Standards for Electronic Healthcare
Claims Attachments

B. Cost and Benefit Analysis

[If you choose to comment on issues in this section, please include the caption "COSTS AND BENEFITS" at the beginning of your comments.]

1. General Assumptions, Limitations, and Scope

Attachments to health care claims will be requested electronically by using the ASC X12N 277—Health Care Claim Request For Additional Information transaction which includes LOINC codes to identify the supplemental claim information being requested. Similarly, the attachment response will be conveyed electronically by the ASC X12N 275—Additional Information to Support a Health Care Claim or Encounter transaction, serving as an envelope for the HL7 message and Additional Information Specification. While an attachment can be sent at the same time as the original claim is submitted, based on instructions from the health plan, it will usually be sent in response to a specific request after a claim has been submitted. Accordingly, this analysis considers the request, the response, the HL7 message standard, and the six additional information specifications as an "attachment package" that cannot be subdivided for purposes of any financial analysis since they cannot logically be implemented as separate stand-alone transactions.

Limitations

Most health plans, health care clearinghouses, and covered health care providers were required to comply with the Transaction Rule standards in 2002, or 2003, depending on the entity type and the applicability of the Administrative Simplification Compliance Act (ASCA), which permitted certain covered entities to apply for an extension of the compliance date. Widespread implementation of the HIPAA Transaction Rule was further delayed when covered entities invoked contingency plans under an enforcement discretion strategy guidance document that had been issued by CMS. One of the results of these implementation delays is that industry-wide cost data could not be compiled for HHS to use in assessing the actual financial impact (that is, cost or savings projections) of implementing any of the original transactions.

The lack of data available today regarding any industry wide HIPAA transaction costs or savings; on the current use of claims attachments; the costs of manual processes; or the impact of conducting any transactions electronically, imposes a significant limitation to any quantitative analysis. Therefore, in order to prepare this proposed rule, HHS used older available studies and anecdotal observations from the industry and SDOs. Since the analysis in the Transaction Rule specifically excluded costs and benefits for electronic health care claims attachments, it further highlighted the data limitations we were faced with for this analysis.

HHS used the 1993 WEDI report coupled with conservative assumptions from the Transaction Rule to predict costs and savings at a high level. We solicit information from the industry regarding implementation costs for the current HIPAA transactions, in addition to: the frequency of claims attachments; the types of attachments currently being requested (by service and/or procedure); the workload associated with requesting attachment information and providing the response; the costs that may be incurred implementing new software, practice management systems, and other tools; as well as any other relevant cost data that could supplement this analysis. We also hope to receive information from WEDI, following their efforts to engage the industry in discussing Return on Investment (ROI) from HIPAA—an initiative expected to begin in the fall of 2005.

The impact analysis in the August 2000 Transactions Rule assessed the expected costs and benefits associated with the Administrative Simplification regulations covering a time span of 10 years, beginning in 2002. That analysis did not include electronic attachments to health care claims because no standard was forthcoming at that time. However, electronic attachments are viewed as a minor incremental cost compared to the total cost assessed in the August 2000 Transactions Rule, because covered entities have readied their systems for the other X12 transactions and will have ample experience with X12 by the time the final rule for electronic health care claims attachments is effective. The analysis here can be an adjunct to that which was provided in the Transactions Rule, since the volume of attachments is directly related to the volume of health care claims.

As we note earlier, data and information about claims attachments was gleaned primarily from the 1993 WEDI report entitled: "The 1993 WEDI Report and Recommendations." Some other general data on claim volumes was gathered from a CY2000 publication from Health Data Management and anecdotally, from informal discussions with industry representatives of health plans and vendors. There were no surveys or proprietary data available from the BlueCross BlueShield Association (BCBSA), the American Medical Association (AMA), the American Hospital Association (AHA), America’s Health Insurance Plans (AHIP), The Association for Electronic Health Care Transactions (AFEHCT), X12, HL7 or any other professional organization or SDO.

The 1993 study by WEDI suggested that 25 percent of all health care claims required support by an attachment or additional documentation. Though these data on attachments are over 10 years old, they are currently the only set of broad-based information available from the industry. We acknowledge that this 1993 statistic does not take into account changes that have occurred following implementation of the HIPAA Transaction and Privacy Rules, nor more recent health plan business rule changes for how claims are adjudicated and what attachments are now being requested. Nonetheless, these are the most comprehensive data available. If current attachment statistics exist, we hope the industry and/or its representatives will provide those data during the comment period.

We also assume in this impact analysis that electronic health care claims attachments would not be implemented at all, and certainly not with uniform standards, in the absence of this rule. This assumption is based on direct industry comment, and current industry practice to date—very few attachments are being sent electronically today; and vendors, health plans and health care providers say that they will not move forward on this until the HIPAA standards are adopted. The early evidence from the current pilot bears this out, as the hospital providers have said that they will not undertake full scale implementation until the regulation is published.

The following assumptions are based upon anecdotal comments by industry professionals, as well as the Department’s general knowledge of present circumstances in the health care industry. Beyond our anecdotal information, and subsequent assumptions, the only available data we have for hospitals and physicians, indicates that their services represent over 50 percent of the claims submitted annually. Furthermore, their services are likely to be those most affected by the six electronic attachments proposed in this rule. One subject matter expert from a national health plan indicated that 50 percent of all claims attachments are likely to be represented by the six attachment types named here. We request comments and any data that will supplement these and all other assumptions in this section:

• Few health care claims attachments are requested or submitted using an electronic format of any kind.
• Preparation and processing of electronic claims attachments (requests and responses) will entail workload effort that is similar in complexity and duration as that associated with the preparation and processing of an electronic claim, for both health care providers and health plans.
• The volume of unsolicited attachments accompanying original health care claims today is relatively small.
• Health care providers will not all be equally impacted by the electronic claims attachment standards. Some health care provider types (for example, ambulance companies, providers of rehabilitation services, and hospitals or other facilities that operate emergency departments) are more likely to elect to conduct attachment transactions electronically because of the frequency of the requests. Other health care providers may decide to implement the transactions later, opting to continue providing requested information via paper-to-paper fax or paper copies in the short term.

The cost and benefit analysis is separated into various sub-sections below. In addition, there is a section that discusses the financial impact of implementation covering a five-year time span, from 2007 to 2011. We use a five-year time span to match the remainder of the 10-year period that was used in the Transaction Rule; that analysis calculated costs and benefits through 2011.

2. Cost and Benefit Analysis for Health Plans

a. Health plans may incur the following implementation costs:

• Learning about and training staff on the new claims attachment standards, the X12 implementation guides, HL7 AIS booklets, and LOINC codes.
• Programming systems to accommodate the new transaction types, messaging standards, and codes.
• Installing LOINC codes.
• Mapping the LOINC codes to the current attachment request reason codes.
• Acquiring translator capability to process HL7 messages.
• Telecommunication expansion.
• Server expansion to retain electronic records.
• Other potential software upgrades for browsing, translating, and validating, as well as internal controlling or messaging/routing functions.
• Health care clearinghouse fees.
• Acquiring XML expertise.
• Changing business practices and retraining staff to accommodate electronic attachments versus paper attachments and records.

These items should not represent unusual expenditures, as some of the same kinds of tasks will have been accomplished through HIPAA Transaction compliance activities. We also understand that several firms that provide translators already have HL7 capabilities in their HIPAA-capable translators.

b. Health plan savings could accrue from:

• Using standardized attachment requests.
• Receiving consistent response information.
• Eliminating paper documents and the manual efforts to request, receive, process, and handle the documents.
• Reducing postage costs.
• The ability to electronically adjudicate health care claims supported by an electronically submitted attachment.

We solicit industry input as to the anticipated implementation costs for technical, business and operational changes that may be required, as well as anticipated savings.

3. Cost and Benefit Analysis for Covered Health Care Providers

a. Covered health care providers may incur the following implementation costs:

• Learning about and training staff on the new electronic claims attachment standards, the X12 implementation guides, HL7 AIS and LOINC codes.
• Programming systems to accommodate the new transaction types, messaging standards, and codes.
• Mapping the LOINC codes to current proprietary codes.
• Installing LOINC codes.
• Software and/or vendor fees.
• Practice management system vendor fees and charges.
• Health care clearinghouse fees.
• Changing business practices and retraining staff to enter different data, perform different functions, conduct different procedures.
• Purchasing or expanding server space.
• Acquiring XML expertise.
• Purchasing or enhancing translator software.
• Telecommunication expansion.
• Utility conversion programs.

Again, many of these items should not represent unusual expenditures for covered health care providers and/or their business associates, as some of the same kinds of tasks will have been accomplished through HIPAA transactions compliance activities to date. Small practices that have practice management or software maintenance agreements are likely to be provided with appropriate software upgrades at modest costs, in view of the market competition for that business sector. Covered health care providers with their own EDI software may incur some added costs to obtain HL7 capabilities for their translators. The costs for covered health care providers to implement this proposal for electronic attachments to health care claims are not considered to be significant and many implementation costs for transactions were estimated to be one-time expenditures rather than recurring ones.

b. Savings could accrue from the following:

• Use of standardized, predictable attachments, and formats rather than numerous proprietary forms associated with individual health plan requirements.
• Reduction of paper documents and manual efforts to receive, process, and respond to requests.
• Reduction in postage and mailing costs.
• Reduction in labor costs.
• Minimization of ambiguities, which frequently result in multiple communication exchanges before the desired information is correctly identified and provided.
• Application of automation by covered health care providers with electronic record systems to support the rapid retrieval of information, and respond to requests.
• More accurate tracking and receipt of attachment information, resulting in fewer lost documents.
• Receipt of payment more quickly.

We solicit industry input as to the anticipated implementation costs for technical, business and operational changes that may be required, as well as on anticipated savings.

We do not make any assumptions about the fiscal impact to clearinghouses, because there was no baseline data in the 1993 WEDI report, and no current data on their costs for implementing the HIPAA transactions over the past several years. Nonetheless, we believe that costs would be similar to those incurred by both health plans and health care providers, because of the programming, mapping, translating and storage functions for which they may be responsible. We anticipate that AFEHCT, HIMSS and AHIMA, to name a few associations, will compile data on costs and potential savings for their constituents in order to avoid concerns over proprietary and competitive data. Such deidentified data may be useful for comments on this proposal. A vendor forum held in August 2005 may encourage analysis within the industry itself.

4. Cost and Benefit Estimates

a. Costs of Implementation: The transaction standards proposed in this rule are in the same family of X12 standards as the other HIPAA-mandated transactions. Therefore, any new activities necessary to implement the electronic health care claims attachment transactions should be consistent with what has already been done, and may be largely in place. The HL7 message standard is used in many clinical settings already, and laboratories and some other health care organizations use the LOINC codes.

While the Department had estimated costs in the impact analysis for the other transactions adopted under the Transaction Rule, we believe that covered entities now have data regarding the actual costs for this implementation, and are themselves in the best position to provide current data regarding the implementation costs of this proposal.

The 1993 WEDI report did not provide data specific to claims attachments, and no reports since that time have attempted to quantify volumes or costs. The report was extremely limited in data for health plans on this subject.

In light of existing limitations, we repeat our solicitation for implementation cost information from affected entities. We are providing highlevel cost and savings estimates in this proposed rule based on the 1993 data and the final Transactions Rule. Anecdotally, we have heard from industry representatives that implementing the standards for electronic health care claims attachments would likely cost 10 percent of what covered entities expended on their overall HIPAA implementation efforts. We use this figure for our cost estimates below. It is the only current figure available, following extensive research and discussion over the past 18 months. If the industry submits sufficiently robust data to allow for a reasonable analysis of costs and savings, updated estimates may be provided in the final rule on these standards.

The tables below illustrate the estimated costs for health plans and health care providers to implement electronic health care claims attachments.

We used Table 4 from the Transactions Rule to demonstrate an estimate of implementation costs for electronic health care claims attachments for both health plans and providers. Using the recent informal industry estimate that implementation of the electronic health care claims attachments standards would cost 10 percent of what covered entities spent on overall HIPAA implementation yields an estimate of $120 million in each of the first 2 years for both sectors. The first 3 years are deemed to have the implementation costs, while future expenses are related to operations, and not reflected in implementation estimates.

b. Benefits of Implementation In order to estimate the benefits of electronic claims attachments, we applied the methodology described below. According to Gartner, Inc., a management research and consulting firm, 5.1 billion health care claims were submitted in the year 2000. Furthermore, of the 5.1 billion health claims submitted, Gartner believes that 486 million claims were from hospitals and 1.9 billion claims were from physicians. This translates to approximately 10 percent and 38 percent of all health claims being submitted by hospitals and physicians respectively.

To predict a trend for total annual physician and hospital claims beyond the year 2000 figures provided by the consulting firm, we used the CMS growth rates of Medicare Parts A & B claims from 2001 through 2005 listed in the CMS Justification of Estimates for Appropriations Committees Fiscal Year 2005 Report (DHHS)) and applied those as the associated growth rates for our physician and hospital health claims model for 2001 through 2005. Furthermore, for the years 2006 through 2011, we assumed the continued 2005 Parts A and B average growth rate of 4 percent for physician and hospital claims. Table 4 below, Total Health Care Claims (in millions), presents a lowhigh sensitivity range for the number of physician and hospital claims for years 2007 through 2011. Our model uses 2007 as the first year; since this is the anticipated year covered entities will need to be compliant with the regulation.

As stated earlier, this proposed rule uses a 5-year period for its analysis, in order to synchronize its potential implementation schedule with the date line established in the original Transactions Rule. Since the initial compliance date for the Transactions Rule was 2002, the end date for that analysis was 2011. In this proposed rule, we begin our estimates in 2007, and end in 2011.

The Table below (Table 4) reflects the estimated number of claims for years 2007 through 2011. As part of a sensitivity analysis, the high numbers reflect a 30 percent increase in the claims count for the same years.

The 1993 WEDI Report concluded that 25 percent of all health care claims require some sort of additional documentation, or attachment. Current anecdotal estimates are that 50 percent of all attachments are represented by those included in this proposed rule. As these are the only data available, we assumed 50 percent of the rate of 25 percent for attachments on our estimated physician and hospital health claims for each year from 2007 through 2011; or 12.5 percent of all claims. We know this results in a large number of potential claims attachments; and this number is undoubtedly higher than the number of claims that might actually require one of the six electronic attachment types proposed here. Nonetheless, we do not have any hard industry data on what percent of claims are submitted for the six service and procedure electronic claims attachment types proposed here, nor what volumes these represent of the total number of attachment types required by a significant number of health plans. Again, we solicit data from health care providers and health plans on this topic.

Table 5 shows the number of electronic health care claims attachments that could potentially be required for health care claims (in millions), in spite of the increase in electronic data exchange through the other HIPAA transactions. The data are shown from a low range to a high range to demonstrate that the volumes are large in either case.

According to the 1993 WEDI Report, operational savings per transaction through the use of electronically submitted claims varies between $1.01 to $1.96 for physicians and $0.64 to $1.07 for hospitals, net of transaction costs (assumed to be up to $0.50 per claim). WEDI believed that conversion from a paper-based process to an electronic transaction process would include savings on labor costs as a result of standardized information and procedures, and a decrease in nonpersonnel expenses such as postage, telephone, and forms. Other savings may accrue to covered health care providers because they will experience a reduction in the days between claims submission and claims payment. Since there was no other quantitative information from the industry outlining the costs and benefits of the transition to EDI, we constructed our estimates by using the WEDI operational savings figures above in our assumptions and calculations. We note here that the WEDI report did not estimate a per transaction cost for electronic attachments or medical records exchange between a health care provider and a health plan. WEDI provided an estimate of a net savings potential of $1.5 billion in labor from copying and shipment of medical records between health care providers, though not for the purpose of claims attachments.

For physicians, we assumed the WEDI operational savings of $1.01 within our low category and $1.96 within our high category for each of the five-year calculations. For hospitals, we assumed the WEDI operational savings of $0.64 within our low category and $1.07 within our high category for each of the five-year calculations. We do not provide any savings assumptions for health plans, as no relevant data were available
through any reports shared with us. We hope that the health plan industry will submit such data to HHS during the comment period. We also note here that operational savings calculations include costs and savings (costs less savings equal operational savings with this methodology). In this proposed rule, we attempt to reflect cost and savings estimates based on available research as well as current informal and anecdotal input from industry subject matter experts.

Table 6, Operational Savings from Electronic Health Care Claims Attachments (in $ millions), shows the total operational savings that could be achieved. The calculations for number of claims attachments are made using the figures in Table 5 and the WEDI savings assumptions for physicians and hospitals.

Next, we assumed a fairly optimistic rate of adoption for the electronic health care claims attachment transactions, because, based on Medicare’s experience, two years past the compliance date for the original set of transactions, 99 percent of the claims being submitted are in HIPAA compliant formats. We believe that most covered entities will choose to implement the human variant option first, which does not have significant technical complexities. Therefore, we use the following conversion factors, or "adoption rates" from paper to electronic attachments: 5 percent for 2007, 20 percent for 2008, 50 percent for 2009, 75 percent for 2010, and 90 percent for 2011. For example, using the low end of attachment volumes found in Table 5, 5 percent of the 354 million attachments (total low) for physician claims are expected to be converted from paper to electronic processing by the end of the year 2007. We used lower conversion rates for the first few years of implementation because not all paper attachments can automatically be moved to an electronic process; and only six attachment types have approved HL7 specifications at present. The conversion factors were based on the 1993 WEDI report, which as has been stated, remains the only available data source. However, as mentioned earlier, HIPAA compliance and adoption rates are promising, just 2 years after the compliance date.

Table 7 represents operational savings from electronic health care claims attachments using the estimated conversion factors. We took the operational savings figures shown in Table 6 and applied the conversion rates for each of the five years.

In its A–4 circular, the Office of Management and Budget (OMB) requires all cost-benefit analyses to provide estimates of net benefits using both 3 percent and 7 percent discount rates (Office of Management and Budget, Circular A–4, September 17, 2003). Table 8, 5-Year (2007 through 2011) Total Operational Savings (in $ millions), shows the potential savings that could be attained for physicians and hospitals when using the standard for electronic attachments. These figures take into account both undiscounted and discounted (3 percent and 7 percent) amounts, respectively, as well as annualized savings.

As final explanation of our use of the older formal data, and current informal estimates, in preparing this proposed rule we conducted extensive research to obtain up-to-date information. Data regarding paper versus electronic claims were not available beyond the year 2000, perhaps in preparation for HIPAA and the assumption that data would be available post implementation. We used a variety of other resources, including Medicare claims data, external research organizations such as Gartner, and contractors to estimate the number of electronic health care claims attachments, conversion rates, operational savings for each conversion factor, and total operation savings. The newly established Office of the National Cordinator for Health Information Technology (ONCHIT) also did not have current data that have provided any further insight for the impact analysis. Studies pertaining to the adoption of electronic medical record systems (EMR or EHR) and the integration of those with financial and administrative systems may be able to provide some useful information for the final rule in a few years time, but there is none available today related to electronic health care claims attachments.

OMB requires that all agencies provide estimates using net present values. OMB recommends the use of 3 percent and 7 percent discount rates based on current cost of capital. The discounted totals in Table 8 are based on these rates, and begin in 2007.

5. Conclusions

As shown in Table 3, Costs Associated with Electronic Health Care Claims Attachments, the estimated costs are $120 million dollars for the first 2 years, and slightly less in the third year. With regard to operational savings, the range is from $414 million to $1.1 billion over five years. In calendar year 2007, maximum operational savings, for both physicians and hospitals, is estimated to range between $414 million to $1 billion.

When we use the term "conversion rate," we use it to mean the transition from a paper-based system to an EDI based process. As table 7 shows, using the assumed first year conversion rate of 5 percent yields an estimated total operational savings range of $21 million to $51 million. For 2008, the estimated operational savings, for both physicians and hospitals, ranges between $431 million and $1 billion. Using the assumed second year conversion rate of 20 percent could yield an estimated total operational savings range of $86 million to $213 million. For 2009, the estimated operational savings, for both physicians and hospitals, ranges between $448 million and $1.1 billion. Using the assumed third year conversion rate of 50 percent yields an estimated total operational savings range of $224 million to $554 million. In 2010, the estimated operational savings, for both physicians and hospitals, ranges between $466 million and $1.1 billion. Using the assumed fourth year conversion rate of 75 percent yields an estimated operational savings range of $349 million to $865 million. In 2011, the estimated total maximum operational savings, for both physicians and hospitals, ranges between $485 million and $1 billion. Using the assumed fifth year conversion rate of 90 percent yields an estimated total operational savings range of $436 million to $1 billion.

The 5-year (2007 through 2011) total operational savings presented in Table 8 shows a total operational savings range, for physicians and hospitals, of $1 billion to $2.5 billion, using the 3 percent discounted rate. While using the 7 percent discounted rate translates to a total operational savings range of $915 million to $2.2 billion. In addition, this table shows an annualized operational savings range, for physicians and hospitals, between $205 million and $506 million using the 3 percent discounted rate, and between $183 million and $453 million using the 7 percent discounted rate.

In accordance with the provisions of Executive Order 12866, this proposed rule has been reviewed by the Office of Management and Budget.

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