[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                      MEDICARE PROVIDER-SPONSORED
                             ORGANIZATIONS

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 24, 1997

                               __________

                             Serial 105-76

                               __________

         Printed for the use of the Committee on Ways and Means


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 58-724                      WASHINGTON : 1999
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                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel
                                 ------                                

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada                  GERALD D. KLECZKA, Wisconsin
JON CHRISTENSEN, Nebraska            JOHN LEWIS, Georgia
PHILIP M. CRANE, Illinois            XAVIER BECERRA, California
AMO HOUGHTON, New York
SAM JOHNSON, Texas

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.



                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisories announcing the hearing................................     2

                               WITNESSES

Health Care Financing Administration, Kathleen Buto, Associate 
  Administrator for Policy.......................................    11
Physician Payment Review Commission, Hon. Gail R. Wilensky, 
  Ph.D., Chair; accompanied by David C. Colby, Ph.D., Deputy 
  Director.......................................................    31
                                 ------                                
American Hospital Association, John Brownlow.....................    61
American Medical Association, Richard F. Corlin, M.D.............    83
Blue Cross and Blue Shield Association, Mary Nell Lehnhard.......    71
Florida Hospital Healthcare System, John Brownlow................    61
National Association of Insurance Commissioners, and Wisconsin 
  Commissioner of Insurance, Josephine W. Musser.................    41

                       SUBMISSIONS FOR THE RECORD

American Association of Homes and Services for the Aging, Sheldon 
  L. Goldberg, statement.........................................   106
Association of Managed Healthcare Organizations, Gordon B. 
  Wheeler, letter................................................   116
Premier, Inc., James L. Scott, statement.........................   118



               MEDICARE PROVIDER-SPONSORED ORGANIZATIONS

                              ----------                              


                        THURSDAY, APRIL 24, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:40 p.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(chairman of the subcommittee) presiding.
    [The advisories announcing the hearing follow:]

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    Chairman Thomas. The subcommittee will come to order.
    Today's hearing is the 12th subcommittee hearing this year, 
and this particular hearing will focus on Medicare provider-
sponsored organizations. PSOs were among the private health 
plan options at the heart of the Republican's plan during the 
104th Congress to reform the Medicare program. While the 
Balanced Budget Act, which contained those physician-sponsored 
organizations, was vetoed by President Clinton, I am pleased to 
see that in the President's proposal he has embraced PSOs as 
well.
    I do strongly believe that doctors and hospitals should be 
encouraged to join together and offer private health plans 
directly to Medicare beneficiaries. Health plans owned and 
controlled by doctors and hospitals can provide a unique 
opportunity for providers to furnish high-quality health care 
plans at affordable costs, particularly in rural America.
    At the same time, however, we obviously need to assure 
beneficiaries and taxpayers that these health plans are not 
only the highest quality, but also are financially sound. It's 
easier to say that than to figure out a structure under current 
knowledge to do it at a very high comfort level.
    While we should reduce obstacles that may deny doctors and 
hospitals the opportunity to compete in the Medicare 
marketplace, we obviously can't lower the bar so far that 
Medicare beneficiaries and the Medicare Trust Fund are exposed 
to excessive financial risks and disruptions in crucial health 
services.
    Reasonable people can differ. There are a number of 
reasonable bills in. What we want to do is to try to find as 
high a commonly-accepted approach as we possibly can. I 
believe, over the last several years, everyone has gained a 
better understanding of whether or not what they initially 
assumed to be true was true or not. That's why I look forward 
to today's testimony. I know it will help guide us in creating 
a policy which balances these competing goals.
    The gentleman from California.
    Mr. Stark. Thank you, Mr. Chairman. I thank you for holding 
this hearing.
    I guess I could sum it up by saying that PSOs make me 
nervous. It escapes me as to why we should take a rather 
loosely defined group of providers and give them special 
exemption from the laws that seem to be working throughout the 
country.
    The New York Times documented abuses in a major national 
hospital system's fee-for-service type operation, and I don't 
know how we prevent those under capitated PSOs. I worry about 
rural areas, where suddenly all of the resources may come under 
one provider group and not refer out cases that may be beyond 
the competence of, say, primary care or family physicians.
    Then the question is, why did we consider overriding State 
law? PSOs are happening. I don't know that they need special 
regulations. I don't know that the regulations are more onerous 
when applied to professionals of higher skill.
    I have trouble deciding whether one doctor in a chain of 
hospitals makes it a physician PSO, or one hospital and a group 
of physicians makes it a hospital PSO. But we do have 
regulations that seem to be working. I guess I have to be shown 
that there is something intrinsic in just saying you can take a 
group--I mean, it would be a lot easier for any managed care 
group to say ``I want to become a PSO.'' How do they do it? Do 
you get one doctor on the group, or do you get 10 or 20 
percent? I don't know how that would work.
    I would like to ask that we include in the record a letter 
from a group of 11 health care and consumer groups who are 
concerned about this, and make that complete my statement.
    Chairman Thomas. Without objection.
    Mr. Stark. I thank the Chairman.
    [The following was subsequently received:]

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    Chairman Thomas. Just let me briefly respond, that all of 
your questions are questions that I find interesting. 
Obviously, we're going to have to find answers to them.
    Just from a quick personal experience in the community of 
Ridgecrest, that has one hospital and 34 doctors, through a 
HCFA waiver we've been able to create a PSO. The key there was 
bringing in a third party to deal with many of the financial 
arrangements between the doctors and the hospital. This is 
evolving.
    I think all of the gentleman's questions need to be 
responded to and hopefully answered at a level that will give 
the gentleman some comfort, but certainly responded to.
    Does the gentlewoman from Connecticut want to make a 
statement?
    Mrs. Johnson. Thank you, Mr. Chairman.
    I would just like to take a moment to mark this hearing as 
a significant event. In the 104th Congress, a group of 
Republicans spent many, many hours on a very significant 
Medicare reform bill that addressed many of the underlying 
problems in our health care system, both for seniors and 
nonseniors. As you will recall, we changed the way medical 
education was funded, to provide long-term strength to our 
medical centers, and we also wrote the first PSO law, to try to 
assure that the managed care market would embody a competition 
focused on quality.
    We do have to answer all the questions that my colleague, 
Mr. Stark, posed. But there is some reason to believe that 
provider-sponsored organizations will help the competitive 
market focus on and be accountable for quality, all actors in 
it.
    This is a hearing and a discussion and a consideration that 
we should have been able to have in the last Congress. As one 
elected official in this Nation who felt particularly strongly 
about the deception of reducing the Medicare debate to cutting 
spending, as many did, including our President, I would just 
have to say that today is a very important occasion, because it 
is a time now in which we're beginning to talk about the real 
structural reforms necessary to enable Medicare to offer better 
benefits, a more modern benefit package, to our seniors, and at 
the same time constrain the rate of growth of costs. Not only 
will we do that in our market, but we will strengthen the 
under-65 market if we do this right.
    I congratulate the chairman on holding this hearing, and I 
congratulate the administration for, now that the political 
debate is over, supporting a discussion that is extremely 
important to seniors in America, because it's the only avenue 
through which they're going to get better benefits at 
reasonable cost, and also joining us in a difficult discussion 
that ought to be fruitful at the end of the course.
    Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentlewoman.
    Now, if we might hear from Kathleen Buto, the Associate 
Administrator for Policy, Health Care Financing Administration. 
Any written testimony you may have, Kathy, will be made a part 
of the record, and you can address us in any way you see fit.
    I note that the testimony is dated April 24th, 1997. To 
underscore the gentlewoman from Connecticut, it would have been 
exciting had it been '95 or '96. But, better late than never.
    Thank you very much.

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

    Ms. Buto. Thank you, Mr. Chairman. I am very pleased to be 
here and have an opportunity to discuss the Administration's 
proposals.
    I am going to specifically focus on the similarities and 
differences regarding PSOs in the President's 1998 budget 
proposals, the Balanced Budget Act of 1995, and a bipartisan 
bill introduced by Representatives Greenwood and Stenholm, 
which is very similar to a bill introduced by Senators Frist 
and Rockefeller. I will also present our experience to date 
with PSOs in the Medicare Choices demonstration program.
    Let me start with areas of agreement. With the goal of 
increasing managed care choices, all three proposals would 
permit PSOs to contract directly with Medicare to enrolled 
beneficiaries. We believe the PSO option, coupled with 
revisions to managed care payment methodologies, will have an 
important and positive impact on increasing managed care 
enrollment for Medicare beneficiaries in areas where enrollment 
is low, including rural areas.
    There is also agreement in all three bills, with a few 
exceptions, that PSOs should be required to meet the same 
standards as Medicare HMOs. Under the President's budget, PSOs 
would be held to all of the same standards related to quality, 
access, marketing, beneficiary liability, benefits, and appeals 
and grievances, as Medicare HMOs. This is also true of the 
Balanced Budget Act and the Greenwood-Stenholm bill.
    There are differences, and let me focus on these. The 
proposals have different approaches in four areas: fiscal 
soundness and solvency, private enrollment requirements, State 
licensure requirements for PSOs, and the ability of the PSO to 
offer a point-of-service option. It is important that we have a 
forum such as this hearing to discuss these issues and the 
concerns of all stakeholders. In developing consensus on these 
issues, I believe that we would all agree that our primary 
focus should be what is best for the beneficiary.
    Let me start first with fiscal soundness and solvency. 
Under all three proposals, PSOs would be subject to different 
fiscal soundness and solvency standards than HMOs because of 
differences between the delivery systems. Under the President's 
budget and the Balanced Budget Act, HCFA would develop these 
standards through regulation. The Greenwood-Stenholm bill; 
however, establishes detailed standards in statute. The 
Administration would prefer that these standards be developed 
in regulation so that we could receive extensive input and 
consultation with other parties on this complex issue.
    The second issue is private enrollment requirements. The 
President's budget would maintain the 50-50 rule until a new 
quality measurement system is finalized, with additional waiver 
authority in the interim. This 50-50 rule applies to all 
managed care plans involving commercial enrollment. Under the 
Greenwood-Stenholm bill, PSOs would be deemed to meet the 50-50 
rule if they had experience providing coordinated care and met 
special quality standards that we believe are substantially 
similar to our current statutory regulatory requirements for 
Medicare HMOs.
    The Balanced Budget Act would repeal altogether the 50-50 
rule for managed care plans, including PSOs. The Administration 
believes that the 50-50 rule should not be completely 
eliminated until it can be replaced by quality measurement 
systems.
    The President's budget would maintain current law minimum 
commercial enrollment requirements, which neither the Balanced 
Budget Act nor the Greenwood-Stenholm bill would require. The 
PSOs have experience managing risk for commercial enrollees 
before they enroll Medicare beneficiaries.
    The third issue involves licensure. The Administration 
wants to ensure that PSOs would not face unreasonable barriers 
to entering the managed care marketplace, while also ensuring 
that PSOs are financially sound entities. We do not believe 
that a broad preemption of State licensing is necessary and 
that preemption of State licensing requirements should be 
limited as much as possible.
    Under the President's budget, PSOs would be required to 
obtain State licensure once the State certification and 
monitoring program for PSOs had been approved by the Secretary. 
To be approved, the State's program would have to be 
substantially similar to Federal standards. After the year 
2000, however, the State could impose more stringent standards, 
but before the approval of the State's program licensing 
requirements would be preempted.
    The Balanced Budget Act utilizes a different approach; 
however, I do not plan to address this in detail. Both the 
Balanced Budget Act and the Greenwood-Stenholm bill provide for 
an approach that essentially requires identical standards which 
the States hold to the Federal standards. However, we believe 
that substantially equivalent or similar criteria in the 
President's budget is more reasonable and more flexible.
    Before the year 2002, in the Greenwood-Stenholm bill, PSOs 
would not need to be licensed by the States at all, and the 
State law would be preempted, regardless of the relationship of 
these laws to Federal standards. After 2002, PSOs would be 
required to have a license only if they are identical.
    The last issue is the point-of-service option. Under the 
President's budget, we would prohibit PSOs from offering a 
point-of-service option. We believe that, essentially, if a PSO 
wants to offer such an option, it essentially becomes more like 
an insurance product and really does fall under the purview of 
the States and ought to be regulated as an insurance product, 
rather than have the special provisions that we have set forth 
for PSOs.
    I see that my time is running short. Let me just conclude 
by mentioning our Medicare Choices demonstration sites. These 
sites total 17, and 11 sites are PSOs. We have already learned 
that there is capability in PSOs to conduct enrollment and to 
process claims. Many of the functions that we anticipated PSOs 
would be able to handle, PSOs are handling.
    One of our Florida PSOs, which has been in operation the 
longest, has already enrolled 4,000 beneficiaries and enrolls 
more every day. We expect that these demonstrations will give 
us a good insight as to how some of the provider-sponsored 
organizations operate.
    I would just note that the Choices demo was designed to 
reach areas where we do not have managed care plans, and it 
appears that PSOs have really been the entities that have 
stepped up to the plate.
    Let me just conclude by saying that, while there are 
differences, I am very confident that, working together, we can 
accomplish the important objective of bringing these 
organizations into the Medicare program.
    Thank you.
    [The prepared statement follows:]

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    Chairman Thomas. Thank you, Miss Buto.
    In your testimony you talk about the 50-50 rule as a proxy 
for quality--and I think we're all familiar with the history of 
it. But I guess my argument would be that, as long as you 
maintained a solid front that this was our substitute for 
quality, and everybody honored the 50-50 rule as our substitute 
for quality, that argument at least had some merit by being 
consistent.
    When we now start saying that in certain areas you're not 
going to have to follow the 50-50 rule, but in other areas you 
are, in essence, you're competing. Then, don't we really erode 
the argument for maintaining a 50-50 standard anywhere?
    Ms. Buto. Let me address that in two parts.
    The different rule, I believe that you are referring to a 
situation in which we would allow PSOs to count, instead of 
commercial enrollees, individuals which are at risk, and meet 
the 50-50 rule, we would not repeal it. We would broaden it so 
that PSOs can count individuals for whom PSOs have borne the 
risk.
    The reason for that is PSOs do not have licenses to 
actually be HMOs, so PSOs are unable to have individuals as 
enrollees now and to bear risk. We were looking for a way to 
recognize PSOs' experience in managing commercial enrollees for 
another HMO or for another plan.
    Mr. Johnson of Texas. Will the gentleman yield?
    Chairman Thomas. If that was your rationale, then why 
couldn't you take somebody who was required to follow the 50-50 
rule and look at a history, and if they had--pick a year--a 
three year, five year, ten year, twenty year history in dealing 
with that same universe of people, you could begin to feel that 
you had a belief that they also would----
    Ms. Buto. Our proposal would provide for exemptions from 
the 50-50 rule, even as we are moving to the quality 
measurement approach and would eliminate it all together. Our 
proposal would include provisions for plans with good track 
records to obtain an exemption, as well as plans in rural 
areas. Therefore, we do broaden the exception for these plans.
    Chairman Thomas. I understand. But some folks get to fly by 
definition and others have to bump along the ground with 
exceptions. It just seems to me that we have reached the 
point--and it's not necessarily a contentious one. It's one, I 
think, of a maturing understanding of what's going on, fully 
understanding why the 50-50 rule went in in the first place, 
and that hopefully, in later testimony, or shortly, we'll get 
some experiential assistance in dealing with risk adjustment 
and other factors that will help us get a comfort level in 
moving away from what are agreed arbitrary methods of 
attempting to substitute quality.
    The gentleman from Texas.
    Mr. Johnson of Texas. Thank you, Mr. Chairman.
    I believe a couple of those organizations in your test unit 
have State HMO licenses anyway. Are they meeting the 50-50 
rule?
    Ms. Buto. You're talking about the Choices demonstration 
sites?
    Mr. Johnson of Texas. Yes.
    Ms. Buto. A number of these do. I think four of the eleven 
have HMO licenses.
    Mr. Johnson of Texas. Are they meeting the 50-50 
requirement?
    Ms. Buto. A number of the sites are not meeting the 50-50 
requirement.
    Mr. Johnson. But they're still functioning in good shape. 
That's what he's talking about.
    I totally agree with you, Mr. Thomas.
    Ms. Buto. If I could just comment on that, I agree that 
what we basically want to do is to move away from a proxy 
measure to real measures of quality. I think we have plans in 
the legislation to issue a set of specific quality requirements 
next year in rulemaking that would actually lay out 
alternatives for replacing the 50-50 rule all together. I 
believe this is the direction we wish to pursue for all plans.
    Mr. Johnson of Texas. Thank you, Mr. Chairman.
    Chairman Thomas. Certainly.
    I appreciate, even if it's just a brief review, of the 
various models and the way in which I think you fairly treated 
the work product, BBA, yours, and the Greenwood-Stenholm bill.
    The one thing I would focus on, though--I don't know 
whether it has intrinsic value--but the BBA proposal for 
approval of the PSOs was subjected to a very extensive 
discussion between the House and the Senate. Since folk would 
sit at the table with a priori beliefs about whether or not 
PSOs and HMOs were a distinction without a difference and, 
therefore, should have to meet the same solvency standards, or 
that because of the uniqueness of the structure, they may not 
have to, and if States traditionally play the role, to what 
extent would the Federal Government intervene, if at all, and 
if so, when, or, in fact, should it be primarily Federal versus 
State.
    As the gentlewoman from Connecticut said, we spent hours 
and hours discussing this and came up with a proposal which was 
predisposed to stay with the States, unless an evidentiary 
level would bring it to the Federal level.
    The President's plan, as I think you rightly describe it, 
is kind of the other way around. It presupposes a Federal 
involvement which creates a series of preemptions and decisions 
and standards by fixed dates. In my opinion, if these are going 
to be as successful as we want them to be, that is a fairly 
extensive additional administrative responsibility that's going 
to be placed on HCFA.
    What level of assurance can you give us that, in creating 
the pattern that you did, different than the one we did, you 
were fully cognizant and willing to assume the additional 
administrative responsibilities and burdens that would be 
placed on HCFA if the President's plan was to go forward, 
notwithstanding whether it's the appropriate way to go or not?
    Ms. Buto. We have certainly considered that, and we have 
had a little experience--although I do not think it is entirely 
parallel--where the Federal Government had a role both with the 
Medigap standardization and with the HCFA rules involving, if 
you will, the setting of some Federal standards and having the 
States then come in and either meet these standards or show 
equivalence. Therefore, we have had some experience in this 
area.
    We have certainly considered it. If a State already has 
identical standards, we would immediately defer to the State 
and require that the PSOs be licensed by the State. We have 
this provision because we recognize that many States are moving 
fairly quickly in this area. We consider this provision as a 
more limited preemption.
    Our experience has been that States move very quickly to 
standardize and to meet the requirements, so that states can, 
in fact, go ahead and license new entities and new models of 
care.
    Chairman Thomas. Thank you.
    One concern, before I move on to others, is the belief that 
I think is shared by all of us, that if we could get a 
structure in place that made sense, in terms of hospitals and 
doctors creating, in essence, a local HMO, it would provide a 
better and more affordable service for rural areas.
    You folks in your proposal have grappled with the AAPCC 
adjustments for low payment counties, which pretty obviously 
has as one of its components the medical use aspect in the 
area. We all agree that the AAPCC is an imperfect instrument, 
and then we look around for something that won't do more 
damage, skewing it in one direction or another, and we wind up 
with the AAPCC.
    You folks have now suggested moving to a level, which was 
the balanced budget act level, of $350. Our rural friends have 
moved to a different approach, with a different formula. But 
regardless of how you determine it, it's clear that the 
decision is to move relatively significant amounts of money 
very quickly into rural areas. I think there's no question 
that, over time, that will create--especially in combination 
with provider-sponsored organization enablement--an opportunity 
to provide what you say you want to provide in your testimony.
    My concern is that if you bump a rural county in Iowa from 
$221 a month to $350 a month, notwithstanding your willingness 
to move rapidly at the Federal level, how can we give any 
assurance to those folk who believe they're going to be 
receiving something approximating $1,500 a year additional 
benefits by virtue of the increase that these dollars will 
actually flow through the system? How can we, with our data, in 
terms of adjusting the community rate within that structure 
dealing with non-Medicare enrollees and the other factors of 
determining costs, be focused on, at the same time we change 
two of those moving parts, increase the AAPCC significantly, 
provide for provider-sponsored organizations, and make the 
statement that people in rural areas are going to get more of 
this increased benefit?
    Do you understand my question? I know you've looked at it, 
but I didn't see it anywhere in the testimony, of how we're 
actually going to deliver what we say and think we're going to 
deliver in rural areas, other than simply increasing the take-
home pay of the physicians who are there.
    Ms. Buto. I understand what you are saying: more benefits, 
increased quality of care, and better access.
    What has been very good about one of the aspects of the 
AAPCC is the requirement that extra benefits be provided, where 
the payments, under the Medicare law, exceed what it actually 
costs to deliver care in that area. That difference will 
increase. It will be larger in rural areas than it is now. 
Currently, people would argue that there is very little 
available at all, which will actually require plans to offer 
extra benefits or other kinds of enhancements to beneficiaries 
who use the plan. This is something that we monitor and 
carefully consider.
    A second point is that we are reconsidering the ACR to 
determine how to calculate the costs to deliver this package of 
services. However, ultimately, the increased payment to rural 
areas should go back to the beneficiaries in the form of 
additional benefits.
    Chairman Thomas. I prefaced all my remarks on in what way 
are you going to be able to do that. That's my concern. Saying 
it ought to go back and having a mechanism in which we can show 
that, in fact, it's flowing through, when we don't have 
sufficient data on the non-Medicare enrollees, and coupling it 
with the suggested problems with the 50-50, I'm just saying 
there is a lot of moving parts in there----
    Ms. Buto. There are.
    Chairman Thomas [continuing]. And I don't have a comfort 
level that we can, to the degree we would like to make a 
statement to people in the rural areas, say we have increased 
the amount and they will receive, in essence, a flow through of 
that increased amount. I just don't see it right now.
    Ms. Buto. I think the key really is, as you pointed out, 
getting better data and being able to actually track the use of 
the additional money. That is something that we very much want 
to do.
    Chairman Thomas. But nobody's talking about in 1998 a 
better data structure. We don't have a substitute quality 
measure for the 50-50 rule. You know, three years down the road 
we have built in increased structures there and I don't want to 
play catch up when we've taken quite a bit of money, in a very 
limited time, and pumped it into areas where I don't yet see a 
high chance of gaining our return on our investment in 
providing these folks with quality care at cheaper prices and 
in choice structures.
    We're going to have to work on that----
    Ms. Buto. That is a good point.
    Chairman Thomas [continuing]. And saying it doesn't make it 
so.
    Ms. Buto. I agree.
    Chairman Thomas. I hate to put money in an area and hope 
the weeds grow. I would much rather make sure the ground is 
cultivated and the flowers grow.
    Ms. Buto. I agree.
    Let me just make one point about Provider Sponsored 
Organizations that is slightly different in that regard. Since 
PSOs are provider based, many collect data. We have data on use 
by physicians of services and a basis for developing a way of 
reviewing an increase in access or services.
    Chairman Thomas. You don't have to sell us on PSOs. I like 
especially the idea in the rural area, where it is the doctor 
moving to the new structure, rather than the patient having to 
find a new doctor in the new structure. That, to me, is the 
beauty of the ability of the rural doctors and hospital in 
creating a PSO, to minimize the fear and concern of the 
patients. So all of that makes sense to me.
    I just have not seen how we're going to require a different 
computation of the ACR based upon the way the world has 
changed. That, to me, is an important part of any understanding 
of how this is going to occur.
    I guess it's just a criticism of the fact that if we're 
really this close, then I'm going to start looking at the items 
that we don't have nailed down, because it would be a shame to 
agree to put in a structure and then find out it isn't doing 
what we wanted, because we don't have the data, we didn't plan 
for it, and we didn't structure it in a way to make it happen.
    The gentleman from California.
    Mr. Stark. Thank you, Mr. Chairman.
    Miss Buto, I guess I'm concerned as to why we find a need 
to have a different regulation and standard for PSOs than we 
already have in place. I don't think you can define a PSO. I 
want to start the other way and ask you to define for me an 
entity which provides medical care now that wouldn't qualify as 
a PSO?
    It sounds to me that what you're doing here, with very 
little adjustment, is basically removing any and all 
regulations from what are loosely called managed care 
providers.
    Ms. Buto. Not any entity would qualify because----
    Mr. Stark. Name an entity that would not.
    Ms. Buto. Well, you have to be able to provide both 
hospital and physician services in order to----
    Mr. Stark. All right. PHOs, MSOs, IDSs all qualify, right?
    Ms. Buto. Well, again, one of the things--There is not just 
a definition. There is the issue of do PSOs meet the solvency 
requirements, will PSOs they meet the quality requirements, et 
cetera.
    Mr. Stark. I read here that all you have to have is a 
hospital, or group of hospitals, and physicians. That's 
basically your definition. Yes, there are some loose 
constrictions here on financial stuff, but not much. You don't 
define financial soundness. I mean, you have one paragraph. 
``The entity meets requirements for fiscal soundness and 
provision against insolvency developed by the Secretary.''
    Ms. Buto. You also have to have experience managing risk, 
although it is experience managing the risk under a capitation 
agreement with HMOs and other entities.
    Mr. Stark. How does a new one have experience if you 
organize a new one? The AMA is in here salivating at the 
thought of having a bunch of doctors organize these things and 
they've had no experience managing risk. They're doctors.
    What I'm suggesting to you is--let me come back. I don't 
think you can name an entity that is now contracting generally 
with the public to provide health care services that wouldn't 
qualify. Name one.
    Ms. Buto. Well, I am unable to, because we have not yet 
defined the solvency standards. Until you do----
    Mr. Stark. Leave solvency aside. That's something for the 
``bean counters'' to deal with. It may or may not have a lot to 
do with quality.
    Suggest to me a kind of organization that doesn't qualify 
for a PSO and, therefore, has been deregulated.
    Ms. Buto. All right. A physician group practice that does 
not have direct arrangements with a hospital, or any 
arrangements with affiliated providers, would not meet the 
requirement.
    Mr. Stark. They don't qualify under your plan, so you're 
saying a group of physicians can't do it unless they affiliate 
with a hospital. You say here, if they affiliate.
    So you've got to have a doctor and a hospital, at a 
minimum, right?
    Ms. Buto. At a minimum----
    Mr. Stark. Tell me a plan that doesn't have a doctor and 
one hospital, or one hospital and one doctor, that wouldn't 
qualify.
    Ms. Buto. Would meet the definition of who could be 
considered, but you have to also meet these other requirements 
of managing risk, solvency, having the other arrangements that 
are needed to provide care.
    Mr. Stark. Come on. You can't define those.
    Ms. Buto. That is what the statutes do.
    Mr. Stark. There's nobody who wouldn't qualify.
    The States have been wrestling with this for some time, and 
some States have done a better job than others. Why not let 
them continue?
    Ms. Buto. I believe that we very much want the states to 
continue. That is why we have written the statute the way we 
have, with basically the States taking over as quickly as the 
states' standards can be found to be substantially equivalent 
to the Federal standards.
    Mr. Stark. You don't have standards that are half as good 
as California's now. Why should California catch up with you? 
That's like a rush to the bottom.
    Now, there may be some States that don't have standards. 
New York has very good standards. You're going to wait until 
you catch up to New York, or until New York catches up to you? 
I don't know.
    Ms. Buto. I do not think we want to be in that position. 
What we are trying to do is to establish some basic standards. 
Since Medicare is a national program, we want to make sure that 
entities meet basically the same standards.
    Mr. Stark. I read this as you're removing the standards. I 
mean, heavens sake, why would you exempt all these people from 
State standards?
    Ms. Buto. Let me try to answer that by saying that the 
reason we put this in was, when we drafted the legislation last 
year, many of these entities were unable to obtain State 
licenses.
    Mr. Stark. Ah. Why?
    Ms. Buto. For reasons that we thought were worth 
considering an alternative set of standards for, having to do 
with solvency, and differences in their delivery systems. They 
also directly deliver care, and reasonable standards could be 
applied to these organizations----
    Mr. Stark. So you mean you're weakening the State 
standards?
    Ms. Buto [continuing]. These standards do not currently 
exist.
    Mr. Stark. You found State standards that these guys 
couldn't qualify for, right?
    Ms. Buto. They were trying to obtain, in some cases, HMO 
licenses, that they believed----
    Mr. Stark. And they couldn't.
    Ms. Buto. The witnesses who will testify after me will 
probably testify at greater length--that they believed that 
these were inappropriate for their kind of system. So it is a 
delivery system----
    Mr. Stark. So what you want to do is replace State 
standards that you perceive as being too tough with no 
standards at all?
    Ms. Buto. We are wanting to recognize these entities as----
    Mr. Stark. You don't know who they are.
    Ms. Buto [continuing]. As different entities from HMOs.
    Mr. Stark. Hey, I can recognize them. I can recognize every 
schlock, shyster, in the delivery business, and you're going to 
qualify him with one bill which says we don't have any more 
State standards. Come on.
    Ms. Buto. No, we are not interested in that, either.
    Mr. Stark. But you're creating that. Why don't you allow 
the States to continue to regulate them? You have in your own 
bill where you define--I mean, you turn over to the States--
here, the term physician. I'm quoting from the Social Security 
Act. It is defined as ``is authorized to practice medicine and 
surgery by the State in which he performs such function.''
    Are you going to relieve the State's authority to recognize 
a physician?
    Ms. Buto. No.
    Mr. Stark. Okay. So you're relying on the States for that 
much.
    Ms. Buto. We currently rely on the States for the basic 
standards under the Medicare HMO program. We intend to do that 
with PSOs as well.
    Mr. Stark. Then why don't you continue to do that under 
this program?
    Ms. Buto. I believe that the legislation definitely says we 
want to do that. We want their laws to govern----
    Mr. Stark. Why don't you come back to us when you have a 
set of standards, when you can define for me what the financial 
standards are, what the quality standards are, how many doctors 
they have to have? When you can do that----
    Mrs. Johnson [presiding]. If the gentleman will conclude.
    Mr. Stark. My time has expired, but I would just close, 
Madam Chairman, by suggesting that this is an administration 
that is ill-prepared to regulate anything. They might as well 
allow those States who are doing a good job to continue.
    I find this not worthy of HCFA. It is just throwing away 
what has been a pretty good regulation. I certainly hope this 
kind of stuff doesn't see the light of day.
    Mrs. Johnson. I will yield my time to myself as the next 
questioner.
    I certainly disagree with my colleague, Mr. Stark, in many 
ways, so in a sense I want to take the question he has raised 
from a completely different angle.
    I was struck by your comment, Miss Buto, that you don't 
want to allow the point-of-service option to an HMO because it 
would make it an insurance product. I don't understand why we 
would not want seniors in America to have the option of the 
variety of insurance products, as long as those insurance 
products provided all Medicare benefits and, you know, met the 
standards of solvency and quality that States have chosen to 
impose on their own Medicare systems and that we have chosen to 
impose on Medicare risk contracts.
    Why wouldn't we want them to have that option when the 
market has demonstrated over and over again that the options 
will be varied, will offer a far greater range of benefits than 
anything Medicare is going to be able to offer in the 
foreseeable future and so on and so forth? Why wouldn't we want 
seniors to have the option of an insurance product, as long as 
that product very simply provided all Medicare benefits and met 
the solvency standards that the State imposes for other HMOs in 
their territory, and the general qualification standards that 
we have set for HMO risk contracts?
    Ms. Buto. Let me say that we very much support point-of-
service. As you know, Medicare risk plans now offer I believe a 
number of--there is something like 30 plans which currently 
offer a point-of-service option.
    The reason is fundamentally tied to the way that we are 
proposing Provider Sponsored Organizations----
    Mrs. Johnson. Let me get that clear. You say that already 
there are Medicare programs offering the point-of-service 
option?
    Ms. Buto. Medicare risk programs.
    Mrs. Johnson. But the legislation that you're proposing 
will not allow HMOs that aren't Medicare risk contractors to 
offer the point-of-service option?
    Ms. Buto. No. I am sorry. Our legislation on PSOs does not 
allow the point-of-service option for PSOs.
    Mrs. Johnson. Why?
    Ms. Buto. The reason is----
    Mrs. Johnson. They're just another form of an HMO. They 
have a different delivery system.
    Ms. Buto. Let me describe for you one of the real 
rationales--and this is an issue where clearly there are 
differences of opinion-- for the Provider Sponsored 
Organization being able to preempt State law, whether it is for 
a short time or having that option preempted for a longer time, 
as under the Greenwood-Stenholm bill. This rationale involves 
fundamentally the plant, the equipment, the sweat equity of 
these entities which guarantee that the care provided will be 
there, and that the solvency requirement should recognize that 
and should allow for other liquidity to cover the out-of-plan 
services.
    Point-of-service is an option that says fundamentally that 
beneficiaries can go outside the plan under a variety of 
different arrangements----
    Mrs. Johnson. Exactly, a variety of different arrangements, 
and presumably, someone who qualified for a POS option would 
have that reflected in the standards that they were required to 
meet in terms of solvency.
    Ms. Buto. The solvency question gets much more complicated, 
if they get into point-of-service, and out----
    Mrs. Johnson. Of course. But that is one of the issues that 
a State licensure group would look at.
    Are you going to be a narrow PSO that only serves within, 
or are you going to be a provider service organization that 
also offers an out-of-network option? Then you would have 
different solvency requirements. But why would we, at the 
Federal level, say you can't offer this option if you can meet 
the regulatory standards to offer it?
    Ms. Buto. I am just saying that, from our standpoint, it 
undercuts the basic point of having the preemption for the PSOs 
to have really what are regulated insurance products as part of 
their entire business.
    Mrs. Johnson. Why do we need to preempt?
    Ms. Buto. I am sorry. That really does seem to be an issue 
where the States really ought to be regulating these products, 
not the Federal Government through a preemption, limited though 
it might be, by statute.
    I understand your point.
    Mrs. Johnson. I don't think that this is an irreconcilable 
problem. My time has expired, but I do think this is a far 
longer discussion about how we work out Federal and State 
authority in this area.
    My goal, in working those issues out, is to assure that 
seniors have the maximum insurance type products possible, in 
the freest market to develop options possible. Because I think 
that serves their interest. We have already seen that.
    Those are the products that expanded the Medicare benefit 
program, not the Medicare HMOs, not the Federal Government. So 
in looking at this issue, I'm looking for maximum flexibility, 
because I think seniors will benefit under that.
    Ms. Buto. I understand your point. Thank you.
    Mrs. Johnson. Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chair.
    I don't necessarily agree with the line of questioning of 
my good friend and colleague, Pete Stark, but I would like to 
re-ask his same question, just to clarify something in my mind.
    Let's say I run Kaiser, and I have doctors, I have 
hospitals, I have experience, I have all the criteria for a 
PSO/PSN. However, do you know what I don't like? I don't like 
the regulation in the solvency standards of the State of 
California. Like my own home State of Wisconsin--we're going to 
hear from our Commissioner--they're tough. So I'm going to go 
shopping around for a regulator who is not as tough.
    I see that a part of the BBA includes that the Department 
of HHS will come up with regulations for solvency and the like, 
so I'm going to bet that it's not going to be as tough as 
California and I'm going to become a PSN.
    So Pete's question is, why can't Kaiser flop, call 
themselves something else, and go shopping for some decent 
regulations, or easier regulations?
    Ms. Buto. Kaiser could do that.
    Mr. Kleczka. That was his point.
    Ms. Buto. However, I believe that the way we have 
structured our proposal it would not be in their interest to 
change over to a PSO regulation and to meet PSO standards in 
reporting. As soon as we certify that the State of California 
has a program to certify PSOs, Kaiser could return to the State 
of California. I am not sure that changing to a PSO regulation 
makes sense. However, it is an issue, obviously, and one that 
we are concerned about.
    The reason why----
    Mr. Kleczka. So the answer to Pete's question is that any 
organization that has those components, like a Kaiser, can 
become a PSN? They would have to decide whether or not it's in 
their interest or what they're looking for, but that's the 
point he tried to make and----
    Ms. Buto. That is right.
    Mr. Kleczka  [continuing]. And I think he was correct.
    Ms. Buto. Our objective is to make sure that the standards 
we set are standards that meet all the solvency and quality 
requirements, which that we would want in any plan of----
    Mr. Kleczka. Okay. But we're betting on that because the 
bill does not set those forth. It says they're going to be 
developed, right? So I don't know how long, when, et cetera.
    Let me let you know where I'm coming from. The question in 
my mind is not when we're going to get PSOs, but how. I have no 
opposition to the creation of these entities. However, we had 
the issue before this committee last session, and the question 
came about as to who was going to regulate, who's going to 
license these types of entities. I produced an amendment, at 
the behest of the Governor of my State, and the Commissioner, 
and lost miserably on a roll call vote before the committee, 
because those who are promoting this new entity don't want 
State regulation.
    However, under the Medicare program now, we have HMOs doing 
business with us, right?
    Ms. Buto. Right.
    Mr. Kleczka. Who licenses those HMOs and who provides the 
regulation for the current HMOs in the Medicare program?
    Ms. Buto. Well, first of all, Medicare certifies HMOs, but 
they must be licensed by the State. HMOs must also meet 
Medicare's requirements, and we certify HMOs. But we require--
--
    Mr. Kleczka. Okay. But they are also licensed like any 
other insurer, by the State that they're organized in, right?
    Ms. Buto. That is correct.
    Mr. Kleczka. So that begs the question, why do we need a 
whole new set of Federal rules and regulations on solvency and 
regulation when we already depend on the States to give us that 
for the HMOs currently doing business with the same program 
that PSOs are going to do business with?
    Ms. Buto. The answer is that the current State regulation 
goes to the HMO licensing. PSOs have made a case, and we at 
least agree with PSOs that there is a good case to be made, 
that PSOs can provide directly these kinds of services under 
risk, under capitation agreement, and have different solvency 
requirements.
    Mr. Kleczka. Why would they be different than any other 
organization serving the medical needs of my constituents?
    You see, what we're talking about here is consumer 
protection, okay?
    Ms. Buto. I understand that.
    Mr. Kleczka. Because once the PSN pledges the building and 
blows the building, that person has to go somewhere for that 
insurance coverage. That's the problem that I possibly foresee 
in the future. So the bottom line to my logic here is that, if 
it's good enough for the Medicare HMOs, it should be good 
enough for these groups.
    Let me tell you, the proponents of the legislation are the 
first ones that I've ever experienced that are looking for 
Federal regulation. Every other business entity in the country 
and the world wants to stay as far away from Washington, DC, as 
possible, and wants the regulators closer to them--i.e., in the 
States. Then, all of a sudden, for this particular type of 
entity, the Federal Government is going to offer a better deal. 
I question that and I'm very concerned about that.
    Ms. Buto. The recently enacted ``Health Insurance 
Portability and Accountability Act of 1996'' provides that the 
Federal Government sets standards. Therefore, I do not believe 
this is entirely without precedence.
    Mr. Kleczka. Again, let me finish by saying, if it's good 
enough for the HMOs in the Medicare program, it should be good 
enough for these new entities.
    Thank you, Madam Chair.
    Mrs. Johnson. Thank you.
    Mr. McCrery.
    Mr. McCrery. Thank you, Madam Chair.
    This is a most interesting discussion. Mr. Stark, Mr. 
Kleczka, and perhaps their Democratic colleagues, argue in 
favor of devolution of power to the States.
    Mr. Kleczka. Would the gentleman yield?
    Mr. McCrery. Sure, I would be glad to.
    Mr. Kleczka. I have learned well over the last two years, 
that all the knowledge and power rests in the States, and we're 
trying to push everything to the States. Eventually we're going 
to push the fiscal liability, but the Governors don't know that 
yet. [Laughter.]
    Mr. McCrery. But, besides the fact that this is great fun, 
we have raised a lot of good questions today. I want to commend 
the Administration for at least putting forth a proposal on 
this subject. It's a very important subject, I think one that 
deserves a lot more discussion.
    Many of these questions, many of these same concerns, were 
raised last year and the year before, and although we did 
reduce our thinking to legislation, as you know, and the 
President chose to veto it, much of what we had in our 
legislation is reflected in your proposal. There are some 
differences.
    I look forward to working with the administration and with 
my colleagues with different views, to work out a suitable 
proposal to allow the market to offer this different kind of 
delivery system to seniors.
    Thank you, Miss Buto.
    Ms. Buto. Thank you.
    Mrs. Johnson. Mr. Johnson I think is next.
    Mr. Johnson of Texas. No questions.
    Mrs. Johnson. Mr. Ensign, Mr. Christensen?
    Okay. Thank you very much, Miss Buto. I know this is the 
beginning of a long and extensive conversation, but I do hope 
that this year it will come to fruition, as I think it's an 
important issue. Thank you.
    Ms. Buto. Thank you so much.
    Mrs. Johnson. If the next panel will come forward, we have 
Gail Wilensky, Chair of the Physician Payment Review 
Commission, accompanied by David Colby, Deputy Director of the 
Commission; and Josephine Musser, Chair of the Special 
Committee on Health Insurance, and President of the National 
Association of Insurance Commissioners, and Commissioner of the 
Office of the Commissioner of Insurance, State of Wisconsin.
    I would have to say this was an extremely important source 
of information as we discussed these issues two years ago, and 
very helpful as we wended our way through. I know you will be 
an important consultant as we move forward. Of course, Dr. 
Wilensky has long contributed to the work of this committee and 
of the Executive branch as well, and we welcome the panel.
    Mr. Kleczka. Madam Chair, if I might have a moment to also 
extend a welcome to the Commissioner of Insurance from the 
State of Wisconsin. Commissioner Musser is the one who got me 
in trouble on this issue last year, and I'm going to ask her, 
in her comments, to get me out of trouble now. I look forward 
to her testimony. It's good to see you here.
    Ms. Musser. I'll try.
    Mrs. Johnson. Dr. Wilensky.

  STATEMENT OF HON. GAIL R. WILENSKY, PH.D., CHAIR, PHYSICIAN 
   PAYMENT REVIEW COMMISSION; ACCOMPANIED BY DAVID C. COLBY, 
  PH.D., DEPUTY DIRECTOR, PHYSICIAN PAYMENT REVIEW COMMISSION

    Ms. Wilensky. Thank you, Madam Chair. I appreciate the 
opportunity to present the views of the Physician Payment 
Review Commission on provider-sponsored organizations. This is 
an area that we have looked at and commented on in the last two 
reports, including the one that was issued about three weeks 
ago to you.
    The view of the Commission is that PSOs represent both 
opportunities and challenges, and we have come to some 
recommendations with regard to how they may be treated.
    The opportunities are that they present a way to increase 
the availability of private plan options in areas that have had 
some difficulties. Those are particularly some of the rural 
areas and some of the smaller urban areas, but, of course, they 
may make a difference in larger urban areas as well, and, in 
general, because they offer options that have not previously 
been available to seniors, and we applaud that.
    There are some challenges, however, that the Commissioners 
have been concerned about. In particular, it is to make sure 
that the seniors are protected, protected both from potential 
plan failure and also protected in the sense of making sure 
that quality health care is provided in these plans, and 
finally, as a matter of equity, to make sure that there are not 
advantages created for certain kinds of plans relative to other 
kinds of plans.
    When the Balanced Budget Act was passed in the last session 
of Congress, there was a waiver of the usual requirements of 
State licensure and some new Federal standards with regard to 
solvency. The staff of PPRC attempted to assess how much change 
has occurred in the last two years, and what effect that might 
have on the need for new regulations and legislation.
    As best they could tell, there appears to be substantial 
growth and changes going on in the States, in terms of how they 
are attempting to deal with the PSOs. There also appear to be a 
number of PSOs that have come forward indicating that there 
perhaps may be fewer barriers and obstacles to the development 
of PSOs than appeared to be the case in 1995.
    The basic position of PPRC is that it is important to apply 
the same standards to all plans, but that it is also important 
to have some flexibility in terms of the establishment and the 
enforcement of these standards. In addition, it is very 
important to find direct measurements for quality and to get 
rid of or replace the 50-50 rule, which has not been a good way 
to assure quality and has also stopped the development of some 
of the plans that could provide health care.
    In terms of the main policy options, there are really three 
questions that you need to deal with. The first is, should the 
PSOs be subjected to the same standards. We believe the answer 
to that is yes. We think there is a general consensus when it 
comes to quality assurance. The big debate has been whether or 
not there should be the same standards when it comes to 
financial reserves, deposit requirements, and to the minimum 
enrollment.
    The question that I think the Congress needs to answer for 
itself is, whether there is a way to really guarantee the 
provision of contractual obligations in the case of financial 
failure or bankruptcy? If there could be, that might allow a 
lot more leeway.
    The second issue is to find direct measures so that you can 
replace the 50-50 rule, that would allow the development of a 
lot of plans that are specifically geared toward the Medicare 
population, although we don't expect that that would be all 
plans by any means.
    Then the third is the issue that you were discussing at the 
end of the last witness, which is who ought to be enforcing and 
developing the standards, the State or the Federal Government.
    As you know, historically it's been the States. Our 
position is that it ought to continue as it has been, perhaps 
relying on NAIC to set a model that would have some 
consistency, since there is legitimate concern that some States 
have not been nearly as well developed in terms of their 
standards and may, in fact, have created barriers.
    I personally--and I'm speaking for myself and not the 
Commission--would suggest that you consider an intermediate 
option as well. That is the use of provisional certification 
and licensure, if one of two occurrences happen. The first is 
if you have a Medicare only plan once you've allowed that now 
to occur by replacing the 50-50 rule. It would seem to me 
reasonable to allow for a Federal certification in that case, 
or secondly, if a plan can show unreasonable barriers, which I 
assume the other witness will assure us won't occur. But if it 
could be shown, then to have a temporary or provisional 
licensure, while that problem is eliminated, seems to me to be 
a reasonable intermediate position. Again, I would like to 
stress that is my personal opinion and not the opinion of PPRC.
    Thank you.
    [The prepared statement follows:]

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    Chairman Thomas [presiding]. Thank you, Gail. I'm sorry I 
wasn't here to welcome you. I have your testimony and I read it 
and appreciate it.
    Next we'll turn to Josephine Musser, who has been a 
stalwart companion on this march to understanding. We 
appreciate your willingness to testify before us. Any written 
testimony you have will be made a part of the record, and you 
can address us in any way you see fit.

 STATEMENT OF JOSEPHINE W. MUSSER, CHAIR, SPECIAL COMMITTEE ON 
   HEALTH INSURANCE, AND PRESIDENT, NATIONAL ASSOCIATION OF 
 INSURANCE COMMISSIONERS; AND COMMISSIONER OF INSURANCE, STATE 
                          OF WISCONSIN

    Ms. Musser. Thank you, and good afternoon, Mr. Chairman, 
and members of the subcommittee.
    I am Jo Musser, President of the National Association of 
Insurance Commissioners, and the Commissioner of Insurance for 
the State of Wisconsin. I am here today on behalf of the 
members of the NAIC Special Committee on Health Insurance, 
which is 42 member States.
    As Chair of the committee, I want to thank you for the 
opportunity to speak, but I also would like to speak on behalf 
of my membership, to say how much we appreciate your leadership 
on health care issues, which are of great importance to the 
States.
    The State insurance regulators play a key role in 
safeguarding consumers across the Nation. An important part of 
that role is encouraging competition. This maximizes choices 
for consumers. We do that by adapting to changing markets, 
changing markets in all lines of insurance. We are adapting to 
the evolving market in health care insurance and delivery 
systems which are presently emerging in the market.
    To meet the needs of that market, the States have 
initiatives well underway for a framework design to oversee 
health insuring organizations by the function that they perform 
and not by the acronym they might use.
    You are being asked to consider special treatment for risk-
bearing provider organizations serving the Medicare managed 
care program. These proposals would deprive our most vulnerable 
population, the elderly and the disabled, of crucial consumer 
safeguards. Approving these proposals will also have a far-
reaching impact on the entire insurance marketplace.
    Protecting the consumers is the primary responsibility of 
State insurance regulators. We meet this responsibility with 
tools developed over years of experience. We approve 
organizations for licensure to engage in the business of 
insurance, including an application of time-tested financial 
requirements. We also continually monitor an organization's 
ongoing financial condition and market conduct through 
extensive examinations and financial analysis.
    We have the authority to act quickly to supervise and 
rehabilitate any of these organizations they show signs of 
financial distress. We maintain sophisticated financial data 
bases for auditing and exchanging information within the State 
and among the States through the NAIC.
    Having just enumerated some of the expertise of the State 
insurance departments, I would like to emphasize that the 
individual pieces of State insurance regulation form a 
comprehensive and integrated whole. The individual components 
are important regulatory tools, but their effectiveness is only 
achieved by their use with complementary and interdependent 
components.
    As you can see, the State insurance regulation is a great 
deal more than merely verifying an organization's initial net 
worth. To provide the same level of consumer protection, the 
Federal Government would need to duplicate the States' existing 
regulatory framework. We feel it is a costly and unnecessary 
duplication, not to mention the total burden to the health care 
system.
    The States are major purchasers of health benefits as well, 
and a competitive marketplace is advantageous to the States 
just as it is to the Federal Government and other large 
employers. The States strongly favor increasing consumer 
choices. A healthy and competitive marketplace, with its myriad 
of consumer choices, can be achieved through the integrated 
regulatory framework already established by the States. The 
regulatory oversight provided by the States is both vital and 
necessary, especially to community-based organizations, because 
a more highly competitive environment increases the risk and 
the magnitude of insolvency.
    The States are keenly aware of and constantly adapting to 
the rapidly evolving health insurance market. State insurance 
regulators are comprehensively evaluating the range of issues 
which are presented by the diversity of organizations in 
today's marketplace. Organizations that are sponsored by 
providers participate in and make an important contribution to 
the health insurance market today. The current regulatory 
structures do not impose a barrier to the entry of different 
types of organizations operating in the marketplace. This is 
because the States have been responsive to the changing market 
needs.
    This is borne out by the active presence of licensed 
organizations owned and controlled by providers in many States. 
In fact, it is reported by the PPRC and others that 
approximately 15 to 20 percent of the existing HMOs in this 
country are organizations sponsored by providers.
    In my own State of Wisconsin, as you've heard a number of 
times, the majority of the HMOs, 18 of the 26, were originally 
organized and sponsored by physicians and hospitals. Wisconsin 
offers an example of the States adapting to the environment and 
the evolving marketplace. In the late 1980s, my department saw 
the bankruptcy of several independent practice associations, or 
IPA, physician networks. To help prevent these failures in the 
future, Wisconsin solvency standards were increased in 1987 to 
reflect the financing necessary for the level of risk that was 
being assumed by the organizations.
    Health insuring organizations, with all shapes and varying 
forms of ownerships and affiliations, are licensed by the 
States because of the insurance function that they perform, not 
according to whether or not they are sponsored by providers. To 
better meet the needs of emerging health insuring 
organizations, the States, working through the NAIC, are 
developing a uniform model for health insuring organizations as 
part of the CLEAR effort, Consolidated Licensure of Entities 
Assuming Risk. This effort seeks to protect consumers and 
promote a more competitive marketplace by ensuring that 
entities that perform the same or similar functions are subject 
to a level regulatory playing field, regardless of their 
acronym.
    The Ohio Insurance Department, which has proposed uniform 
licensure to govern all health insuring organizations, offers 
an example of the CLEAR initiative. The States recognize that 
some of the organizations and arrangements in today's market 
may warrant flexibility in regulatory standards.
    The NAIC's risk-based capital, or RBC, formula for managed 
care organizations is the most notable component of the CLEAR 
initiative. This recognizes the structural differences among 
organizations. The formula sets minimum capital requirements 
according to the level of risk being assumed by the 
organization and provides consumer assurances that services 
promised will be services delivered.
    The States are an essential part of the overall framework 
that governs Medicare managed care. We are committed to 
protecting all the consumers, while adapting to the regulatory 
environment. The States can do this best by continuing to 
license health organizations, including provider-sponsored 
organizations.
    Thank you.
    [The prepared statement follows:]

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    Chairman Thomas. Thank you, Jo.
    The ``$64,000 question'' from the time we've begun this 
process is, if there is a distinction, is it a distinction that 
makes a difference. I'm waiting for the ``silver bullet.'' I 
just have to tell you, when you say the same or similar, you 
don't give me any comfort level, because that means there's a 
difference, and is the difference enough to create a different 
standard. That's what I'm hoping you're going to provide to us 
as you go through this study.
    But I want to get some understandings, and I guess, Gail, 
you're the one who would be most likely to try to respond to 
this.
    The American Hospital Association, in testimony before us a 
short time ago, in talking about PSOs versus HMOs and creating 
an argument that PSOs are better than HMOs, the points they 
made in terms of why they're better is, one, in their 
testimony, AHA said ``They put clinical decisions in the hands 
of those most capable of balancing efficiency and patient 
care.'' Another quote: PSOs are more likely ``to focus on 
improving the health of the entire community.'' A third quote, 
``Economic and patient care incentives for PSOs are all 
aligned.''
    Do you have any credible study or any evidence that you 
could provide this subcommittee that PSOs actually provide 
those advantages to enrollees or beneficiaries beyond 
traditional HMOs?
    Ms. Wilensky. I think it----
    Chairman Thomas. Outside of any pamphlet or brochure that 
might otherwise claim to be----
    Ms. Wilensky. I think basically it would be impossible to 
do so. In the first place, they're very new entities. To be 
able to assess the impact would mean they would have had to 
have been around for a while and then assessed.
    But even beyond that, the fact is you have provider-
sponsored HMOs. You know that. And Wisconsin is a very good 
example. Therefore, the notion that there is something that 
would distinguish the motivation just on that basis just makes 
no sense.
    In terms of enrollment and the number of years that they 
have been going on, it is very clear that PSOs, in general, are 
just younger entities. So I think that anyone who seriously 
wanted to do a study would have to wait a while. But you can at 
least raise a question on that because of all of the provider-
sponsored HMOs.
    Chairman Thomas. My argument would be let's get them up and 
running, with reasonable and appropriate structures, and let 
people vote with their feet. That's my preferred way to always 
resolve who's better.
    On page 15 you talk about the various approaches, and that 
in the balanced budget amendment we took what you call a 
stopgap measure. It was taken simply because we didn't have 
adequate information, nor was anyone able to provide us with a 
relatively solid evidentiary position that we should leave it 
entirely to the States or that we should move it to the Federal 
level.
    It seems to me, if we can get a model that we can use, all 
we need to do at the Federal level is say this is a pretty good 
model and, you know, the old business of Federal preemption, 
that if States don't follow up, we'll do it. But we didn't have 
that. So I thought what I came up with was, one, something that 
the House and the Senate could agree to, but I guess I would 
ask you again.
    Can you give me any level of confidence that there would be 
no artificial barrier placed in front of any PSO in any State?
    Ms. Wilensky. No, I certainly can't, and the presumption is 
that in some States there will be obstacles or barriers of some 
kind, which is why I think having the safety valve of being 
able to appeal to the Federal Government is attractive.
    Chairman Thomas. Additionally in your statement, on page 2, 
you talk about the same standard should apply to all the plans 
participating in Medicare, and then you go on to say, however, 
you've got to understand the differences in plan design and 
some flexibility might be appropriate in establishing and 
enforcing these standards. So if you're going to have the same 
but maybe some flexibility, it's kind of like same or similar.
    What types of different standards do you think should be 
applied to PSOs? What rationale can you provide for the need to 
handle it differently? I know that doctors argue that they 
have, in essence, professional sweat equity that they bring to 
the table. This takes us back two or three years ago, with all 
the discussions that we had.
    I guess the question is, by your making this statement, do 
you believe there are differences that would require handling 
them differently?
    Ms. Wilensky. We think there are differences, if the 
seniors are protected, that are worth taking into account. The 
issue is not only the solvency requirement but what kind of 
assets you might want to use to count toward solvency.
    With regard to the sweat equity issue, the question is, if 
you have an organization that declares bankruptcy or is 
otherwise financially insolvent, is there a way to assure the 
seniors that the individuals or the institution, if there's a 
hospital attached, will continue to provide services through 
the plan, even in the presence of a bankrupt organization. If 
there is a way to write a contractual obligation that did that, 
that was the kind of flexibility that we had in mind. If it's 
not possible, and if the arrangement is only with the 
organization, per se, then once it's bankrupt, the assurances 
don't mean anything and you haven't resolved the problem.
    So it was really a matter of principle that we thought was 
important to put in place. How you would actually carry it out, 
as you're indicating, gets very tricky.
    Chairman Thomas. Obviously, we wouldn't be carrying on 
these hearings, nor would we have different approaches, if we 
had a yardstick for solvency that we could lay beside any 
different model to determine the level of coverage necessary.
    I guess, asking the same question the other way around, Jo, 
do you have a comfort level that there is no State currently 
placing unnecessary barriers in front of the approval of PSOs 
that would warrant us not talking about a fallback that we had 
in the BBA, to allow for someone, if they made the case, to 
deal with some entity other than a State, if the State was 
blocking them?
    Ms. Musser. I can't guarantee you, no, that every State 
will never pose any kind of what may be presented to you as an 
unreasonable barrier. I can tell you that, in looking at the 
States, how they calculate admitted assets, how they calculate 
risk-based capital or capital requirements, and their licensure 
process and how long that takes, the other financial filing 
requirements, their auditing requirements, in the current 
setup, whether it's CISNs in Minnesota or ODSs in Iowa, or HMOs 
in Wisconsin, or PSOs in Georgia. There are many States who are 
well underway to accommodate provider-owned organizations.
    My question, in part, is--and my HMOs are owned by 
physicians. They address a number of the points that were made 
by the hospital association, and now----
    Chairman Thomas. Jo, we're pinched for time. Everybody else 
has left to vote. I think some members want to hear your 
response to this, and an additional one. So the subcommittee 
will stand in recess until I get back.
    Ms. Musser. Thank you.
    [Recess.]
    Chairman Thomas. The subcommittee will reconvene.
    When we last talked, just to let the subcommittee members 
know, I asked two unfair questions and they were answered 
appropriately. One to Dr. Wilensky, could she assure me there 
would be no need for a relief, a safety valve structure, in 
case States, for whatever reason, would not play the game 
fairly, in essence, and then the reverse question to Jo Musser, 
could she assure me--and she began her discussion by saying she 
can't guarantee.
    To a certain extent, we're right back to where we started. 
I don't want to create a Federal approval structure unless 
someone tells me that's the only option. I don't have a comfort 
level that we just leave it to the States, because we don't 
know whether there is sufficient sophistication, willingness, 
cooperation, understanding, to deal with the approval of PSOs 
in unhindered fashion. That's why we wound up with the 
structure we had in the BBA, and until I get a comfort level 
otherwise, that's the structure that I'm going to look at.
    What I would ask you, Dr. Musser, if you can't guarantee me 
that no State wouldn't, will you guarantee me that you're going 
to give me a work product in your stated time frame which 
begins to shed light on the experiences out there, to the best 
of our current experential knowledge, on some kind of a 
yardstick for the question of solvency risk.
    Ms. Musser. Yes, sir, I can. We have been working on the 
fast track, to be sure, on our risk-based capital standard. It 
is moving along beautifully.
    The risk-based capital standard is a calculation that 
determines the level of working capital necessary to start up a 
business like this, and it takes into account a variety of 
managed care credits, including equity arrangements, 
compensation arrangements, whether there are withholds or 
capitation or partials. It takes into account buildings and 
equipment, takes into account reinsurance agreements, and it 
is, again, by function, not acronym, so it doesn't apply to any 
specific entity, which we would argue against, but, rather, 
whatever the States chooses to call it.
    It starts out with a risk level, and then, as an 
organization lays off risk through its structure--whether it's 
reinsurance or capitation, partial capitation or equity--it 
gives credit toward that capital requirement and reduces it 
through these various credits.
    That formula, as I said, is on the fast track. I'm very, 
very pleased with its development. I told you that we would 
have it done by June, and if things continue to go as they are 
going, we will.
    Chairman Thomas. Thank you very much. That's of some 
comfort. Beginning or end of June? [Laughter.]
    Ms. Musser. Well, our national meeting is actually June 6-
13, so if things continue to go well, it will be presented 
there.
    Chairman Thomas. I appreciate that. Often in the movie 
industry they have a preview of coming attractions. If we might 
be able to take a look at it prior to any formal structure, 
just to begin to get some ideas--because our timetable may not 
be able to just await your arrival at the national meeting and 
the official send off.
    Ms. Musser. I've been preparing a document that explains it 
in plain English, and it covers these various credits. We've 
got a draft document that I will give to you as soon as we can 
get it cleaned up.
    Chairman Thomas. Thank you very much.
    Mr. Stark.
    Mr. Stark. Well, I would like to thank the witnesses for 
their input.
    What I'm hearing, Ms. Musser, from you, is that we should 
allow the State commissioners to continue to do what they seem 
to do very well.
    I did understand that Glenn Pomeroy, who I suspect is the 
brother of our own Earl--it keeps running in the family. 
There's a lot of nepotism among these insurance commissioners, 
huh? He testified that, in his 39-State survey, 27 States have 
processed PSO applications in an average turnaround time of 90 
days.
    Now, nobody gets away with that kind of bragging without 
somebody criticizing him. But you're not doing so bad. It was 
Columbia Hospital who said it takes 18 to 24 months, and I can 
understand that. Maybe it ought to take 18 years for them. 
[Laughter.]
    So what Glenn would suggest to us that it isn't so bad 
having the States continue to try and protect the consumers and 
keep these organizations solvent.
    Gail, I guess what you're saying is that we might have some 
problems if we just remove the regulations, and admittedly, 
there are different kinds of entities, and we maybe ought to be 
more flexible in how we apply regulations, but we ought to try 
and have uniform regulations for all providers. Is that a 
fair----
    Ms. Wilensky. Yes, and to keep it basically at the State 
level, perhaps with an appeal, but to have the State remain the 
main line of defense.
    Mr. Stark. In support of your testimony, I'm going to 
suggest something to my colleagues, and it may suggest to them 
that perhaps we ought to keep this uniform and not start making 
special exceptions for special groups.
    I know, Dr. Wilensky, that you're familiar with physician 
reimbursement laws, are you not?
    Ms. Wilensky. Yes.
    Mr. Stark. And I know you're aware of the angst that has 
caused among medical providers and in the industry, and that 
there have been more lawsuits and more investigations and more 
exceptions and more ways to try to get around the referral and 
kickback laws, or conform with them in creative ways.
    I'm suggesting that once we start having all different 
levels of providers of managed care, we're going to get into 
that same box again. We're going to create a whole cottage 
industry of lawyers trying to figure out how to shoehorn 
insurance companies and qualify them as PSOs and we're not 
going to have much time to do anything else.
    Is that a fair analogy, just to suggest that what we have 
is working--okay, it needs improvement--and if there are going 
to be new types of providers, let's try and just keep one 
standard as we have now.
    Ms. Wilensky. I think the enforcement provisions of the 
State, in the best States, is much more extensive, as you had 
mentioned earlier, than what we're likely to get at the Federal 
level.
    My personal opinion--again, it was not a PPRC 
recommendation--is that one of these entities could appeal to 
the Secretary. If the Secretary agrees in that there's a 
problem, provide provisional licensure or certification.
    Mr. Stark. Yeah. That makes more sense to me, if the----
    Ms. Wilensky. But not write a separate law.
    Mr. Stark. Thank you very much. I want to thank both you 
and Ms. Musser for enlightening us.
    Chairman Thomas. The gentlewoman from Connecticut.
    Mrs. Johnson. Thank you.
    Actually, that's pretty much the structure that was in the 
Balanced Budget Amendment in the Medicare reform of the 104th 
Congress. I think it does give us some pretty good guidance as 
we start this debate now.
    I want to turn to a different aspect. The administration 
said there were four controversial areas, one of them being 
quality assurance. You know, the 50-50 rule is 15 years old. 
Surely, with all the technological advances that have taken 
place in that time, we can do better than that. I don't 
understand why, when the National Commission on Quality 
Assurance has developed the HEDIS system, and now has three 
years of reporting under their belt--this is a system that was 
specifically developed to look at quality across all kinds of 
plans, regardless of whether they were HMOs or managed cares or 
whatever. Now we have three years of data reported under this 
system.
    Why can't we use that system and require that these plans 
be approved by either an NCQA approval process for quality, a 
quality assurance process, or something along that line? Why 
does the Federal Government rely on a 50-50 rule that is 
basically irrelevant instead of at least moving that far to an 
NCQA quality assurance standard based on HEDIS' experience?
    Ms. Wilensky. I think the answer is the Federal Government 
can and should. Kathy Buto mentioned that HCFA was planning to 
have regulations, I think, in 1998. It might be helpful to have 
a sense of the Congress or a directive to have those, indeed, 
issued in 1998. I think the 50-50 rule is a proxy that was 
excusable in the 1980s, but the work that has been done really 
ought to supersede 50-50.
    Under HEDIS now, and under Medicare's requirement to report 
HEDIS information for Medicare managed care plans, which is now 
going into effect, there is just reporting but there is no 
mechanism in place to audit and take action based on the 
information that's reported. That's what HCFA needs to do as 
the next step, but I think it needs to do it now.
    Mrs. Johnson. Why wouldn't it be reasonable to require that 
these plans meet the NCQA standard and then, by '98, HCFA have 
a specific standard from this data? I mean, even in an interim 
sense, their standard is more quality focused and does more 
about quality care in a network setting than 50-50 rules do.
    Ms. Wilensky. NCQA has two functions. One is an 
accreditation function, and the second is that it establishes a 
data system. So the issue for HCFA now is, when the information 
is reported in the HEDIS format, if there are measurements that 
are not met, what happens next. That's really the issue, the 
ongoing measurement, the ongoing quality assurance, and the 
steps that need to be development to remedy any failures.
    Mrs. Johnson. But given those two different functions, why 
couldn't we use their certification program until the Federal 
Government evaluates the data and either alters or adjusts it 
for Medicare, or perhaps doesn't, depending on what they find?
    Ms. Wilensky. I think the less-than-perfect state of HEDIS 
is far better, in my mind, than the 50-50 rule, personally.
    Mrs. Johnson. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Thomas. The gentleman from Nebraska.
    Mr. Christensen. Thank you, Mr. Chairman.
    Mrs. Musser, I wanted to find out from you what enforcement 
provisions you have in place for those PSOs that might be in 
noncompliance?
    Ms. Musser. If I understand your question correctly, do you 
mean noncompliance with financial?
    Mr. Christensen. Yes.
    Ms. Musser. I see. Okay.
    In Wisconsin, we don't have PSOs. We have HMOs, which are 
the same structure as you're talking about. So first I will 
address Wisconsin.
    We have financial reporting requirements; we have auditing 
requirements. Upon audit and financial analysis, and the 
submission of their quarterly and annual financial statements, 
if they're approaching a level of surplus or solvency that 
troubles us, as soon as we decide that it becomes troublesome, 
we go in and work with management. We can help them find 
additional sources of capital. We can recommend--in fact, 
strongly recommend that they change management, if that's the 
problem. We can have them sell off pieces of lines of their 
business, et cetera. We have a surplus level that is required, 
and if they fall below that level, we can put them into 
liquidation.
    We in Wisconsin have very few liquidations because we get 
involved much earlier, and we try to preserve the integrity of 
the organization. Other States are very similar as it relates 
to how they regulate for solvency, in all lines of insurance. 
In fact, what I just told you applies to all lines of 
insurance.
    Mr. Christensen. I may have misunderstood you. Did you say 
you have no PSOs in Wisconsin?
    Ms. Musser. We have no PSOs in Wisconsin. We have HMOs in 
Wisconsin, which are owned by doctors and hospitals.
    Mr. Christensen. How would you separate the two--if you 
wanted for lack of a better definition, I think you probably 
may have PSOs and HMOs. How would you describe the difference 
in Wisconsin?
    Ms. Musser. Well, you know, it's confusing to me. I must be 
very honest with you. Eighteen of our 26 HMOs were founded and 
owned, initially started up by physicians, large specialty 
clinics owned by physicians, sometimes with hospitals. They, in 
fact, make the medical decisions, they make the utilization 
review decisions, they hire an outside firm to do claims 
management, a third party administrator. They have a licensed 
company, called an HMO in Wisconsin.
    We do have reduced solvency requirements for HMOs than 
indemnity insurers. Ours are a million five for HMOs, or three 
percent of premium. If they choose to go into the point-of-
service business, they have to come up to ten percent. So we do 
regulate by function now, and you could call them really 
whatever you want. We happen to call them HMOs.
    Mr. Christensen. So if you're putting a little T-bar chart 
together on the differences between an HMO and, say, a PSO, a 
quasi-PSO, in the State of Wisconsin, do you have anything on 
the right side of the chart?
    Ms. Musser. No. I mean, there are no barriers for providers 
owning and operating risk-bearing entities in Wisconsin. They 
put together a million five, they file a business plan, we 
approve their licensure and their geographic service area, we 
have 26 HMOs covering virtually every part of the State, rural 
and urban. You could call them PSOs. Iowa would probably call 
them ODSs. Minnesota would call them CISNs. You know, it's just 
a matter of terminology or acronym, as I said earlier.
    Depending on the function or the level of risk they take, 
we do have varying levels of capital requirement. The risk-
based capital formula I think will improve on that 
dramatically. It's a very dynamic formula that really gets at 
many more of the different structures that we're seeing 
emerging now.
    Mr. Christensen. Thank you.
    Chairman Thomas. The gentleman from New York?
    Mr. Houghton. No questions.
    Chairman Thomas. I thank both of you. Gail, I'm sure you'll 
be back here fairly soon, continuing to do a good job.
    Jo, when I next see you, I expect to have something in your 
hand for us. If I don't see you before then, good luck in 
bringing it about.
    Ms. Musser. Thank you.
    Ms. Wilensky. Thank you, Mr. Chairman.
    Chairman Thomas. We would ask the next panel to come 
forward. John Brownlow, Vice President and Chief Operating 
Officer, Florida Hospital Healthcare System, Orlando, Florida, 
on behalf of the American Hospital Association; Mary Nell 
Lehnhard, Senior Vice President, Office of Policy and 
Representation, Blue Cross and Blue Shield; and Dr. Richard 
Corlin, Speaker of the House of Delegates, American Medical 
Association.
    I want to thank all of you for your willingness to testify. 
If you have a written statement, it will be made a part of the 
record. You may inform us, in the time you have, any way you 
see fit.
    We will start with Mr. Brownlow and work to you folks on 
his left.

 STATEMENT OF JOHN BROWNLOW, CHIEF OPERATING OFFICER AND VICE 
PRESIDENT FOR MANAGED CARE, FLORIDA HOSPITAL HEALTHCARE SYSTEM, 
         ON BEHALF OF THE AMERICAN HOSPITAL ASSOCIATION

    Mr. Brownlow. Thank you.
    Mr. Chairman and members of the committee, my name is John 
Brownlow. I am Vice President and Chief Operating Officer of 
Florida Hospital Healthcare System, a provider-sponsored 
organization located in Orlando, Florida.
    Our provider-sponsored organization is made up of 648 
physicians, five hospitals, 13 walk-in medical centers, and 14 
ancillary providers.
    I am pleased to be here today on behalf of the American 
Hospital Association and its diverse members, 5,000 hospitals, 
health systems, networks, and other health care providers.
    Before I begin with our experience, I would like to say we 
greatly appreciate the work of Chairman Thomas, in trying to 
make PSOs a Medicare option through his drafting of the 
original legislation reported out of this committee in 1995, 
and we commend Representatives Greenwood and Stenholm for 
introducing bipartisan PSO legislation in this Congress. AHA 
strongly supports this legislation.
    I want to briefly share with you some of our firsthand 
experiences as a provider-sponsored organization that has 
entered into a Medicare risk contract with HCFA under the 
Medicare Choices demonstration project. We believe we have a 
valuable story to tell about the real life experience of a PSO.
    The name of our health plan for seniors is called Florida 
Hospital Premier Care. We determined that it was important to 
include the name ``Florida Hospital'' in the health plan name, 
since Florida Hospital has been in the community for over 80 
years and currently serves almost half of the traditional 
Medicare population in the greater Orlando market, which is 
comprised of about 140,000 Medicare beneficiaries. Currently, 
30 percent of Medicare beneficiaries receive benefits from 
Medicare risk HMOs in our market. This is a level that has been 
relatively flat in recent years.
    After receiving approval from HCFA on December 26th to be a 
PSO in the demonstration project, we ran the first announcement 
of our new plan in the newspaper on December 31, and again on 
New Year's Day. The response to our early marketing efforts has 
been tremendous. On the first day our newspaper ad ran, we 
received over 500 calls from interested Medicare beneficiaries. 
On January 2, the first business day after the New Year, our 
staff were overwhelmed from the 2,500 responses that were 
received.
    FHHS's early marketing results have shown that 60 percent 
of our enrollees have come from traditional fee-for-service 
Medicare, and 40 percent have left their Medicare HMO to join a 
health plan locally owned and operated.
    I would like to point out some of the differences between 
our health plan versus a traditional and typical Medicare risk 
HMO, some of which HMOs have been in the market for over five 
years.
    First, our roots are in the local community and we're there 
to stay. We're enrolling Medicare beneficiaries that have grown 
to trust the hospital and physicians in the community based on 
providing compassionate and quality health care. We know that 
by sponsoring and putting our name on the health plan, we are 
relying on a reputation that the hospital and physicians have 
spent decades developing.
    Based upon a survey of our current members, over 80 percent 
of the individuals mentioned that the hospital's reputation in 
the community, and the fact that the plan was sponsored and 
owned by a local community hospital, was the basis for their 
decision.
    Second, we bring health care decisions back to local 
providers. We believe that physician leadership is critical in 
any high-quality health care delivery system. That means having 
decisions made by local providers with the first-hand knowledge 
that a beneficiary needs.
    Our affiliated physicians have freely given hundreds of 
hours each month over the last three years participating in the 
administration of the organization, developing the medical 
management process, policies and procedures, reviewing patient 
care, and providing input on how to make the managed care 
process better by putting the patient first.
    Many of the primary care physicians that are in our network 
had never experienced or participated in a Medicare risk plan 
before because of all the ``hassle'' they experienced with 
commercial HMOs in the past. Not until they had a say and were 
engaged in the process of managing a PSO did they choose to 
participate in the Medicare risk plan.
    Additionally, PSOs will help pull down health care costs by 
directly managing both the use of services and the cost of 
producing these services. PSOs will reduce administrative 
expenses that will both save Medicare dollars and increase the 
percentage of health care dollars going to patient care and 
member health improvements.
    To ensure PSOs are a viable option for seniors, Medicare 
should enter into contracts only with PSOs that provide 
coordinated care, accept financial risk, and meet Medicare's 
risk contracting standards.
    Thank you.
    [The prepared statement follows:]

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    Chairman Thomas. Thank you very much.
    Miss Lehnhard.

STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE PRESIDENT, OFFICE 
   OF POLICY AND REPRESENTATION, BLUE CROSS AND BLUE SHIELD 
                          ASSOCIATION

    Ms. Lehnhard. Mr. Chairman, members of the committee, I am 
Mary Nell Lehnhard, Senior Vice President for the Blue Cross 
and Blue Shield Association, and I'm here today representing 
all the Blue Cross and Blue Shield plans.
    I would say at the outset that we welcome competition from 
PSOs and we believe absolutely that they should be a choice for 
Medicare beneficiaries. We do not believe they should be exempt 
from State licensure. Under current Medicare law, any 
organization that accepts Medicare capitation and signs a 
Medicare risk contract must meet all Medicare standards and be 
licensed by the State as meeting all local consumer protection 
laws.
    This rule applies to HMOs and PSOs. This rule assures that 
Medicare beneficiaries get the strongest possible set of 
protections, all State laws and all Federal Medicare rules. It 
is not necessary, nor is it good public policy, to waive this 
important requirement for PSOs to be in the program, and I 
would like to make four brief points.
    First, PSOs can meet State standards. Many PSOs are already 
operating under State licensure laws, and many are in the 
process of approval. The NAIC risk-based capital will provide a 
more sophisticated way to set financial standards for these 
organizations.
    In fact, according to AHP, 14 percent of Medicare risk 
plans already are PSOs. I would repeat that. Fourteen percent 
of Medicare risk plans are PSOs.
    Secondly, timeliness is not a barrier. The NAIC has done a 
survey, that 75 percent of applications submitted by PSOs are 
processed in 90 days.
    Third, waiving the consumer protection laws would be a 
tremendous disservice to beneficiaries and would result in a 
different and confusing set of standards based on what kind of 
products you have. Beneficiaries wouldn't know whether they're 
protected by State and Federal law, or just Federal law. 
Experience suggests that they would ask for essentially a truth 
in labeling to figure out how their plan is protected.
    In addition--and this is extremely important--all 
beneficiaries in PSOs would lose very visible State 
protections. These State laws will frequently go beyond 
Medicare Federal rules, no matter how broad HHS tries to make 
these. I would point out that we focused on financial standards 
today, and financial standards are but one part of what the 
States have in place to protect consumers. There is a very 
broad range, over a thousand consumer protection laws on the 
books, that States have to protect consumers.
    For example, Maryland has stringent laws regarding the 
collection and verification on the network physicians. They 
look at their training, their certification, their physical and 
mental status, and past malpractice. Seventeen States have 
rules like this that would be preempted by the Federal 
Government if this provision passes.
    A majority of States have regulations governing brokers 
that sell HMO and PSO products. These requirements include 
disclosure of commissions and limits on compensations and other 
rules for brokers. Other States have special requirements to 
assure that the network primary care physician actually has 
experience in providing primary care.
    Medicare beneficiaries will be very concerned that these 
laws apply to some products, HMOs, but not other products, 
PSOs.
    The fourth point I would make is that Congress will be 
sending a very powerful message that could result in some 
communities literally losing their hospitals. The message would 
be one of encouragement, especially to small rural hospitals, 
to sign up to be a Medicare risk plan, the promise of a new 
income stream. The encouragement is the waiving of consumer and 
financial protections that State legislatures have determined 
to be necessary to protect beneficiaries.
    For example, at the heart of the financial standards that 
hospital and physician PSOs want to waive are the current 
liquidity requirements. The NAIC investment guidelines in many 
States require HMOs and PSOs to have a minimum amount of their 
assets in liquid assets or cash assets. The PSO bills that have 
been introduced would allow PSOs to meet this liquidity test 
with their land and their buildings.
    This means that a PSO, particularly in a rural area that 
has to send a majority of its complicated cases into the city, 
could not be required, either by the State or the Secretary, to 
have cash on hand to pay those claims that had to be paid on a 
fee-for-service basis. Their hands would be tied. You can't pay 
out-of-area claims with a hospital parking lot.
    The result of inadequate cash means the community loses its 
PSO and it means the community loses its hospital. We believe 
the answer to encouraging PSOs to develop is not to waive 
important State standards that very visibly protect consumers, 
the PSO and the hospital. Rather, we believe Congress should 
first increase the AAPCC payment in rural areas. PSOs would 
immediately have well-capitalized partners knocking at their 
door, and they wouldn't have to assume unreasonable risk on 
their own.
    Secondly--and we don't necessarily advise this--but 
Congress could waive the 50-50 rule. This is an absolute 
barrier to PSOs that only want to be in Medicare, signing up 
for Medicare risk contracts.
    In summary, we don't oppose PSOs. We just believe that 
Congress should not waive the current Medicare requirements 
that assure the highest level of protections for beneficiaries.
    [The prepared statement follows:]

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    Chairman Thomas. Thank you very much, Miss Lehnhard.
    Dr. Corlin.

    STATEMENT OF RICHARD F. CORLIN, M.D., SPEAKER, HOUSE OF 
            DELEGATES, AMERICAN MEDICAL ASSOCIATION

    Dr. Corlin. Thank you, Mr. Chairman, and members of the 
committee.
    I'm a gastroenterologist in Santa Montica, CA, and I'm 
Speaker of the House of Delegates of the American Medical 
Association.
    The case for PSOs is compelling. Yet regulatory obstacles 
clearly do stand in the way. Last year, with strong 
congressional bipartisan support, we were successful in 
overcoming one of these obstacles. Despite massive opposition 
from the insurance companies, the FTC and the DOJ opted for 
expanded consumer choice and increased competition. Last 
August, they issued new antitrust guidelines for physician 
networks.
    We are here today to seek your help in securing the 
remaining tools needed to promote the development of provider-
sponsored organizations and provider-sponsored networks. 
Physicians continue to be troubled by the threat to patients 
when third parties intrude into medical decision making. 
Physicians know that by using recently developed techniques we 
can reduce costs and lead medicine into a new era of improved 
quality for our patients.
    The importance of physician leadership in health plans is 
well documented. Recent studies have confirmed the high 
performance of health care systems which directly integrate 
physicians into medical and management decision making. Yet, 
fear of competition has caused HMOs and other insurance 
industry representatives to balk. In vehemently opposing PSO 
legislation, they're using the same arguments against us that 
were used against them to oppose the development of the Blue 
Cross/Blue Shield plans of the 1930s and '40s, and the 1973 HMO 
Act.
    I might point out here that HMOs were well operational 
prior to 1973, but that Act facilitated their further 
development, just as this Act will facilitate further PSO 
development. How ironic it is now to, having gotten into the 
lifeboat, the Blues and the HMOs want to pull in the ladder so 
that nobody else can climb aboard.
    The AMA is pleased that Congress acknowledged the 
importance of PSOs and PSNs by including provisions 
facilitating their development in the Balanced Budget Act of 
1995. In addition, we note the strong bipartisan support this 
year for PSOs, including the introduction of H.R. 475 by 
Representatives Greenwood and Stenholm, the President's 
proposal, and the ``blue dog'' plan. We look forward to working 
with the Congress and the administration to realize the full 
potential of physician and other health care provider led 
networks.
    The AMA believes that PSO legislation should have certain 
characteristics. First, just as did the HMO Act in 1973, this 
legislation should allow for as much flexibility as possible to 
stimulate innovation in the delivery of patient care. It should 
not favor any health care provider group over another in the 
ownership and management structure of a PSO. Balance must 
prevail so that medical ethics and patient welfare dominate 
over other concerns.
    Second, PSO legislation should contain tough consumer 
protection standards. Some PSO opponents claim that we are 
asking for exemptions from provisions related to quality 
assurance, marketing and enrollment protection, data 
collection, access to care, grievances and conflicts of 
interest, when, in fact, nothing could be further from the 
truth. Indeed, we have been the ones championing tougher 
regulation in these areas.
    Third, PSO legislation should address regulatory obstacles 
that interfere with the development of PSNs. These include 
certain of the anti fraud and abuse laws and self-referral laws 
which were designed for nonrisk sharing arrangements and are 
totally inappropriate here.
    Fourth, since Medicare is a Federal program, PSOs should be 
subject to Federally developed standards which will recognize 
their unique differences. Many State regulators fail to account 
for the distinction between provider networks that deliver 
services directly and insurers that merely purchase health care 
services from others and then resell them.
    By developing a Federal framework, Congress will continue 
its precedent of encouraging new ventures that stimulate 
competition and provide efficiencies.
    The 1973 HMO Act created a Federal regulatory scheme for 
HMOs, preempting State laws that interfered with their 
formation and operation. Over the objection of insurance 
companies, HMOs argued successfully that they represented a 
different product which should be evaluated by different 
standards.
    Finally, any legislation considered by the House should 
also include the creation of PSNs. PSNs could contract with 
PSOs or other eligible organizations to deliver needed health 
care services. Provider networks offer a tremendous evolution 
in health care delivery. The encouragement of PSOs subject to 
Federal regulation will benefit both the Medicare program and 
Medicare beneficiaries.
    We thank you, Mr. Chairman, and would be pleased to answer 
any questions you or others may have.
    [The prepared statement follows:]

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    Chairman Thomas. Thank you, Doctor.
    Well, I guess maybe the first thing I could do is pose some 
questions that were posed in the testimony so that other folk 
can respond to them.
    Miss Lehnhard, what is different now that was different 
when HMOs felt it necessary to have major changes in 
legislation, both at the State level and, in fact, at the 
Federal level, in the Health Maintenance Organization Act of 
1973 that provided for an exemption at the Federal level for 
HMOs? Why isn't it fair to do for PSOs the same thing we did 
for HMOs, or more fairly, why is there no need to do for PSOs 
what we did for HMOs?
    Ms. Lehnhard. I would make three points about that. First 
of all, this is not an ``us and them'' issue. The '73 HMO Act 
helped PSOs just like it helped HMOs. The same laws that were 
barriers for HMOs were barriers for PSOs, so we were both 
helped by that.
    Secondly, it was generally agreed that everyone went too 
far in '73. There were a lot of very visible HMO financial 
insolvencies and the States had to go back and put stronger 
standards for HMOs on the books. In fact, that was the genesis 
for the NAIC/HMO model act.
    Third, I think the most important difference is that it did 
not set up a parallel Federal track of regulations. The HMOs 
still have to be licensed by the State. It merely got rid of 
some very absolute barriers to being structured.
    Chairman Thomas. Do you believe that PSOs and HMOs really 
aren't different, that it's a distinction without a difference, 
or is there a difference and can you discern one?
    Ms. Lehnhard. The differences that I see is an ownership 
issue. The PSOs are owned by physicians or a hospital, provider 
owned. They are both accepting risk when they accept a 
capitation payment; they promise to provide all the services 
under the contract for that capitation payment.
    I believe the same in that regard, they should have to meet 
the same financial standards, the same consumer protection 
standards. I think the NAIC risk-based capital standards will 
refine those standards, and a key point is they will reduce 
some of the financial standards for HMOs that have reinsurance 
or have a lot of protections. It's going to be a calibration of 
the financial standards, not a total overhaul.
    Chairman Thomas. Dr. Corlin or Mr. Brownlow, if you want to 
jump in, this is one of my concerns and one of the reasons I'm 
so desperate for a yardstick that I can use to see if there 
really is a difference.
    I'm somewhat concerned and haven't spent the time to work 
it out--and maybe you folks have, because of your particular 
focus--that if we set up a structure for approval, as Miss 
Lehnhard said, based upon ownership and control, rather than on 
function and risk assumption, which is the direction the NAIC 
is going with its model--I mean, time passes, relationships 
change.
    If we have these PSOs out there that are based upon 
ownership and control, and an HMO wants to acquire one, or a 
PSO wants to acquire an HMO, do you have any concern about 
creating sufficiently different structures so that when there 
are mergers, combinations, failures, assumptions of 
responsibilities, that you don't create a situation in which, 
if you have a Federal standard based upon ownership and control 
and there's an HMO based upon the risk assessment at the State 
level and there's a merger, you're either going to have to go 
back through the State--you know, this business of trying to 
mix apples and oranges when they may not be apples and oranges.
    Dr. Corlin. Yes, Mr. Thomas. We're very concerned about 
that. That's why we have proposed that this simply be as four-
year start up, if you would, exemption, to allow the cash 
requirements to be built up as the plan is built up. We think 
that would answer the major part of the very legitimate concern 
you have.
    But underneath that there's another issue. Almost half the 
insurance in the United States already is written under Federal 
regulation, ERISA, which are plans that totally exempt 
themselves from State legislation. It's a uniform Federal 
standard. And that's for State employees; it's for private 
employees and the State, not even for beneficiaries covered by 
a uniform Federal plan.
    Secondly, the statement that there exists throughout all 
the States uniform standards is, very simply, fiction. And the 
fact that 90 days is sufficient to get a plan licensed is an 
absolute fiction.
    We have attempted to get data and information. When you 
call State insurance commissioners, first of all, the cash 
requirements are vastly different from State to State. 
Secondly, when you say ``I want to start a PSO, send me an 
application,'' the most common answer you get is, look in the 
regulations, the information is there. And the statement that 
data supplied is insufficient and applications are not complete 
is simply because nobody has told the applicants what they need 
to do to apply. There is no desire to submit an incomplete 
application. Nobody tells us what information is necessary.
    Chairman Thomas. I understand that problem, but HMOs faced 
it and apparently they've been able to overcome it with some 
degree of success. I think what you're telling me is the people 
that you're thinking about having run these operations don't 
want to deal with bureaucracies at the State level.
    You know, you're giving me a number of arguments which, 
frankly, to me, are not dispository. They are simply, ``Hey, 
you want to own the business, this is the price of doing 
business today,'' which is unfortunate and I would love to deal 
with that as well.
    But let me ask the question another way. If you're asking 
for a greater Federal role because of all the problems that you 
at some length explained to us, would you be willing then to 
move the HMO regulation to the Federal level as well, 
notwithstanding whether the regulation of either PSOs or HMOs 
is a good thing at the Federal level. If you're doing it at the 
Federal level, why shouldn't HMOs be doing it at the Federal 
level?
    Dr. Corlin. Well, we're talking here about beneficiaries 
who are a Federal responsibility, at least with regard to the 
source of the payment for their care. Secondly, we are simply 
asking for some start-up help to allow these organizations to 
enter and compete effectively in a market which is already, for 
some organizations, well capitalized from other sources, and we 
want to be able to show that we can deliver health care which 
answers, in many cases, better quality improvement, better 
quality assurances, and secondly, has its financial incentives 
in----
    Chairman Thomas. How can you show us that it's better 
quality assurance? I would love to see that. A number of 
assertions have been made that if we go for this structure and 
facilitate it at the Federal level, that what we're going to 
get is something better than what it would be if that same 
structure were required to have to be approved at the State 
level.
    The argument that it's better and, therefore, we should be 
compelled to provide Federal assurance, is a compelling one. I 
just haven't seen the compelling evidence.
    Dr. Corlin. The uniformity of it I believe is an advantage, 
particularly during the start-up----
    Chairman Thomas. So do the HMOs. They would love to have 
uniformity in dealing with--in offering services. They 
currently have to bump along the ground through the States.
    You see, we're looking for the compelling reason for 
changing the current system. If you'll recall in the BBA, we 
didn't know for sure whether the arguments had merit, so we 
said go to the States first. And when you showed us the States 
were unwilling to deal with you folks in a reasonable way, we 
would provide a Federal structure. Frankly, I haven't heard any 
answers right now that give me a comfort that what we provided 
in the BBA isn't the best thing out there.
    Mr. Brownlow. Mr. Chairman, could I respond?
    One of the things that PSOs ar trying to do is only 
participate in the Medicare population. One of the requirements 
that a State has is that you do have to have the 50-50 rule, a 
rule that would not apply under a PSO doing only Medicare 
beneficiary HMO coverage.
    I think that's an important distinction. I think, as well, 
one of the things that we look for is some Federal 
certification that will be consistent from State to State. At 
this point, many States have not defined what a PSO is. They're 
not sure how to deal with it. They're not sure how to regulate 
it. They're not sure how to certify it.
    So I think if the Federal Government would come up with 
certification that would be applied equally, State to State, 
these could get started and they could enroll the Medicare 
beneficiary population.
    Chairman Thomas. Mr. Brownlow, all those arguments were 
made with HMOs, and in talking to the people who actually do 
the work, I'm impressed with the sophistication of a number of 
them, by whatever name it's called, in terms of the structure.
    One very quick question. On page 10 of your testimony, 
Doctor, you talked about the problem of getting doctors to go 
into a structure because of pension nondiscrimination rules.
    Are you asking for a class exemption there? Is that the 
point you're making, or just that life is difficult when you--
--
    Dr. Corlin. We're not asking for a class exemption.
    Chairman Thomas. Okay. Thank you very much.
    The gentleman from New York.
    Mr. Houghton. Just one quick question for Miss Lehnhard.
    Dr. Corlin, reading from page 9 of your testimony, you say 
that PSO legislation should address regulatory obstacles, and 
these include anti fraud and abuse laws and self-referral laws, 
things like that, and that, in effect, these laws have no 
purpose in the regulation of networks but are designed to 
reduce the provision of unnecessary care.
    How do you feel about that?
    Dr. Corlin. Well, the----
    Mr. Houghton. I'm was really asking Miss Lehnhard. I know 
how you feel about it.
    Dr. Corlin. I'm sorry.
    Ms. Lehnhard. I don't know what barriers they're talking 
about that have to do with--is it State fraud laws?
    Mr. Houghton. I think what Dr. Corlin was saying is that 
there are many laws, such as anti fraud and abuse laws and 
self-referral laws which should not be applied to the PSOs, 
that they would just be inappropriate.
    Ms. Lehnhard. I think that the HMOs would have had the same 
problem, since these are also networks of physicians. If the 
PSOs are flourishing in the States--I haven't heard of these 
problems. I'm sorry.
    Mr. Houghton. Would you like to make a comment, Doctor?
    Dr. Corlin. Yeah. The real issue here--and I'm sorry the 
point was missed in the previous response. The real issue is 
that those laws and provisions are extremely relevant in a fee-
for-service reimbursement system. They are not relevant and, 
indeed, are often counterproductive in a capitated 
reimbursement system.
    That's the reason for saying that we need the exemptions, 
not because it's a special organization but because it operates 
in a totally different type of reimbursement system from the 
one that the anti fraud and abuse and self-referral laws were 
designed to protect the public from abuses in--that was a 
terrible sentence, but----
    Mr. Houghton. I understand, and that's very helpful.
    Yes, ma'am?
    Ms. Lehnhard. Sir, my response would be, I don't know of 
any State where PSOs have to be licensed as an insurance 
company, a fee-for-service plan. They all have the option of 
being licensed as a capitated plan, where these rules won't 
apply.
    Mr. Houghton. Thank you.
    Mr. Christensen [president]. Mr. Brownlow, we have about 
two and a half minutes before we have to go vote. I know that 
during your opening testimony you had about four or five points 
that you wanted to make, in terms of differences of PSOs, that 
you felt were important.
    Is that in your written testimony?
    Mr. Brownlow. Yes.
    Mr. Christensen. Okay. I'll take a look at that and maybe I 
can follow up with some written questions at the time and visit 
with you on that.
    Mr. Brownlow. Some of the points are in there. I would make 
a couple more as well.
    I think that a difference between a PSO and an HMO is, 
under the PSO, the Federal Government will be paying the 
providers directly. They won't be going through an HMO, with 
administrative and profit and overhead taken off the top before 
the downstream risk finally gets to a PSO, to then be able to 
administrate the plan for the Medicare beneficiary.
    I think, second, an HMO provides insurance. A PSO provides 
health delivery. As well, a PSO is reimbursed under multiple 
types of reimbursement. We've got point-of-service, we've got 
PPO, we've got HMO, and so forth. Typically, in an HMO, all of 
the reimbursement is in the form of a fixed premium paid by a 
subscriber, or the government in the case of Medicare.
    Mr. Christensen. I'm going to have to go run and vote. I 
want to thank you for coming all the way from Orlando. I'm 
sorry that we've gone so far into the day, but thank you for 
coming up. I appreciate it, Mrs. Lehnhard, Dr. Corlin. Thank 
you very much.
    This meeting is adjourned.
    [Whereupon, at 4:05 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

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