Standards for Electronic Transactions and Code Sets

VI. Final Impact Analysis

A. Executive Summary

Title II of the Health Insurance Portability and Accountability Act (HIPAA) provides a statutory framework for the establishment of a comprehensive set of standards for the electronic transmission of health information. Pursuant to this Title, the Department of Health and Human Services published proposed regulations concerning electronic transactions and code sets (May, 1998), national standard health care provider identifier (May, 1998), national standard employer identifier (June, 1998), security and electronic signature standards (August, 1998), and standards for privacy of individually identifiable health information (November, 1999).

Currently, there are numerous electronic codes available in the market. Without government action, a common standard might eventually emerge as the result of technological or market dominance. However, the uneven distribution of costs and benefits may have hindered the development of a voluntary industry-wide standard. Congress concluded that the current market is deadlocked and that the health care industry would benefit in the long run if government action were taken now to establish an industry standard. This approach, however, does entail some risks. For example, whenever the government chooses a standard, even one that is the best available at any point in time, the incentives to develop a better standard may be diminished because there is virtually no market competition and government-led standards often take longer to develop than those developed as the result of market pressures. The approach taken in this regulation is designed to encourage and capitalize on market forces to update standards as needs and technology change and have the government respond as quickly and efficiently as possible to them.

As discussed in the proposals, the regulations will provide a consistent and efficient set of rules for the handling and protection of health information. The framework established by these administrative simplification regulations is sufficiently flexible to adapt to a health system that is becoming increasingly complex through mergers, contractual relationships, and technical and telecommunication changes. Moreover, the promulgation of a final privacy standard will enhance public confidence that highly personal and sensitive information is being properly protected, and therefore, it will enhance the public acceptance of increased use of electronic systems. Collectively, the standards that will be promulgated under Title II can be expected to accelerate the growth of electronic transactions and information exchange in health care.

The final Impact Analysis provides estimates based on more current information and more refined assumptions than the original NPRM analysis. Since the original estimates were made, some of the voluntary development and investment in technology that was anticipated at the time of the proposal was diverted or delayed because of Y2K concerns; the investment is still expected but the timing of it has been delayed. The analysis utilizes more current data and reflects refinements in underlying assumptions based on the public comments and other information that has been collected on market changes. In addition, this analysis extended the time period for measuring costs and savings from five years to ten years. Given that the HIPAA provisions require initial expenses but subsequently produce a steady stream of savings, a ten year analysis more accurately measures the impact of the regulations.

This final rule has been classified as a major rule subject to Congressional review. The effective date is [OFR--INSERT 60 days after publication in the Federal Register]. If, however, at the conclusion of the Congressional review process the effective date has been changed, we will publish a document in the Federal Register to establish the actual effective date or to issue a notice of termination of the final rule action.

Therefore, the following analysis includes the expected costs and benefits of the administration simplification regulations related to electronic systems for ten years. Although only the electronic transactions standards are being promulgated in this regulation, the Department expects affected parties to make systems compliance investments collectively because the regulations are so integrated. Moreover, the data available to us are also based on the collective requirements of the regulations; it is not feasible to identify the incremental technological and computer costs for each regulation based on currently available data. The Department acknowledges that the aggregate impact analysis does not provide the information necessary to assess the choice of specific standards.

The costs of implementing the standards specified in the statute are primarily one-time or short-term costs related to conversion. These costs include system conversion/upgrade costs, start-up costs of automation, training costs, and costs associated with implementation problems. These costs will be incurred during the first three years of implementation. Although there may be some ongoing maintenance costs associated with these changes, vendors are likely to include these costs as part of the purchase price. Plans and providers may choose to upgrade their systems beyond the initial upgrade required by the rule as technology improves over time. Since the rule only requires an initial systems upgrade, the costs of future upgrades are not included in the cost estimate of the rule. The benefits of EDI include reduction in manual data entry, elimination of postal service delays, elimination of the costs associated with the use of paper forms, and the enhanced ability of participants in the market to interact with each other.

In this analysis, the Department has used conservative assumptions and it has taken into account the effects of the trend in recent years toward electronic health care transactions. Based on this analysis, the Department has determined that the benefits attributable to the implementation of administrative simplification regulations will accrue almost immediately but will not exceed costs incurred by health care providers and health plans until after the second year of implementation. After the second year, however, the benefits will continue to accrue for an extended period of time. The total net savings for the period 2002-2011will be $29.9 billion (a net savings of $13.1 billion for health plans, and a net savings of $16.7 billion for health care providers). The single year net savings for the year 2011 will be $5.6 billion ($2.5 billion for health plans and $3.1 billion for health care providers). The discounted present value of these savings is $19.1 billion over the ten years. These estimates do not include the sizeable secondary benefits that are likely to occur through expanded e-commerce resulting from standardized systems.

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

B. Guiding Principles for Standard Selection

The implementation teams charged with designating standards under the statute have defined, with significant input from the health care industry, a set of common criteria for evaluating potential standards. These criteria are based on direct specifications in the HIPAA, the purpose of the law, and principles that support the regulatory philosophy set forth in Executive Order 12866 of September 30, 1993, and the Paperwork Reduction Act of 1995. In order to be designated as a standard, a proposed standard should:

• Improve the efficiency and effectiveness of the health care system by leading to cost reductions for or improvements in benefits from electronic HIPAA health care transactions. This principle supports the regulatory goals of cost-effectiveness and avoidance of burden.
• Meet the needs of the health data standards user community, particularly health care providers, health plans, and health care clearinghouses. This principle supports the regulatory goal of cost-effectiveness.
• Be consistent and uniform with the other HIPAA standards (that is, their data element definitions and codes and their privacy and security requirements) and with other private and public sector health data standards to the extent possible. This principle supports the regulatory goals of consistency and avoidance of incompatibility, and it establishes a performance objective for the standard.
• Have low additional development and implementation costs relative to the benefits of using the standard. This principle supports the regulatory goals of cost-effectiveness and avoidance of burden.
• Be supported by an ANSI-accredited standard setting organization or other private or public organization that will ensure continuity and efficient updating of the standard over time. This principle supports the regulatory goal of predictability.
• Have timely development, testing, implementation, and updating procedures to achieve administrative simplification benefits faster. This principle establishes a performance objective for the standard.
• Be technologically independent of the computer platforms and transmission protocols used in HIPAA health transactions, except when they are explicitly part of the standard. This principle establishes a performance objective for the standard and supports the regulatory goal of flexibility.
• Be precise and unambiguous but as simple as possible. This principle supports the regulatory goals of predictability and simplicity.
• Keep data collection and paperwork burdens on users as low as is feasible. This principle supports the regulatory goals of cost-effectiveness and avoidance of duplication and burden.
• Incorporate flexibility to adapt more easily to changes in the health care infrastructure (such as new services, organizations, and health care provider types) and information technology. This principle supports the regulatory goals of flexibility and encouragement of innovation.

C. Introduction

The Department assessed several strategies for determining the impact of the various standards that the Secretary will designate under the statute. The costs and savings of each individual standard could be analyzed independently, or the Department could analyze the costs and savings of all the standards in the aggregate. The decision was made to base the analysis on the aggregate impact of all the standards. Given that all the standards are likely to be made final within a reasonable period of one another, it is likely that organizations will seek to make changes to comply with all the regulations at the same time, at least for those components of the regulations that require computer and technology changes. This will be the most efficient investment for most affected organizations, and the estimates the Department has obtained from industry sources are based on this assumption.

The statute gives health care providers and health plans 24 months (36 months for small health plans) to implement each standard after the effective date of the final rule. This provides the industry flexibility in determining the most cost-effective means of implementing the standards. Dictated by their own business needs, health plans and health care providers may decide to implement more than one standard at a time or to combine implementation of a standard with other system changes. As a result, overall estimates will be more accurate than individual estimates.

Assessing the benefits of implementing each standard independently could also be inaccurate. While each individual standard is beneficial, the standards as a whole have a synergistic effect on savings. For example, the combination of the standard health plan identifier and the standard claim format will improve the coordination of benefits process to a much greater extent than use of either standard individually.

It is difficult to assess the costs and benefits of such a sweeping change because no-one has historical experience with this unique area. Moreover, the standardization of electronic transactions will spur secondary innovations, particularly in e-commerce, that may be described generally but are too new to assess quantitatively. Consequently, the analysis of these secondary benefits will be qualitative.

D. Overall Cost/Benefit Analysis

To assess the impact of the HIPAA administrative simplification provisions, it is important to understand current industry practices. A 1993 study by Lewin-VHI estimated that administrative costs comprised 17 percent of total health expenditures. Paperwork inefficiencies are a component of those costs, as are the inefficiencies caused by the more than 400 different data transmission formats currently in use. Industry groups such as ANSI ASC X12N have developed standards for EDI transactions which are used by some health plans and health care providers. However, migration to these recognized standards has been hampered by the inability to develop a concerted approach. For example, even “standard” formats such as the Uniform Bill (UB-92), the standard Medicare hospital claim form (which is used by most hospitals, skilled nursing facilities, and home health agencies for inpatient and outpatient claims) are customized by health plans and health care providers.

Several reports have made estimates of the costs and/or benefits of implementing EDI standards. In assessing the impact of the HIPAA administrative simplification provisions, the Congressional Budget Office reported that:

“The direct cost of the mandates in Title II of the bill would be negligible. Health plans (and those health care providers who choose to submit claims electronically) would be required to modify their computer software to incorporate new standards as they are adopted or modified...Uniform standards would generate offsetting savings for health plans and health care providers by simplifying the claims process and coordination of benefits.” (Page 4 of the Estimate of Costs of Private Sector Mandates in the Congressional Budget Office report)

The most extensive industry analysis of the effects of EDI standards was developed by WEDI in 1993, which built upon a similar 1992 report. The WEDI report used an extensive amount of information and analysis to develop its estimates, including data from a number of EDI pilot projects. The report included a number of electronic transactions that are not covered by HIPAA, such as materials management. The WEDI report projected implementation costs ranging between $5.3 billion and $17.3 billion (3, p. 9-4) and annual savings for the transactions covered by HIPAA ranging from $8.9 billion and $20.5 billion (3, pp. 9-5 and 9-6). Lewin estimated that the data standards proposed in the Healthcare Simplification and Uniformity Act of 1993 would save from 2.0 to 3.9 percent in administrative costs annually ($2.6 to $5.2 billion based on 1991 costs) (1, p.12). A 1995 study commissioned by the New Jersey Legislature estimated yearly savings of $760 million related to EDI claims processing, reducing claims rejection, performing eligibility checks, decreasing accounts receivable, and other potential EDI applications in New Jersey alone (4, p.316).

We have drawn on the 1993 WEDI report for many of our estimates because it is the most comprehensive available. However, our conclusions differ, especially in the area of savings, for a number of reasons. The WEDI report was intended to assess the savings in an EDI environment that is much broader than is covered by HIPAA. Furthermore, EDI continued to grow through the 1990's (see Faulkner & Gray, 2000) , and it is reasonable to assume that EDI would continue to grow for the foreseeable future even without HIPAA. The Department’s objective in this analysis is to assess the effect of the legislation and these regulations on the health care sector; only a portion of the benefits of EDI identified by WEDI would be attributable to HIPAA.

E. Implementation Costs

The costs of implementing the standards specified in the statute are primarily one-time or short-term costs related to conversion. They can be characterized as follows:

1. System Conversion/Upgrade -- Health care providers and health plans will incur costs to convert existing software to utilize the standards. Health plans and large health care providers generally have their own information systems, which they maintain with in-house or contract support. Small health care providers are more likely to use off-the-shelf software developed and maintained by a vendor. Examples of software changes include the ability to generate and accept transactions using the standard (for example, claims, remittance advices) and converting or cross walking medical code sets to chosen standards. However, health care providers have considerable flexibility in determining how and when to accomplish these changes. One alternative to a complete system redesign would be to purchase a translator that reformats existing system outputs into standard transaction formats. A health plan or health care provider could also decide to implement two or more related standards at once or to implement one or more standards during a software upgrade. Each health care provider’s and health plan’s situation will differ, and each will select a cost-effective implementation scheme. Many health care providers use billing associates or health care clearinghouses to facilitate EDI. (Although we discuss billing associates and health care clearinghouses as separate entities in this impact analysis, billing associates are considered to be the same as health care clearinghouses for purposes of administrative simplification if they meet the definition of a health care clearinghouse). Those entities would also have to reprogram to accommodate standards.
2. Start-up Cost of Automation -- The statute does not require health care providers to conduct transactions electronically. To benefit from EDI, health care providers who choose to conduct electronic transactions but do not currently have electronic capabilities would have to purchase and install computer hardware and software as well as train their staffs to use the technology. However, this conversion is likely to be less costly once standards are in place because there will be more vendors providing support services. Furthermore, providers without electronic capabilities are more likely to conclude that the benefits of conducting transactions electronically justify a capital investment in EDI technology.
3. Training -- Health care provider and health plan personnel will require training on the use of the various standard identifiers, formats, and code sets. For the most part, training will be directed toward administrative personnel, though clinical staff will also need training on the new code sets. With standardization, however, vendors are more likely to offer assistance in training as a means of increasing sales, thereby reducing the per unit cost of training.
4. Implementation Problems -- The implementation of any industry-wide standards will inevitably create additional complexity in regard to how health plans and health care providers conduct business. Health plans and health care providers will need to work on re-establishing communication with their trading partners, and process transactions using the new formats, identifiers, and code sets. This is likely to result in a temporary increase in rejected transactions, manual exception processing, payment delays, and requests for additional information.

While the majority of costs are one-time costs related to implementation, there are also on-going costs associated with administrative simplification, such as subscribing to or purchasing documentation and implementation specifications related to code sets and standard formats and obtaining current health plan and health care provider identifier directories or data files. Because covered entities are already incurring most of these costs, the costs under HIPAA will be marginal. These small ongoing costs are included in the estimate of the system conversion and upgrade costs.

In addition, EDI could affect cash flow throughout the health insurance industry. Electronic claims reach the health plan faster and can be processed faster. This has the potential to improve health care providers’ cash flow situations while decreasing health plans’ earnings on cash reserves. However, improved cash flow is generally considered a benefit, particularly for small businesses.

F. Benefits of Increased Use of EDI for Health Care Transactions

Some of the benefits attributable to increased EDI can be readily quantified, while others are more intangible. For example, it is easy to compute the savings in postage from EDI claims, but attributing a dollar value to processing efficiencies is difficult.

The benefits of EDI to the industry in general are well documented in the literature. One of the most significant benefits of EDI is the reduction in manual data entry. The paper processing of business transactions requires manual data entry when the data are received and entered into a system. For example, the data on a paper health care transaction from a health care provider to a health plan have to be manually entered into the health plan’s business system. If the patient has more than one health plan, the second health plan would also have to manually enter the data into its system if it cannot receive the information electronically. Repeated keying of information transmitted via paper results in increased labor as well as significant opportunities for keying errors. EDI permits direct data transmission between computer systems which, in turn, reduces the need to rekey data.

Another problem with paper-based transactions is that these documents are primarily mailed. Normal delivery times of mailings can vary anywhere from one to several days for normal first class mail. Shipping paper documents more quickly can be expensive. While bulk mailings can reduce some costs, paper mailings remain costly. Using postal services can also lead to some uncertainty as to whether the transaction was received, unless more expensive certified mail options are pursued. A benefit of EDI is that the capability exists for the sender of the transaction to receive an electronic acknowledgment once the data is opened by the recipient. Also, because EDI involves direct computer to computer data transmission, the associated delays with postal services are eliminated. With EDI, communication service providers such as value added networks function as electronic post offices and provide 24-hour service. Value added networks deliver data instantaneously to the receiver’s electronic mailbox.

In addition to mailing time delays, there are other significant costs in using paper forms. These include the costs of maintaining an inventory of forms, typing data onto forms, addressing envelopes, and the cost of postage. The use of paper also requires significant staff resources to receive and store the paper during normal processing. The paper must be organized to permit easy retrieval if necessary.

G. The Role of Standards in Increasing the Efficiency of EDI

There was a steady increase in the use of EDI in the health care market through the late 1990's, and there is likely to be some continued growth, even without national standards. However, the upward trend in EDI health care transactions will be enhanced by having national standards in place. Because national standards are not in place today, there continues to be a proliferation of proprietary formats in the health care industry. Proprietary formats are those that are unique to an individual business. Due to proprietary formats, business partners that wish to exchange information via EDI must agree on which formats to use. Since most health care providers do business with a number of health plans, they must produce EDI transactions in many different formats. For small health care providers facing the requirement of maintaining multiple formats, this is a significant disincentive to converting to EDI.

National standards will allow for common formats and translations of electronic information that will be understandable to both the sender and receiver. Multiple electronic formats increase associated labor costs because more personnel time and more skills are required to link or translate different systems. These costs are reflected in increased office overhead, a reliance on paper and third party vendors, and communication delays. National standards eliminate the need to determine what format a trading partner is using. Standards also reduce software development and maintenance costs that are required for operating or converting multiple proprietary formats. Health care transaction standards will improve the efficiency of the EDI market and will help further persuade reluctant industry partners to choose EDI over traditional mail services.

The statute directs the Secretary to establish standards and sets out the timetable for doing so. The Secretary must designate a standard for each of the specified transactions and medical code sets. Health plans and health care providers generally conduct EDI with multiple partners and the choice of a transaction format is a bilateral decision between the sender and receiver. Many health care providers and health plans need to support many different transaction formats in order to meet the needs of all of their trading partners. Single standards will maximize net benefits and minimize ongoing confusion.

Health care providers and health plans have a great deal of flexibility in how and when they will implement standards. The statute specifies dates by which health plans will have to use adopted standards, however, health plans can determine if, when, and in which order they will implement standards before the date of mandatory compliance. Health care providers have the flexibility to determine when it is cost-effective for them to convert to EDI. Health plans and health care providers have a wide range of vendors and technologies from which to choose in implementing standards and can choose to utilize a health care clearinghouse to transmit (produce and receive) standard transactions.

H. Updated Cost and Benefit Assumptions

As mentioned above, we have made changes to the original impact analysis published in the NPRM. In response to the public comments regarding the NPRM impact analysis, the Department did a thorough review of the original assumptions and data sources. In the review process, it became clear that the original data sources required updating and that there were some inconsistencies in the original assumptions. What follows is an explanation of each change and the rationale behind the new methodology.

Ten Year Time-Frame: This Impact Analysis changes the original NPRM’s time-frame from five years to ten years. The need for this change results from the nature of the HIPAA regulations: there will be significant one-time initial investments followed by many years of savings. Because a five year impact analysis will show the full cost of the regulations but truncate the savings significantly, a ten year time-frame allows for a fuller presentation of the benefits administrative simplification offers the health care industry. As an illustration of the difference between a five year and a ten year time frame, the initial NPRM Impact Analysis estimated $1.5 billion in net savings to the industry, but a ten year analysis using identical assumptions as the original NPRM would estimate $24.2 billion in net savings. The Department believes it is more appropriate to use a time frame that more accurately estimates the long term impact of the regulations.

New Data: Given the length of time between the publication of the NPRM and the final rule, it was necessary to update data for the number of plans and providers, the number of claims, and the current proportion of claims that are electronic in the health care industry. Updated data on the number of different types of plans and providers were obtained from a variety of sources, including the 1997 Economic Census, the 1999 Statistical Abstract of the United States, the American Medical Association and other industry groups, the Department of Labor, and the Department of Health and Human Services. In the NPRM, the 1993 WEDI report was used to determine the total number of claims in the health care industry for 1993, which was trended forward using data from the 1996 edition of Faulkner and Gray’s Health Data Directory to estimate the number of claims annually over the 1998 to 2002 time frame. For the final impact analysis, we used 1999 data (the most recent available) from the 2000 edition of Faulkner and Gray’s Health Data Directory to determine the total number of claims in the industry, the number of claims by provider type, and the percent of claims that are billed electronically by provider type.

The baseline rate of growth in the number of claims and the rate of growth in the proportion of electronic claims were revised using historical trend data from the 2000 Faulkner and Gray report. In the final impact analysis, the average annual rate of growth over the 1995 to 1999 period is used to determine the annual increase in the number of claims and in the proportion of claims that are electronic, for all claims in the industry and by provider type.

New Electronic Claims Growth Assumptions: This Impact Analysis makes a refinement to the original assumptions for determining the rate of increase in electronic claims due to HIPAA. The model assumes that electronic claims submissions will increase in the first three years after the implementation at a rapid pace as many health care providers and health plans make the switch to electronic formats but then the rate will decrease over time. The model also assumes some providers will not make the transition to EDI during the ten year period. Specifically, we assumed that the proportion of manual claims will decrease by twenty percent annually from 2002 to 2005 and then will decrease by ten percent annually from 2006 to 2011. By contrast, the original NPRM model assumed the rate of increase in electronic claims would grow by two additional percentage points above the baseline rate each year.

Savings per Claim: This impact analysis uses more consistent assumptions for the savings per claim. In the original NPRM, the savings per claim for payers and each provider type was based on the ranges developed by WEDI. However, the NPRM did not consistently pick from a given point in the WEDI ranges, but rather various points were chosen for different groups based on limited anecdotal information. Upon further analysis, the Department no longer believes there is a justifiable basis to pick from different parts of the WEDI ranges, given the lack of additional evidence to support more precise assumptions. Therefore, the final impact analysis assumes the savings per claim will be at the mid-point of the WEDI ranges for payers and all providers.

Inflation Adjustment: The final Impact Analysis corrects an inconsistency found in the NPRM regarding an inflation adjustment to the annual savings per claim assumptions. Specifically, the NPRM increased the savings per claim by 3% annually to account for inflation. This adjustment was an inconsistency because no other figures in the NPRM impact analysis were adjusted for inflation. Therefore, for the final impact analysis, all dollar estimates, including the savings per claim, are in current 2000 dollars.

First Year Savings: Another change made to the impact analysis was to include savings in the first year of mandatory compliance with the rule. The NPRM assumed that there would be no savings in the first year of mandatory compliance, yet we believe that this assumption was in error because most entities must comply no later than two years after the effective date of the final rule (three years for small health plans), and therefore some savings will begin two years after publication of the rule. In fact, it could be argued that some entities will come into compliance prior to the two year deadline and begin to produce savings, but in order to produce a conservative estimate, this analysis only assumes that savings begin in the first year of mandatory compliance.

Impact of Changes: The cumulative effect of the changes made to the impact analysis increases the net savings from administrative simplification. Although the NPRM only showed five year costs and savings, the underlying analysis included ten year estimates as well. Compared to the original impact analysis, the final impact analysis increases the estimated gross costs of the rule from $5.8 billion to $7.0 billion over ten years. The original impact analysis produced gross savings of $30 billion and net savings of $24.2 billion over ten years while the new impact analysis produces gross savings of $36.9 billion and net savings of $29.9 billion over ten years. Although the new impact analysis now shows an additional $5.7 billion in savings over ten years, the Department believes the revised assumptions underlying these estimates are based on better, more up-to-date data, are more consistent, and are more reasonable. The discounted present value of the savings is $19.1 billion over ten years. Furthermore, the updated impact analysis still produces a conservative estimate of the impact of administrative simplification. For example, the new impact analysis assumes that over the ten-year post- implementation period, only 11.2% of the growth in electronic claims will be attributable to HIPAA. Given the widely recognized benefits standardization offers the health care industry, assuming that only 11.2% of all health claims will be affected by HIPAA represents a reasonably conservative estimate of the impact .

I. Cost/Benefit Tables

The tables below illustrate the essential costs and savings for health plans and health care providers to implement the standards and the savings that will occur over time as a result of the HIPAA administrative simplification provisions. All estimates are stated in 2000 dollars. The costs are based on estimates of a moderately complex set of software upgrades, which were provided by the industry. The range of costs and savings that health plans and health care providers will incur is quite large and is based on such factors as the size and complexity of the existing systems, ability to implement using existing low-cost translator software, and reliance on health care clearinghouses to create standard transactions. The cost of a moderately complex upgrade represents a reasonable mid-point in this range. In addition, we assume that health plans and health care providers that operate EDI systems will incur implementation costs related to manual operations to make those processes compatible with the EDI systems. For example, manual processes may be converted to produce paper remittance advices that contain the same data elements as the EDI standard transaction. These costs are estimated to equal 50 percent of the software upgrade cost. Health care providers that do not have existing EDI systems will also incur some costs due to HIPAA, even if they choose not to implement EDI for all of the HIPAA transactions. For example, a health care provider may have to change accounting practices in order to process the revised paper remittance advice discussed above. We have assumed the average cost for non-EDI health care providers and health plans to be half that of already- automated health care providers and health plans.

Savings due to standardization come from three sources. First, there are savings due to increased use of electronic claims submissions throughout the health care industry. Second, there will be savings based on simplification of the manual claims that remain in the system. Finally, there will be savings due to increased electronic non-claims transactions, such as eligibility verifications and coordination of benefits. It is important to view these estimates as an attempt to furnish a realistic context rather than as precise budgetary predictions. The estimates also do not include any benefits attributable to the qualitative aspects of administrative simplification, nor is there any inclusion of secondary benefits. Industry people have argued that standardization will accelerate many forms of new e-commerce. These innovations may generate significant savings to the health care system or improvements in the quality of health but they have not been included here.

More detailed information regarding data sources and assumptions is provided in the explanations for the specific tables.

Table 1 below shows estimated costs and savings for health plans. The number of plans listed in the chart is derived from the 1993 WEDI report, trade publications, and data from the Department of Labor. The cost per health plan for software upgrades is based on the WEDI report, which estimated a range of costs required to implement a fully capable EDI environment, and more current estimates provided by the industry. The high-end estimates ranged from two to ten times higher than the low-end estimates. Lower end estimates were used in most cases because, as explained above, HIPAA does not require changes as extensive as envisioned by WEDI. The estimated percentages of health plans that accept electronic billing are based on reports in the 2000 edition of Faulkner & Gray’s Health Data Directory (5). The total cost for each type of health plan is the sum of the cost for EDI and non-EDI health plans. Cost for EDI health plans is computed as follows:

(Total Entities x EDI % x Average Upgrade Cost x 1.5)

(NOTE: As described above, EDI health plans would incur costs both to upgrade software and to make manual operations compatible with EDI systems. The cost of changing manual processes is estimated to be half the cost of system changes.)

Cost for non-EDI health plans is computed as follows:

Total entities x (1 - EDI %) x Average Upgrade Cost x 0.5

(NOTE: As described above, cost to non-EDI health plans is assumed to be half the cost of systems changes for EDI plans.)

The data available permit us to make reasonable estimates of the costs that will be borne by different types of health plans (Table 1). Unfortunately, though we can estimate the overall savings, we cannot reliably estimate their distributional effects. Hence, only the aggregate savings estimates are presented.

Note: The estimates in Table 1 show cost savings in 2000 dollars (estimates in the proposed rule were in 1998 dollars). The Office of Management and Budget now requires all agencies to provide estimates using a net present value calculation. Furthermore, OMB recommends the use of a 7 percent discount rate based on the current cost of capital. The discounted totals in the table are based on this rate beginning in 2003.

Table 2 illustrates the costs and savings attributable to various types of health care providers.

The number of entities (practices or establishments, not individual health care providers) is based on the 1997 Economic Census, the 1999 Statistical Abstract of the United States, the American Medical Association’s Physician Characteristics and Distribution in the U.S. (2000- 2001 edition), and Department of Health and Human Services data trended to 2002. Estimated percentages of EDI billing are based on the 2000 edition of Faulkner & Gray’s Health Data Directory or are Departmental estimates.

The cost of software upgrades for personal computers (PCS) in provider practices or establishments is based on reports of the cost of software upgrades to translate and communicate standardized claims forms. The low end of the range of costs is used for smaller practices or establishments and the high end of the range of costs for larger practices/establishments with PCS. The cost per upgrade estimate for hospitals and other facilities is a Departmental estimate derived from estimates by WEDI and estimates of the cost of new software packages in the literature. The estimates fall within the range of the WEDI estimates, but that range is quite large. For example, WEDI estimates that the cost for a large hospital upgrade will be from $50,000 to $500,000.

The $20.2 billion in savings in Table 4 represents savings to health care providers for the first ten years of implementation. The discounted present value of these savings is $19.1 billion over ten years. They are included to provide a sense of how the HIPAA administrative simplification provisions will affect various entities.

Note: The estimates in Table 2 show cost savings in 2000 dollars (estimates in the proposed rule were in 1998 dollars). The Office of Management and Budget now requires all agencies to provide estimates using a net present value calculation. Furthermore, OMB recommends the use of a 7 percent discount rate based on the current cost of capital. The discounted totals in the table are based on this rate beginning in 2003.

Table 3 shows the estimates we used to determine the portion of EDI claims increase attributable to the HIPAA administrative simplification provisions. The proportion of claims that would be processed electronically even without HIPAA is assumed to grow at the same rate from 2002 through 2011 as it did from 1995-1999. The proportion of “other” health care provider claims is high because it includes pharmacies that generate large volumes of claims and have a high rate of electronic billing.

The increase in EDI claims attributable to HIPAA is highly uncertain and is critical to the savings estimate. These estimates are based on an analysis of the current EDI environment. Most of the growth rate in electronic billing is attributable to Medicare and Medicaid; smaller private insurers and third party administrators (who are not large commercial insurers) have lower rates of electronic billing and may benefit significantly from standardization.

Table 4 shows the annual costs, savings, and net savings over a ten year implementation period which are gained by using the HIPAA standards. Virtually all of the costs attributable to HIPAA will be incurred within the first three years of implementation, since the statute requires health plans other than small health plans to implement the standards within 24 months and small health plans to implement the standards within 36 months of the effective date of the final rule. As each health plan implements a standard, health care providers that conduct electronic transactions with that health plan will also implement the standard. No net savings would accrue in the first year because not enough health plans and health care providers will have implemented the standards. Savings will increase as more health plans and health care providers implement the standards, thus exceeding costs in the fourth year. At that point, the majority of health plans and health care providers will have implemented the standards and, as a result, costs will decrease and benefits will increase.

The savings per claim processed electronically instead of manually is based on the mid- point of the range estimated by WEDI.: $1 per claim for health plans, $1.49 for physicians, $0.86 for hospitals and $0.83 for others. These estimates are based on surveys of health care providers and health plans. Total savings are computed by multiplying the per claim savings by the number of EDI claims attributed to HIPAA. The total number of EDI claims is used in computing the savings to health plans, while the savings for specific health care provider groups is computed using only the number of EDI claims generated by that group (for example, savings to physicians is computed using only physician EDI claims).

WEDI also estimated savings resulting from other HIPAA transactions, such as eligibility verifications, coordination of benefits, and claims inquiries (among others). The average savings per transaction was slightly higher than the savings from electronic billing, but the number of transactions was much smaller than the number of claims transactions. The estimates for transactions other than claims were derived by approximating a number of transactions and estimating the anticipated savings associated with each transaction relative to those assumed for the savings for electronic billing (see table 5). In general, the approximations are close to those used by WEDI. For these non-billing transactions, the Department assumed that the simplification promoted by HIPAA will facilitate a significant conversion from manual to electronic formats. While today it is estimated that about 44% of these non-billing transactions are electronic, by the end of the ten year period it is estimated that 92% will become electronic.

Savings can also be expected from simplifications in manual claims. The basic assumption is that the savings are ten percent of savings per claim that are projected for conversion from manual to electronic billing. However, it is also assumed that the standards will only gradually allow health care providers and health plans to abandon old manual forms and identifiers by 10% annually; this staged transition is inevitable because many of the relationships that have been established with other entities will require a period of overlap during transitioning with entities with which they do business.

Note: Figures do not total due to rounding.

Note: The estimates in Table 4 show cost savings in 2000 dollars (estimates in the proposed rule were in 1998 dollars). The Office of Management and Budget now requires all agencies to provide estimates using a net present value calculation. Furthermore, OMB recommends the use of a 7 percent discount rate based on the current cost of capital. The discounted totals in the table are based on this rate beginning in 2003.

The ratios in Table 5 were derived from the WEDI Report, which estimated the volume and savings of the listed non-billing transactions. By comparing the relationship between billing volume and savings to non-billing volume and savings, it is possible to estimate total savings due to other transactions. These ratios were used because the billing data has been updated by the Faulkner and Gray Health Data Directory, but WEDI has not updated the estimates for non- billing transactions. Therefore, this model implicitly assumes that the ratio of billing transactions to non-billing transactions has remained constant since 1993.

J. Qualitative Impacts of Administrative Simplification

Administration simplification produces more than hard-dollar savings. There are also qualitative benefits that are less tangible, but nevertheless important. These changes become possible when data can be more easily integrated across entities. WEDI suggests in its 1993 report that the implementation of an EDI infrastructure will cause a “ripple-effect” on the whole health care delivery system; this chain reaction will occur because there will be a reduction in duplicate medical procedures and processes as a patient is handled by a continuum of health care providers during an episode of care. WEDI also suggests that there will be a reduction in the exposure to health care fraud as security controls on electronic transactions will prevent unauthorized access to financial data.

Standards may also reduce administrative burden and improve job satisfaction. For example, fewer administrative staff will be required to translate procedural codes, since a common set of codes will be used. All codes used in these transactions will be standardized, eliminating different values for data elements (for example, place of service).

Administrative simplification will promote the accuracy, reliability and usefulness of the information shared. For example, today there are any number of transaction formats in use. There are over 400 variations of electronic formats for claims transactions alone. As noted earlier, these variations make it difficult for parties to exchange information electronically. At a minimum, it requires data to be translated from the sender’s own format to the different formats specified by each intended receiver. Translation usually requires additional equipment and labor.

Administrative simplification greatly enhances the sharing of data both within entities and across entities. It facilitates the coordination of benefits information by having in place a standardized set of data that is known to all parties, along with standardized name and address information that tells where to route transactions. Today, health care providers are reluctant to file claims with multiple health plans on behalf of the patient because information about a patient’s eligibility in a health plan is difficult to verify. Most claims filed by patients today are submitted in hard copy. We anticipate that more health care providers will file claims and coordinate benefits on the patient’s behalf once standard transactions are adopted and this information is made available electronically.

K. Regulatory Flexibility Analysis

The Regulatory Flexibility Act (RFA) of 1980, Public Law 96-354, requires the Department to prepare a regulatory flexibility analysis if the Secretary certifies that a proposed regulation will have a significant economic impact on a substantial number of small entities. In the health care sector, a small entity is one with less than $5 million in annual revenues. For the purposes of this analysis (pursuant to the RFA), nonprofit organizations are considered small entities; however, individuals and States are not included in the definition of a small entity. We have attempted to estimate the number of small entities and provide a general discussion of the effects of the statute.

For the purpose of this analysis, all 31 nonprofit Blue Cross-Blue Shield Health Plans are considered small entities. 28% of HMOs are considered small entities because of their nonprofit status. Doctors of osteopathy, dentistry, podiatry, as well as chiropractors, and solo and group physicians’ offices with fewer than three physicians, are considered small entities. Forty percent of group practices with 3 or more physicians and 100 percent of optometrist practices are considered small entities. Seventy-two percent of all pharmacies, 88% of medical laboratories, 100% of dental laboratories and 90% of durable medical equipment suppliers are assumed to be small entities as well.

We found the best source for information about the health data information industry is Faulkner & Gray’s Health Data Directory. This publication is the most comprehensive data dictionary of its kind that we could find. The information in this directory is gathered by Faulkner & Gray editors and researchers who called all of the more than 3,000 organizations that are listed in the book in order to elicit information about their operations. It is important to note that some businesses are listed as more than one type of business entity; this is because in reporting the information, companies could list themselves as many as three different types of entities. For example, some businesses listed themselves as both practice management vendors and claims software vendors because their practice management software was “EDI enabled.”

All the statistics referencing Faulkner & Gray’s come from the 2000 edition of its Health Data Directory. It lists 78 claims clearinghouses, which are entities under contract that take electronic and paper health care claims data from health care providers and billing companies that prepare bills on a health care provider’s behalf. The claims clearinghouse acts as a conduit for health plans; it batches claims and routes transactions to the appropriate health plan in a form that expedites payment.

Of the 78 claims clearinghouses listed in this publication, eight processed more that 20 million electronic transactions per month. Another 15 handled 2 million or more transactions per month and another 4 handled over a million electronic transactions per month. The remaining 39 entities listed in the data dictionary processed less than a million electronic transactions per month. Almost all of these entities have annual revenues of under $5 million and would therefore be considered small entities.

Another entity that is involved in the electronic transmission of health care transactions is materials management/supply ordering software companies (value added networks). They are involved in the electronic transmission of data over telecommunication lines. Faulkner & Gray list 21 materials management/supply ordering software vendors that handle health care transactions. We believe that almost all of these companies meet the definition of a small business.[1]

A billing company is another entity involved in the electronic routing of health care transactions. It works primarily with physicians in office and hospital-based settings. Billing companies, in effect, take over the office administrative functions for a physician; they take information such as copies of medical notes and records and prepare claim forms that are then forwarded to an insurer for payment. Billing companies may also handle the receipt of payments, including posting payment to the patient’s record on behalf of the health care provider. They can be located within or outside of the physician’s practice setting.

In the proposed rule we stated that The International Billing Association, a trade association representing billing companies, estimated that there were 4500 billing companies in business in the United States. The International Billing Association’s estimates are based on the number of names and addresses of actual billing companies on its mailing list. Since we were unable to find more recent information about these entities, we are assuming that the number of billing companies has not changed significantly and that all of the 4500 billing companies continue to have revenues under $5 million annually.

Software system vendors provide computer software applications support to health care clearinghouses, billing companies, and health care providers. In particular, they work with health care providers’ practice management and health information systems. These businesses provide integrated software applications for such services as accounts receivable management, electronic claims submission (patient billing), record keeping, patient charting, practice analysis and patient scheduling. Some software vendors are also involved in providing applications for translating paper and nonstandard computer documents into standardized formats that are acceptable to health plans.

Faulkner & Gray list 78 physician practice management vendors and suppliers, 76 hospital information systems vendors and suppliers, 140 software vendors and suppliers for claims-related transactions, and 20 translation vendors (now known as Interface Engines/ Integration Tools). We were unable to determine the number of these entities with revenues over $5 million, but we assume most of these businesses would be considered small entities.

As discussed earlier in this analysis, the cost of implementing the standards specified in the statute are primarily one-time or short-term costs related to conversion. They were characterized as follows: software conversion; cost of automation; training; implementation problems; and cost of documentation and implementation specifications. Rather than repeat that information here, we refer you to the beginning of this impact analysis.

1. Health care Providers and Health Plans

As a result of standard data format and content, health care providers and health plans that wish to do business electronically will be able to do so knowing that capital outlays they make are likely to be worthwhile, with some certainty on the return of their investment. This is because covered entities that exchange electronic health care transactions will be required to receive and send transactions in the same standard formats. We believe this will be an incentive for small physicians’ offices to convert from paper to EDI. In a 1996 Office of the Inspector General study entitled “Encouraging Physicians to Use Paperless Claims,” the Office of the Inspector General and HCFA agreed that over $36 million in annual Medicare claims processing savings could be achieved if all health care providers submitting 50 or more Medicare claims per month submitted them electronically. Establishment of EDI standards will make it financially beneficial for many small health care providers to convert to electronic claim submissions because all health plans will accept the same formats.

Additionally, health care providers that currently use health care clearinghouses and billing agencies will see costs stabilize and will potentially enjoy some cost reduction. This will result from the increased efficiency that health care clearinghouses and billing companies will realize from being able to more easily link with health care industry business partners.

2. Third Party Vendors

Third party vendors include third party processors/health care clearinghouses (including value added networks), billing companies, and software system vendors. While the market for third party vendors will change as a result of standardization, these changes will be positive for the industry and its customers over the long term. However, the short term/one time costs discussed above will apply to the third party vendor community.

a. Health Care Clearinghouses and Billing Companies

As noted above, health care clearinghouses are entities that take health care transactions, convert them into standardized formats, and forward them to the insurer. Billing companies take on the administrative functions of a physician’s office. The market for health care clearinghouse and billing company services will definitely be affected by the HIPAA administrative simplification provisions; however, there appears to be some debate on how the market for these services will be affected.

It is likely that competition among health care clearinghouses and billing companies will increase over time as standards reduce some of the technical limitations that currently inhibit health care providers from conducting their own EDI. For example, by eliminating the requirement to maintain several different claims standards for different trading partners, health care providers will be able to more easily link themselves directly to health plans. This could negatively affect the market for health care clearinghouses and system vendors that do translation services; however, standards should increase the efficiency in which health care clearinghouses operate by allowing them to more easily link to multiple health plans. The increased efficiency in operations resulting from standards could, in effect, lower their overhead costs as well as attract new health care clearinghouse customers to offset any loss in market share that they might experience.

Another potential area of change is that brought about through standardized code sets. Standard code sets will lower costs and break down logistical barriers that discouraged some health care providers from doing their own coding and billing. As a result, some health care providers may choose an in-house transaction system rather than using a billing company as a means of exercising more control over information. Conversely, health care clearinghouses may acquire some short-term increase in business from those health care providers that are automated but do not use the selected standards. These health care providers will hire health care clearinghouses to take data from the nonstandard formats they are using and convert them into the appropriate standards. Generally, health care clearinghouses can also be expected to identify opportunities in which they could add value to transaction processing and to find new business opportunities, such as in training health care providers on the new transaction sets. Standards will increase the efficiency of health care clearinghouses, which could in turn drive costs for these services down. Health care clearinghouses may be able to operate more efficiently or at a lower cost based on their ability to gain market share. Some small billing companies may be consumed by health care clearinghouses that may begin offering billing services to augment their health care clearinghouse activities. However, most health care providers that use billing companies will probably continue to do so because of the comprehensive and personalized services these companies offer.

Value added networks transmit data over telecommunication lines. We anticipate that the demand for value added network services will increase as additional health care providers and health plans move to electronic data exchange. Standards will eliminate the need for data to be reformatted, which will allow health care providers to purchase value added network services individually rather than as a component of the full range of