"+ 
Department of Health and Human Servces

OFFICE OF

INSPECTOR GENERA

ELECTRONIC MEDIA CLAIMS AND

CONTRACTORS' FOR-
PROFIT

SUBSIDIARIES

A MANAGEMENT ADVISORY REPORT 
SU.VICt,r 
Richard P. Kusserow 
INSPECfOR GENERA 
"'a  OEI-12-91-01410  EXECU SUMY

To discuss current practices at several Medicare contractors which have 
PUROSE 
an impact on electronic media claims (EMC) 
submission. 
BACKGROUN  Both the Health Care Financing Administration (HCF A) and the
OIG have become aware of allegations that certain contractors refuse to cooperate

with some biling servces which wish to submit EMC. This refusal would violate

HCF A' s instructions to provide the formats and edits needed to 
bil. These

contractors, among others
, are also alleged to require use of their subsidiaries

software to submit EMC, which might violate antitrust law.

The four contractors (three intermediaries and one carrer) 
MAOR FIINGS 
reviewed appear to provide for EMC submission of Medicare claims for most 
tyes of
providers, in accord with Transmittal 
1507. 
The three intermediaries, however, refuse to accept direct computer-to-computer

EMC submissions for their private line of business unless the provider uses 
their

subsidiary 
s software for the transaction.

The contractors' practices of requiring biling servces and health care providers to use 
the contractors' for-profit EMC subsidiaries may violate Federal antitrust 
laws. 
To enhance increased EMC activity, the HCFA 
MAOR RECOMMNDATIONS 
should: 
Monitor compliance with Transmittal 1507, particularly the timeliness with 
which contractors fulfil requests for 
lists of edits. 
Determine the number and tye of subsidiaries at each contractor, and their
roles with respect to Medicare. 
Consider the use of a clearinghouse, which would receive and distribute 
claims
from all providers for all payers. 
Remain aware of contractors' general business operations. Anti-competitive
activity may have a negative effect on innovation and technological growth in 
the industry, and limit HCF A's future options. Consider requiring bidders on
future contracts to guarantee equal acceptance of properly-
formatted claims 
from all bilers to all payers, both private and Medicare. 
The HCFA's comments on the draft of this report were taken into 
consideration in 
revising the final report. The comments are appended in full.  ......  .....  ......  ......  ..... . .......   ........   ........   ...... .  .......  . ........ .  ...... . . ......... .  ............   ........ .  .  ...... ...  . ........  . ....... .  .. ........   ......... .  . .... .. .. .....   .... ......   ...........  . ...... . . ........ .  ... . ....   .......... . . .........  . ..........   ......   . ....   ..... .....   ..........   .......... ..  ......   ........... .  ...  . .   ...... .... . ....... .. . .......   ...........  . ........ .  ...........   .... .... .  .........  . ........   ...........   ......... .  ..........  . ........ ... . ..... ......  ..
TABLE OF CONTENTS

EXCU SUMY 
PUROSE. 
BACKGROUN. 
MEODS 
FIINGS 
RECOMMATIONS 
COMM 
APPENIX  HCFA'  PUROSE 
The purpose of this management advisory report is to discuss current practices 
several Medicare contractors which have an impact on electronic media clais 
(EMC)
submission. 
BACKGROUN 
The director of the Health Care Financing Administration s (HCFA) Bureau of 
Program Operations asked the Offce of Inspector General to determe if EMC 
submision was being impeded by contractor policies. A national bilg 
servce has 
alleged that various contractors have not made avaiable to them the formats and edits 
needed to submit error-
free electronic claims, which they believe has had the effect of
limting free and open competition and thus raising costs to Medicare. Additionally, 
both bilng servces and health-care providers have alleged that some contractors 
refuse to accept direct computer-to-computer EMC submissions except when
submitted through the contractors' for-profit EMC subsidiaries. 
The HCF A had issued instructions to intermediaries (contractors which process 
claims 
for institutional providers, such as hospitals and skilled nursing facilties) in December 
199. These instructions, issued as Transmittal 1507  Medicare Intermediary Manual. 
Part 3 - Claims Process. require intermediaries to provide detailed copies of their 
consistency edits to all providers interested in EMC submission and to provide copies
of edits and billng procedure changes to all providers and bil submitters from 
whom 
they receive EMC. 
The Secretary of Health and Human Servces has publicly supported uniform, 
automated record-keeping procedures, including EMC. Medicare is the largest single
payment source for many hospitals. Since HCF A usualy contracts with only one 
intermediary per State, that State s intermediary has an disproportionate impact on 
the hospitals because of its unique status vis-a-vis Medicae. 
Hospitals have transferred many record-keeping functions to integrated computer 
systems. The advent of the Prospective Payment System (PPS) in 
1983 generated
interest in computer systems which could lik the demographic, fiancial and clical 
data needed to generate a Medicare 
clai. For many hospitals, the ideal biling
system would be one which would download inormation from a variety of sources into
a computer program which would then create "claims" for every insurer responsible for
the hospital's patients. Such a program could then send the claims electronically to 
computer systems for Medicare, Medicaid, Blue Cross, and other commercial 
insurance, without the need for rekeying or reformatting any of the necessary data.  Some hospitals have created such programs, working with their various insurers; others 
have purchased such systems from or through billig servces; and stil others have 
access to clearighouses which redirect claims to various sources, with or without 
editing them. Being required by one insurer to use a certain 
softare program, or
language inconsistent with other insurers , defeats the effciencies achieved by these 
sophisticated programs. 
The health insurance industry has changed greatly since Blue Cross plans came into 
existence in the 1930's. Two early advantages that allowed for the growth of the plans 
were their tax-exempt status and special relationships with hospitals, whose
adminstrators and trustees formed the boards of the plans. Most 
Blue Cross plans 
provided servce benefits, rather than indemnifng the patient or employer against
losses. Thus State insurance regulators required their reserves to be servces rather 
than cash. All these features have changed: Blue Cross plans lost their tax-exempt
status in 1986; their boards are no longer composed of hospital representatives; some 
plans are now "mutual" plans, which return operating surpluses to policy-holders. 
Additionally, many plans have created for-profit subsidiaries which carr out functions 
formerly done "in-house " including marketing, claims processing, and product 
development, and own subsidiaries such as health maitenance organizations and life 
insurance companies. 
The practice of requiring customers to purchase one
, possibly unwanted, good or
servce before allowing them to purchase a desired goo or servce is known as "
tyng.
Antitrust law generally prohibits this practice. Similarly prohibited are price 
fing and
allocation of terrtories by market rivals. Although the McCarran-Ferguson Act of
1945 exempts the ''business of insurance " from the antitrst laws, this exemption does
not apply to activities of insurance companies unrelated to the underwting or
spreading of risk and the relationship between the insurer and the insured. 
Legislation 
has been introduced in both the Senate (S. 430, introduced by Senator Metzenbaum) 
and House (H. , introduced by Representative Brooks) callng for 
R. 9 modifications of 
the McCarran-Ferguson Act, which has over the years come to be widely interpreted 
as exempting insurance companies from antitrust laws. Both versions 
would outlaw 
tyg, among other anti-competitive behaviors, in the inurance industry. 
MEODS 
We conducted intervews with contractor personnel at thee 
intermediaries (Blue
Cross of Arona, Blue Cross of South Caolina, and Blue Cross of Virginia) and one 
carrer (Blue Shield of Maryland), health-care providers and associations, biling
agencies, and HCFA staff, regarding practices at these contractors. We did not 
attempt to verify allegations related to activity before Transmittal 
1507 was issued. 
Our priary focus was the ease with which providers can electronically submit 
Medicare claims, but we also tried to determine the forces within the contractors 
which have an impact on EMC.  FIINGS 
The four contractors reviewed appear to provide for EMC submission of Medicare 
claims for most tyes of providers, in accord with Transmittal 1507. We believe that 
they no longer refuse to cooperate with requests for edits. 
The three intermediaries, however, refuse to accept direct computer-to-computer
EMC submissions for their private line of business unless the 
provider uses their
subsidiary s software for the transaction. This subvert the prohibition in Transmittal 
1507 against requiring rekeying of claims data Medicare claims can be submitted 
, since 
electronically. The effect, however, is that hospitals have to use the subsidiary 
s system
for all tyes of claims, or have two systems running concurrently, in order to bil 
computer-to-computer to all insurers. 
Biling servces which have devised systems 
better meet their customers needs must purchase the contractor 
s servces as well 
making their prices less competitive than they would otherwse be. 
Contractors may have a marketing advantage as a result of their Medicare contract. 
They market their EMC package as superior to competitors' in the servces offered 
since they have more direct access to the status of pending claims, including Medicare
claims. However, this claim may not in fact be true, since private biling servces can
offer hospitals other enhancements, tailored for the hospital's overall accounting 
system. 
Small providers or groups of providers may not be able to submit Medicare 
claims 
electronically in all jurisdictions, even when they have the capabilty (or have 
contracted with a billng servce) to do so, because contractors have not made the 
necessary modifications to their systems. Because the providers are small, the 
contractors feel they are a low priority. Their small siz, however, is what makes them 
financially vulnerable to delayed paper claims and the wait 
for a remittance advice in 
order to bil a supplemental payer. 
The contractors' practices of requiring biling servces and health care providers to use 
the contractors' for-profit EMC subsidiaries may violate Federal antitrust laws. 
RECOMMATIONS 
To enhance increased EMC activity, the HCF A should: 
Monitor compliance with Transmittal 1507, partcularly the timeliness with 
which contractors fulfill requests for lists of edits. 
Require regional office contractor representatives to 
determne the number and 
tye of subsidiaries at each contractor, and their roles with respect to Medicare.  Work with contractors which are not able to accmmodate electronic bils from 
all tyes of providers to develop simple generic programs, for example, which 
small providers can use in different jurisdictions. This would be 
simplified by
more consistent carrer programs and systems. 
Consider using a clearinghouse, which would receive and distribute claims from 
all providers for all payers. Effective and effcient administration of the 
Medicare program may require such an initiative, as EMC and computerized 
medical records form a larger part of the claims system. Such a clearinghouse 
could be an existing one, one created by a consortia of contractors, or one 
created centrally by HCFA. 
Remain aware of your contractor s general business operations. Those insurers 
which have used aggressive tactics to compel providers to 
use their subsidiary 
products or servces are then able to further aggandize their market 
share. 
This anti-competitive activity may have a negative effect on innovation and 
technological growth in the industry, and limit HCF A's future options. The 
HCF A may wish to consider requiring bidders on future contracts to guarantee 
equal acceptance of properly-formatted claims from all bilers to all payers 
both private and Medicare. 
In commenting on the draft version of this report, HCFA indicated they believe they 
lack the authority to address potentially-abusive behavior in the contractors' private 
lines of business. Thus, we have eliminated a recommendation that HCFA consult 
with the Antitrust Division of the Department of Justice concerning the contractors 
activities. We have kept and expanded upon the last recommendation 
regarding 
contractors' business activities in relation to their work for HCF A and added a 
recommendation that HCF A consider the use of a clearnghouse. These 
recommendations attempt to identify ways HCF A can address those contractor 
activities which inhibit electronic submission of claims while remaining within the 
scope of HCF A's current authority.  APPENDIX: HCFA'
s COMMENTS
 \/ 	
. .
... 
.._ . \. ..-  .-..  . ..:. '-.,  -:-:",'. .\ . - .. "'-'-
"-t-
t.('7 
.A-
Health Care 
DEPARTMENT OF HEALTH &. HUMAN SERVICES  nJ Financing Administration 
/- C/3 
Memorandum
100	
;:.J  J..tt 
Date	 ' /+ A-
Gail R. Wilensky, Ph.Da-i.
From 
Admiistrator 
OIG Draft Management 
Subject	 Advisory Report - "Electronic Media Oaims and 
Contractors' For-profit Subsidiares " OEI-12-91-01410 
Inspector General 
Offce of the Secretary 
We have reviewed the subject draft management 
advisory report. At the
Health Care Financing Administration s request, OIG reviewed current
practices at Medicare contractors to determine 
if electronic media 
claims
(EMC) submission was being impeded by contractor 
policies. 
The report found that three of the four 
contractors reviewed refuse to accept
direct computer-to-computer EMC submissions for their private line
business unless the provider uses its subsidiary 
s softare for 
the transaction.
OIG alleges that this practice could then make 
bilng servces that have
devised systems for Medicare 
biling less competitive, since the provider would
be required to purchase the contractor 
s se  ces in any case. 
The report contains five 
recommendations. Our comments on these
recommendations, as well as a general comment on the report
, are attached. 
Thank you for the opportunity to 
review this 
drat management advisory
report. Please advise us whether you agree with our position on the report
recommendations at your earliest 
convenience. 
Attachment 
iG 
?DIG 
CTG.
AS 
DIG.
c;.r 

DIG-
or 

AIG-Ml) 
OGC/IG 
EXSEC 
DAT SEN 
\.::.t 
. - r  Comments of the Health Care Financing Administrtion ( 
A) on t

OIG Draft Management Advsory Report - "
Electronic

Media Oaims and Contractors
' For-
profit Subsidiaries

OEI-12-91-01410 
Recommendation 
HCF A should monitor compliance with Tramitt 1507, parcularly the
timeliness with which contractors 
fi requests for lits of edits. 
Response 
We agree with thi recommendation. In addition, we are drafg electronic
media claims (EMC) instructons which wi 
prohibit contrctors from favorig 
providers or billig servces that submit claim through the parent companies 
for-
profit subsidiaries. 
Recommendation 2

HCFA should 
consult with the Antitrt Divion of the Deparment of Justice
to detennine whether the contractors' actions violate antitrt 
laws. 
Response 
We disagree with this recommendation. As 
the report points out, the 
questionable actions on the par of contrctors occ only in their priate lies
of business with which HCF A is not diectly involved 
Therefore, we believe it
would be inappropriate for us to approach the 
Deparent of 
Justice (DOJ)
concerng possible antitrt  prite 
violations in these  businesses. Such action
should be taken by the company or entity that 
believes it is being hared by
contractor 
s policies.  Page 2

Recommendation 3

HCFA should require regional offce (RO) contractor 
representatives to
determe 
the number and tye of subsidiaries at each contractor, and their 
roles with respect to Medicare, perhaps as part of the Annual Contractor 
Evaluation Report (ACER). 
Response 
We agree and have already undertaken such action. 
On May 21, 1991, we
sent a memorandum to all the ROs 
directing them to obtain this information
from their contractors. We will 
update this data periodically, although we are
not yet sure that the ACER is the proper 
means for doing so. 
Recommendation 4

HCFA should work with contractors who are not 
able to accommodate 
electronic bill from all tyes of providers to develop simple generic programs
for example
, which small providers can use in different juridictions. 
This
would be simplified by more consistent carrt;r programs 
and systems. 
Response 
We agree with this recommendation. Ths will be an 
ongoing process. The
recently implemented 
Carrer National Standard EMC Format will help
eliinate 
inconsistent requirements among the caers
, thereby improving the
EMC situation for multi-jurisdiction providers. In addition
, we are currently
expanding the Medicare Manual instructions to 
require contractors to accept
all bil and media tyes electronically. 
Recommendation 5

HCFA should consider contractors
' general busines operations when awarding
Medicare contracts.  Page 3

Response 
We do not agree with this recommendation. We agree the idea 
has merit. 
However, neither sections 1816 and 1842 of the Social Security Act nor the 
Federal Acquisition Regulations extends to HCFA 
the authority to delve into a
contractor s priate lies of business as pan of the contractg 
process. Unless
a contractor has been convicted or is under indictment for some 
violation of
the law, or we have received substantial evidence of miconduct, we have no 
way of knowig what a contractor does in its non-Medicae lies of 
business. 
General Comment 
TIs draft report is rather sparse 
with respect to specifc facts. For example
four intennediares are mentioned in the draft report but are not 
identifed.
While we have learned informally which intennediares were 
investigated, it is
difcult to respond to GIG' s findings without knowig specific facts concerning
each intermediary. It would be helpful to us if the final 
version of thi report
included more specific details.