NAIC has done a survey, that 75 percent of applications submitted by PSOs are processed in 90 days.

Third, waiving the consumer protection laws would be a tremendous disservice to beneficiaries and would result in a different and

confusing set of standards based on what kind of products you

have. Beneficiaries wouldn’t know whether they’re protected by

State and Federal law, or just Federal law. Experience suggests

that they would ask for essentially a truth in labeling to figure out

how their plan is protected.

In addition—and this is extremely important—all beneficiaries in

PSOs would lose very visible State protections. These State laws

will frequently go beyond Medicare Federal rules, no matter how

broad HHS tries to make these. I would point out that we focused

on financial standards today, and financial standards are but one

part of what the States have in place to protect consumers. There

is a very broad range, over a thousand consumer protection laws

on the books, that States have to protect consumers.

For example, Maryland has stringent laws regarding the collection and verification on the network physicians. They look at their

training, their certification, their physical and mental status, and

past malpractice. Seventeen States have rules like this that would

be preempted by the Federal Government if this provision passes.

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A majority of States have regulations governing brokers that sell

HMO and PSO products. These requirements include disclosure of

commissions and limits on compensations and other rules for brokers. Other States have special requirements to assure that the

network primary care physician actually has experience in providing primary care.

Medicare beneficiaries will be very concerned that these laws

apply to some products, HMOs, but not other products, PSOs.

The fourth point I would make is that Congress will be sending

a very powerful message that could result in some communities literally losing their hospitals. The message would be one of encouragement, especially to small rural hospitals, to sign up to be a

Medicare risk plan, the promise of a new income stream. The encouragement is the waiving of consumer and financial protections

that State legislatures have determined to be necessary to protect

beneficiaries.

For example, at the heart of the financial standards that hospital

and physician PSOs want to waive are the current liquidity requirements. The NAIC investment guidelines in many States require HMOs and PSOs to have a minimum amount of their assets

in liquid assets or cash assets. The PSO bills that have been introduced would allow PSOs to meet this liquidity test with their land

and their buildings.

This means that a PSO, particularly in a rural area that has to

send a majority of its complicated cases into the city, could not be

required, either by the State or the Secretary, to have cash on hand

to pay those claims that had to be paid on a fee-for-service basis.

Their hands would be tied. You can’t pay out-of-area claims with

a hospital parking lot.

The result of inadequate cash means the community loses its

PSO and it means the community loses its hospital. We believe the

answer to encouraging PSOs to develop is not to waive important

State standards that very visibly protect consumers, the PSO and

the hospital. Rather, we believe Congress should first increase the

AAPCC payment in rural areas. PSOs would immediately have

well-capitalized partners knocking at their door, and they wouldn’t

have to assume unreasonable risk on their own.

Secondly—and we don’t necessarily advise this—but Congress

could waive the 50–50 rule. This is an absolute barrier to PSOs

that only want to be in Medicare, signing up for Medicare risk contracts.

In summary, we don’t oppose PSOs. We just believe that Congress should not waive the current Medicare requirements that assure the highest level of protections for beneficiaries.

[The prepared statement follows:]

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Chairman THOMAS. Thank you very much, Miss Lehnhard.

Dr. Corlin.

STATEMENT OF RICHARD F. CORLIN, M.D., SPEAKER, HOUSE

OF DELEGATES, AMERICAN MEDICAL ASSOCIATION

Dr. CORLIN. Thank you, Mr. Chairman, and members of the committee.

I’m a gastroenterologist in Santa Montica, CA, and I’m Speaker

of the House of Delegates of the American Medical Association.

The case for PSOs is compelling. Yet regulatory obstacles clearly

do stand in the way. Last year, with strong congressional bipartisan support, we were successful in overcoming one of these obstacles. Despite massive opposition from the insurance companies, the

FTC and the DOJ opted for expanded consumer choice and increased competition. Last August, they issued new antitrust guidelines for physician networks.

We are here today to seek your help in securing the remaining

tools needed to promote the development of provider-sponsored organizations and provider-sponsored networks. Physicians continue

to be troubled by the threat to patients when third parties intrude

into medical decision making. Physicians know that by using recently developed techniques we can reduce costs and lead medicine

into a new era of improved quality for our patients.

The importance of physician leadership in health plans is well

documented. Recent studies have confirmed the high performance

of health care systems which directly integrate physicians into

medical and management decision making. Yet, fear of competition

has caused HMOs and other insurance industry representatives to

balk. In vehemently opposing PSO legislation, they’re using the

same arguments against us that were used against them to oppose

the development of the Blue Cross/Blue Shield plans of the 1930s

and ’40s, and the 1973 HMO Act.

I might point out here that HMOs were well operational prior to

1973, but that Act facilitated their further development, just as

this Act will facilitate further PSO development. How ironic it is

now to, having gotten into the lifeboat, the Blues and the HMOs

want to pull in the ladder so that nobody else can climb aboard.

The AMA is pleased that Congress acknowledged the importance

of PSOs and PSNs by including provisions facilitating their development in the Balanced Budget Act of 1995. In addition, we note

the strong bipartisan support this year for PSOs, including the introduction of H.R. 475 by Representatives Greenwood and Stenholm, the President’s proposal, and the ‘‘blue dog’’ plan. We look

forward to working with the Congress and the administration to realize the full potential of physician and other health care provider

led networks.

The AMA believes that PSO legislation should have certain characteristics. First, just as did the HMO Act in 1973, this legislation

should allow for as much flexibility as possible to stimulate innovation in the delivery of patient care. It should not favor any health

care provider group over another in the ownership and management structure of a PSO. Balance must prevail so that medical ethics and patient welfare dominate over other concerns.

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Second, PSO legislation should contain tough consumer protection standards. Some PSO opponents claim that we are asking for

exemptions from provisions related to quality assurance, marketing

and enrollment protection, data collection, access to care, grievances and conflicts of interest, when, in fact, nothing could be further from the truth. Indeed, we have been the ones championing

tougher regulation in these areas.

Third, PSO legislation should address regulatory obstacles that

interfere with the development of PSNs. These include certain of

the anti fraud and abuse laws and self-referral laws which were designed for nonrisk sharing arrangements and are totally inappropriate here.

Fourth, since Medicare is a Federal program, PSOs should be

subject to Federally developed standards which will recognize their

unique differences. Many State regulators fail to account for the

distinction between provider networks that deliver services directly

and insurers that merely purchase health care services from others

and then resell them.

By developing a Federal framework, Congress will continue its

precedent of encouraging new ventures that stimulate competition

and provide efficiencies.

The 1973 HMO Act created a Federal regulatory scheme for

HMOs, preempting State laws that interfered with their formation

and operation. Over the objection of insurance companies, HMOs

argued successfully that they represented a different product which

should be evaluated by different standards.

Finally, any legislation considered by the House should also include the creation of PSNs. PSNs could contract with PSOs or

other eligible organizations to deliver needed health care services.

Provider networks offer a tremendous evolution in health care delivery. The encouragement of PSOs subject to Federal regulation

will benefit both the Medicare program and Medicare beneficiaries.

We thank you, Mr. Chairman, and would be pleased to answer

any questions you or others may have.

[The prepared statement follows:]

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Chairman THOMAS. Thank you, Doctor.

Well, I guess maybe the first thing I could do is pose some questions that were posed in the testimony so that other folk can respond to them.

Miss Lehnhard, what is different now that was different when

HMOs felt it necessary to have major changes in legislation, both

at the State level and, in fact, at the Federal level, in the Health

Maintenance Organization Act of 1973 that provided for an exemption at the Federal level for HMOs? Why isn’t it fair to do for PSOs

the same thing we did for HMOs, or more fairly, why is there no

need to do for PSOs what we did for HMOs?

Ms. LEHNHARD. I would make three points about that. First of

all, this is not an ‘‘us and them’’ issue. The ’73 HMO Act helped

PSOs just like it helped HMOs. The same laws that were barriers

for HMOs were barriers for PSOs, so we were both helped by that.

Secondly, it was generally agreed that everyone went too far in

’73. There were a lot of very visible HMO financial insolvencies and

the States had to go back and put stronger standards for HMOs on

the books. In fact, that was the genesis for the NAIC/HMO model

act.

Third, I think the most important difference is that it did not set

up a parallel Federal track of regulations. The HMOs still have to

be licensed by the State. It merely got rid of some very absolute

barriers to being structured.

Chairman THOMAS. Do you believe that PSOs and HMOs really

aren’t different, that it’s a distinction without a difference, or is

there a difference and can you discern one?

Ms. LEHNHARD. The differences that I see is an ownership issue.

The PSOs are owned by physicians or a hospital, provider owned.

They are both accepting risk when they accept a capitation payment; they promise to provide all the services under the contract

for that capitation payment.

I believe the same in that regard, they should have to meet the

same financial standards, the same consumer protection standards.

I think the NAIC risk-based capital standards will refine those

standards, and a key point is they will reduce some of the financial

standards for HMOs that have reinsurance or have a lot of protections. It’s going to be a calibration of the financial standards, not

a total overhaul.

Chairman THOMAS. Dr. Corlin or Mr. Brownlow, if you want to

jump in, this is one of my concerns and one of the reasons I’m so

desperate for a yardstick that I can use to see if there really is a

difference.

I’m somewhat concerned and haven’t spent the time to work it

out—and maybe you folks have, because of your particular focus—

that if we set up a structure for approval, as Miss Lehnhard said,

based upon ownership and control, rather than on function and

risk assumption, which is the direction the NAIC is going with its

model—I mean, time passes, relationships change.

If we have these PSOs out there that are based upon ownership

and control, and an HMO wants to acquire one, or a PSO wants

to acquire an HMO, do you have any concern about creating sufficiently different structures so that when there are mergers, combinations, failures, assumptions of responsibilities, that you don’t

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create a situation in which, if you have a Federal standard based

upon ownership and control and there’s an HMO based upon the

risk assessment at the State level and there’s a merger, you’re either going to have to go back through the State—you know, this

business of trying to mix apples and oranges when they may not

be apples and oranges.

Dr. CORLIN. Yes, Mr. Thomas. We’re very concerned about that.

That’s why we have proposed that this simply be as four-year start

up, if you would, exemption, to allow the cash requirements to be

built up as the plan is built up. We think that would answer the

major part of the very legitimate concern you have.

But underneath that there’s another issue. Almost half the insurance in the United States already is written under Federal regulation, ERISA, which are plans that totally exempt themselves from

State legislation. It’s a uniform Federal standard. And that’s for

State employees; it’s for private employees and the State, not even

for beneficiaries covered by a uniform Federal plan.

Secondly, the statement that there exists throughout all the

States uniform standards is, very simply, fiction. And the fact that

90 days is sufficient to get a plan licensed is an absolute fiction.

We have attempted to get data and information. When you call

State insurance commissioners, first of all, the cash requirements

are vastly different from State to State. Secondly, when you say ‘‘I

want to start a PSO, send me an application,’’ the most common

answer you get is, look in the regulations, the information is there.

And the statement that data supplied is insufficient and applications are not complete is simply because nobody has told the applicants what they need to do to apply. There is no desire to submit

an incomplete application. Nobody tells us what information is necessary.

Chairman THOMAS. I understand that problem, but HMOs faced

it and apparently they’ve been able to overcome it with some degree of success. I think what you’re telling me is the people that

you’re thinking about having run these operations don’t want to

deal with bureaucracies at the State level.

You know, you’re giving me a number of arguments which,

frankly, to me, are not dispository. They are simply, ‘‘Hey, you

want to own the business, this is the price of doing business today,’’

which is unfortunate and I would love to deal with that as well.

But let me ask the question another way. If you’re asking for a

greater Federal role because of all the problems that you at some

length explained to us, would you be willing then to move the HMO

regulation to the Federal level as well, notwithstanding whether

the regulation of either PSOs or HMOs is a good thing at the Federal level. If you’re doing it at the Federal level, why shouldn’t

HMOs be doing it at the Federal level?

Dr. CORLIN. Well, we’re talking here about beneficiaries who are

a Federal responsibility, at least with regard to the source of the

payment for their care. Secondly, we are simply asking for some

start-up help to allow these organizations to enter and compete effectively in a market which is already, for some organizations, well

capitalized from other sources, and we want to be able to show that

we can deliver health care which answers, in many cases, better

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quality improvement, better quality assurances, and secondly, has

its financial incentives in——

Chairman THOMAS. How can you show us that it’s better quality

assurance? I would love to see that. A number of assertions have

been made that if we go for this structure and facilitate it at the

Federal level, that what we’re going to get is something better than

what it would be if that same structure were required to have to

be approved at the State level.

The argument that it’s better and, therefore, we should be compelled to provide Federal assurance, is a compelling one. I just

haven’t seen the compelling evidence.

Dr. CORLIN. The uniformity of it I believe is an advantage, particularly during the start-up——

Chairman THOMAS. So do the HMOs. They would love to have

uniformity in dealing with—in offering services. They currently

have to bump along the ground through the States.

You see, we’re looking for the compelling reason for changing the

current system. If you’ll recall in the BBA, we didn’t know for sure

whether the arguments had merit, so we said go to the States first.

And when you showed us the States were unwilling to deal with

you folks in a reasonable way, we would provide a Federal structure. Frankly, I haven’t heard any answers right now that give me

a comfort that what we provided in the BBA isn’t the best thing

out there.

Mr. BROWNLOW. Mr. Chairman, could I respond?

One of the things that PSOs ar trying to do is only participate

in the Medicare population. One of the requirements that a State

has is that you do have to have the 50–50 rule, a rule that would

not apply under a PSO doing only Medicare beneficiary HMO coverage.

I think that’s an important distinction. I think, as well, one of

the things that we look for is some Federal certification that will

be consistent from State to State. At this point, many States have

not defined what a PSO is. They’re not sure how to deal with it.

They’re not sure how to regulate it. They’re not sure how to certify

it.

So I think if the Federal Government would come up with certification that would be applied equally, State to State, these could get

started and they could enroll the Medicare beneficiary population.

Chairman THOMAS. Mr. Brownlow, all those arguments were

made with HMOs, and in talking to the people who actually do the

work, I’m impressed with the sophistication of a number of them,

by whatever name it’s called, in terms of the structure.

One very quick question. On page 10 of your testimony, Doctor,

you talked about the problem of getting doctors to go into a structure because of pension nondiscrimination rules.

Are you asking for a class exemption there? Is that the point

you’re making, or just that life is difficult when you——

Dr. CORLIN. We’re not asking for a class exemption.

Chairman THOMAS. Okay. Thank you very much.

The gentleman from New York.

Mr. HOUGHTON. Just one quick question for Miss Lehnhard.

Dr. Corlin, reading from page 9 of your testimony, you say that

PSO legislation should address regulatory obstacles, and these inVerDate 29-OCT-99 12:00 Nov 10, 1999 Jkt 010199 PO 00001 Frm 00106 Fmt 6633 Sfmt 6602 E:\HEARINGS\58724 txed01 PsN: txed01
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clude anti fraud and abuse laws and self-referral laws, things like

that, and that, in effect, these laws have no purpose in the regulation of networks but are designed to reduce the provision of unnecessary care.

How do you feel about that?

Dr. CORLIN. Well, the——

Mr. HOUGHTON. I’m was really asking Miss Lehnhard. I know

how you feel about it.

Dr. CORLIN. I’m sorry.

Ms. LEHNHARD. I don’t know what barriers they’re talking about

that have to do with—is it State fraud laws?

Mr. HOUGHTON. I think what Dr. Corlin was saying is that there

are many laws, such as anti fraud and abuse laws and self-referral

laws which should not be applied to the PSOs, that they would just

be inappropriate.

Ms. LEHNHARD. I think that the HMOs would have had the same

problem, since these are also networks of physicians. If the PSOs

are flourishing in the States—I haven’t heard of these problems.

I’m sorry.

Mr. HOUGHTON. Would you like to make a comment, Doctor?

Dr. CORLIN. Yeah. The real issue here—and I’m sorry the point

was missed in the previous response. The real issue is that those

laws and provisions are extremely relevant in a fee-for-service reimbursement system. They are not relevant and, indeed, are often

counterproductive in a capitated reimbursement system.

That’s the reason for saying that we need the exemptions, not because it’s a special organization but because it operates in a totally

different type of reimbursement system from the one that the anti

fraud and abuse and self-referral laws were designed to protect the

public from abuses in—that was a terrible sentence, but——

Mr. HOUGHTON. I understand, and that’s very helpful.

Yes, ma’am?

Ms. LEHNHARD. Sir, my response would be, I don’t know of any

State where PSOs have to be licensed as an insurance company, a

fee-for-service plan. They all have the option of being licensed as

a capitated plan, where these rules won’t apply.

Mr. HOUGHTON. Thank you.

Mr. CHRISTENSEN [president]. Mr. Brownlow, we have about two

and a half minutes before we have to go vote. I know that during

your opening testimony you had about four or five points that you

wanted to make, in terms of differences of PSOs, that you felt were

important.

Is that in your written testimony?

Mr. BROWNLOW. Yes.

Mr. CHRISTENSEN. Okay. I’ll take a look at that and maybe I can

follow up with some written questions at the time and visit with

you on that.

Mr. BROWNLOW. Some of the points are in there. I would make

a couple more as well.

I think that a difference between a PSO and an HMO is, under

the PSO, the Federal Government will be paying the providers directly. They won’t be going through an HMO, with administrative

and profit and overhead taken off the top before the downstream

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risk finally gets to a PSO, to then be able to administrate the plan

for the Medicare beneficiary.

I think, second, an HMO provides insurance. A PSO provides

health delivery. As well, a PSO is reimbursed under multiple types

of reimbursement. We’ve got point-of-service, we’ve got PPO, we’ve

got HMO, and so forth. Typically, in an HMO, all of the reimbursement is in the form of a fixed premium paid by a subscriber, or the

government in the case of Medicare.

Mr. CHRISTENSEN. I’m going to have to go run and vote. I want

to thank you for coming all the way from Orlando. I’m sorry that

we’ve gone so far into the day, but thank you for coming up. I appreciate it, Mrs. Lehnhard, Dr. Corlin. Thank you very much.

This meeting is adjourned.

[Whereupon, at 4:05 p.m., the hearing was adjourned.]

[Submissions for the record follow:]

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