[Federal Register Volume 73, Number 164 (Friday, August 22, 2008)]
[Proposed Rules]
[Pages 49741-49793]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-19296]



[[Page 49741]]

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Part II





Department of Health and Human Services





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45 CFR Part 162



Health Insurance Reform; Modifications to the Health Insurance 
Portability and Accountability Act (HIPAA) Electronic Transaction 
Standards; Proposed Rule

Federal Register / Vol. 73, No. 164 / Friday, August 22, 2008 / 
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 162

[CMS-0009-P]
RIN 0938-AM50


Health Insurance Reform; Modifications to the Health Insurance 
Portability and Accountability Act (HIPAA) Electronic Transaction 
Standards

AGENCY: Office of the Secretary, HHS.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to adopt updated versions of the standards 
for electronic transactions originally adopted in the regulations 
entitled, ``Health Insurance Reform: Standards for Electronic 
Transactions,'' published in the Federal Register on August 17, 2000, 
which implemented some of the requirements of the Administrative 
Simplification subtitle of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA). These standards were modified in 
our rule entitled, ``Health Insurance Reform: Modifications to 
Electronic Data Transaction Standards and Code Sets,'' published in the 
Federal Register on February 20, 2003. This rule also proposes the 
adoption of a transaction standard for Medicaid Pharmacy Subrogation. 
In addition, this rule proposes to adopt two standards for billing 
retail pharmacy supplies and professional services, and to clarify who 
the ``senders'' and ``receivers'' are in the descriptions of certain 
transactions.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on October 21, 2008.

ADDRESSES: In commenting, please refer to file code CMS-0009-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the file code to find the document 
accepting comments.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-0009-P, P.O. Box 8014, Baltimore, MD 
21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-0009-P, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses:
    a. Room 445-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    b. 7500 Security Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.

FOR FURTHER INFORMATION CONTACT: 
    Lorraine Doo (410) 786-6597.
    Gladys Wheeler (410) 786-0273.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: All comments received before the 
close of the comment period will be available for viewing by the 
public, including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951. Copies: To order copies of the Federal Register 
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Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-
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each copy is $9. As an alternative, you may view and photocopy the 
Federal Register document at most libraries designated as Federal 
Depository Libraries and at many other public and academic libraries 
throughout the country that receive the Federal Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. The web site address is: http://www.gpoaccess.gov/fr/index.html.

Table of Contents

I. Background
    A. Legislative Background
    B. Regulatory History
    C. Standards Adoption and Modification
II. Provisions of the Proposed Rule
    A. Proposed adoption of Accredited Standards Committee X12 (ASC 
X12) Version 005010 Technical Reports Type 3 for HIPAA Transactions
    B. Proposed adoption of the National Council for Prescription 
Drug Programs (NCPDP) Telecommunication Standard Implementation 
Guide Version D, Release 0 (D.0) and Equivalent Batch Standard Batch 
Implementation Guide, Version 1, Release 2 (1.2) for Retail Pharmacy 
Transactions
    C. Proposed adoption of a standard for Medicaid Pharmacy 
Subrogation: NCPDP Medicaid Subrogation Standard Implementation 
Guide, Version 3.0 for pharmacy claims
    D. Proposal to adopt NCPDP Telecommunication Standard D.0 and 
ASC X12 Version 005010 Technical Reports Type 3 for billing retail 
pharmacy supplies and services
    E. Proposed Modifications to Descriptions of Transactions
    F. Proposed Compliance and Effective Dates
III. Collection of Information Requirements
IV. Response to Comments
V. Regulatory Impact Analysis

I. Background

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA)

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Public Law 104-191, mandated the adoption of standards for 
electronically conducting certain health care administrative 
transactions between certain entities. In the August 17, 2000 final 
rule, the Secretary adopted standards for eight electronic health care 
transactions (65 FR 50312). The Secretary adopted modifications to some 
of those standards in a February 20, 2003 final rule (68 FR 8381). 
Since the standards compliance date of October 2003, a number of 
technical issues with the standards, including issues resulting from 
new business needs have been identified. Industry stakeholders 
submitted hundreds of change requests to the standards maintenance 
organizations, with recommendations for improvements to the standards. 
These requests were considered, and many were accepted, resulting in 
the development and approval of newer versions of the standards for 
electronic transactions. However, covered entities are not permitted to 
use the newer versions we are proposing herein until the Secretary of 
Health and Human Services (HHS) adopts them by regulation for covered 
transactions.
    In addition to technical issues and business developments 
necessitating consideration of the new versions of the standards, there 
remain a number of unresolved issues that had been identified by the 
industry early in the implementation period for the first set of 
standards, and those issues were never addressed through regulation 
(for example, which is the correct standard to use for billing retail 
pharmacy supplies and professional services). This proposed rule 
addresses those outstanding issues.

A. Legislative Background

    The Congress addressed the need for a consistent framework for 
electronic transactions and other administrative simplification issues 
in HIPAA, which was enacted on August 21, 1996. HIPAA requires the 
adoption and use of standards to facilitate the electronic transmission 
of certain health information and the conduct of certain business 
transactions.
    Through subtitle F of title II of HIPAA, the Congress added to 
title XI of the Social Security Act (the Act) a new Part C, entitled 
``Administrative Simplification.'' Part C of title XI of the Act 
consists of sections 1171 through 1179. These sections define various 
terms and impose several requirements on HHS, health plans, health care 
clearinghouses, and certain health care providers concerning the 
electronic transmission of health information. Section 1171 of the Act 
establishes definitions for purposes of Part C of title XI for the 
following terms: code set, health care clearinghouse, health care 
provider, health information, health plan, individually identifiable 
health information, standard, and standard setting organization (SSO). 
Section 1172(a) of the Act makes any standard adopted under Part C 
applicable to: (1) Health plans; (2) health care clearinghouses; and 
(3) health care providers who transmit health information in electronic 
form in connection with a transaction for which the Secretary has 
adopted a standard(s). Current standards are at 45 CFR part 162 
subparts K through R.
    Section 1172 of the Act requires any standard adopted by the 
Secretary under Part C of Title XI to be developed, adopted, or 
modified by a standard setting organization, except in the special 
cases where no standard for the transaction exists, as identified under 
section 1172(c)(2) of the Act. Section 1172 of the Act also sets forth 
consultation requirements that must be met before the Secretary may 
adopt standards. In the case of a standard that has been developed, 
adopted, or modified by an SSO, the SSO must consult with the following 
organizations in the course of the development, adoption, or 
modification of the standard: the National Uniform Billing Committee 
(NUBC), the National Uniform Claim Committee (NUCC), the Workgroup for 
Electronic Data Interchange (WEDI) and the American Dental Association 
(ADA). Under section 1172(f) of the Act, the Secretary must also rely 
on the recommendations of the National Committee on Vital and Health 
Statistics (NCVHS) and shall also consult with appropriate Federal and 
State agencies and private organizations.
    Section 1173(a) of the Act requires the Secretary to adopt 
transaction standards and data elements for such transactions, to 
enable the electronic exchange of health information for specific 
financial and administrative health care transactions and other 
financial and administrative transactions as determined appropriate by 
the Secretary. Under sections 1173(b) through (f) of the Act, the 
Secretary is also required to adopt standards for: specified unique 
health identifiers, code sets, security for health information, 
electronic signatures, and the transfer of certain information among 
health plans.
    Section 1174 of the Act requires the Secretary to review the 
adopted standards and adopt modifications to the standards, including 
additions to the standards, as appropriate, but not more frequently 
than once every 12 months. Modifications must be completed in a manner 
that minimizes disruption and cost of compliance. The same section 
requires the Secretary to ensure that procedures exist for the routine 
maintenance, testing, enhancement, and expansion of code sets. 
Moreover, if a code set is modified, the code set that is modified must 
include instructions on how data elements that were encoded before the 
modification may be converted or translated to preserve the information 
value of the data elements that existed before the modification.
    Section 1175(b) of the Act provides for a compliance date not later 
than 24 months after the date on which an initial standard or 
implementation specification is adopted for all covered entities except 
small health plans, which must comply not later than 36 months after 
such adoption. If the Secretary adopts a modification to a HIPAA 
standard or implementation specification, the compliance date for the 
modification may not be earlier than the 180th day following the date 
of the adoption of the modification. The Secretary must consider the 
time needed to comply due to the nature and extent of the modification 
when determining compliance dates, and may extend the time for 
compliance for small health plans, if the Secretary deems it 
appropriate.

B. Regulatory History

    On August 17, 2000, we published a final rule entitled, ``Health 
Insurance Reform: Standards for Electronic Transactions'' in the 
Federal Register (65 FR 50312) (hereinafter referred to as the 
Transactions and Code Sets rule). That rule implemented some of the 
HIPAA Administrative Simplification requirements by adopting standards 
for eight electronic transactions and for code sets to be used in those 
transactions. Those transactions were: health care claims or equivalent 
encounter information; health care payment and remittance advice; 
coordination of benefits; eligibility for a health plan; health care 
claim status; enrollment and disenrollment in a health plan; referral 
certification and authorization; and health plan premium payments. We 
defined these transactions and specified the adopted standards at 45 
CFR part 162, subparts I and K through R.
    The standards that we adopted were developed by two American 
National Standards Institute (ANSI) accredited standard setting 
organizations (commonly and hereinafter referred to as Standards 
Developing Organizations (SDO)): the National Council for Prescription 
Drug Programs (NCPDP)

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and the Accredited Standards Committee ASC X12, which will hereinafter 
be abbreviated and referred to as X12. In our regulations and guidance 
materials to date, we have always referred to ``X12N'' where the ``N'' 
indicates the particular subcommittee. However, we have been informed 
by the X12 committee that it no longer uses the ``N'' to indicate the 
subcommittee. Therefore, in keeping with the current practice of the 
X12, we will not continue to use the ``N'' either, and we will simply 
refer to the standards of that organization as ``X12'' standards. We 
adopted the NCPDP Telecommunication Standard version 5.1 (hereinafter 
referred to as NCPDP 5.1) and its equivalent batch standard for retail 
pharmacy drug claims under the health care claims or equivalent 
encounter transaction, as well as the eligibility for a health plan 
transaction for retail pharmacy drugs, the retail pharmacy drug claims 
remittance advice transaction, and the coordination of benefits 
information transaction for retail pharmacy drug claims. We adopted a 
number of X12 standards, all in Version 4010, for the remaining 
transactions (see Sec.  162.1101 through 1802).
    On February 20, 2003, we published a final rule entitled, ``Health 
Insurance Reform: Modifications to Electronic Data Transaction 
Standards and Code Sets,'' in the Federal Register (68 FR 8381) 
(hereinafter referred to as the Modifications rule). In that rule, we 
adopted certain modifications to some of the standards for the eight 
electronic standard transactions. These modifications resulted in part 
from recommendations of the industry because the original versions of 
the X12 standards had certain requirements (for example, requiring 
information that is not available or not needed) that impeded 
implementation. Since the industry did not have extensive prior 
experience with the X12 standards, implementation problems were 
compounded. It is likely that this lack of expertise also contributed 
to limited input during the Version 4010 ballot process (to approve the 
``original'' standards). For information about the ballot process for 
any particular SDO, interested parties should visit the individual Web 
sites for a full explanation of the process and how to participate. The 
result is that the standards were not thoroughly analyzed to identify 
problems before Version 4010 was adopted. The X12 agreed to create 
``addenda'' to the original versions of the standards, called Version 
4010A, in order to facilitate implementation for the industry, and the 
Secretary adopted those addenda into regulations in every instance 
where the Secretary had adopted Version 4010. (See 68 FR 8381). 
(Readers will note that we have removed the numeral ``1'' from the end 
of Version 4010/4010A1 for ease of reference. Since there is only one 
addendum, we did not feel the need to include the number ``1'' after 
each citation in this proposed rule.)
    In Table 1 below, we summarize the full set of transaction 
standards adopted in the Transactions and Code Sets rule and as 
modified in the Modifications rule. The table uses abbreviations of the 
standards and the names by which the transactions are commonly 
referred, as a point of reference for the readers. The official 
nomenclature and titles of each standard and transaction are provided 
later in the narrative of this preamble.

            Table 1--Adopted Standards for HIPAA Transactions
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           Standard                           Transaction
------------------------------------------------------------------------
ASC X12 837 D................  Health care claims--Dental.
ASC X12 837 P................  Health care claims--Professional.
ASC X12 837 I................  Health care claims--Institutional.
ASC X12 837..................  Health care claims--Coordination of
                                Benefits.
ASC X12 270/271..............  Eligibility for a health plan (request
                                and response).
ASC X12 276/277..............  Health care claim status (request and
                                response).
ASC X12 834..................  Enrollment and disenrollment in a health
                                plan.
ASC X12 835..................  Health care payment and remittance
                                advice.
ASC X12 820..................  Health plan premium payment.
ASC X12 278..................  Referral certification and authorization
                                (request and response).
NCPDP 5.1....................  Retail pharmacy drug claims
                                (telecommunication and batch standards).
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C. Standards Adoption and Modification

    In addition to adopting the first set of transaction standards and 
code sets, the Transactions and Code Sets rule adopted procedures for 
the maintenance of existing standards and for adopting new standards 
and modifications to existing standards (see Sec.  162.910).
1. Designated Standards Maintenance Organizations (DSMO)
    Section 162.910 sets out the standards maintenance process and 
defines the role of SDOs and the DSMO. An SDO is an organization 
accredited by the ANSI that develops and maintains standards for 
information transactions or data elements. SDOs include the X12, the 
NCPDP, and Health Level Seven (HL7). In August 2000, the Secretary 
designated six organizations (see Health Insurance Reform: Announcement 
of Designated Standard Maintenance Organizations Notice (65 FR 50373)) 
to maintain the health care transaction standards adopted by the 
Secretary, and to process requests for modifying an adopted standard or 
for adopting a new standard. The six organizations include the three 
SDOs referenced above. The other three organizations are the National 
Uniform Billing Committee (NUBC), the National Uniform Claim Committee 
(NUCC), and the Dental Content Committee (DCC) of the American Dental 
Association. The DSMO operate through a coordinating committee. For 
additional information about the DSMO process and procedures, refer to 
the Web site at http://www.hipaa-dsmo.org/Main.asp.
2. Process for Adopting Modifications to Standards
    In general, HIPAA requires the Secretary to adopt standards that 
have been developed by an SDO with certain exceptions. In addition to 
directing the Secretary to adopt standards, HIPAA, at section 1172(d) 
of the Act, also requires the Secretary to establish specifications for 
implementing each adopted standard.
    The process for adopting a new standard or modifications to 
existing standards is described in the Transactions and Code Sets rule 
(65 FR 50312 at 50344) and implemented at Sec.  162.910. Under Sec.  
162.910, the Secretary considers recommendations for proposed 
modifications to existing standards or a proposed new standard, only if 
the recommendations are

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developed through a process that provides for--
     Open public access;
     Coordination with other SDOs;
     An appeals process for the requestor of the proposal or 
the DSMO that participated in the review and analysis if either of the 
preceding were dissatisfied with the decision on the request;
     An expedited process to address HIPAA content needs 
identified within the industry; and
     Submission of the recommendation to the NCVHS.
    Any entity may submit change requests with a documented business 
case to support the recommendation to the DSMO. The role of the DSMO 
committee is to receive and manage those change requests. The DSMO 
review the request and notify the SDO of the recommendation for 
approval or rejection. If the changes are recommended for approval, the 
DSMO also notifies the NCVHS and suggest that a recommendation for 
adoption be made to the Secretary of HHS. Instructions for the DSMO 
process and access to the submission tools are available at http://www.hipaa-dsmo.org.
    All of the modifications and the new transaction standard proposed 
in this rule were developed through a process that conforms with Sec.  
162.910. The suggested modifications and new standard recommended for 
approval by the DSMO were submitted to NCVHS for consideration. In 
2007, the NCVHS conducted two days of hearings with health care 
providers, health plans, clearinghouses, vendors, and interested 
stakeholders on the adoption of the new ASC X12 Version 005010 
Technical Reports Type 3 and the NCPDP Telecommunication Standard, 
Version D.0, to replace Versions 4010/4010A and the NCPDP Version 5.1. 
Testimony was also presented for the NCPDP Medicaid pharmacy 
subrogation standard (Version 3.0). A list of organizations that 
provided testimony to the NCVHS is available on the agenda for the July 
2007 meetings, at http://www.ncvhs.hhs.gov/070730ag.htm. In addition to 
the standards organizations, other testifiers included Delaware 
Medicaid, MEDCO, Healthcare Billing and Management Association (HBMA), 
BlueCross BlueShield Association (BCBSA), Integra Professional 
Services, EDS, LabCorps, the American Dental Association, the American 
Hospital Association, the National Community Pharmacists Association 
(NCPA), the Medical Group Management Association (MGMA), the National 
Association of Chain Drug Stores (NACDS), the Workgroup for Electronic 
Data Interchange (WEDI) and Smith Premier. In a letter dated September 
26, 2007 (available at http://www.ncvhs.hhs.gov/070926lt.pdf ), the 
NCVHS submitted to the Secretary its recommendations to adopt the 
updated versions of standards as well as the NCPDP Medicaid pharmacy 
subrogation standard.
    As noted above, and as indicated in the letter from NCVHS, HHS 
consulted with other Federal and State agencies and private 
organizations to gain input for this proposed rule regarding the 
adoption and implementation of standards. We also worked with WEDI 
specifically to conduct industry-focused information forums on 
implementation of the modified standards proposed in this rule.
3. Implementation Specifications and Technical Reports Type 3
    Each adopted standard has operating rules that are documented in an 
implementation specification or guide. These implementation 
specifications or guides comprise ``the specific instructions for 
implementing a standard'' (Sec.  162.103). In addition to ensuring that 
specific data are communicated in the same way among trading partners, 
and providing instructions to users for implementing standards, these 
implementation specifications dictate field size limits and provide 
guidance for the type of information to be included in a particular 
field. The specificity that results enables health information to be 
exchanged electronically between any two entities, using the same 
instructions for format and content without losing the integrity of the 
data.
    In 2003, the X12 initiated the concept of the Technical Reports 
Type 3 to promote consistency and coherency among information 
processing systems which use X12 standards and encourage uniform 
standards implementation. X12 Technical Reports are in three formats: 
Type 1 reports are tutorials that describe the intent of the authoring 
subcommittee and provide guidance on usage of the standard; Type 2 
reports provide models of business practices and data flows to assist 
users in the development of software systems that would use the EDI 
transmissions; and Type 3 reports are implementation guides that 
address a specific business purpose (for example, a claim), and provide 
comprehensive instructions for the use and content of a transaction. 
The Technical Reports Type 3 are the updated equivalents of the X12 
Implementation Guides referenced in the current HIPAA regulations. We 
note that no format or function differences exist between previous 
implementation specifications and Technical Reports Type 3. We 
reference Technical Reports Type 3 in the proposed regulation text in 
accordance with the way in which the X12 now refers to its 
implementation guides. Documents called Type 1 Errata are used to 
supplement published Technical Reports Type 3 that solve significant 
problems that prevent achievement of the business purpose.
    NCPDP terminology has not changed since the adoption of the current 
HIPAA regulations. Therefore, the NCPDP standards continue to be 
referred to as implementation guides or specifications.

II. Provisions of the Proposed Rule

A. Proposed Adoption of X12 Version 005010 Technical Reports Type 3 for 
HIPAA Transactions

    We propose to revise Sec.  162.1102, Sec.  162.1202, Sec.  
162.1302, Sec.  162.1402, Sec.  162.1502, Sec.  162.1602, Sec.  
162.1702, and Sec.  162.1802 to adopt the ASC X12 Technical Reports 
Type 3, Version 005010, hereinafter referred to as Version 5010, as a 
modification of the current X12 Version 4010 and 4010A1 standards, 
hereinafter referred to as Version 4010/4010A, for the HIPAA 
transactions listed below. In some cases, the Technical Reports Type 3 
have been modified by Type 1 Errata, and these Errata are also included 
in our proposal. Covered entities conducting the following HIPAA 
standards would be required to use Version 5010:
     Health care claims or equivalent encounter information 
(Sec.  162.1101)
    -- Professional health care claims
    -- Institutional health care claims
    -- Dental health care claims
     Dental, professional, and institutional health care 
eligibility benefit inquiry and response (Sec.  162.1201)
     Dental, professional, and institutional referral 
certification and authorization (Sec.  162.1301)
     Health care claim status request and response (Sec.  
162.1401)
     Enrollment and disenrollment in a health plan (Sec.  
162.1501)
     Health care payment and remittance advice (Sec.  162.1601)
     Health plan premium payments (Sec.  162.1701)
     Coordination of Benefits (Sec.  162.1801)
    -- Dental health care claims
    -- Professional health care claims
    -- Institutional health care claims
    Following is a brief description of the enhancements in the updated 
version of the standards and our rationale in support of its adoption.

[[Page 49746]]

Justification for Adopting Version 5010 TR3 Reports
    Despite the changes made to Version 4010 that prompted the 
establishment of Version 4010A, which was adopted in the Modifications 
rule, operational and technical gaps still exist in Version 4010A. In 
addition, it has been more than 5 years since implementation of the 
original standards, and business needs have evolved during this time. 
While the implementation specifications continue to improve with each 
new version, deficiencies in the adopted versions continue to cause 
industry-wide issues. These deficiencies in the current implementation 
specifications have caused much of the industry to rely on ``companion 
guides'' created by health plans to address areas of Version 4010/4010A 
that are not specific enough or require work-around solutions to 
address business needs. These companion guides are unique, plan-
specific implementation instructions for the situational use of certain 
fields and/or data elements that are needed to support current business 
operations. We believe that industry reliance on companion guides has 
minimized some of the potential benefits offered by the standards 
because each guide has a different set of requirements, making full 
standardization nearly impossible. Furthermore, as the industry worked 
with the standards and became more adept at using them, opportunities 
for improvement became apparent and were included in subsequent 
versions of the implementation specifications. It also became apparent 
that dependence on companion guides could be greatly reduced, if not 
eliminated, if proposed modifications were ultimately adopted for use 
by the industry.
    As stated earlier, in the years following the compliance deadline, 
hundreds of requests to upgrade the standards have been submitted by 
the industry to the DSMO Steering committee. These requests have been 
made in accordance with the DSMO Change Request process, described in 
the Transactions and Code Sets rule. The DSMO Steering committee has 
evaluated approximately five hundred requests for changes to Version 
4010/4010A. Version 5010 changes significantly improve the 
functionality of the transactions and correct problems encountered with 
Version 4010/4010A. Change Description Guides detailing the specific 
changes made to each new version are available at http://www.wpc-edi.com. The Medicare Fee-for-Service program is evaluating the impact 
of implementing Version 5010 in the future, and has completed a gap 
analysis of the standards. Medicare has prepared a comparison of the 
current X12 HIPAA EDI standards (Version 4010/4010A) with Version 5010 
and the NCPDP EDI standards Version 5.1 to D.0, and has made these 
side-by-side comparisons available to other covered entities and their 
business associates on the CMS Web site: http://www.cms.hhs.gov/ElectronicBillingEDITrans/18_5010D0.asp.
    The areas of improvement included in Version 5010 can be grouped 
into four main themes. Each theme is discussed in detail below:
    Front Matter/Education--Information in the front matter 
(hereinafter referred to as the Front Matter section) of Version 5010 
now provides clearer instructions. Ambiguous language has been 
eliminated and the rules for required and situational data elements are 
more clearly defined.
    Technical Improvements--Technical improvements in Version 5010 
include new guidelines that use the same data representation for the 
same purposes across all of the transactions for which Version 5010 is 
used. This reduces ambiguities and reduces the number of times that the 
same data could have multiple codes or qualifiers, or from appearing in 
different segments for the same purpose. Consistent data representation 
reduces ambiguities that result from the same data having multiple 
codes or qualifiers and from the same data appearing in different 
segments in different transactions. In other words, ambiguous language 
has been eliminated, the rules for required and situational data 
elements are more clearly defined, and instructions for many business 
processes have been clarified.
    Structural Changes--Modifications to the physical components of the 
transaction have been made. New segments and new data elements have 
been added and data elements have been modified or removed to make the 
data elements longer, shorter, or of a different data type to add 
functionality and improve consistency. In some cases, new 
``composites,'' defined as a collection of related data elements, have 
been added in order to ensure that related data is reported and 
received in the same section of the transaction instead of spread out 
in different areas. This increases the accuracy of processing because 
programming can be consistent for each transaction.
    Data Content--Redundant and unnecessary data content requirements 
have been removed to eliminate confusion for implementers. Additional 
requirements have been added where needed to clarify existing data 
content requirements.
    The following section includes a brief summary of changes for each 
of the versions of the implementation guides. We note that some of the 
implementation guides had significant modifications while others were 
changed only moderately. In the following discussions for each 
transaction, we use short-hand for referring to the current and 
modified versions of the standard. Instead of writing out the full name 
of the standard in each case, we refer to ``Version 4010/4010A'' and 
``Version 5010.'' The Version 4010/4010A and Version 5010 short-hand 
refers to the particular transaction standard discussed in each section 
below. For example, in the first section below, we address the Health 
Care Claims or Equivalent Encounter Information transaction for 
institutional health care claims. Rather than refer to the ASC X12 
837I, Version 4010/4010A and the X12 837 Version 5010 Technical Report 
Type 3 for the Health Care Claims or Equivalent Encounter Information 
transaction for institutional claims, we refer to Version 4010/4010A 
and Version 5010, respectively, with the understanding that we are 
referring to those versions in the context of the health care claims or 
equivalent encounter information transactions for institutional claims. 
This is true also for our discussion of the NCPDP transaction 
standards. Finally, the standards are presented in the order we believe 
best represents the level of utilization within the industry; in other 
words, the transactions which are used most often by the industry, such 
as claims and eligibility verification, are listed before lesser used 
transactions, such as enrollment and premium billing. In the section 
below, the order of the transactions does not follow the order of the 
regulation text. However, in the regulation text section of this 
proposed rule, the standards are represented in the same order in which 
they have been published in each of the earlier regulations.
Health Care Claims or Equivalent Encounter Information Transaction 
(837)
Institutional Health Care Claims (837I)
    We propose to revise Sec.  162.1102 by adding a new paragraph 
(c)(4) that would replace the ASC X12N 837I Version 4010/4010A with the 
Health Care Claim: Institutional (837) ASC X12 Standards for Electronic 
Data Interchange Technical Report Type 3 and Type 1 Errata to Health 
Care Claim: Institutional for the Health Care Claims

[[Page 49747]]

or Equivalent Encounter Information Transaction for institutional 
claims.
    Version 4010/4010A does not provide a means for identifying an ICD-
10 procedure or diagnosis code on an institutional claim. Version 5010 
anticipates the eventual use of ICD-10 procedure and diagnosis codes 
and adds a qualifier as well as the space needed to report the number 
of characters that would permit reporting of ICD-10 procedure and 
diagnosis codes on institutional health care claims.
    Other significant changes include the following:
     Version 5010 separates diagnosis code reporting by 
principal diagnosis, admitting diagnosis, external cause of injury and 
reason for visit, allowing the capture of detailed information (for 
example, mortality rates for certain illnesses, the success of specific 
treatment options, length of hospital stay for certain conditions, and 
reasons for hospital admissions).
     Version 4010/4010A does not allow for the identification 
of a ``Present on Admission'' indicator (POA) on the institutional 
claim. Present on Admission means the condition or diagnosis that is 
present at the time the order for inpatient admission occurs--
conditions that develop during an outpatient encounter, including 
emergency department, observation, or outpatient surgery, are 
considered as present on admission. This information is being captured 
through a workaround in Version 4010/4010A by placing this information 
in an unassigned segment. This has created confusion for hospitals and 
has limited access to information that is critical to identifying 
hospital acquired conditions and the ability to track utilization of 
the POA indicator and treatment outcomes as specified by section 5001 
of the Deficit Reduction Act. Version 5010 allows the POA indicator to 
be associated with each individual diagnosis code allowing the capture 
of detailed information (for example, mortality rates for certain 
illnesses, length of hospital stay for certain conditions and reasons 
for hospital admissions).
     Version 5010 includes clear and precise rules that clarify 
how and when the NPI is to be reported. Instructions require submitters 
to report the same organizational type NPI in the same position for all 
payers. This improves the accuracy of information that is needed to 
conduct coordination of benefits by ensuring that the NPI information 
that is submitted to a secondary or tertiary payer reflects the NPI 
information that was processed by the primary payer. Version 4010/4010A 
does not have clear rules about how an NPI should be reported for 
subparts, or how to identify atypical providers (for example, taxi 
services, home and vehicle modifications services, and respite services 
that are not required to obtain an NPI), resulting in confusion among 
providers about who needs an NPI and when an NPI for a subpart or an 
individual provider should be reported.
     Version 5010 provides clear definitions and precise rules 
with instructions for consistently reporting provider information in 
the same position and with the same meaning throughout the transaction. 
Version 4010/4010A lacks a clear definition for the various types of 
providers (other than attending and operating) who participate in 
providing health care and who could be named in the claim transaction 
(for example, ordering provider and referring provider).
    Version 5010 makes programming more efficient because it uses the 
same structure for all data elements across the transactions for which 
5010 is used. Therefore, the structure for patient information in the 
institutional health care claims transaction would be the same as that 
for eligibility for a health plan transaction. Version 4010/4010A does 
not structure certain data (for example, patient information) 
consistently with the standards for other transactions, such as the 
eligibility for a health plan transaction.
     Professional health care claims (837P).
    We propose to revise Sec.  162.1102 by adding a new paragraph 
(c)(3) that would replace the ASC X12N 837P Version 4010/4010A with the 
837 Health Care Claim: Professional ASC X12 Technical Report Type 3 for 
the Health Care Claims or Equivalent Encounter Information Transaction 
for professional claims.
    Like the institutional health care claim transaction, Version 4010/
4010A does not provide a means for identifying an ICD-10 diagnosis code 
on a professional claim. Version 5010 anticipates the eventual use of 
ICD-10 diagnosis codes and adds a qualifier as well as the space needed 
to report the number of characters that would permit reporting of ICD-
10 diagnosis codes on professional claims.
    Other changes in Version 5010 that were added in response to 
industry requests for improvements to Version 4010/4010A include:
     Version 5010 only allows the reporting of minutes for 
anesthesia time, ensuring consistency and clarity across transactions. 
Version 4010/4010A lacks consistency in allowing for the reporting of 
anesthesia time, in either units or minutes. This inconsistency creates 
confusion among providers and plans, and frequently requires electronic 
or manual conversions of units to minutes or vice versa, depending on a 
health plan's requirement, and is especially complicated when 
conducting COB transactions with varying requirements among secondary 
or tertiary payers.
     Version 5010 allows ambulance providers to report pick-up 
information for ambulance transport electronically and makes it a 
requirement on all ambulance claims. Version 4010/4010A does not allow 
ambulance providers to report pick-up information for ambulance 
transport. Plans that need this information to adjudicate an ambulance 
claim must request this information after the claim is received. This 
means that providers are required to submit the information separately 
or on paper, which complicates the claim submission substantially. 
Version 5010 includes an implementation note that states that the 
provider specialty information applies to the entire claim unless there 
are individual services where the provider specialty information 
differs. This feature eliminates redundant reporting. Version 4010/
4010A contains redundant requirements for reporting a referring 
provider's medical specialty when a claim contains more than one 
service, and the referring provider specialty information differs for 
at least one of the services.
     Dental health care claims (837D).
    We propose to revise Sec.  162.1102 by adding a new paragraph 
(c)(2) that would replace the ASC X12N 837D Version 4010/4010A with the 
837 Health Care Claim: Dental ASC X12 Technical Report Type 3 and Type 
1 Errata for Health Care Claims or Equivalent Encounter Information for 
dental claims.
    Certain services performed by dentists are considered to be medical 
services and are covered as medical benefits by insurance plans. In 
Version 4010/4010A, a dental claim cannot be processed as a medical 
claim because not all the required or situational information for a 
medical claim is included in the dental claim. In Version 5010 for 
dental claims, data requirements are closely aligned with the data 
requirements for medical claims, which supports coordinating benefits 
between dental and medical health plans.
    Other changes in Version 5010 that were added in response to 
industry requests for improvements to Version 4010/4010A include:
     Version 5010 includes a designated location for treatment 
start and stop

[[Page 49748]]

dates for dental crowns or bridges, which health plans need to 
appropriately administer their dental benefits. Version 4010/4010A does 
not allow for this information to be reported.
     Version 5010 supports the reporting of specific tooth 
numbers with the International Tooth Numbering System (ITNS) code. 
Version 4010/4010A does not support this reporting, which makes 
submitting claims for dental services that may be covered under a 
medical plan complicated and burdensome. The services typically relate 
to wisdom teeth extraction and traumatic dental injuries, and are 
generally provided by oral and maxillofacial surgeons. Since these 
services often are covered by a medical benefit, they are reported on 
the 837 professional claim. Without support for the ITNS on the 837 
professional claim, providers face denials, claim re-works and the 
manual submission of paper documentation to provide the tooth number 
information that is needed by plans to properly adjudicate claims and 
electronically conduct coordination of benefits. Version 5010 
eliminates these cumbersome processes by providing a standardized field 
for reporting the ITNS code on claims that may be required to report 
certain dental services on an 837 professional claim, rather than the 
dental version.
     Version 5010 includes an enhancement that supports the 
reporting of an address for the place of treatment for dental claims. 
Version 4010/4010A does not support the recording of this information. 
The place of treatment is typically the dentist's address and it is 
needed by health plans for claims adjudication. The support for this 
information is available in Version 4010/4010A but only for 
institutional and professional claims.
     Version 5010 requires a first name only when the entity is 
a person, whereas Version 4010/4010A requires a first name even in 
instances when the entity is not a person. The deficiency in Version 
4010/4010A means that, even if an organization or company is the 
subscriber for a workers' compensation claim, in which case there would 
be no first name, the submitter is still required to provide a first 
name.
Health Care Payment and Remittance Advice Transaction (835)--For All 
Claim Types
    We propose to revise Sec.  162.1602 by adding a new paragraph (c) 
that would replace the ASC X12N 835 Version 4010/4010A with the 835 
Health Care Claim Payment/Advice ASC X12 Technical Report Type 3 for 
the Health Care Payment and Remittance Advice transaction. This would 
apply to all claim types, including retail pharmacy claims.
    Many of the enhancements in Version 5010 involve the Front Matter 
section of the Technical Report Type 3, which contains expanded 
instructions for accurately processing a compliant 835 transaction. 
Version 5010 provides refined terminology for using a standard, and 
enhances the data content to promote clarity. The benefits of these 
refinements could include more accurate use of the standard, reduction 
of manual intervention and could motivate vendors and billing services 
to provide a more cost-effective solution for the submission and 
receipt of electronic remittance advice transactions.
    Other changes in Version 5010 that were added in response to 
industry requests for improvements to Version 4010/4010A include:
     Version 5010 makes improvements to permit better use of 
remittance advice by tightening business rules and reducing the number 
of available code value options. Version 4010/4010A for remittance 
advice lacks standard definitions and procedures for translating 
remittance information and payments from various health plans to a 
provider which makes automatic remittance posting difficult.
     Version 5010 provides instructions for certain business 
situations where none had existed before. For example, Version 5010 
instructs providers on how to negate a payment that may be incorrect 
and post a correction.
     Version 5010 for the 835 transaction does not affect the 
processing of Version 4010/4010A claim transactions. This compatibility 
with the earlier standard would permit implementers to begin testing 
Version 5010 for the 835 transaction before the compliance date, and, 
at the same time, continue to process 837 claims using Version 4010/
4010A. This flexibility is important because there may be a transition 
period with claims for services rendered before the compliance date 
that will be in the older version of the standard because data elements 
required in Version 5010 might not have been captured at the time 
services were rendered.
     Version 5010 includes a new Medical Policy segment that 
provides more up-to-date information on payer policies and helps in 
detail management, appeals, and reduces telephone and written inquiries 
to payers. The new segment helps providers locate related published 
medical policies that are used to determine benefits by virtue of the 
addition of a segment for a payer's URL for easy access to a plan's 
medical policies. Version 4010/4010A does not provide the ability to 
include information or resources for policy-related payment reductions 
or omissions.
     Version 5010 eliminates codes marked ``Not Advised,'' but 
leaves the code representing ``debit'' as situational, with 
instructions on how and when to use the code. Version 4010/4010A 
contains codes marked ``Not Advised,'' which means that the guide 
recommends against using it, but does not prohibit its use. For 
example, in Version 4010/4010A, there are codes to indicate whether a 
payment is a debit or a credit, and the debit code is marked ``Not 
Advised'' because the transaction is a payment, and a credit code is 
expected instead. There is no use for the debit code, so the 
instruction ``Not Advised'' appears for that field.
     Version 5010 provides clear instructions for use of the 
claim status indicator codes. Version 4010/4010A includes status codes 
that indicate a primary, secondary, or tertiary claim, but no 
instructions for the use of these codes. This creates confusion when a 
claim is partially processed, or when a claim is processed but there is 
no payment.
Enrollment and Disenrollment in a Health Plan (834)
    We propose to revise Sec.  162.1502 by adding a new paragraph (c) 
that would replace the ASC X12N 834 Version 4010/4010A with the 834 
Benefit Enrollment and Maintenance ASC X12 Technical Report Type 3 for 
the Enrollment and Disenrollment in a health plan transaction.
    The most significant differences between Version 4010/4010A and 
Version 5010 for the enrollment and disenrollment in a health plan 
transaction is the addition of functionality in Version 5010 that did 
not exist in Version 4010/4010A. For example, Version 5010 can use ICD-
10 diagnosis codes for reporting pre-existing conditions and additional 
ICD-10 disease classifications. This functionality was added in 
anticipation of the adoption of the ICD-10 code sets.
    Other changes in Version 5010 that were added in response to 
requests for improvements to Version 4010/4010A include:
     Version 5010 adds the ability to designate certain 
information as confidential and restrict access to member information. 
This new function provides privacy protection by safeguarding 
confidential information.
     Version 5010 adds maintenance reason codes to explain 
coverage

[[Page 49749]]

changes. The new codes reflect changes in student status, age 
limitations, additional coverage information, life partner changes, 
termination due to non-payment, and other changes. This information is 
important for establishing coverage patterns and recording accurate 
information on coverage status.
     Version 5010 provides the ability to report enrollment 
subtotals by employees and dependents or grand totals, unlike Version 
4010/4010A; although not a critical change, this is a feature of 
Version 5010 that facilitates use of the 834 transaction.
     Version 5010 eliminates date range confusion by adding 
fields for a ``start'' date and an ``end'' date. Version 4010/4010A 
lacks definitions and instructions for reporting date ranges that 
indicate coverage ``to'' a certain date, versus coverage ``through'' a 
certain date, and instructions as to when to send the dates of 
effectiveness for coverage changes. Without accurate coverage 
effectiveness and coverage change information, the administration of 
enrollment and disenrollment in a health plan becomes inefficient and 
cumbersome and frequently requires manual intervention, negating the 
benefits of electronic data interchange (EDI).
Health Plan Premium Payments (820).
    We propose to revise Sec.  162.1702 by adding a new paragraph (c) 
that would replace the ASC X12N 820 Version 4010/4010A with the 820 
Payroll Deducted and Other Group Premium Payment for Insurance 
Products, ASC X12 Technical Report Type 3 for the Health Plan Premium 
Payments Transaction.
    A deficiency in Version 4010/4010A is the inability for health plan 
sponsors to report additional deductions from payments. The addition of 
this data element is an important improvement in Version 5010 because 
it helps reduce confusion for health plans when payments are not the 
amount expected. Version 4010/4010A does not have a way to indicate the 
method used to deliver the remittance. Version 5010 includes an 
indicator for the delivery method, and options include file transfer, 
mail, and online. This permits trading partners to select and indicate 
the method that best meets their business needs.
    Other changes in Version 5010 that were added in response to 
industry requests for improvements to Version 4010/4010A include:
     Version 5010 permits a health plan sponsor to adjust an 
entire transaction for a previous payment without tying it to an 
individual member record. Version 4010/4010A requires a health plan 
sponsor to link a transaction payment adjustment for a previous payment 
to an individual member record, creating extra work and additional 
administrative tasks.
     To eliminate confusion, Version 5010 changes the premium 
remittance detail information from ``situational'' to ``required,'' so 
that all entities must provide the specific data regarding premiums. In 
Version 4010/4010A, premium remittance detail information is 
situational and only required for HIPAA transactions. Plan sponsors 
always use the transaction for premium payments to health plans so the 
transaction is always a HIPAA transaction and, therefore, premium 
remittance detail information is always required.
Eligibility for a Health Plan (270/271).
    We propose to revise Sec.  162.1202 by adding a new paragraph 
(c)(2) that would replace the ASC X12N 270/271 Version 4010/4010A with 
the 270/271 Health Care Eligibility/Benefit Inquiry and Information 
Response ASC X12 Technical Report Type 3 for the Eligibility for a 
Health Plan Transaction. This transaction is used to determine 
eligibility for institutional, professional and dental services, and 
for eligibility and benefit inquiries between prescribers and Part D 
Plan Sponsors. (It is not used between pharmacies and health plans for 
a pharmacy's eligibility inquiries--that standard is an NCPDP standard, 
and its use is discussed in the section on Version D.0 later in this 
preamble.)
    Version 4010/4010A does not require health plans to report relevant 
coverage information, for example, coverage effectiveness dates--health 
plans are only required to provide a response that coverage does exist. 
Version 5010 corrects this deficiency by requiring the payer to report 
specific coverage information (for example, the name of plan coverage, 
beginning effective date, benefit effective dates, and primary care 
provider (if available)). This additional information significantly 
improves the value of the transaction to the provider community.
    Other changes in Version 5010 that were added in response to 
industry requests for improvements to Version 4010/4010A include:
     Version 5010 adds nine categories of benefits that must be 
reported if they are available to the patient. Some examples of those 
categories are pharmacy, vision, and mental health. Version 4010/4010A 
contains no requirement to report categories of benefits.
     Version 5010 adds 38 additional patient service type codes 
to the ones that are available in Version 4010/4010A. This expands the 
use of patient service type codes available to submit in an eligibility 
inquiry. The use of a more specific patient services type code enriches 
the data that is returned in the eligibility response, matching the 
information in the eligibility response to that in the eligibility 
inquiry.
     Version 5010 provides clearer instructions for describing 
subscriber and dependent relationships. Health plan subscriber and 
dependent relationships are unclear in Version 4010/4010A, creating 
ambiguity and confusion about when to use ``subscriber'' and when to 
use ``dependent'' when one of them is also the patient.
Referral Certification and Authorization (278).
    We propose to revise Sec.  162.1302 by adding a new paragraph 
(c)(2) that would replace the ASC X12N 278 Version 4010/4010A with the 
278 Health Care Services Request for Review and Response ASC X12 
Technical Report Type 3 and Type 1 Errata for the Referral 
Certification and Authorization transaction.
    This transaction is not commonly used in the industry today because 
of the many implementation constraints of Version 4010/4010A. These 
constraints include the inability to report specific information on 
patient conditions (for example, mental status), functional limitations 
of the patient (for example, handicapped), and the specialty 
certifications of a provider. Version 4010/4010A also does not provide 
a way for the requestor to limit the number of occurrences of a service 
within a defined time frame (for example, limiting the number of visits 
to three within a ninety-day period). Version 5010 corrects these 
deficiencies.
    Version 5010 includes the following additional improvements over 
Version 4010/4010A:
     Version 5010 includes rules and separate implementation 
segments for key patient conditions, including: ambulance certification 
information; chiropractic certification; durable medical equipment 
information; oxygen therapy certification information; patient 
functional limitation information; activities currently permitted for 
the patient information; and patient mental status information. Version 
4010/4010A lacks differentiating rules for various conditions, making 
the standard cumbersome to use for both providers and health plans.

[[Page 49750]]

     Version 5010 supports or expands support for, a variety of 
business cases deemed important by the industry, including: Medical 
services reservations (permitting requesters to reserve a certain 
number of service visits within a defined period of time, for example, 
number of physical therapy visits); dental service detail (for tooth 
numbering and other dental related services); and ambulance transport 
requests to capture multiple address locations for multiple trips.
     Version 5010 supports or expands authorization exchanges, 
including requests for drug authorization procedure code modifiers and 
patient state of residence, which may be important from a coverage 
determination standpoint. Version 4010/4010A does not support 
authorizations for drugs and certain pharmaceuticals, and a number of 
other common authorization exchanges between covered entities.
Health Care Claim Status (276/277)
    We propose to revise Sec.  162.1402 by adding a new paragraph (c) 
that would replace the ASC X12N 276/277 Version 4010/4010A with the 
Health Care Claim Status Request and Response ASC X12 Technical Report 
Type 3 and Type 1 Errata for the Health Care Claim Status Transaction, 
for institutional, professional and dental claims.
    One of the deficiencies of the Version 4010/4010A 276 inquiry is 
that it does not identify prescription numbers and the associated 277 
response cannot identify which prescription numbers are paid or not 
paid at the claim level of the transaction. The ability to identify a 
prescription by the prescription number is important for pharmacy 
providers when identifying claims data in their systems. Version 5010 
includes new functionality that allows for identification of 
prescription numbers and the associated response allows for 
identification of which prescription numbers are paid or not paid at 
the claim level.
    Other changes in Version 5010 that were added in response to 
requests for improvements to Version 4010/4010A include:
     Version 5010 eliminates a number of requirements to report 
certain data elements which are considered sensitive personal 
information specific to a patient, and which are not necessary to 
process the transaction. The Version 4010/4010A requirements for the 
collection and reporting of sensitive patient health information have 
raised concerns about privacy and minimum necessary issues. For 
example, the Version 4010/4010A standard requires the subscriber's date 
of birth and insurance policy number, which often is a social security 
number. This information is not needed to identify the subscriber 
because the policy number recorded for the patient already uniquely 
identifies the subscriber.
     To reduce reliance on companion guides, and ensure 
consistency in the use of the Implementation Guides, situational rules 
that were ambiguous in Version 4010/4010A are clarified in Version 
5010. For example, Version 4010/4010A contains a number of situational 
rules that are unclear and open to different interpretations. Based on 
industry requests for changes, the DSMO reviewed all of the 4010/4010A 
situational rules and revised each standard as appropriate to reduce 
multiple interpretations. For example, Version 5010 clarifies the 
relationships between dependents and subscribers, and makes a clear 
distinction between the term ``covered status'' (whether the particular 
service is covered under the benefit package) and ``covered 
beneficiary'' (the individual who is eligible for services). Since 
Version 4010/4010A does not provide clear rules for the interpretation 
of these terms, industry use of the fields is inconsistent, and subject 
to entity-specific determinations. An additional example of a 
clarification is the creation of a new section in the Version 5010 
Referral Certification and Authorization transaction, where a separate 
segment was created to allow for the entry of information to clearly 
indicate that a patient's medical condition met certification 
requirements for ambulance or oxygen therapy. The creation of a 
specific section to capture such information eliminates the need to 
request or send that information later.
     Version 5010 implements consistent rules across all TR3s 
regarding the requirement to include both patient and subscriber 
information in the transaction. Some current implementation guides 
(Version 4010/4010A) require that subscriber information be sent even 
when the patient is a dependent of the subscriber and can be uniquely 
identified with an individual identification number, whereas other 
transactions (for example, eligibility for a health plan inquiry (270) 
and referral certification and authorization request (278)) permit 
sending only the patient dependent information if the patient has a 
unique member ID. These standards do not require the subscriber ID. The 
requirement to include the subscriber information with the dependent 
member information for a uniquely identifiable dependent is an 
administrative burden for the provider.
     Version 5010 provides clear instructions for users on how 
to use the transaction in either batch or real time mode. Version 4010/
4010A does not provide any such guidance, which is needed by the 
industry.
Coordination of Benefits (COB)--(837)
    We propose to revise Sec.  162.1802 by adding new paragraphs 
(c)(2), (c)(3), and (c)(4) that would replace the ASC X12N 837 Version 
4010/4010A implementation guides for the Coordination of Benefits (COB) 
Transaction, with Version 005010 Technical Report Type 3 and Type 1 
Errata for institutional, professional and dental claims. COB is a 
claim function included in each of the individual named claim Type 3 
Technical Reports (837I, 837P and 837D).
    There are a number of deficiencies with Version 4010/4010A, 
including the lack of clear instructions for several important 
scenarios, including how to create a COB claim when the prior payer's 
remittance information came to the provider in a paper format and how a 
receiver can calculate a prior payer's allowed amount. Additional 
deficiencies that have made coordination of benefits transactions among 
payers difficult is the presence of statements such as ``if needed by a 
payer for adjudication'' and similar statements that have allowed for 
varying interpretations within the health care industry. These 
obstacles to successfully completing an electronic compliant COB 
transaction using Version 4010/4010A, and accepting and adjudicating 
COB transactions among a variety of payers, have been removed or 
significantly mitigated in Version 5010.
    Other changes in Version 5010 that were added in response to 
industry requests for improvements to Version 4010/4010A include:
     A number of sections have been added or modified in 
Version 5010 to provide the broad-based instructions necessary to 
ensure a standard implementation of COB transactions, including 
instructions for balancing dollar amounts on a claim.
     The Front Matter section of Version 5010 includes an 
explanation of the destination payer's specific information (for 
example, claims data and provider identifiers that are needed for 
conducting COB).

[[Page 49751]]

B. Proposed Adoption of NCPDP Telecommunication Standard Implementation 
Guide Version D Release O (D.0) and Equivalent Batch Standard Batch 
Implementation Guide, Version 1, Release 2 (1.2) for Retail Pharmacy 
Transactions

    We propose to revise Sec.  162.1102, Sec.  162.1202, Sec.  
162.1302, and Sec.  162.1802 by adding new paragraphs (c)(1) to each of 
those sections to adopt the NCPDP Telecommunication Standard 
Implementation Guide, Version D, Release 0 (Version D.0) and equivalent 
NCPDP Batch Standard Implementation Guide, Version 1, Release 2 
(Version 1.2) (hereinafter collectively referred to as Version D.0) in 
place of the NCPDP Telecommunication Standard Implementation Guide, 
Version 5, Release 1 and equivalent NCPDP Batch Standard Batch 
Implementation Guide, Version 1, Release 1 (hereinafter collectively 
referred to as Version 5.1), for the following retail pharmacy drug 
transactions: Health care claims or equivalent encounter information; 
eligibility for a health plan; referral certification and 
authorization; and coordination of benefits.
    Since the adoption of Version 5.1 as a transaction standard in the 
Transactions and Code Sets rule, the industry has submitted requests to 
NCPDP for modifications to Version 5.1. These modification requests 
were for similar reasons as those for the X12 standards--changing 
business needs, many necessitated by the requirements of the Medicare 
Prescription Drug Improvement and Modernization Act of 2003 (MMA).
    In NCVHS hearings held in July 2007, industry stakeholders cited 
business needs that would be addressed by the increased functionality 
in Version D.0 to include:
     Enhanced guidance for Coordination of Benefits (COB). In 
Version D.0, extensive clarification is made to the implementation 
guide for coordination of benefits processing. New data elements, for 
example, patient responsibility and benefit stage were added, along 
with a refined use of the Other Coverage Code field.
     Processing of Medicare Part D claims. Changes in Version 
D.0 include the addition of three new data elements and rejection 
codes.
     Enhanced eligibility checking. Version D.0 provides more 
complete eligibility information for Medicare Part D and other 
insurances.
     Specific COB for Medicare Part D. Version D.0 includes 
identification of patient responsibility, benefit stage, and coverage 
gaps on secondary claims.
     Streamlined claims processing for compounded drugs. In 
Version D.0, the compound segment has been modified to allow for the 
billing of multiple ingredients. To standardize this process, the two 
alternative ways of billing compounded claims have been removed.
    As a result of the hearings, the NCVHS Subcommittee on Standards 
and Security determined that the business needs identified by the 
industry would be met by Version D.0. The NCVHS expressed its support 
for Version D.0, and recommended that it be proposed for adoption as a 
HIPAA transaction standard through rulemaking. Based on the comments 
from industry stakeholders (as discussed above), the NCVHS specifically 
referenced several of the improvements in Version D.0, including: The 
modified field and segment defined situations; resolution of the 
situational versus optional data requirements to accommodate the HIPAA 
privacy regulations; and segment usage matrices that clarify which 
segments and fields are sent for each transaction type, and segments 
and fields within each transaction type. It also cited the enhancements 
made to accommodate Medicare Part D, which include the addition of a 
``facilitator'' entity and eligibility transaction to provide coded 
patient eligibility information for Medicare Part D and enhancements to 
identify and process Medicare Part D long term care claims. 
Enhancements with respect to Medicare Part B claims include additional 
segments for processing Medicare certificates of medical necessity, new 
data elements for processing those transactions, and assistance in the 
crossover of claims from Medicare to Medicaid. Finally, the NCVHS 
stated that Version D.0 also supports the following: COB and collection 
of rebates for compounded claims; clarification for pricing guidelines; 
the addition of new data elements that give more specificity to the COB 
process; a new section on prior authorization added to the 
implementation guide; a prescription/service reference number increase 
to 12 digits; and transaction codes for service billings.
    Because we believe Version D.0 would better support the business 
needs of the industry, for the reasons cited by the NCVHS, we propose 
to adopt Version D.0. We solicit comments regarding the proposed 
adoption of Version D.0 as the HIPAA standard, set forth in proposed 
revisions to Sec.  162.1102, Sec.  162.1202, Sec.  162.1302, and Sec.  
162.1802.

C. Proposed Adoption of a Standard for Medicaid Pharmacy Subrogation: 
NCPDP Medicaid Subrogation Implementation Guide, Version 3.0 for 
Pharmacy Claims

    We propose to add a new subpart S to 45 CFR part 162 to adopt a 
standard for the subrogation of pharmacy claims paid by Medicaid. The 
transaction would be the Medicaid Pharmacy Subrogation transaction, 
defined at proposed Sec.  162.1901, and the new standard would be the 
NCPDP Batch Standard Medicaid Subrogation Implementation Guide, Version 
3, Release 0 (Version 3.0), July 2007 (hereinafter referred to as 
Version 3.0) at proposed Sec.  162.1902. The standard would be 
applicable to Medicaid agencies in their role as health plans, but not 
to providers or health care clearinghouses because this transaction is 
not utilized by them. As a condition of Medicaid eligibility, an 
individual must assign to the State Medicaid agency his or her rights 
to payments for medical services from other liable third parties. This 
allows the Medicaid agency the right to stand in the place of the 
Medicaid recipient for the purpose of collecting reimbursement from 
liable third parties wherever the Medicaid agency has paid claims on 
behalf of a Medicaid recipient. This is referred to as ``Medicaid 
subrogation.''
    Federal law requires, with some exceptions, that Medicaid be the 
payer of last resort. Health plans that are legally required to pay for 
health care services received by Medicaid recipients are to pay for 
services primary to Medicaid. However, Medicaid agencies sometimes pay 
claims for which a third party may be legally responsible. This can 
occur when the Medicaid agency is not aware of the existence of other 
coverage. There are also specific circumstances for which States are 
required by Federal law to pay claims and then seek reimbursement 
afterward. Whenever Medicaid pays claims for which another party is 
legally responsible, the State is required to seek recovery.
    For the purpose of adopting a HIPAA standard, we propose to define 
a Medicaid pharmacy subrogation transaction as the transmission of a 
claim from a Medicaid agency to a payer for the purpose of seeking 
reimbursement from the responsible health plan for a pharmacy claim the 
State has paid on behalf of a Medicaid recipient.
    A majority of health plans use a pharmacy benefit manager (PBM) to 
manage prescription drug coverage and handle claims processing. Some 
health

[[Page 49752]]

plans administer the prescription coverage in-house, but contract with 
a claims processor to handle claims adjudication. A few of the large 
health plans perform their own claims processing. When PBMs process 
claims on behalf of health plans, they are considered to be business 
associates of the health plans. Section 162.923(c) requires a covered 
entity that chooses to use a business associate to conduct all or part 
of a transaction on behalf of the covered entity, to require the 
business associate to comply with all applicable requirements of the 
HIPAA regulations. Therefore, while entities such as PBMs and claims 
processors do not necessarily have ultimate financial liability, to the 
extent they are required by contract or otherwise to process claims on 
behalf of health plans, they will need to be able to receive the 
Medicaid pharmacy subrogation transaction in the standard format.
    There are many different formats utilized for submitting Medicaid 
pharmacy subrogation claims. To meet the many different requirements of 
the third party payers, States must maintain and utilize a variety of 
pharmacy billing formats. This is because different third party payers 
require different pieces of information. According to a study conducted 
by the Office of the Inspector General (OIG) entitled, ``Medicaid 
Recovery of Pharmacy Payments from Liable Third Parties'' (OEI-3-00-
00030, August 2001, available at http://oig.hhs.gov/oei/reports/oei-03-00-00030.pdf), 29 States indicated that the lack of universal 
formatting and data elements on pharmacy claims leads to the denial of 
Medicaid claims, contributing to millions of dollars of lost revenue to 
Medicaid. States have had to work through numerous changes and 
challenges to submit claims that are correctly formatted for various 
health plans. When States' claims are denied for formatting or missing 
data, and have to be reworked and resubmitted; there is additional 
administrative and financial burden on States and third parties. 
According to the OIG study, some PBMs have reimbursed claims at a lower 
rate as a penalty for the claim being in the wrong format. In order to 
recover Medicaid funds, some States have found it necessary to recoup 
from the pharmacies and it is left up to the pharmacies to seek 
reimbursement from the third party payers.
    In 1999, representatives from CMS and the Medicaid agencies began 
working closely with NCPDP to develop a standard electronic format that 
could be used to facilitate electronic transmission of pharmacy 
subrogation claims from Medicaid agencies to other payers. The standard 
combines a subset of elements from the NCPDP Version 5.1 drug claim 
standard with additional elements that Medicaid specifically needs to 
conduct subrogation, such as the Medicaid paid amount and the Medicaid 
agency identification number. The additional Medicaid-specific elements 
had to be placed in other NCPDP fields that were not discretely defined 
in Version 5.1. In June 2000, as a result of these collaborative 
efforts, NCPDP issued the Medicaid Subrogation Implementation Guide 
Version 2.0 for the Batch Standard.
    At least two-thirds of the States utilize Version 2.0 voluntarily, 
many through the use of a business associate that bills pharmacy claims 
on the State's behalf. The States, or their business associates, use 
the NCPDP format with some modifications to accommodate the various 
other health plan requirements. There are at least ten major third 
party payers that have entered into an agreement with States and/or 
their business associates to accept the NCPDP format. However, the 
absence of full standardization now presents challenges for States, 
which must continue to maintain and use many billing formats.
    We did not adopt a standard for Medicaid pharmacy subrogation at 
the time the first set of HIPAA transaction standards were adopted 
because it was not one of the specified transactions mandated in the 
law. However, we believe that, in light of the challenges noted above, 
deriving from the lack of full standardization, it is now appropriate 
to propose a standard for the Medicaid pharmacy subrogation 
transaction. Section 1173(a)(1)(B) of the Act authorizes the Secretary 
to adopt standards for any other financial and administrative 
transactions as deemed appropriate, consistent with the goals of 
improving the operation of the health care system and reducing 
administrative costs. We believe that adopting a standard for Medicaid 
pharmacy subrogation would facilitate electronic data interchange; 
thereby reducing administrative costs and improving the operations of 
the health care system by eliminating multiple formats and methods of 
performing this transaction.
    We solicit comments regarding the proposed adoption of the NCPDP 
Batch Standard Medicaid Subrogation Implementation Guide, Version 3.0 
as the HIPAA standard for the Medicaid pharmacy subrogation 
transaction, and the proposed dates for compliance with the standard 
addressed in proposed Sec.  162.1902.

D. Proposed adoption of the National Council for Prescription Drug 
Programs (NCPDP) Telecommunication Standard D.0 and the Health Care 
Claim: Professional ASC X12 Technical Report Type 3 for Billing Retail 
Pharmacy Supplies and Services

    We propose to revise Sec.  162.1102 to adopt both Version D.0 and 
the 837 Health Care Claim: Professional ASC X12 Technical Report Type 3 
for billing retail pharmacy supplies and professional services. The use 
of either standard would be determined by trading partner agreements.
    The Transactions and Code Sets rule adopted two transaction 
standards relating to the billing of retail pharmacy claims. Version 
5.1 is required for the transmission of retail pharmacy drug claims, 
and the X12 837 for professional services and supplies. (Sec.  
162.1102). The final rule, however, does not define what or who 
constitutes ``retail pharmacies'' and further, what a ``retail pharmacy 
drug claim'' is in the context of the NCPDP, Version 5.1 standard. The 
regulations also do not specify, define, or describe the items or 
services that are to be billed on the X12N 837P standard, only that the 
services are ``health care services.'' As a result, different 
interpretations of the regulations exist as to whether a ``retail 
pharmacy drug claim,'' which is to be billed using Version 5.1, 
includes claims only for drug products, for drug products and 
associated pharmacy services and supplies, or for drug products and any 
retail pharmacy services or supplies. CMS has interpreted the 
regulation as requiring that Version 5.1 be used only for drug products 
and that the X12N 837P be used for retail pharmacy services and 
supplies other than drug products.
    Since publication of the Transactions and Code Sets rule, there has 
been ongoing debate in the industry about which is the appropriate 
standard for billing retail pharmacy supplies and professional 
services. Retail pharmacy supplies and professional services include 
syringes, applicators, inhalers and nebulizers, and home infusion IV 
supplies. These are often tied to a retail pharmacy claim for a 
prescription, such as insulin, ointments, and inhaler solutions. For 
example, a patient could get a prescription and/or refill for insulin 
and the syringes. Under the current rule, pharmacies are expected to 
submit the insulin claim in real-time, using the NCPDP standard, and 
get immediate benefit coverage and co-pay insurance information. 
However, they must bill the prescription for the syringes with the X12 
standard, which

[[Page 49753]]

is typically a batch billing process so the pharmacist would not get 
immediate notification of coverage and co-pay insurance information. 
The transaction could be further complicated if the patient is 
prescribed consultation or Medication Therapy Management (MTM) services 
for the use and dosage of the insulin with the syringes. The issue of 
MTM is discussed later in this section.
    At the time the Transactions and Code Sets rule was published, HHS' 
opinion that the NCPDP standard should be used for retail pharmacy and 
the X12 standard should be used for professional pharmacy claims was 
based on the inability of NCPDP to accommodate HCPCS codes that could 
be used to identify pharmacy procedures and services. The code set has 
since expanded, and Version 5.1 is now capable of accommodating the 
National Drug Codes (NDC) and the HCPCS codes to identify pharmacy 
procedures and services more accurately. In the Modifications rule (68 
FR 8387), there was additional discussion regarding the complications 
of not allowing the use of NCPDP for pharmacy supplies and services, 
and there is significant discussion in that rule that supports the 
industry need to be able to use the NCPDP standard in place of the 
Version 4010 standard for these claims. Since publication of the 
Transactions and Code Sets rule and the Modifications rule, we have 
responded to substantial correspondence and provided guidance in a 
Frequently Asked Question (FAQ) clarifying that the NCPDP standard is 
to be used for billing retail pharmacy drug claims and that the X12 837 
standard is to be used for billing retail pharmacy supplies and 
professional services. Nonetheless, there continues to be a lack of 
consensus in the industry regarding which standard to use for billing 
retail pharmacy supplies and professional services because of the 
disagreement as to what is a retail pharmacy drug claim. Some segments 
of the pharmacy industry interpret a retail pharmacy drug claim as one 
that could include pharmacy supplies and professional services, and 
therefore would permit the use of the NCPDP standard. Others believe 
that retail pharmacy drug claims do not include retail pharmacy 
supplies and professional services and, therefore, permit the X12 
standard to be used. There are also entities that believe it is 
appropriate to use one or the other standard depending on whether the 
insurance benefit is medical, in which case X12 is used for retail 
pharmacy supplies and professional services, or whether it is a 
pharmacy benefit, in which case the NCPDP standard should be used. 
Whether the benefit is covered under medical or pharmacy is typically 
determined by the design of an employer's or health plan's benefit 
package. We also continue to receive input from the industry that it is 
common practice for pharmacies to use the NCPDP standard instead of the 
X12 standard because of the convenience and accuracy NCPDP provides for 
these services and claim types.
    In 2006, the debate escalated due to implementation of the Medicare 
Part D Program under the Medicare Prescription Drug, Improvement, and 
Modernization Act (MMA). The MMA provides coverage for certain 
professional pharmacy services, referred to as Medication Therapy 
Management (MTM) services. MTM services are a distinct service or group 
of services that optimize therapeutic outcomes for individual patients. 
MTM services are independent of, but can occur in conjunction with, the 
provision of a medication product. MTM encompasses a broad range of 
professional activities and responsibilities within the licensed 
pharmacist's, or other qualified health care provider's, scope of 
practice. Some pharmacies believe it is appropriate to use the NCPDP 
standard for MTM services because the service is part of a 
prescription. Other segments, notably the small independent pharmacies, 
believe it is appropriate to use the X12 standard because they 
interpret ``professional services'' to mean that a ``professional'' 
(837P) claim is required and their vendor software offers that 
capability.
    The industry acknowledges advantages and disadvantages for use of 
both standards, and has provided evidence that both standards should be 
considered compliant and that the use of either would be appropriate 
under HIPAA. In August 2007, a national organization sent a letter to 
CMS in support of using the NCPDP for both retail pharmacy service and 
supply type claims. The letter explained that chain drug stores feel 
strongly that they should be able to bill using NCPDP 5.1. Entities 
supporting the use of NCPDP 5.1 make the argument that NCPDP 5.1 offers 
real-time adjudication of claims, whereas the X12 837P is a batch 
process. According to the National Association of Chain Drug Stores, 
pharmacies are not coding for the X12 837 transaction because it is too 
cumbersome. Instead, when forced to use this transaction, pharmacies 
must use an outside vendor or clearinghouse, even though it is an added 
expense because they already have the capability to exchange the same 
information in real time with NCPDP 5.1. On the other side of the 
discussion, the independent pharmacies argue that X12 837 is the 
appropriate standard for ``supplies and professional services'' as 
evidenced by the fact that they have purchased software from their 
national association to accommodate this standard. Further, they 
believe that the X12 837 is more robust in its support of the data 
elements needed to bill for MTM services.
    After discussions with representatives of national organizations as 
well as the NCPDP, CMS posted an addendum to its Frequently Asked 
Question (FAQ) on the CMS website in October 2007. This FAQ now also 
includes the following: ``While CMS adheres to its foregoing 
interpretation of the regulations requiring that MTM retail pharmacy 
services be reported using the X12 837P standard, we recognize that a 
reasonable argument could be advanced in response to the Department 
seeking to enforce this regulation, contending that the regulations 
could be read to instead direct the use of the NCPDP, Version 5.1 
standard for such services. We further realize that notice and comment 
rulemaking, which the Department anticipates initiating in the near 
future will resolve the apparent ambiguity of these regulatory 
provisions. In light of the foregoing planned rulemaking and the 
uncertain outcome of any enforcement action, we elect not to take 
enforcement action against those covered entities that continue to use 
the NCPDP, Version 5.1 standard for this transaction.''
    The implementation guides for both adopted standards accommodate 
the transaction, including the use of the appropriate code sets, and 
neither guide states clearly which standard applies for billing retail 
pharmacy services and supplies. This is a unique situation--no other 
HIPAA transactions can be adequately supported by two implementation 
guides. Based upon the input we have received from the industry on the 
use of these standards, we believe that allowing for the use of either 
the NCPDP or ASC X12 standards would accommodate prevailing business 
practices, ensure efficiency, and prevent redundant costs. For example, 
a pharmacy provider would no longer need to bill two separate claims 
(that is, one for a drug, and a separate claim for the supplies 
associated with the drug's administration). Health plans already accept 
both transaction types, and have the systems in place to adjudicate the 
retail and professional claims using either transaction. Therefore we 
do not believe this will be

[[Page 49754]]

an additional burden to plans. We do not believe that the proposed 
approach would be disruptive to current industry practice, as we have 
stated, and we do not believe that there will be any negative impact on 
providers or consumers in accommodating this existing business process. 
Rather, we believe our proposed approach would be the least disruptive 
to the industry because it accommodates prevailing business practices 
and permits entities to use the standard that is most appropriate, 
efficient and accurate for processing certain kinds of pharmacy 
transactions. Furthermore, the NCPDP standard accommodates the billing 
of supplies and services as well, if not more effectively than the X12 
standard, because it was designed by the industry, with a specific 
focus on the full set of requirements for all types of pharmacy 
transactions. Both Version D.0 and Version 5010 accommodate the billing 
of supplies and services. This is also consistent with NCVHS 
recommendations dated June 17, 2004.
    We solicit comments on the proposal to adopt both the NCPDP 
standard and the X12 standard for billing retail pharmacy supplies and 
professional services.

E. Modifications to the Descriptions of Standards

    We propose to revise the descriptions of the transactions at Sec.  
162.1301, Sec.  162.1401, and Sec.  162.1501 to more clearly specify 
the senders and receivers of those transactions.
    In the Transactions and Code Sets rule, we identified eight health 
care transactions and adopted standards for each of them. Included in 
most of the descriptions of those transactions is a specification of 
``to whom'' and ``from whom'' the transaction is transmitted. This 
specification enables covered entities to be able to determine more 
easily when they may be conducting transactions for which a HIPAA 
standard is adopted and, therefore, when they need to comply with the 
transaction standard. However, descriptions for three of the 
transactions do not specify the ``to'' and ``from'' criteria--that is, 
the sender and receiver are not identified. This lack of specificity 
creates confusion and uncertainty in the industry about when a 
particular electronic transmission meets the definition of a 
transaction. In addition, in 2003 the Secretary's Advisory Committee on 
Regulatory Reform recommended that we adopt ``to'' and ``from'' data 
submission requirements for all of the standard transactions. We wish 
to make our existing policies as clear as possible, and we use this 
proposed rule as the opportunity to do so.
    In this proposed rule, we would revise descriptions for three of 
the standard transactions to ensure that ``to'' and ``from'' 
requirements are specified.
1. Enrollment and Disenrollment in a Health Plan Transaction
    In Sec.  162.1501, the text does not specify the sender of the 
transmission. We propose to clarify, by revising the regulation text, 
that the enrollment and disenrollment in a health plan transaction is 
the transmission of subscriber enrollment information from the sponsor 
of the insurance coverage, benefits or policy to a health plan, to 
establish or terminate insurance coverage. The Version 5010 
Implementation Guide also defines the transaction this way: ``The 834 
is used to transfer enrollment information from the sponsor of the 
insurance coverage, benefits, or policy to a payer.''
    We note that when enrollment and disenrollment information is 
currently sent electronically from a sponsor to a health plan, a 
sponsor that is not otherwise a covered entity is not required to use 
the transaction standard because, as a non-covered entity, HIPAA does 
not apply to it. A sponsor is an employer that provides benefits to its 
employees, members or beneficiaries through contracted services. 
Numerous entity types act as sponsors in providing benefits, including, 
for example, unions, government agencies, and associations. While it is 
not mandatory for plan sponsors that are not covered entities to use 
the transaction standard, such an entity may nevertheless voluntarily 
use the standard or may contract with a health care clearinghouse to 
translate nonstandard data into a standard transaction on its behalf in 
order to take advantage of available efficiencies and cost saving 
opportunities through EDI.
2. Referral Certification and Authorization Transaction
    In Sec.  162.1301, the text does not indicate who the senders and 
receivers of the referral certification and authorization transactions 
are--it simply states that the transmission is a request or response. 
We therefore propose to clarify the senders and receivers by stating 
that the referral and certification authorization transaction is any of 
the following transmissions:
     A request from a health care provider to a health plan for 
the review of health care to obtain an authorization for the health 
care.
     A request from a health care provider to a health plan to 
obtain authorization for referring an individual to another health care 
provider.
     A response from a health plan to a health care provider to 
a request described in the first or second bullet above.
3. Health Care Claim Status Transaction
    In Sec.  162.1401, the text does not indicate who the senders and 
receivers of the health care claim status transaction are--it simply 
states that the transmission is an inquiry or response. We therefore 
propose to clarify the parties to this transaction by stating that the 
health care claim status transaction is the transmission of either of 
the following:
     An inquiry from a health care provider to a health plan to 
determine the status of a health care claim, or
     A response from a health plan to a health care provider 
about the status of a health care claim.

F. Proposed Compliance and Effective Dates

    We propose to revise Sec.  162.900 to reflect that, for the 
Medicaid pharmacy subrogation transaction, all covered entities, except 
for small health plans, would be required to be in compliance no later 
than 24 months after the effective date of the final rule. Small health 
plans would have an additional 12 months for compliance. Willing 
trading partners would be able to agree to use the Medicaid subrogation 
standard voluntarily at any time after the effective date and before 
the compliance date. For example, covered entities that implement 
Version D.0 may choose to implement the Medicaid subrogation standard 
at the same time because such an action can be accommodated in the work 
flow.
    CMS recognizes that transactions often require the participation of 
two covered entities, and when one covered entity is under a different 
set of compliance requirements, the second covered entity may be put in 
a difficult position. For the Medicaid subrogation of pharmacy claims 
transaction, small health plans would have an extra year to comply with 
the regulation. Therefore, if a Medicaid agency attempted to transmit 
Version 3.0 to a small health plan before the small health plan was 
required to be compliant, the small health plan could reject the 
transaction. This would require the Medicaid agency to use two versions 
of the transaction, or to use one compliant version, and one 
proprietary version, depending on the trading partner agreement with 
the small health plan for this interim period. We propose to resolve 
this problem of different

[[Page 49755]]

compliance dates by revising the language in Sec.  162.923. Section 
162.923, entitled ``Requirements for covered entities'' currently 
states, ``(a) General rule. Except as otherwise provided in this part, 
if a covered entity conducts with another covered entity (or within the 
same covered entity), using electronic media, a transaction for which 
the Secretary has adopted a standard under this part, the covered 
entity must conduct the transaction as a standard transaction.'' We 
propose to revise Sec.  162.923 by making paragraph (a) applicable only 
to a covered entity that conducts transactions with another entity that 
is required to comply with the transaction standards. We believe that 
such a change would result in a less disruptive process by recognizing 
and resolving the difficult position covered entities may face when 
conducting transactions with trading partners who have different 
compliance deadlines. Accordingly, we would revise Sec.  162.923 as 
follows: ``(a) General rule. Except as otherwise provided in this part, 
if a covered entity conducts with another covered entity that is 
required to comply with a transaction standard adopted under this part 
(or within the same covered entity), using electronic media, a 
transaction for which the Secretary has adopted a standard under this 
part, the covered entity must conduct the transaction as a standard 
transaction.'' If we change Sec.  162.923(a) in this way, a Medicaid 
agency, which would have a different compliance date than a small 
health plan with whom it is conducting the subrogation transaction, 
would not be required to conduct the transaction in the standard format 
until the date by which the small health plan must be in compliance 
with the standard.
    We invite comments regarding the proposed compliance dates for our 
proposal to adopt the Medicaid pharmacy subrogation transaction 
standard. We further propose to revise section Sec.  162.900 to remove 
the provisions related to the Administrative Simplification Compliance 
Act of 2001 (ASCA) Public Law 107-105.
    The revised transactions descriptions would be effective on the 
effective date of the final rule.
    NCVHS noted that, according to testimony, there were no expected 
implementation issues with Version D.0, but that implementation of 
Version 5010 would likely prove slightly more challenging because of 
the number of standards and the diversity of trading partners. However, 
because most covered entities will need to program for both Version 
5010 and Version D.0, we believe that it is most practical to propose 
the same compliance dates for both. We propose that for Versions 5010 
and D.0, health plans, including small health plans, health care 
clearinghouses and covered health care providers, be required to be 
compliant on and after April 1, 2010. We do not propose a 2-year time 
frame for compliance, as recommended by NCVHS, because we believe the 
industry has sufficient experience with implementation issues 
associated with the HIPAA standards to enable them to conduct their 
design/build activities, and schedule and perform testing within a 12-
month period. Furthermore, the ability to implement and use the ICD-10 
code set is contingent upon implementation of Version 5010. Since we 
anticipate timely publication of regulations to adopt the ICD-10 code 
set, we wish to give the industry sufficient time in which to 
effectively plan and implement the Version 5010 transaction standards. 
We anticipate the compliance date for ICD-10 to be in 2011. Presuming 
that, given this anticipated schedule, and in order to give the 
industry at least eighteen months of experience with Version 5010, the 
compliance date for those standards must be April 2010. We have not 
surveyed the industry broadly, other than the interviews conducted for 
the impact analysis, and while we acknowledge the logistical and 
implementation issues associated with the transition to Version 5010 
and Version D.0, we maintain that the industry is capable of planning 
and designing the technical and operational infrastructure requirements 
in time for the proposed deadline. We believe that the benefits of the 
new versions, the potential for mitigating existing inefficient work 
arounds, and streamlining business processes will outweigh any benefits 
to be derived from a two-year compliance time frame recommended by the 
NCVHS. We specifically ask for industry comment on the timing and the 
costs of this proposed implementation schedule.
    We also do not propose an additional year for small health plans to 
comply because we believe this allowance is unnecessary. Small health 
plans have had sufficient time to be compliant with the HIPAA 
transaction standards as well as the NPI, and to have made the 
appropriate investments in technology and infrastructure, as have their 
larger counterparts. The system and business process changes to 
accommodate Version 5010 and Version D.0 are not significant enough to 
warrant an additional year for those organizations that should now have 
sufficient experience with the standards.
    We did consider, as an alternative, a proposal in which all health 
plans and all health care clearinghouses would be required to be 
compliant one year after the effective date, and covered health care 
providers would be required to be compliant 12 months later. In this 
way, providers would have ample time to test with their trading 
partners, and problems would be identified and resolved timely. We are 
not proposing the staggered compliance date option. Our discussion of 
the issues follows.
    NCVHS testimony and subsequent industry input clearly support the 
adoption of Version 5010 for the affected X12 transactions and Version 
D.0 for the NCPDP transactions, but also confirm that it would be a 
significant undertaking for the industry, particularly in light of 
other potential Health IT initiatives such as migrating from the ICD-9 
to ICD-10 code sets and implementing the new standards for claims 
attachments after that final rule is published.
    The difficulties associated with implementation of the first set of 
HIPAA transaction standards and the National Provider Identifier (NPI) 
standard highlights the criticality of testing to ensure that 
transactions can be successfully exchanged between trading partners 
before the compliance date. The testing process is complex and time-
consuming, especially for health plans and health care clearinghouses, 
which must test with very large numbers of trading partners. 
Historically, industry testing of the HIPAA standards has been 
concentrated at the very end of the compliance period, often resulting 
in insufficient time to identify and resolve all of the problems soon 
enough; this compression of the testing process has led to late 
identification of problems and has necessitated relief in the form of a 
flexible enforcement approach and contingency plans to avoid widespread 
noncompliance and cash flow disruption.
    The July 2007 NCVHS letter, referenced earlier in this document, 
also recommended moving to a staggered compliance schedule for most of 
the standards proposed in this rule, which would require health plans 
and health care clearinghouses to be prepared for trading partner 
testing at the end of the first year of the implementation period, and 
to allow the second year to be used for testing. According to the 
NCVHS, this schedule would ensure that covered entities have ample time 
for communication, outreach, internal and external testing, corrective 
action, and

[[Page 49756]]

implementation. The NCVHS also recommended that CMS adopt certain 
levels of compliance for the standards. For example, Level 1 compliance 
would mean that the covered entity could demonstrate that it could 
create and receive compliant transactions. Level 2 compliance would 
demonstrate that covered entities had completed end-to-end testing with 
all of their partners.
    Testing appears to be the key to successful timely implementation 
of standards. In fact, the NCVHS letter noted that testifiers 
emphasized that there was a need to test Version 5010 in real-life 
settings to ensure its interoperability and ability to support the 
transactions. Three types of testing needs were identified: (1) Testing 
of the standards for workability; (2) conformance testing of products 
and applications that send and/or receive the transactions; and (3) 
end-to-end testing to ensure interoperability among trading partners. 
NCVHS observed that, with the previous HIPAA transaction standards 
implementation, these three types of testing occurred unevenly, 
resulting in delays that could be minimized or avoided by staggering 
the various types of testing.
    To accommodate an effective testing schedule, a variety of options 
for staggering the implementation of the Version 5010 and D.0 
modifications were offered by testifiers to the NCVHS. There was a 
proposal to NCVHS that the compliance date for plans and clearinghouses 
could be a year before the date for providers in order to facilitate 
end-to-end testing. Alternatively, different compliance dates could be 
assigned to different transactions (for example, implement the claim 
and related transactions first). Testifiers at the July 30, 2007 
hearings also attested to the importance of allowing dual processing 
(old plus new versions) for a sufficient period to allow end-to-end 
testing to occur.
    Because of the importance of testing in achieving a smooth 
transition to the updated standards, we did consider proposing two 
different compliance dates for covered entities--a strategy in which 
health plans and health care clearinghouses would have to be compliant 
1 year before covered health care providers to allow for adequate 
testing. However, such a proposal would shorten the overall 
implementation period for the entire industry and we believe it would 
present a number of other potential challenges to the industry.
    First, a staggered implementation schedule would require all 
entities to use dual systems for the duration of the testing period, 
which could add to the cost of implementation, in part because plans 
and clearinghouses would have to implement a robust trading partner 
tracking system to know which providers were testing Version 5010, 
which were using Version 4010, and then, which successfully completed 
testing and had fully converted to Version 5010. Providers would have 
additional operational costs to manage their own testing and 
implementation schedule with plans and clearinghouses. The logistics 
could be complex, costly, and disruptive. Second, staggered compliance 
dates could impact plan-to-plan COB transactions because plans and 
providers would be implementing Version 5010 at different times. In 
order to conduct compliant Version 5010 transactions, all plans would 
have to be compliant at the same time, and all providers would have to 
be using Version 5010 as well, to take advantage of plan-to-plan COB. 
In addition, compliance in the case of a staggered implementation 
schedule would mean that, on the compliance date for plans and 
clearinghouses, those entities would have to be able to send and 
receive compliant transactions. However, it would be inappropriate to 
require plans and clearinghouses to reject noncompliant transactions 
received from providers during the one year period before providers 
would be required to be compliant, since the providers would not be 
required under this proposal to be able to conduct compliant 
transactions until the end of that period.
    We believe we have the authority under the statute to propose 
different compliance dates for different entity groups, and we believe 
that exercising that authority could be in the interest of the industry 
to facilitate an orderly and effective transition to the use of the 
standards. However, for the reasons noted above, we are not proposing 
this approach. We are, however, interested in comments on the 
advantages and disadvantages of a staggered implementation schedule, 
specifically with respect to its effect on the testing process.
    Although we are not proposing a staggered compliance schedule, we 
strongly encourage health plans and clearinghouses to begin to get 
their systems ready as early as possible, and providers to work with 
their trading partners to schedule testing timely as well. We also 
encourage clearinghouses and vendors to take advantage of the market 
opportunity to develop leading edge tools for implementing Version 
5010, and support early testing for their provider clients. We note 
that NCVHS recognized the widespread use of compliance testing 
services, which allow entities to test products and applications to 
ensure they can create and accept compliant transactions. We agree that 
such services could simplify end-to-end testing by ensuring that 
individual products are compliant in advance. While HHS does not 
recognize or promote any specific organizations or tools for such 
services, we do support the use of such testing services for software 
and/or applications that would demonstrate a covered entity's ability 
to create, send, and receive compliant transactions.
    We anticipate that upon publication of this proposed rule in the 
Federal Register, the industry will actively initiate and/or complete 
planning for implementation of Version 5010. While not included under 
the auspices of this proposed rule, we also acknowledge the impact of 
the implementation of the ICD-10 code set on the Version 5010 and 
Version D.0 implementation timelines. Once the Version 5010/Version D.0 
and ICD-10 final rules are published, we estimate that the industry 
will begin documenting the requirements for the necessary system 
changes for each standard, initiate and/or complete any gap analyses, 
and then undertake design and system changes. The Version 5010/Version 
D.0 rule implementation would progress first, based on the need to have 
those updated standards in place prior to ICD-10 implementation in 
order to accommodate the increase in the size of the fields for the 
ICD-10 code sets. In the case of Version 5010 and Version D.0, system 
testing could commence approximately 8 months prior to a Version 5010 
compliance date. We anticipate that ICD-10 testing could start shortly 
after the Version 5010 compliance date, and approximately one year 
prior to the October 2011 compliance date. Upon publication of these 
proposed rules for both Version 5010/Version D.0 and ICD-10 in the 
Federal Register, HHS, through CMS, plans on proactively conducting 
outreach and education activities, as well as engaging industry leaders 
and other stakeholder organizations to provide a variety of educational 
and communication programs to their respective constituencies. These 
activities would include roundtable conference calls with the industry, 
including Medicare contractors, fiscal intermediaries and carriers; 
health plans, clearinghouses, hospitals; physicians; pharmacies, other 
providers; and other stakeholders. CMS will also develop and make 
available ``Frequently Asked Questions'' on the website, fact

[[Page 49757]]

sheets, and other supporting education and outreach materials for 
partner dissemination. Other potential activities will be identified 
and developed based on stakeholder input.
    The draft proposed timeline shown below is for preliminary planning 
purposes only, and represents our best estimate, given our current 
knowledge, of what an implementation timetable might look like. It is 
subject to revision as updated information becomes available.

 Draft Proposed Timeline for ICD-10 and Versions 5010/D.0 Implementation
------------------------------------------------------------------------
                 ICD-10                          Version 5010/D.0
------------------------------------------------------------------------
8/08: Publish proposed rule............  8/08: Publish proposed rule.
------------------------------------------------------------------------
                                         9/08: Industry begins
                                          requirements documentation for
                                          systems changes; CMS and
                                          industry initiate education
                                          and outreach.
------------------------------------------------------------------------
12/08: CMS and industry begin ongoing
 education and outreach.
------------------------------------------------------------------------
                                         4/09: Industry builds and tests
                                          systems changes (internal and
                                          external testing).
------------------------------------------------------------------------
06/09: Industry begins design
 documentation.
------------------------------------------------------------------------
12/09: Industry builds and internally
 tests systems changes.
------------------------------------------------------------------------
                                         4/10: Compliance date for all
                                          covered entities.
------------------------------------------------------------------------
07/10-10/11: Conduct testing with
 trading partners.
------------------------------------------------------------------------
10/11: ICD-10 compliance date for all
 covered entities.
------------------------------------------------------------------------

    We solicit industry and other stakeholder comments on our timeline 
assumptions and our proposed education and outreach strategy.
    In sum, the challenges and difficulties encountered with previous 
standards implementation have informed the industry, which we believe 
now more meaningfully appreciates the benefits of collaboration, 
communication, and coordinated testing in making a substantial 
difference in successful implementation. Furthermore, we believe the 
industry is eager to move forward with Versions 5010 and D.0, and an 
aggressive timetable will be the right incentive to move the industry 
to proactive action and collaboration. We invite public comment on our 
proposed compliance dates.

III. Collection of Information Requirements

    The burden associated with the information collection requirements 
contained in Sec.  162.1102, Sec.  162.1202, Sec.  162.1301, Sec.  
162.1302, Sec.  162.1401, Sec.  162.1402, Sec.  162.1501, Sec.  
162.1502, Sec.  162.1602, Sec.  162.1702, and Sec.  162.1802 of this 
document are subject to the PRA; however, these information collection 
requirements are currently approved under OMB control number 0938-0866. 
This package will be revised to incorporate any proposed additional 
transaction standards and proposed modifications to transaction 
standards not currently captured in the PRA package associated with OMB 
approval number 0938-0866.

IV. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

V. Regulatory Impact Analysis

A. Overall Impact

    We have examined the proposed impacts of this rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
as amended by Executive Order 13258 (February 26, 2002) and further 
amended by Executive Order 13422 (January 18, 2007), the Regulatory 
Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 
1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 
1995 (Pub. L. 104-4), Executive Order 13132 on Federalism, and the 
Congressional Review Act (5 U.S.C. 804(2)).
    Executive Order 12866 (as further amended) directs agencies to 
assess all costs and benefits of available regulatory alternatives and, 
if regulation is necessary, to select regulatory approaches that 
maximize net benefits (including potential economic, environmental, 
public health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
This proposed rule is anticipated to have an annual benefit on the 
economy of $100 million or more, and would have economically 
significant effects, making it a major rule under the Executive Order 
and the Congressional Review Act. We believe that covered entities have 
already largely invested in the hardware, software and connectivity 
necessary to conduct the new version of the standards, and the new 
standard proposed. We anticipate that the adoption of these new 
versions and the new standard would result in costs that would be 
outweighed by the benefits. Accordingly, we have prepared a Regulatory 
Impact Analysis that to the best of our ability presents the costs and 
benefits of the proposed rulemaking.

B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) of 1980, Public Law 96-354, 
requires agencies to describe and analyze the impact of the proposed 
rule on small entities unless the Secretary can certify that the 
regulation will not have a significant impact on a substantial number 
of small entities. In the health care sector, a small entity is one 
with between $6.5 million and $31.5 million in annual revenues or is a 
nonprofit organization. For the purposes of this analysis (pursuant to 
the RFA), nonprofit organizations are considered small entities; 
however, individuals and

[[Page 49758]]

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 proposed regulation, and where 
we had difficulty, or were unable to find information, we solicit 
industry comment. We believe that the conversion to Versions 5010 and 
D.0 would have an impact on virtually every health care entity, since 
at least some personnel in every covered entity would have to adjust to 
certain new business rules and procedures to accommodate the 
improvements in the data available from the transactions.
    In our analysis, we combine Versions 5010 and D.0 because these two 
standards would be implemented at the same time, and in some cases are 
dependent on each other. For example, a health plan may use Version 
5010 to send a remittance advice notification to a pharmacy, even 
though the pharmacy has used Version D.0 to submit its claim. This 
means that both the health plan and the pharmacy will have to implement 
both Version 5010 and Version D.0 in order to effectively exchange 
transactions. Similarly, a pharmacy may use Version 5010 to bill for 
supplies (for example, syringes), yet use Version D.0 for the retail 
pharmacy service of the insulin. The pharmacy will have to implement 
both Versions 5010 and D.0.
    Table 27a in the impact analysis presents the implementation costs 
of Versions 5010, D.0 and 3.0 on all entities we anticipate would be 
affected by the rule. The data in that table are used in this analysis 
to provide cost information.
    Because most health care providers are either nonprofit or meet the 
SBA's size standard for small business, we treat all health care 
providers as small entities. For providers, the changes may be minimal 
involving no more than a software upgrade for practice management and 
billing systems. Thus, we expect that the vast majority of physicians 
and practitioners will need to make relatively small changes in their 
systems and in their processes. We include pharmacies in this analysis, 
and consider some of them to be small businesses, and they are thus 
represented in our tables and the accompanying narrative. A number of 
health plans are considered small businesses, but we were unable to 
identify data for these entities, and therefore solicit industry 
feedback to complete this analysis for the final rule. We address 
clearinghouses and Pharmacy Benefit Managers (PBMs) in our discussion, 
but we do not believe that there are a significant number of 
clearinghouses that would be considered small entities because of the 
consolidation that has been occurring in the marketplace over the past 
5 years. This was confirmed by a number of associations, including the 
Maryland Commission for Health Care. PBMs are excluded from the 
analysis because we have no data to indicate that they would qualify as 
a small entity. For example, as of 2006, the top four PBMs in the 
country accounted for about 75 percent of the prescription market, and 
of the top 10 PBMs, the largest showed revenues of more than $35 
billion, with the smallest having revenues of $75 million (http://www.managedcaremag.com/archives/0609/0609.pbms.html). We invite comment 
and data from the industry regarding our assumptions.
    State Medicaid agencies are excluded from this analysis because 
they have annual estimated revenues that exceed the small entity 
threshold of $31.5 million under the regulatory flexibility analysis 
guidelines. Furthermore, States are not considered small entities in 
any Regulatory Flexibility Analysis.
Initial Regulatory Flexibility Analysis (IRFA)
1. Number of Small Entities
    In total, we estimate that there are more than 300,000 health care 
organizations that may be considered small entities either because of 
their nonprofit status or because of their revenues. On the provider 
side, practices of doctors of osteopathy, podiatry, chiropractors, 
mental health independent practitioners with annual receipts of less 
than $6.5 million are considered to be small entities. Solo and group 
physicians' offices with annual receipts of less than $9 million (97 
percent of all physician practices) are also considered small entities, 
as are clinics. Approximately 92 percent of medical laboratories, 100 
percent of dental laboratories and 90 percent of durable medical 
equipment suppliers are assumed to be small entities as well. The 
American Medical Billing Association (AMBA) (http://www.ambanet.net/AMBA.htm) lists 97 billing companies on its web site. It notes that 
these are only ones with Web sites.
    The Business Census data shows that there are 4,786 firms 
considered as health plans and/or payers (NAICS code 5415) responsible 
for conducting transactions with health care providers. In the proposed 
rule's impact analysis, we use a smaller figure based on a report from 
AHIP. But for purposes of the RFA, we did not identify a subset of 
small plans, and instead solicit industry comment as to the percentage 
of plans that would be considered small entities.
    We identified the top 78 clearinghouses/vendors in the Faulkner and 
Gray health data directory from 2000--the last year this document was 
produced. Health care clearinghouses provide transaction processing and 
translation services to both providers and health plans.
    We identified nearly 60,000 pharmacies, using the National 
Association of Chain Drug Stores Industry Profile (2007, http://www.nacds.org), and for the purposes of the initial regulatory 
flexibility analysis we are proposing to treat all independent 
pharmacies reported in the Industry Profile as ``small entities.'' The 
number of independent pharmacies reported for 2006 is approximately 
17,000 entities. We specifically invite comments on the number of small 
pharmacies.
    Based on Figure 2 of the Industry Profile, independent pharmacy 
prescription drug sales account for 17.4 percent of total pharmacy drug 
sales of $249 billion sales for 2006. Allocating the 5010 and D.0 costs 
based on the share of prescription drug revenues to independent 
pharmacies (the small businesses), implementation costs are expected to 
range between $7.06 and $13.7 or 0.00 and 0.03 percent of revenues. 
These figures indicate that there is minimal impact, and the affect 
falls well below the HHS threshold, referred to at the beginning of 
this section.
2. Costs for Small Entities
    To determine the impact on health care providers we used Business 
Census data on the number establishments for hospitals and firms for 
the classes of providers and revenue data reported in the Survey of 
Annual Services for each NAICS code. Because each hospital maintains 
its own financial records and reports separately to payment plans, we 
decided to report the number of establishments rather than firms. For 
other providers, we assumed that the costs to implement the 5010 would 
be accounted for at the level of firms rather than at the individual 
establishments. Therefore, we reported the number of firms for all 
other providers.
    Since we are treating all health care providers as small entities 
for the purpose of the initial regulatory flexibility analysis, we 
allocated 100 percent of the implementation costs reported in the 
impact analysis for provider type. Table 1 shows the impact of the 
Version 5010 implementation costs as a percent of the provider 
revenues. For example, dentists, with

[[Page 49759]]

reported 2005 revenues of $87.4 billion and costs ranging from $299 
million to $598 million have the largest impact on their revenues of 
between $0.19 percent and 0.39 percent. We are soliciting comments 
specifically on the number of providers affected by the proposed rule 
and information that will help us in our analysis of the burden on 
providers.
    We do not include an analysis of the impact on small health plans 
here, because we were not able to determine the number of plans that 
meet the SBA size standard of $6.5 million in annual receipts.
    In evaluating whether there were any clearinghouses that could be 
considered small entities, we consulted with three national 
associations (EHNAC, HIMSS and the Cooperative Exchange), as well as 
the Maryland Commission for Health Care, and determined that the number 
of clearinghouses that would be considered small entities was 
negligible. Revenues cited on the Cooperative Exchange Web site 
(www.cooperativeexchange.org/faq.html) divided clearinghouses into 
three revenue categories--small ($10 million); medium ($10 million to 
$50 million) and large ($50 million or greater). We identified the top 
78 clearinghouses, and determined that they are typically part of large 
electronic health networks, such as Siemens, RxHub, Availity, GE 
Healthcare etc., none of which fit into the category of small entity. 
Finally, we contacted industry experts who have also been trying to 
gather revenue data from the industry without success. As referenced 
earlier, in a report by Faulkner and Gray in 2000, the top 51 entities 
were listed, and the range of monthly transactions was 2,500 to 4 
million, with transaction fees of $0.25 per transaction to $2.50 per 
transaction. We determined that even based on this data, few of the 
entities would fall into the small entity category, and we do not count 
them in this analysis.
    With respect to Version 3.0, we point out that while we do not know 
how many health plans/payers will exchange the subrogation standard 
with Medicaid agencies, those entities would be counted in the health 
plan category and addressed under the analysis for Version 5010 and 
D.0. We do not provide a separate analysis here.
    In sum, we assumed that the financial burden would be equal to or 
less than three percent of revenues. HHS policy states that if a rule 
imposes a burden equal to or greater than three percent of a firm's 
revenues, it is significant (see: ``Guidance on Proper Consideration of 
Small Entities in Rulemakings of the U.S. Department of Health and 
Human Services'' at http://www.hhs.gov/execsec/smallbus.html). Based on 
the results of this analysis, we are reasonably confident that the rule 
will not have a significant impact on a substantial number of small 
entities. Nevertheless, we are specifically requesting comments on our 
analysis and asking for any data that will help us determine the number 
and sizes of firms implementing the standards proposed in this notice.
    Table 2 below summarizes the impact of the rule on the health care 
industry.

                        Table 2--Analysis of Implementation of the Burden of Versions 5010, D.0 and 3.0 on Small Covered Entities
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Small
                                                                                                entity                     Small  entity
                                                            Total                Revenue or  receipts of   Version 5010/     share of     Implementation
          NAICS                      Entities             Number of     Small      Receipts     total       D.0 annual     version 5010/  cost  revenue-
                                                          entities    entities       ($        receipts     costs  (in    D.0 Costs  (in   receipts (in
                                                                                  millions)      (in         millions)      millions $)      percent)
                                                                                               percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
6221.....................  General Acute Care Hospitals       5,386       5,386     612,245        100       $536-$1,072  ..............       0.09-0.18
                            (establishments).
6211.....................  Physicians (firms)..........     189,562     189,562     330,889        100           250-501  ..............       0.08-0.15
6212.....................  Dentists (firms)............     118,163     118,163      87,405        100           172-344  ..............       0.19-0.39
44611....................  Pharmacies (includes 5010         56,946      17,482     249,000         17.4           49-96        7.1-13.7       0.02-0.03
                            and D.0).
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In column 1 we display the NAICS code for class of entity. Column 2 
shows the number of entities that are reported in the Business Census 
for 2006 or ``Chain Pharmacy Industry Profile.''
    Column 3 shows the number of small entities that were computed 
based the Business Census and Survey of Annual Service when the data 
was available. All health care providers were assumed to be small. We 
assumed that all independent pharmacies reported in Table 2 of the 
Industry profile are small entities.
    Column 4 shows revenues that were reported for 2005 in the Survey 
of Annual Services, or in the case of pharmacies, in Figure 2 of the 
Industry profile. In the case of health plans and third party 
administrators, we used the consumer payments reported for private 
health insurance in 2006 in the National Health Expenditure accounts.
    Column 5 shows the percent of small entity revenues.
    Column 6 shows the implementation costs for Version 5010, D.0 and 
3.0 taken from Table 27a of the impact analysis.
    Column 7 shows the costs allocated to the small entities based on 
the percent of small entity revenues to total revenues.
    Column 8 presents the percent of the small entity share of 
implementation costs as a percent of the small entity revenues. As 
stated in the guidance cited earlier in this section, HHS has 
established a baseline threshold of 3 percent of revenues that would be 
considered a significant economic impact on affected entities. None of 
the entities exceeded or came close to this threshold.
    We note that the impact in our scenarios is consistently under the 
estimated impact of 3 percent for all of the entities listed above, 
which is below the threshold the Department considers as a significant 
economic impact. As expressed in the Department guidance on conducting 
regulatory flexibility analyses, the threshold for an economic impact 
to be considered significant is 3 percent to 5 percent of either 
receipts or costs. As is clear from the analysis, the impact does not 
come close to the threshold. Thus based on the foregoing analysis, we 
conclude that some health care providers may encounter significant 
burdens in the course of converting to the modified Versions 5010 and 
D.0. However, we are of the opinion that, for most providers, health 
plans, and clearinghouses the costs will not be significant.
3. Alternatives Considered
    As stated in section V.D of this proposed rule, we considered 
various policy alternatives to adopting Versions 5010, D.0 and 3.0. For 
Version 5010, one alternative considered was that we not adopt the 
modifications, but allow the industry to continue using the current 
versions. This would not have been an appropriate solution because it 
does

[[Page 49760]]

nothing to address the existing shortcomings of the current versions, 
such as issues with inconsistent instructions, situational rules that 
preclude the full benefits of standardization for the industry, limited 
eligibility and secondary payer information, and continued reliance on 
companion guides from health plans. The existing shortcomings of the 
currently adopted standards continue to impact the industries' ability 
to meet evolving business needs and advanced technology.
    We considered a number of options for implementing a staggered 
transition to Version 5010--phasing in the implementation of the new 
standards by covered entity type. For example, clearinghouses and 
health plans would modify their systems first, followed by providers. 
We rejected this option as being too costly and too burdensome. This 
option would require clearinghouses and health plans, which are largely 
national, covering multiple states, to maintain and operate both 
Version 4010/4010A and Version 5010. Programmers would have to 
accommodate the new standards, but maintain programs for the older 
version. This could increase the likelihood of errors in payments and 
incorrect eligibility information, and could create confusion and 
uncertainty for providers. It is likely that there would be delays in 
claims processing. We believe the cost of maintaining two systems 
concurrently would impose a very significant burden on health plans, 
providers, and clearinghouses.
    Another alternative considered and rejected was to delay 
implementation for small entities. However, because we treat all health 
care providers as small entities, we did not see any benefit to be 
gained from delaying implementation of Version 5010 beyond the 18 month 
implementation period being proposed in the rule, and therefore 
rejected this alternative.
    A final alternative considered was waiting and adopting later 
versions of the X12 standards. In large part, this is not a feasible 
option since the adoption of Version 5010 is critical to the use of 
ICD-10. Given our expectation that use of the ICD-10 code set will be 
mandated in the next few years, the industry must have experience using 
Version 5010 in order to effectively implement ICD-10. We recognize 
that other relevant Federal Rules, current or future, may overlap and/
or affect this proposed rule. We do not believe that this proposed rule 
conflicts with the expected ICD-10 rule, but rather supports the 
industry's ability to implement that code set in a more timely fashion.
    We considered various alternatives to adopting NCPDP Version D.0. 
One alternative that was considered but not proposed was to do nothing 
and keep the current Version 5.1 as a HIPAA transaction standard. This 
option, however, would not support the health care industry's needs for 
better and enhanced claims information. If the Department continues to 
require Version 5.1, the enhancements that were made in Version D.0 to 
improve Part D eligibility and claims processing would put those who 
rely on this information at a disadvantage.
    Another alternative we considered was to stagger the implementation 
dates for the Version D.0 among the entities that utilize the affected 
NCPC transaction. This alternative is not feasible since pharmacies, 
PBMs, and health plans all rely on the information transmitted though 
the NCPDP transaction. If any one of these three entities is not using 
the same NCPDP version at the same time, the information needed to 
process claims and check eligibility would be deficient. Pharmacies 
need the most current eligibility data from the plans to determine 
correct coverage and payment information. Plans and PBMs would suffer 
because they would not have the most current information reflected 
though the claims data to maintain the beneficiaries' most current 
benefits.
    We considered a number of alternatives to proposing the adoption of 
the NCPDP 3.0 Medicaid pharmacy subrogation standard. We considered not 
adopting the standard, which would allow the industry to continue using 
Version 2.0 or other proprietary electronic and paper formats. This 
option would mean that the Medicaid plans would have to continue to 
support multiple formats in order to bill pharmacy claims to third 
party payers. The current multiplicity of claim formats creates a 
significant barrier to Medicaid agencies being able to comply with 
Federal law in ensuring that Medicaid is the payer of last resort.
    We also considered adopting the Version 2.0 standard which would 
require a number of workarounds to be compatible with Version D.0 or 
other NCPDP claim standards (except for NCPDP, Version 5.1). The NCPDP 
testified to the NCVHS in January 2008 that adopting Version 3.0 for 
Medicaid subrogation is a cost-saving tool and will improve the 
efficiency of those already using Version 2.0. The NCPDP testified that 
adopting Version 3.0 will make it more feasible for states and payers 
to invest in system upgrades to accommodate one specific standard. The 
NCVHS did not recommend any viable alternatives to Version 3.0 for 
handling Medicaid subrogation transactions because it believes that 
Version 3.0 adequately addresses the business needs of Medicaid 
agencies and industry partners.
4. Conclusion
    As stated in the HHS guidance cited earlier in this section, HHS 
uses a baseline threshold of 3 percent of revenues to determine if a 
rule would have a significant economic impact on affected entities. 
None of the entities exceeded or came close to this threshold. Based on 
the foregoing analysis, we could certify that this proposed regulation 
would not have a significant economic impact on a substantial number of 
small entities. However, because of the relative uncertainty in the 
data, the lack of consistent industry data, and our general 
assumptions, we invite public comments on the analysis and request any 
additional data that would help us determine more accurately the impact 
on the various categories of entities affected by the proposed rule.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule would have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. This proposed rule would 
affect the operations of a substantial number of small rural hospitals 
because they are considered covered entities under HIPAA and must 
comply with the regulations; however, we do not believe the rule would 
have a significant impact on those entities, for the reasons stated 
above in reference to small businesses. Therefore, the Secretary has 
determined that this proposed rule would not have a significant impact 
on the operations of a substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates would require spending in any 1 year 
$100 million in 1995 dollars, updated annually for inflation. In 2008, 
that threshold is approximately $130 million. This proposed rule 
contains proposed mandates that would impose spending costs on State, 
local, or tribal governments in the aggregate, or by the private 
sector, in excess of the current

[[Page 49761]]

threshold. This impact analysis addresses these impacts both 
qualitatively and quantitatively. In general, each State Medicaid 
Agency and other government entity that is considered a covered entity 
would be required to invest in software, testing and training to 
accommodate the adoption of the modified versions of the standards, and 
the new standard. UMRA does not address the total cost of a rule. 
Rather, it focuses on certain categories of cost, mainly those 
``Federal mandate'' costs resulting from (A) imposing enforceable 
duties on State, local, or tribal governments, or on the private 
sector, or (B) increasing the stringency of conditions in, or 
decreasing the funding of, State, local, or tribal governments under 
entitlement programs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. This proposed rule would have a substantial direct effect 
on State or local governments, could preempt State law, or otherwise 
have a Federalism implication because even though State Medicaid 
agencies would be converting to a modified version of an existing 
standard (Version 4010/4010A to Version 5010 and NCPCP 5.1 to NCPDP 
D.0) with which they are already familiar, there are expenses for 
implementation and wide-scale testing. State Medicaid agencies are 
currently required to conduct pharmacy subrogation, and in accordance 
with this proposed rule, would be able to use either the new Medicaid 
pharmacy subrogation standard or contract with trading partners and/or 
contractors who specialize in this field to fulfill its subrogation 
requirement, but there would still be some level of implementation 
costs to bear. With respect to subrogation for pharmacy claims, we note 
that this proposed rule would not add a new business requirement for 
States, but rather would mandate a standard to use for this purpose 
which would be used consistently by all States. There will also be 
expenditures for States as they convert from Version 5.1 to D.0 for 
other pharmacy transactions, and this transition will have 
implementation and testing costs as well, meaning there will be 
additional fiscal impacts on States based on this rule.

C. Anticipated Effects

    The objective of this regulatory impact analysis is to summarize 
the costs and benefits of the following proposals:
     Migrating from Version 4010/4010A to Version 5010 in the 
context of the current health care environment;
     Migrating from Version 5.1 to Version D.0; and
     Adopting a new standard for the Medicaid subrogation 
transaction.
    We assume for purposes of this analysis that maintaining existing 
practices with respect to claims submissions for retail pharmacy 
supplies and services (as discussed in section II.D above) would have 
no impact on the industry.
    The remainder of this section provides details supporting the cost 
benefit analysis for each of the three above-referenced proposals.
1. Adoption of Version 5010
    This portion of the analysis is based on industry research 
conducted for us by Gartner, Incorporated (Gartner) to assess the costs 
and benefits associated with the adoption of Version 5010. As part of 
this endeavor, Gartner worked with us to establish a segmentation 
strategy to identify the individual segments across the full spectrum 
of health care that would be affected by the proposed migration to 
Version 5010. These segments were identified:
Providers
     Hospitals
     Physicians
     Dentists
     Pharmacies
Health Plans
     Commercial Health Plans and Blue Cross/Blue Shield Plans
     Government Plans: Medicare and Medicaid
Clearinghouses and Vendors
     Clearinghouses
     Vendors
    Based on this segmentation, Gartner identified and interviewed 
select credible individuals with representative perspectives. These 
individuals addressed both the business and technical areas for their 
respective organizations or associations, and were capable of 
understanding and articulating the potential cost-benefit of changes to 
their existing systems and processes. In addition to these interviews, 
Gartner conducted research to complement the existing data on the 
current state of HIPAA transactions. This research included dialog and 
data collection from leading associations and other stakeholder 
constituencies that represented one or more of the segments identified. 
We note that we did not interview any ``non-hospital'' institutions, 
but made the assumption that skilled nursing facilities (SNFs) and 
other types of organizations may be affiliated with some of the larger 
hospital systems, which were included in the analysis. Furthermore, we 
have not broken the data out to reflect any particular sub-segment of 
the industry, other than hospitals, physicians, dentists and 
pharmacies. The benefits were based on the total number of all claims 
throughout the health care system, including non-hospital institutions. 
We believe that while not all possible organization types were 
interviewed, the assumptions and findings can be extrapolated to 
provide fair insight into the financial impacts across the industry. 
This applies to any federal agency that must comply with the rule; 
these entities will have similar costs and benefits to their private 
sector cohorts. We invite public comment and cost or benefit data to 
support any concerns about the accuracy or consistency in our 
assumptions and estimates, particularly related to non-hospital 
institutions.
    Throughout this process, Gartner constructed a cost-benefit model 
that synthesized the findings from the interviews as well as the inputs 
from the secondary research. This model was developed to estimate the 
net impact of implementing Version 5010 across the entire health care 
spectrum inclusive of all of the individual segments. When the model 
was completed, Gartner conducted a series of internal quality assurance 
steps, a sensitivity analysis, and peer review to properly validate the 
results.
Affected Entities
    All HIPAA covered entities would be affected by this proposed rule. 
Covered entities include all health plans, all health care 
clearinghouses, and health care providers that transmit health 
information in electronic form in connection with a transaction for 
which the Secretary has adopted a standard. We note that health care 
providers may choose not to conduct transactions electronically. 
Therefore, they would be required to use these standards only for 
transactions that they conduct electronically. See the Transactions and 
Code Sets rule for a discussion of affected entities (65 FR 50361).
    Covered entities would incur a number of one-time costs to 
implement Version 5010. These costs would include analysis of business 
flow changes, software procurement or

[[Page 49762]]

customized software development, integration of new software into 
existing provider/vendor systems, staff training, collection of new 
data, testing, and transition processes. Systems implementation costs 
would account for most of the costs, with system testing alone 
accounting for 60 to 70 percent of costs for all covered entities. 
Ongoing operational costs are expected to initially grow as 
transmissions increase, but would result in lower costs per transaction 
as higher volumes are handled. The costs would be offset by the 
benefits of increased Electronic Data Interchange (EDI) and operational 
savings.
    Through the interview process, Gartner estimated the cost of 
implementing Version 5010 by establishing an estimated baseline cost 
for implementing Version 4010/4010A for each individual entity. 
Subsequently, it determined the comparative costs for Version 5010 as a 
percentage of the total estimated Version 4010/4010A costs. Since the 
costs of implementing Version 4010/4010A are now more quantifiable, 
this methodology provided the most reliable means of estimating the 
Version 5010 costs. Most sources agreed that Version 5010 costs would 
represent 20 to 40 percent of the total cost of implementing Version 
4010/4010A. This is because the Version 4010/4010A implementation 
represented a shift to completely new standards, while Version 5010 is 
a less complex move from one version of a standard to another. Most 
start up investments, such as hardware procurement made during the 
Version 4010/4010A implementation, would not need to be repeated for 
Version 5010. The estimated total cost for implementing Version 4010/
4010A during its 2 year implementation period for each segment is: 
$4,661 million for hospitals; $2,175 million for physicians; $1,493 
million for dentists; $336 million for pharmacies; $18,021 million for 
private plans/health plans: $1,202 million for government plans and 
$125 million for clearinghouses. In calculating the minimum and maximum 
costs for implementing Version 5010, the 20 and 40 percent ranges have 
been applied to each of the minimum and maximum estimates for 
implementing Version 4010/4010A, except for pharmacies. In analyzing 
cost projections for the pharmacy industry, we use an estimate of 20 
percent because, as will be explained below, some portion of the 
implementation costs would be addressed by the pharmacy efforts to 
comply with Version D.0.
    The current limitations of Version 4010/4010A and anticipated 
benefits of Version 5010 are discussed in detail in Section II.A. This 
cost benefit analysis considers those anticipated benefits in analyzing 
how affected entities would convert to key financial and business 
advantages, including:
     Lower transaction costs resulting from movement from paper 
to electronic transactions and;
     Reduction in staff resource time resulting from a decrease 
in phone calls to check eligibility and claim status and obtain 
referral authorizations via electronic transactions that provide the 
same information;
    Gartner estimated the benefits of implementing Version 5010 by 
identifying three specific categories of savings: (1) Savings due to 
better standards for electronic claims transactions; (2) cost savings 
due to an increase in use of the electronic claims transactions by more 
covered entities; and (3) operational savings due to increased use of 
electronic auxiliary transactions by more covered entities. We refer to 
auxiliary transactions as those non-claims electronic transactions such 
as eligibility and referral requests and responses. The savings 
categories are further described as follows:
     Savings due to better standards--increased use of the 
electronic claims transactions resulting in a decreased need for manual 
intervention
     Cost Savings--increased use of claims related electronic 
transactions by entities that had not used them before (remittance 
advice, claims status)
     Operational Savings--increased use of auxiliary, non-
claims electronic transactions by entities that had not used them 
before (eligibility requests and responses).
    Each savings category is explained in more detail in the 
assumptions section below and we encourage readers to refer back to 
this assumptions section during the review of the cost benefit 
analysis.
    All financial analysis is calculated over a 10-year planning 
horizon, including an assumption that there would be a 2-year 
implementation period. System implementation costs are assumed to be 
incurred over that 2-year implementation period and are distributed 
evenly in our analysis. Benefits are assumed not to be realized until 
post-implementation, in 3 to 10 years.
Assumptions for Version 5010 Impact Analysis
    In calculating the costs and benefits, Gartner made a number of 
assumptions, based on interview data and secondary research. The 
interviews provided information that was used to reflect the size of 
the industry segments, the segment implementation costs, and the 
application of benefits and savings. We provide those assumptions and 
estimates here for reference throughout this portion of the impact 
analysis. We are specifically soliciting comments on the assumptions 
related to costs and benefits, as they are presented in this section of 
the proposed rule.
    In Table 2 below, we show the projected annual claims volumes for 
providers over a ten-year period. Gartner projected the annual increase 
in the number of claims at four percent, and used the base from the 
estimates that were identified in the Claims Attachments proposed rule. 
These figures are used as a base to calculate the provider benefits.

                                                 Table 2--Annual Claim Volume Projections (In Millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        2010      2011      2012      2013      2014      2015      2016      2017      2018      2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
Physician (low).....................................     3,186     3,313     3,446     3,583     3,727     3,876     4,031     4,192     4,360     4,534
Physician (high)....................................     4,142     4,307     4,480     4,659     4,845     5,039     5,241     5,450     5,668     5,895
Hospital (low)......................................       796       828       861       896       932       969     1,008     1,048     1,090     1,134
Hospital (high).....................................     1,036     1,077     1,121     1,165     1,212     1,260     1,311     1,363     1,418     1,475
Dentist (low).......................................       540       561       584       607       631       657       683       710       738       768
Dentist (high)......................................       660       686       713       742       772       802       834       868       903       939
                                                     ---------------------------------------------------------------------------------------------------
    Total claims (low)..............................     4,552     4,702     4,891     5,086     5,290     5,501     5,721     5,950     2,264     6,607
                                                     ---------------------------------------------------------------------------------------------------
    Total claims (high).............................     5,837     6,071     6,314     6,566     6,829     7,102     7,386     7,681     7,989     8,309
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 49763]]

    Table 3 below reflects the estimated current adoption rate for each 
of the HIPAA standards, and the projected rate of adoption for each of 
the modified versions of the standards over the 10-year planning 
horizon. For the enrollment (834) and payroll deducted and other group 
premium payment (820) standards, we assume utilization would apply only 
to health plans since providers do not use either of these two 
standards. We assume that acceptance rates would gradually increase in 
the first 5 years after implementation, through 2016, and after that 
time would remain level.

 Table 3--Current and Projected Rates of Use for HIPAA Standards Across
            All Covered Entities--Over 10 Years [In percent]
------------------------------------------------------------------------
                                     Current      Increase     Increase
             Standard               Acceptance   (minimum)    (maximum)
------------------------------------------------------------------------
837--claims......................           75            2            5
835--remittance advice...........           60            5           10
278--referral request & response.          **0           10           20
276/277--claims status request &            10           10           20
 response........................
270/271--eligibility request and            10           10           20
 response........................
834--enrollment/disenrollment....            3            0            0
820--premium.....................            2            0            0
------------------------------------------------------------------------
Source: Gartner interviews and secondary research.
** Minimal use--while there is not quite zero percent uptake, the use of
  this transaction is so minimal, it does not register on any scale;
  therefore, we state its current acceptance rate as negligible.

General Assumptions for the Cost-Benefit Analysis for Providers and 
Health Plans
    For the cost benefit analysis for each of the provider segments--
hospitals, physicians, pharmacies, and dentists as well as the health 
plans, we apply the following set of assumptions, which are listed 
below. (These assumptions will not be repeated in each individual 
section of the impact analysis to follow.) Benefits that would accrue 
to each provider segment include:
     All providers currently using 835/837 messages would 
accrue benefits in the way of savings (for example, through reduced 
phone calls).
     Physicians that have not yet implemented 835/837 would 
accrue future savings through lower transaction costs for these 
electronic exchanges.
     An expected uptake of between 2-5 percent in the first 
five years following implementation, for all providers implementing 837 
transactions (for example, 75 percent in 2010; 77 percent in 2015).
     An expected uptake of between 5-10 percent over ten years 
for all providers for 835 transactions.
     Costs and benefits for the Coordination of Benefit 
transaction (COB) are included in the estimates for the 837 claim 
standard transaction and are not broken out separately.
     Providers would benefit from fewer phone calls to health 
plans to check eligibility or claims status for auxiliary transactions 
(270/271, 276/277, 278).
     An expected increase in the usage of auxiliary 
transactions across the entire provider community and new adopters 
would see net benefits that would compound the aforementioned benefits 
as adopters utilize EDI more often.
    The operational savings would result from reductions in manual 
efforts, particularly phone calls that must be made to resolve issues 
with a transaction that is manual today, such as a claim status or 
eligibility check. Each phone call avoided for a claim transaction is 
estimated to save 10 minutes of time for a provider's staff member, and 
each required manual intervention avoided is estimated to save 5 
minutes of time. The following are estimates of the potential volume of 
avoided phone calls for providers:
     835--A reduction in phone calls between 1.45 percent and 
2.90 percent as a percentage of pended claims. This would equate to 
millions of phone calls for providers in the first year with increasing 
amounts in subsequent years as claim volumes increase.
     837--A reduction in phone calls between 0.28 percent and 
0.70 as a percentage of pended claims. This also would equate to 
millions fewer phone calls for all providers.
     For all other transactions, the current call volume would 
be reduced proportional to their total transaction volume. Because of 
the smaller volumes for these transactions, the additional savings was 
deemed to be too small for inclusion into the overall model.
    Cost savings from reduced phone calls were estimated based on 
annual loaded compensation for plan or provider staff members (customer 
service, claims or billing) at $40,000 and billing/claims resources at 
$60,000 which equates to $0.32 per minute and $0.48 per minute 
respectively.
    As a corollary to the operational and uptake benefits identified 
for the providers, health plans would expect corresponding benefits 
including:
     For 835/837 messages, plans would receive benefits in the 
way of savings through reduced phone calls related to ambiguity in the 
current messages.
     As uptake of the 835/837 transactions increase between 
trading partners, there would be savings through lower transaction 
costs; in other words, unit costs would decrease.
     For auxiliary transactions (270/271, 276/277, 278), plans 
would receive benefit in the way of operational savings through reduced 
phone calls.
    Since we would expect an increase in the market for auxiliary 
transactions within the physician community as new uptake occurs with 
trading partners, plans would receive some cost savings through lower 
transaction costs.
Explanation of Cost Calculations
    To determine the costs for each sub-segment (that is, hospitals, 
physicians, and dentists), we established an estimate for what the 
total approximate Version 4010/4010A costs were for an individual 
entity within that sub-segment (based on the interviews and other data 
available through research) and then applied an estimated range of 20 
to 40 percent of those costs to come up with estimated minimum and 
maximum costs for Version 5010. The range was accepted as a realistic 
proxy by all providers and plans who participated in the interviews. 
Through the course of the interviews, we identified more granular cost 
categories and reviewed these with the participants to help analyze and 
validate overall cost estimates by entity.
    Table 4 below shows Gartner's estimates of costs for Version 4010/

[[Page 49764]]

4010A implementation, which again, were calculated based on estimates 
of implementation for each individual entity within a segment, and 
multiplying that estimate by the number of entities.

Table 4--Gartner Estimated Total Cost for Implementation of Version 4010/
                                  4010A
------------------------------------------------------------------------
                                                             Costs (in
                         Segment                             millions)
------------------------------------------------------------------------
Hospitals*..............................................          $4,661
Physicians..............................................           2,175
Dentists................................................           1,493
Pharmacy................................................             336
Private Plans...........................................          18,021
Government Plans........................................           1,202
Clearinghouses..........................................             125
------------------------------------------------------------------------
Source: Gartner interviews and secondary research.
* Includes some long term care and skilled nursing facilities when
  connected to a hospital or hospital system.

    Table 5 reflects our assumptions regarding the percent of the total 
costs allocated to each cost category (for example, testing and 
training) for the provider and plan segments. Specifically, we 
estimated that 60 percent of all implementation costs would go towards 
testing for providers, and 70 percent for plans. We invite comment from 
the industry on these assumptions and estimates, particularly on the 
assumption that there would be no new hardware costs for implementing 
Version 5010, since the interviews did not yield information on 
providers who do not currently have electronic capability.

  Table 5--Percentage and Total Amounts for Cost Items Used for Version
              5010 Calculations--Providers and Health Plans
------------------------------------------------------------------------
                                                  Percent of total costs
                                                 -----------------------
                    Cost item                                   Health
                                                   Providers     plans
------------------------------------------------------------------------
Hardware Procurement............................           0           0
Software Costs..................................          15          10
Transmission Costs..............................           0           0
New Data Collection.............................           0           0
Customized Software Development.................           5         2.5
Testing Cost....................................          60          70
Training Costs..................................           5         2.5
Transition Costs................................          15          15
                                                 -----------------------
    Totals......................................         100         100
------------------------------------------------------------------------
Source: Gartner interviews and secondary research.

    Transition costs, which we assume will occur in the third year of 
implementation, are defined as the post-implementation costs for 
monitoring, maintaining, and adjusting the upgraded systems and related 
processes with trading partners until all parties reach a ``steady 
state.'' An example of this type of cost might be additional bug fixes 
and the associated testing required on the Version 5010 platform after 
the system has been fully cut over. In addition, some interviewees 
expected there to be some laggards in implementing Version 5010 after 
the regulation timeline and expected to incur additional costs during 
this transition period as a result of late entrants. We note that we do 
not include hardware costs even for providers who might move from a 
paper-based system to an EDI system because we do not believe that the 
number of providers who have no electronic capability is very high. We 
do believe that providers who move away from a paper-based system are 
likely to have software and/or vendor costs, and we account for this. 
We invite stakeholder comment on these assumptions, and welcome any 
data regarding the number of providers who do not have any hardware to 
support electronic transactions.
Explanation of Benefits and Savings Calculations
    In our analysis, we assume that benefits would accrue in three 
categories which arise from: (1) Better standards--improvements in the 
claims standards which would increase their usability and reduce manual 
intervention; (2) an increase in the adoption and use of the electronic 
claim transactions themselves, which would result in financial savings 
through an increased use of EDI; and (3) an increase in use of the 
auxiliary transactions, such as eligibility, claims status, and 
referral, which would reduce manual intervention (personnel 
involvement) and increase efficiencies and cash flow. For ease of 
understanding, we label the three savings categories as Better 
Standards, Cost Savings and Operational Savings, though all three 
represent savings to the entities. We further explain each category 
again here, and include the ``titles'' we have given them:
    (1) Better standards or savings due to improved claims standards: 
The improvements in Version 5010 that would reduce manual intervention 
to resolve issues related to the claim or remittance advice, due to 
ambiguity in the standards;
    (2) Cost savings or savings due to new users of claims standards: 
Increased use of electronic transactions for claims and remittance 
advice that would accrue to parties who had previously avoided the 
electronic transactions because of their deficits and shortcomings; and
    (3) Operational savings or savings due to increased auxiliary 
standards usage: Increase use of auxiliary transactions through EDI 
that would result from a decrease in manual intervention to resolve 
issues with the data (handled through phone calls or correspondence).
    To calculate the savings in the ``better standards'' savings 
category, which is specific to the increased use of electronic 
transactions for claims and remittance advice, we use data from a 2007 
report compiled by America's Health Insurance Plans (AHIP) which 
indicated that savings due to EDI were in the range of $.73 per 
transaction. Using the $.73 as the baseline, Gartner used the 
interviews to refine this estimate for both providers and plans. We 
apportion the amount between providers and plans, and based on the 
interviews, anticipate that providers would receive at least $.55 in 
savings for moving transactions from paper to EDI and plans would 
benefit by at least $.18. All of the operational benefits were based on 
reduced phone calls and manual intervention as a percentage of total 
claims. Because we do not have any concrete numbers for how many claims 
the private plans process versus the government plans, we used the 
percentage of covered lives as stated in the Harvard/JFK School of 
Public Policy study as the best way to approximate how much of the 
benefits would go to private plans versus government plans (82 percent 
covered lives in private plans versus 16 percent for government plans) 
(Harvard JFK School of Public Policy--``Health care delivery covered 
lives--Summary of Findings--2007'') We further assumed that there are 
no material differences in the number of claims handled with the 
government-covered lives versus private-covered lives.
    Table 6 details the business activities such as manual 
interventions and phone

[[Page 49765]]

calls that make up the calculations for the other two categories of 
projected savings: Cost and operational savings related to an increase 
in users of the electronic transactions for claims, and an increase in 
use of the auxiliary transaction standards by all covered entities. 
Where we speak of ``manual intervention,'' we mean that a human 
resource must take some action related to a particular claim or inquiry 
because the transaction has been delayed, pended or rejected.
    Calculations are based on the number of interventions and the 
amount of time spent per intervention, multiplied by the average cost 
per intervention (based on average salaries for certain full-time 
employees). Affected entities can use the categories and calculations 
shown here to compare against their own operations, in order to 
evaluate the proposed impact to their own organization.
    Based on industry interviews, we identified the average annual 
compensation packages, amount of time for certain business activities 
(manual interventions) related to claims and other transactions, and 
determined the cost per minute for these activities. According to 
Gartner's interviews, and for purposes of this analysis, we estimate 
the average annual compensation package (salary plus benefits) for a 
health plan or plan service representative to be $40,000 and for a 
provider billing specialist to be $60,000. The cost per minute for a 
service representative is $0.32 ($40,000/(2080*60)) and for a provider 
representative is $0.48. We invite industry comment on these estimates.

 Table 6--Phone Calls and Manual Interventions Required by Providers and
            Health Plans Due to Lack of EDI or Non Use of EDI
------------------------------------------------------------------------
            Industry segment                      Amount of time
------------------------------------------------------------------------
Providers:
Time taken by a provider billing agent   10 minutes.
 to process manual intervention for a    Example: 10 minutes x .48 =
 pended claim.                            $4.80 per call
Time taken by a provider billing agent   6 minutes.
 to process non Auto adjudicated claims.
Time taken by a provider's office staff  5 minutes.
 member to find out Eligibility
 information.
Time taken by a provider billing agent   12 minutes.
 to find out the status of the claim.
Time taken by a provider's office staff  10 minutes.
 member to find out the status of a
 referral.
Health Plans:
Time taken by a plan claims processor    5 minutes.
 to process manual intervention for a
 pended claim.
Time taken by a plan claims processor    5 minutes.
 to process non Auto adjudicated claims.
Time taken by a plan customer service    5 minutes.
 representative to give eligibility
 information.
Time taken by a plan customer service    8 minutes.
 representative to give status of the
 claim pended claim.
Time taken by a plan Utilization Review  8 minutes.
 representative to give status of a
 referral.
------------------------------------------------------------------------
Source: Gartner interviews and secondary data.

    The formulas for the three savings categories are as follows:
    (1) Better standards: Number of estimated claims transactions (835/
837) requiring a phone call times the number of minutes per call, times 
the average cost per minute (for example: 1,000 claims x 10 minutes x 
$0.48 = $4,800)
    (2) Cost savings (new use of EDI for 835/837): Number of 
transactions converted from paper to EDI (estimated to have a range of 
2 to 5 percent over 10 years) times estimated cost savings per 
transaction (total savings of $0.73, where the provider benefit is 
$0.55 and the plan benefit is $0.18).
    (3) Operational savings for increased use of EDI for auxiliary 
transactions: Number of estimated transactions (for the 270/271, 276/
277, 278) requiring a phone call times the number of minutes per call 
times the average cost per minute. For example: 1,000 transactions x 10 
minutes x 0.48 = 4,800.
    Other data points of relevance to this analysis include the number 
of health care claims exchanged between covered entities. Based on its 
research, Gartner assumed a low estimate of 4,522 million and a high 
estimate of 5,837 million claims annually, beginning in 2010. Table 7 
depicts the percent of transactions that are electronic, and their 
disposition. Gartner also assumes that 14 percent of all claims 
annually are pended, meaning that they are not paid upon receipt, and 
may be held for additional information.

               Table 7--Disposition of Claims Transactions
------------------------------------------------------------------------
                                                     Percent
------------------------------------------------------------------------
Electronic Claims......................  75 percent.
Auto Adjudication of electronic claims.  71 percent.
Pended claims..........................  14% (of all claims).
Cost savings from electronic             $0.73 ($0.55 for providers;
 transactions.                            $0.18 for plans).
------------------------------------------------------------------------
Source: AHIP Report: ``An Updated Survey of Health Care Claims Receipt
  and Processing Times,'' May 2006.


[[Page 49766]]

1. Health Care Providers
    As discussed above, providers are covered entities under HIPAA if 
they transmit health information in electronic form in connection with 
a HIPAA transaction. Providers are not required by HIPAA to conduct 
transactions electronically, but if they do, they must use the HIPAA 
standards adopted by the Secretary. However, Medicare providers, with a 
few limited exceptions, are required to submit Medicare claims 
electronically under the Administrative Simplification Compliance Act 
of 2001 (ASCA) Public Law 107-105. Providers may conduct the following 
transactions: Health care claims or equivalent encounter information, 
health care payment and remittance advice, eligibility for a health 
plan, referral certification and authorization, and health care claim 
status. They do not conduct the enrollment and disenrollment in a 
health plan or health plan premium payment transactions. Many providers 
submit claim transactions electronically, and somewhat fewer accept 
electronic remittance advices. Usage of the auxiliary transactions 
(eligibility, claim status, and referral/authorization) is much lower 
than the claims transactions.
    Providers that conduct a transaction electronically would be 
required to implement Version 5010 of that transaction. As stated, we 
assume that the improvements in Version 5010 would result in more 
providers conducting those transactions electronically. Use of the 
claims transaction (837) is already high for providers and would be 
moderately affected by improvements in Version 5010. While the 835 
remittance advice is also used, there are a number of technical issues 
that have hampered its wide-scale deployment. These issues were 
discussed in the preamble of this proposed rule. Utilization overall 
would increase due to the technical improvements in Version 5010. More 
providers will use any or all of the non-claims electronic transactions 
because the improvements will make them more useful. The auxiliary 
transactions for eligibility, claims status and referrals currently 
have relatively low utilization under Version 4010/4010A because of the 
perceived lack of business value. We believe adopting these 
modifications will change that trend. For example, the Version 4010/
4010A eligibility transaction only requires that minimum data about an 
individual patient and his/her coverage be returned on the response, 
and that minimum data set is not useful to providers. Thus, very few 
providers or health plans have implemented this transaction, preferring 
instead to use existing voice and interactive voice response (IVR) 
systems. Improvements in the Front Matter section and instructions for 
Version 5010 would yield a modest increase in use, which would have a 
positive financial impact on providers and health plans. Our 
assumptions regarding the providers' current acceptance of the 
transactions and the projected adoption rate are shown in Table 2 in 
the assumptions section. In the remainder of this section, we discuss 
the costs and benefits of implementing Version 5010 for each segment of 
the provider industry, including hospitals, physicians, pharmacies and 
dentists.
    a. Hospitals
    For purposes of this cost/benefit analysis, hospitals were divided 
into three categories based on bed-size (See table 8 below).

                       Table 8--Hospital Breakdown
------------------------------------------------------------------------
                                                             Number of
                      Hospital size                          hospitals
------------------------------------------------------------------------
400+ Bed Hospitals......................................             521
100-400 Bed Hospitals...................................           2,486
Fewer than 100 bed hospitals............................           2,757
                                                         ---------------
    Total...............................................           5,764
------------------------------------------------------------------------
Source: AHA Hospital Statistics 2007 edition.

    Hospitals have pursued various implementation models of the HIPAA 
standards, including Direct Data Entry (DDE), internally managed EDI, 
use of clearinghouses or billing vendors, and a variety of hybrids of 
these models. All of these implementation models were considered in 
this analysis. Larger hospitals typically have pursued hybrid models 
but favor the use of clearinghouses and internally managed EDI where 
possible. Smaller hospitals typically rely more heavily on direct data 
entry, clearinghouses, and/or billing vendors to manage their EDI 
operations.
    A subset of hospitals have reached a level of maturity with Version 
4010/4010A transactions and believe that many of the benefits that 
would be attained by converting to Version 5010 have been mostly 
achieved. In other words, some hospitals have already taken extensive 
advantage of EDI, and of the auto adjudication opportunities afforded 
by Version 4010/4010A, so there may be only incremental benefits for 
that group, through adoption of Version 5010. These hospitals typically 
have implemented the full set of transactions (including the 
eligibility and claim status transactions). Based on the Gartner 
research, hospitals falling into this category include the 521 
hospitals with 400+ beds as well as 20 percent of the mid-sized 
hospitals with 100-400+ beds and 10 percent of the hospitals with less 
than 100 beds. These hospitals have consistently deployed an internally 
managed EDI system and/or a hybrid solution and have invested in 
substantial development efforts to create workarounds to any problem 
segments within Version 4010/4010A that were particularly important to 
their organization. For this subset, the transition to Version 5010 may 
be more streamlined than for the smaller or less advanced entities 
because there would be fewer new system and business changes, and more 
expertise available to resolve implementation issues. However, the 
benefits would also be less pronounced because those hospitals that 
have implemented the full suite of transactions with the majority of 
their partners have already realized the benefits associated with 
moving from paper, phone or fax transactions to electronic 
transactions.
    Some hospitals (mid-sized and small) have not yet taken full 
advantage of technical solutions to maximize the use or benefits of the 
HIPAA standards, and continue to depend on a variety of manual efforts 
to conduct the various business functions. The transition to Version 
5010 would provide significant benefits with respect to a reduction in 
these manual procedures, resulting in decreased costs and increased 
efficiencies.
    We anticipate the total cost for all hospitals to implement Version 
5010 would be within a range of $932 million to $1,864 million. This 
estimated cost was calculated by applying a 20 percent (minimum) and 40 
percent (maximum) factor to the estimated cost of implementing Version 
4010/4010A. We provided the cost estimates for Version 4010/4010A for 
each industry segment in the assumptions section above. While the 
average costs by hospital would vary based on size and complexity of 
the hospital system, they would fall within the 20-40 percent range 
compared to the investments made for implementing Version 4010/4010A. 
Smaller hospitals typically rely on a billing vendor and/or a 
clearinghouse for a large majority of their electronic claims 
exchanges. We assume that these hospitals implemented the 837 
transactions only. We assume these hospitals are subject to vendor 
release schedules and would be dependent on these partners to upgrade 
their current transactions to the Version 5010 standards. Furthermore, 
these

[[Page 49767]]

smaller hospitals may have to absorb some costs for testing, as testing 
would represent a significant portion of the overall costs for 
implementation. Nonetheless, we assume that these costs would be lower 
for this group than for the larger entities. We assume that many of 
these hospitals have regulatory compliance clauses in their vendor 
contracts, which would result in many costs largely being absorbed by 
their vendors. Our assumptions are based on industry interviews which 
indicate that small organizations will rely on their vendors for most 
of the heavy lifting for testing. We believe the impact on the 
individual entity will be minimal, comparatively. However, we welcome 
comments and data from the industry and other stakeholders on this 
matter.
    Hospitals would enjoy savings and benefits in the same three 
categories we identified earlier in the assumptions section of this 
analysis. Savings due to better standards are estimated to be a minimum 
of $403 million. Cost savings, due to an increase in use of the 
electronic claims transactions (837 and 835) are estimated to be a 
minimum of $67 million. (This figure is derived by multiplying the 
number of claims times the savings of $.55 per claim (from the AHIP 
report).) The operational savings for use of the auxiliary transactions 
(270/271, 276/277, 278) are projected to be a minimum of $1,313 
million. (This figure is calculated by taking the number of calls that 
would be avoided, times the time each of those calls would take times 
the cost per call.) The benefits related to increased use of the 
auxiliary transactions would be realized in a reduction in the amount 
of time that manual intervention would be needed to address the same 
``issues'' that can be handled by a transaction. In other words, use of 
electronic eligibility transactions would save a provider's employee 10 
minutes of time per avoided manual intervention or phone call to verify 
eligibility.
    We specifically solicit industry comments on the assumptions made 
here relative to the costs and benefits for hospitals for the 
implementation of Version 5010. Table 9b below shows the costs and 
benefits for all hospitals.

                            Table 9--Version 5010 Cost Benefit Summary for Hospitals
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
                                              Minimum    Maximum
----------------------------------------------------------------------------------------------------------------
Costs:
    System Implementation..................       $792     $1,584
    Transition.............................        140        280
                                            ----------------------
    Total costs............................        932      1,864
Benefits:                                                          Formula:
    Operational Savings--better standards..        403      1,096     Number of estimated transactions (835/837)
                                                                       requiring a phone call x number of
                                                                       minutes per call x $ average cost per
                                                                       minute.
    Cost Savings--increase in electronic            66        219     Number of transactions converted from
     claims transactions.                                              paper to EDI x estimated cost savings per
                                                                       transaction ($.55).
    Operational Savings--increase in use of      1,314      3,414     Number of estimated transactions (270/271,
     auxiliary transactions.                                           276/277, 278) requiring a phone call x
                                                                       number of minutes per call x $ average
                                                                       cost per minute.
                                            -----------------------
    Total benefits.........................      1,783      4,729
    Net Benefits...........................        851      2,865
----------------------------------------------------------------------------------------------------------------

b. Physicians and Other Providers
    Physicians have also pursued a variety of implementation models for 
the HIPAA transactions. They are largely dependent on the requirements 
of their trading partners (the health plans with whom they conduct 
transactions) and the services of their vendors and clearinghouses, who 
provide a range of support and technology, to process the transactions. 
A full range of implementation methods were considered in this 
analysis. Larger physician practices have pursued direct transmission 
with health plans, but many mid-sized practices and small physician 
practices are dependent on the use of clearinghouses and rely on 
billing vendors to manage their EDI operations.
    For purposes of this cost benefit analysis, Gartner divided 
physicians practices into four size-based categories, as shown in table 
10 below:

             Table 10--Physician Breakdown by Practice Size
------------------------------------------------------------------------
                                                              Number of
                       Practice size                          practices
------------------------------------------------------------------------
100+ Physicians............................................          393
50-100 Physicians..........................................          590
3-49 Physicians............................................       38,961
1-2 Physicians.............................................      194,278
                                                            ------------
    Total..................................................     234,222
------------------------------------------------------------------------
Source: AMA.

    Within these four types of practices, a distinction can be drawn 
between the groups with more than 50 physicians (large practices) and 
those that are less than 50 physicians (small practices).
    For the large physician practices, as in large hospitals, there are 
greater levels of acceptance as well as more diversified 
implementations of the Version 4010/4010A standards. Therefore, the 
bulk of the costs associated with the implementation of Version 5010 
for large practices would be in the category of testing, which we 
estimate at 60 percent of costs, as explained in the general 
assumptions section earlier in this document.
    The majority of the small physician practices currently utilize 
vendor supplied practice management software, billing vendors, and/or 
clearinghouses to handle their HIPAA EDI transactions. For small 
providers that are PC-based or have client-server systems that rely on 
vendor-supplied software, we do not believe the provider would bear any 
immediate costs for the software upgrades. Based on Gartner's 
interviews and our own experience with the industry, most software 
maintenance contracts offer free upgrades to accommodate regulatory 
changes, and we believe that most contracts have clauses that require 
vendors to be compliant with mandatory standards. However, as with each 
provider category in which we identified dependence on vendors, there 
are still testing costs that must be addressed. The impact on those 
providers that have such contracts would be postponed

[[Page 49768]]

until the contract is renewed, and would be mitigated by market 
factors.
    We anticipate that the total conversion cost for physicians would 
be in the range of $435 million and $870 million. (This was calculated 
by taking the base of $2,175 million (for implementing Version 4010/
4010A), and multiplying that number by version 5010 implementation 
factor of 20 percent (minimum) and 40 percent (maximum)).
    As with hospitals, physicians are positioned to receive the same 
benefits of using Version 5010, including the previously mentioned 
savings, through reduced phone calls and reduced manual intervention. 
Physicians would experience savings and benefits in the three 
categories as follows: Savings due to better standards is estimated to 
be $1,613 million. Cost savings, due to an increase in use of the 
electronic claims transactions (837 and 835) is estimated to be $269 
million. (This figure is derived by multiplying the number of claims 
times the savings of $.55 per claim, as noted in the AHIP study.) The 
operational savings for use of the auxiliary transactions (270/271, 
276/277, 278) is projected to be $5,250 million. (The narrative for 
these calculations has been provided elsewhere, and the formulas appear 
in the cost benefit table for hospitals.) Again, we invite public 
comment on these figures and assumptions, particularly on the 
assumption that there would be no new hardware costs for implementing 
Version 5010, since the interviews did not yield information on 
providers who do not currently have electronic capability. Table 11 
below summarizes the cost-benefits for physicians:

 Table 11--Version 5010 Cost Benefit Summary for Physicians--in Millions
------------------------------------------------------------------------
                                              Minimum         Maximum
------------------------------------------------------------------------
Costs:
    System Implementation...............            $370            $740
    Transition..........................              65             131
                                         -------------------------------
        Total Costs.....................             435             870
Benefits:
    Operational Savings--better                    1,612           4,378
     standards..........................
    Cost Savings--increase in electronic             270             874
     claims transactions................
    Operational Savings--increase in use           5,251          13,562
     of auxiliary transactions..........
                                         -------------------------------
        Total Benefits..................           7,133          18,814
                                         -------------------------------
        Net Benefits....................           6,698          17,944
------------------------------------------------------------------------

c. Dentists
    There are an estimated 175,000 dentists currently covered under 
HIPAA. However, the dental community has not yet widely adopted the 
HIPAA standards, in large part because the standards did not meet their 
practical business needs, particularly for claims and remittance 
advice. The improvements in Version 5010 would increase the potential 
value of the HIPAA standards for dentists, and should increase 
utilization. Currently, the typical dental practice relies on vendor 
solutions and clearinghouses to handle their Version 4010/4010A HIPAA 
transactions, and, therefore, the costs for implementing Version 5010 
would largely fall on vendors as a cost of doing business. The majority 
of the dental costs would stem from testing and other related services 
not covered by any pre-negotiated upgrades with their vendors. 
Implementation costs for Version 5010 are anticipated to be in the 
range of $299 million (20 percent) to $598 million (40 percent) based 
on using the same implementation factor of the Version 4010/4010A 
implementation costs of $1,493 million.
    The benefits derived from implementing Version 5010 for dentists 
would be the same as those for the other provider segments, as 
described in the assumptions section of this analysis. For example, 
based on improvements in Version 5010, we anticipate that for dental 
practices, there would be an increase in the adoption rate of 2 to 5 
percent in the 837 transactions, and 5 to 10 percent in 835 
transactions, over a ten-year period.
    Increased utilization of the standards would occur because of 
improvements that specifically affect dental practices. For example, 
increased utilization of the 837 would occur because the standard now 
accommodates certain dental terminology to differentiate dental 
services from medical services. Version 4010/4010A does not allow for 
reporting diagnoses codes that are required for some specialty claims 
such as oral and maxillofacial surgery. This has resulted in challenges 
for this segment of the industry because many of these services are 
billed using the professional claim, but the professional claim does 
not have a way to provide tooth numbers or other tooth-related 
information. These claims often had to be submitted on paper. The 
ability to report those codes in Version 5010, with the tooth numbers, 
would provide a standard means for these claims to be submitted 
electronically. The 835 would be more widely adopted for its ability to 
post receivables automatically.
    In general, we believe dentists would achieve these benefits from 
operational savings, which would result in:
     Reduced time to determine eligibility
     Reduced manual effort to prepare claims
     Reduced burden to complete account posting
     Greater visibility into claims status
    We also expect that dental practices would derive similar benefits 
as physicians, in the way of savings through reduced phone calls for 
claims transactions as well as for auxiliary transactions (270/271 and 
276/277). For dentists that have not yet implemented 835/837, there 
would be savings through increased use of EDI. Dentists would 
experience savings and benefits in the three categories as follows: 
Minimum savings due to better standards is estimated to be $274 
million; minimum cost savings due to an increase in use of the 
electronic claims transactions (837 and 835) are estimated to be $45 
million. (Again, this figure is derived by multiplying the number of 
claims times the savings of $.55 per claim, as noted in the AHIP 
study.) The operational savings for use of the auxiliary transactions 
(270/271, 276/277, and 278) is projected to be a minimum of $889 
million. (The narrative for these calculations has been

[[Page 49769]]

provided in the assumptions section.) Table 12 below shows the cost 
benefit summary for the dental industry.

  Table 12--Version 5010 Cost Benefit Summary for Dentists--in Millions
------------------------------------------------------------------------
                                              Minimum         Maximum
------------------------------------------------------------------------
Costs:
    System Implementation...............            $254            $508
    Transition..........................              45              90
                                         -------------------------------
        Total Costs.....................             299             598
Benefits:
    Operational Savings--better                      274             699
     standards..........................
    Cost Savings--increase in electronic              45              56
     claims transactions................
    Operational Savings--increase in use             889           2,173
     of auxiliary transactions..........
                                         -------------------------------
        Total Benefits..................           1,208           2,928
                                         -------------------------------
        Net Benefits....................             909           2,330
------------------------------------------------------------------------

d. Pharmacies
    Pharmacies are currently using Version 4010/4010A of the 835 and 
837 transactions in their current business practices, most often for 
the remittance advice (835) and pharmacy supplies and services (837). 
Pharmacies would transition to the use of Version 5010 when the final 
rule becomes effective, in particular for the 835 transaction. For 
retail pharmacy claims, pharmacies primarily use Version 5.1. Since we 
are proposing to replace Version 5.1 with Version D.0 in this 
regulation, and many of the system changes, costs and benefits for 
implementing both Version 5010 and Version D.0 would result from 
related efforts, we have combined the impact analysis for Version 5010 
and Version D.0. That analysis is detailed later in Section 3 of this 
analysis.
e. Health Plans
    According to estimates provided by Gartner, there are nearly 4,000 
health plans in the United States. For the purposes of this analysis, 
we divided plans into four categories based on their size: National and 
Super Regional Private Plans; Large Private Plans; Mid-Sized Private 
Plans, and Small Private Plans, as shown in table 13 below.

                     Table 13--Health Plan Breakdown
------------------------------------------------------------------------
                                                               Number of
                          Plan size                              plans
------------------------------------------------------------------------
National and Super Regional..................................         12
Large........................................................         75
Mid-sized....................................................        325
Small........................................................      3,537
                                                              ----------
    Total....................................................      3,949
------------------------------------------------------------------------

    Within these four types of private plans (as described above), 
there are two distinct scenarios that emerged: Small/Midsized Plans and 
Large/National/Super-Regional Plans.
    The large plans could be characterized as having implemented the 
full set of 4010/4010A transactions but often did not have trading 
partners for certain auxiliary transactions. They have already 
developed workarounds for many of the problems that were identified as 
being solved in Version 5010. Furthermore, their maturity in working 
with the Version 4010/4010A transaction set was at a point where they 
had extracted most of the value from the standards in place.
    Small plans resembled the larger plans in that they had implemented 
the full set of transactions. However, the smaller plans had not 
developed as many workarounds for Version 4010/4010A limitations as 
their larger peers. As a result, Version 5010 may serve to provide this 
segment more benefit on average than their larger peers. In order to 
calculate health plan implementation costs, we calculated the costs 
within a factor of 20 to 40 percent of the costs for implementing 
Version 4010/4010A. Overall, private health plans recognize the 
importance of continuing to maintain and upgrade the national standards 
and perceive there to be qualitative benefits that warrant 
considerations beyond just the quantifiable net benefit from the 
change.
    The benefit for all private plans falls between $5,780 and $15,114 
million. Private plans would experience savings and benefits in the 
three categories as follows: savings due to better standards is 
estimated to be in a range of $1,283 million to $3,430 million; cost 
savings, due to an increase in use of the electronic claims 
transactions (837 and 835) is estimated to be in a range of $111 
million and $278 million. (This time, the estimate is derived by 
multiplying the total number of all claims (physician, hospital, and 
dental) times the savings of $.18 per claim for plans, as noted in the 
AHIP study.); the operational savings for use of the auxiliary 
transactions (270/271, 276/277, and 278) is projected to be in a range 
of $4,386 million to $11,406 million. (The narrative for these 
calculations has been provided earlier.) Table 14 depicts total plan 
cost benefits summary.

Table 14--Version 5010 Cost Benefit Summary for Private Health Plans--in
                                Millions
------------------------------------------------------------------------
                                              Minimum         Maximum
------------------------------------------------------------------------
Costs:
    System Implementation...............          $3,064          $6,128
    Transition..........................             541           1,081
                                         -------------------------------
        Total Costs.....................           3,604           7,209
Benefits:
    Operational Savings--better                    1,283           3,430
     standards..........................

[[Page 49770]]

 
    Cost Savings--increase in electronic             111             276
     claims transactions................
    Operational Savings--increase in use           4,386          11,406
     of auxiliary transactions..........
                                         -------------------------------
        Total Benefits..................           5,780          15,112
        Net Benefits....................           2,175           7,903
------------------------------------------------------------------------

Government Plans
    To prepare the cost benefit analysis for government plans, we 
obtained input from Medicare and from several subject matter experts 
from Medicaid plans across the country. Other government entities, like 
the Veteran's Health Administration, were assumed to have similar cost/
benefit structure as the Large Private plans and were estimated as 
such. One of the key findings from the interviews was that even in the 
case of government plans that have implemented the full set of 
transactions, there is still a very limited exchange of the auxiliary 
transactions at this time.
    Government systems costs are expected to occur across a number of 
Federal and state agencies and include transition costs. For Medicare, 
since its cost structure is different from private plans, total 
Medicare costs include those that would be expended by the MACs, DME 
MACs, carriers, intermediaries and other contractors. The costs are 
high, but the net benefit to Medicare relative to the private plans is 
slightly more positive. Overall, costs for government plans were 
similar in nature to private plans, and included analysis, translator/
software customization, testing, and training. The cost to government 
systems in transitioning to Version 5010 is estimated to be within a 
range of $252 million to $481 million over 10 years. This figure was 
derived by applying a 20 percent and 40 percent factor onto the cost to 
implement Version 4010/4010A, which was $1,203 million. The examples in 
this impact analysis are only illustrative in nature and are based on 
limited analysis. They are presented to illustrate the potential 
administrative costs to the Federal government.
    Derived benefits accrued for implementing Version 5010 to 
government plans would be similar to those of private plans. Savings 
would be acquired from reduced phone calls because current ambiguity in 
the transactions (such as situational versus required information for 
some of the key data elements) would be reduced. As with all other 
affected entities, as more uptake of 835/837 messages occur with 
trading partners, there would be cost savings through lower transaction 
costs. The same estimates for increased adoption of the 837 
transactions of between 2 and 5 percent and between 5 and 10 percent 
for the 835 transactions would apply to government plans, and we 
project similar increases in the use of the auxiliary transactions. 
Since we projected an increase in the market for the auxiliary 
transactions within the physician community as new uptake occurs with 
the trading partners (for example, health plans), the government plans 
would benefit from cost savings as well, as follows: Minimum savings 
due to better standards are estimated to be $279 million. Minimum cost 
savings, due to an increase in use of the electronic claims 
transactions (837 and 835) are estimated to be $24 million. (Again, 
this figure is derived by multiplying the number of claims times the 
savings of $.18 per claim, as noted in the AHIP study.) The minimum 
operational savings for use of the auxiliary transactions (270/271, 
276/277, 278) is projected to be $953 million. (The narrative for these 
calculations has been provided elsewhere.) Table 15 shows the cost 
benefit summary for government plans.

Table 15--Version 5010 Cost Benefit Summary for Government Health Plans--
                               in Millions
------------------------------------------------------------------------
                                              Minimum         Maximum
------------------------------------------------------------------------
Costs:
    System Implementation...............            $214            $409
    Transition..........................              38              72
                                         -------------------------------
        Total Costs.....................             252             481
Benefits:
    Operational Savings--better                      279             746
     standards..........................
    Cost Savings--increase in electronic              24              60
     claims transactions................
    Operational Savings--increase in use             953           2,480
     of auxiliary transactions..........
                                         -------------------------------
        Total Benefits..................           1,256           3,286
                                         -------------------------------
        Net Benefits....................           1,004           2,805
------------------------------------------------------------------------

f. Clearinghouses and Vendors
    Gartner estimates that there are 162 clearinghouses, which includes 
claims-related transaction vendors. This segment of the HIPAA universe 
provides a critical service in today's environment. For the purposes of 
this study, however, any related costs expected to be incurred by these 
vendors was considered to be a ``cost of doing business'' and were not 
included in the overall Cost/Benefit impact. Costs were, however, 
collected from the clearinghouses/vendors and analyzed as best as could 
be with the information available.
    While many providers who use vendor-supplied software may be able 
to defer the costs of software upgrades, the vendor industry may have 
to bear, at least initially, the costs of such upgrades. Vendors have 
not provided data on their costs, and this regulation does not address 
the costs on the vendor industry, but welcomes input as to the 
estimated costs and benefits from this industry, for inclusion in the 
final rule.

[[Page 49771]]

For though vendors are not covered entities under HIPAA, their role is 
significant with respect to the services they provide to health plans 
and to covered health care provider clients.
    We estimate the range of clearinghouse costs to be between $37 
million and $45 million for the Version 5010 upgrade over the 3-year 
implementation period--two years for implementation and a third year 
for transition. Estimates were determined in the same fashion as the 
providers and plans. Clearinghouses were estimated to have total 
Version 4010/4010A costs of approximately $125 million.
    We do not estimate that there would be a positive payback related 
to the Version 5010 upgrade for clearinghouses or vendors, however, 
there are some discrete benefits that would be realized through this 
transition including:
     Higher transaction volumes
     Lower service and operational costs (reduced phone calls)
     Operational efficiencies (Lower percent as measured 
against total costs)
     Increased market size
    Because these benefits are predicated on several dependencies and 
market circumstances beyond our ability to predict with complete 
accuracy, neither HHS nor Gartner attempted to quantify those in dollar 
figures. Table 16 below summarizes the clearinghouse costs.

    Table 16--Version 5010 Cost Benefit Summary for Clearinghouses in
                                Millions
------------------------------------------------------------------------
                       Costs                         Maximum    Minimum
------------------------------------------------------------------------
System Implementation.............................        $33        $41
Transition........................................          3          4
                                                   ---------------------
    Total Costs...................................         37         45
------------------------------------------------------------------------

Qualitative Benefits
    With few exceptions, sources expressed their belief that the 
advancement of the HIPAA standards was the right thing to do across the 
industry. Some participants acknowledged that the advancement to 
Version 5010 would not benefit their organization directly, but they 
were still in support of the modifications to the standards.
    There were a number of benefits that were articulated but not 
quantified by the participating subject matter and industry experts 
that may warrant further discussion with the industry. Among the 
qualitative benefits that were consistently mentioned by interviewees 
were the following:
     Improved accuracy resulting from simplified messaging.
     A new field specifically to capture certain hospital 
acquired condition indicators that are so critical to the industry.
     A new field to capture ``Present on Admission'' indicators 
as directed by the Deficit Reduction Act.
     Resultant quality through greater reliability of clean 
message exchange.
     Collaborative benefits stemming from the ability to share 
more information.
    It is also important to note that Version 5010 is considered a key 
dependency to move towards adopting the ICD-10 CM code set for HIPAA 
transactions. While there is disagreement in the industry about the 
benefits of adopting ICD-10 in the next few years, such a transition is 
viewed as positive over the long-term, and is acknowledged as an option 
that is not available today. In summary, sources agree that all of the 
qualitative benefits lead to the delivery of an improved quality of 
care and allow the providers and plans to focus more of their time on 
patients and less of their time on administration.
3. Version D.0 (and Version 5010 for Pharmacies)
    The objective of this portion of the regulatory impact analysis is 
to summarize the cost and benefits of implementing Version D.0.
Affected Entities
    Almost all pharmacies, health care providers, and plans/PBMs 
already use Version 5.1, as it is the claim format most widely adopted 
by providers who submit retail pharmacy claims, and health plans that 
process retail pharmacy claims. These entities currently use the 
Version 5.1 standard to transmit retail pharmacy claim information 
between provider and plans/PBMs, and between pharmacies and plans/PBMs. 
This is accomplished in one of two ways, either through interactive on-
line transmission or transmission through batch mode.
    Retail pharmacies use Version 5.1 to submit claims to health plans/
PBMs when they dispense a prescription medication to a patient who has 
prescription drug benefits through his/her health insurance coverage. 
The National Association of Chain Drug Stores (NACDS) estimates that 
there are more than 38,000 retail pharmacies owned and operated by both 
national and regional pharmacy chains that process more than 2.3 
billion prescriptions annually. Independent community pharmacies, 
according to the National Community Pharmacist Association (NCPA) 
represent an additional 18,000 independent retail community pharmacies 
across the United States, and process 1.4 billion prescriptions 
annually.
    There are approximately 3,950 health plans according to the 
America's Health Insurance Plans (AHIP) and Gartner research. With 
regard to PBMs, there are four national pharmacy benefit management 
companies that process about 75 percent of the more than 3 billion 
prescriptions dispensed annually in the United States. The remainder 
are specialized PBMs.
    Some health care providers who dispense medications directly to 
their patients, known as dispensing physicians, may use the Version 5.1 
to submit these prescription drug claims on behalf of their patients to 
the PBMs and/or plans, depending on the patient's health insurance 
coverage. However, we do not estimate this practice to be widespread 
and therefore, do not account for it in this impact analysis. We invite 
comment regarding the number of pharmacy benefit management companies 
and their respective market share.
Costs
a. Chain Pharmacies
    The retail pharmacy industry would be the most impacted by the 
transition from Version 5.1. to Version D.0. According to the NACDS, 
there are nearly 200 chain pharmacy companies in the United States. The 
programming changes to incorporate the new fields that constitute the 
Version D.0 are performed at systems located at the corporate level, 
and then these system updates are pushed out to the individual 
pharmacies within the pharmacy chain. One large national pharmacy chain 
has estimated that it spent approximately $10 million when it converted 
to Version 5.1. In comparison, it anticipates that corporate-wide costs 
for the conversion to Version D.0, including programming, system 
testing and personnel training, would be around $2 million. Another 
large national pharmacy chain estimates its migration costs from 
Version 5.1 to Version D.0 at $1.5 million. Chain pharmacy cost 
estimates for programming these systems, testing to ensure that systems 
work with Version D.0, and training of personnel are dependent on the 
size of the pharmacy chain, its respective proprietary systems, and 
number of employees that would require training. Overall, industry 
estimates for conversion to Version D.0 range from $100,000 for a small 
pharmacy chain to $1 million for

[[Page 49772]]

large national pharmacy chains. We assume that these costs would be 
incurred in the first year of the implementation of Version D.0, in 
2010.
    We assume that there are 20 large national pharmacy chains and the 
remaining 180 chains are small chains. Therefore, we estimate costs for 
the migration from Version 5.1 to Version D.0 to be $20 million for 
large national pharmacy chains, and $18 million for the remaining 180 
small chains, for a total of $38 million. We estimate that these costs 
would be incurred during the first two years of implementation.

      Table 17--Chain Pharmacy Costs for Conversion to Version D.0
------------------------------------------------------------------------
                        Category                               Cost
------------------------------------------------------------------------
Large pharmacy chains (20 x $1,000,000).................     $20,000,000
Small pharmacy chains (180 x $100,000)..................      18,000,000
------------------------------------------------------------------------

b. Independent Pharmacies
    Independent pharmacies would also incur costs, the majority of 
which would result from upgrading their software systems to Version 
D.0. These costs are harder to estimate. Independent pharmacies use 
software dispensing packages purchased from pharmacy dispensing 
software system vendors, and usually pay a monthly maintenance fee and 
a per-claim cost of anywhere from 4 cents to 10 cents per claim. 
Maintenance fees are negotiated between the software vendor and the 
pharmacies, and may take the form of a flat fee, or a fee based on a 
sliding scale. These maintenance fees would likely increase slightly, 
as vendors pass along their cost of the upgrade to the pharmacy. We 
assume this would take place not during the course of an existing 
contract, but when the pharmacy's contract with the vendor comes up for 
renewal, likely within two years, in this case 2010 and 2011, the first 
two years of Version D.0 implementation. Based on industry feedback, we 
estimate that the average monthly maintenance contract between a 
pharmacy and a vendor amounts to a range of $400 to $800 per month per 
pharmacy, with the average industry estimate being about $500. We 
estimate a range of between .50 and 1 percent maintenance fee increase 
attributable to the conversion to Version D.0, or an additional $2.50 
to $5.00 per month per pharmacy, or $540,000 to $1,080,000 based on 
18,000 independent pharmacies ($500 x 0 .50 percent/1 percent x 12 
months x 18,000 pharmacies). We solicit industry and stakeholder 
comment on our cost assumptions.

 Table 18--Increase in Independent Pharmacy Monthly Maintenance Fees for
                        Conversion to Version D.0
------------------------------------------------------------------------
               Percentage of increase to maintenance fees
-------------------------------------------------------------------------
                Category                       .50%             1%
------------------------------------------------------------------------
Number of Independent Pharmacies........          18,000          18,000
Average monthly maintenance fee.........            $500            $500
Average annual maintenance fee increase.        $540,000      $1,080,000
------------------------------------------------------------------------

    With respect to costs for implementing Version 5010, we use the 
same pharmacy categories of chains and independents. As stated above, 
the retail pharmacy industry would be impacted by the transition from 
Version 4010/4010A to Version 5010 for billing supplies and services, 
and receiving the remittance advice (835). Similar to the programming 
changes to accommodate D.0, the upgrade to Version 5010 would be 
performed at the corporate level, and the system updates would be 
pushed out to the individual pharmacies within the pharmacy chain. 
Estimates from the large national pharmacy chains regarding costs for 
implementation of Versions 5010 and 5.1 are outlined above. These same 
entities stated that they anticipate corporate-wide costs for the 
conversion to Version 5010, including programming, system testing and 
personnel training, would be around 20 percent of the Version 4010/
4010A costs. This is consistent with the overall industry estimate that 
implementation of Version 5010 would represent approximately 20 to 40 
percent of the cost of implementing Version 4010/4010A. As with Version 
D.0, chain pharmacy cost estimates for programming, testing, and 
training are dependent on the size of the pharmacy chain, their 
respective proprietary systems, and the number of employees that would 
require training. We assume that these costs would be incurred in the 
first 2 years of the implementation of Version 5010, as we do with the 
other HIPAA standards and other industry segments.
    Independent pharmacies would also incur costs, the majority of 
which would result from upgrading software systems to Version 5010 and 
Version D.0, as has been discussed. Independent pharmacies use software 
dispensing packages, and usually pay a monthly maintenance fee and a 
per-claim cost. We assume that these types of costs for implementing 
Version 5010 would be incorporated into the costs for implementing 
Version D.0, and therefore do not add additional costs. Thus, using the 
same estimates for the number of chain and independent pharmacies, and 
applying a rate of 20 percent to Version 4010/4010A implementation 
costs, we estimate costs specific to the migration from Version 4010/
4010A to Version 5010 to be a range of $58 million to $114 for system 
implementation and $10 million to $20 million for transition costs, for 
a total range of $67 million to $134 million. We assume that these 
costs would implicitly include testing, as this activity would be 
executed jointly for Version D.0 and Version 5010. We invite the 
industry to comment on our assumptions and projected cost estimates, 
and to provide current data to support alternative theories or view 
points, as the comparison between Version 4010/4010A costs and Version 
5010 implementation costs could be overstated.
    We described the benefits for all providers, including pharmacy 
providers, in the assumptions section of this analysis (for example, 
better standards and decreased manual effort). We identified the 
largest benefits for pharmacies in the content requirements in the 835 
standard (required fields versus situational or optional fields, and 
improvements in the specificity of the business rules which will 
minimize multiple interpretations of the guides). These enhancements 
would help to reduce manual interventions needed to resolve transaction 
issues. For example, Version 4010/4010A does not provide instructions 
for reconciling payments. The new Front Matter section in Version 5010 
explicitly details how this information is to be reported in the

[[Page 49773]]

summary section of the remittance advice. Thus, benefits and savings 
would accrue through better standards. For this savings calculation, we 
use the same formula as for other provider cost savings--multiplying 
the number of claims that would not require manual intervention, times 
the cost per call and the number of minutes estimated for each call. 
Savings due to better standards (837 and 835) are estimated to be in 
the range of $20 million to $27 million.
c. Health Plans and PBMs
    Health plans should see minimal changes in their operations and 
workflows between Version 5.1 and Version D.0. Version D.0 does not 
require any substantial or additional data reporting to enhance the 
eligibility or subrogation/secondary plan aspects of the transaction. 
Most of that work would be performed by the pharmacy benefit managers 
(PBMs) that service the plans. Plans would likely continue to provide 
data to the PBMs weekly via flat file transmission. However, PBMs would 
have to reprogram their systems to be able to process claims in Version 
D.0. As with the large pharmacy chains, we estimate the cost for large 
PBMs to migrate to Version D.0 to be approximately $1 million to $1.5 
million per large national PBMs, and approximately $100,000 for 
specialty PBMs. Due to mergers and acquisitions over the past 4 years, 
the number of PBMs has dropped from approximately 100 to about 40 total 
PBMs in the U.S. Of those, we estimate that four are considered large 
PBMs and would therefore incur approximately $4 million to $6 million 
in conversion costs to Version D.0, and the remainder would incur 
$100,000 or $3,600,000 in the aggregate, for a total cost ranging 
between $8.6 and $10.6 million. We do not estimate any additional costs 
to health plans for implementing Version 5010 for pharmacies, as all 
efforts are included in the overall budget towards compliance. We 
solicit industry comment on these cost assumptions, and additional 
information regarding how PBM costs affect health plans, and how these 
costs are passed on to the plans. We also invite comment as to how the 
change to Version D.0 would affect core systems, and what the costs 
might be to health plans, particularly large plans with broad 
operations.

            Table 19--PBM Costs of Conversion to Version D.0
------------------------------------------------------------------------
                 Category                               Cost
------------------------------------------------------------------------
Large PBMs (4 x $1,000,000/$1,500,000)....  $4,000,000/$6,000,000
Specialty PBMs (36 x $100,000)............  $3,600,000
------------------------------------------------------------------------

d. Vendors
    Software vendors have commitments to their software clients to 
maintain compliance with the latest adopted e-prescribing standards. 
They must incorporate these standards into their software systems, 
otherwise they would not be able to sell their products competitively 
in the marketplace. These systems cannot properly function using 
outdated standards and/or missing key functionalities which the 
industry has identified as essential to their business operations. We 
expect that upgrades to these standards are anticipated by vendors, and 
the cost of programming and/or updating the software is incorporated 
into the vendor's routine cost of doing business. We further assume 
they would pass along costs to customers through increases in the cost 
of licensing and/or monthly maintenance fees, which we previously 
discussed and estimated to be about 0.50 to 1 percent based on industry 
interviews. We solicit industry and stakeholder comment on the 
assumption that vendor costs will be passed on to the customer over 
time, and solicit feedback on actual costs for vendor software upgrades 
and impact on covered entities, including the conversion of historical 
data.
Benefits
a. Pharmacies
    Pharmacies need Version D.0 to process Medicare Part D claims. 
Currently, there are many workarounds in pharmacy systems due to the 
shortcomings of Version 5.1 in processing ``coordination of benefits'' 
claims. Pharmacies would benefit from the use of the NCPDP D.0 standard 
because it provides better guidance than Version 5.1 in Medicare Part D 
coordination of benefits situations, and now identifies ``patient 
responsibility'' and ``benefit stage'' to help identify coverage gaps 
on secondary claims. By processing the claim correctly the first time--
sending the right fields, with the right details, and additional fields 
with detailed pricing segments--the result could be that pharmacies are 
paid correctly, and patients pay correct co-pays, and there could be 
fewer pharmacy audits and recoupments.
    A recoupment is a request for refund when a pharmacy is erroneously 
overpaid by a plan. A common reason for a recoupment is that the plan 
was not aware of a patient's other health insurance coverage, 
information that can be provided through use of the Version D.0 
standard. Currently, there are issues with Version 5.1's 
misinterpretation of ``coordination of benefits.'' There are extensive 
customer service issues with many of these claims due to the charging 
of incorrect co-pays, as the correct values do not exist in Version 
5.1. Version D.0 redefines the ``other coverage codes'' and provides 
claim examples in coordination of benefits situations to eliminate 
future confusion. Extra information, which would be available in the 
E1--Eligibility Verification transaction (this transaction resides on 
the NCPDP Telecom 5.0 standard and provides information on a patient's 
benefit eligibility at the time of prescription dispensing) would be 
beneficial to pharmacies as well, but it is the coordination of 
benefits and more precise pricing fields that would save pharmacies 
time and money. One industry group estimated that large pharmacy chains 
could save upwards of $1 million a year due to avoided audits and 
incorrect payments. For smaller chains, the industry estimates savings 
would be approximately $100,000 per chain. This does not include the 
time that pharmacists and pharmacy technician staff spend on these 
claims trying to process them at the pharmacy level. We assume an 
annual benefit of $38 million for large and small pharmacy chains in 
avoided audits and incorrect payments, and a total 10-year benefit of 
$380 million, and conservatively estimate benefits at 50 percent, or 
$190 million. We invite industry and stakeholder comments on this 
assumption.
    Table 20 below shows the amount of savings as a result of avoided 
audits and incorrect payments based on implementation of Version D.0.

[[Page 49774]]



 
                   [Large and small chain pharmacy avoided audit and incorrect payment savings resulting from Version D.0 (millions)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                          Benefit type                             2010    2011    2012    2013    2014    2015    2016    2017    2018    2019    Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Large Pharmacy chains (20 x $1M)................................     $20     $20     $20     $20     $20     $20     $20     $20     $20     $20    $200
Small Pharmacy Chains (20 x $1M)................................      18      18      18      18      18      18      18      18      18      18     180
Total (maximum).................................................      38      38      38      38      38      38      38      38      38      38     380
50% (minimum)...................................................      19      19      19      19      19      19      19      19      19      19     190
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Based on a study funded by the National Association of Chain Drug 
Stores (NACDS), ``Pharmacy Activity Cost and Productivity Study'' 
(http://www.nacds.org/user-assets/PDF_files/arthur_andersen.PDF), the 
average pharmacist spends 1.1 percent of his or her time dealing with 
third party plan issues. According to NACDS, there are 136,773 
pharmacists employed by chain pharmacies, and 94,000 full-time 
community pharmacists. In 2010, the first year of the migration from 
Version 5.1 to Version D.0, that number is expected to increase to 
244,829, or approximately 7,028 per year based on industry trend 
information. For these 244,829 full-time pharmacists, 1.1 percent of 
2,080 working hours annually equals 22.88 hours per year that a 
pharmacist spends on third party plan issues, times the study's 
estimated average pharmacist hourly wage of $60, which equals $1,373 
per pharmacist, $1,373 x 244,829 full-time pharmacists equals 
$336,101,251 in potential productivity savings to be realized by the 
use of Version D.0 in the first benefit year. However, we recognize 
that all call backs and inquiries would not be entirely eliminated. 
Therefore, we conservatively estimate that 25 to 50 percent of the 
pharmacist's time spent on third party plan questions could be 
eliminated, for a total first year savings of $84 million to $168 
million. Over the next 9 years, we estimate that, based on Department 
statistics (http://www.hhs.gov/pharmacy/phpharm/howmany.html) the 
number of pharmacists will increase by 1.3 percent per year. We 
estimate 10-year productivity savings at $1,134 million to $2,268 
million. We did not estimate hourly wage increases for the other job 
types discussed elsewhere in this regulation, and therefore savings 
calculated for other entities do not include the additional dollar 
values.

[[Page 49775]]



                                                                                       Table 21--Pharmacist Productivity Savings From Version D.0
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                         Year                                2010            2011            2012            2013            2014            2015            2016            2017            2018            2019
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
No. of Pharmacists....................................         244,829         248,012         251,236         254,502         257,811         261,162         264,557         267,996         271,480         275,010         2,596,595
Incremental Pharmacists...............................  ..............           3,183           3,224           3,266           3,309           3,352           3,395           3,439           3,484           3,529            30,181
Pharmacist Hourly Wages...............................          $60.00          $63.18          $66.52          $70.04          $73.75          $76.65          $80.76          $85.04          $89.54          $94.28  ................
Hours x Wages x Pharmacists...........................    $336,101,251    $358,515,508    $382,375,458    $407,843,319    $435,029,477    $458,013,485    $488,845,770    $521,444,688    $556,175,087    $593,230,486    $4,537,574,528
                                                       ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total (25%).......................................     $84,025,313     $89,628,877     $95,593,864    $101,960,830    $108,757,369    $114,503,371    $122,211,442    $130,361,172    $139,043,772    $148,307,621    $1,134,393,632
                                                       ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total (50%).......................................    $168,050,626    $179,257,754    $191,187,729    $203,921,659    $217,514,738    $229,006,742    $244,422,885    $260,722,344    $278,087,544    $296,615,243    $2,268,787,264
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 49776]]

    According to the same NACDS study, pharmacy staffs spend 0.9 
percent of their time dealing with third party plan issues. Although 
there are usually multiple pharmacy technicians on premises at a given 
time, for purposes of this analysis we assume that one and one-half 
pharmacy staff persons per pharmacy are addressing these third party 
plan issues.
    In projecting the growth in the number of pharmacies over the next 
9 years, we used data from the NACDS, ``Community Retail Pharmacy 
Outlets by Type of Store, 1996-2006'' (http://www.nacds.org/user-seets/pdfs/facts_resources/2006/Retail_Outlets2006.pdf), which showed that 
while there were 2 years of negative growth, the average percentage 
increase in the number of pharmacies was .835 percent per year. We 
applied this percentage growth factor to our analysis, and calculated 
benefits based only on the incremental growth in the number of 
pharmacies, assuming that existing pharmacies would have already 
accounted for their technician hours. We also assume that the salaries 
of pharmacy technician staff would rise approximately $.50 cents an 
hour each year, based on industry data (http://flahec.org/hlthcarers/pharmtec.htm and http://www.nacds.org/wmspage.cfm?parm1=507) showing 
that their median hourly earnings rose from $11.73 in 2005, to $12.74 
in 2007. Starting our analysis in the year 2010, we project there would 
be 56,946 pharmacies. We assume that one and one-half full-time 
pharmacy staff persons per pharmacy would spend 28.08 hours per year on 
third party plan issues (0.9 percent x 3,140). The hourly wage for one 
and one-half persons is $21.36 based on a per-technician hourly wage 
projected at $14.24 (1.5 x $14.24=$21.36) for the year 2010. This 2010 
hourly wage is based upon the current average hourly wage of $12.74, 
increased 0.50 cents per year according to industry trend information. 
We calculated the 2010 hourly technician wage of $21.36 times the 
number of hours spent on third party plan issues, 28.08, times the 
number of pharmacies, 56,946 for a total of $34,155,573 ($21.36 x 28.08 
x 56,946). Once again, we recognize that all call backs and inquiries 
would not be entirely eliminated. Therefore, we conservatively estimate 
that 25 percent of the pharmacy staff's time spent on third party plan 
questions could be eliminated, for a total 10 year productivity savings 
of $98 million to $196 million.

[[Page 49777]]



                                                                                Table 22--Pharmacy Technician Staff Productivity Savings From Version D.0
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                          Year                                 2010            2011            2012            2013            2014            2015            2016            2017            2018            2019
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
No. of Pharmacies.......................................          56,946          57,421          57,900          58,383          58,870          59,361          59,856          60,355          60,858          61,366  ..............
Incremental No. of Pharmacies...........................  ..............             475             479             483             487             491             495             499             503             508  ..............
Technician Hourly Wage ( x1.5 techs.)...................          $21.36          $21.86          $22.36          $22.86          $23.36          $23.86          $24.36          $24.86          $25.36          $25.86  ..............
Hours (28.080) x Wages x No. of Pharmacies..............     $34,155,573     $35,246,664     $36,353,604     $37,476,561     $38,615,706     $39,771,205     $40,943,228     $42,131,942     $43,337,517     $44,560,847    $392,592,847
                                                         -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total (25%).........................................      $8,538,893      $8,811,666      $9,088,401      $9,369,140      $9,653,926      $9,942,801     $10,235,807     $10,532,986     $10,834,379     $11,140,212     $98,148,212
                                                         -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total (50%).........................................     $17,077,787     $17,623,332     $18,176,802     $18,738,281     $19,307,853     $19,885,603     $20,471,614     $21,065,971     $21,668,759     $22,280,424    $196,296,424
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 49778]]

Health Plans and PBMs
    We assume that if pharmacists and technicians realize productivity 
savings as a result of the use of Version D.0, then conversely, health 
plans and PBMs would realize commensurate savings though a reduction in 
pharmacist and technician calls to customer service representatives at 
health care plans and PBMs.
    Using the previous assumptions, we again estimate the annual salary 
of a typical plan/PBM customer service representative at $40,000, or 
approximately $19.23 per hour. If pharmacists spend a total of 22.88 
hours per year on the phone making third party payer inquiries, we 
estimate that a customer service representative would spend the same 
amount of time on the phone answering the pharmacists' third party 
inquiries. At $19.23 an hour, that would equate to savings of $440 per 
customer service representative. Additionally, if pharmacy technicians 
each spend 28.08 hours each year on the phone making third party payer 
inquiries, this would equate to $540 per customer service 
representative, for a total savings of $980 per customer service 
representative. If we apply a conservative benefit assumption of 25 
percent, this would equate to productivity savings of $245 per customer 
service representative.
    We have no knowledge of the number of customer service 
representatives employed by plans and PBMs, and therefore cannot draw 
any quantitative conclusions from the above analysis. We assume that, 
even taking a conservative approach by estimating the benefit at 25 
percent as we did for the pharmacists and technicians, plans and PBMs 
would greatly benefit from productivity savings among their customer 
service representatives in avoided calls from pharmacists and 
technicians regarding third party payer issues.
    We also assume that if pharmacies are realizing savings through 
avoided audits and returned payments, plans are also receiving a 
commensurate benefit, but we have no data from industry to support this 
assumption. We solicit industry and interested stakeholder comments on 
these benefit assumptions.
    With respect to benefits related to implementing Version 5010, we 
described the benefits for all providers, including pharmacy providers, 
in the assumptions section of this analysis (better standards and 
decreased manual effort). We identified the largest benefits for 
pharmacies in the content requirements in the 835 standard (required 
fields versus situational or optional fields) and improvements in the 
specificity of the business rules which will minimize multiple 
interpretations of the guides. These enhancements will help to reduce 
manual interventions needed to resolve transaction issues. For example, 
Version 4010/4010A does not provide instructions for reconciling 
payments. The new Front Matter section in Version 5010 explicitly 
details how this information is to be reported in the summary section 
of the remittance advice. Thus, benefits and savings would accrue 
through better standards. For this savings calculation, we use the same 
formula as for other provider cost savings--multiplying the savings 
from reduced manual intervention by the number of claims and remittance 
advice transactions that would be affected by the improvements. Savings 
due to better standards (837 and 835) is estimated to be in the range 
of $20 million to $27 million.

                                     Table 23--Cost Savings for Pharmacies Due to Better Standards for Version 5010
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   2010    2011    2012    2013    2014    2015    2016    2017    2018    2019    Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Decrease in phone calls.........................................  ......  ......     .77     .80     .83     .86     .90     .93     .97    1.01  ......
Time to process call--6 minutes.................................       0       0      $2      $2      $2      $2      $3      $3      $3      $3     $20
Cost per call--$.48/minute......................................       0       0      $3      $3      $3      $3      $3      $4      $4      $4     $27
--------------------------------------------------------------------------------------------------------------------------------------------------------

Summary of Version D.0 and Version 5010 for Pharmacy Costs and Benefits
    Costs would be incurred by pharmacy chains, independent pharmacies 
and PBMs in the migration from Version 5.1 to Version D.0. Benefits 
resulting from avoided audits and incorrect payments, and pharmacist 
and pharmacy technician productivity savings would accrue to pharmacy 
chains and independent pharmacies.

  Table 24--Cost Benefit Summary for Pharmacies in Millions for Version
                          D.0 and Version 5010
------------------------------------------------------------------------
                                             Minimum         Maximum
------------------------------------------------------------------------
Costs (Chains and independents):
    D.0 Pharmacy Chains Systems                  $18               $38
     Implementation....................
    D.0 Independent Pharmacies                   540             1,080
     Maintenance Fees..................
    D.0 PBM Programming................            8.6              10.6
    5010 System Implementation.........           58               114
    5010 Transition....................           10                20
                                        --------------------------------
        Total Costs....................           95.14            183.6
Benefits:
    D.0 Pharmacist Productivity Savings        1,134             2,268
    D.0 Pharmacy Technician                       98               196
     Productivity Savings..............
    D.0 Avoided Audits and Accurate              190               380
     Payments..........................
    5010 Operational Savings--better              20                27
     standards.........................
                                        --------------------------------
        Total Benefits.................        1,442             2,871
                                        --------------------------------
        Net Benefits...................        1,346             2,870
------------------------------------------------------------------------


[[Page 49779]]

3. Version 3.0

A. Introduction

    All State Medicaid programs or their business associates that 
conduct Medicaid pharmacy subrogation transactions for pharmacy claims 
would be required to use the NCPDP Medicaid Subrogation Standard, 
Version 3.0 when billing third party payers that may be legally 
responsible for payment.
    Based upon industry analysis and current usage, we have determined 
that adopting a standard for the subrogation transaction would result 
in one-time conversion costs for Medicaid State agencies, or their 
business associates, as well as the third party payers of Medicaid 
claims. This includes primarily pharmacy benefit managers (PBMs) and 
claims processors as well as medical health plans that process their 
claims in house. Some third party payers would incur system upgrade 
costs directly and others would incur them in the form of a fee paid to 
a contractor. We project that the accrued savings that would result 
from the administrative simplification of adopting a HIPAA standard for 
Medicaid pharmacy subrogation would be ongoing and offset any immediate 
expenditures.

B. Current Medicaid Claims Processing Environment

    Approximately 37 States are currently billing a major portion of 
their Medicaid pharmacy subrogation claims electronically. At the time 
of this impact analysis, 33 of the 37 States were using a contingency 
fee contractor to bill their claims. This means that these States have 
hired a contractor to seek reimbursement from third parties and the 
contractor keeps a portion of the recoveries. The other four States 
were billing electronically without the use of a contractor. The 
remaining 14 States were billing primarily all of their Medicaid 
pharmacy subrogation claims on paper.
    It is important to note that since some payers currently require 
the use of their own unique billing format, States and contractors with 
electronic billing capability have found it necessary to bill a 
substantial amount of subrogation claims on paper.
    In addition, due to the current challenges of having to use various 
formats to meet the needs of different payers, some States, on 
occasion, recoup the subrogation monies directly from pharmacy 
providers, and the providers are responsible for billing the payers. 
The impact on pharmacy providers for implementing the NCPDP subrogation 
format is discussed in section D of this proposed rule.

C. Impact Analysis on State Medicaid Programs

    The current Version 2.0 for standard Medicaid pharmacy subrogation, 
with some modifications to accommodate various third party payers, is 
being widely used. Therefore, some of the costs referenced in this 
impact analysis have already been absorbed.
    The costs for States that currently bill electronically to upgrade 
their systems to Version 3.0 for Medicaid subrogation transactions, and 
to transition from paper Medicaid subrogation claims to electronic 
Version 3.0, would be outweighed by the benefits accrued to States. The 
following sections provide details to support this conclusion. We 
invite public comments on this conclusion.
1. Impact on States That Use a Contingency Fee Contractor
    For the 33 States that contract out their Medicaid pharmacy 
subrogation billing processes, there would be no direct costs. 
Contingency fee contractors generally keep a percentage, from 6 percent 
to 15 percent, of the monies they recover from third parties. It is 
expected that these contractors would absorb the upfront costs. If the 
standard is adopted, we project that reimbursement to States would 
increase proportionally to a projected increase in volume of electronic 
claims, and as a result, the contractors would recover their cost on 
the back-end, as they would be recouping additional contingency fees 
based on the volumes.
    Our estimates are based on the assumption that virtually all paper 
subrogation claims would be converted to electronic transactions 
because currently, some States only conduct subrogation on paper. With 
the adoption of Version 3.0 as a HIPAA standard, all States (or their 
contractors) will be required to utilize Version 3.0 when transmitting 
Medicaid subrogation claims to plans or payers.
2. Impact on States Converting From Paper
    The total costs and benefits to the Federal government and State 
Medicaid programs are arrayed in Tables 24a and 24b at the end of this 
section.
a. Cost of Development
    The typical steps to be taken in the implementation of the Version 
3.0 include:
     Completing an analysis to identify gaps and weaknesses in 
existing process.
     Participating in internal meetings for project management 
and control.
     Completing documentation requirements necessary for 
project management.
     Providing translator training to development staff.
     Completing new translator maps for both the outgoing NCPDP 
claim and the returning NCPDP response files.
     Completing legacy system changes to accommodate the NCPDP 
transactions.
     Completing acceptance testing.
    Since States have already made the necessary investments in 
developing electronic transaction capabilities to meet HIPAA mandates 
and they anticipate upgrading their systems in order to adopt the NCPDP 
D.0 standard for processing claims, we expect that additional 
infrastructure costs would be relatively small. Costs would be 
significantly reduced because the Medicaid subrogation standard Version 
3.0 utilizes the data elements in, and operates in conjunction with, 
the version D.0 claim standard.
    We captured data from the State of Illinois, which recently adopted 
Version 2.0 for pharmacy subrogation as a stand-alone systems upgrade. 
The cost for development was estimated at $220,000 for staff and 
mainframe systems. This figure does not include costs on the Local Area 
Network (LAN) where the translator development and testing occurred, or 
connectivity setup costs performed by another agency. Illinois is the 
only state that has recently converted to Version 2.0 and was able to 
provide cost data. Alabama is in the process of converting to Version 
2.0, but its implementation is being done in conjunction with other 
system upgrades, and the costs specific to Medicaid subrogation could 
not be isolated.
    Since we believe it is unlikely that a State would choose to use 
the Medicaid pharmacy subrogation standard as a stand-alone upgrade, 
but instead would implement it in conjunction with Version D.0, we 
project the cost to be lower. Therefore, we would expect the cost of 
adopting the Medicaid subrogation standard in conjunction with adopting 
the Version D.0 to range from $50,000 to $150,000 per State. The State 
would be responsible for 10 percent of the $50,000 to $150,000 per 
State, and the Federal government would reimburse the State 90 percent 
of the design, development, and installation costs related to changes 
in their Medicaid Management Information Systems (MMIS).
    Of the 14 States that bill paper, we project that seven would incur

[[Page 49780]]

development costs in order to conduct their own billing and the other 
seven would hire a contingency fee contractor to conduct their billing.
    However, since we have received a limited amount of data, we 
solicit comments from States.
b. Costs of Adopting and Implementing Trading Partner Agreements (TPAs) 
With Third Party Payers
    Once a State has a system in place to process pharmacy claims using 
the Medicaid subrogation standard, the State typically enters into 
``Trading Partner Agreements'' with other payers in order to conduct 
subrogation electronically. This involves--
     Outreach activities.
     Meetings to assure that the strategy developed will 
accomplish a successful implementation.
     Connectivity for file transfers and to mitigate the values 
in various fields in outgoing NCPDP claim transactions and the 
returning NCPDP response transaction.
     Modifications to accommodate the needs in the translator 
maps and legacy systems.
     Acceptance testing and deployment scheduling.
    According to the AHIP, there are four national PBMs that process 
about 75 percent of all prescriptions dispensed annually, and there are 
a small handful of specialized PBMs. Based on information provided by 
States and business associates, we expect that approximately forty (40) 
third party payers, primarily PBMs and claims processors as well as a 
few large health plans that process claims in-house, would be affected.
    Based on estimates from some at least two States (Illinois and 
Alabama) that have recently, or are in the process of, billing 
electronically, the cost to adopt and implement their first trading 
partner agreements are estimated to range from $14,000 to $20,000. We 
believe that as States and payers gain experience in negotiating these 
agreements and the number of these agreements increases, the cost would 
be significantly reduced. Therefore, we estimate the cost for a State 
to establish and implement trading partner agreements with payers to 
range from $5,000 to $15,000 for each trading partner agreement. It is 
projected that each State would enter into a trading partner agreement 
with an average of 15 payers. The anticipated costs per State would 
range from $75,000 to $225,000. Since we believe that one half of the 
14 States would hire a contractor, the costs for the other seven States 
to adopt a trading partner agreement with 15 plans would range from 
$525,000 to $1.6 million. The State would be responsible for 50 percent 
of the cost since the Federal government reimburses States 50 percent 
of their administrative costs, related to the proper and efficient 
administration of the Medicaid program.
3. Impact on States That Bill Electronically (Without the Use of a 
Contingency Fee Contractor)
a. Cost of Development
    For the four States that are currently conducting pharmacy 
subrogation transactions electronically, the changes would be minimal 
and the cost impact would be much less than for the States that 
currently bill paper to convert to Version 3.0.
b. Costs of Adopting and Implementing Trading Partner Agreements With 
Third Party Payers
    The cost to adopt and implement a trading partner agreement would 
be the same: $5,000 to $15,000, for these States as it would be for the 
States that are converting from paper to electronic billing. The only 
difference is that these States would have already established trading 
partner agreements with some payers and would be setting up trading 
partner agreements with additional payers. We would estimate that these 
four States would each establish trading partner agreements with an 
additional 12 payers for a total cost ranging from $20,000 to $60,000.
4. Medicaid Savings
    We have determined that the accrued savings to States would 
outweigh the costs based on the fact that after implementation, 
Medicaid agencies would no longer have to keep track of and use various 
electronic formats for different payers. This would simplify their 
billing systems and processes and reduce administrative expenses.
    Based on our data, we estimate the total number of paper Medicaid 
pharmacy subrogation claims to be between 2.5 and 3.4 million annually. 
We are seeing a trend where States that have historically ``paid and 
chased'' pharmacy claims are implementing cost avoidance systems. By 
doing so, States are requiring pharmacy providers to bill third party 
payers before billing Medicaid, thereby reducing the need for Medicaid 
subrogation. We expect this trend to continue.
    According to a study by Milliman in 2006, and referenced by the 
American Medical Association (AMA) on their Web site, electronic claims 
can save an average of $3.73 per clean claim filed. Based on this 
study, the Medicaid program stands to save an estimated $12.7 million 
annually once Version 3.0 is fully implemented, beginning in the third 
year of implementation. For the third and fourth year when Version 3.0 
is fully implemented, the administrative savings will be distributed 
equally between the States and the Federal government. The total 
savings over the 10 year period is estimated to be $17.6 million. After 
the fourth year, savings will essentially cease as States transition to 
routine use of the standard.
    Rather than using the assumptions that the AHIP study referenced 
earlier in this analysis for Version 5010, we use the study referenced 
by the AMA because it identifies savings for the entity that generates 
the claim, which, in the case of subrogation, is the Medicaid agency. 
We believe that this $3.73 savings estimate represents the savings 
potential of overhead, labor, and other indirect benefits applicable to 
Medicaid. The AMA report referencing the study can be found at: http://www.ama-assn.org/ama/pub/category/18185.html. Select ``Follow the 
Claim'' to be taken to the report. The study itself can be found at 
http://transact.webmd.com/milliman_study.pdf.
    The savings represents both State agencies and the Federal 
government, as the Federal government would share 50 percent of any 
administrative savings. We did not receive specific data from Medicaid 
agencies on subrogation savings, and therefore welcome industry input 
and data to validate or enhance these assumptions during the public 
comment period.
    In addition to the administrative savings, we anticipate that 
Medicaid would realize programmatic savings resulting from an increase 
in claims paid due to increased efficiency in electronic claims 
processing using Version 3.0. We do not have sufficient data to 
accurately project the actual savings; therefore, we solicit public 
comments.
    We do not anticipate a significant change in volume in subrogation 
claims in future years. Even though the trend shows an increase in 
prescriptions overall, States are becoming more efficient in avoiding 
payment on the front-end which results in fewer subrogation claims on 
the backend.

D. Impact on Medicaid Pharmacy Providers

    In situations where Medicaid has been unable to successfully bill 
third parties, due to the current challenges of having to use various 
formats to meet the needs of different payers, States sometimes recoup 
the subrogation monies from pharmacy providers and it

[[Page 49781]]

is left up to the providers to bill the appropriate third party payers. 
Use of a standard format should enable States to bill third parties 
successfully and therefore help to alleviate this administrative burden 
on providers. We do not estimate this practice to be widespread and 
therefore do not account for it in this impact analysis.

E. Impact on Third Party Payers (Includes Plan Sponsors, Pharmacy 
Benefit Managers (PBMs), Prescription Drug Plans (PDPs) and Claims 
Processors)

    Insurers, employers and managed care plans are sometimes referred 
to as plan sponsors. A majority of plan sponsors use a PBM to manage 
prescription drug coverage and handle claims processing. Some plan 
sponsors administer the prescription coverage in-house, but contract 
with a claims processor just to handle claims adjudication. A few of 
the larger plan sponsors perform their own claims processing. The total 
costs and benefits to third party payers are arrayed in Table 25a and 
Table 25b at the end of this section.
1. Impact on Plan Sponsors That Use a PBM or Claim Processor
    As mentioned earlier, there are four PBMs that handle about 75 
percent of all prescription orders dispensed annually in the United 
States, and a handful of specialized PBMs. These PBMs have contracts 
with hundreds of plan sponsors. We estimate that about 10 PBMs and 
processors are already accepting the Version 2.0 subrogation standard 
from States or their contractors.
    For the majority of plan sponsors that contract out their claims 
adjudication to PBMs or claims processors, the costs of implementing 
Version 3.0 and establishing trading partner agreements would be 
minimal. The PBMs and claims processors would likely absorb the upfront 
cost and recover their expenses from their hundreds of plan sponsors on 
the back-end. This could be done by charging a flat fee or by 
increasing the amount of the transaction fees that are charged to plans 
sponsors for processing Medicaid claims. These fees would be offset for 
plan sponsors since they would no longer be paying higher fees for 
processing paper claims.
2. Impact on Plan Sponsors That Do Not Use a PBM or Claim Processor
    There may be a few large payers, primarily insurers and managed 
care organizations that administer their own claims adjudication. These 
payers would have already made the necessary investments in developing 
electronic capabilities to meet HIPAA mandates. We anticipate that the 
payers would upgrade their systems in order to adopt the Version D.0 
for processing claims from providers. Version 3.0 utilizes a number of 
the data elements found in Version D.0. Therefore, we expect that 
additional infrastructure costs would be relatively small.
a. Costs of Development
    We estimate the development costs to individual payers that would 
need to implement Version 3.0 for the Medicaid pharmacy subrogation 
standard, Version 3.0 to be similar to the cost for State Medicaid 
programs which would be in the $50,000 to $150,000 range. We estimate 
that there are about 20 payers that do not contract with a PBM and they 
would need to upgrade their systems at a total cost of $1 to $3 
million. However, since we do not have sufficient data to accurately 
project actual costs, we solicit comments from third party payers.
b. Costs of Adopting and Implementing Trading Partner Agreements With 
States
    We estimate the plan sponsor's costs of adopting and implementing a 
trading partner agreement with a State would be similar to the cost 
estimated for State Medicaid programs, which would range from $5,000 to 
$15,000 per agreement.
    We anticipate that approximately 40 States would utilize a 
contingency fee contractor, therefore, the process for setting up 
trading partner agreements with a contractor versus 40 individual 
States would be streamlined and much less costly. We estimate the cost 
per plan sponsor for establishing agreements to include all of the 
States to range from $60,000 to $180,000. However, since we do not have 
sufficient data, we solicit comments from plan sponsors.
    In addition to the administrative costs, we anticipate that the 
increased efficiency in claims processing would result in payers paying 
out more for Medicaid subrogation claims that would have otherwise been 
denied. We do not have sufficient data to estimate the potential costs. 
We invite public comments on the costs for the increase in Medicaid 
subrogation adjudicated claims.
3. Savings Impact
    Savings from the application of electronically conducting 
subrogation may vary, but even small savings per claim can have a large 
impact on administrative costs when dealing with large claim volumes.
    According to a survey conducted by AHIP in May 2006, electronic 
claims are roughly half the cost of paper claims. The average cost of 
processing a clean electronic claim was 85 cents, nearly half the $1.58 
cost of processing a clean paper claim. Pended claims requiring manual 
or other review cost $2.05 on average per claim to process.
    We do not have data for the States to distinguish the proportion of 
clean claims versus those that require manual review. Using the 
assumption that 50 percent of claims require manual review, the savings 
of converting 3.4 million paper claims to electronic transmission would 
be $3.3 million. Use of the standard would provide a source of ongoing 
savings for the industry.
    We do not anticipate a significant change in volume in subrogation 
claims in future years. Even though the trend shows an increase in 
prescriptions overall, States are becoming more efficient in avoiding 
payment on the front end which results in fewer subrogation claims on 
the backend. The following tables (Table 25a/b and 26a/b) show the 
estimated State, Federal and payer costs and benefits for implementing 
Version 3.0.

[[Page 49782]]



                                         Table 25a--Estimated State and Federal Costs in Millions--for Years 2010-2019 for Implementation of Version 3.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                   Cost type                              Government plans            2010      2011      2012      2013      2014      2015      2016      2017      2018      2019      Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Development....................................  Federal--Minimum.................     $.158     $.158         0         0         0         0         0         0         0         0     $.316
                                                 Federal--Maximum.................      .472      .472         0         0         0         0         0         0         0         0      .944
                                                 State--Minimum...................      .018      .018         0         0         0         0         0         0         0         0      .036
                                                 State--Maximum...................      .052      .052         0         0         0         0         0         0         0         0      .104
Trading Partner Agreements.....................  Federal--Minimum.................      .191      .191         0         0         0         0         0         0         0         0      .382
                                                 Federal--Maximum.................      .580      .580         0         0         0         0         0         0         0         0     1.160
                                                 State--Minimum...................      .191      .191         0         0         0         0         0         0         0         0      .382
                                                 State--Maximum...................      .580      .580         0         0         0         0         0         0         0         0     1.160
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                                       Table 25b--Estimated State and Federal Benefits--in millions--for Years 2010-2019 for Implementation of Version 3.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                 Benefit type                            Government plans            2010      2011      2012      2013      2014      2015      2016      2017      2018      2019      Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
General Benefit...............................  Federal--Minimum.................     $1.16     $2.33      $4.7      $4.7        $0        $0        $0        $0        $0        $0     $12.9
                                                Federal--Maximum.................      1.59      3.17       6.4       6.4         0         0         0         0         0         0      17.59
                                                State--Minimum...................      1.16      2.33       4.7       4.7         0         0         0         0         0         0      12.9
                                                State--Maximum...................      1.59      3.17       6.4       6.4         0         0         0         0         0         0      17.59
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                                              Table 26a--Estimated Payer Costs--in Millions--for Years 2010-2019--for Implementation of Version 3.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    2010       2011      2012      2013      2014      2015      2016      2017      2018      2019      Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Costs:
    Development..............................  Payer--Minimum..................      $.500      $.500        $0        $0        $0        $0        $0        $0        $0        $0       $1
                                               Payer--Maximum..................      1.5        1.5           0         0         0         0         0         0         0         0        3
    Trading Partner Agreements...............  Payer--Minimum..................      1.2        1.2           0         0         0         0         0         0         0         0        2.4
                                               Payer--Maximum..................      3.6        3.6           0         0         0         0         0         0         0         0        7.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 49783]]


                        Table 26b--Estimated Payer Benefits--in Millions--for Years 2010-2019--From Implementation of Version 3.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                 General Savings                     2010     2011      2012       2013      2014     2015     2016     2017     2018     2019    Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Payer--Minimum...................................    $.600    $1.24     $2.475     $2.475       $0       $0       $0       $0       $0       $0    $6.79
Payer--Maximum...................................     .800     1.65      3.3        3.3          0        0        0        0        0        0     9.05
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Alternatives Considered

    We considered a number of alternatives for each of the proposals 
and eliminated each of them in favor of the recommendations in this 
proposed rule.
    For each of the three sections of this proposed rule, one 
alternative considered was to make no changes to the status quo. That 
would mean that the current versions of X12N (Version 4010/4010A) and 
NCPDP (Version 5.1) would continue to be the adopted standards for 
HIPAA transactions, and that a standard would not be adopted for 
Medicaid subrogation transactions. In each case we rejected this 
alternative because such a decision would not only continue to hamper 
adoption of EDI for all covered entities, it would potentially preclude 
the industry from implementing the ICD-10 code set for the HIPAA 
administrative transactions. We note that Version 4010/4010A cannot 
accommodate ICD-10 codes, while Version 5010 can. Keeping version 4010/
4010A as the standard would result in impeding the expansion of EDI.
    Moreover, if we continue to use Version 4010/4010A, the industry 
would continue to use a number of workarounds to be able to use the 
standards and would continue the reliance on companion guides, which is 
counter to the concept of standardization. The NCPDP testified to the 
NCVHS in July 2007 that adopting Version 5010 is a cost-saving measure 
that would improve the efficiency of those already using Version 4010/
4010A, and encourage others to adopt and use more of the standards.
    For Version D.0, we considered not adopting this modification and 
leaving intact the requirement to use Version 5.1. However, we rejected 
this alternative because we believe Version 5.1 has become outdated and 
is not efficient or effective in processing Medicare Part D 
prescription drug benefit program claims. We also considered waiting to 
adopt Version D.0 at a later date, but felt it was important to advance 
the use of Version D.0 to encourage standards adoption by the industry 
and enable the industry to reap the improved benefits of the standard 
as soon as possible.
    For Medicaid subrogation transactions, we considered allowing the 
industry to continue using the proprietary formats currently in use. 
However, this would not have the desired effect of increasing the use 
of EDI, or of moving the industry towards a uniform standard.
    With respect to the proposed adoption of the Version 3.0 Medicaid 
subrogation standard, we considered the following alternatives:
     Not adopt Version 3.0 and permit the industry to continue 
using Version 2.0 proprietary electronic and paper formats. This would 
require the Medicaid agencies to support multiple formats in order to 
bill pharmacy claims to third party payers. The current multiplicity of 
claim formats creates a significant barrier to Medicaid agencies being 
able to comply with Federal law in ensuring that Medicaid is the payer 
of last resort. Using the Version 2.0 standard would require a number 
of workarounds to be compatible with version D.0 or other NCPDP claim 
standards except for Version 5.1.
     The NCPDP testified to the NCVHS in January 2008 that 
adopting Version 3.0 for Medicaid subrogation is a cost-saving tool and 
would improve the efficiency of those already using Version 2.0. It 
also would make it more feasible for other states and payers to invest 
in system upgrades to accommodate one specific standard. The NCVHS did 
not recommend any viable alternatives to Version 3.0 for handling 
Medicaid subrogation transactions because they purported that Version 
3.0 adequately addresses the business need for Medicaid agencies and 
industry partners.
Summary of Costs and Benefits for This Proposed Rule
    The final tables, 27a and 27b, are the compilation of the minimum 
and maximum costs and benefits for all of the standards being proposed 
in this NPRM.
BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C

E. Accounting Statement and Table

    Whenever a rule is considered a significant rule under Executive 
Order 12866, we are required to develop an Accounting Statement. This 
statement must state that we have prepared an accounting statement 
showing the classification of the expenditures associated with the 
provisions of this proposed rule. Monetary annualized Benefits and non-
budgetary costs are presented as discounted flows using three percent 
and seven percent factors.

                                         Table 28--Accounting Statement
     [Accounting Statement: Classification of Estimated Expenditures, from FY 2010 to FY 2019 (in millions)]
----------------------------------------------------------------------------------------------------------------
                                                                                                Source citation
            Category               Primary estimate    Minimum estimate    Maximum estimate     (RIA, preamble,
                                      (millions)          (millions)          (millions)             etc.)
----------------------------------------------------------------------------------------------------------------
                                                    Benefits
----------------------------------------------------------------------------------------------------------------
Annualized Monetized benefits:
    7% Discount.................  $2,930............  $1,647............  $4,214............  RIA.
    3% Discount.................  $3,151............  $1,769............  $4,532............  RIA.
Qualitative (un-quantified)       Wider adoption of
 benefits.                         standards due to
                                   decrease in use
                                   of companion
                                   guides; increased
                                   productivity due
                                   to decrease in
                                   manual
                                   intervention
                                   requirements.
----------------------------------------------------------------------------------------------------------------
Benefits generated from plans to providers and pharmacies, providers to plans and pharmacies, and pharmacies to
 beneficiaries.
----------------------------------------------------------------------------------------------------------------
                                                      Costs
----------------------------------------------------------------------------------------------------------------
Annualized Monetized costs:
    7% Discount.................  $1,073............  $718..............  $1,428............  RIA.
    3% Discount.................  $942..............  $630..............  $1,254............  RIA.
Qualitative (un-quantified)       None..............  None..............  None.               ..................
 costs.
----------------------------------------------------------------------------------------------------------------
Cost will be paid by health plans to contractors, programming consultants, IT staff and other outsourced
 entities; providers will pay costs to software vendors, trainers and other consultants. Clearinghouses will pay
 costs to IT staff/contractors and software developers; pharmacies will pay costs to contractors, software
 vendors and trainers, and government plans will pay costs to consultants, vendors and staff.
----------------------------------------------------------------------------------------------------------------
                                                    Transfers
----------------------------------------------------------------------------------------------------------------
Annualized monetized transfers:   N/A...............  N/A...............  N/A.                ..................
 ``on budget''.
From whom to whom?..............  N/A...............  N/A...............  N/A.                ..................
Annualized monetized transfers:   N/A...............  N/A...............  N/A.                ..................
 ``off-budget''.
From whom to whom?..............  N/A...............  N/A...............  N/A.                ..................
----------------------------------------------------------------------------------------------------------------


[[Page 49790]]

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

List of Subjects in 45 CFR Part 162

    Administrative practice and procedure, Electronic transactions, 
Health facilities, Health insurance, Hospitals, Incorporation by 
reference, Medicare, Medicaid, Reporting and recordkeeping 
requirements.

    For the reasons set forth in the preamble, the Department of Health 
and Human Services proposes to amend 45 CFR subtitle A, subchapter C as 
set forth below:

PART 162--ADMINISTRATIVE REQUIREMENTS

    1. The authority citation for part 162 continues to read as 
follows:

    Authority: Secs. 1171 through 1179 of the Social Security Act 
(42 U.S.C. 1320d-1320d-8), as added by sec. 262 of Public Law 104-
191, 110 Stat. 2021-2031, and sec. 264 of Public Law 104-191, 110 
Stat. 2033-2034 (42 U.S.C. 1320d-2 (note)).

Subpart I--General Provision for Transactions

    2. Revise Sec.  162.900 to read as follows:


Sec.  162.900  Compliance dates for transaction standards and code 
sets.

    (a) Small health plans. (1) All small health plans must comply with 
the applicable requirements of Subparts I through R of this part no 
later than October 16, 2003.
    (2) All small health plans must comply with the applicable 
requirements of Subpart S of this part no later than [date 36 months 
after the effective date of the final rule].
    (b) Covered entities other than small health plans.
    (1) All covered entities other than small health plans must comply 
with the applicable requirements of Subparts I through R of this part 
no later than October 16, 2003.
    (2) All covered entities other than small health plans must comply 
with the applicable requirements of Subpart S of this part no later 
than [date 24 months after the effective date of the final rule].
    3. Amend Sec.  162.920 as follows:
    A. Revise the introductory text and paragraph (a) introductory 
text.
    B. Add paragraphs (a)(10) through (a)(18).
    C. Revise paragraph (b) introductory text.
    D. Add paragraphs (b)(4) through (b)(6).
    The revisions and additions read as follows:


Sec.  162.920  Availability of implementation specifications.

    A person or an organization may directly request copies of the 
implementation specifications and the Technical Reports Type 3 
described in subparts I through S of this part from the publishers 
listed in this section. The Director of the Federal Register approves 
the implementation specifications, which include the Technical Reports 
Type 3 described in this section for incorporation by reference in 
subparts I through S of this part in accordance with 5 U.S.C. 552(a) 
and 1 CFR part 51. The implementation specifications and Technical 
Reports Type 3 described in this section are also available for 
inspection by the public at the Centers for Medicare & Medicaid 
Services, 7500 Security Boulevard, Baltimore, Maryland 21244 or at the 
National Archives and Records Administration (NARA). For information on 
the availability of this material at NARA, call 202-714-6030, or go to: 
http://www.archives.gov/federal_register/code_of_federal_regulations/i br_locations.html.
    (a) ASC X12N specifications and the ASC X12 Standards for 
Electronic Data Interchange Technical Report Type 3. The implementation 
specifications for the ASC X12N and the ASC X12 Standards for 
Electronic Data Interchange Technical Report Type 3 (and accompanying 
Type 1 Errata) may be obtained from the Washington Publishing Company, 
747 177th Lane, NE., Bellevue, WA, 98008; Telephone (425) 562-2245; and 
FAX (775) 239-2061. They are also available through the Internet at 
http://www.wpc-edi.com/. All ASC X12 Standards for Electronic Data 
Interchange Technical Report Type 3 adopted for use under HIPAA and any 
corresponding addenda are available in three configurations: 
downloadable PDFs, PDFs shipped on CD, and bound books. A fee is 
charged for all implementation specifications, including Technical 
Reports. Charging for such publications is consistent with the policies 
of other publishers of standards. The transaction implementation 
specifications are as follows:
* * * * *
    (10) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Claim: Dental (837), May 2006, 
Washington Publishing Company, 005010X224, and Type 1 Errata to Health 
Care Claim: Dental (837), ASC X12 Standards for Electronic Date 
Interchange Technical Report Type 3, October 2007, Washington 
Publishing Company, 005010X224A1, as referenced in Sec.  162.1102 and 
Sec.  162.1802.
    (11) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Claim: Professional (837), May 
2006, Washington Publishing Company, 005010X222, as referenced in Sec.  
162.1102 and Sec.  162.1802.
    (12) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Claim: Institutional (837), May 
2006, Washington Publishing Company, 005010X223, and Type 1 Errata to 
Health Care Claim: Institutional (837), ASC X12 Standards for 
Electronic Data Interchange Technical Report Type 3, October 2007, 
Washington Publishing Company, 005010X223A1, as referenced in Sec.  
162.1102 and Sec.  162.1802.
    (13) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Claim Payment/Advice (835), April 
2006, Washington Publishing Company, 005010X221, as referenced in Sec.  
162.1602.
    (14) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Benefit Enrollment and Maintenance (834), 
August 2006, Washington Publishing Company, 005010X220, as referenced 
in Sec.  162.1502.
    (15) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Payroll Deducted and Other Group Premium 
Payment for Insurance Products (820), February 2007, Washington 
Publishing Company, 005010X218, as referenced in Sec.  162.1702.
    (16) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Services Review--Request for 
Review and Response (278), May 2006, Washington Publishing Company, 
005010X217, and Type 1 Errata to Health Care Services Review--Request 
for Review and Response (278), ASC X12 Standards for Electronic Data 
Interchange Technical Report Type 3, April 2008, Washington Publishing 
Company, 005010X217E1, as referenced in Sec.  162.1302.
    (17) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Claim Status Request and Response 
(276/277), August 2006, Washington Publishing Company, 005010X212, and 
Type 1 Errata to Health Care Claim Status Request and Response (276/
277), ASC X12 Standards for Electronic Data Interchange Technical 
Report Type 3, April 2008, Washington Publishing Company 
(005010X212E1), as referenced in Sec.  162.1402.

[[Page 49791]]

    (18) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Eligibility Benefit Inquiry and 
Response (270/271), April 2008, Washington Publishing Company, 
005010X279, as referenced in Sec.  162.1202.
    (b) Retail pharmacy specifications and Medicaid subrogation 
implementation guides. The implementation specifications for the retail 
pharmacy standards and the implementation specifications for the batch 
standard for Medicaid subrogation transactions may be obtained from the 
National Council for Prescription Drug Programs, 9240 East Raintree 
Drive, Scottsdale, AZ 85260. Telephone (480) 477-1000; FAX (480) 767-
1042. They are also available through the internet at http://www.ncpdp.org. A fee is charged for all NCPDP Implementation Guides. 
Charging for such publications is consistent with the policies of other 
publishers of standards. The transaction implementation specifications 
are as follows:
* * * * *
    (4) The Telecommunication Standard Implementation Guide Version D, 
Release 0 (Version D.0), August 2007, National Council for Prescription 
Drug Programs, as referenced in Sec.  162.1102, Sec.  162.1202, Sec.  
162.1302, and Sec.  162.1802.
    (5) The Batch Standard Implementation Guide, Version 1, Release 2 
(Version 1.2), January 2006, National Council for Prescription Drug 
Programs, as referenced in Sec.  162.1102, Sec.  162.1202, Sec.  
162.1302, and Sec.  162.1802.
    (6) The Batch Standard Medicaid Subrogation Implementation Guide, 
Version 3, Release 0 (Version 3.0), July 2007, National Council for 
Prescription Drug Programs, as referenced in Sec.  162.1902.
    4. Revise Sec.  162.923 paragraph (a) to read as follows:


Sec.  162.923  Requirements for covered entities.

    (a) General rule. Except as otherwise provided in this part, if a 
covered entity conducts with another covered entity that is required to 
comply with a transaction standard adopted under this part (or within 
the same covered entity), using electronic media, a transaction for 
which the Secretary has adopted a standard under this part, the covered 
entity must conduct the transaction as a standard transaction.
* * * * *

Subpart K--Health Care Claims or Equivalent Encounter Information

    5. Section 162.1102 is amended as follows:
    A. Revise the introductory text to paragraph (b).
    B. Add a new paragraph (c).
    The revisions and additions read as follows:


Sec.  162.1102  Standards for health care claims or equivalent 
encounter information transaction.

* * * * *
    (b) For the period from October 16, 2003 through March 31, 2010:
* * * * *
    (c) For the period on and after April 1, 2010:
    (1) Retail pharmacy drug claims. The Telecommunication Standard 
Implementation Guide Version D, Release 0 (Version D.0), August 2007 
and equivalent Batch Standard Implementation Guide, Version 1, Release 
2 (Version 1.2), National Council for Prescription Drug Programs. 
(Incorporated by reference in Sec.  162.920).
    (2) Dental health care claims. The ASC X12 Standards for Electronic 
Data Interchange Technical Report Type 3--Health Care Claim: Dental 
(837), May 2006, Washington Publishing Company, 005010X224, and Type 1 
Errata to Health Care Claim: Dental (837) ASC X12 Standards for 
Electronic Data Interchange Technical Report Type 3, October 2007, 
Washington Publishing Company, 005010X224A1. (Incorporated by reference 
in Sec.  162.920).
    (3) Professional health care claims. The ASC X12 Standards for 
Electronic Data Interchange Technical Report Type 3--Health Care Claim: 
Professional (837), May 2006, Washington Publishing Company, 
005010X222. (Incorporated by reference in Sec.  162.920).
    (4) Institutional health care claims. The ASC X12 Standards for 
Electronic Data Interchange Technical Report Type 3--Health Care Claim: 
Institutional (837), May 2006, Washington Publishing Company, 
005010X223, and Type 1 Errata to Health Care Claim: Institutional (837) 
ASC X12 Standards for Electronic Data Interchange Technical Report Type 
3, October 2007, Washington Publishing Company, 005010X223A1. 
(Incorporated by reference in Sec.  162.920).
    (5) Retail pharmacy supplies and professional services claims. (i) 
The Telecommunication Standard Implementation Guide Version D, Release 
0 (Version D.0), August 2007, and equivalent Batch Standard 
Implementation Guide, Version 1, Release 2 (Version 1.2), National 
Council for Prescription Drug Programs (Incorporated by reference in 
Sec.  162.920); and
    (ii) The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Claim: Professional (837), May 
2006, Washington Publishing Company, 005010X222. (Incorporated by 
reference in Sec.  162.920).

Subpart L--Eligibility for a Health Plan

    6. Section 162.1202 is amended by--
    A. Revising the introductory text to paragraph (b).
    B. Adding a new paragraph (c).
    The revisions and additions read as follows:


Sec.  162.1202  Standards for eligibility for a health plan 
transaction.

* * * * *
    (b) For the period from October 16, 2003 through March 31, 2010:
* * * * *
    (c) For the period on and after April 1, 2010:
    (1) Retail pharmacy drugs. The Telecommunication Standard 
Implementation Guide Version D, Release 0 (Version D.0), August 2007, 
and equivalent Batch Standard Implementation Guide, Version 1, Release 
2 (Version 1.2), National Council for Prescription Drug Programs. 
(Incorporated by reference in Sec.  162.920).
    (2) Dental, professional, and institutional health care eligibility 
benefit inquiry and response. The ASC X12 Standards for Electronic Data 
Interchange Technical Report Type 3--Health Care Eligibility Benefit 
Inquiry and Response (270/271), April 2008, Washington Publishing 
Company, 005010X279. (Incorporated by reference in Sec.  162.920).

Subpart M--Referral Certification and Authorization

    7. Revise Sec.  162.1301 to read as follows:


Sec.  162.1301  Referral certification and authorization transaction.

    The referral certification and authorization transaction is any of 
the following transmissions:
    (a) A request from a health care provider to a health plan for the 
review of health care to obtain an authorization for the health care.
    (b) A request from a health care provider to a health plan to 
obtain authorization for referring an individual to another health care 
provider.
    (c) A response from a health plan to a health care provider to a 
request described in paragraph (a) or paragraph (b) of this section.
    8. Section 162.1302 is amended by--
    A. Revising the introductory text to paragraph (b).
    B. Adding a new paragraph (c).

[[Page 49792]]

    The revisions and additions read as follows:


Sec.  162.1302  Standards for referral certification and authorization 
transaction.

* * * * *
    (b) For the period from October 16, 2003 through March 31, 2010:
* * * * *
    (c) For the period on and after April 1, 2010:
    (1) Retail pharmacy drugs. The Telecommunication Standard 
Implementation Guide Version D, Release 0 (Version D.0), August 2007, 
and equivalent Batch Standard Implementation Guide, Version 1, Release 
2 (Version 1.2), National Council for Prescription Drug Programs 
(Incorporated by reference in Sec.  162.920).
    (2) Dental, professional, and institutional request for review and 
response. The ASC X12 Standards for Electronic Data Interchange 
Technical Report Type 3--Health Care Services Review--Request for 
Review and Response (278), May 2006, Washington Publishing Company 
(005010X217), and Type 1 Errata to Health Care Services Review--Request 
for Review and Response (278), ASC X12 Standards for Electronic Data 
Interchange Technical Report Type 3, April 2008, Washington Publishing 
Company, 005010X217E1. (Incorporated by reference in Sec.  162.920).

Subpart N--Health Care Claim Status

    9. Revise Sec.  162.1401 to read as follows:


Sec.  162.1401  Health care claim status transaction.

    The health care claim status transaction is the transmission of 
either of the following:
    (a) An inquiry from a health care provider to a health plan to 
determine the status of a health care claim.
    (b) A response from a health plan to a health care provider about 
the status of a health care claim.
    10. Section 162.1402 is amended by--
    A. Removing ``on and after October 16, 2003'' and adding in its 
place ``from October 16, 2003 through March 31, 2010'' in the 
introductory text in paragraph (b).
    B. Adding a new paragraph (c).
    The additions read as follows:


Sec.  162.1402  Standards for health care claim status transaction.

* * * * *
    (c) For the period on and after April 1, 2010: The ASC X12 
Standards for Electronic Data Interchange Technical Report Type 3--
Health Care Claim Status Request and Response (276/277), August 2006, 
Washington Publishing Company, 005010X212, and Type 1 Errata to Health 
Care Claim Status Request and Response (276/277), ASC X12 Standards for 
Electronic Data Interchange Technical Report Type 3, April 2008, 
Washington Publishing Company, 005010X212E1. (Incorporated by reference 
in Sec.  162.920).

Subpart O--Enrollment and Disenrollment in a Health Plan

    11. Revise Sec.  162.1501 to read as follows:


Sec.  162.1501  Enrollment and disenrollment in a health plan 
transaction.

    The enrollment and disenrollment in a health plan transaction is 
the transmission of subscriber enrollment information from the sponsor 
of the insurance coverage, benefits, or policy, to a health plan to 
establish or terminate insurance coverage.
    12. Section 162.1502 is amended by--
    A. Removing ``on and after October 16, 2003'' and adding in its 
place ``from October 16, 2003 through March 31, 2010'' in the 
introductory text of paragraph (b).
    B. Adding a new paragraph (c).
    The additions read as follows:


Sec.  162.1502  Standards for enrollment and disenrollment in a health 
plan transaction.

* * * * *
    (c) For the period on and after April 1, 2010: The ASC X12 
Standards for Electronic Data Interchange Technical Report Type 3--
Benefit Enrollment and Maintenance (834), August 2006, Washington 
Publishing Company, 005010X220 (Incorporated by reference in Sec.  
162.920).

Subpart P--Health Care Payment and Remittance Advice

    13. Section 162.1602 is amended by--
    A. Removing ``on and after October 16, 2003'' and adding in its 
place ``from October 16, 2003 through March 31, 2010'' in the 
introductory text of paragraph (b).
    B. Adding a new paragraph (c).
    The additions read as follows:


Sec.  162.1602  Standards for health care payment and remittance advice 
transaction.

* * * * *
    (c) For the period on and after April 1, 2010: The ASC X12 
Standards for Electronic Data Interchange Technical Report Type 3--
Health Care Claim Payment/Advice (835), April 2006, Washington 
Publishing Company, 005010X221. (Incorporated by reference in Sec.  
162.920).

Subpart Q--Health Plan Premium Payments

    14. Section 162.1702 is amended by--
    A. Removing ``on and after October 16, 2003'' and adding in its 
place ``from October 16, 2003 through March 31, 2010'' in the 
introductory text of paragraph (b).
    B. Adding a new paragraph (c).
    The additions read as follows:


Sec.  162.1702  Standards for health plan premium payments transaction.

* * * * *
    (c) For the period on and after April 1, 2010: The ASC X12 
Standards for Electronic Data Interchange Technical Report Type 3--
Payroll Deducted and Other Group Premium Payment for Insurance Products 
(820), February 2007, Washington Publishing Company, 005010X218. 
(Incorporated by reference in Sec.  162.920).

Subpart R--Coordination of Benefits

    15. Section 162.1802 is amended by--
    A. Revising the introductory text of paragraph (b).
    B. Adding a new paragraph (c).
    The revisions and additions read as follows:


Sec.  162.1802  Standards for coordination of benefits information 
transaction.

* * * * *
    (b) For the period from October 16, 2003 through March 31, 2010:
* * * * *
    (c) For the period on and after April 1, 2010:
    (1) Retail pharmacy drug claims. The Telecommunication Standard 
Implementation Guide Version D, Release 0 (Version D.0), August 2007, 
and equivalent Batch Standard Implementation Guide, Version 1, Release 
2 (Version 1.2), National Council for Prescription Drug Programs. 
(Incorporated by reference in Sec.  162.920).
    (2) The ASC X12 Standards for Electronic Data Interchange Technical 
Report Type 3--Health Care Claim: Dental (837), May 2006, Washington 
Publishing Company, 005010X224, and Type 1 Errata to Health Care Claim: 
Dental (837), ASC X12 Standards for Electronic Date Interchange 
Technical Report Type 3, October 2007, Washington Publishing Company, 
005010X224A1. (Incorporated by reference in Sec.  162.920).
    (3) The ASC X12 Standards for Electronic Data Interchange Technical 
Report Type 3--Health Care Claim: Professional (837), May 2006, 
Washington Publishing Company, 005010X222. (Incorporated by reference 
in Sec.  162.920).

[[Page 49793]]

    (4) The ASC X12 Standards for Electronic Data Interchange Technical 
Report Type 3--Health Care Claim: Institutional (837), May 2006, 
Washington Publishing Company, 005010X223, and Type 1 Errata to Health 
Care Claim: Institutional (837), ASC X12 Standards for Electronic Data 
Interchange Technical Report Type 3, October 2007, Washington 
Publishing Company, 005010X223A1. (Incorporated by reference in Sec.  
162.920).
    16. Add a new Subpart S to read as follows:
Subpart S--Medicaid Pharmacy Subrogation
Sec.
162.1901 Medicaid pharmacy subrogation transaction.
162.1902 Standard for Medicaid pharmacy subrogation.


Sec.  162.1901  Medicaid pharmacy subrogation transaction.

    The Medicaid pharmacy subrogation transaction is the transmission 
of a claim from a Medicaid agency to a payer for the purpose of seeking 
reimbursement from the responsible health plan for a pharmacy claim the 
State has paid on behalf of a Medicaid recipient.


Sec.  162.1902  Standard for Medicaid pharmacy subrogation.

    The Secretary adopts the Batch Standard Medicaid Subrogation 
Implementation Guide, Version 3, Release 0 (Version 3.0), July 2007, 
National Council for Prescription Drug Programs, as referenced in Sec.  
162.1902. (Incorporated by reference at Sec.  162.920).

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: April 23, 2008.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: May 14, 2008.
Michael O. Leavitt,
 Secretary.

    Editorial Note: This document was received at the Office of the 
Federal Register on August 15, 2008.
 [FR Doc. E8-19296 Filed 8-15-08; 3:55 pm]
BILLING CODE 4120-01-P