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96–925 PDF 2004

S. HRG. 108–699

THE HEALTHCARE CRISIS IN SOUTHEASTERN

PENNSYLVANIA: THE ROLE OF THE HEALTH

INSURANCE INDUSTRY

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY AND CONSUMER RIGHTS

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

PHILADELPHIA, PENNSYLVANIA

APRIL 12, 2004

Serial No. J–108–67

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ORRIN G. HATCH, Utah, Chairman 

CHARLES E. GRASSLEY, Iowa 

ARLEN SPECTER, Pennsylvania 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

LARRY E. CRAIG, Idaho 

SAXBY CHAMBLISS, Georgia 

JOHN CORNYN, Texas 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

JOHN EDWARDS, North Carolina 

BRUCE ARTIM, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS

MIKE DEWINE, Ohio, Chairman 

ORRIN G. HATCH, Utah 

ARLEN SPECTER, Pennsylvania 

LINDSEY O. GRAHAM, South Carolina 

SAXBY CHAMBLISS, Georgia 

HERBERT KOHL, Wisconsin 

PATRICK J. LEAHY, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

JOHN EDWARDS, North Carolina 

PETER LEVITAS, Majority Chief Counsel and Staff Director 

JEFFREY MILLER, Democratic Chief Counsel 

(III)

C O N T E N T S

STATEMENT OF COMMITTEE MEMBER

Page 

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1

WITNESSES 

Badolato, Hon. David, M.D., Family Practice Associates of Upper Dublin, 

Fort Washington, Pennsylvania .......................................................................... 2

Ballou, Roger, President, Chief Executive Officer and Director, CDI Corporation, Philadelphia, Pennsylvania ........................................................................ 12

Burns, L. Robert, Ph.D., MBA, James Joo-Jin Kim Professor and Professor 

of Health Care Systems, University of Pennsylvania, Wharton School of 

Business, Philadelphia, Pennsylvania ................................................................ 4

Fine, Stuart H., Chief Executive Officer, Grand View Hospital and Affiliated 

Entities, Sellersville, Pennsylvania .................................................................... 20

Foreman, Stephen, Ph.D., J.D., Vice President of Research and Director, 

Pennsylvania Medical Society Health Services Research Institute, Harrisburg, Pennsylvania .............................................................................................. 16

Gillespie, Patrick B., Business Manager, Philadelphia Building and Construction Trades Council, Philadelphia, Pennsylvania .............................................. 14

Marshall, Joseph W., III, Chairman and CEO, Temple University Health 

System, Philadelphia, Pennsylvania .................................................................. 10

Trichtinger, Martin D., M.D., Internist, Montgomery County, Pennsylvania .... 18

Udvarhelyi, I. Steven, M.D., Senior Vice President and Chief Medical Officer, 

Independence Blue Cross, Philadelphia, Pennsylvania .................................... 8

SUBMISSIONS FOR THE RECORD 

Badolato, Hon. David, M.D., Family Practice Associates of Upper Dublin, 

Fort Washington, Pennsylvania, prepared statement ....................................... 36

Burns, L. Robert, Ph.D., MBA, James Joo-Jin Kim Professor and Professor 

of Health Care Systems, University of Pennsylvania, Wharton School of 

Business, Philadelphia, Pennsylvania, prepared statement ............................. 50

Foreman, Stephen, Ph.D., J.D., Vice President of Research and Director, 

Pennsylvania Medical Society Health Services Research Institute, Harrisburg, Pennsylvania, prepared statement ........................................................... 55

Marshall, Joseph W., III, Chairman and CEO, Temple University Health 

System, Philadelphia, Pennsylvania, prepared statement ............................... 64

Trichtinger, Martin D., M.D., Internist, Montgomery County, Pennsylvania, 

prepared statement .............................................................................................. 68

Udvarhelyi, I. Steven, M.D., Senior Vice President and Chief Medical Officer, 

Independence Blue Cross, Philadelphia, Pennsylvania, prepared statement 

and attachments ................................................................................................... 72

(1)

THE HEALTHCARE CRISIS IN SOUTHEASTERN 

PENNSYLVANIA: THE ROLE OF THE HEALTH 

INSURANCE INDUSTRY 

MONDAY, APRIL 12, 2004

UNITED STATES SENATE, 

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY, AND CONSUMER RIGHTS, 

COMMITTEE ON THE JUDICIARY, 

Washington, D.C. 

The Subcommittee met, pursuant to notice, at 9:04 a.m., in the 

Maris Courtroom, 601 Market Street, Philadelphia, Pennsylvania, 

Senator Arlen Specter, presiding. 

Present: Senator Specter. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Senator SPECTER. Good morning, ladies and gentlemen. The field 

hearing of the Antitrust Subcommittee of the Senate Committee on 

the Judiciary will now proceed. 

This morning we will make an inquiry into the health care situation in Southeastern Pennsylvania with particular focus on the role 

of the health insurance industry. 

There have been recurrent comments, really complaints, about 

what many consider to be an overconcentration of Blue Cross and 

Blue Shield. This issue has come to our attention recurrently discussions with doctors, discussions with hospital officials, and most 

recently when Governor Rendell and I convened a meeting of a 

number of hospitals in the Philadelphia area on the efforts to keep 

the Medical College of Pennsylvania open. There the point was 

made about the very low reimbursements from Blue Cross and 

Blue Shield. And the comment was made that the reimbursement 

by Blue Cross Blue Shield was lower even then what is provided 

by Medicare. 

There has been very substantial concern expressed by small businessmen and small businesswomen about the high cost of health 

care. And the issue has arisen as to whether there ought to be an 

exemption under the antitrust laws to allow some to bargain collectively to try to reduce the rates on the approach that a larger number in the insured group would provide lower rates. 

House Bill 1247 provides for such legislation and I concluded 

that I would not introduce legislation at least until we had this 

hearing and had some further insights into the issue. 

2

We have also noted a number of lawsuits filed against Blue 

Cross Blue Shield which have been settled with allegations of practices which are highly questionable if not unlawful and noted that 

a number of these lawsuits were settled with confidentiality agreements which precluded individuals from testifying before this Subcommittee because they are barred from doing so under those confidentiality agreements. 

I have long been concerned with such confidentiality agreements 

on the issue as to whether they are contrary to public policy, if 

there are allegations of impropriety and they are settled whether 

there is a right by the community to know. 

To deal with this issue the Judiciary Committee issued subpoenas. One of the parties subject to subpoena asked to be relieved 

of the obligation to testify at this hearing today because the settlement with Blue Cross Blue Shield was almost completed. And we 

decided to honor that request. Apparently there has not been a 

final preparation and execution of all the papers. We may revisit 

that depending upon what happens. 

With a very brief introduction and the addendum of my thanks 

to Senator DeWine of Ohio, who is the Chairman of the Subcommittee, I am senior to Senator DeWine on the full Committee 

but I chair the Subcommittee on Labor, Health, Human Services 

and Education and he chairs this Subcommittee, we will now proceed. 

Under the standard rules of the Committee and Subcommittee, 

we have allocated five minutes for opening statements to allow the 

maximum amount of time for dialogue for question and answer. 

You might think five minutes is insufficient. We recently had a memorial service for Ambassador Annenberg. And the speakers included the Secretary of State, Colin Powell and former President 

Gerald Ford and a number of other officials, governor, myself and 

others. And were allocated three minutes to speak. So I want you 

to know how generous the five minute allocation is. 

Our first witness is Dr. David Badolato, a member of the Family 

Practice Associates of Upper Dublin and a senior physician in the 

Department of Family Practice at Abington Memorial Hospital. He 

is a member of the Pennsylvania Medical Society and the Pennsylvania Academy of Family Practice, certified by the American Board 

of Family Practice, completed his residency at Abington Memorial 

Hospital, a graduate of La Salle College and Hahnemann University School of Medicine. 

Thank you very much for joining us, Dr. Badolato, and we look 

forward to your testimony. 

STATEMENT OF DAVID BADOLATO, M.D., FAMILY PRACTICE 

ASSOCIATES OF UPPER DUBLIN, FORT WASHINGTON, PENNSYLVANIA 

Dr. BADOLATO. Thank you, Senator. Good morning to all. I will 

do less than the three pages of testimony to honor the five minutes. 

I come to you this morning as the senior physician of Family 

Practice of Upper Dublin, as you mentioned. We are eight physicians and 26 staff, care for 15,000 patients who mostly reside in 

eastern Montgomery County. 

3

I am in my 26th year of practice and I love what I do. In our 

practice we have a passion for excellence, and are committed to 

quality and safety in the medical care of our patients. Our practice 

has been recognized for leadership in quality by the two major insurance companies of Southeastern Pennsylvania. And in almost 

every measurement for both companies we rank in the top 1 percent. 

Unfortunately, the financial condition of our practice continues to 

deteriorate and our ability to continue to practice is imminently 

threatened. We are in serious financial debt as a result of extreme 

reductions imposed by the two dominant health insurance companies of Pennsylvania. They are IBC and Aetna. We have 10 years 

of data pertaining to our quality and our decreasing reimbursements. 

Senator SPECTER. You say IBC, Independence Blue Cross? 

Dr. BADOLATO. Yes. 

We have 10 years of data pertaining to our quality and the decreasing reimbursements. We welcome an in-depth analysis by appropriate professionals of the microeconomics within our practice. 

We believe that such a study will reveal the truth and define the 

equitable reimbursements required to support and sustain 99th 

percent performing practices who have achieved quality and safety 

outcomes for our patients. 

It appears that the two dominant health insurance companies of 

Southeastern Pennsylvania have been able to proceed with reimbursement reductions unchecked by any outside entity during the 

past 10 years. It appears in contracting that the market dominance 

leads to a take it or leave it contracting. Sadly, too often, one can 

say take it or leave the state. 

In addition, the less 10 years have seen a dramatic increase in 

the insurance company requirement for administrative resources 

required at the practice level. The resource consumption and barriers, such as preauthorization and precertification mechanisms, 

have placed roadblocks even in the delivery of gold standard diagnostic test and treatments. 

There is a problem. Our medical school graduates have serious debt load, $200,000-plus, and appear to no longer be able to afford 

to enter the specialty of family practice. 

But let us look at the outcomes. 25 percent vacancy upon entry 

into the residency programs nationally. 58 percent of those entering family practice residencies in the United States are graduates 

of foreign medical schools. 

I, the physicians, the staff, and the patients invite you to the 

practice for a collaborative analysis of quality and what the reimbursements are that are required to sustain such quality. We welcome Government, corporate America, medical academic institutions, business leadership, et cetera, to such a platform. 

I urge you to stop the increasing damage to the medical infrastructure. If we continue on this path, it may take an entire generation to rebuild the quality components which have been destroyed due to our neglecting to act responsibly as guardians and 

stewards of the essential social good of quality health care. 

I reinforce three final points. A top 1 percent performing practice 

is unable to continue to practice with the current conditions. 

4

Secondly, the national outcomes of vacancies in our residencies 

and the overwhelming majority of foreign medical graduates filling 

those positions is of concern. 

And lastly, please, I ask for responsible guardians to use our 

practice to discover the truth without the negative influence of 

market dominance. 

I thank you for the opportunity to speak today. 

[The prepared statement of Dr. Badolato appears as a submission for the record.] 

Senator SPECTER. Thank you very much Dr. Badolato. 

We turn now to Dr. L. Robert Burns, James Joo-Jin Kim Professor and Professor of Health Care Systems at the University of 

Pennsylvania’s Wharton School of Business, Director of Research at 

the Leonard Davis Institute of Health Economics and Visiting Professor to the Department of Preventive Medicine, University of 

Wisconsin. 

Thank you for joining us, Dr. Burns, and we welcome your testimony. 

STATEMENT OF L. ROBERT BURNS, PH.D., MBA, JAMES JOOJIN KIM PROFESSOR AND PROFESSOR OF HEALTH CARE 

SYSTEMS, UNIVERSITY OF PENNSYLVANIA, WHARTON 

SCHOOL OF BUSINESS, PHILADELPHIA, PENNSYLVANIA 

Mr. BURNS. Thank you Senator. I appreciate the opportunity to 

present testimony about the market structure for health insurance 

in Southeastern Pennsylvania and some of its observed effects. 

My remarks are drawn from research I am now conducting on 

the history of the Southeast Pennsylvania insurer and hospital 

markets during the 1980s and 1990s. 

Senator SPECTER. Dr. Burns, as Senator Thurmond always used 

to say, pull the machine closer. 

Mr. BURNS. Is that better? 

Senator SPECTER. I do not know, I have not heard either from 

you or Senator Thurmond. 

[Laughter.] 

Mr. BURNS. My remarks are drawn from research I am now conducting on the history of the insurer and hospital markets in 

Southeastern Pennsylvania during the 1980s and 1990s. They are 

based on several years of research data analysis and interviews 

with major stakeholders in the market. 

However, I should point out I have not had as much access to 

the executives of Independence Blue Cross as I would have liked 

and thus, my remarks may not fully reflect their side of the story. 

For purposes of my remarks, the Southeast Pennsylvania market 

includes Philadelphia County and the four suburban counties: 

Bucks, Montgomery, Delaware and Chester. 

Also for purposes of definition, I define market structure in terms 

of the number of competitors in the market and their relative share 

of the market. These two components are often summarized as the 

Herfindahl-Hirschman Index, HHI, which measures how much 

market share is concentrated in one or a few firms. The higher the 

HHI, the more concentrated the market and the more powerful are 

one or a small number of firms. 

5

The five county area in Southeastern Pennsylvania exhibits a big 

contrast in insurer and hospital market structures. During the 

1990s, the hospital market featured lots of competition between 

lots of hospitals. The HHI for hospital services in Southeastern 

Pennsylvania ranged from 185 to 654, depending on the year of 

measurement and how one assessed market share in terms of beds 

or patient days. 

But regardless of the measure one used, this was a very competitive hospital market with very low concentration. Philadelphia consistently ranked among the top five most competitive hospital markets, i.e., low Herfindahl Index, in the United States with 1 million 

or more population. And all of the hospital system formations during the 1990s barely raised the HHI in Southeast Pennsylvania. 

On the other hand, the health insurance market in Southeast 

Pennsylvania is quite concentrated. According to data from 

InterStudy, the HHI for health maintenance organizations or 

HMOs operating in the Philadelphia market was 4,134 in 1999 and 

4209 in the year 2000. Data from the Pennsylvania Department of 

Insurance indicates similar figures, rising steadily since 1994 

through 2000. 

Depending on which data source you use, this places Southeast 

Pennsylvania in the top five percent most concentrated insurer 

markets in the United States with 1 million or more population. 

To be sure, HMOs are only one part of the insurer market. One 

also needs to consider preferred provider organization, PPO, and 

point of service plans, POS. A recent report that analyzes the market structure of large U.S. metropolitan areas with 1 million or 

more population found that Philadelphia had the fifth most concentrated market for PPO enrollment and the highest, the number 

one most concentrated market for combined HMO and PPO enrollment. 

For both HMO and PPO products, Independence Blue Cross, 

IBC, is the market leader in Southeast Pennsylvania. In 1997, for 

example, IBC had captured 41 percent share of the HMO market 

through its Keystone Health Plan East subsidiary, and 68 percent 

share of the PPO market. 

In sum, Southeast Pennsylvania features two contrasts with 

other large cities, a very competitive hospital market with low HHI 

and a very concentrated insurer market with high HHI. This type 

of situation may lead to high levels of insurer market power over 

hospitals and consumers of health insurance. I consider some of the 

evidence for this below. 

This research on the Philadelphia market did not concentrate on 

Independence Blue Cross or its potential market power. However, 

in conducting my research I came across several studies conducted 

during the 1990s by the Delaware Valley Hospital Council that 

suggest that Independence Blue Cross utilized its market power in 

ways detrimental to the cash flow of hospitals in the area. 

For example, among commercial insurers during the mid-1990s, 

IBC exhibited the highest denial rate for hospital inpatient services 

both in terms of the percentage of patients denied and the percentage of inpatient days denied. Similarly, IBC and its HMO subsidiary Keystone exhibited the highest median payment denial rate 

for emergency room services. Finally, IBC exhibited the lowest acVerDate 0ct 09 2002 10:48 Nov 30, 2004 Jkt 096683 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\96925.TXT SJUD4 PsN: CMORC
6

cess to acute rehab services for its Medicare managed care enrollees. 

Other data collected by the Pennsylvania Medical Society and 

the American Hospital Association provide additional evidence for 

the exercise of market power by IBC. During the mid to late-1990s, 

IBC featured the largest number of unpaid claims for Philadelphia 

providers in terms of dollar volume among all insurers. 

Hospital payment-to-cost ratios for privately insured patients 

also began to fall by the mid-1990s through the end of the decade. 

These decreases were more pronounced in Southeast Pennsylvania 

than in other metropolitan areas. And as mentioned before, IBC 

dominated this market. 

Nationally, there is also evidence that HMOs that have attained 

market power have exercised it over both consumers and providers. 

For example, HMOs that enjoy high HHI sell their managed care 

products at higher premium levels to employers and other buyers. 

Similarly, they have found that HMOs that account for a larger 

share of all inpatient days in the market can force down hospital 

prices per days paid. 

The research has not investigated whether HMOs attempt to exercise market power simultaneously both upstream with employers 

and buyers and downstream with hospital suppliers. 

The typical U.S. metropolitan area has a concentrated HMO 

market. Across all metropolitan areas with 1 million or more population, the median HHI for HMO insurance is 2,291. Although this 

value is higher than the cutoff point used by the Department of 

Justice to define a highly concentrated market, it does not include 

competition from other types of insurance. It is thus unclear 

whether the effects described are widely found in other parts of the 

country. However, Philadelphia appears to be an outlier compared 

to the rest of the country. 

In conclusion, the data suggests that Philadelphia is a unique 

market when one considers both the insurer market and the hospital market. There seems to be a huge imbalance of bargaining 

power between insurers and hospitals due to the high concentration in the former and the low concentration in the latter. 

Evidence also seems to suggest that IBC has exploited this differential market power. Moreover, at least nationally there has 

been a tendency to allow insurers to amass more market power 

than providers in order to allow them to extract lower prices for inpatient and outpatient care with the hope of lowering rate of increase in health care spending. 

I am not aware of the increase in health care spending in Southeast Pennsylvania and thus cannot comment on what overall effects may have been asserted or achieved by IBC’s dominance in 

the market. The available evidence suggest the welfare of hospitals 

may have been hurt, as reflected in past statistics on denial rates, 

slow payment of claims and low payment-to-cost ratios. Thank you 

for this opportunity. 

[The prepared statement of Mr. Burns appears as a submission 

for the record.] 

Senator SPECTER. Thank you, Dr. Burns. 

7

Before proceeding, I think it would be useful for those hearing 

your testimony to define a couple of your terms. Would you define 

what an HMO is, contrasted with a PPO? 

Mr. BURNS. Yes. HMO is a health maintenance organization 

where there are two sets of things to consider. One is the insurers 

will contract with an employer for a predefined premium called a 

capitated premium, which covers a defined set of benefits or services for the enrollees, the employees in that company. 

And then the HMO insuring will turn around and then contract 

with hospitals and doctors in any number of ways. In this market, 

it has typically been on a discounted fee-for-service basis, although 

during the 1990s they experimented with capitation. 

The other interesting characteristic about the HMO is that you 

are required to use the panel of providers that contract with the 

HMO. So it is sort of a closed network of providers. 

The PPO, the preferred provider organization, allows the enrollees to seek a broader panel of hospitals and doctors. They pay a 

differential, though, in using those hospitals and doctors. But it is 

a less restrictive network, a little bit more of an open network. 

Senator SPECTER. You used the term upstream and downstream. 

I think it would be useful to define those terms. There are people 

following these hearings, lay people who will not know all of the 

technicalities and so that they can follow it and have an understanding as to what is involved here, would you define upstream 

and downstream? 

Mr. BURNS. Sure. The insurance companies, Independence Blue 

Cross being one of them, are intermediaries between the buyers or 

the employers on one side and the providers, the hospitals and the 

physicians, on the other side. The HMOs, when they amass market 

power with this high HHI have the potential of exerting market 

power upstream towards the buyers of health care as well as downstream towards the suppliers or the providers of health care. 

And so on either side of their bargaining relationship, going to 

the people who pay or to the people who provide health care, they 

have the potential to exercise bargaining power over them. 

Senator SPECTER. Thank you, Dr. Burns. 

Our next witness is Dr. I. Stephen Udvarhelyi, Senior Vice President and Chief Medical Officer for Independence Blue Cross and its 

affiliated companies, Keystone Health Plan East and AmeriHealth. 

Independence Blue Cross and its affiliate provide health coverage, according to the information provided to this Subcommittee, 

to over 4 million individuals with approximately 3 million of these 

members residing in the Greater Philadelphia area. 

In his role as Chief Medical Officer, Dr. Udvarhelyi has overall 

responsibility for medical management programs and policies and 

is the chief medical spokesperson for the company. 

He is a board-certified internist and completed his residency in 

internal medicine at the University of Minnesota, fellowship in 

general medicine at Brigham and Women’s Hospital in Boston and 

a graduate of Harvard University and the Johns Hopkins School of 

Medicine with a master’s degree in health services administration 

from Harvard. 

8

Mr. G. Fred DiBona, who is the Chief Executive Officer of Independence Blue Cross wanted to be here this morning, but could not 

be. So we welcome you here, Dr. Udvarhelyi. 

STATEMENT OF I. STEVEN UDVARHELYI, M.D., SENIOR VICE 

PRESIDENT AND CHIEF MEDICAL OFFICER, INDEPENDENCE 

BLUE CROSS, PHILADELPHIA, PENNSYLVANIA 

Dr. UDVARHELYI. Thank you, Senator and good morning. Thank 

you for the opportunity to participate in the hearing. 

From my perspective, there are two critical health care issues 

facing our region. First is the cost crisis that is making health care 

increasingly unaffordable. And the other is the perpetuation of misinformation about what is causing the crisis. 

The fact is, health care costs in this region are skyrocketing and 

are higher than almost any other region in the country. It is also 

a fact that when health care costs increase, so do health insurance 

premiums. 

From our perspective, here is the bottom line. The most common 

commercial policy we sell at Independence Blue Cross is our Personal Choice PPO family plan. Today it costs over $15,000 per year, 

including drug coverage. Four years ago, in 2000, the same coverage cost $8,000 per year. That is an increase of almost 90 percent 

in four years. 

Most employers have responded to the increase costs by sharing 

the cost of health care with their workers. But many employers are 

buying fewer benefits. Some only pay for the worker’s insurance, 

leaving the employee to pay for the rest of the family, which could 

cost almost $9,000 per year out of pocket after taxes with the product I just referenced. 

We should not wonder why so many workers cannot afford to 

cover their spouses and children, who are now becoming part of the 

growing ranks of the uninsured. And even more concerning, some 

employers are no longer providing any coverage at all. 

This is a crisis, Senator. And behind the increases in health insurance premiums are skyrocketing health care costs. At Independence Blue Cross our overall medical costs per member, like our premiums, have increased almost 90 percent over a four year period. 

There are several reasons for this increase in medical cost. 

First, Independence Blue Cross has increased fees to hospitals 

and physicians. Over a 19 month period, through March of 2003, 

we increased physician fees by more than 22 percent, worth over 

$300 million. We have also increased rates to hospitals which have 

resulted in renegotiated agreements with virtually every hospital 

in our network, over 55 hospitals and 25 health systems, during 

the last four years. 

Second, payments to doctors and hospitals increased due to both 

an increase in the use of services and an increase in the use of 

more expensive services and technology. Here are the numbers 

about how that plays out. In just five years our payments to hospitals have more than doubled from $1.1 billion to $2.4 billion. Per 

hospital, payments over that same period have risen 109 percent 

from $19 million to $39 million per hospital. Total physician payments are up 92 percent, with the average annual payment per 

9

physician—this is just from Independence Blue Cross—an increase 

from about $85,000 per year to almost $145,000 per year. 

A major driver of these increases is that almost no city in America uses medical services at the rate we do in Philadelphia. Philadelphia’s overall medical costs are the fifth highest in the country 

for large metropolitan areas, more than 40 percent higher for example than Chicago. Our rate of hospital care is the third-highest 

in the Nation. Philadelphia has 46 percent more hospital beds per 

capita than the national average and actually 24 percent more 

than the Pennsylvania average. We make 38 percent more visits to 

physicians than the national average and have higher rates of outpatient surgery than two-thirds of the country, and we are second 

in the Nation for both radiology visits and cardiovascular visits. 

This list could go on, but the fact is that for almost every type 

of medical service, Philadelphia ranks as one of the highest areas 

in the country. 

It is also worth nothing what is not driving our cost and utilization. The increases are not due to increases in our membership. 

Since January 1st of 2000, our membership in Southeastern Pennsylvania has grown by just 1.7 percent. That is less than .5 percent 

a year. In fact, over the last two years, our membership has declined. Our medical costs, however, show no sign of falling. 

Let us make no mistake, the hospitals and physicians of Southeastern Pennsylvania are facing extremely difficult financial issues, 

as are our customers and their employees. But Independence Blue 

Cross cannot solve the pressures facing hospitals and physicians. 

For example, we represent only 26 percent of the average hospital 

revenue in this marketplace. And the increases I shared a moment 

ago hardly support our critics’ notion that Independence Blue 

Cross’s market position forces hospitals and physicians to accept 

inadequate levels of reimbursement. 

So while we do not question the right for physicians and hospitals to request increased reimbursements, here is our dilemma. 

Every time we increase our payment rates to physicians, to hospitals, to pharmacies, and to any other entity that provides health 

care to our members, the people who buy our health insurance policies end up paying for it with higher premiums. 

The truth is, the crisis will not be solved by allowing hospitals 

and physicians to engage in collective bargaining. This will only increase costs at a faster rate and exacerbate the cost crisis. This is 

not only view. For years the FTC has clearly taken a position 

against allowing physicians and hospitals to engage in collective 

bargaining. And as you will read in the letter attached to my written testimony from Dr. Anthony Coletta, physicians have been able 

to partner effectively with Independence Blue Cross without any 

exemptions from the Nation’s antitrust laws. 

Senator it is time for people like those gathered here today to get 

serious about the real issue threatening our health care system, 

which is that Americans are losing their access to health care because they simply cannot afford it. And getting serious means focusing on how to reduce the systems cost. 

How bad is the crisis? Well, let us look at the number of uninsured Pennsylvanians has increased 36 percent from 1999 to 2002 

to a number of over 1.4 million people. So bad that labor leaders 

10

like you will hear from Pat Gillespie will tell you that the number 

one position in negotiations is no longer salary. It is health benefits. And at $15,000 for just one family’s health insurance policy, 

how much higher can we go before we address the real issues. 

Thank you for the opportunity to share my views. 

[The prepared statement of Dr. Udvarhelyi appears as a submission for the record.] 

Senator SPECTER. Thank you very much, Mr. Udvarhelyi. 

Our next witness is Mr. Joseph Chip Marshall, III, Chairman 

and CEO of the Temple University Health System which encompasses academic and community hospital, medical school and community-based physician and home care services. 

He is a member of the Board of Trustees of Temple Board of Hospital and Health System Association of Pennsylvania and the 

Pennsylvania College of Optometry, the Greater Philadelphia 

Chamber of Commerce and has served as Chairman of the Pennsylvania State Ethics Commission and has a B.A. and law degree 

from Temple University. 

Thank you for joining this morning, Mr. Marshall and we look 

forward to your testimony. 

STATEMENT OF JOSEPH CHIP MARSHALL, III, CHAIRMAN AND 

CEO, TEMPLE UNIVERSITY HEALTH SYSTEM, PHILADELPHIA, PENNSYLVANIA 

Mr. MARSHALL. Thank you, Senator. And thank you for the opportunity to testify today and for holding this hearing to consider 

whether antitrust law should allow collective bargaining among 

physicians to enable them to negotiate with health insurers and to 

consider the role of large health insurers in the Southeast Pennsylvania health care market. 

I last testified before you in March of 2003 at another Senate 

hearing on Medicare outlier payments and appreciate your leadership in helping health care providers receive fair and adequate reimbursement to ensure quality and accessible health care for all 

Pennsylvanians. 

The Temple University Health System is comprised of a major 

academic teaching hospital, three community hospitals, one pediatric hospital, a ground transport team and a network of more than 

1,500 physicians. TUHS is a cornerstone of the health care delivery 

system in Philadelphia and the surrounding region. 

On any given day, approximately 500 people utilize the services 

of TUHS emergency rooms and an additional 1,700 people present 

for non-emergency ambulatory surgery and services. As one of the 

largest private employers in the city of Philadelphia, TUHS entities 

employ approximately 7,000 people, pay nearly $300 million annually in salaries, and an additionally $73 million annually in benefits. 

As CEO of this comprehensive health system which is faced daily 

with numerous complex issues, I view the physician bargaining 

question from a unique vantage point. It would be a great relief if 

this were the only challenge before us. Every day we struggle with 

rising pharmaceutical, medical supply and technology costs, workforce issues and escalating malpractice premiums. 

11

Compounding this, we are faced with a rising tide of patients 

without health insurance. Last year alone TUHS provided nearly 

$63 million in charity care to the communities we serve. 

We must strive to mend the health care delivery system in urgent need of repair. In so doing we must work collaboratively to 

promote improvements in the health care delivery system to benefit 

hospitals, physicians, insurers, employers and above all, our patients. 

I know that collective bargaining among physicians is offered as 

a solution to Pennsylvania’s health care delivery problems. Some 

see this as a way to help balance competing interests of physician 

and insurers, encourage physicians to practice in our region and 

improve quality and continuity of health care. Others believe that 

insurers will simply pass along higher costs to employers and other 

consumers who continue to strive to meet rising insurance costs, 

ultimately causing an increase in the number of patients who 

present to hospitals without health insurance. 

Clearly, the question of collective bargaining is difficult but is 

only one of many that must be answered in resolving the health 

care crisis in Southeast Pennsylvania. 

There is no doubt that as the region’s leading health care insurer, Independence Blue Cross casts a giant shadow over health 

care providers in this region. In fact, a little over a year ago we 

locked horns with IBC during arduous contract negotiations. We 

even had to implement determination procedures in the contract 

before we finally resolved the matter of our contract with IBC. 

Did IBC give us all that we asked? Certainly not. Did IBC take 

our concerns seriously? I sincerely believe so. Did we negotiate a 

fair contract? Ultimately, yes. 

Together we issued a joint press release and TUHS placed a fullpage newspaper advertisement marking the successful completion 

of negotiations that marked the beginning of a new five year agreement. 

Make no mistake, however. Neither TUHS nor any hospital in 

the region can say all is perfect in payer relations. We would love 

for IBC and other insurers to pay us more. Our costs are rising but 

we cannot pass them on. We need to either lessen demand or increase the number of dollars in our system. We recognize, however, 

that there is no single cure for our region’s health care problems 

and finger-pointing will not provide the solutions. 

Looking around this room I see many stakeholders in the health 

care delivery system. We have labor leaders, business leaders, Government leaders, physicians, health care administrations and consumers. it is only by working collaboratively that we can fix our region’s health care system to improve deliveries, enhance quality, 

ensure affordability, and increase accessibility to all. 

We at TUHS are committed to working with all stakeholders to 

build a sturdy health care system to meet current needs and to assure a stable delivery system for the next generation. 

Senator Specter, thank you for the opportunity to testify on this 

matter and for your leadership on this very important issue. 

[The prepared statement of Mr. Marshall appears as a submission for the record.] 

Senator SPECTER. Thank you very much, Mr. Marshall. 

12

Our next witness is Mr. Robert Ballou, President and CEO of 

CDI Corporation which provides engineering and information technologies, staffing, outsourcing and consulting services to a wide 

range of Fortune 400 customers. 

Prior to joining CDI, Mr. Ballou held positions at Global Vacation 

Group, Thayer Capital Partners and Alamo Rent-a-Car. A graduate 

of the University of Pennsylvania’s Wharton School and from Dartmouth College’s Amos Tuck School of Business. 

Thank you for joining us, Mr. Ballou, and we look forward to 

your testimony. 

STATEMENT OF ROGER BALLOU, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, CDI CORPORATION, PHILADELPHIA, PENNSYLVANIA 

Mr. BALLOU. Thank you, Senator Specter and good morning. 

My name is Roger Ballou and I am President and CEO of CDI 

Corporation, a $1.1 billion publicly traded outsourcing and professional staffing company headquartered in Philadelphia. Thank you 

for inviting me to this hearing today to discuss a topic of great importance to CDI and its 16,600 staff and contract employees, the 

rising cost of health care and specifically provider collective-bargaining. 

As a businessman running an international company, I tend to 

try to break things down into the simplest of terms, cost and benefits, assets and liabilities. The issues I face day-to-day vary in complexity, but in reality most can be solved by the application of basic 

principles learned in economics 101. 

I have learned that same approach in evaluating the cost benefits of provider collective bargaining. I can unequivocally say it just 

does not add up. 

Fundamentally, it is an issue of supply and demand. A basic 

truth of our economic system is that there exists a right price in 

which all those who wish to buy can find sellers willing to sell and 

all those who wish to sell can find buyers willing to buy. Provider 

collective-bargaining would alter this equation by exempting physicians from Federal antitrust laws and enable them as a group to 

demand higher costs from the buyers. 

But these higher prices simply translate into higher cost ultimately for the buyers, in this case health care insurers, who would 

be forced to buy at artificially inflated market prices. 

As we all know, however, price increases are passed along in the 

market economy and ultimately end up with the consumer. In the 

health care market, that means businesses and employees would 

be stuck with the bill, a bill that is already onerous and getting 

worse every year. 

To give you an idea of the dramatic increase in pricing, from 

1998 to 2003 the health care premiums paid by CDI and its employees increased more than 60 percent. Last year alone premiums 

paid by CDI and CDI employees jumped more than 13 percent, and 

that is below the national average. 

Every year we competitively shop around for the best rates for 

our employees and have remained with Independence Blue Cross 

because they offer the best rates, rates that would surely go up if 

13

physicians were permitted to collectively bargain with health plans 

over fees and other contract terms. 

Provider collective bargaining would not only drive up health 

care costs in Pennsylvania as a matter of course, it would also most 

likely impede job growth in the State. As CEO of a publicly traded 

company I have a fiduciary duty to my shareholders. I must make 

sure that the company runs efficiently and turns a profit or I am 

out of a job. 

When making a decision on where to locate or relocate a business 

function, health care costs enter the equation. I can tell you that 

in the past two years we have moved a back office operation from 

Philadelphia to Charleston, West Virginia in part due to lower 

health care costs in that State. I know other Pennsylvania businesses grapple with the same issues. 

Simply put, if health care costs in Pennsylvania continue to rise, 

it would further erode the State’s competitiveness and ability to attract and retain businesses. 

In short, provider collective bargaining would accelerate the already spiraling cost of health care in Pennsylvania and the country, which in turn would increase the number of uninsured and 

underinsured employees and further drain business capital that 

could be better spent on investment and job creation. This is the 

exact opposite of what needs to be done. We should be taking costs 

out of health care, not increasing the cost of health care services. 

It is for this reason that we need to explore real solutions to contain health care costs, such as health savings accounts and medical 

malpractice tort reform that would cap non-economic damages. 

These solutions, especially tort reform, should be actively pursued 

on a national and state level. Physicians must have their insurance 

burden eased. The health insurance industry needs to make a profit and Pennsylvania businesses and employees need relief from outof-control health care costs. 

These are not necessarily competing interests. There are solutions but provider collective bargaining is not one of them. 

Senator Specter, thank you for allowing me to share my experience with you at this forum and I will be happy to answer any 

questions you may have later. 

[The prepared statement of Mr. Ballou appears as a submission 

for the record.] 

Senator SPECTER. Thank you very much, Mr. Ballou. 

Our next witness is Mr. Patrick B. Gillespie, Business Manager 

of the Philadelphia Building and Construction Trades Council since 

1982. The Council represents approximately 70,000 union members 

in the construction industry in the Philadelphia region. He served 

as a member of the Pennsylvania House of Representatives in 1975 

and 1976, and is a member of the Board of Directors of Independence Blue Cross. 

Mr. Gillespie, that is what my notes tell me here, but were you 

in the House of Representatives? 

Mr. GILLESPIE. Yes, Senator. When I was a child, yes, sir. In 

1976. 

Senator SPECTER. then it is accurate. I have known you for a 

long time but I did not know of your background in the house. 

Thank you. 

14

Mr. GILLESPIE. Certain things I am not proud of, Senator. 

[Laughter.] 

Senator SPECTER. I thought I had a pretty comprehensive knowledge of your background, Pat, but not that. 

Thank you for joining us and the floor is yours. 

STATEMENT OF PATRICK B. GILLESPIE, BUSINESS MANAGER, 

PHILADELPHIA BUILDING AND CONSTRUCTION TRADES 

COUNCIL, PHILADELPHIA, PENNSYLVANIA 

Mr. GILLESPIE. Thank you, Senator. 

As you stated, my name is Pat Gillespie. I am the Business Manager of the Philadelphia Building Trades Council. 

It is my understanding that the primary issue you wanted to discuss today is collective bargaining for physicians and hospitals and 

whether that would represent a positive change for consumers of 

health care in Pennsylvania. As a person who believes in the sanctity of collective bargaining with their employer, this is kind of an 

interesting dilemma that I have. 

At the outset I want to state for the record that in addition to 

my role as manager of the Philadelphia Building Trades, I am a 

member of the Independence Blue Cross Board of Directors. And 

the reason I am on that board is absolutely germane to the subject 

of today’s gathering. 

The workers who I represent, and there about 70,000 of them, 

care very much about their health care coverage. Right now it is 

running about $15,000 a year to cover each member. They care 

about the quality and quantity of their benefits and increasingly 

they are very concerned about the cost of those benefits. 

That is why it is important for me to sit on the Independence 

Blue Cross is Board because there I hear firsthand why my member’s health insurance premiums are going up. I ask the questions 

that my members ask me and I can better understand the factors 

that are driving up the cost of their health care coverage. 

In other words, I am there to represent people who work hard 

every day to provide for families that count on them. One of the 

things that they want to provide for their families is health insurance, obviously. As a result, I have learned a whole lot about the 

health insurance business and I have learned one lesson well. The 

costs of my member’s health insurance is tied directly to the 

amount of health insurance paid out for health care. When the cost 

of medical care goes up, our premiums go up. 

That is what has me worried about today’s subject, Senator, because no matter how I look at the idea of paying still more to physicians and hospitals it comes out the same way, higher insurance 

costs for my members. These days, I guarantee you that will mean 

loss of jobs because companies that employ our members are having a harder and harder time finding health care benefits for their 

workers and my members. 

That is why these companies cannot believe it when they hear 

the Government might step in and artificially alter the balance between an insurer like IBC strikes between their financial needs for 

providers and members. 

The issue is not about contracting leverage or bargaining power. 

The real issue is how to assure affordable health care to as many 

15

people as possible while still compensating providers fairly. That is 

what IBC does. Day in and day out it strikes a balance between 

those needs of my members, your constituents, and the providers 

of medical care. 

Let me tell you why companies buy health insurance from IBC. 

They do it because IBC’s long history, sound reputation, strong network of hospital and physician competitive prices. That is why 

those companies expect, no they insist, that IBC negotiate on their 

behalf with physicians and hospitals to ensure that quality care is 

provided at a reasonable price. 

Those companies have no interest in Government making it more 

difficult for IBC to negotiate a deal which are fair to both members 

and providers because they know full well that can lead to higher 

health care costs. 

I have been seeing a disturbing trend lately. It involves the Government stepping in and ordering health insurance companies to 

provide additional benefits, adopt new rules or implement new programs. People call them mandates and I guess that is what they 

are, well intended. But let me tell you who pays for those mandates 

each and every time they are enacted is our members. 

As an example, back in 1999 the Pennsylvania Legislature, such 

an August body, decided as part of Act 68 to order health insurers 

to pay for emergency room visits if a prudent layperson would 

agree that the situation was an emergency. At that time, Independence Blue Cross already was paying 98 percent of all emergency 

room claims. So how much more could another 2 percent amount 

to? 

Well, Senator, today IBC’s emergency from costs just for its 

HMOs has increased 154 percent. Why? Because people use the ER 

as a doctors office. I am sure no legislator ever intended that to 

happen, but it did and my members are paying for it. 

And how about the HIPAA—this is my favorite one—the Federal 

initiative that was designed to protect all of us and our health information. It was a high and lofty intent and a good deal. Independence Blue Cross spent more than $40 million to implement 

that Federal mandate. Did any legislator intend for that to happen? I do not think so. But it did and my members will end up paying that $40 million, along with everyone else who buys Independence Blue Cross insurance. 

I am not sure I can think of a Federal, State or local mandate 

that ever resulted in a decrease of health insurance cost, which 

brings me back to the subject of today’s session, whether the Government should step in so physicians and hospitals can get paid 

more. I think we have to go very slowly with this and very carefully. A friend of mine said one time on this issue that we should 

not be looking for villains. There are plenty of them out there. 

What we should be looking for is solutions. 

Thank you, Senator. 

[The prepared statement of Mr. Gillespie appears as a submission for the record.] 

Senator SPECTER. Thank you very much, Mr. Gillespie. 

We now turn to Dr. Stephen Foreman, Vice President of Research and Director of the Pennsylvania Medical Society Health 

Services Research institute. A student of the Pennsylvania health 

16

insurance markets for more than six years, he has prepared reports 

on the dynamics of Philadelphia, Pittsburgh, Central Pennsylvania 

and the Northeastern Pennsylvania area. He provides consulting 

services to the American Medical Association for issues relating to 

health insurance markets. 

A Ph.D. in health economics from the University of California at 

Berkeley, a law degree from the University of North Carolina and 

a master’s in public administration from Harvard’s Kennedy School 

of Government. 

Thank you for being with us today, Dr. Foreman, and we look 

forward to your testimony. 

STATEMENT OF STEPHEN FOREMAN, PH.D., J.D., VICE PRESIDENT OF RESEARCH AND DIRECTOR, PENNSYLVANIA MEDICAL SOCIETY HEALTH SERVICES RESEARCH INSTITUTE, 

HARRISBURG, PENNSYLVANIA 

Mr. FOREMAN. Thank you, Senator. 

We also appreciate the opportunity to present testimony about 

the Southeast Pennsylvania health insurance markets. 

I would like to make it clear at the outset that our testimony is 

not intended as a corporate or personal attack on any of the market participants or the people who work for them. Each of them is 

doing what they think best. 

However, each is doing what comes naturally in what we call a 

failed market. This, we believe, is the fundamental cause of a host 

of problems and calls for extensive public policy analysis. 

First, let us look at the market. Clearly, Independence Blue 

Cross has a dominant share. In 2002 Independence had an 85 percent share and Aetna about 13 percent. 

What about employers, hospitals and physicians? Basically they 

are fragmented. What does such market produce? Annual doubledigit health insurance premium increases, unilateral decisions 

about payment fee schedules that are unilaterally imposed or stagnant or declining compensation, despite the fact that physician fees 

have been raised 20 percent recently, leaving physician payment 

substantially below Medicare levels. 

Health insurers with high profit levels also exist. 

How did this market evolve? Not by skilled foresight in the industry. Independence’s overhead costs are good but not remarkably 

better than any other firms. Indeed, there is no published evidence 

that larger health insurers are any more efficient. To the contrary, 

they exhaust their economies of scale at about 100,000 to 150,000 

enrollees. 

The Health Insurance Industry Association contends that competition is robust and that market entry is easy. This is certainly 

not the case. Nor can employer’s self-insurance provide effective 

competition because dominant insurers demand and receive lower 

hospital and physician prices. Market entry barriers are high and 

they are rising higher. 

Indeed the best evidence of barriers is that despite high profit 

levels in this market, there has been no substantial new entry for 

the past 10 years. 

So why is not this market the subject of antitrust investigation? 

The Sherman Act has two provisions that would appear to apply. 

17

For the reasons that we described in our written comments, conduct in this market may bear further study. There are perhaps reasonable arguments that there are no antitrust violations here. If so, 

we would then ask is this market good for the public? If not, then 

market restoring changes in the antitrust laws may well be warranted. 

So that brings us to a closer look at public policy concerns. AHIP, 

the insurance industry trade association argues that dominant 

health insurers are needed to pull down health care costs. You 

have already heard that in some great detail. You will hear today 

that Independence needs its size and that physicians and hospitals 

must stay fragmented in order to hold down health care costs. 

For the reasons described in our written comments, this is not 

true nor does it make for sound public policy. Despite the strenuous assertions of well-meaning health insurers, private monopoly 

and monopsony enforcement is not in the public interest here. If 

markets cannot work toward competition, then public and not private regulation of price is required. 

Cost containment presumes that insurers pass their savings 

along through to employers and to the public through reduced premiums. However, double digit premium increases over the last 10 

years suggest that this may not be occurring. 

Indeed, the whole notion that rising health care costs can be 

dealt with through a simplistic cost reduction imposed on providers 

is misplaced. Rising costs are a function of a complex host of factors. You have already heard a lot about the utilization issue in 

Southeast Pennsylvania. There are many others. 

Imposing cost containment on hospitals and physicians solely is 

unfair, improper and does not deal with the underlying causes of 

medical care cost inflation. It will destroy medical care and will 

drastically reduce patient access. 

So where does that leave us? The evolution of the Southeast 

Pennsylvania health insurance market puts us squarely at a crossroad. Is a competitive private commercial health insurance market 

the best way to allocate scarce medical care resources? If so, then 

steps need to be taken to restore competition here. If we believe 

that competition cannot work, we should not lightly conclude that 

private commercial health insurers are the best entities to administer a single-payer system and dictate price. Effectively that is 

what we have here now. 

Pennsylvania’s physicians believe that the current situation is 

untenable and growing worse. Physicians are integral participants 

in a failed market. 

As our elderly population increases rapidly, we will need to provide ever-increasing amounts of medical care here. Pennsylvania 

physicians urge appropriate action now so that they can continue 

to deliver the best possible medical care for each of their patients. 

Thank you very much. 

[The prepared statement of Mr. Foreman appears as a submission for the record.] 

Senator SPECTER. Thank you very much, Dr. Foreman. 

Our next witness is Dr. Martin D. Trichtinger, a board-certified 

physician in internal medicine. For years an active member and 

leader in both the Pennsylvania Medical Society and the MontVerDate 0ct 09 2002 10:48 Nov 30, 2004 Jkt 096683 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\96925.TXT SJUD4 PsN: CMORC
18

gomery County Medical Society. In 2003, he acted as vice-speaker 

of the Pennsylvania Medical Society’s House of Delegates and is 

currently a member of the Society’s Council on Policy and Governmental Affairs. 

In 1998 he served as the president of the Montgomery County 

Medical Society and is currently a board member delegate and executive committee member. 

Dr. Trichtinger is a graduate of the Jefferson Medical College in 

Philadelphia and I believe also the chairman of the Political Action 

Committee of the Pennsylvania Medical Society. 

Thank you for joining us and the floor is yours. 

STATEMENT OF MARTIN D. TRICHTINGER, M.D., INTERNIST, 

MONTGOMERY COUNTY, PENNSYLVANIA 

Dr. TRICHTINGER. Thank you, Senator Specter. 

As you have said, my name is Marty Trichtinger, M.D. I am an 

internist practicing in Jenkintown, Pennsylvania. I come before you 

to speak on behalf of the physicians of Southeastern Pennsylvania. 

I do want to thank you again particularly for holding these hearings. 

I wanted to give you some perspective in terms of the view of a 

physician in an attempt to provide a high level quality of care to 

patients who are obviously your constituents. 

Basically there have been many wedges that have been driven 

into the doctor-patient relationship and Southeastern Pennsylvania 

has some of the highest practice costs in the Nation. These are 

driven obviously by the professional liability crisis, and some of the 

worse reimbursement levels nationally for health care delivery. 

I wanted to begin on the contracting process. You have already 

heard Mr. Gillespie talk about negotiation within the market. However, based on some of the prior testimony you have heard, there 

are essentially two giant insurers operating within this market, 

and essentially one being bigger than the other. 

Neither I nor the group of physicians that I participate in have 

the ability to negotiate with these insurers to amend our contracts 

with either of the two predominant payers. Both Aetna and IBC 

presently have 95 percent of the private commercial patients in 

this region. 

They are able to dictate the terms of the contract, including the 

level of reimbursement and the cost of the patient care. 

I have no ability to change this dilemma. In fact, in 1998 IBC 

unilaterally decreased its fees for many of its services. In some 

cases, this decrease was more than 60 percent of what they were 

previously paying. Since that time some of these fees have been increased, but many of the current fees still remain below 1998 levels. 

So you may ask why would I continue to participate or accept a 

contract on such unfavorable terms? Unfortunately, the answer is 

all too simple. Unless I plan to leave the State, I have no choice 

if I wish to take care or continue to provide the care of the patients 

that I have seen for greater than 20 years. 

In addition to these low levels of reimbursement, both fee-forservice and capitation contracts also allow insurers to pay claims 

processing and perform other insurance games. This further 

19

tightens the vice grip of escalating costs and unfair reimbursement. 

These games include bundling of services into a single-payer system. 

Insurance company play another destructive game when they do 

not recognize the entirety of the CPT coding system, the system 

that was initially developed by the AMA. And it effectively provides 

a wide range of looking at all aspects of health care. If you have 

the ability to pick and choose certain aspects of this coding system 

that favor the insurer and electing not to adopt coding provisions 

that favor patient care, I find this patently unfair. 

Ultimately the tight vise grip that squeezes physicians hurts patients as well. In some instances, because of this tight vice grip, patients do not have the access to cutting edge technology in the doctor’s office due to these financial constraints that are placed upon 

us. 

Also, retention and recruitment of quality staff at the doctor’s office and even other quality physicians to join the practices is inhibited by this fee scale system. 

My practice at Abington Hospital admits patients to the hospital 

and cares for these patients while they are hospitalized. And hospital admissions can occur at any hour of the day or night, and 

care is demanding both clinically and emotionally. Our group believes that it is in the patient’s best interest to be there when the 

patients are hospitalized. We provide a very important role in 

terms of advocacy, safety and quality. 

Unfortunately, under the present system, in August of 2001, IBC 

terminated its episode of care payment leaving us with the dilemma to either accept seeing patients at no reimbursement versus 

turning the care over to hospitalists who do not know the patient. 

Ironically, these payments to the hospitalist provide them with 

even more reimbursement than what we were receiving under the 

episode of care. 

That seems particularly wasteful that IBC would pay another 

physician to take care of my hospitalized patient, and it makes little sense in terms of the quality and the continuity of care that we 

are not able to take care of our own hospitalized patients. 

No one knows my patients better than I do, and I feel that it is 

inappropriate that IBC puts us in this sort of Faustian dilemma of 

either accepting the care of the patients for free or handing it over 

to a hospitalist to provide the care. 

I wanted to thank you for the opportunity to provide this testimony today. I am hopeful that you will be able to have the appropriate Federal regulatory agencies review the health care delivery 

system dynamics in the Philadelphia area. We definitely need to 

bring the best and the brightest physicians into the Philadelphia 

area and we need to be able to keep them here so that our patients 

benefit. 

We believe that now is the time to come to terms with this very 

serious problem. 

Thank you. 

[The prepared statement of Dr. Trichtinger appears as a submission for the record.] 

Senator SPECTER. Thank you very much for your testimony, Dr. 

Trichtinger. 

20

We have one additional witness on the list and that is Mr. Stuart 

H. Fine, Chief Executive Officer of Grand View Hospital and affiliate entities in Sellersville. And we will come back to Mr. Fine in 

just a moment or two. 

Dr. Udvarhelyi, with respect to the reserve which Blue Cross 

Blue Shield, Independence Blue Cross is alleged to have, that figure has been estimated as high as $5 billion. Is that a correct figure? 

Mr. UDVARHELYI. No, Senator, that is not a correct figure. 

Senator SPECTER. What is the correct figure? 

Mr. UDVARHELYI. I believe our reserve level now is—I do not 

have the exact number. We can certainly get it for you. I believe 

it is just a little over $800 million. 

Senator SPECTER. A little over what? 

Mr. UDVARHELYI. $800 million. 

Senator SPECTER. $800 million? 

Mr. UDVARHELYI. Yes, and our reserves, Senator, represent on 

average the ability to pay about 40 days of claims on hand. We pay 

$660 million of claims each and every month, about $8 billion in 

claims a year. So our reserves represent a little bit more than one 

month’s claim payment ability in the event of an emergency. 

Senator SPECTER. There has been a contention by some of the officials of the Commonwealth of Pennsylvania that they have the 

authority under the Insurance Department rules to assess funds 

against Independence Blue Cross to, in effect, take those funds to 

help with the malpractice problem. Does any such authority reside 

in the Commonwealth of Pennsylvania, in your opinion? 

Mr. UDVARHELYI. Senator, I could not comment on what authority the State has. What I can say is that the State did hold hearings in the fall of 2002 into the are of reserves. Testimony was 

given by Independence Blue Cross as well as some outside experts 

and the result, I think, of that investigation is that our level of reserves is entirely appropriate. 

In fact, some of the experts would say if anything we are underreserved. And I believe Dr. Foreman of the Medical Society has 

looked at that and would concur that, at least in our case, our reserves are not excessive. 

Senator SPECTER. Mr. Fine, we turn to you at this point. You are 

the Chief Executive Officer of Grand View Hospital and affiliated 

entities in Sellersville, Pennsylvania. It is my understanding that 

there has been litigation between your hospital and Independence 

Blue Cross; is that correct? 

Mr. FINE. Yes, it is, Senator. 

Senator SPECTER. And that litigation was settled subject to a 

confidentiality agreement? 

Mr. FINE. Yes, sir. 

Senator SPECTER. What are the essential terms of the confidentiality agreement? 

STATEMENT OF STUART H. FINE, CHIEF EXECUTIVE OFFICER, 

GRAND VIEW HOSPITAL AND AFFILIATED ENTITIES, 

SELLERSVILLE, PENNSYLVANIA 

Mr. FINE. According to a letter received from Independence Blue 

Cross by my counsel earlier this month, I am to, if I can find the 

21

correct section here, I am not to voluntarily disclose in testimony 

anything that need not be voluntarily disclosed. Blue Cross has not 

waived any of its rights or remedies relating to the settlement 

agreement or the mutual release of provider contracts. 

I understand that I am able to respond to direct questions put 

to me. 

Senator SPECTER. Dr. Udvarhelyi, what is the purpose of such a 

restrictive confidentiality agreement? 

Mr. UDVARHELYI. Senator, our contract negotiations and certainly settlement discussions are considered confidential from a 

business standpoint and hence, we do not permit them in the public domain. 

Senator SPECTER. Why confidential? Why should not the public 

have a right to know what the charges were made in litigation and 

what the terms of a settlement are? 

Mr. UDVARHELYI. Senator, I cannot comment on the legal aspects 

of the agreement, although we would be happy to get back to you 

on that. I believe, like many settlements which are settled in a 

legal manner, the terms of that are frequently kept confidential between the parties to protect both parties’ interests. 

Senator SPECTER. Mr. Fine, the Morning Call on July 17th, 2001 

reported that you had stated that Grand View Hospital ‘‘loses millions of dollars each year because IBC does not reimburse Grand 

View for the entire cost of its care of Blue Cross patients.’’ The 

Morning Call then added that ‘‘Fine estimated that Grand View 

would likely lose $5 million in the next 12 months if it continues 

to be reimbursed under the terms of the expiring contract.’’ Are 

those quotes accurate, Mr. Fine? 

Mr. FINE. Yes, sir, they are. 

Senator SPECTER. It was reported that in July of 2001 while your 

contract negotiations were ongoing, you made some comments to 

the press about your difficulties with Independence Blue Cross. 

And in response Independence Blue Cross sued you and your hospital for libel. 

According to the Morning Call of July 17th, 2001 your attorney 

referred to the suit as a ‘‘fairly heavy-handed negotiating tactic.’’ 

Is all of that accurate? 

Mr. FINE. I believe it to be accurate, Senator. 

Senator SPECTER. Do you agree with the comment attributed to 

your attorney that the purpose of the suit was to pressure you and 

your hospital to agree to IBC’s terms? 

Mr. FINE. Yes, sir, I do. 

Senator SPECTER. Dr. Udvarhelyi, are you familiar with that lawsuit? 

Mr. UDVARHELYI. Senator, I am not familiar with the details of 

that lawsuit. 

Senator SPECTER. Is there anybody hear from IBC who is familiar with that lawsuit? Anybody in the room? 

Would you step forward please? Would you identify yourself for 

the record, please? 

Mr. TUFANO. Sure, Senator. I am Paul Tufano. I am the General 

Counsel for IBC. 

Senator SPECTER. Are you familiar that lawsuit? 

22

Mr. TUFANO. I am, Senator but I did not know you would be asking about it today and so I did not get a chance to review the 

pleadings from that. I would be happy to and follow up with you 

and your staff, if you would like. 

Senator SPECTER. It is a pretty unusual lawsuit. do you know 

about it in a general way? 

Mr. TUFANO. I recall that there were some statements made by 

the hospital and Dr. Fine at the time in connection with the negotiations about Independence Blue Cross. And I recall that the litigation was filed. I do not have the exact details of what the statements were handy right now. 

Senator SPECTER. Has Independence Blue Cross filed lawsuits 

under similar circumstances? 

Mr. TUFANO. Not that I recall, at least in my four-and-a-half 

years with the company, Senator. 

Senator SPECTER. If you would supplement your answers to both 

questions, I would appreciate it. We had not anticipated calling you 

as a witness and I can understand you would not be familiar with 

it. But since the witness for Independence Blue Cross did not 

know, thank you. 

Mr. TUFANO. I will certainly supplement that after today’s hearing. Thanks, Senator. 

Senator SPECTER. We would appreciate that. 

Mr. Gillespie, when we talk about collective bargaining and you 

are concerned that if there was collective bargaining that there 

might be the intervention of another insurance company into the 

field. And you were concerned that that would cause your union 

members to pay more dues. 

There has been a counter argument offered that if there was another insurer in the field that that competition between some other 

insurer and Independence Blue Cross might tend to drive costs 

down. Do you think there is any merit to that? 

Mr. GILLESPIE. I think that what drives costs up is the utilization. I think that however you slice it or dice it. My concern about 

collective bargaining is who is the employer? Who becomes the employer? Does the agent, the indemnifier that our members select is 

Independence Blue Cross. They do not have to select them. They 

select them because that is where we get the best rates. 

If those Independence Blue Cross rates go up, then people will 

look at Aetna, as they have. Or they will look at other indemnifiers 

in the area. It is kind of like shifting the chairs on the Titanic. 

We have a serious health care cost problem and I do not think 

that problem gets settled by—I mean, the reason Independence 

Blue Cross enjoys the market share that they have here in the five 

county area is that they tend to their knitting. They are pretty aggressive when it comes to maintaining their costs. 

And by the way, I believe their administrative costs are about 

nine cents on the dollar, which is pretty good in this day and age. 

So the idea of saying that we could get better health care, we can 

contain costs, we can provide a better service if we allow a condition in the antitrust law that allows our doctors to act as employees and our insurance companies to act as employers. 

I can understand the doctors saying we have to band together 

and say this is what we are going to charge. And they can very 

23

well do that. And Independence Blue Cross can just say okay, we 

will just pass that on. 

But what happens then when they just pass the costs through, 

when they just pass the costs through, then the people that have 

to pay that cost are our members who either A, will not continue 

to buy that service; or B, just look somewhere else where they can 

get it cheaper. 

And what has happened in the marketplace is, as people will say 

here, all these lofty folks around, I feel a little inadequate talking 

about economics here. But what happens in the marketplace is if 

you do not have the money then you just cannot buy the service. 

In Pennsylvania we have well over 1 million people now who 

work for a living. These are not poor folks. These are people who 

work who just decided not to have health care coverage. 

The other dilemma that is going to be a tragedy is people who 

are just buying health care coverage for themselves and not for 

their families. 

We are headed for a catastrophe and we have to find the solution 

as to containing costs for our health care, whether we overutilize 

it or whether it is just too expensive or whether society has to come 

forward and say okay, we have to pay. And instead of paying 

$15,000 a year, it is $30,000 a year. That is the number we have 

to pay. 

But then where do we find that? The average salary for a building tradesman in my territory, the five County area, the average 

salary is $65,000 or $70,000 a year. It varies. And these are the 

good jobs in the blue-collar realm. The construction industry has always been a good job, $65,000 or $70,000 is good. $15,000 going to health care, that is an awful lot of money. That 

is a big percentage. 

Senator I wish I had an answer. But I do not see how making 

Independence Blue Cross or Aetna or other insurance companies an 

employer in the scenario of collective bargaining with doctors resolves it. 

Senator SPECTER. Mr. Gillespie, that is the issue we are wrestling with. And your perspective for collective bargaining is a very 

unique perspective because there is no doubt that labor could not 

deal with management when each employee was looking out for 

himself. It was the collective bargaining aspect which gave the 

members the strength in combination. 

But I understand your point. 

Mr. Marshall, you have testified in favor of the benefit of collective bargaining. If there were to be an exemption under the antitrust laws for communities where there is a certain market share 

dominated by one firm what do you think the consequence of that 

would be? Would it necessarily drive up health care costs? Or 

would there be an opportunity for another insurer to come into the 

field which might provide competition illustratively for IBC? 

Mr. MARSHALL. I am not sure, Senator, that I testified for or 

against the concept because I am not even sure I understand—

Senator SPECTER. Okay, if you are not sure, then what do you 

think? 

Mr. MARSHALL. What I have wrestled with, and whether the 

issue is malpractice or—it is like Jell-O. You push in one direction 

24

and it pops out another. What I am really hoping is we can get a 

comprehensive solution. If collective bargaining—

Senator SPECTER. What would you suggest for a comprehensive 

solution? I think everybody would like that, Mr. Marshall. But 

what is it? 

Mr. MARSHALL. That is why I preface that by saying I wrestle 

with this all the time. I guess what I am saying is that we have 

to make sure that if we rob Peter to pay Paul, you are going to be 

back here with one of the apostles a year from now. 

Senator SPECTER. Mr. Marshall, we do not want to rob anybody, 

but avoiding robbery, how do we do it? 

Mr. MARSHALL. As I have talked with you in the past, I think 

we have to go to some more of a—and I use this word term advisedly, more of a single-payer system. And how it gets implemented, I am not sure. 

Senator SPECTER. Are you talking about the Federal Government 

as a single-payer? 

Mr. MARSHALL. Or some collective of a single-payer. 

Senator SPECTER. Are you talking about the Clinton health care 

plan? 

Mr. MARSHALL. No, I assure you, Senator, I am not talking about 

the Clinton health care plan. That dog will not hunt. 

But to the point, if Pat is right and physicians collectively bargain and that drives up cost, well we all—including physicians. As 

Marty will tell you, he has an office. His costs go up. It is not just 

malpractice. It is the cost of employing his nurses, it is paying their 

health care, and it is everything else. 

What we are doing is just shifting it across. And if you really 

want to look at the health care problem for the last 25 years in this 

country is we have all been shifting. And nobody sat back and said 

okay, here are the things that confront us. We have health care inflation way over 2 percent or 3 percent or whatever the rate is. 

And as I said earlier in my testimony, we either are going to 

have to lessen the demand, which is a pretty tough thing because 

we all sit, Stu sits with an emergency room, I sit with an emergency room and a number of the hospitals here sit with emergency 

rooms. But do not get to choose. We do not get to say sorry, you 

cannot come in because you do not have dollars. We are obligated 

under Federal law. If somebody gets on our door, we have to take 

care of it. 

Senator SPECTER. Mr. Marshall, in taking a look at what has 

happened to Medical College of Pennsylvania, to what extent if at 

all do you attribute that to the low reimbursements from Blue 

Cross Blue Shield? 

Mr. MARSHALL. Senator, as you know, we have looked very hard 

at it. I do not know. I am not sure I even understand what their—

I am not sure I am even familiar with what percentage. But I 

would have to say if they are like us, they have probably equally 

as much of a complaint with the Federal Government and the State 

government. 

I have to tell you, Senator, my neurosurgeons will come in and tell you they get $26 a visit for a medical assistance payment. And 

I assure you, because I pay those costs—

Senator SPECTER. Does IBC reimbursement less than Medicare? 

25

Mr. MARSHALL. I do not know. I think in some cases. I do not 

know. I do not know the answer to that question. 

Senator SPECTER. Dr. Trichtinger, does IBC reimburse less than 

Medicare? 

Dr. TRICHTINGER. Yes, for us it does. And what is interesting to 

me is the fact that the—

Senator SPECTER. I am sorry, I did not hear you. You say it does? 

Dr. TRICHTINGER. Yes, in fact, it does pay us less than Medicare. 

We are one of the few areas where instead of Medicare being the 

sort of the floor for prices, Medicare happens to be our ceiling. We 

get about 35 percent less than Medicare. 

And what was interesting to me was that the Medicare Payment 

Advisory Commission just indicated that the HMO products in this 

country get 7 percent higher or have 7 percent higher than the feefor-service amount for Medicare. And yet, ironically we are paid 35 

percent less. 

So if we could go to an entire Medicare fee-for-service system, 

theoretically the Government could save 7 percent and actually pay 

us hopefully 35 percent more. 

Senator SPECTER. There has been considerable criticism of the 

Medicare reimbursement rates. They were scheduled to be cut 

March 1, 2003 by 4.4 percent and that cut was eliminated. They 

were scheduled to be cut both in fiscal year 2004 and 2005 and 

that was changed by the Medicare Reform Bill. 

Dr. Badolato, you testified about Aetna in the field as well as 

Independence Blue Cross. Does the presence of Aetna provide any 

realistic competition with IBC to move to lower the cost? 

Dr. BADOLATO. With few differences, it appears that one is a mirror of the other. In fact, in my written testimony there are 11 

slides. One of the slides shows the per member per month paid to 

our practice by US Healthcare, then Aetna for 10 years. The same 

slide shows the Keystone payments per member per month, although it does not track the 10 years. I believe they would mirror 

each other. 

Basically the payments today are less than 10 years ago. So we 

see problems that are unique within each company in that in their 

formulas of payment but the end result is very similar and very 

damaging. 

Dr. TRICHTINGER. Senator Specter, because you moved so quickly 

on it, I know you were not looking for a thank you. But I did want 

to point out to those on this panel that it was the senior Senator 

from Pennsylvania who helped lead the fight in the Senate to correct that Medicare correction that you had mentioned earlier. 

As I said, I realize you were not looking for a thank you, but I 

wanted to give it anyway. 

Senator SPECTER. No, I was looking for a thank you. I really set 

you up for that one with a little head and shoulder fake. 

Mr. GILLESPIE. Is that what time of year it is? 

Senator SPECTER. Mr. Gillespie, it is always that time of the 

year, just like your collective bargaining, it is always there. 

That is a recurring problem. You are looking for a comprehensive 

solution that Chip Marshall is looking for, we are all looking for. 

There is a lot of searching. 

26

I have been on the Subcommittee for Health and Human Services in my 24th year and I have chaired it most of the time since 

1995. And these are problems that are virtually intractable. 

There is quite an array of talent here at this table, let me tell 

you. I have been at a lot of hearings and I have not seen a hearing 

with more talent than we have here today. 

Usually our hearings in Washington are interrupted by votes and 

interrupted by appearances in some other room to make a quorum. 

And there is a lot which is being brought to bear here. 

And Dr. Trichtinger is correct that Senator Stevens and I—he 

chairs the full Committee but I brought the issue to his attention 

and we eliminated that cut on March 1st. it was a 4.4 percent cut 

which would have cost $58 billion. And when we moved forward on 

Medicare reform we eliminated the cuts in 2004 and 2005 and 

added a small addition. 

Dr. Badolato, I did not quite hear your answer as to whether 

Aetna provided any competition for the dominant market share of 

the IBC? Do you think Aetna does? 

Dr. BADOLATO. I believe they do not. 

Senator SPECTER. Mr. Ballou, you have commented about concern about the rates going up if there was to be collective bargaining. Do you have a view on what would happen if another insurance company was able to enter into the field? There are some 

which are trying to come in and they are faced with this requirement that Independence Blue Cross requires 75 percent enrollment, and IBC justifies that. Mr. Udvarhelyi, correct me if I am 

wrong but you need to spread the risk. 

But when IBC requires 75 percent enrollment, nobody else can 

come in. If somebody else could come in, do you think that might 

provide some competition to lower rates? 

Mr. BALLOU. This is an open market in terms of the ability to 

come in. There are other competitors here. We bid our insurance 

on the year. We look at Independence Blue Cross. We look at 

Aetna. Frankly Aetna’s rates were not as good as Independence 

Blue Cross for us. 

Somebody would have to find a way to do something kind of unnatural to lower the rates much. If you look at it, with a company 

on the scale of Independence Blue Cross—I heard earlier someone 

cite 9 percent administrative cost load. When you look at the underwriting burden that they carry and when you hear the reserve 

ratios, the money is not sitting at Independence Blue Cross. It is 

being spent in the system. 

And if Aetna could do better rates than Independence Blue 

Cross, I am sure they would do that today to gain market share 

they could afford to do it. It is clear that they cannot. And that 

means that their cost structure is higher or they are not getting as 

good of rates from the physicians and hospitals. 

The issue here is the total cost of the system as I see it. And no 

one sitting at this table has the comprehensive solution in hand. 

But I do believe there are elements of it that would require tax reform. Certainly it would be useful to make more medical expenses 

deductible. I think the health savings accounts on the part of the 

Medicare reform were actually a very positive step in the right direction there. 

27

We are looking very, very hard at redesigning our insurance program to take advantage of health savings accounts, to actually 

make the user of the service more frequently the payor, and have 

incentives to manage the use of the care better. 

I think that there are things that could be done with medical 

malpractice reform that would drive costs out of the system. I think 

that would be useful as well. 

So as I see this, this is an issue of finding a way to contain and 

manage the cost of providing medical care as opposed to is there 

another insurer who could come in and do a better job? The costs 

are still the costs. 

Senator SPECTER. Dr. Foreman, you mentioned the Sherman Act. 

Do you think there may be a Sherman Act issue of violation potentially in IBC’s dominance in the market here? 

Mr. FOREMAN. We have been to the FTC and Justice and asked 

them to look at a number of items of conduct that we thought 

should be put on the table for investigation, without making a direct conclusion of violation at all but as a subject for investigation. 

To begin with, for example, we think that all four major Pennsylvania Blue Cross firms could be competing in this market quite actively and make the market improve. They do not, we understand, 

because of a division of markets agreement. We would like to see 

that agreement looked at, perhaps done away with. 

Senator SPECTER. What are the provisions or terms of that agreement generally? 

Mr. FOREMAN. We have not seen the agreement in words. We 

have heard people talk about it and we have seen the effect in that 

the four Blue Cross insurance firms in Pennsylvania have specific 

territories and they do not compete outside them generally. So even 

the basics of the agreement itself are not public. 

Senator SPECTER. This is a territorial division? 

Mr. FOREMAN. Yes, sir. 

Senator SPECTER. And IBC has the five counties? 

Mr. FOREMAN. Yes, sir. 

Senator SPECTER. How many other counties are controlled by 

whom? 

Mr. FOREMAN. By and large, Northeast Blue provides health insurance in Northeast Pennsylvania. I cannot exactly give you the 

number of counties. High Mark provides the insurance in 29 counties in Western Pennsylvania. And Capital Blue Cross, which does 

compete with High Mark, provides health insurance in 21 counties 

in central Pennsylvania. 

Senator SPECTER. We had hearings with the FTC last week on 

OPEC, which is gouging us with a clear cut conspiracy and restraint of trade without any active state defense or any sovereign 

immunity. 

I do not propose to ask this panel questions on that subject, but 

because the FTC has not acted does not mean a whole lot. They 

have got a pretty consistent record for inaction. They are experts 

in the field. They even compete with Congress for inaction. That is 

how good they are on that particular subject. 

Mr. FOREMAN. I would just like to emphasize, it is possible there 

is not an active antitrust violation here, but that should not end 

the inquiry. The question then ought to be whether the antitrust 

28

laws themselves ought to be strengthened to deal with this situation. 

Senator SPECTER. Well, that is one of the things we are considering, whether there ought to be ability to combine. That would be 

a change in the antitrust laws. 

Dr. Burns, you commented that IBC, the word you used was exploited. Would you amplify on what you meant by the term exploit? 

Mr. BURNS. What I was referring to, Senator, was during the 

1990s there is evidence suggesting that because of their large share 

of the market, being a very concentrated market, IBC could deny 

payments to providers, slow down payments to providers, downgrade payments to providers and hurting the cash flow of hospital 

in particular. 

Senator SPECTER. Dr. Burns, I would like you to respond to 

issues raised by the Chester County Hospital, which filed a complaint in the United States District Court for the Eastern District 

of Pennsylvania on May 5th, 2002 stating that ‘‘in 1999 IBC effectively forced the hospital to enter into a contract that was 20 percent below cost. For fiscal year 2001 the hospital received approximately $34 million in revenue from the IBC Group and nevertheless sustained operating losses on IBC group patients exceeding 

$8.5 million and forcing the hospital into a negative operating position. For fiscal year 2002 the hospital is experiencing similar 

losses.’’

Before asking you to comment on that, Dr. Burns, Dr. 

Udvarhelyi, is that an accurate statement of that Chester County 

complaint? 

Mr. UDVARHELYI. Senator, I cannot confirm the details of that 

complaint. I have not briefed that complaint specifically prior to 

this hearing. 

Senator SPECTER. Could counsel confirm that? 

Mr. TUFANO. Senator, I do not know word for word but yes, essentially that was one of the complaints in their lawsuit was with 

regard to the level of reimbursement. 

Senator SPECTER. There is a confidentiality agreement which 

precludes the Chester County people from testifying? 

Mr. TUFANO. And it would preclude me, Your Honor, as well 

from answering questions. We are in the process of finalizing the 

settlement agreement we have reached with them two months ago. 

Senator SPECTER. I am not sure that is correct. The confidentiality runs to the benefit of IBC. Would that preclude you? 

Mr. TUFANO. It is for both parties. It is a mutual confidentiality 

agreement. Both parties agreed to the confidentiality agreement, 

Senator. 

Senator SPECTER. Would that be subordinate to an inquiry by the 

Senate Judiciary Committee? 

Mr. TUFANO. I am not sure. I would like to confer with our outside counsel here. 

Senator SPECTER. You are counsel. 

Mr. TUFANO. I have our Chester County counsel from that lawsuit with us here. To the extent we needed to—

Senator SPECTER. Fine, I would like to hear his view on the subject. 

29

Mr. TUFANO. To the extent we wanted to talk about things that 

were covered by the confidentiality agreement, I guess Senator, we 

would like to at least explore with you if there are ways that we 

could provide that information to you in a nonpublic forum, to the 

extent we get into things that might be directly covered by the confidentiality agreement and/or that our proprietary. Information like 

rates and things like that. 

Senator SPECTER. The Chester County counsel is here. 

Mr. TUFANO. Yes, he is. 

Senator SPECTER. Could you step forward please? Would you 

identify yourself for the record, please? 

Mr. KRESS. My name is Jim Kress. I am an attorney with 

Howrey Simon Arnold and White in Washington, D.C. 

Senator SPECTER. Mr. Kress, I am not going to ask you to testify 

because well, a subpoena was authorized for you. You stated you 

did not want to testify because the matter was being finalized and 

we respect that. 

So I will just offer an observation myself. If the confidentiality 

agreement runs to the benefit of IBC, I do not think there is anything that the Chester County Hospital would have reluctance to 

have disclosed. And I do think that a Judiciary Committee inquiry 

would take precedence. 

Mr. Fine, following the advice of counsel, offered no testimony 

but responded to questions and he is under subpoena. And whatever he testifies hereto is immune from any action. 

That is one of the benefits of having a Senate inquiry. What was 

testified to is absolutely privileged. But thank you for stepping forward. 

Mr. KRESS. I may want to correct one statement. I was counsel 

to—

Senator SPECTER. You may be opening the door, but go ahead. 

Mr. KRESS. I actually was counsel to Independence Blue Cross in 

its proceeding with Chester County Hospital and not to the hospital itself. 

Senator SPECTER. I see. Okay, I am glad you corrected that. 

Dr. Burns, what do you think about the Chester County complaint? Does that fit into your category of exploitation? 

Mr. BURNS. It is consistent with other stories I have heard in the 

marketplace about hospitals talking about their negotiations with 

Blue Cross. But it is also consistent with what is happening to the 

payment rates for acute care hospitals in Southeastern Pennsylvania over time. 

The American Hospital Association calculates a statistic. It is 

called the payment-to-cost ratio. If you look at what it costs the 

hospital for a patient for day, and if you look at what they get paid 

for that day, it is a ratio. And the higher that ratio, the better. 

That means the hospital is getting paid a decent rate to cover its 

costs and to earn a little surplus. 

That payment-to-cost ratio in the private insurance market 

which Blue Cross dominates has dropped over the last seven years 

in Southeast Pennsylvania and it is now basically near the Medicare level. 

I remember one of the gentlemen say that in his own particular 

situation they pay less than Medicare. But across all of Southeast 

30

Pennsylvania, at least for hospitals, what the private sector insurers are paying the hospitals is basically similar to what Medicare 

pays. 

The problem with that is they are paying at roughly 100 percent 

of cost. Hospitals are not making much of a margin on either Medicare or on Independence Blue Cross or other private insurers. 

Senator SPECTER. Well, really not only much of a cost. At least 

according to the Chester County complaint they are getting less. 

Mr. BURNS. Well, in some cases when you have less bargaining 

power, that is an average across all hospitals. Some may be slightly 

higher. Some may be lower. And the hospitals that have succeeded 

in getting rates slightly better from Independence Blue Cross and 

Aetna US Healthcare. 

Senator SPECTER. So a little more bargaining power would help? 

Mr. BURNS. That is what they have tried to do there. 

Senator SPECTER. Maybe joining together with an antitrust exemption. 

Mr. BURNS. We are talking about hospitals now? 

Senator SPECTER. So am I. 

Mr. BURNS. The hospitals now join together. 

Senator SPECTER. The hospitals could join together. 

Mr. BURNS. Sure, they can, and they have. 

Senator SPECTER. I mean, they could if they had an exemption. 

They cannot under the current law. 

Mr. BURNS. Hospitals can join together as long as their market 

share does not exceed 35 percent. 

Senator SPECTER. They can join together in negotiating with 

IBC? 

Mr. BURNS. Yes, they can. 

Senator SPECTER. But doctors cannot? 

Mr. BURNS. Doctors cannot. Not if the doctors are self-employed 

private practitioners. 

Senator SPECTER. Is that correct; Mr. Marshall? 

Mr. Fine, I see you reaching for the microphone. I do not want 

to miss this opportunity. 

Mr. FINE. If I am understanding Dr. Burns’ point correctly, I believe that hospitals can merge. Hospitals can, through corporate affiliations, come together under certain circumstances and within 

certain parameters negotiate with Blue Cross as a group. 

Senator SPECTER. After they are merged they are one. That is 

called a marriage is it not, sort of? 

Mr. FINE. Yes, sir, where hospitals such as my own that remain 

independent community hospitals cannot align with other independent community hospitals strictly for the purpose of negotiating 

third-party contracts. 

Senator SPECTER. Dr. Trichtinger, what do you think of the situation at Chester County Hospital if their statements are accurate? 

Dr. TRICHTINGER. As Dr. Burns had already stated, it fits with 

the circumstances that I am familiar with up in my area, though 

I do not know the particulars. The Chester County reports in the 

paper ought not to have surprised anyone on the northern side of 

the suburbs. 

Mr. GILLESPIE. Senator, Pat Gillespie. 

31

On the Chester County Hospital issue, I think we have to be cautious using that as some kind of template or some kind of example 

because when Chester County completed their initial negotiations 

with IBC for their rates, a five-year deal, they went out and announced to the marketplace what a wonderful deal that they had. 

I do not know what circumstances changed in the deal, but certainly they were paid on time. And I do not think—I think it is 

being—I think accuracy is important in these issues. 

It is not a story, as Dr. Burns said. It was fact. They actually 

went out, Chester County Hospital actually went out to the marketplace and used the negotiated settlement that they had with 

Independence Blue Cross as a way of how well they are doing business. 

Senator SPECTER. Thank you for that information. I had not 

heard that. That is something we will pursue with Chester County 

if, as and when we are able to have their participation in this inquiry. 

There was a complaint filed by Children’s Hospital of Philadelphia in November of 1999 alleging that Independence Blue Cross 

improperly used CHOP’s name in advertising after expiration of a 

contract between the two companies. In its complaint CHOP said 

that under its contract with IBC ‘‘CHOP agreed to provide pediatric hospital services to IBC enrollees and IBC agreed to pay 

CHOP for services covered under the relevant IBC product in an 

amount that was less than CHOP charges as defined in its usual 

and customary reimbursement rate.’’

Dr. Udvarhelyi, are you familiar with the situation with the 

CHOP complaint? 

Mr. UDVARHELYI. I have some knowledge of it, Senator. 

Senator SPECTER. Were they accurate about that? 

Mr. UDVARHELYI. I cannot validate that particular point. 

Senator SPECTER. Would you take a look to see if you can validate that? 

Mr. UDVARHELYI. We will get back to you. 

Senator SPECTER. Yes or no. 

Dr. Foreman, what do you think about the allegations of the 

CHOP complaint if, in fact, they turned out to be validated by IBC? 

Mr. FOREMAN. I suspect that just from the little I know about it, 

and I do not know a lot, from reading the newspapers and talking 

with some people in the industry, that this was part of the negotiating process that once more ended up at or near litigation. 

Senator SPECTER. Counsel stood and wants to make a comment. 

Thank you, Paul. 

Mr. TUFANO. Senator, the Children’s Hospital lawsuit from 1999, 

one of the allegations that you referred to was a Lanham Act allegation. And as I recall the timing was such that one of the issues 

that was in dispute was whether or not the contract had terminated. And I believe as part of the lawsuit that they had filed they 

alleged that because the contract, in their opinion, had terminated 

at that point, our continuing to list them on our provider directory 

which we publish once or twice a year was a Lanham Act violation. 

That once the contract was expired that we did not have the ability 

legally to continue to include them in the provider directory. 

That is what, I think, that allegation was about. 

32

Senator SPECTER. Okay, thank you for your addition. 

Mr. TUFANO. Could I also add to that, we had just last week announced a new four-year agreement with Children’s Hospital last 

week. 

Senator SPECTER. Anybody else like to add anything to the preceding? Dr. Trichtinger? 

Dr. TRICHTINGER. I just wish that IBC was spending less money 

on lawyers and reimbursing the physicians with some of that 

money. 

Senator SPECTER. Any of the lawyers want to respond to that? 

Mr. GILLESPIE. Lawyers should not respond. 

Senator Pat Gillespie, as a board member of Independence Blue 

Cross. It was mentioned that a number of the hospitals had merged 

and became one. And they now do enjoy negotiating power and 

they are negotiating. And yet, it still does not seem to be enough. 

The point is that there is health care dollar out there that if it 

is not adequate, then I think these forces should come up and say 

listen, it is not adequate. We have to spend more than $15,000 a 

year to indemnify ourselves for health care. It has to be $30,000. 

That is where we have to go here. 

We have this tremendous entity of health care, and by the way 

of full disclosure, I really should not even say this, but my kid is 

a doctor over at Children’s Hospital. So I know a little bit about 

the dilemma that they are having, especially with the debt. 

But the problem is that society has to come forward and say look, 

we have to spend more money than this. Or maybe we will come 

up with some other resolution to the problem. 

But just going around in circles here and finding someone to 

scapegoat, I heard Dr. Burns mention a couple of times about untimely payments. That is one of the things that Independence Blue 

Cross prides themselves on. They get their payments out on time, 

significantly under what normal business practices are. 

Thank you. 

Senator SPECTER. Dr. Badolato? 

Dr. BADOLATO. Senator, thank you. 

I would love the opportunity for some summary comments and 

I also offer a solution. 

First of all, Dr. Udvarhelyi referred to two major points he wanted to address at the beginning. One is misinformation. 

If we look at our practice as an example, and again top 1 percent 

in performance quality measurements and so on, 15,000 patients, 

eight physicians, et cetera. 

Our effective per member per month reimbursement in 2004 is 

less than what we got in 1994. We are getting 80 percent of Medicare except for a non-physician visit code. Our physicians’ hourly 

compensation is equivalent to Mr. Gillespie’s people, which I calculated between $32 and $33. That is what our physicians, after 11 

years of training and 15 years of experience, are getting. 

We believe that we have 10 years of data which can show, which 

can demonstrate, in fact it is on page two of my presentation, that 

quality costs less. 

We have invited by at least two of my statements if not three for 

a collaborative opportunity to look at quality practices, to look at 

leadership practices and then use Mr. Ballou’s recommendations of 

33

economics 101 which I adhere to and say what does it cost? And 

therefore worked the reimbursements based on that. 

I believe we are one of the few practices in the country, if not 

the only, that has generated a slide as is our slide number one, 

showing number of visits, phone calls, et cetera, that is required to 

take care of such a population of 15,000. 

And on October 1st, 2002, I sent what I believe to be a wonderfully collegial collaborative invitation to Dr. Udvarhelyi. That invitation was passed down to other medical directors and eventually 

my request for a collaborative working relationship to solution find 

was refused. 

And that is a correction of some misinformation. 

Senator SPECTER. Thank you very much, Dr. Badolato. 

A couple of other issues on litigation, Dr. Udvarhelyi. In 2002, 

the Pennsylvania Orthopedic Society sued IBC for failing to properly reimburse, and alleged that IBC never disclosed its reimbursement schedule to the doctors and that it engaged in a practice of 

improperly denying reimbursements. 

And in a 2003 settlement IBC agreed to provide the following to 

the plaintiff class: fuller disclosure of its payment policies, and increased payments up to $40 million over the following two years. 

Dr. Udvarhelyi, do you know if that is accurate? 

Mr. UDVARHELYI. That is generally correct, Senator. 

Senator SPECTER. You say it is? 

Mr. UDVARHELYI. Yes, sir. 

Senator SPECTER. And on the issue of retaliation, where counsel 

said that he would make an inquiry, there was a suit filed by Centennial School District in 1993 and then IBC filed a counterclaim 

alleging defamatory statements which were attributed to a Mr. 

Bradley Hearse, a school board member. Quoting Mr. Hearse as 

saying that IBC ‘‘wanted all those enrolled in a rival HMO to be 

turned over to Keystone, an IBC subsidiary, for the same benefits 

at a higher price. And that Blue Cross actions were predatory.’’

That is reportedly an opinion filed by Federal Judge John Padova 

on July 11th, 1994 to grant in part and deny in part a motion to 

dismiss a counterclaim. Dr. Udvarhelyi, are you familiar with that? 

Mr. UDVARHELYI. No, Senator, I am not. 

Senator SPECTER. Counsel, are you? 

Mr. TUFANO. Senator, that is about six years before I joined the 

company. I am vaguely familiar with the Centennial case but not 

enough to give you a thorough response to that. 

Senator SPECTER. If you would take a look at that, we would appreciate it. 

Mr. TUFANO. I will. 

Senator SPECTER. Anything else, gentlemen? 

Mr. UDVARHELYI. Senator, if I could just clarify a couple of 

points. 

With regard to payment for both physicians and hospitals, we 

pay claims we receive in approximately eight days from the time 

we receive it. We have done, for example hospitals, we know that 

from the time a patient is discharged to the time we receive the 

bill is approximately 36 days. So that full time elapsed, most of 

that time is time from patient discharged until we send a check is 

actually the bill has not yet come to us from the hospital. And then 

34

there is additional time at the hospital to when that money gets 

posted. 

So when we hear about the long time for payment, at least from 

the time we have received it for both physicians and hospitals, 

about eight days. So we do not believe that there is a slow pay 

issue. 

And the Insurance Department, when they reviewed us, found 

that we paid claims according to State regulations almost at 100 

percent. 

The other clarification on market share that I would like to make 

is that I do not know how everyone sometimes calculate these numbers. We believe the right way to look at it is for people who actually live in the five counties who carry a part of one of our products 

is a sort of accurate way to do that. 

And if you calculate it that way, our market share is just over 

50 percent, not at the 80-some percent that was quoted earlier. We 

do insure, as in the case of Mr. Ballou’s company, employers who 

are based in Pennsylvania but who may have employees in other 

States. We do not believe that it is right to take those employees 

that are living in other States and put them over a denominator 

that is just the people living in Philadelphia. 

So I think that if we were going to include the people that live 

in California, Chicago, et cetera, we would have to include the residents that live there as well. So again, we think the number is 

slightly lower. 

And lastly, Senator, I would like to offer a comment as to the intended effects of increasing rates to physicians and hospitals. I 

think the math is pretty simple, and that is that the cost of health 

care is really a function of two things. Well, three actually. 

It is the number of services that are used, the mix of those services, and the price per service. Whether Independence Blue Cross 

is providing coverage or whether Aetna or some new entrant, if you 

assume that the physicians are ordering the services the patients 

need and the hospitals are doing the same thing—I would contend 

by the way, as I mentioned in my testimony, that the rate of services is not only going up but the mix is going up. So when we look 

at somebody’s lungs with a radiology study, we are not looking at 

a plain x-ray anymore. We are doing a spiral CT scan. We are exchanging a test that costs maybe $50 to one that costs hundreds 

of dollars. 

So when we look at now the total cost of care, that mix can have 

a big impact. But if all we do is assume that the doctors and the 

hospitals are going to order the same services for patients they do 

today, but a new entrant comes in and whether it is collective bargaining or anything else, the prices go up. I do not understand how 

the new entrant is going to offer their insurance product at a lower 

rate for that same defined population if they are paying 20 percent 

more than the current rates. 

There is no way the costs go out of the system in that model. 

So the solution, I think, is that we have to work together to 

eliminate the waste, the redundancy, the defensive medicine. I will 

tell you that I have talked to physicians and talked to the medical 

society. Doctors order tests that are not needed because they are 

afraid they are going to be sued. They order tests that some other 

35

doctors ordered because they do not know that they have been ordered. 

And so there is redundancy, there is waste in the system. I think 

collectively that we can try to trim that down. And as you can see 

in my written testimony, the sad truth is that—these are researchers at Dartmouth, Elliot Fisher and David Wennberg have shown 

that high cost areas in the United States, and Philadelphia is one 

of them, unfortunately we do not necessarily have better outcomes. 

What their research has shown is that for use of known effective 

preventive services, the high cost areas like Philadelphia have actually lower rates of those services. And even things like death 

rates from hip fracture, heart attacks and colon cancer are higher 

in high cost areas of the country. 

Senator SPECTER. Dr. Udvarhelyi, there is no doubt that the 

scope of this issue is very broad and we have not touched on a fraction of it in the focus narrowly here. 

We are working, as Mr. Ballou commented about the so-called 

lottery verdicts, trying to find a formula for caps. It has been before 

the Senate three times now and far short of cloture, 49 votes. 

We changed the Balanced Budget Act of 1997 substantially. I 

have taken the lead on graduate medical education, disproportionate share, moving in many, many directions with CMS to try 

to tackle a wide range of medical issues. 

So that in your closing statement you started to talk on some of 

them which are vast beyond any question. And we are tackling 

them at many levels. 

State Senator Greenleaf and I held a hearing in Norristown a 

week ago Friday to try to acquaint seniors with the new Medicare 

prescription drug issue, but also the possibility of small business 

going together. 

But this is under very active consideration. We had Dr. Thompson, Secretary of HHS, testify extensively within the past month. 

And Dr. Zerhouni, head of NIH. It is a vast subject. And a good 

part of the cost turns on new procedures and new technology. 

I was the beneficiary of an MRI which we did not have not too 

long ago. And we are fortunately enabling people to live longer. 

And the question as to how we provide their services. 

And the new Act wants to give everybody a medical examination, 

the seniors, and then have pharmaceutical available to them for 

preventative medicine. It is a giant issue and we will work on it 

on many, many levels. 

I thought today’s hearing was very informative, although we did 

not cover everything but a little attempt at investigation. You have 

heard at least one Senator’s views of confidentiality agreements 

and retaliatory lawsuits. I used to be that line of work. I do not 

do that anymore. In fact, I do not think I had any retaliatory lawsuits but I used to bring a fair number of prosecutions when I had 

a different hat. 

But to repeat, this is very informative and we thank you all. 

That includes our hearing. 

[Whereupon, at 11:02 a.m., the Subcommittee was adjourned.] 

[Submissions for the record follow.]

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