STATEMENT OF WILLIAM A. CONWAY, M.D., VICE CHAIRMAN, HENRY FORD HEALTH SYSTEM, DETROIT, MICHIGAN; ON BEHALF OF AMERICAN GROUP PRACTICE ASSOCIATION, MEMBER, BOARD OF TRUSTEES Dr. CONWAY. Thank you for the opportunity to testify. I am Dr. Bill Conway, vice chairman of the Henry Ford Medical Group, which is part of the Henry Ford Health System in Detroit, Michigan. We are a nonprofit organization that provides the full spectrum of health care services through a staff of 1,000 employee physicians. Today I am pleased to testify on behalf of the AGPA, American Group Practice Association, as a member of its board of trustees. The association is composed of about 250 group practices, with more than 25,000 physicians nationwide. Although there are only a few nonprofit medical group practices in our country today, their size and impact are enormous. Many of these are icons of American medicine. Among them are Mayo, Leahy, Cleveland, Geisinger, Virginia Mason, and Henry Ford. In addition to having an international reputation for excellence, these practices provide significant charity care. They offer some of the world's best medical education and training. They are leaders in medical research and quality improvement. And, most importantly, they are sincerely devoted to community service. One of the bipartisan issues in the debate on health care reform has been the need for access to quality health care for millions of Americans in inner cities and rural areas. These group practices are serving these vulnerable communities. Continuing quality health care for these underserved communities is going to depend on the ability of these community-based nonprofit organizations remaining viable and able to attract and keep highly qualified professionals. Before describing the details of our issue, I would like to thank Congresswoman Dunn for her recognition of our issue and her leadership in developing a solution. I would also like to thank Congressman Camp from my own State of Michigan and Congressman Portman of Ohio for their understanding and active support. Using some data from the Henry Ford Medical Group as an example of this issue in group practices across the country, I would like to explain that the average salary for an employed physician in our group is $135,000. Comparable physicians in the for-profit sector average $40,000 to $50,000 more per year in direct compensation. That gap has always been there, and we have been able to compete despite it. In the past couple of years, as a result of the decrease in the salary cap on qualified retirement plans, 20 percent of our medical staff at Henry Ford lost 25 to 35 percent of their retirement benefits that would have accrued by age 65. Because of other options for retirement, this did not affect for-profit enterprises as much as our staff. Because of this increasing gap in total compensation possibilities and its impact on our recruiting and retention capabilities, we are seeking an amendment to the Internal Revenue Code. This would provide a limited exemption from IRC section 457 to eligible nonprofit group practices. First, it would increase the dollar limitations for employees of nonprofit integrated health systems. Second, it would index the deferral amount for inflation. Third, it would create an exemption from the limitations of section 457(c). We believe there are sound reasons why a change in the law is good public policy, and I would like to outline these briefly. The first is to support effective reform of the health care system. Many Members of Congress and the private sector look to integrated health care systems as the model best able to achieve cost containment with continued high quality care. In many instances, a nonprofit salaried physician group is at the core of these systems that are forming today. Without adjustments to the Tax Code, existing and forming physician groups are encouraged to avoid or abandon nonprofit status. The second reason is the availability of quality physicians where most needed. Under current tax law, employers who retain nonprofit status are at a significant disadvantage in recruiting and retaining the brightest physicians. Many of these professionals, as I pointed out earlier, are serving millions of inner city and rural residents. The third reason is tax equity and simplicity. The recent reduction of the salary cap from $235,000 to $150,000 has made it dif ficult for tax-exempt employers to provide competitive retirement packages. Taxable employers deal with this problem through more generous salary increases and nonqualified plans. Tax-exempt employers are limited by rules governing private inurement and limits on nonqualified plans and have fewer options. To restore balance to the system, tax-exempt organizations need more flexibility to offer reasonable and competitive retirement benefits. Finally, our medical professionals in these nonprofit group practices forego substantial benefits in order to serve their communities. To compel them to deepen that sacrifice compared with their for profit colleagues is unrealistic and unfair. We are concerned that, if the competitive disadvantage created by the recent Tax Code change continues, it will have a serious adverse effect on our unique medical institutions. The ultimate loss will be to the community and patients, and the diversity of the American health care system. Mr. Chairman, on behalf of the AGPA's 25,000 physicians, I wish to thank you for hearing us on this critical issue today. [The prepared statement follows:] STATEMENT OF WILLIAM A. CONWAY, M.D. VICE CHAIRMAN, HENRY FORD HEALTH SYSTEM ON BEHALF OF AMERICAN GROUP PRACTICE ASSOCIATION Mr. Chairman, thank you for the opportunity to testify. I am William A. Conway, M.D., Vice Chairman of Henry Ford Medical Group, which is part of the Henry Ford Health System in Detroit, Michigan. We are a non-profit organization that includes virtually the entire continuum of health care services. I am pleased to submit testimony on behalf of the American Group Practice Association, where I serve as a member of the Board of Trustees. AGPA is the only physician-governed organization representing the needs of integrated, multispecialty group practices in the country. AGPA membership is comprised of integrated multi-specialty group practices which are committed to providing the highest quality, most cost-effective care to their patients under both managed care and fee-for-service arrangements. AGPA is dedicated to the continuous improvement of clinical practice and cost performance. With approximately 250 member groups, AGPA represents more than 25,000 physicians nation-wide. We are asking the Committee to consider an equity provision that would allow us the ability to offer our professionals reasonable deferred compensation packages, in a manner comparable to those allowed for profit groups under the tax code. Congress and the private sector look to integrated health systems as models best able to achieve cost-containment with continued, high-quality care. In many instances, the non-profit salaried physician group is the optimal foundation for creating the kind of managed care plans that promise true delivery-system reform for Americans of all ages and income status. Without adjustments to the tax code, physician groups are encouraged to avoid non-profit status. Groups that remain non-profit are at a great disadvantage in recruiting top-flight talent. movement in the opposite direction from where health care should be going. This is On behalf of our members, I want to thank Congresswoman Jennifer Dunn, not only for her recognition of this as an important health policy problem, but also thank her for her leadership in developing a solution. I want to thank Congressman Dave Camp of our own state of Michigan, and Congressman Rob Portman of Ohio for their understanding and active support. There are only a few non-profit medical group practices in our country today, but their impact on health care is enormous. Their names constitute a "Hall of Fame" in medicine, among them: Mayo, Lahey, Cleveland, Virginia Mason, and Henry Ford. In addition to a well-deserved, international reputation for medical excellence, the non-profit group practices have several other characteristics in common. They provide significant charity care and other uncompensated care. An issue stressed by both Republicans and Democrats in the debate on health care, Medicare and Medicaid is that of access to quality health care for millions of Americans who live in inner cities and rural areas. In the future, Quality health care for under-served communities will depend almost entirely on the ability of the community-based, non-profit organizations to come together as health plans and to attract and keep highly qualified professionals. Currently, coverage for inner-city and rural populations is a combination of Medicaid, Medicare and charity care in clinics and hospital emergency rooms, where the need for physicians is particularly high. Government payment rates and malpractice insurance costs have already driven many of the private physician providers to higher income areas. The hospitals and non-profit health systems are hiring physicians to fill the gaps. These health care professionals often are attracted to these non-profit settings by teaching and research opportunities. They will serve part or all of their professionals careers in the nonprofit setting out of a deep sense of social obligation. They often are part of a multi-specialty group which accepts risk for an enrolled population through various HMO arrangements, which effectively eliminates their ability to improve personal income through referrals or increased visits. At the Henry Ford Health System in Detroit, patients receive their care from both the Henry Ford Medical Group, comprised of about 1,000 salaried physicians, as well as 1,200 private practice physicians connected to the Henry Ford Health System through network arrangements with our own H.M.O., Health Alliance Plan of Michigan, with 425,000 enrolled members. We are a pluralistic medical model, like many of the other large multi-specialty group practice organizations throughout the country. We serve more than 40,000 Medicaid and 50,000 Medicare patients under both enrolled and fee-for-service arrangements--again similar to the diversity your will find in the other large medical groups. We own and operate four community hospitals and 36 ambulatory centers throughout Southeast Michigan. And like many of the other large medical groups--including Mayo in Minnesota, Cleveland Clinic in Ohio, and Lahey Clinic in New England--teaching and research are central to our mission. Charity care runs about $38 million per year for Henry Ford Health System, with an additional $40 million in other uncompensated care, particularly through the Medicaid Program, which pays about 35 cents on the dollar in Michigan for physician services. Our preferred clinical approach is patient-focused managed care -- irrespective of the type of health insurance coverage the patient has. At the Henry Ford System, the average salary of an employed physician is $135,000, whereas it is about $150,000 for the other large groups. In contrast, physicians in the for-profit sector average $50,000 more per year in compensation. About one-third of our physicians are affected by the tax code limitations we want to fix. Nationally, we estimate that about 20,000 salaried physicians in non-profit health care organizations were adversely affected by the 1993 changes in the tax code. As a result of the salary cap, twenty percent of cur medical staff at Henry Ford lost 25 to 35 percent in retirement benefits at age 65.. We are seeking an amendment to the Internal Revenue Code which would provide a limited exemption from IRC Section 457 to eligible non-profit group medical practices. It would: increase the dollar limitations for employees of non-profit integrated health systems; index the deferral amount for inflation; and create an exemption from the limitations of Section 457 (c)(2). There are sound reasons why a change in the law is good public policy. I will summarize these briefly: 1. The first is Availability of Quality Physicians Where Most Needed. Under current tax law, non-profit employers are at a significant disadvantage in recruiting and retaining the best and brightest physicians. Many salaried professionals are on the front lines, delivering primary care and related services to millions of inner city and rural residents. Because IRC Section 457 (e)(1)(B) limits the ability of non-profits to offer attractive and competitive compensation packages, such medical practices lose out in the national and local competition for top physicians and other health professionals to the for-profit entities which are able to offer more favorable retirement alternatives. 2. The second reason is Availability of Critical Medical Institutions. An important way to maintain high quality and availability is to affirmatively encourage physician groups and other medical professionals to continue to organize in a non-profit status. Current law provides incentives to abandon non-profit status and discourage health institutions and professionals who would collaborate and consolidate themselves under non-profit coverage agreements for Medicare, Medicaid or private practice. 3. The third reason is Effective Reform of the Total Health Care System. The evolving health care system will rely on physicians and other care providers working together in integrated health care networks. Instead of expediting the formation of such integrated networks, current law regarding deferred compensation acts as a serious barrier. Groups of physicians and other medical professionals who might join together with hospitals and other nonprofit entities to form cost-efficient integrated networks are reticent because of the significant retirement benefits they lose. An exemption to IRC Section 457 will remove an important barrier to the formation of integrated health care delivery networks. 4. The fourth and final reason is Tax Equity and Simplicity. Professional compensation usually includes a combination of employer-paid and employee-paid retirement plans. Rules governing these retirement arrangements are spelled out in several parts of the tax code. IRC Section 457 governs deferred compensation arrangements between non-profit organizations and their employees. The recent reduction of the salary cap from $235,000 to $150,000, combined with other limits, has made it difficult for many employers to provide adequate and competitive retirement packages. Taxable employers have been able to deal with this problem through their non-qualified deferred compensation plans. Tax-exempt employers do not have similar options, as compensation is limited by rules governing private inurement and community benefits. To restore some balance to the system, tax-exempt organizations should be allowed the flexibility to offer reasonable benefits. Congress has begun to recognize the inequities of current law and this Committee recently approved legislation exempting state and local governments from the dollar limitations contained in IRC Section 457 (b)(2) and Section 457 (c)(1). The Tax Simplification and Technical Corrections Act of 1993 (H.R. 3419) amends Sections 415 and 457 to provide that excess benefit arrangements of government entities will not be subject to IRC Section 457 (b)(2) and Section 457 (c)(1) limits. As a matter of fairness, as well as good health care and tax policy, non-profit group practices should be accorded similar treatment. Toward the end of the 103rd Congress, the Senate Finance Committee began to take such action. It reported a provision, as part of the "Health Security Act," which would have removed the current cap on deferred compensation plans for certain medical group practices. The bipartisan Senate "Mainstream Group" adopted a similar provision. Our intent with this legislation is not a total balance between for-profit and non-profit organizations. We recognize that non-profit organizations have certain beneficial and inherent advantages. The tax code and other laws are designed to take this into account. However, the realities of a competitive marketplace, with intense cost pressures and performance pressures do create a disadvantage for us in recruiting professional staff and in our efforts to consolidate into integrated systems. The remedy in Congresswoman Dunn's bill is designed to bring the laws for non-profits to a reasonable standard -- to restore a better balance between what we can offer highly qualified and productive staff and what they find available from the for-profit companies. Medical professionals in tax-exempt group medical practices already forego substantial, personal economic benefits in order to serve their communities. To compel them to deepen that sacrifice, compared with those made by their for-profit colleagues, is both unrealistic and unfair. The ultimate loss in such circumstances is to the community and the patients, who have a right to expect the best, most cost-efficient health care America's medical profession can provide. Mr. Chairman, on behalf of AGPA's 25,000 members, I thank you and the members of your Committee for hearing us on this critical issue. 24-384 96-7 |