Department of Health and Human Servces

OFFICE OF

INSPECTOR GENERAL

ELECTRONIC FUNDS TRANSFER FOR

MEDICAID PROVIDERS

to\' 
, StRV1Cen
u .
Richard P. Kusserow 
INSPECTOR GENERA 
1- JU 
199  OFFICE OF INSPECfOR GENERA

The mission of the Offce of Inspector General (OIG), as mandated by Public Law 95-452, as 
amended, is to protect the integrity of the Department of Health and Human Servces' (HHS)
programs as well as the health and welfare of beneficiaries served by those programs. This 
statutory mission is carried out through a nationwide network of audits, investigations, and 
inspections conducted by three OIG operating components: the Office of Audit Servces, the 
Offce of Investigations, and the Offce of Evaluation and Inspections. The OIG also informs 
the Secretary of HHS of program, and management problems, and recommends courses to 
correct them. 
OFFICE OF AUDIT SERVICES 
The OIG's Offce of Audit Servces (OAS) provides all auditing servces for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors in 
carrng out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and effciency throughout the Department. 
OFFICE OF INVESTIGATIONS 
The OIG's Office of Investigations (01) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 
unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions 
administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 
control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 
OFFICE OF EVALUATION AND INSPECfIONS 
The OIG's Offce of Evaluation and Inspections (OEI) conducts short-term management and 
program evaluations (called inspections) that focus on issues of concern to the Department 
the Congress, and the public. The findings and recommendations contained in these inspection 
reports generate rapid, accurate, and up-to-date information on the effciency, vulnerabilty, 
and effectiveness of departmental programs. 
This report was prepared under the direction of Mark R. Yessian, Ph.  , Regional Inspector 
General, Office of Evaluation and Inspections, and Martha B. Kvaal, Deputy Regional 
Inspector General, Office of Evaluation and Inspections, Region I. Participating in this project 
were the following people: 
Boton Region  Headquaers 
David R. Veroff Project Leader  Vicki Greene 
Lead Analyst 
David Schrag, 

For a copy of this report, please call the Boston Regional Offce at 617-565-1050.  Department of Health and Human Servces

OFFICE OF

INSPECTOR GENERAL

ELECTRONIC FUNDS TRANSFER FOR

MEDICAID PROVIDERS

SERVICf,f. 
Richard P. Kusserow 
INSPECTOR GENERAL 
'0 
"ItVc130  OEI-01-91-00821   EXECUTIVE  SUMMARY

PUROSE 
The purpose of this study is to examine the use of electronic funds transfer for 
reimbursing Medicaid providers. 
BACKGROUN 
Electronic funds transfer (EFT) has taken the place of paper checks for over 15 years. 
It is most commonly employed to make recurring payments, such as salary and 
retirement benefits. 
The Health Care Financing Administration (HCFA) has recently expressed interest in 
paying providers with EFT. The HCF A sees EFT as another step toward reducing 
administrative costs and improving provider relations in the Medicare and Medicaid 
programs. 
HCF A' s Medicaid Bureau has indicated its intention to support State use of EFT. 
draft revision of the State Medicaid Manual shows that HCF A plans to provide 
enhanced Federal Financial Participation (FFP) for expenses related to EFT and 
electronic remittance advisories (RAs). (Payers use RAs to inform providers of the 
status of any outstanding claims the providers have submitted. The RA 
show whether 
each claim has been paid, denied, or suspended for further review.) The HCFA would 
pay 90 percent of design and development costs and 75 percent of operational 
costs. 
In contrast, HCF A pays only 50 percent of the postage costs for mailing paper checks 
and RAs. 
This report details the extent to which State Medicaid programs are currently paying 
providers with EFT as opposed to paper checks. It also discusses problems with EFT 
that States have identified and suggests possible solutions. 
FIINGS 
Only eight States are usng EFT to reimbure Medicaid proviers. 
Many States see advantages to using EFT Several States are conserig EFT but few 
have defite plans to adopt it. 
States have identified a diverse set of problems with EFT Some of these are eas 
address, but others are more difcult. 
Three commonly cited obstacles to EFT--loss of cash flow, potential fraud 
and initial cost--seem easily surmountable.  Additional obstacles to EFT may make it harder to implement in some States 
than in others. 
Greater use of EFT may not create substantial savings unless accompanied by 
lesser use of paper remittance advisories. 
RECOMMNDATIONS 
HCF A should: 

To address the problems and concerns regarding EFT that States have identified, the
Work with the State Medicaid Directors' Assocition (SMDA) to identi aditonal 
problems with EFT facing States and to share other States' solutions to those problems. 
Work with the National Automated Clearing House Association (NACHA) both to 
exlore how the Automated Clearing House can be used for Medicaid EFT and RA and 
to provie information to States. 
Ast 
States in developingf biulln g agreements for proviers who use electronic claim 
remittance advisories, and  transers.  In particular, HCF A could (1) specify 
wording for biling agreements that would satisfy Federal requirements, and (2) 
distribute to all States copies of biling agreements used by States that currently 
employ EFT. 
Develop guidelines for provider  These guidelines should identify 
partcipation in EFT 
conditions that States could impose on providers receiving payment through EFT. 
COMMNT 
We solicited and received comments on our draft report from HCFA, the Assistant 
Secretary for Planning and Evaluation (ASPE), SMDA, and NACHA. The ASPE 
SMDA, and NACHA were supportive of our recommendations and provided only 
technical comments. The HCF A concurred with our first two recommendations but 
did not concur with the last two as originally drafted. In response to HCFA' 
comments, we modified those two recommendations. They now more accurately 
reflect our vision of HCFA's role in promoting EFT technology. An explanation of 
the changes is provided on pages 10-11 and in appendix A.  . . . . . . . . . . . . . . . . ..  ..  ..  ..  .. .  ..  ..  ..  ..  ..  ..  .. . 
. . ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ..  ..  ..  ..  ..  ..  ..  ..  ..  .. .  ..  ..  ..  . . . . . .. 
TABLE OF CONTENTS

PAGE 
EXECUTIVE SUMMARY 
. . . . . . . 1

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
FINDINGS 
RECOMMENDATIONS 
........................................... 9 
COMMENTS ON THE DRAF REPORT 
APPENDICES 
A. Detailed Comments on the Draft Report 
. . . . . . . . . . . . . . . . . . . . . . . . . . . . A
B. Notes 
. . . . . . . . . . . . . . . . . . . B  INTRODUCTION

PUROSE 
The purpose of this study is to examine the use of electronic funds transfer for 
reimbursing Medicaid providers. 
BACKGROUN 
Electronic funds transfer (EFT) has taken the place of paper checks for over 15 years. 
It is most commonly employed to make recurring payments, such as salary and 
retirement benefits. About 17 000 banks and other financial institutions and 35 000 
businesses use EFT through the national Automated Clearing House (ACH) system. 
The Health Care Financing Administration (HCFA) already provides strong incentives 
2 It 
for providers to bil the Medicare program in electronic form. also bore 90 
percent of the development costs for each State s Medicaid Management Information 
System (MMIS)--a powerful computer system for processing claims and maintaining 
3 The HCFA has 
utilization data. recently expressed interest in paying Medicare and 
Medicaid providers through EFT, which it sees as another step toward automating 
claims processing. It believes that EFT can reduce administrative costs and improve 
provider relations in those programs. 
In July 1991, at the request of providers and Medicare contractors, HCFA proposed a 
new payment system for Medicare.4 The system would 
give providers the option of 
receiving payments through EFT rather than by paper check. Providers support EFT 
because it would relieve them from delivering paper checks to their own banks and 
eliminate the time they have to wait for checks to clear before drawing upon them. 
The HCF A supports EFT because each transfer would cost only 3 to 10 cents, as 
opposed to the first-class postage costs for paper checks (now 29 cents before bulk 
discounts). 
The HCFA plans to use EFT as an incentive to automate other Medicare claims-
processing functions. Only providers submitting electronic claims and agreeing to 
accept electronic remittance advisories (RAs) would be eligible for EFT. 
(Payers use 
RAs to inform providers of the status of any outstanding claims the providers have 
submitted. The RAs show whether each claim has been paid, denied, or suspended 
for further review.) The RAs wil be sent back to providers over the same telephone 
Jines used by providers to submit claims. 
Unlike Medicare, Medicaid is a State-operated program. The HCFA does not 
reimburse providers directly, but reimburses States for a portion of their expenditures. 
Therefore, HCF A could not institute EFT for the Medicaid program unilaterally. It is 
in HCFA's interest for States to use EFT rather than paper checks, however, because  a reduction in States' administrative costs would lead to a reduction in Federal 
reimbursement as well. 
The HCFA's Medicaid Bureau has indicated its intention to support State use of EFT. 
A January 1992 revision of the State Medicaid Manual indicates that HCFA will 
provide enhanced Federal Financial Participation (FFP) for expenses related to EFT 
and electronic RAs. The HCFA will pay 90 percent of design and development costs 
and 75 percent of operational costs. In contrast, HCF A pays only 50 percent of the 
postage costs for mailing paper checks and RAs. 
This report details the extent to which State Medicaid programs are currently paying 
provider claims through EFT as opposed to paper checks. It also discusses problems 
with EFT that States have identified and suggests possible solutions. 
METIODOWGY 
Data for this report were collected during a related project on point-of-servce (PaS) 
claims management systems (OEI-01-91-00820). Telephone intervews were conducted 
in May and June 1991 with Medicaid claims management staff in every State except 
6 We 
West Virginia. also held less formal telephone discussions with staff from HCFA 
and the Federal Reserve Bank.  FINDINGS

AR 
ONLY EIGHT STATE  USING EFf TO REIMURSE MEDICAI 
PROVIERS. 
In 42 States, all providers are paid with paper checks. The only States now using EFT 
are Arizona, Florida, Georgia, Nebraska, New Jersey, North Carolina, Pennsylvania 
and Texas. Respondents from Arizona, Georgia, Nebraska, New Jersey, Pennsylvania 
and Texas indicated that EFT is available only to a few  7 These 
tyes of providers.
results are displayed in table 
MA 
STATE SEE ADVANAGES TO USING EFf. SEVERA STATE 
CONSIDERING EFf, BUT FEW HAVE DEFIN PLAS TO ADOPT IT. 
Respondents from the large majority of States identified at least one benefit of EFT. 
Not surprisingly, most pointed out that EFT would improve provider relations by 
speeding up payments and would reduce administrative costs for printing and 
9 Respondents from two 
postage. States also noted that EFT could eliminate lost 
checks. This could be a significant benefit: Medicaid officials in Idaho have estimated 
the replacement cost of a single lost check to be $47. 
Of the 42 States with no EFT capabilities, only 6 (Arkansas, California, Maine 
Maryland, Tennessee, and Utah) have definite plans to add EFT. Three States 
(Georgia, New Jersey and Texas) that use some EFT have definite plans to expand. 
Apart from these nine States, there is little or no movement toward the use of EFT. 
Nineteen States reported that EFT was under discussion, but 22 others reported no 
intention to change (table 
1). 
WI 
STATE HAVE IDENTIED A DIVRSE SET OF PROBLEMS  EFf. 
SOME OF THE AR EAY TO ADDRES, BUT OTHRS AR MORE 
DIFICUT. 
Three commonly cited obstacles to EFT--Ioss of cash flow, potentil fraud and initil 
suountable. 
cost--seem easly 
One of the more easily handled concerns involves cash flow. States fear that EFT wil 
loosen their control over bank balances and promote quicker fund depletion
, leading
to a loss of interest. There is no reason, however, why EFT must have these effects. 
Although it is true that EFT eliminates the "float" of funds that occurs while checks 
are in the mail, the transfers can be scheduled to compensate for that 
loss. In fact 
HCF A has already anticipated this problem with regard to Medicare payments. The 
new plans call for a three-working-day delay between the time paper checks would 
have been issued and the time EFTs are actually made. The delay is designed  TABLE 1: 
STATE MEDICAI PROGRA'

CUNT 
USE OF EFf AN STATUS OF PlAS TO CHGE

STATE  USES EFT?
 ST A TUS OF PLANS 
Alabama
 None

Alaska
 Non

Ari zona  Yes--Large health plans only None

Arkansas  Definlte--For PharmacIes onlv at firs t
Cal Hornia  Definite--All provider typs 
Colorado 
Under discussion

Connect i cut  None

Delaware  Under di scuss I on

None

Florida  Yes--All provider typs 
None

Georg i a  Yes--Hospitals. nursing homs  Definlte--Expand to all provi der typs

Hawa ii  None

Idaho 
None

Illinois 
Under dl scuss i on

Indiana

None

Iowa
 None

Kansas

Under discussion

Kentucky

Under discussion

Louisiana

None 
Maine
 Definlte--EFT and electronic RAs for all
provider typs 
Maryland
 Definite--All provider typs

Massachusetts
 Non

Michigan

None

Minnesota

Under dIscussion

MississiDDi

Under discussion

Mi ssouri 
Under discussion

Montana

Under discussion

Nebraska  Yes- -State institutions only
 None 
Nevada
 None 
New HalJh ire
 Under discussion

New Jersey  Yes--Hospitals only
 Definite--EFT daily for hospitals, weekly for

LTC facilities other provider typs

New Mexico
 Under discussion

New York  Under discussion

North Carol ina  Yes- -All provider types  None 
North Dakota  None 
Ohio  None 
Oklahom 
None 
Oregon  Unde r discuss I 
Pennsyl vani a  Yes--Capitation providers only  Under discussion

Rhode Island
 None 
South Carol i na  Under discussion

South Dakota
 Non 
Tennessee  Definite--Weekly paymnts 
Texas  Yes- -Contracted svstems only Definite--Avai lable to  more Pharmaci es
Utah  Definite--All provider typs 
Vermont  Under discussion

Virginia 
None 
Washin ton  Under dl scuss Ion 
West Virginia  Did not respond
Wi scons i n  Under dIscussIon 
Wyom i ng  Under dIscussion 
Source: OIG survey of State Medicaid agencies, June 1991.
 "B States 
specifically "to minimize the loss of interest to the Medicare Trust Fund.
concerned about cash flow problems could impose similar delays. Of course, such 
delays might limit gains in provider satisfaction. Stil, the convenience of EFT and the 
abilty to draw on funds immediately after payment should make EFT attractive to 
providers anyway.

Another commonly expressed fear is fraud. Federal regulations require States to 
notify providers that fiing false claims and accepting payment for them are violations 
of law. The regulations specify that this notification must be printed either on the 
claim form or on the payment check. When prosecuting alleged fraud, many States 
rely on providers' signatures on these papers to prove that providers were aware of 
the penalties and knowingly submitted the claims or accepted payment. A number of 
respondents expressed concern that EFT would eliminate their opportunity to obtain 
providers' signatures , especially for those who submit claims electronically. 
The HCFA and several States, however, do not seem to share this concer-n. There are 
a number of ways to collect providers' signatures or an acceptable substitute, even for 
electronically submitted claims. Thirty-nine States use annual biling agreements, 12 
use cover sheets that accompany diskette and tape submissions, and 2 require 
passwords for on-line claims submission (table 2). Six States rely on check 
endorsements, either alone or in conjunction with other methods. The HCFA, in its 
revision to the State Medicaid Manual, has indicated that biling agreements "updated 
as needed" would satisfy the Federal requirements. It recommends that Medicaid 
agencies confer with their States' Attorneys General to ensure compliance with State 
laws. 
Some Medicaid officials responded that though EFT may simplify and economize 
program administration in the long run, it is difficult and costly to implement initially. 
These officials said their States had neither the staff time nor the money to commit to 
such an undertaking. Start-up costs are a major obstacle for States wishing to 
12 The 
implement any type of advancement in computerized claims processing.
HCFA has anticipated this problem and, as stated earlier, is offering enhanced 
matching funds as an incentive. 
Additional obstacles to EFT may make it harder to implement in some States than in 
others. 
In some States, payments to providers are made not by the Medicaid agency or fiscal 
agent but by another State agency such as the Treasury or Comptroller s Office. In 
those States, there may be any number of additional reasons the organizations 
responsible for payment have shied away from EFT. Whatever the reasons, HCF A 
might not have sufficient leverage with those other State agencies to bring about a 
conversion. 
Also, there may be circumstances peculiar to individual States that could pose diffcult 
problems. For example, one respondent expressed doubts about the sophistication  TABLE 2: 
METHODS USED BY STATE MEDICAI CAGlESNC
 IE

TO PROVE ACCOUNABILIT FOR 
CHECK  BILLING  COVER 
STATE  ENDORSEMENT  AGREEMENT  SHEET  PASSWORD 
Alabama  Yes 
Alaska  Yes  Yes 
Ari zona  Yes  Yes 
Arkansas  Yes 
Cal ifornia  Yes  Yes 
Colorado  Yes 
Connec t i cut  Yes 
Delaware  Yes  Yes 
Yes 
Florida  Yes 
GeorCli a  Yes 
Hawaii  Yes 
Idaho  Yes 
III inois 
Yes 
Indiana  Yes 
Iowa  Yes  Yes 
Kansas  Yes 
Kentucky.  Yes 
Loui s i ana  Yes 
Maine  Yes 
Maryland  Yes 
Massachusetts  Did not  resDond 
Michigan  Yes  Yes 
Minnesota  Yes 
Mississippi  Yes 
Missouri  Yes 
Montana  Yes  Yes 
Nebraska  Yes  Yes 
Nevada  Did not  resDond 
New Hamcshi re  Yes 
New Jersev  Yes 
New Mex i co  Yes 
New York  Yes 
North Carol ina  Yes 
North Dakota  Yes  Yes 
Ohio  Yes 
Ok lahoma  Yes 
Oregon  Yes 
Pennsvl vani a  Yes 
Rhode Is land  Did not  resDond 
South Carol ina  Yes 
South Dakota  Yes 
Tennessee  Yes 
Texas  Yes 
Utah  Yes  Yes 
Vermont  Yes  Yes 
VirClinia  Yes 
Wash i ngton  Yes  Yes 
West Virginia  Did not  resDond 
Wisconsin  Yes 
Wyomi ng  Yes 
Total "Yes" 
Source: OIG survey of State Medicaid agencies, June 1991.
 , "
his State s banks and their ability to accommodate EFT. Clearly, HCFA cannot be 
responsible for upgrading banks' computer capabilities. Another respondent , this one 
from California, had other reservations about EFT. Medicaid providers there 
apparently change addresses and bank accounts at a high rate. Approximately 5 to 10 
percent make a change each month. This can negate the benefits of EFT, which is 
designed to take advantage of regularity in 
payments. The respondent, however 
thought that the problem might be unique to California, which has, he said  a bank on 
every corner." Where providers have fewer choices in financial institutions, account 
changes may be less frequent. 
Greater use of EFT ma not create substantial savigs unless accompanied by leer use 
of paper remittance advisories. 
Four respondents questioned the ability of EFT to save money without a concurrent 
switch to electronic remittance advisories (RAs). This is a serious concern. 
At first glance, a comparison of the transaction cost per EFT (3 to 10 cents) with the 
paper and postage costs of each check (about 29 cents) makes EFT appear to 
be a 
clear money saver. But because paper checks are now usually packaged with paper 
remittance advisories, this comparison may be fallacious. 
When RAs are printed on paper and mailed to providers, the incremental costs of 
printing and including a reimbursement check in the same envelope are negligible-
apparently even less than the cost of EFTP Therefore, few if any financial gains 
would result from substituting EFT for paper checks if the State continued to send 
paper RAs.

The decline of paper RAs may be imminent, however. Several States are already 
transmitting electronic RAs to at least some providers. In most of those States, the 
RAs are delivered on computer tape or diskette. I4 In those cases, the RAs must stil 
be mailed or hand-delivered, and a paper check can easily be included. But Hawaii 
and Kentucky have the ability to send RAs on-line--that is, over telephone lines--and 
Arkansas plans to add a similar ability in early 1992. States could save money by using 
EFT for providers who receive on-line RAs. 
On-line RAs wil soon become an option for many more States. The American 
National Standards Institute has created a nationwide standard for electronic 
remittance advisories. States should be able to use this standard to send on-line RA 
to providers' financial institutions through the Automated Clearing House--the same 
network used to send EFT. Providers could arrange to obtain the RAs from their 
financial institutions in a variety of ways.

EFT could generate savings even without on-line RAs. It is well established that 
electronically submitted claims are cheaper to process than paper claims.I6 States 
could follow the Medicare example of using EFT as an incentive to promote electronic  claims submission. In fact, some States now provide electronic RAs only to providers 
who submit electronic claims, thus creating a similar incentive. 
EFT might also save money by allowing States to prepare RAs less frequently. 
Providers might be satisfied with biweekly or monthly RAs if they stil received weekly
EFT. If this were true, States now sending weekly RAs could cut associated costs by 
50 to 75 percent.
 RECOMMENDA TIONS

The HCF A has already taken a major step by offering enhanced funding for electronic 
funds transfer and remittance advisories. But it is unlikely that this step alone will 
motivate many States to use EFT, given the numerous problems with EFT that the 
States have identified. To address these concerns, HCFA should: 
Work with the State Medicaid Directors ' Association to identify additional problem wih 
EFT facing States and to share other States' solutions to those problem. 
Work with the National Automated Clearing House Association both to 
exlore how the 
Automated Clearig House can be used  RA and to provi
for Medicaid EFT and 
information to States. 
Assit States in developing biling agreements for providers who use electronic claim 
fu 
remittance adviories, and  Two actions in particular would be 
transers. 
appropriate. (1) The HCFA could specify wording for biling agreements that would 
satisfy Federal requirements, as it has for claim forms and paper checks (42 CFR 
455.18-19). This wording could then be added to State-specific biling agreements. 
(2) The HCFA could distribute to all States copies . of biling agreements used by 
States that currently employ EFT. States choosing to implement EFT could use these 
current agreements as models.

Develop guidelines for provider  These guidelines should identify 
partcipation in EFT 
conditions that States could impose on providers receiving payment through EFT. 
Possibilities include requiring electronic claims submission and electronic RAs (as 
HCFA has proposed for the Medicare program), or limiting changes in bank accounts. 
In developing these guidelines HCFA should draw on the experiences of the States 
already using EFT and of the Medicare program.  COMMENTS  ON THE DRAFT REPORT

We solicited and received comments on our draft report from two components 
of the 
Department of Health and Human Services--
the Health Care Financing 
Administration (HCFA) and the Assistant Secretary for Planning and Evaluation 
(ASPE). We also solicited and received comments from two independent 
organizations--the State Medicaid Directors' Association (SMDA) and the National 
Automated Clearing House Association (NACHA). We reproduce these comments in 
appendix A; our response to the comments appears below. 
Commnts from HCFA 
The HCF A concurred with our recommendations that it work with SMDA and 
NACHA to investigate ways to facilitate adoption of EFT. It did not concur, however 
with our recommendations to develop a standard biling agreement and 
a set of rules 
for provider participation. (The draft version s recommendations are reprinted in 
HCFA' s comments, which are contained in appendix A.) The HCFA reiterated its 
support for EFT, but stated that it needed further analysis of our findings before 
agreeing to these recommendations. 
The HCFA believed that implementing our recommendations would constitute a 
nationwide, Federal mandate that State Medicaid programs implement EFT. That 
was not our intention. We firmly believe that EFT should remain an optional 
component of the Medicaid program, and that the decision to provide enhanced 
Federal funding of EFT should be made on a State-
by-State basis. We see our 
recommendations as steps that HCF A should take to help those States 
 choosing 
adopt EFT to do so in a cost-effective manner. 
In response to HCFA' s concerns, we have modified our last two recommendations. 
We no longer call for HCFA to develop a provider biling agreement that 
would 
satisfy legal requirements in all States; instead, we call for HCFA to assist States in 
developing customized biling agreements. Also, we now describe the conditions for 
provider participation as "guidelines" rather than "rules " and make clear that the 
ultimate decision on whether to use the 
guidelines should be left to the States. 
believe that by implementing these recommendations, HCFA wil move toward its 
stated goal of supporting State use of EFT. At the same time, HCFA wil help ensure
that if and when EFT is adopted by States it offers benefits to providers, States, and 
HCF A. 
The HCF A made two technical comments, both calling for further analysis of
statements made in the report. 
California providers switching bank accounts  We offered this example simply 
to ilustrate potential problems with EFT. We do not mean to suggest that all  States would face similar problems on the same scale. Therefore, we did not 
feel that further analysis is necessary. 
Use of electronic RAs. The questions HCFA raises about electronic RAs are 
excellent and certainly need to be answered in the course of implementing 
EFT. It is precisely these sorts of questions that we think HCF A should 
address in consultation with SMDA and NACHA (see our first two 
recommenda tions). 
Comments from other organizationS 
The ASPE commented that the State Medicaid Manual 
revisions referred to as a draft 
in our draft report have now been finalized. Our report now reflects this update. 
The SMDA found our report useful and believes that State Medicaid agencies will 
support our recom  endations to HCF A. We appreciate SMDA's comments and infer 
that SMDA is wiling to work with HCFA as suggested in our first recommendation. 
The NACHA expressed support for Medicaid agencies' use of EFT and identified 
three specific issues for HCFA and the States to consider. We appreciate NACHA' 
support and believe that these issues should be addressed jointly by HCFA and 
NACHA.   APPENDIX A

DETAID COMMNT ON TH DRA REPORT 
OIG REPONSE TO TH COMMNT 
In this appendix, we present in full the comments on the draft report offered by the 
Health Care Financing Administration (HCFA), the Assistant Secretary for Planning 
and Evaluation (ASPE), the State Medicaid Directors' Association (SMDA), and the 
National Automated Clearing House Association (NACHA). Our response to each 
set of comments is contained in the section of the report titled "Comments on the 
Draft Report. 
A -
 . / -:

Health Care
DEPARTMENT OF HEALTH &. HVMAI\ SERVICES 
Financing Administration.

Memorandum 
,(.".'0 
APR I 4 

Date 
From 
J. Michael Hudson 

Actig Admtrator 

Subject  Ii 
OIG Draf Report: fElectrorUc Funds Tranfer tor Medicad Provders,

(OEI-Ol-91-021)

Inpector General

Ofce of the Secreta 
Wt; have revewed the subject draft report which dicusses the degree to which 
States bave adopted Electonic Funds Tranfer (EFT for payment of Medicad
provders. The report also identied a number of factors which prevented additional 
States from adopting thi fuds transfer method. 
EF. 
OIG found that only eight States curently use  DIG indicates these States 
recogned several advantages through EFT use, includig additional admtrative 
savigs. In order to promote EFT, OIG recommends that HCFA: (1) work with the 
State Medicaid Directors' Association and (2) the National Automated Qearg House 
Association to promote EFT 
implementation among Medicaid provders; (3) work with
State Medicad agencies to create a stadard, fraud-proof bilg agreement for
provders using electronic claims, remittace advsories and fuds transfers, and ensure
that this agreement satisfies legal signature requiements on both Federal and State 
levels; and (4) design reasonable rules for provders receivg EFT which require
clai  litig 
electronic  submision and electonic  ban 
remittance adviories or 
accunt 
changes. 
DIG' s recommendations are geared toward implementing EFT 
nationwide. 
Though we concur with the 
fit two recommendations, we do not believe the report
provdes conclusive evidence that nationwide implementation 
ca actua be 
tie. 
accmplished at tbs  Since the purpse of funher implementation of EFT is to 
achieve savigs larger than those produced by the sytems most States cuentl 
employ, we believe DIG should investigate the costs and benefits of EF more 
thoroughly in accrdace with our attached comments. Consequentl, we defer 
concurg  remaig 
with the  two OIG recommendations unti a more comprehensive
report is completed. 
th 
Thank you for the opportunty to review and comment on  draf report Please 
advse us whether you agree with our position on the report s recommendations at your 
earliest convenience. 
Attchment 
A - 2 
/r.  Comments of the Health Care 
Financing Administration 
OIQraft 
on the  Report: '
(HA)  'Eectronic funds 

edicaid Provders " OEI-OI-91-00821

Recommendation 1

That HCF A work with the State Medicad Diectors' Asocition to identi additional 
problems with Electronic Funds Tranfer (EF) facig 
States and to share other States 
solutions to those problems. 
ecommenqation 2

That HCF A work with the National Automated 
Clearg House Asocation both to 
explore how the Automated Clearg House ca be usd for Medicad EF and RA 
(remittace adviories) and to provde inormtion to States. 
esponse to Recommendations 1 and 2 
We concur with these recommendations, panicularly gien Secreta Sul' s cuent 
intiatie to reduce admistrative health cae expenses though 
increased use of 
electronic data submision. We believe it wi be  work with the State 
fritful to 
Medicad Directors' Association on plans for comprehensive Medicad 
implementation
of EFT. By doing so, we anticipate gaing a better understadig of the diculties 
States face and the solutions they fid. Workig with the National Automated Clearg
House Association should funher faciltate ths process by explorig options for EFT,
electronic RA 
and transferrg inormation electronica to States. 
RecommendMjon 3 
That HCF A work with State Medicad agencies to create a stadad, fraud-proof bilg 
RA 
agreement for provders using electonic clais,  and fuds tranfers. The 
agreement should be wrtten to satisfy legal signature requirements in every State as 
well as Federal legal requiements. 
Recommendation 4

That HCF A design a reasonable set of rules to which provders must agree in order to 
clai 
receive EFT. These rules must include requirg electonic  submiion, requig
electonic RA, or liting changes in ban accounts. 
A - 3
 Page 2 
Response to Recommenqations 3 and 
BCFA 
HCF A support the goal of the OIG report. We currently provde enhanced Federa 
Financial Parcipation to those States that wih to develop EFT sytems. Givg 
Medicad provders those same options would also be consistent with HCFA' s long-
caot 
term goal. However, notwthstading our conceptual support for EFT, we 
concu with Recommendations 3 and 4. 
towd  EF 
OIG' s recommendations are geaed  nationa implementation of  for 
Medicad. However, we believe EFT implementation on th sce inolves a 
th 
considerably more complex set of isues th diusd with  report A more 
EF 
thorough analis of the relative costs and benefits of  is alo requied for each 
dicrete par: the Federal governent, States, provders inurers etc Whe such 
caot 
anis m y be beyond the scpe of the origial study, we  endors the key 
fidig supportg these recommendations without such effort Unti a more rigorous 
analyis is provded, we alo caot commt oureclvleas t o developing a stadadid
bilg agreement for pnmders  electonic RA and EF. 
using electonic 
OIG needs to exame the varety of State sytems and the impact such vaety wi 
have on nationaJ implementation effort. Consideration of the multiplicity of State 
underten 
sytems, and concomitat effects on potential savigs, must be  before the 
th 
recommendations of  report ca be reconsidered. Though the report repetedl 
defitie 
mentions that eight States now employ EFT, there are no  statements that 
intace. 
EFT has been found to be cost-effecte in any of these  Moreover, OIG 
does not discuss the operational expriences of any of these States. Such dicuion 
determg 
would be invaluable in  the benefits of national Medicad EFT 
implementation. We  de facto mandating of EFT without fuher study 
believe that a 
would be counterproductie, because it would serve to retad rather than foster the 
interest of States in EFT. 
Techncal Comments 
Medcad provders there (Caorna) appaentl change addresss 
and ban accunts at a 
high rate.  to 10 percent 
Approxately 
make a change each month. Ths can negate the benefits of EF, 
which is designed to tae advtage of reguarty in payments. The 
respondent, however, thought the problem might be unque to
Caorna.. 
OIG does not provde analyis of these statements. The report does not clar how 
comparable Caorna is to other States, nor how signcatly savigs in Caorna are 
th 
afected by  problem. 
A - 4
 Page 3

Pa,e 7. far&mpU 
The fial sentence of this paragraph reads  .few, if any, fiancial gains would result
from substitutig EFT for paper checks if States continue to send paper RA.
" Given 
that use of both  and electonic RA is stated to be necessar to achieve cost
EF 
effecteness, dicusion of the costs and impediments to accptace of RA 
among
Medcad  waanted. 
provders alo seems  Subsequent statements that ''te declie of 
paper RA  imminent" and "RA wi soon beme options for may more 
may be 
States" do not sufciently quell concern. 
For exple, there should be a dicusion of whether pnMders wi have to obta 
RA. If obtag 
speial equipment to receive electonic  equipment is necess, what
are the costs per provder? Is there one preferred sytem 
compatIble with al State 
us 
necess? If 
operations, or are multiple options  dierent sytems must be  what 
are the prjce diferential, and how liely is it that each State s Medicad provders 
tae on such additional expenses? Could a national requirement for use of both 
and electonic RA have a negatie impact on beneficiar accss to medica cae? 
These questions need to be addressed. 
A - 5
 .;.

DEPARTMENT OF HEALTH & HUMAN SERVICES  OfIC of the Secety 
Washington, D.C. 20201

TO:  Richard P. Kusserow 
Inspector General 
FROM:  Assistant Secretary for 
Planning and Evaluation 
SUBJECT:  OIG Draft Report: "Electronic Funds Transfer (EFT) for
Medicaid Providers 
" OEI-Ol-91-00821 
Thank you for providing me with an opportunity to review your 
draft report on EFT for Medicaid providers. I would suggest only
one change to reflect a development that has occurred since your 
report was drafted. The report should be revised to reflect that 
HCFA I s State Medicaid Manual revision concerning the enhanced 
match for EFT efforts has been finalized. It is currently at the
printer and is expected to go out in the next four to six weeks. 
Martin 
H. Gerry 
A - 6
 ., 
.,.. _."..... ..."-. ', .-.',., ..- . - ,., .-.-' . _.' p "'.
STATE MEDICAID 
DIRECTORS' ASSOCIATION 
. O 
. L'  "h" 
March 24, 199 
Mr. RkhardP. Kusserow, Inspetor General 
S. Depaent of 
Health & Human Services

Washington,' D.C. 20201

Dear Inspector General Kusserow; 
I have reviewed your draft report entitled 
Electronic Funds Transfer for Medicaid Providc 
This report provides a useful anlysis of both benefits and poential problems with electronic
funds transfer (EFT systems. Moreover, the report provides useful inormation on state activities
which wil be of asistance to 
those states wishing to explure this technology further. 
I believe
the report'
s summation of the diversity of state concerns with EFT  iJ be helpful in framing the
discussion on how best to resolve those 
issues. 
r believe state Medicaid agencies wil support the 
recommendations contained in the druft report 
and wil support efforts to promote discussion of EFT. 
. Sincerely, 
Ray Haley I Chairman

State Mcdicajd Directors' Association and 
Director, Arkansas Office of Medical 
Services 
Astion 
Ameli lbre 
An affiliate of lbe  c:m PubLic 
tHO Fir.t Stret, N.  , Suite SOO, Wd.o;i  c.  2002-405 (202) 682.(lOO  ACH

America  st Electronic Payments Network 
s Laf1'C.
NArIO:-AL AUlMATED 
CU-:AIU:-C HOUSE ASSOCIATION 
April 27, 1992

Mr. Richard P. K usserow

Inspector General

Department of Health & Human Services

Washington, D.C. 20201

Dear Mr. Kusserow:

nk you for the opportunity to comment on your draft report entitled
ElectroniC' Funds Transfer 
for Medicaid Providers . The National Automated Clearing
House Association (NACHA) is a trade association representing 42 member Automated
Clearing House tACH) associa tions whose members comprise over 15 500 depository
financial institutions. NACHA establishes the rules for the inter-regional exchange of
commercial ACH payments and develops new ACH products and improves existing 
ones
in order to meet the needs of financial institution participants and their 
customers.
NACHA also provides marketing and educational 
services to its members. The ACH 
network is a nationwide payments system used by more than 22 500 participating
bfj inllaionnc iacol minsmtieturctiioanl san, d1 2g0o 0v0e0rn cmorepnotr AatCioHns t,r aanndsa mctiiollniosn ws iothf  ac ovnasluumee rs. In 1991 over 1.7
of over $6.9 trillion
was sent over the ACH network. 
NACHA is pleased that the Health Care Financing 
Administration (HCFA) is
encouraging the use of electronic funds transfer for 
reimbursing Medicaid providers and
supports your efforts. Using the ACH for this purpose would be a natural 
fit. As you
indicated in your report, effective April 3, 1992 the NACHA Operating Rules were
amended to permit the use of the ANSI ASC X12.85 (Healthcare Claims Payment Order)
transaction set to the table of permissible ANSI transactions be used in the 
CCD+ and
CTX transactions. In addition, NACHA'
s Board of Directors are currently reviewing a
proposed rule amendment that would increase the number of addenda 
records
accompanying a CTX from 4 990 to 9 999. One of the reasons this proposed rule 
change
was set in motion was due to a request from the health care industry. 
I believe that several issues need to addre!; ed prior to using the ACH to
reimburse Medicaid providers. Some of the 
issues identified include: 
Compliance with standards. As mentioned above, the ANSI ASC X12.
transaction set has been approved for use with 
CCD+ and CTX. Compliance with
these standards are extremely important in ensuring the integrity of the 
payment 
system. 
Payment remittance information. The 
ACH network is a payments system that
permits payment related information to 
accompany the payment. The NACHA
Operating Rules were recently amended to permit zero dollar corporate 
payments
over the ACH so long as the entry carries an 
addenda which contains remittance
information. If a format other than the ANSI 
ASC X12.85 is being considered for 
Suitc 200, 607 Hcrndon Parkw.y Ht'rndon, VA 22070 
703/742. 096 
9190 .  i83/787.
..cycled paper *  R. Kusserow 
April 17, 1992

Page 2

use HCFA would need to receive approval of the proposed format by the 
NACHA
Board of Directors. .At a minimum, proposals for rule 
changes must be received
by NACHA at least one year prior to 
implementation. 
Awareness. The financial industry 
should be made aware of HCFA'
the ACH for Medicaid payments. NACHA and its regional ACH assso cpilaatinosn tso use
publish newsletters and sponsor 
workshops that may be avenues for HCFA to
keep financial institutions apprised. Support by the financial industry 
could
assist HCFA in getting additional states to adopt 
electronic funds transfer for 
Medicaid payments.

NACHA would be more than happy to sit down with you or your staff to 
discuss
HCFA' s plans for using the ACH for Medicaid payments. In addition, we would
welcome your input to our 
Bankers EDI Council meeting. The Bankers EDI Council was
formed by NACHA to 
address the needs of the financial community as it relates to
financial ED!. If you are interested in interacting with this 
group, please let me know.
If you have any questions9 or1 n9eed0 m. ore information 
please do not hesitate to contact me.
I may reached at 703/742-
Si nee rei y, 
Linda O'Hara

Director of Rules & Operations

A - 9
  APPENDIX 
NOTE 
National Automated Clearing House Association  ACH: The Electronic 
Solution, no date. 
See Health Care Financing Administration  Report to Congress on Electronic 
Media Claims (RC-90-028), October 23, 1990, p. 3. Until 1986, when Congress 
imposed a 14-day minimum delay before payment, providers using electronic 
biling were paid  Recently, HCFA has helped develop a 
substantially faster. 
standard electronic physician claim form, which providers can use to bil private 
insurance companies and Medicaid as well as Medicare. 
Health Care Financing Administration  State Medicaid Manual  Section 11205. 
Medicare Program: Revised Procedures for Paying Claims from Providers of 
Services, II 56  Federal Register 31666 (July 11 , 1991). 
The announcement of the EFT  Federal Register did not 
proposal in the 
estimate the number of providers who were expected to request EFT or the 
total anticipated savings. Under the proposal, HCFA would also allow 
payments to be made by wire transfer--a process similar to EFT. However 
because wire transfers are more expensive than EFT, providers would have to 
pay the costs associated with that service. 
The appropriate Medicaid agency official in West Virginia was unable to 
The District of Columbia also participated in the 
participate because of ilness. 
survey and is hereafter referred to as a State. 
In Arizona, EFT is available only to nine large health plans; in Nebraska, only 
to State-operated institutions and agencies; in New Jersey, only to hospitals; in 
Pennsylvania, only to pre-paid health plans; and in Texas, only to providers 
, EFT was started as a pilot program for hospitals 
under contract. In Georgia
and nursing homes only, but it wil soon be available to all provider 
tyes. Only 
Florida and North Carolina currently make EFT available to all provider tyes. 
AIl but 16 respondents mentioned at least one advantage. It should be noted 
that respondents were not asked to identify advantages and disadvantages of 
EFT in general, but rather of real-time EFT in particular. Real-time EFT 
would transfer money to providers immediately after they dispensed services. 
The advantages of real-time and non-real-time EFT are generally the same. 
But real-time EFT carries some disadvantages that need not pertain to non-
real-time EFT. Because real-time EFT wil not likely be an option for  report. 
Medicaid programs, these additional disadvantages are not discussed in this
Twenty-five respondents mentioned provider relations; 13 mentioned reduced 
administrative costs. 
10.	 This estimate was set about three years ago and has not been adjusted for 
inflation. The costs represent staff salary and benefits for the time necessary to 
cancel one check and manually produce another. The State is not assessed 
charges by the bank for 
canceling checks. 
11.	 Federal Register 31667. 
56 
12.	 For a discussion of other computerized claims-processing functions, see Office 
of Inspector General  Point-of-Service Claims Management Systems for 
Medicaid, OEI-01-91-00820. 
13.	 In Utah, the printing and paper cost of each check is only 1.2 cents. In 
Oregon, the cost is only 0.75 cents. 
14.	 Twenty-nine States can send RAs on computer tape, and 7 States can send 
them on computer diskette. 
15.	 Telephone conversation with Karen Lyter, National Automated Clearing House 
Association, September 12, 1991. 
16.	 Health Care Financing Administration  Report to Congress p. 2.