[Senate Hearing 108-699]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-699

  THE HEALTHCARE CRISIS IN SOUTHEASTERN PENNSYLVANIA: THE ROLE OF THE 
                       HEALTH INSURANCE INDUSTRY

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                       PHILADELPHIA, PENNSYLVANIA

                               __________

                             APRIL 12, 2004

                               __________

                          Serial No. J-108-67

                               __________

         Printed for the use of the Committee on the Judiciary


                   U.S. Government Printing Office
96-925 PDF                  Washington : 2004

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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa            PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania          EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho                CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia             RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas                   JOHN EDWARDS, North Carolina
             Bruce Artim, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                      MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah                 HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania          PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia             JOHN EDWARDS, North Carolina
        Peter Levitas, Majority Chief Counsel and Staff Director
                Jeffrey Miller, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              

                     STATEMENT OF COMMITTEE MEMBER

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

                               WITNESSES

Badolato, Hon. David, M.D., Family Practice Associates of Upper 
  Dublin, Fort Washington, Pennsylvania..........................     2
Ballou, Roger, President, Chief Executive Officer and Director, 
  CDI Corporation, Philadelphia, Pennsylvania....................    12
Burns, L. Robert, Ph.D., MBA, James Joo-Jin Kim Professor and 
  Professor of Health Care Systems, University of Pennsylvania, 
  Wharton School of Business, Philadelphia, Pennsylvania.........     4
Fine, Stuart H., Chief Executive Officer, Grand View Hospital and 
  Affiliated Entities, Sellersville, Pennsylvania................    20
Foreman, Stephen, Ph.D., J.D., Vice President of Research and 
  Director, Pennsylvania Medical Society Health Services Research 
  Institute, Harrisburg, Pennsylvania............................    16
Gillespie, Patrick B., Business Manager, Philadelphia Building 
  and Construction Trades Council, Philadelphia, Pennsylvania....    14
Marshall, Joseph W., III, Chairman and CEO, Temple University 
  Health System, Philadelphia, Pennsylvania......................    10
Trichtinger, Martin D., M.D., Internist, Montgomery County, 
  Pennsylvania...................................................    18
Udvarhelyi, I. Steven, M.D., Senior Vice President and Chief 
  Medical Officer, Independence Blue Cross, Philadelphia, 
  Pennsylvania...................................................     8

                       SUBMISSIONS FOR THE RECORD

Badolato, Hon. David, M.D., Family Practice Associates of Upper 
  Dublin, Fort Washington, Pennsylvania, prepared statement......    36
Burns, L. Robert, Ph.D., MBA, James Joo-Jin Kim Professor and 
  Professor of Health Care Systems, University of Pennsylvania, 
  Wharton School of Business, Philadelphia, Pennsylvania, 
  prepared statement.............................................    50
Foreman, Stephen, Ph.D., J.D., Vice President of Research and 
  Director, Pennsylvania Medical Society Health Services Research 
  Institute, Harrisburg, Pennsylvania, prepared statement........    55
Marshall, Joseph W., III, Chairman and CEO, Temple University 
  Health System, Philadelphia, Pennsylvania, prepared statement..    64
Trichtinger, Martin D., M.D., Internist, Montgomery County, 
  Pennsylvania, prepared statement...............................    68
Udvarhelyi, I. Steven, M.D., Senior Vice President and Chief 
  Medical Officer, Independence Blue Cross, Philadelphia, 
  Pennsylvania, prepared statement and attachments...............    72

 
  THE HEALTHCARE CRISIS IN SOUTHEASTERN PENNSYLVANIA: THE ROLE OF THE 
                       HEALTH INSURANCE INDUSTRY

                              ----------                              


                         MONDAY, APRIL 12, 2004

                              United States Senate,
                                 Subcommittee on Antitrust,
                   Competition Policy, and Consumer Rights,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 9:04 a.m., in 
the Maris Courtroom, 601 Market Street, Philadelphia, 
Pennsylvania, Senator Arlen Specter, presiding.
    Present: Senator Specter.

 OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                   THE STATE OF PENNSYLVANIA

    Senator Specter. Good morning, ladies and gentlemen. The 
field hearing of the Antitrust Subcommittee of the Senate 
Committee on the Judiciary will now proceed.
    This morning we will make an inquiry into the health care 
situation in Southeastern Pennsylvania with particular focus on 
the role of the health insurance industry.
    There have been recurrent comments, really complaints, 
about what many consider to be an overconcentration of Blue 
Cross and Blue Shield. This issue has come to our attention 
recurrently discussions with doctors, discussions with hospital 
officials, and most recently when Governor Rendell and I 
convened a meeting of a number of hospitals in the Philadelphia 
area on the efforts to keep the Medical College of Pennsylvania 
open. There the point was made about the very low 
reimbursements from Blue Cross and Blue Shield. And the comment 
was made that the reimbursement by Blue Cross Blue Shield was 
lower even then what is provided by Medicare.
    There has been very substantial concern expressed by small 
businessmen and small businesswomen about the high cost of 
health care. And the issue has arisen as to whether there ought 
to be an exemption under the antitrust laws to allow some to 
bargain collectively to try to reduce the rates on the approach 
that a larger number in the insured group would provide lower 
rates.
    House Bill 1247 provides for such legislation and I 
concluded that I would not introduce legislation at least until 
we had this hearing and had some further insights into the 
issue.
    We have also noted a number of lawsuits filed against Blue 
Cross Blue Shield which have been settled with allegations of 
practices which are highly questionable if not unlawful and 
noted that a number of these lawsuits were settled with 
confidentiality agreements which precluded individuals from 
testifying before this Subcommittee because they are barred 
from doing so under those confidentiality agreements.
    I have long been concerned with such confidentiality 
agreements on the issue as to whether they are contrary to 
public policy, if there are allegations of impropriety and they 
are settled whether there is a right by the community to know.
    To deal with this issue the Judiciary Committee issued 
subpoenas. One of the parties subject to subpoena asked to be 
relieved of the obligation to testify at this hearing today 
because the settlement with Blue Cross Blue Shield was almost 
completed. And we decided to honor that request. Apparently 
there has not been a final preparation and execution of all the 
papers. We may revisit that depending upon what happens.
    With a very brief introduction and the addendum of my 
thanks to Senator DeWine of Ohio, who is the Chairman of the 
Subcommittee, I am senior to Senator DeWine on the full 
Committee but I chair the Subcommittee on Labor, Health, Human 
Services and Education and he chairs this Subcommittee, we will 
now proceed.
    Under the standard rules of the Committee and Subcommittee, 
we have allocated five minutes for opening statements to allow 
the maximum amount of time for dialogue for question and 
answer. You might think five minutes is insufficient. We 
recently had a memorial service for Ambassador Annenberg. And 
the speakers included the Secretary of State, Colin Powell and 
former President Gerald Ford and a number of other officials, 
governor, myself and others. And were allocated three minutes 
to speak. So I want you to know how generous the five minute 
allocation is.
    Our first witness is Dr. David Badolato, a member of the 
Family Practice Associates of Upper Dublin and a senior 
physician in the Department of Family Practice at Abington 
Memorial Hospital. He is a member of the Pennsylvania Medical 
Society and the Pennsylvania Academy of Family Practice, 
certified by the American Board of Family Practice, completed 
his residency at Abington Memorial Hospital, a graduate of La 
Salle College and Hahnemann University School of Medicine.
    Thank you very much for joining us, Dr. Badolato, and we 
look forward to your testimony.

 STATEMENT OF DAVID BADOLATO, M.D., FAMILY PRACTICE ASSOCIATES 
         OF UPPER DUBLIN, FORT WASHINGTON, PENNSYLVANIA

    Dr. Badolato. Thank you, Senator. Good morning to all. I 
will do less than the three pages of testimony to honor the 
five minutes.
    I come to you this morning as the senior physician of 
Family Practice of Upper Dublin, as you mentioned. We are eight 
physicians and 26 staff, care for 15,000 patients who mostly 
reside in eastern Montgomery County.
    I am in my 26th year of practice and I love what I do. In 
our practice we have a passion for excellence, and are 
committed to quality and safety in the medical care of our 
patients. Our practice has been recognized for leadership in 
quality by the two major insurance companies of Southeastern 
Pennsylvania. And in almost every measurement for both 
companies we rank in the top 1 percent.
    Unfortunately, the financial condition of our practice 
continues to deteriorate and our ability to continue to 
practice is imminently threatened. We are in serious financial 
debt as a result of extreme reductions imposed by the two 
dominant health insurance companies of Pennsylvania. They are 
IBC and Aetna. We have 10 years of data pertaining to our 
quality and our decreasing reimbursements.
    Senator Specter. You say IBC, Independence Blue Cross?
    Dr. Badolato. Yes.
    We have 10 years of data pertaining to our quality and the 
decreasing reimbursements. We welcome an in-depth analysis by 
appropriate professionals of the microeconomics within our 
practice. We believe that such a study will reveal the truth 
and define the equitable reimbursements required to support and 
sustain 99th percent performing practices who have achieved 
quality and safety outcomes for our patients.
    It appears that the two dominant health insurance companies 
of Southeastern Pennsylvania have been able to proceed with 
reimbursement reductions unchecked by any outside entity during 
the past 10 years. It appears in contracting that the market 
dominance leads to a take it or leave it contracting. Sadly, 
too often, one can say take it or leave the state.
    In addition, the less 10 years have seen a dramatic 
increase in the insurance company requirement for 
administrative resources required at the practice level. The 
resource consumption and barriers, such as preauthorization and 
precertification mechanisms, have placed roadblocks even in the 
delivery of gold standard diagnostic test and treatments.
    There is a problem. Our medical school graduates have 
serious debt load, $200,000-plus, and appear to no longer be 
able to afford to enter the specialty of family practice.
    But let us look at the outcomes. 25 percent vacancy upon 
entry into the residency programs nationally. 58 percent of 
those entering family practice residencies in the United States 
are graduates of foreign medical schools.
    I, the physicians, the staff, and the patients invite you 
to the practice for a collaborative analysis of quality and 
what the reimbursements are that are required to sustain such 
quality. We welcome Government, corporate America, medical 
academic institutions, business leadership, et cetera, to such 
a platform.
    I urge you to stop the increasing damage to the medical 
infrastructure. If we continue on this path, it may take an 
entire generation to rebuild the quality components which have 
been destroyed due to our neglecting to act responsibly as 
guardians and stewards of the essential social good of quality 
health care.
    I reinforce three final points. A top 1 percent performing 
practice is unable to continue to practice with the current 
conditions.
    Secondly, the national outcomes of vacancies in our 
residencies and the overwhelming majority of foreign medical 
graduates filling those positions is of concern.
    And lastly, please, I ask for responsible guardians to use 
our practice to discover the truth without the negative 
influence of market dominance.
    I thank you for the opportunity to speak today.
    [The prepared statement of Dr. Badolato appears as a 
submission for the record.]
    Senator Specter. Thank you very much Dr. Badolato.
    We turn now to Dr. L. Robert Burns, James Joo-Jin Kim 
Professor and Professor of Health Care Systems at the 
University of Pennsylvania's Wharton School of Business, 
Director of Research at the Leonard Davis Institute of Health 
Economics and Visiting Professor to the Department of 
Preventive Medicine, University of Wisconsin.
    Thank you for joining us, Dr. Burns, and we welcome your 
testimony.

  STATEMENT OF L. ROBERT BURNS, PH.D., MBA, JAMES JOO-JIN KIM 
 PROFESSOR AND PROFESSOR OF HEALTH CARE SYSTEMS, UNIVERSITY OF 
    PENNSYLVANIA, WHARTON SCHOOL OF BUSINESS, PHILADELPHIA, 
                          PENNSYLVANIA

    Mr. Burns. Thank you Senator. I appreciate the opportunity 
to present testimony about the market structure for health 
insurance in Southeastern Pennsylvania and some of its observed 
effects.
    My remarks are drawn from research I am now conducting on 
the history of the Southeast Pennsylvania insurer and hospital 
markets during the 1980s and 1990s.
    Senator Specter. Dr. Burns, as Senator Thurmond always used 
to say, pull the machine closer.
    Mr. Burns. Is that better?
    Senator Specter. I do not know, I have not heard either 
from you or Senator Thurmond.
    [Laughter.]
    Mr. Burns. My remarks are drawn from research I am now 
conducting on the history of the insurer and hospital markets 
in Southeastern Pennsylvania during the 1980s and 1990s. They 
are based on several years of research data analysis and 
interviews with major stakeholders in the market.
    However, I should point out I have not had as much access 
to the executives of Independence Blue Cross as I would have 
liked and thus, my remarks may not fully reflect their side of 
the story.
    For purposes of my remarks, the Southeast Pennsylvania 
market includes Philadelphia County and the four suburban 
counties: Bucks, Montgomery, Delaware and Chester.
    Also for purposes of definition, I define market structure 
in terms of the number of competitors in the market and their 
relative share of the market. These two components are often 
summarized as the Herfindahl-Hirschman Index, HHI, which 
measures how much market share is concentrated in one or a few 
firms. The higher the HHI, the more concentrated the market and 
the more powerful are one or a small number of firms.
    The five county area in Southeastern Pennsylvania exhibits 
a big contrast in insurer and hospital market structures. 
During the 1990s, the hospital market featured lots of 
competition between lots of hospitals. The HHI for hospital 
services in Southeastern Pennsylvania ranged from 185 to 654, 
depending on the year of measurement and how one assessed 
market share in terms of beds or patient days.
    But regardless of the measure one used, this was a very 
competitive hospital market with very low concentration. 
Philadelphia consistently ranked among the top five most 
competitive hospital markets, i.e., low Herfindahl Index, in 
the United States with 1 million or more population. And all of 
the hospital system formations during the 1990s barely raised 
the HHI in Southeast Pennsylvania.
    On the other hand, the health insurance market in Southeast 
Pennsylvania is quite concentrated. According to data from 
InterStudy, the HHI for health maintenance organizations or 
HMOs operating in the Philadelphia market was 4,134 in 1999 and 
4209 in the year 2000. Data from the Pennsylvania Department of 
Insurance indicates similar figures, rising steadily since 1994 
through 2000.
    Depending on which data source you use, this places 
Southeast Pennsylvania in the top five percent most 
concentrated insurer markets in the United States with 1 
million or more population.
    To be sure, HMOs are only one part of the insurer market. 
One also needs to consider preferred provider organization, 
PPO, and point of service plans, POS. A recent report that 
analyzes the market structure of large U.S. metropolitan areas 
with 1 million or more population found that Philadelphia had 
the fifth most concentrated market for PPO enrollment and the 
highest, the number one most concentrated market for combined 
HMO and PPO enrollment.
    For both HMO and PPO products, Independence Blue Cross, 
IBC, is the market leader in Southeast Pennsylvania. In 1997, 
for example, IBC had captured 41 percent share of the HMO 
market through its Keystone Health Plan East subsidiary, and 68 
percent share of the PPO market.
    In sum, Southeast Pennsylvania features two contrasts with 
other large cities, a very competitive hospital market with low 
HHI and a very concentrated insurer market with high HHI. This 
type of situation may lead to high levels of insurer market 
power over hospitals and consumers of health insurance. I 
consider some of the evidence for this below.
    This research on the Philadelphia market did not 
concentrate on Independence Blue Cross or its potential market 
power. However, in conducting my research I came across several 
studies conducted during the 1990s by the Delaware Valley 
Hospital Council that suggest that Independence Blue Cross 
utilized its market power in ways detrimental to the cash flow 
of hospitals in the area.
    For example, among commercial insurers during the mid-
1990s, IBC exhibited the highest denial rate for hospital 
inpatient services both in terms of the percentage of patients 
denied and the percentage of inpatient days denied. Similarly, 
IBC and its HMO subsidiary Keystone exhibited the highest 
median payment denial rate for emergency room services. 
Finally, IBC exhibited the lowest access to acute rehab 
services for its Medicare managed care enrollees.
    Other data collected by the Pennsylvania Medical Society 
and the American Hospital Association provide additional 
evidence for the exercise of market power by IBC. During the 
mid to late-1990s, IBC featured the largest number of unpaid 
claims for Philadelphia providers in terms of dollar volume 
among all insurers.
    Hospital payment-to-cost ratios for privately insured 
patients also began to fall by the mid-1990s through the end of 
the decade. These decreases were more pronounced in Southeast 
Pennsylvania than in other metropolitan areas. And as mentioned 
before, IBC dominated this market.
    Nationally, there is also evidence that HMOs that have 
attained market power have exercised it over both consumers and 
providers. For example, HMOs that enjoy high HHI sell their 
managed care products at higher premium levels to employers and 
other buyers. Similarly, they have found that HMOs that account 
for a larger share of all inpatient days in the market can 
force down hospital prices per days paid.
    The research has not investigated whether HMOs attempt to 
exercise market power simultaneously both upstream with 
employers and buyers and downstream with hospital suppliers.
    The typical U.S. metropolitan area has a concentrated HMO 
market. Across all metropolitan areas with 1 million or more 
population, the median HHI for HMO insurance is 2,291. Although 
this value is higher than the cutoff point used by the 
Department of Justice to define a highly concentrated market, 
it does not include competition from other types of insurance. 
It is thus unclear whether the effects described are widely 
found in other parts of the country. However, Philadelphia 
appears to be an outlier compared to the rest of the country.
    In conclusion, the data suggests that Philadelphia is a 
unique market when one considers both the insurer market and 
the hospital market. There seems to be a huge imbalance of 
bargaining power between insurers and hospitals due to the high 
concentration in the former and the low concentration in the 
latter.
    Evidence also seems to suggest that IBC has exploited this 
differential market power. Moreover, at least nationally there 
has been a tendency to allow insurers to amass more market 
power than providers in order to allow them to extract lower 
prices for inpatient and outpatient care with the hope of 
lowering rate of increase in health care spending.
    I am not aware of the increase in health care spending in 
Southeast Pennsylvania and thus cannot comment on what overall 
effects may have been asserted or achieved by IBC's dominance 
in the market. The available evidence suggest the welfare of 
hospitals may have been hurt, as reflected in past statistics 
on denial rates, slow payment of claims and low payment-to-cost 
ratios. Thank you for this opportunity.
    [The prepared statement of Mr. Burns appears as a 
submission for the record.]
    Senator Specter. Thank you, Dr. Burns.
    Before proceeding, I think it would be useful for those 
hearing your testimony to define a couple of your terms. Would 
you define what an HMO is, contrasted with a PPO?
    Mr. Burns. Yes. HMO is a health maintenance organization 
where there are two sets of things to consider. One is the 
insurers will contract with an employer for a predefined 
premium called a capitated premium, which covers a defined set 
of benefits or services for the enrollees, the employees in 
that company.
    And then the HMO insuring will turn around and then 
contract with hospitals and doctors in any number of ways. In 
this market, it has typically been on a discounted fee-for-
service basis, although during the 1990s they experimented with 
capitation.
    The other interesting characteristic about the HMO is that 
you are required to use the panel of providers that contract 
with the HMO. So it is sort of a closed network of providers.
    The PPO, the preferred provider organization, allows the 
enrollees to seek a broader panel of hospitals and doctors. 
They pay a differential, though, in using those hospitals and 
doctors. But it is a less restrictive network, a little bit 
more of an open network.
    Senator Specter. You used the term upstream and downstream. 
I think it would be useful to define those terms. There are 
people following these hearings, lay people who will not know 
all of the technicalities and so that they can follow it and 
have an understanding as to what is involved here, would you 
define upstream and downstream?
    Mr. Burns. Sure. The insurance companies, Independence Blue 
Cross being one of them, are intermediaries between the buyers 
or the employers on one side and the providers, the hospitals 
and the physicians, on the other side. The HMOs, when they 
amass market power with this high HHI have the potential of 
exerting market power upstream towards the buyers of health 
care as well as downstream towards the suppliers or the 
providers of health care.
    And so on either side of their bargaining relationship, 
going to the people who pay or to the people who provide health 
care, they have the potential to exercise bargaining power over 
them.
    Senator Specter. Thank you, Dr. Burns.
    Our next witness is Dr. I. Stephen Udvarhelyi, Senior Vice 
President and Chief Medical Officer for Independence Blue Cross 
and its affiliated companies, Keystone Health Plan East and 
AmeriHealth.
    Independence Blue Cross and its affiliate provide health 
coverage, according to the information provided to this 
Subcommittee, to over 4 million individuals with approximately 
3 million of these members residing in the Greater Philadelphia 
area.
    In his role as Chief Medical Officer, Dr. Udvarhelyi has 
overall responsibility for medical management programs and 
policies and is the chief medical spokesperson for the company.
    He is a board-certified internist and completed his 
residency in internal medicine at the University of Minnesota, 
fellowship in general medicine at Brigham and Women's Hospital 
in Boston and a graduate of Harvard University and the Johns 
Hopkins School of Medicine with a master's degree in health 
services administration from Harvard.
    Mr. G. Fred DiBona, who is the Chief Executive Officer of 
Independence Blue Cross wanted to be here this morning, but 
could not be. So we welcome you here, Dr. Udvarhelyi.

STATEMENT OF I. STEVEN UDVARHELYI, M.D., SENIOR VICE PRESIDENT 
      AND CHIEF MEDICAL OFFICER, INDEPENDENCE BLUE CROSS, 
                   PHILADELPHIA, PENNSYLVANIA

    Dr. Udvarhelyi. Thank you, Senator and good morning. Thank 
you for the opportunity to participate in the hearing.
    From my perspective, there are two critical health care 
issues facing our region. First is the cost crisis that is 
making health care increasingly unaffordable. And the other is 
the perpetuation of misinformation about what is causing the 
crisis.
    The fact is, health care costs in this region are 
skyrocketing and are higher than almost any other region in the 
country. It is also a fact that when health care costs 
increase, so do health insurance premiums.
    From our perspective, here is the bottom line. The most 
common commercial policy we sell at Independence Blue Cross is 
our Personal Choice PPO family plan. Today it costs over 
$15,000 per year, including drug coverage. Four years ago, in 
2000, the same coverage cost $8,000 per year. That is an 
increase of almost 90 percent in four years.
    Most employers have responded to the increase costs by 
sharing the cost of health care with their workers. But many 
employers are buying fewer benefits. Some only pay for the 
worker's insurance, leaving the employee to pay for the rest of 
the family, which could cost almost $9,000 per year out of 
pocket after taxes with the product I just referenced.
    We should not wonder why so many workers cannot afford to 
cover their spouses and children, who are now becoming part of 
the growing ranks of the uninsured. And even more concerning, 
some employers are no longer providing any coverage at all.
    This is a crisis, Senator. And behind the increases in 
health insurance premiums are skyrocketing health care costs. 
At Independence Blue Cross our overall medical costs per 
member, like our premiums, have increased almost 90 percent 
over a four year period. There are several reasons for this 
increase in medical cost.
    First, Independence Blue Cross has increased fees to 
hospitals and physicians. Over a 19 month period, through March 
of 2003, we increased physician fees by more than 22 percent, 
worth over $300 million. We have also increased rates to 
hospitals which have resulted in renegotiated agreements with 
virtually every hospital in our network, over 55 hospitals and 
25 health systems, during the last four years.
    Second, payments to doctors and hospitals increased due to 
both an increase in the use of services and an increase in the 
use of more expensive services and technology. Here are the 
numbers about how that plays out. In just five years our 
payments to hospitals have more than doubled from $1.1 billion 
to $2.4 billion. Per hospital, payments over that same period 
have risen 109 percent from $19 million to $39 million per 
hospital. Total physician payments are up 92 percent, with the 
average annual payment per physician--this is just from 
Independence Blue Cross--an increase from about $85,000 per 
year to almost $145,000 per year.
    A major driver of these increases is that almost no city in 
America uses medical services at the rate we do in 
Philadelphia. Philadelphia's overall medical costs are the 
fifth highest in the country for large metropolitan areas, more 
than 40 percent higher for example than Chicago. Our rate of 
hospital care is the third-highest in the Nation. Philadelphia 
has 46 percent more hospital beds per capita than the national 
average and actually 24 percent more than the Pennsylvania 
average. We make 38 percent more visits to physicians than the 
national average and have higher rates of outpatient surgery 
than two-thirds of the country, and we are second in the Nation 
for both radiology visits and cardiovascular visits.
    This list could go on, but the fact is that for almost 
every type of medical service, Philadelphia ranks as one of the 
highest areas in the country.
    It is also worth nothing what is not driving our cost and 
utilization. The increases are not due to increases in our 
membership. Since January 1st of 2000, our membership in 
Southeastern Pennsylvania has grown by just 1.7 percent. That 
is less than .5 percent a year. In fact, over the last two 
years, our membership has declined. Our medical costs, however, 
show no sign of falling.
    Let us make no mistake, the hospitals and physicians of 
Southeastern Pennsylvania are facing extremely difficult 
financial issues, as are our customers and their employees. But 
Independence Blue Cross cannot solve the pressures facing 
hospitals and physicians. For example, we represent only 26 
percent of the average hospital revenue in this marketplace. 
And the increases I shared a moment ago hardly support our 
critics' notion that Independence Blue Cross's market position 
forces hospitals and physicians to accept inadequate levels of 
reimbursement.
    So while we do not question the right for physicians and 
hospitals to request increased reimbursements, here is our 
dilemma. Every time we increase our payment rates to 
physicians, to hospitals, to pharmacies, and to any other 
entity that provides health care to our members, the people who 
buy our health insurance policies end up paying for it with 
higher premiums.
    The truth is, the crisis will not be solved by allowing 
hospitals and physicians to engage in collective bargaining. 
This will only increase costs at a faster rate and exacerbate 
the cost crisis. This is not only view. For years the FTC has 
clearly taken a position against allowing physicians and 
hospitals to engage in collective bargaining. And as you will 
read in the letter attached to my written testimony from Dr. 
Anthony Coletta, physicians have been able to partner 
effectively with Independence Blue Cross without any exemptions 
from the Nation's antitrust laws.
    Senator it is time for people like those gathered here 
today to get serious about the real issue threatening our 
health care system, which is that Americans are losing their 
access to health care because they simply cannot afford it. And 
getting serious means focusing on how to reduce the systems 
cost.
    How bad is the crisis? Well, let us look at the number of 
uninsured Pennsylvanians has increased 36 percent from 1999 to 
2002 to a number of over 1.4 million people. So bad that labor 
leaders like you will hear from Pat Gillespie will tell you 
that the number one position in negotiations is no longer 
salary. It is health benefits. And at $15,000 for just one 
family's health insurance policy, how much higher can we go 
before we address the real issues.
    Thank you for the opportunity to share my views.
    [The prepared statement of Dr. Udvarhelyi appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Udvarhelyi.
    Our next witness is Mr. Joseph Chip Marshall, III, Chairman 
and CEO of the Temple University Health System which 
encompasses academic and community hospital, medical school and 
community-based physician and home care services.
    He is a member of the Board of Trustees of Temple Board of 
Hospital and Health System Association of Pennsylvania and the 
Pennsylvania College of Optometry, the Greater Philadelphia 
Chamber of Commerce and has served as Chairman of the 
Pennsylvania State Ethics Commission and has a B.A. and law 
degree from Temple University.
    Thank you for joining this morning, Mr. Marshall and we 
look forward to your testimony.

   STATEMENT OF JOSEPH CHIP MARSHALL, III, CHAIRMAN AND CEO, 
  TEMPLE UNIVERSITY HEALTH SYSTEM, PHILADELPHIA, PENNSYLVANIA

    Mr. Marshall. Thank you, Senator. And thank you for the 
opportunity to testify today and for holding this hearing to 
consider whether antitrust law should allow collective 
bargaining among physicians to enable them to negotiate with 
health insurers and to consider the role of large health 
insurers in the Southeast Pennsylvania health care market.
    I last testified before you in March of 2003 at another 
Senate hearing on Medicare outlier payments and appreciate your 
leadership in helping health care providers receive fair and 
adequate reimbursement to ensure quality and accessible health 
care for all Pennsylvanians.
    The Temple University Health System is comprised of a major 
academic teaching hospital, three community hospitals, one 
pediatric hospital, a ground transport team and a network of 
more than 1,500 physicians. TUHS is a cornerstone of the health 
care delivery system in Philadelphia and the surrounding 
region.
    On any given day, approximately 500 people utilize the 
services of TUHS emergency rooms and an additional 1,700 people 
present for non-emergency ambulatory surgery and services. As 
one of the largest private employers in the city of 
Philadelphia, TUHS entities employ approximately 7,000 people, 
pay nearly $300 million annually in salaries, and an 
additionally $73 million annually in benefits.
    As CEO of this comprehensive health system which is faced 
daily with numerous complex issues, I view the physician 
bargaining question from a unique vantage point. It would be a 
great relief if this were the only challenge before us. Every 
day we struggle with rising pharmaceutical, medical supply and 
technology costs, workforce issues and escalating malpractice 
premiums.
    Compounding this, we are faced with a rising tide of 
patients without health insurance. Last year alone TUHS 
provided nearly $63 million in charity care to the communities 
we serve.
    We must strive to mend the health care delivery system in 
urgent need of repair. In so doing we must work collaboratively 
to promote improvements in the health care delivery system to 
benefit hospitals, physicians, insurers, employers and above 
all, our patients.
    I know that collective bargaining among physicians is 
offered as a solution to Pennsylvania's health care delivery 
problems. Some see this as a way to help balance competing 
interests of physician and insurers, encourage physicians to 
practice in our region and improve quality and continuity of 
health care. Others believe that insurers will simply pass 
along higher costs to employers and other consumers who 
continue to strive to meet rising insurance costs, ultimately 
causing an increase in the number of patients who present to 
hospitals without health insurance.
    Clearly, the question of collective bargaining is difficult 
but is only one of many that must be answered in resolving the 
health care crisis in Southeast Pennsylvania.
    There is no doubt that as the region's leading health care 
insurer, Independence Blue Cross casts a giant shadow over 
health care providers in this region. In fact, a little over a 
year ago we locked horns with IBC during arduous contract 
negotiations. We even had to implement determination procedures 
in the contract before we finally resolved the matter of our 
contract with IBC.
    Did IBC give us all that we asked? Certainly not. Did IBC 
take our concerns seriously? I sincerely believe so. Did we 
negotiate a fair contract? Ultimately, yes.
    Together we issued a joint press release and TUHS placed a 
full-page newspaper advertisement marking the successful 
completion of negotiations that marked the beginning of a new 
five year agreement.
    Make no mistake, however. Neither TUHS nor any hospital in 
the region can say all is perfect in payer relations. We would 
love for IBC and other insurers to pay us more. Our costs are 
rising but we cannot pass them on. We need to either lessen 
demand or increase the number of dollars in our system. We 
recognize, however, that there is no single cure for our 
region's health care problems and finger-pointing will not 
provide the solutions.
    Looking around this room I see many stakeholders in the 
health care delivery system. We have labor leaders, business 
leaders, Government leaders, physicians, health care 
administrations and consumers. it is only by working 
collaboratively that we can fix our region's health care system 
to improve deliveries, enhance quality, ensure affordability, 
and increase accessibility to all.
    We at TUHS are committed to working with all stakeholders 
to build a sturdy health care system to meet current needs and 
to assure a stable delivery system for the next generation.
    Senator Specter, thank you for the opportunity to testify 
on this matter and for your leadership on this very important 
issue.
    [The prepared statement of Mr. Marshall appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Marshall.
    Our next witness is Mr. Robert Ballou, President and CEO of 
CDI Corporation which provides engineering and information 
technologies, staffing, outsourcing and consulting services to 
a wide range of Fortune 400 customers.
    Prior to joining CDI, Mr. Ballou held positions at Global 
Vacation Group, Thayer Capital Partners and Alamo Rent-a-Car. A 
graduate of the University of Pennsylvania's Wharton School and 
from Dartmouth College's Amos Tuck School of Business.
    Thank you for joining us, Mr. Ballou, and we look forward 
to your testimony.

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

    Mr. Ballou. Thank you, Senator Specter and good morning.
    My name is Roger Ballou and I am President and CEO of CDI 
Corporation, a $1.1 billion publicly traded outsourcing and 
professional staffing company headquartered in Philadelphia. 
Thank you for inviting me to this hearing today to discuss a 
topic of great importance to CDI and its 16,600 staff and 
contract employees, the rising cost of health care and 
specifically provider collective-bargaining.
    As a businessman running an international company, I tend 
to try to break things down into the simplest of terms, cost 
and benefits, assets and liabilities. The issues I face day-to-
day vary in complexity, but in reality most can be solved by 
the application of basic principles learned in economics 101.
    I have learned that same approach in evaluating the cost 
benefits of provider collective bargaining. I can unequivocally 
say it just does not add up.
    Fundamentally, it is an issue of supply and demand. A basic 
truth of our economic system is that there exists a right price 
in which all those who wish to buy can find sellers willing to 
sell and all those who wish to sell can find buyers willing to 
buy. Provider collective-bargaining would alter this equation 
by exempting physicians from Federal antitrust laws and enable 
them as a group to demand higher costs from the buyers.
    But these higher prices simply translate into higher cost 
ultimately for the buyers, in this case health care insurers, 
who would be forced to buy at artificially inflated market 
prices.
    As we all know, however, price increases are passed along 
in the market economy and ultimately end up with the consumer. 
In the health care market, that means businesses and employees 
would be stuck with the bill, a bill that is already onerous 
and getting worse every year.
    To give you an idea of the dramatic increase in pricing, 
from 1998 to 2003 the health care premiums paid by CDI and its 
employees increased more than 60 percent. Last year alone 
premiums paid by CDI and CDI employees jumped more than 13 
percent, and that is below the national average.
    Every year we competitively shop around for the best rates 
for our employees and have remained with Independence Blue 
Cross because they offer the best rates, rates that would 
surely go up if physicians were permitted to collectively 
bargain with health plans over fees and other contract terms.
    Provider collective bargaining would not only drive up 
health care costs in Pennsylvania as a matter of course, it 
would also most likely impede job growth in the State. As CEO 
of a publicly traded company I have a fiduciary duty to my 
shareholders. I must make sure that the company runs 
efficiently and turns a profit or I am out of a job.
    When making a decision on where to locate or relocate a 
business function, health care costs enter the equation. I can 
tell you that in the past two years we have moved a back office 
operation from Philadelphia to Charleston, West Virginia in 
part due to lower health care costs in that State. I know other 
Pennsylvania businesses grapple with the same issues.
    Simply put, if health care costs in Pennsylvania continue 
to rise, it would further erode the State's competitiveness and 
ability to attract and retain businesses.
    In short, provider collective bargaining would accelerate 
the already spiraling cost of health care in Pennsylvania and 
the country, which in turn would increase the number of 
uninsured and underinsured employees and further drain business 
capital that could be better spent on investment and job 
creation. This is the exact opposite of what needs to be done. 
We should be taking costs out of health care, not increasing 
the cost of health care services.
    It is for this reason that we need to explore real 
solutions to contain health care costs, such as health savings 
accounts and medical malpractice tort reform that would cap 
non-economic damages. These solutions, especially tort reform, 
should be actively pursued on a national and state level. 
Physicians must have their insurance burden eased. The health 
insurance industry needs to make a profit and Pennsylvania 
businesses and employees need relief from out-of-control health 
care costs.
    These are not necessarily competing interests. There are 
solutions but provider collective bargaining is not one of 
them.
    Senator Specter, thank you for allowing me to share my 
experience with you at this forum and I will be happy to answer 
any questions you may have later.
    [The prepared statement of Mr. Ballou appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Ballou.
    Our next witness is Mr. Patrick B. Gillespie, Business 
Manager of the Philadelphia Building and Construction Trades 
Council since 1982. The Council represents approximately 70,000 
union members in the construction industry in the Philadelphia 
region. He served as a member of the Pennsylvania House of 
Representatives in 1975 and 1976, and is a member of the Board 
of Directors of Independence Blue Cross.
    Mr. Gillespie, that is what my notes tell me here, but were 
you in the House of Representatives?
    Mr. Gillespie. Yes, Senator. When I was a child, yes, sir. 
In 1976.
    Senator Specter. then it is accurate. I have known you for 
a long time but I did not know of your background in the house. 
Thank you.
    Mr. Gillespie. Certain things I am not proud of, Senator.
    [Laughter.]
    Senator Specter. I thought I had a pretty comprehensive 
knowledge of your background, Pat, but not that.
    Thank you for joining us and the floor is yours.

     STATEMENT OF PATRICK B. GILLESPIE, BUSINESS MANAGER, 
    PHILADELPHIA BUILDING AND CONSTRUCTION TRADES COUNCIL, 
                   PHILADELPHIA, PENNSYLVANIA

    Mr. Gillespie. Thank you, Senator.
    As you stated, my name is Pat Gillespie. I am the Business 
Manager of the Philadelphia Building Trades Council.
    It is my understanding that the primary issue you wanted to 
discuss today is collective bargaining for physicians and 
hospitals and whether that would represent a positive change 
for consumers of health care in Pennsylvania. As a person who 
believes in the sanctity of collective bargaining with their 
employer, this is kind of an interesting dilemma that I have.
    At the outset I want to state for the record that in 
addition to my role as manager of the Philadelphia Building 
Trades, I am a member of the Independence Blue Cross Board of 
Directors. And the reason I am on that board is absolutely 
germane to the subject of today's gathering.
    The workers who I represent, and there about 70,000 of 
them, care very much about their health care coverage. Right 
now it is running about $15,000 a year to cover each member. 
They care about the quality and quantity of their benefits and 
increasingly they are very concerned about the cost of those 
benefits.
    That is why it is important for me to sit on the 
Independence Blue Cross is Board because there I hear firsthand 
why my member's health insurance premiums are going up. I ask 
the questions that my members ask me and I can better 
understand the factors that are driving up the cost of their 
health care coverage.
    In other words, I am there to represent people who work 
hard every day to provide for families that count on them. One 
of the things that they want to provide for their families is 
health insurance, obviously. As a result, I have learned a 
whole lot about the health insurance business and I have 
learned one lesson well. The costs of my member's health 
insurance is tied directly to the amount of health insurance 
paid out for health care. When the cost of medical care goes 
up, our premiums go up.
    That is what has me worried about today's subject, Senator, 
because no matter how I look at the idea of paying still more 
to physicians and hospitals it comes out the same way, higher 
insurance costs for my members. These days, I guarantee you 
that will mean loss of jobs because companies that employ our 
members are having a harder and harder time finding health care 
benefits for their workers and my members.
    That is why these companies cannot believe it when they 
hear the Government might step in and artificially alter the 
balance between an insurer like IBC strikes between their 
financial needs for providers and members.
    The issue is not about contracting leverage or bargaining 
power. The real issue is how to assure affordable health care 
to as many people as possible while still compensating 
providers fairly. That is what IBC does. Day in and day out it 
strikes a balance between those needs of my members, your 
constituents, and the providers of medical care.
    Let me tell you why companies buy health insurance from 
IBC. They do it because IBC's long history, sound reputation, 
strong network of hospital and physician competitive prices. 
That is why those companies expect, no they insist, that IBC 
negotiate on their behalf with physicians and hospitals to 
ensure that quality care is provided at a reasonable price.
    Those companies have no interest in Government making it 
more difficult for IBC to negotiate a deal which are fair to 
both members and providers because they know full well that can 
lead to higher health care costs.
    I have been seeing a disturbing trend lately. It involves 
the Government stepping in and ordering health insurance 
companies to provide additional benefits, adopt new rules or 
implement new programs. People call them mandates and I guess 
that is what they are, well intended. But let me tell you who 
pays for those mandates each and every time they are enacted is 
our members.
    As an example, back in 1999 the Pennsylvania Legislature, 
such an August body, decided as part of Act 68 to order health 
insurers to pay for emergency room visits if a prudent 
layperson would agree that the situation was an emergency. At 
that time, Independence Blue Cross already was paying 98 
percent of all emergency room claims. So how much more could 
another 2 percent amount to?
    Well, Senator, today IBC's emergency from costs just for 
its HMOs has increased 154 percent. Why? Because people use the 
ER as a doctors office. I am sure no legislator ever intended 
that to happen, but it did and my members are paying for it.
    And how about the HIPAA--this is my favorite one--the 
Federal initiative that was designed to protect all of us and 
our health information. It was a high and lofty intent and a 
good deal. Independence Blue Cross spent more than $40 million 
to implement that Federal mandate. Did any legislator intend 
for that to happen? I do not think so. But it did and my 
members will end up paying that $40 million, along with 
everyone else who buys Independence Blue Cross insurance.
    I am not sure I can think of a Federal, State or local 
mandate that ever resulted in a decrease of health insurance 
cost, which brings me back to the subject of today's session, 
whether the Government should step in so physicians and 
hospitals can get paid more. I think we have to go very slowly 
with this and very carefully. A friend of mine said one time on 
this issue that we should not be looking for villains. There 
are plenty of them out there. What we should be looking for is 
solutions.
    Thank you, Senator.
    [The prepared statement of Mr. Gillespie appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Gillespie.
    We now turn to Dr. Stephen Foreman, Vice President of 
Research and Director of the Pennsylvania Medical Society 
Health Services Research institute. A student of the 
Pennsylvania health insurance markets for more than six years, 
he has prepared reports on the dynamics of Philadelphia, 
Pittsburgh, Central Pennsylvania and the Northeastern 
Pennsylvania area. He provides consulting services to the 
American Medical Association for issues relating to health 
insurance markets.
    A Ph.D. in health economics from the University of 
California at Berkeley, a law degree from the University of 
North Carolina and a master's in public administration from 
Harvard's Kennedy School of Government.
    Thank you for being with us today, Dr. Foreman, and we look 
forward to your testimony.

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

    Mr. Foreman. Thank you, Senator.
    We also appreciate the opportunity to present testimony 
about the Southeast Pennsylvania health insurance markets.
    I would like to make it clear at the outset that our 
testimony is not intended as a corporate or personal attack on 
any of the market participants or the people who work for them. 
Each of them is doing what they think best.
    However, each is doing what comes naturally in what we call 
a failed market. This, we believe, is the fundamental cause of 
a host of problems and calls for extensive public policy 
analysis.
    First, let us look at the market. Clearly, Independence 
Blue Cross has a dominant share. In 2002 Independence had an 85 
percent share and Aetna about 13 percent.
    What about employers, hospitals and physicians? Basically 
they are fragmented. What does such market produce? Annual 
double-digit health insurance premium increases, unilateral 
decisions about payment fee schedules that are unilaterally 
imposed or stagnant or declining compensation, despite the fact 
that physician fees have been raised 20 percent recently, 
leaving physician payment substantially below Medicare levels.
    Health insurers with high profit levels also exist.
    How did this market evolve? Not by skilled foresight in the 
industry. Independence's overhead costs are good but not 
remarkably better than any other firms. Indeed, there is no 
published evidence that larger health insurers are any more 
efficient. To the contrary, they exhaust their economies of 
scale at about 100,000 to 150,000 enrollees.
    The Health Insurance Industry Association contends that 
competition is robust and that market entry is easy. This is 
certainly not the case. Nor can employer's self-insurance 
provide effective competition because dominant insurers demand 
and receive lower hospital and physician prices. Market entry 
barriers are high and they are rising higher.
    Indeed the best evidence of barriers is that despite high 
profit levels in this market, there has been no substantial new 
entry for the past 10 years.
    So why is not this market the subject of antitrust 
investigation? The Sherman Act has two provisions that would 
appear to apply. For the reasons that we described in our 
written comments, conduct in this market may bear further 
study. There are perhaps reasonable arguments that there are no 
antitrust violations here. If so, we would then ask is this 
market good for the public? If not, then market restoring 
changes in the antitrust laws may well be warranted.
    So that brings us to a closer look at public policy 
concerns. AHIP, the insurance industry trade association argues 
that dominant health insurers are needed to pull down health 
care costs. You have already heard that in some great detail. 
You will hear today that Independence needs its size and that 
physicians and hospitals must stay fragmented in order to hold 
down health care costs.
    For the reasons described in our written comments, this is 
not true nor does it make for sound public policy. Despite the 
strenuous assertions of well-meaning health insurers, private 
monopoly and monopsony enforcement is not in the public 
interest here. If markets cannot work toward competition, then 
public and not private regulation of price is required.
    Cost containment presumes that insurers pass their savings 
along through to employers and to the public through reduced 
premiums. However, double digit premium increases over the last 
10 years suggest that this may not be occurring.
    Indeed, the whole notion that rising health care costs can 
be dealt with through a simplistic cost reduction imposed on 
providers is misplaced. Rising costs are a function of a 
complex host of factors. You have already heard a lot about the 
utilization issue in Southeast Pennsylvania. There are many 
others.
    Imposing cost containment on hospitals and physicians 
solely is unfair, improper and does not deal with the 
underlying causes of medical care cost inflation. It will 
destroy medical care and will drastically reduce patient 
access.
    So where does that leave us? The evolution of the Southeast 
Pennsylvania health insurance market puts us squarely at a 
crossroad. Is a competitive private commercial health insurance 
market the best way to allocate scarce medical care resources? 
If so, then steps need to be taken to restore competition here. 
If we believe that competition cannot work, we should not 
lightly conclude that private commercial health insurers are 
the best entities to administer a single-payer system and 
dictate price. Effectively that is what we have here now.
    Pennsylvania's physicians believe that the current 
situation is untenable and growing worse. Physicians are 
integral participants in a failed market.
    As our elderly population increases rapidly, we will need 
to provide ever-increasing amounts of medical care here. 
Pennsylvania physicians urge appropriate action now so that 
they can continue to deliver the best possible medical care for 
each of their patients.
    Thank you very much.
    [The prepared statement of Mr. Foreman appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Dr. Foreman.
    Our next witness is Dr. Martin D. Trichtinger, a board-
certified physician in internal medicine. For years an active 
member and leader in both the Pennsylvania Medical Society and 
the Montgomery County Medical Society. In 2003, he acted as 
vice-speaker of the Pennsylvania Medical Society's House of 
Delegates and is currently a member of the Society's Council on 
Policy and Governmental Affairs.
    In 1998 he served as the president of the Montgomery County 
Medical Society and is currently a board member delegate and 
executive committee member.
    Dr. Trichtinger is a graduate of the Jefferson Medical 
College in Philadelphia and I believe also the chairman of the 
Political Action Committee of the Pennsylvania Medical Society.
    Thank you for joining us and the floor is yours.

STATEMENT OF MARTIN D. TRICHTINGER, M.D., INTERNIST, MONTGOMERY 
                      COUNTY, PENNSYLVANIA

    Dr. Trichtinger. Thank you, Senator Specter.
    As you have said, my name is Marty Trichtinger, M.D. I am 
an internist practicing in Jenkintown, Pennsylvania. I come 
before you to speak on behalf of the physicians of Southeastern 
Pennsylvania.
    I do want to thank you again particularly for holding these 
hearings.
    I wanted to give you some perspective in terms of the view 
of a physician in an attempt to provide a high level quality of 
care to patients who are obviously your constituents.
    Basically there have been many wedges that have been driven 
into the doctor-patient relationship and Southeastern 
Pennsylvania has some of the highest practice costs in the 
Nation. These are driven obviously by the professional 
liability crisis, and some of the worse reimbursement levels 
nationally for health care delivery.
    I wanted to begin on the contracting process. You have 
already heard Mr. Gillespie talk about negotiation within the 
market. However, based on some of the prior testimony you have 
heard, there are essentially two giant insurers operating 
within this market, and essentially one being bigger than the 
other.
    Neither I nor the group of physicians that I participate in 
have the ability to negotiate with these insurers to amend our 
contracts with either of the two predominant payers. Both Aetna 
and IBC presently have 95 percent of the private commercial 
patients in this region.
    They are able to dictate the terms of the contract, 
including the level of reimbursement and the cost of the 
patient care.
    I have no ability to change this dilemma. In fact, in 1998 
IBC unilaterally decreased its fees for many of its services. 
In some cases, this decrease was more than 60 percent of what 
they were previously paying. Since that time some of these fees 
have been increased, but many of the current fees still remain 
below 1998 levels.
    So you may ask why would I continue to participate or 
accept a contract on such unfavorable terms? Unfortunately, the 
answer is all too simple. Unless I plan to leave the State, I 
have no choice if I wish to take care or continue to provide 
the care of the patients that I have seen for greater than 20 
years.
    In addition to these low levels of reimbursement, both fee-
for-service and capitation contracts also allow insurers to pay 
claims processing and perform other insurance games. This 
further tightens the vice grip of escalating costs and unfair 
reimbursement. These games include bundling of services into a 
single-payer system.
    Insurance company play another destructive game when they 
do not recognize the entirety of the CPT coding system, the 
system that was initially developed by the AMA. And it 
effectively provides a wide range of looking at all aspects of 
health care. If you have the ability to pick and choose certain 
aspects of this coding system that favor the insurer and 
electing not to adopt coding provisions that favor patient 
care, I find this patently unfair.
    Ultimately the tight vise grip that squeezes physicians 
hurts patients as well. In some instances, because of this 
tight vice grip, patients do not have the access to cutting 
edge technology in the doctor's office due to these financial 
constraints that are placed upon us.
    Also, retention and recruitment of quality staff at the 
doctor's office and even other quality physicians to join the 
practices is inhibited by this fee scale system.
    My practice at Abington Hospital admits patients to the 
hospital and cares for these patients while they are 
hospitalized. And hospital admissions can occur at any hour of 
the day or night, and care is demanding both clinically and 
emotionally. Our group believes that it is in the patient's 
best interest to be there when the patients are hospitalized. 
We provide a very important role in terms of advocacy, safety 
and quality.
    Unfortunately, under the present system, in August of 2001, 
IBC terminated its episode of care payment leaving us with the 
dilemma to either accept seeing patients at no reimbursement 
versus turning the care over to hospitalists who do not know 
the patient. Ironically, these payments to the hospitalist 
provide them with even more reimbursement than what we were 
receiving under the episode of care.
    That seems particularly wasteful that IBC would pay another 
physician to take care of my hospitalized patient, and it makes 
little sense in terms of the quality and the continuity of care 
that we are not able to take care of our own hospitalized 
patients.
    No one knows my patients better than I do, and I feel that 
it is inappropriate that IBC puts us in this sort of Faustian 
dilemma of either accepting the care of the patients for free 
or handing it over to a hospitalist to provide the care.
    I wanted to thank you for the opportunity to provide this 
testimony today. I am hopeful that you will be able to have the 
appropriate Federal regulatory agencies review the health care 
delivery system dynamics in the Philadelphia area. We 
definitely need to bring the best and the brightest physicians 
into the Philadelphia area and we need to be able to keep them 
here so that our patients benefit.
    We believe that now is the time to come to terms with this 
very serious problem.
    Thank you.
    [The prepared statement of Dr. Trichtinger appears as a 
submission for the record.]
    Senator Specter. Thank you very much for your testimony, 
Dr. Trichtinger.
    We have one additional witness on the list and that is Mr. 
Stuart H. Fine, Chief Executive Officer of Grand View Hospital 
and affiliate entities in Sellersville. And we will come back 
to Mr. Fine in just a moment or two.
    Dr. Udvarhelyi, with respect to the reserve which Blue 
Cross Blue Shield, Independence Blue Cross is alleged to have, 
that figure has been estimated as high as $5 billion. Is that a 
correct figure?
    Mr. Udvarhelyi. No, Senator, that is not a correct figure.
    Senator Specter. What is the correct figure?
    Mr. Udvarhelyi. I believe our reserve level now is--I do 
not have the exact number. We can certainly get it for you. I 
believe it is just a little over $800 million.
    Senator Specter. A little over what?
    Mr. Udvarhelyi. $800 million.
    Senator Specter. $800 million?
    Mr. Udvarhelyi. Yes, and our reserves, Senator, represent 
on average the ability to pay about 40 days of claims on hand. 
We pay $660 million of claims each and every month, about $8 
billion in claims a year. So our reserves represent a little 
bit more than one month's claim payment ability in the event of 
an emergency.
    Senator Specter. There has been a contention by some of the 
officials of the Commonwealth of Pennsylvania that they have 
the authority under the Insurance Department rules to assess 
funds against Independence Blue Cross to, in effect, take those 
funds to help with the malpractice problem. Does any such 
authority reside in the Commonwealth of Pennsylvania, in your 
opinion?
    Mr. Udvarhelyi. Senator, I could not comment on what 
authority the State has. What I can say is that the State did 
hold hearings in the fall of 2002 into the are of reserves. 
Testimony was given by Independence Blue Cross as well as some 
outside experts and the result, I think, of that investigation 
is that our level of reserves is entirely appropriate.
    In fact, some of the experts would say if anything we are 
under-reserved. And I believe Dr. Foreman of the Medical 
Society has looked at that and would concur that, at least in 
our case, our reserves are not excessive.
    Senator Specter. Mr. Fine, we turn to you at this point. 
You are the Chief Executive Officer of Grand View Hospital and 
affiliated entities in Sellersville, Pennsylvania. It is my 
understanding that there has been litigation between your 
hospital and Independence Blue Cross; is that correct?
    Mr. Fine. Yes, it is, Senator.
    Senator Specter. And that litigation was settled subject to 
a confidentiality agreement?
    Mr. Fine. Yes, sir.
    Senator Specter. What are the essential terms of the 
confidentiality agreement?

  STATEMENT OF STUART H. FINE, CHIEF EXECUTIVE OFFICER, GRAND 
     VIEW HOSPITAL AND AFFILIATED ENTITIES, SELLERSVILLE, 
                          PENNSYLVANIA

    Mr. Fine. According to a letter received from Independence 
Blue Cross by my counsel earlier this month, I am to, if I can 
find the correct section here, I am not to voluntarily disclose 
in testimony anything that need not be voluntarily disclosed. 
Blue Cross has not waived any of its rights or remedies 
relating to the settlement agreement or the mutual release of 
provider contracts.
    I understand that I am able to respond to direct questions 
put to me.
    Senator Specter. Dr. Udvarhelyi, what is the purpose of 
such a restrictive confidentiality agreement?
    Mr. Udvarhelyi. Senator, our contract negotiations and 
certainly settlement discussions are considered confidential 
from a business standpoint and hence, we do not permit them in 
the public domain.
    Senator Specter. Why confidential? Why should not the 
public have a right to know what the charges were made in 
litigation and what the terms of a settlement are?
    Mr. Udvarhelyi. Senator, I cannot comment on the legal 
aspects of the agreement, although we would be happy to get 
back to you on that. I believe, like many settlements which are 
settled in a legal manner, the terms of that are frequently 
kept confidential between the parties to protect both parties' 
interests.
    Senator Specter. Mr. Fine, the Morning Call on July 17th, 
2001 reported that you had stated that Grand View Hospital 
``loses millions of dollars each year because IBC does not 
reimburse Grand View for the entire cost of its care of Blue 
Cross patients.'' The Morning Call then added that ``Fine 
estimated that Grand View would likely lose $5 million in the 
next 12 months if it continues to be reimbursed under the terms 
of the expiring contract.'' Are those quotes accurate, Mr. 
Fine?
    Mr. Fine. Yes, sir, they are.
    Senator Specter. It was reported that in July of 2001 while 
your contract negotiations were ongoing, you made some comments 
to the press about your difficulties with Independence Blue 
Cross. And in response Independence Blue Cross sued you and 
your hospital for libel.
    According to the Morning Call of July 17th, 2001 your 
attorney referred to the suit as a ``fairly heavy-handed 
negotiating tactic.'' Is all of that accurate?
    Mr. Fine. I believe it to be accurate, Senator.
    Senator Specter. Do you agree with the comment attributed 
to your attorney that the purpose of the suit was to pressure 
you and your hospital to agree to IBC's terms?
    Mr. Fine. Yes, sir, I do.
    Senator Specter. Dr. Udvarhelyi, are you familiar with that 
lawsuit?
    Mr. Udvarhelyi. Senator, I am not familiar with the details 
of that lawsuit.
    Senator Specter. Is there anybody hear from IBC who is 
familiar with that lawsuit? Anybody in the room?
    Would you step forward please? Would you identify yourself 
for the record, please?
    Mr. Tufano. Sure, Senator. I am Paul Tufano. I am the 
General Counsel for IBC.
    Senator Specter. Are you familiar that lawsuit?
    Mr. Tufano. I am, Senator but I did not know you would be 
asking about it today and so I did not get a chance to review 
the pleadings from that. I would be happy to and follow up with 
you and your staff, if you would like.
    Senator Specter. It is a pretty unusual lawsuit. do you 
know about it in a general way?
    Mr. Tufano. I recall that there were some statements made 
by the hospital and Dr. Fine at the time in connection with the 
negotiations about Independence Blue Cross. And I recall that 
the litigation was filed. I do not have the exact details of 
what the statements were handy right now.
    Senator Specter. Has Independence Blue Cross filed lawsuits 
under similar circumstances?
    Mr. Tufano. Not that I recall, at least in my four-and-a-
half years with the company, Senator.
    Senator Specter. If you would supplement your answers to 
both questions, I would appreciate it. We had not anticipated 
calling you as a witness and I can understand you would not be 
familiar with it. But since the witness for Independence Blue 
Cross did not know, thank you.
    Mr. Tufano. I will certainly supplement that after today's 
hearing. Thanks, Senator.
    Senator Specter. We would appreciate that.
    Mr. Gillespie, when we talk about collective bargaining and 
you are concerned that if there was collective bargaining that 
there might be the intervention of another insurance company 
into the field. And you were concerned that that would cause 
your union members to pay more dues.
    There has been a counter argument offered that if there was 
another insurer in the field that that competition between some 
other insurer and Independence Blue Cross might tend to drive 
costs down. Do you think there is any merit to that?
    Mr. Gillespie. I think that what drives costs up is the 
utilization. I think that however you slice it or dice it. My 
concern about collective bargaining is who is the employer? Who 
becomes the employer? Does the agent, the indemnifier that our 
members select is Independence Blue Cross. They do not have to 
select them. They select them because that is where we get the 
best rates.
    If those Independence Blue Cross rates go up, then people 
will look at Aetna, as they have. Or they will look at other 
indemnifiers in the area. It is kind of like shifting the 
chairs on the Titanic.
    We have a serious health care cost problem and I do not 
think that problem gets settled by--I mean, the reason 
Independence Blue Cross enjoys the market share that they have 
here in the five county area is that they tend to their 
knitting. They are pretty aggressive when it comes to 
maintaining their costs.
    And by the way, I believe their administrative costs are 
about nine cents on the dollar, which is pretty good in this 
day and age.
    So the idea of saying that we could get better health care, 
we can contain costs, we can provide a better service if we 
allow a condition in the antitrust law that allows our doctors 
to act as employees and our insurance companies to act as 
employers.
    I can understand the doctors saying we have to band 
together and say this is what we are going to charge. And they 
can very well do that. And Independence Blue Cross can just say 
okay, we will just pass that on.
    But what happens then when they just pass the costs 
through, when they just pass the costs through, then the people 
that have to pay that cost are our members who either A, will 
not continue to buy that service; or B, just look somewhere 
else where they can get it cheaper.
    And what has happened in the marketplace is, as people will 
say here, all these lofty folks around, I feel a little 
inadequate talking about economics here. But what happens in 
the marketplace is if you do not have the money then you just 
cannot buy the service.
    In Pennsylvania we have well over 1 million people now who 
work for a living. These are not poor folks. These are people 
who work who just decided not to have health care coverage.
    The other dilemma that is going to be a tragedy is people 
who are just buying health care coverage for themselves and not 
for their families.
    We are headed for a catastrophe and we have to find the 
solution as to containing costs for our health care, whether we 
overutilize it or whether it is just too expensive or whether 
society has to come forward and say okay, we have to pay. And 
instead of paying $15,000 a year, it is $30,000 a year. That is 
the number we have to pay.
    But then where do we find that? The average salary for a 
building tradesman in my territory, the five County area, the 
average salary is $65,000 or $70,000 a year. It varies. And 
these are the good jobs in the blue-collar realm. The 
construction industry has always been a good job, $65,000 or 
$70,000 is good.
    $15,000 going to health care, that is an awful lot of 
money. That is a big percentage.
    Senator I wish I had an answer. But I do not see how making 
Independence Blue Cross or Aetna or other insurance companies 
an employer in the scenario of collective bargaining with 
doctors resolves it.
    Senator Specter. Mr. Gillespie, that is the issue we are 
wrestling with. And your perspective for collective bargaining 
is a very unique perspective because there is no doubt that 
labor could not deal with management when each employee was 
looking out for himself. It was the collective bargaining 
aspect which gave the members the strength in combination.
    But I understand your point.
    Mr. Marshall, you have testified in favor of the benefit of 
collective bargaining. If there were to be an exemption under 
the antitrust laws for communities where there is a certain 
market share dominated by one firm what do you think the 
consequence of that would be? Would it necessarily drive up 
health care costs? Or would there be an opportunity for another 
insurer to come into the field which might provide competition 
illustratively for IBC?
    Mr. Marshall. I am not sure, Senator, that I testified for 
or against the concept because I am not even sure I 
understand--
    Senator Specter. Okay, if you are not sure, then what do 
you think?
    Mr. Marshall. What I have wrestled with, and whether the 
issue is malpractice or--it is like Jell-O. You push in one 
direction and it pops out another. What I am really hoping is 
we can get a comprehensive solution. If collective bargaining--
    Senator Specter. What would you suggest for a comprehensive 
solution? I think everybody would like that, Mr. Marshall. But 
what is it?
    Mr. Marshall. That is why I preface that by saying I 
wrestle with this all the time. I guess what I am saying is 
that we have to make sure that if we rob Peter to pay Paul, you 
are going to be back here with one of the apostles a year from 
now.
    Senator Specter. Mr. Marshall, we do not want to rob 
anybody, but avoiding robbery, how do we do it?
    Mr. Marshall. As I have talked with you in the past, I 
think we have to go to some more of a--and I use this word term 
advisedly, more of a single-payer system. And how it gets 
implemented, I am not sure.
    Senator Specter. Are you talking about the Federal 
Government as a single-payer?
    Mr. Marshall. Or some collective of a single-payer.
    Senator Specter. Are you talking about the Clinton health 
care plan?
    Mr. Marshall. No, I assure you, Senator, I am not talking 
about the Clinton health care plan. That dog will not hunt.
    But to the point, if Pat is right and physicians 
collectively bargain and that drives up cost, well we all--
including physicians. As Marty will tell you, he has an office. 
His costs go up. It is not just malpractice. It is the cost of 
employing his nurses, it is paying their health care, and it is 
everything else.
    What we are doing is just shifting it across. And if you 
really want to look at the health care problem for the last 25 
years in this country is we have all been shifting. And nobody 
sat back and said okay, here are the things that confront us. 
We have health care inflation way over 2 percent or 3 percent 
or whatever the rate is.
    And as I said earlier in my testimony, we either are going 
to have to lessen the demand, which is a pretty tough thing 
because we all sit, Stu sits with an emergency room, I sit with 
an emergency room and a number of the hospitals here sit with 
emergency rooms. But do not get to choose. We do not get to say 
sorry, you cannot come in because you do not have dollars. We 
are obligated under Federal law. If somebody gets on our door, 
we have to take care of it.
    Senator Specter. Mr. Marshall, in taking a look at what has 
happened to Medical College of Pennsylvania, to what extent if 
at all do you attribute that to the low reimbursements from 
Blue Cross Blue Shield?
    Mr. Marshall. Senator, as you know, we have looked very 
hard at it. I do not know. I am not sure I even understand what 
their--I am not sure I am even familiar with what percentage. 
But I would have to say if they are like us, they have probably 
equally as much of a complaint with the Federal Government and 
the State government.
    I have to tell you, Senator, my neurosurgeons will come in 
and tell you they get $26 a visit for a medical assistance 
payment. And I assure you, because I pay those costs--
    Senator Specter. Does IBC reimbursement less than Medicare?
    Mr. Marshall. I do not know. I think in some cases. I do 
not know. I do not know the answer to that question.
    Senator Specter. Dr. Trichtinger, does IBC reimburse less 
than Medicare?
    Dr. Trichtinger. Yes, for us it does. And what is 
interesting to me is the fact that the--
    Senator Specter. I am sorry, I did not hear you. You say it 
does?
    Dr. Trichtinger. Yes, in fact, it does pay us less than 
Medicare. We are one of the few areas where instead of Medicare 
being the sort of the floor for prices, Medicare happens to be 
our ceiling. We get about 35 percent less than Medicare.
    And what was interesting to me was that the Medicare 
Payment Advisory Commission just indicated that the HMO 
products in this country get 7 percent higher or have 7 percent 
higher than the fee-for-service amount for Medicare. And yet, 
ironically we are paid 35 percent less.
    So if we could go to an entire Medicare fee-for-service 
system, theoretically the Government could save 7 percent and 
actually pay us hopefully 35 percent more.
    Senator Specter. There has been considerable criticism of 
the Medicare reimbursement rates. They were scheduled to be cut 
March 1, 2003 by 4.4 percent and that cut was eliminated. They 
were scheduled to be cut both in fiscal year 2004 and 2005 and 
that was changed by the Medicare Reform Bill.
    Dr. Badolato, you testified about Aetna in the field as 
well as Independence Blue Cross. Does the presence of Aetna 
provide any realistic competition with IBC to move to lower the 
cost?
    Dr. Badolato. With few differences, it appears that one is 
a mirror of the other. In fact, in my written testimony there 
are 11 slides. One of the slides shows the per member per month 
paid to our practice by US Healthcare, then Aetna for 10 years. 
The same slide shows the Keystone payments per member per 
month, although it does not track the 10 years. I believe they 
would mirror each other.
    Basically the payments today are less than 10 years ago. So 
we see problems that are unique within each company in that in 
their formulas of payment but the end result is very similar 
and very damaging.
    Dr. Trichtinger. Senator Specter, because you moved so 
quickly on it, I know you were not looking for a thank you. But 
I did want to point out to those on this panel that it was the 
senior Senator from Pennsylvania who helped lead the fight in 
the Senate to correct that Medicare correction that you had 
mentioned earlier.
    As I said, I realize you were not looking for a thank you, 
but I wanted to give it anyway.
    Senator Specter. No, I was looking for a thank you. I 
really set you up for that one with a little head and shoulder 
fake.
    Mr. Gillespie. Is that what time of year it is?
    Senator Specter. Mr. Gillespie, it is always that time of 
the year, just like your collective bargaining, it is always 
there.
    That is a recurring problem. You are looking for a 
comprehensive solution that Chip Marshall is looking for, we 
are all looking for. There is a lot of searching.
    I have been on the Subcommittee for Health and Human 
Services in my 24th year and I have chaired it most of the time 
since 1995. And these are problems that are virtually 
intractable.
    There is quite an array of talent here at this table, let 
me tell you. I have been at a lot of hearings and I have not 
seen a hearing with more talent than we have here today.
    Usually our hearings in Washington are interrupted by votes 
and interrupted by appearances in some other room to make a 
quorum. And there is a lot which is being brought to bear here.
    And Dr. Trichtinger is correct that Senator Stevens and I--
he chairs the full Committee but I brought the issue to his 
attention and we eliminated that cut on March 1st. it was a 4.4 
percent cut which would have cost $58 billion. And when we 
moved forward on Medicare reform we eliminated the cuts in 2004 
and 2005 and added a small addition.
    Dr. Badolato, I did not quite hear your answer as to 
whether Aetna provided any competition for the dominant market 
share of the IBC? Do you think Aetna does?
    Dr. Badolato. I believe they do not.
    Senator Specter. Mr. Ballou, you have commented about 
concern about the rates going up if there was to be collective 
bargaining. Do you have a view on what would happen if another 
insurance company was able to enter into the field? There are 
some which are trying to come in and they are faced with this 
requirement that Independence Blue Cross requires 75 percent 
enrollment, and IBC justifies that. Mr. Udvarhelyi, correct me 
if I am wrong but you need to spread the risk.
    But when IBC requires 75 percent enrollment, nobody else 
can come in. If somebody else could come in, do you think that 
might provide some competition to lower rates?
    Mr. Ballou. This is an open market in terms of the ability 
to come in. There are other competitors here. We bid our 
insurance on the year. We look at Independence Blue Cross. We 
look at Aetna. Frankly Aetna's rates were not as good as 
Independence Blue Cross for us.
    Somebody would have to find a way to do something kind of 
unnatural to lower the rates much. If you look at it, with a 
company on the scale of Independence Blue Cross--I heard 
earlier someone cite 9 percent administrative cost load. When 
you look at the underwriting burden that they carry and when 
you hear the reserve ratios, the money is not sitting at 
Independence Blue Cross. It is being spent in the system.
    And if Aetna could do better rates than Independence Blue 
Cross, I am sure they would do that today to gain market share 
they could afford to do it. It is clear that they cannot. And 
that means that their cost structure is higher or they are not 
getting as good of rates from the physicians and hospitals.
    The issue here is the total cost of the system as I see it. 
And no one sitting at this table has the comprehensive solution 
in hand. But I do believe there are elements of it that would 
require tax reform. Certainly it would be useful to make more 
medical expenses deductible. I think the health savings 
accounts on the part of the Medicare reform were actually a 
very positive step in the right direction there.
    We are looking very, very hard at redesigning our insurance 
program to take advantage of health savings accounts, to 
actually make the user of the service more frequently the 
payor, and have incentives to manage the use of the care 
better.
    I think that there are things that could be done with 
medical malpractice reform that would drive costs out of the 
system. I think that would be useful as well.
    So as I see this, this is an issue of finding a way to 
contain and manage the cost of providing medical care as 
opposed to is there another insurer who could come in and do a 
better job? The costs are still the costs.
    Senator Specter. Dr. Foreman, you mentioned the Sherman 
Act. Do you think there may be a Sherman Act issue of violation 
potentially in IBC's dominance in the market here?
    Mr. Foreman. We have been to the FTC and Justice and asked 
them to look at a number of items of conduct that we thought 
should be put on the table for investigation, without making a 
direct conclusion of violation at all but as a subject for 
investigation.
    To begin with, for example, we think that all four major 
Pennsylvania Blue Cross firms could be competing in this market 
quite actively and make the market improve. They do not, we 
understand, because of a division of markets agreement. We 
would like to see that agreement looked at, perhaps done away 
with.
    Senator Specter. What are the provisions or terms of that 
agreement generally?
    Mr. Foreman. We have not seen the agreement in words. We 
have heard people talk about it and we have seen the effect in 
that the four Blue Cross insurance firms in Pennsylvania have 
specific territories and they do not compete outside them 
generally. So even the basics of the agreement itself are not 
public.
    Senator Specter. This is a territorial division?
    Mr. Foreman. Yes, sir.
    Senator Specter. And IBC has the five counties?
    Mr. Foreman. Yes, sir.
    Senator Specter. How many other counties are controlled by 
whom?
    Mr. Foreman. By and large, Northeast Blue provides health 
insurance in Northeast Pennsylvania. I cannot exactly give you 
the number of counties. High Mark provides the insurance in 29 
counties in Western Pennsylvania. And Capital Blue Cross, which 
does compete with High Mark, provides health insurance in 21 
counties in central Pennsylvania.
    Senator Specter. We had hearings with the FTC last week on 
OPEC, which is gouging us with a clear cut conspiracy and 
restraint of trade without any active state defense or any 
sovereign immunity.
    I do not propose to ask this panel questions on that 
subject, but because the FTC has not acted does not mean a 
whole lot. They have got a pretty consistent record for 
inaction. They are experts in the field. They even compete with 
Congress for inaction. That is how good they are on that 
particular subject.
    Mr. Foreman. I would just like to emphasize, it is possible 
there is not an active antitrust violation here, but that 
should not end the inquiry. The question then ought to be 
whether the antitrust laws themselves ought to be strengthened 
to deal with this situation.
    Senator Specter. Well, that is one of the things we are 
considering, whether there ought to be ability to combine. That 
would be a change in the antitrust laws.
    Dr. Burns, you commented that IBC, the word you used was 
exploited. Would you amplify on what you meant by the term 
exploit?
    Mr. Burns. What I was referring to, Senator, was during the 
1990s there is evidence suggesting that because of their large 
share of the market, being a very concentrated market, IBC 
could deny payments to providers, slow down payments to 
providers, downgrade payments to providers and hurting the cash 
flow of hospital in particular.
    Senator Specter. Dr. Burns, I would like you to respond to 
issues raised by the Chester County Hospital, which filed a 
complaint in the United States District Court for the Eastern 
District of Pennsylvania on May 5th, 2002 stating that ``in 
1999 IBC effectively forced the hospital to enter into a 
contract that was 20 percent below cost. For fiscal year 2001 
the hospital received approximately $34 million in revenue from 
the IBC Group and nevertheless sustained operating losses on 
IBC group patients exceeding $8.5 million and forcing the 
hospital into a negative operating position. For fiscal year 
2002 the hospital is experiencing similar losses.''
    Before asking you to comment on that, Dr. Burns, Dr. 
Udvarhelyi, is that an accurate statement of that Chester 
County complaint?
    Mr. Udvarhelyi. Senator, I cannot confirm the details of 
that complaint. I have not briefed that complaint specifically 
prior to this hearing.
    Senator Specter. Could counsel confirm that?
    Mr. Tufano. Senator, I do not know word for word but yes, 
essentially that was one of the complaints in their lawsuit was 
with regard to the level of reimbursement.
    Senator Specter. There is a confidentiality agreement which 
precludes the Chester County people from testifying?
    Mr. Tufano. And it would preclude me, Your Honor, as well 
from answering questions. We are in the process of finalizing 
the settlement agreement we have reached with them two months 
ago.
    Senator Specter. I am not sure that is correct. The 
confidentiality runs to the benefit of IBC. Would that preclude 
you?
    Mr. Tufano. It is for both parties. It is a mutual 
confidentiality agreement. Both parties agreed to the 
confidentiality agreement, Senator.
    Senator Specter. Would that be subordinate to an inquiry by 
the Senate Judiciary Committee?
    Mr. Tufano. I am not sure. I would like to confer with our 
outside counsel here.
    Senator Specter. You are counsel.
    Mr. Tufano. I have our Chester County counsel from that 
lawsuit with us here. To the extent we needed to--
    Senator Specter. Fine, I would like to hear his view on the 
subject.
    Mr. Tufano. To the extent we wanted to talk about things 
that were covered by the confidentiality agreement, I guess 
Senator, we would like to at least explore with you if there 
are ways that we could provide that information to you in a 
nonpublic forum, to the extent we get into things that might be 
directly covered by the confidentiality agreement and/or that 
our proprietary. Information like rates and things like that.
    Senator Specter. The Chester County counsel is here.
    Mr. Tufano. Yes, he is.
    Senator Specter. Could you step forward please? Would you 
identify yourself for the record, please?
    Mr. Kress. My name is Jim Kress. I am an attorney with 
Howrey Simon Arnold and White in Washington, D.C.
    Senator Specter. Mr. Kress, I am not going to ask you to 
testify because well, a subpoena was authorized for you. You 
stated you did not want to testify because the matter was being 
finalized and we respect that.
    So I will just offer an observation myself. If the 
confidentiality agreement runs to the benefit of IBC, I do not 
think there is anything that the Chester County Hospital would 
have reluctance to have disclosed. And I do think that a 
Judiciary Committee inquiry would take precedence.
    Mr. Fine, following the advice of counsel, offered no 
testimony but responded to questions and he is under subpoena. 
And whatever he testifies hereto is immune from any action.
    That is one of the benefits of having a Senate inquiry. 
What was testified to is absolutely privileged. But thank you 
for stepping forward.
    Mr. Kress. I may want to correct one statement. I was 
counsel to--
    Senator Specter. You may be opening the door, but go ahead.
    Mr. Kress. I actually was counsel to Independence Blue 
Cross in its proceeding with Chester County Hospital and not to 
the hospital itself.
    Senator Specter. I see. Okay, I am glad you corrected that.
    Dr. Burns, what do you think about the Chester County 
complaint? Does that fit into your category of exploitation?
    Mr. Burns. It is consistent with other stories I have heard 
in the marketplace about hospitals talking about their 
negotiations with Blue Cross. But it is also consistent with 
what is happening to the payment rates for acute care hospitals 
in Southeastern Pennsylvania over time.
    The American Hospital Association calculates a statistic. 
It is called the payment-to-cost ratio. If you look at what it 
costs the hospital for a patient for day, and if you look at 
what they get paid for that day, it is a ratio. And the higher 
that ratio, the better. That means the hospital is getting paid 
a decent rate to cover its costs and to earn a little surplus.
    That payment-to-cost ratio in the private insurance market 
which Blue Cross dominates has dropped over the last seven 
years in Southeast Pennsylvania and it is now basically near 
the Medicare level.
    I remember one of the gentlemen say that in his own 
particular situation they pay less than Medicare. But across 
all of Southeast Pennsylvania, at least for hospitals, what the 
private sector insurers are paying the hospitals is basically 
similar to what Medicare pays.
    The problem with that is they are paying at roughly 100 
percent of cost. Hospitals are not making much of a margin on 
either Medicare or on Independence Blue Cross or other private 
insurers.
    Senator Specter. Well, really not only much of a cost. At 
least according to the Chester County complaint they are 
getting less.
    Mr. Burns. Well, in some cases when you have less 
bargaining power, that is an average across all hospitals. Some 
may be slightly higher. Some may be lower. And the hospitals 
that have succeeded in getting rates slightly better from 
Independence Blue Cross and Aetna US Healthcare.
    Senator Specter. So a little more bargaining power would 
help?
    Mr. Burns. That is what they have tried to do there.
    Senator Specter. Maybe joining together with an antitrust 
exemption.
    Mr. Burns. We are talking about hospitals now?
    Senator Specter. So am I.
    Mr. Burns. The hospitals now join together.
    Senator Specter. The hospitals could join together.
    Mr. Burns. Sure, they can, and they have.
    Senator Specter. I mean, they could if they had an 
exemption. They cannot under the current law.
    Mr. Burns. Hospitals can join together as long as their 
market share does not exceed 35 percent.
    Senator Specter. They can join together in negotiating with 
IBC?
    Mr. Burns. Yes, they can.
    Senator Specter. But doctors cannot?
    Mr. Burns. Doctors cannot. Not if the doctors are self-
employed private practitioners.
    Senator Specter. Is that correct; Mr. Marshall?
    Mr. Fine, I see you reaching for the microphone. I do not 
want to miss this opportunity.
    Mr. Fine. If I am understanding Dr. Burns' point correctly, 
I believe that hospitals can merge. Hospitals can, through 
corporate affiliations, come together under certain 
circumstances and within certain parameters negotiate with Blue 
Cross as a group.
    Senator Specter. After they are merged they are one. That 
is called a marriage is it not, sort of?
    Mr. Fine. Yes, sir, where hospitals such as my own that 
remain independent community hospitals cannot align with other 
independent community hospitals strictly for the purpose of 
negotiating third-party contracts.
    Senator Specter. Dr. Trichtinger, what do you think of the 
situation at Chester County Hospital if their statements are 
accurate?
    Dr. Trichtinger. As Dr. Burns had already stated, it fits 
with the circumstances that I am familiar with up in my area, 
though I do not know the particulars. The Chester County 
reports in the paper ought not to have surprised anyone on the 
northern side of the suburbs.
    Mr. Gillespie. Senator, Pat Gillespie.
    On the Chester County Hospital issue, I think we have to be 
cautious using that as some kind of template or some kind of 
example because when Chester County completed their initial 
negotiations with IBC for their rates, a five-year deal, they 
went out and announced to the marketplace what a wonderful deal 
that they had.
    I do not know what circumstances changed in the deal, but 
certainly they were paid on time. And I do not think--I think 
it is being--I think accuracy is important in these issues.
    It is not a story, as Dr. Burns said. It was fact. They 
actually went out, Chester County Hospital actually went out to 
the marketplace and used the negotiated settlement that they 
had with Independence Blue Cross as a way of how well they are 
doing business.
    Senator Specter. Thank you for that information. I had not 
heard that. That is something we will pursue with Chester 
County if, as and when we are able to have their participation 
in this inquiry.
    There was a complaint filed by Children's Hospital of 
Philadelphia in November of 1999 alleging that Independence 
Blue Cross improperly used CHOP's name in advertising after 
expiration of a contract between the two companies. In its 
complaint CHOP said that under its contract with IBC ``CHOP 
agreed to provide pediatric hospital services to IBC enrollees 
and IBC agreed to pay CHOP for services covered under the 
relevant IBC product in an amount that was less than CHOP 
charges as defined in its usual and customary reimbursement 
rate.''
    Dr. Udvarhelyi, are you familiar with the situation with 
the CHOP complaint?
    Mr. Udvarhelyi. I have some knowledge of it, Senator.
    Senator Specter. Were they accurate about that?
    Mr. Udvarhelyi. I cannot validate that particular point.
    Senator Specter. Would you take a look to see if you can 
validate that?
    Mr. Udvarhelyi. We will get back to you.
    Senator Specter. Yes or no.
    Dr. Foreman, what do you think about the allegations of the 
CHOP complaint if, in fact, they turned out to be validated by 
IBC?
    Mr. Foreman. I suspect that just from the little I know 
about it, and I do not know a lot, from reading the newspapers 
and talking with some people in the industry, that this was 
part of the negotiating process that once more ended up at or 
near litigation.
    Senator Specter. Counsel stood and wants to make a comment. 
Thank you, Paul.
    Mr. Tufano. Senator, the Children's Hospital lawsuit from 
1999, one of the allegations that you referred to was a Lanham 
Act allegation. And as I recall the timing was such that one of 
the issues that was in dispute was whether or not the contract 
had terminated. And I believe as part of the lawsuit that they 
had filed they alleged that because the contract, in their 
opinion, had terminated at that point, our continuing to list 
them on our provider directory which we publish once or twice a 
year was a Lanham Act violation. That once the contract was 
expired that we did not have the ability legally to continue to 
include them in the provider directory.
    That is what, I think, that allegation was about.
    Senator Specter. Okay, thank you for your addition.
    Mr. Tufano. Could I also add to that, we had just last week 
announced a new four-year agreement with Children's Hospital 
last week.
    Senator Specter. Anybody else like to add anything to the 
preceding? Dr. Trichtinger?
    Dr. Trichtinger. I just wish that IBC was spending less 
money on lawyers and reimbursing the physicians with some of 
that money.
    Senator Specter. Any of the lawyers want to respond to 
that?
    Mr. Gillespie. Lawyers should not respond.
    Senator Pat Gillespie, as a board member of Independence 
Blue Cross. It was mentioned that a number of the hospitals had 
merged and became one. And they now do enjoy negotiating power 
and they are negotiating. And yet, it still does not seem to be 
enough.
    The point is that there is health care dollar out there 
that if it is not adequate, then I think these forces should 
come up and say listen, it is not adequate. We have to spend 
more than $15,000 a year to indemnify ourselves for health 
care. It has to be $30,000. That is where we have to go here.
    We have this tremendous entity of health care, and by the 
way of full disclosure, I really should not even say this, but 
my kid is a doctor over at Children's Hospital. So I know a 
little bit about the dilemma that they are having, especially 
with the debt.
    But the problem is that society has to come forward and say 
look, we have to spend more money than this. Or maybe we will 
come up with some other resolution to the problem.
    But just going around in circles here and finding someone 
to scapegoat, I heard Dr. Burns mention a couple of times about 
untimely payments. That is one of the things that Independence 
Blue Cross prides themselves on. They get their payments out on 
time, significantly under what normal business practices are.
    Thank you.
    Senator Specter. Dr. Badolato?
    Dr. Badolato. Senator, thank you.
    I would love the opportunity for some summary comments and 
I also offer a solution.
    First of all, Dr. Udvarhelyi referred to two major points 
he wanted to address at the beginning. One is misinformation.
    If we look at our practice as an example, and again top 1 
percent in performance quality measurements and so on, 15,000 
patients, eight physicians, et cetera.
    Our effective per member per month reimbursement in 2004 is 
less than what we got in 1994. We are getting 80 percent of 
Medicare except for a non-physician visit code. Our physicians' 
hourly compensation is equivalent to Mr. Gillespie's people, 
which I calculated between $32 and $33. That is what our 
physicians, after 11 years of training and 15 years of 
experience, are getting.
    We believe that we have 10 years of data which can show, 
which can demonstrate, in fact it is on page two of my 
presentation, that quality costs less.
    We have invited by at least two of my statements if not 
three for a collaborative opportunity to look at quality 
practices, to look at leadership practices and then use Mr. 
Ballou's recommendations of economics 101 which I adhere to and 
say what does it cost? And therefore worked the reimbursements 
based on that.
    I believe we are one of the few practices in the country, 
if not the only, that has generated a slide as is our slide 
number one, showing number of visits, phone calls, et cetera, 
that is required to take care of such a population of 15,000.
    And on October 1st, 2002, I sent what I believe to be a 
wonderfully collegial collaborative invitation to Dr. 
Udvarhelyi. That invitation was passed down to other medical 
directors and eventually my request for a collaborative working 
relationship to solution find was refused.
    And that is a correction of some misinformation.
    Senator Specter. Thank you very much, Dr. Badolato.
    A couple of other issues on litigation, Dr. Udvarhelyi. In 
2002, the Pennsylvania Orthopedic Society sued IBC for failing 
to properly reimburse, and alleged that IBC never disclosed its 
reimbursement schedule to the doctors and that it engaged in a 
practice of improperly denying reimbursements.
    And in a 2003 settlement IBC agreed to provide the 
following to the plaintiff class: fuller disclosure of its 
payment policies, and increased payments up to $40 million over 
the following two years.
    Dr. Udvarhelyi, do you know if that is accurate?
    Mr. Udvarhelyi. That is generally correct, Senator.
    Senator Specter. You say it is?
    Mr. Udvarhelyi. Yes, sir.
    Senator Specter. And on the issue of retaliation, where 
counsel said that he would make an inquiry, there was a suit 
filed by Centennial School District in 1993 and then IBC filed 
a counterclaim alleging defamatory statements which were 
attributed to a Mr. Bradley Hearse, a school board member. 
Quoting Mr. Hearse as saying that IBC ``wanted all those 
enrolled in a rival HMO to be turned over to Keystone, an IBC 
subsidiary, for the same benefits at a higher price. And that 
Blue Cross actions were predatory.''
    That is reportedly an opinion filed by Federal Judge John 
Padova on July 11th, 1994 to grant in part and deny in part a 
motion to dismiss a counterclaim. Dr. Udvarhelyi, are you 
familiar with that?
    Mr. Udvarhelyi. No, Senator, I am not.
    Senator Specter. Counsel, are you?
    Mr. Tufano. Senator, that is about six years before I 
joined the company. I am vaguely familiar with the Centennial 
case but not enough to give you a thorough response to that.
    Senator Specter. If you would take a look at that, we would 
appreciate it.
    Mr. Tufano. I will.
    Senator Specter. Anything else, gentlemen?
    Mr. Udvarhelyi. Senator, if I could just clarify a couple 
of points.
    With regard to payment for both physicians and hospitals, 
we pay claims we receive in approximately eight days from the 
time we receive it. We have done, for example hospitals, we 
know that from the time a patient is discharged to the time we 
receive the bill is approximately 36 days. So that full time 
elapsed, most of that time is time from patient discharged 
until we send a check is actually the bill has not yet come to 
us from the hospital. And then there is additional time at the 
hospital to when that money gets posted.
    So when we hear about the long time for payment, at least 
from the time we have received it for both physicians and 
hospitals, about eight days. So we do not believe that there is 
a slow pay issue.
    And the Insurance Department, when they reviewed us, found 
that we paid claims according to State regulations almost at 
100 percent.
    The other clarification on market share that I would like 
to make is that I do not know how everyone sometimes calculate 
these numbers. We believe the right way to look at it is for 
people who actually live in the five counties who carry a part 
of one of our products is a sort of accurate way to do that.
    And if you calculate it that way, our market share is just 
over 50 percent, not at the 80-some percent that was quoted 
earlier. We do insure, as in the case of Mr. Ballou's company, 
employers who are based in Pennsylvania but who may have 
employees in other States. We do not believe that it is right 
to take those employees that are living in other States and put 
them over a denominator that is just the people living in 
Philadelphia.
    So I think that if we were going to include the people that 
live in California, Chicago, et cetera, we would have to 
include the residents that live there as well. So again, we 
think the number is slightly lower.
    And lastly, Senator, I would like to offer a comment as to 
the intended effects of increasing rates to physicians and 
hospitals. I think the math is pretty simple, and that is that 
the cost of health care is really a function of two things. 
Well, three actually.
    It is the number of services that are used, the mix of 
those services, and the price per service. Whether Independence 
Blue Cross is providing coverage or whether Aetna or some new 
entrant, if you assume that the physicians are ordering the 
services the patients need and the hospitals are doing the same 
thing--I would contend by the way, as I mentioned in my 
testimony, that the rate of services is not only going up but 
the mix is going up. So when we look at somebody's lungs with a 
radiology study, we are not looking at a plain x-ray anymore. 
We are doing a spiral CT scan. We are exchanging a test that 
costs maybe $50 to one that costs hundreds of dollars.
    So when we look at now the total cost of care, that mix can 
have a big impact. But if all we do is assume that the doctors 
and the hospitals are going to order the same services for 
patients they do today, but a new entrant comes in and whether 
it is collective bargaining or anything else, the prices go up. 
I do not understand how the new entrant is going to offer their 
insurance product at a lower rate for that same defined 
population if they are paying 20 percent more than the current 
rates.
    There is no way the costs go out of the system in that 
model.
    So the solution, I think, is that we have to work together 
to eliminate the waste, the redundancy, the defensive medicine. 
I will tell you that I have talked to physicians and talked to 
the medical society. Doctors order tests that are not needed 
because they are afraid they are going to be sued. They order 
tests that some other doctors ordered because they do not know 
that they have been ordered.
    And so there is redundancy, there is waste in the system. I 
think collectively that we can try to trim that down. And as 
you can see in my written testimony, the sad truth is that--
these are researchers at Dartmouth, Elliot Fisher and David 
Wennberg have shown that high cost areas in the United States, 
and Philadelphia is one of them, unfortunately we do not 
necessarily have better outcomes. What their research has shown 
is that for use of known effective preventive services, the 
high cost areas like Philadelphia have actually lower rates of 
those services. And even things like death rates from hip 
fracture, heart attacks and colon cancer are higher in high 
cost areas of the country.
    Senator Specter. Dr. Udvarhelyi, there is no doubt that the 
scope of this issue is very broad and we have not touched on a 
fraction of it in the focus narrowly here.
    We are working, as Mr. Ballou commented about the so-called 
lottery verdicts, trying to find a formula for caps. It has 
been before the Senate three times now and far short of 
cloture, 49 votes.
    We changed the Balanced Budget Act of 1997 substantially. I 
have taken the lead on graduate medical education, 
disproportionate share, moving in many, many directions with 
CMS to try to tackle a wide range of medical issues.
    So that in your closing statement you started to talk on 
some of them which are vast beyond any question. And we are 
tackling them at many levels.
    State Senator Greenleaf and I held a hearing in Norristown 
a week ago Friday to try to acquaint seniors with the new 
Medicare prescription drug issue, but also the possibility of 
small business going together.
    But this is under very active consideration. We had Dr. 
Thompson, Secretary of HHS, testify extensively within the past 
month. And Dr. Zerhouni, head of NIH. It is a vast subject. And 
a good part of the cost turns on new procedures and new 
technology.
    I was the beneficiary of an MRI which we did not have not 
too long ago. And we are fortunately enabling people to live 
longer. And the question as to how we provide their services.
    And the new Act wants to give everybody a medical 
examination, the seniors, and then have pharmaceutical 
available to them for preventative medicine. It is a giant 
issue and we will work on it on many, many levels.
    I thought today's hearing was very informative, although we 
did not cover everything but a little attempt at investigation. 
You have heard at least one Senator's views of confidentiality 
agreements and retaliatory lawsuits. I used to be that line of 
work. I do not do that anymore. In fact, I do not think I had 
any retaliatory lawsuits but I used to bring a fair number of 
prosecutions when I had a different hat.
    But to repeat, this is very informative and we thank you 
all.
    That includes our hearing.
    [Whereupon, at 11:02 a.m., the Subcommittee was adjourned.]
    [Submissions for the record follow.]
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