HRSA Telehealth - Universal Service Fund: Options for the Future

Issue: Universal Service
In the first year of the FCC Universal Service Rural Health Care Program, no funds have been awarded to eligible rural health providers for telecommunication services out of a possible $100 million in telecommunications rate subsidies. The FCC is currently in the process of selecting an auditor for the program and until the audit is complete, no funds will be distributed. What happened, and what are some options for the future?

Discussion
Universal Service rate subsidies for rural telehealth providers could potentially make telecommunications services more affordable, as these services currently account for between 18% and 30% of rural health providers’ overall telemedicine costs. In practice, however, OAT grantees have found that the program does not always meet their needs because of its complexity, multiple steps, eligibility restrictions, and use of published tariffs for benchmarks that reflect "month-to-month" as opposed to actual longer-term rates paid by urban health care providers. Consequently, only a small number of rural health providers and their telephone companies were able to finish their applications by the original deadline.

While the problems facing the Universal Service Fund’s Rural Health Care Program may require a long-term legislative or regulatory "fix," OAT offers some near-term options.

Background
When the landmark Telecommunications Act of 1996 was enacted, it provided a blueprint for major changes in the telecommunications industry, such as opening up competition between long distance carriers and the Regional Bell Operating Companies in the same markets. Additionally, the Act proposed that schools, classrooms, health care providers, and libraries should, generally, have access to advanced telecommunications services.

Section 254 of the Act required the Federal Communications Commission (FCC) to explore actions that would provide advanced telecommunications services to rural health care providers. The Act required that:

To implement this law, the FCC held public hearings on rural telemedicine issues and established the Advisory Committee on Telecommunications and Health Care composed of telecommunications, telemedicine, and rural health care experts to advise them and the Joint Board on Universal Service support. This Advisory Committee developed a report that, among other things, defined what is "rural," recommended eligible telecom services to be covered as well as a "market basket" of "essential" telemedicine applications for rural areas.

On May 8, 1997, the FCC released a Report and Order on Universal Service that implemented Section 254. Among other things, the FCC Report and Order:

More specifically, the FCC ruled that all rural public and non-profit health care providers could obtain telecommunications services at rates comparable to those paid for similar services in the nearest urban area with more than 50,000 residents, within the state in which the rural health care provider was located. Any telecommunications service of a bandwidth up to and including 1.544 Mbps that is necessary for the provision of health care services is eligible for support. And telecommunications carriers are required to charge rural health care providers a rate no higher than the highest tariffed or publicly available rate than that charged in an urban setting.

Although the FCC did incorporate numerous Advisory Committee recommendations such as 1.544 Mbps eligible bandwidth, it rejected many recommendations such as unlimited support for toll-free access to the Internet and infrastructure support.

Later in July of the same year, the FCC established the Rural Health Care Corporation (RHCC), a non-profit organization, to implement and administer the program funds of an initial $100 million for rural health care providers. Under the RHCC program, both rural health care providers and the telephone companies providing services must submit several forms to qualify for rate subsidies. Rural healthcare providers must first submit Form 465, which allows the healthcare provider to submit bids for telecom services and certifies its eligibility for the program. After a 28-day waiting period for bids from competitive telephone companies, the health care provider would theoretically choose among competing bids.

At that point, the healthcare provider must also complete Form 466 for each telecommunications carrier that provides it with eligible telecommunication services. Form 466 must be jointly submitted with the Telecommunications Service Providers Support Form (Form 468), completed by the telecommunications carrier(s) with which the health care provider has signed a contract for service or purchased service at tariffed rates. The RHCC will not process Form 466 without an accompanying Form 468 and a copy of a service contract or tariff number/agreement.

After one year, the FCC and the RHCC have not yet distributed any funds and according to the FCC, no funds will be distributed until a comprehensive audit of the program is completed. The FCC is currently in the process of selecting an auditor, thus, funds may not be available for several months. As of February 12, 1999, 105 compliant telemedicine applications were awaiting FCC approval, and over 200 additional applicants were in the process of completing their applications before submitting them to the FCC. The beginning of the year also brought about a merger of the RHCC and the Schools and Libraries Corporation (SLC) together with the Universal Service Administrative Company (USAC). RHCC is now the Rural Health Care division (RHCD) of USAC.

What Happened?
The Universal Fund Program potentially offers rural healthcare providers greater affordability for telecommunications services, which are estimated to account for at least 18% of rural health providers overall telemedicine costs. Consequently, the Office for the Advancement of Telehealth has extensively publicized this program through our newsletters, radio spots, video spots, and through brochures that were developed for the public health sector. Moreover, our grantees are required to incorporate the program in their grant applications.

In practice, however, our grantees have found that the program does not always meet their needs because of its complexity, multiple steps, eligibility restrictions, and use of published tariffs for benchmarks that reflect "list" as opposed to actual rates paid by urban health care providers.

Specifically, the benchmark reflects month-to-month published tariffs for telecommunications services such as a T1 bandwidth as compared to longer term published rates such as one-year or three-year published tariffs that are available to large organizations. For example, a large urban hospital can often negotiate longer term contracts such as a three-year tariffed rate with its telephone company who in turn may waive its installation fee and charge a lower monthly rate than that for a small health provider who pays a month to month rate for services.

In addition to problems with benchmarks, the program’s eligible telecommunications carriers (ETCs) and eligible services may be too narrowly defined. For example, the program excludes the participation of Inter Exchange Carriers, (IXCs) that provide the critical link between Local Exchange Carriers (LECs) in rural areas and also excludes alternative local carriers such as cable or wireless companies that may be able to provide needed competition to the LECs. Moreover, the program’s eligible telecommunication services do not cover important services such as ISDN, frame relay or toll services that are critical to many telemedicine projects and more costly for users in rural areas.

To date, only a handful of rural health providers have been able to complete their applications for a discount rate. Because of the multiple steps involved in the application process, a number of rural health providers have submitted their application but are still in the process of negotiating rates with their telephone company providers. Since the rural telephone companies must also fill out their own separate application, many OAT grantees have reported spending long hours educating their local telephone companies about the program. Without significant competition in rural markets for telecommunications services, these LECs do not have great incentive to participate in the program given the amount of time and resources that is required to complete the applications. No one among those who filed Form 465 received any competing telecommunications service company bids.

To shed greater light on the application process problems facing our grantees, the University of Missouri asked OAT grantees to share their experiences. The University, which hosts a listserv for OAT grantees, compiled comments from about 21 grantees¹ that represent telemedicine "hub" sites that serve numerous rural health providers along the system’s "spokes." The University found that a large number of OAT grantees face urban benchmark rates below their own telephone company rates, thus yielding a negative discount rate. Outlined below are some of the University of Missouri’s findings:

Aside from the practical problems facing the grantees, there are also systemic problems with the program. For example, the Act assumes that competition for telecommunications services would be prevalent in rural areas by the time the Rural Health Care Program became operational. In fact, there has been no competition for telecom services in any of OAT’s grantee rural areas. Without competition in their markets, rural telephone companies do not have an incentive to bid for rural health provider services or participate in the program.

OAT grantees are also concerned about the impact of excluding IXCs from the Universal Service Program. In places such as Alaska or the Pacific Basin, IXCs may be the only providers available for telemedicine services. Some of our grantees have provided the following illustrations of their predicament:

The WWAMI Rural Telemedicine Network

The WWAMI Rural Telemedicine Network serves a five-state region (Washington, Wyoming, Alaska, Montana and Idaho) that geographically covers 20% of the continental United States and is vastly either rural or frontier country. This region is noted for its rugged terrain and diverse climatic conditions, which vary from mild temperatures along the Pacific coast to extremes of heat and cold in portions of Alaska and on the great plains of eastern Montana. This area also houses the nation's highest mountain chains, which are often impassible from fall to spring.

One half of our network partners are ineligible under the current FCC regulations because they use either AT&T, Sprint, or other long-distance carriers. Our most remote and most active site has a monthly line charge of $1,250 for its AT&T-supplied Switch-56 lines, and the others have bills that range from $280-$1,120 per month (all of which are either ISDN or Sw-56 lines). As with most federally funded demonstration projects, the funding agency is very interested in seeing the grantee develop a program that will be self-sustaining at some point in time. Thus, one of the stated goals for our project was to develop a network where the rural partners could continue to operate their equipment without financial assistance from the University of Washington after the grant ceased to exist. This is the reason we purchased equipment that was lower-end in bandwidth and a bit more affordable. However, these efforts will be for naught if there isn't some rate relief provided to our most financially and geographically vulnerable Network partners.

Arizona Telemedicine Project

One of the areas in the state with the greatest need for telemedicine is the northeast corner, which falls within the Navajo and Hopi reservations. This is a region of more than 25,000 square miles with a low population density and very limited services. Distances are great and access to specialty health care services is a problem. The Arizona Telemedicine Program currently serves two sites in this region and there is a great deal of interest from other sites. For this region, we have no choice but to use an IXC, and in fact only a single IXC responded to our RFP for these services. That IXC has to work with 4 different LEC's to provide dedicated T1 circuits. These circuits are our most expensive circuits at approximately $5,000 per month for each site.

The exclusion of IXCs (from the Universal Fund) costs our program a minimum of $100,000 per year. This cost presents a significant barrier to the sustainability of our program. The fact that we can only use an IXC in that region, coupled with the exclusion of IXCs (from the program), inhibits the potential for expanding what has been a very successful application of telemedicine in a region with very high need. This exclusion also means that these sites, of high need, are at the top of the list for downsizing should we encounter a reduction in funding.

Possible Options
Outlined below are possible options that can be made by the FCC in the near- or long-term future to improve the RHCD program. A discussion of possible statutory amendments to the legislation is beyond the scope of this piece.

Recent Changes. As of December 31, 1998, the FCC decided to extend the RHCD application deadline to 18 months and grandfather all applications until the June 30, 1999 deadline. By announcing that applications currently under consideration would be considered in the next period and by not requiring resubmission in January 1999, the FCC and RHCD will be able to increase the number of applicants who have completed their submissions for the second year.

Create New Benchmarks. The current RHCD benchmarks are published telecommunications tariffs that reflect the month-to-month or "list" price rather than the actual longer-term "discount" prices negotiated by large urban health providers and their telecommunications companies. Consequently, in many instances, rural health providers find that their own actual prices for telecommunications services are either lower or close to the published urban tariffs. Therefore the "real" discount to the rural health provider may be negligible.

One way to address this problem is to develop benchmarks that better reflect the longer term negotiated urban telecommunications rates between urban health providers and their local telephone companies. To assess these rates, the FCC might enlist a third party organization like the Chamber of Commerce that could survey health providers and their telephone companies in a select urban area. Using this pilot project to refine the data collection methodology and analysis, this third party would create a model that could be repeated nationwide.

Another way to assess these rates might be to examine published negotiated rates between federal government clients and local telephone companies, although these negotiated rates may depend on variables such as high volume or multiple year commitments that could not be duplicated by the rural health provider.

Clearly, benchmarks will change as the technology and related prices change. More importantly, as local competition becomes more prevalent in different urban markets, prices should decline. At this time, however, most rural health providers have only monopoly local telephone providers, available.

Streamline the Application Process. Streamlining may attract more health care applicants or encourage more telephone companies to participate in the program and allow them to complete their applications in a shorter time frame. One possible way to simplify the process would be to offer rural health providers and telephone companies the option to jointly file their application, particularly if there is limited competition for services. This option would eliminate the 28-day posting period.

Another option would be to revise the FCC’s regulatory language to allow the use of a tariff (standard practice) in lieu of a contract. For normal business practice, a tariff would be considered similar to a contract with a local telephone company. For the purposes of the RHCD applications, however, a separate contract must be negotiated between the rural health care provider and the company even if a negotiated tariff for services already exists.

In addition to these options, a number of organizations have jointly recommended that USAC no longer require the local phone company also known as a Local Exchange Carrier (LEC) to make calculations of specific charges to be discounted. Instead an approved rural health care provider could submit their paid phone bill to USAC, spelling out their broad band services along with distance line charges. USAC would then reimburse the carrier for the discounted distance line charges on the bill. The carrier would then pass the money on in the form of a discount on the next bill. The discounts would be based on an average cost for communications services to rural areas versus urban areas in existence for each state.

Expert Focus Group. Given the complexity of the problems facing rural health providers and the Universal Service program, the FCC, in cooperation with the RHCD, might convene a small group of five to seven telecommunications experts for a one-day meeting at the Commission to brainstorm possible options for the program. Experts, not directly associated with regulators, the telecommunications industry or state government, could provide unbiased insights and independent solutions to address the issues facing the RHCD program. In addition, the FCC might consider asking these experts to develop brief options papers in advance of the meeting that would serve as the basis for discussion and workable recommendations.

Other Issues
Third Party Payment and Attestation. In order to capture economies of scale benefits, the majority of OAT grantees are organized into "hub and spoke" configurations much like those used by major airlines. Consequently, rural health provider spokes often use telecommunication infrastructures ultimately built out by and paid for by the hub site. While this configuration provides economies of scale and other efficiencies, it raises some difficult questions for the FCC and RHCD. One concern voiced by the FCC is the issue of third party payment. That is, the FCC must be certain that the LEC receive subsidies only for services to appropriate rural spoke sites. If the LEC charges the urban hub for telecom services received by the rural spoke site, the FCC cannot be sure that the telecom subsidy is used only for the rural spokes sites and not for the urban hub site.

One way to address this dilemma is to create an agreement or an attestation between the hub and spokes sites that ensures that the LEC receives subsidies only for telecommunication services rendered to spoke sites.

Longer-term options
Expand the Definition of Eligible Telecommunications Carriers and Eligible Telecommunications Services. Over the long term, the FCC, USAC and the RHCD may want to consider expanding the definition of eligible telecommunication carriers. For example, Inter Exchange Carriers may be the only available carriers in places such as Alaska, the Pacific Basin or very rural parts of mainland America. Additionally, the FCC may want to consider expanding eligibility to alternative local carriers such as wireless companies that may be able to provide needed competition for LEC services to rural health providers.

Expanding the definition of eligible telecommunications services to include services such as ISDN, frame relay or toll access - all of which are more costly for users in rural areas - would also increase access to services critical to rural telemedicine projects.

Alternative Approaches. The FCC might consider revisiting some of the recommendations originally put forth by the Advisory Committee on Telecommunications and Health Care or consider adding other important telecommunication services such as ISDN, Frame Relay or toll base subsidies to the list of eligible services.

Next Steps
The Office for the Advancement of Telehealth will be working closely with the FCC, USAC and the RHCD as they move forward on the Universal Service issue. OAT has already submitted a letter to Chairman William Kennard supporting the extension of the first-year application deadline and the simplification of the application process. We also plan to submit a letter to the FCC Chairman and Commissioners, outlining the options above. In addition to these short-term solutions, there is also a need for specific statutory amendments to legislation that will require a longer-term strategy. For example, expanding the definition of eligible rural health providers to include long-term care providers and for-profit rural health care providers that serve a large number of rural communities where no non-profit providers exist would greatly expand the number of applicants.

Over the next few months, we expect to see USAC submit a status report on the RHCD program to the FCC by March 15, 1999. And finally, once the FCC has selected an outside auditor for the program and the audit has been completed, we hope to see funds distributed to our grantees and other rural health care providers.

The Advisory Committee recommended that the Commission limit universal service support to services of bandwidths up to and including 1.544 Mbps or its equivalent. It also recommended toll-free access to the Internet providing access to services such as electronic mail, the most current health care information, and collaborative applications be included in the list of telecommunications services necessary for the provision of health care in a state. In addition, the Advisory Committee recommended that an eligible telecommunications carrier receive universal service support to build, upgrade, or extend its backbone infrastructure so it could offer telecommunications services necessary for the provision of health care to all eligible health care providers in the rural areas it served. Moreover, if backbone facilities that had been extended or upgraded with universal service funds were used by other non-eligible customers of the carrier, there should be mechanisms to recover the supported costs of the infrastructure from the profits obtained from serving such customers.

¹A total of 21 telemedicine "hub" sites commented on the Universal Service Program on a listserv hosted by the University of Missouri. These "hub" sites are typically the managing entity and largest provider of specialty services within their respective telemedicine network. These 21 "hubs" represent a total of 244 different telemedicine sites in Maine, Illinois, Tennessee, Kentucky, Montana, West Virginia, Missouri, North Carolina, Louisiana, Arkansas, New Mexico, Washington, Virginia, Michigan, Colorado, South Dakota, Nebraska, Arizona, and Wisconsin.

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