Department of Health and Human Servces

OFFICE OF

INSPECTOR GENERAL

POINT-OF-SERVICE CLAIMS

MANAGEMENT SYSTEMS FOR MEDICAID

SERVIQ" 
Richard P. Kusserow 
INSPECTOR GENERAL 
'0 
"1t\fc130  MAY 199  OFFICE OF INSPECTOR 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 selVed 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 Offce of Audit Servces, the
Offce of Investigations, and the Offce of Evaluation and Inspections. The OIG also inform
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 SelVices (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

carryg out their respective responsibilties 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 Offce 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 
INSPECTIONS 
The OIG'
s Offce of Evaluation and Inspections (DEI) 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, Offce of Evaluation and Inspections, and Martha B. Kvaal, Deputy Regional
Inspector General, Offce of Evaluation and Inspections, Region I. Participating in this project
were the following people: 
Boton Region  Headquarrs
David R. Veroff Project Leader  Vicki Greene 
Lead Analyst

David Schrag, 

Barry C. McCoy

Deborah Skahan
 ", +~ 
Department of Health and Human Servces 
OFFICE OF

INSPECTOR GENERAL

POINT-OF-SERVICE CLAIMS

MANAGEMENT SYSTEMS FOR MEDICAID

~ SERVICEs

Richard 
P. Kusserow 
t r

INSPECTOR GENERAL
"1t""30  OEI-OI-91-020   EXECUTIVE  SUMMARY 
PURE 
The purpose of this study is to examine the potential of point-of-servce 
claims 
management systems for State Medicaid programs. 
BACKGROUN 
Point-of-servce (POS) claims management systems use computers and 
telecommunications networks to perform one or more of four related but distinct 
cJaims management functions: 
(1) eJigibilty verification 
(2) claims submission 
(3) claims adjudication, and 
(4) utilzation review.

P~S systems aJIow aJI of these functions to be performed in real time--that is, in a 
matter of seconds--while or before servces are dispensed. TheoreticaJIy, any 
tye of
provider can access P~S systems. But most existing systems, which are in the private 
sector, manage only prescription drug cJaims. 
The HCF A has the authority to provide Federal funding for P~S systems if they are
enhancements to the States' MMIS. Furthermore , the Omnibus Budget Reconciliation 
Act of 1990 (OBRA 90) requires the Secretary of Health and Human Servces (HHS) 
to encourage each State Medicaid program to implement P~S systems for managing 
prescription drug cJaims. The act provides 90 percent Federal Financial Participation 
(FFP) for the development of these 
systems and authorizes the Secretary to waive 
certain paperwork requirements. 
Information for this study was gathered through surveys of State Medicaid agencies; 
discussions with HCFA, trade and professional organizations, and private companies 
involved in Medicaid and private-sector 
cJaims processing; a review of materials 
prepared by States; and a review of business literature and government studies. 
FIINGS 
pr 
adtrtin 
P~S syste have SQved mone and ennced  in th onl two 
Slate 
usg 
New York's P~S system is saving milions of dollars a year by performing 
eligibility verification and utilization review. 
Massachusetts uses its P~S system for eligibility verification only. It is also 
saving milions of dollars annually.  pl 
Few State  to acqe P~S syst. 
Several States have had preJiminary discussions about developing P~S 
systems, but few have made commitments. 
Eight months after the passage of OBRA 90, only one State had definite plans
to implement a POS drug claims management system that incorporates an 
im 
four POS system functions. 
Ii 
ba 
sy. 
Seer  hae  Sta' 
of P~S 
States lack the money required to adopt new 
systems and do not have 
sufficient staff to research them. States fear they will miss the OBRA 90 
deadJine for enhanced Federal funding. 
Combining P~S technology with existing claims-processing systems may be 
difficult. 
State Medicaid officials fear that P~S systems would have several negative 
effects on States and their citizens. 
States and private payers do not use uniform electronic 
cJaims formats. This 
complicates the implementation of P~S systems and adds to their cost. 
inte 
Many State have receied  or confug informtin about P~S syste. 
Key Medicaid systems staff in 19 States did not receive information about 
P~S technology from HCFA. 
Private telecommunications and drug claims-processing companies have been 
active in promoting P~S technology, but they lack experience in Medicaid 
environmen ts. 
The HCF A has issued unclear policy statements regarding specific 
requirements for procuring P~S systems. 
RECOMMNDATIONS 
The HCFA should collect information on P~S technology and regularly distribute it to
States. The HCFA should ilustrate alternative methods of 
using P~S technology,
offer strategies for procuring cost-effective systems, and facilitate communication
between States planning to procure or already 
using P~S systems. 
The HCF A should clarify the operational requirements for 
enhanced Federal funding
of P~S systems.  The HCF A should promote the development of standard electronic cJaims formats 
and their use by State Medicaid agencies. The HCF A, State Medicaid Directors 
Association (SMDA), American National Standards Institute (ANSI), and National 
Council for Prescription Drug Programs (NCPDP) should work together toward these 
goals. 
State Medicaid agencies that develop P~S claims processing systems should ensure 
that they are compatible with standard electronic claims formats as the formats 
become available. 
COMM 
We received formal comments on our draft report from HCFA, SMDA, ANSI 
NCPDP, and the Assistant Secretary for Planning and Evaluation (ASPE). These 
comments, and our responses to them, are reproduced in appendix E. 
AJI of these organizations expressed support for our .recommendations relating to the
development and use of standard claim formats. The 
HCF A and ASPE disagreed
with our original recommendation that HCF A produce and distribute to States a guide
to P~S systems. Both stated that such an effort was premature. Our revised 
recommendation better reflects our belief that HCF A should playa continual 
leadership role in informing States about advances in P~S 
technology. The HCF A 
also stated that it had satisfied our original recommendations for HCF A to cJarify its
policies on enhanced Federal Financial Participation for P~S systems. We agreed that
recent HCF A guidelines make sufficiently clear that funding will continue beyond the 
OBRA 90 deadline, but we stil contend that the operational requirements require 
additional clarification. 
We also received informal comments from several organizations interested in the 
subject of p~s systems for the Medicaid program. Where appropriate, we have 
incorporated their 
suggestions into the report. 
EPILUE 
Since our draft report was written in December 1991
, there have been several 
important developments. The NCPDP released a new standard drug claim format 
that is intended to accommodate Medicaid claims. Work progressed on P~S 
systems
in Alabama, Arkansas, and Missouri. California s request for bids on its MMIS 
contract included specifications for P~S 
claims processing, and other States are 
expected to follow suit. All major MMIS suppliers are now developing p~s
technology, meaning that P~S systems will likely find increasing use in the Medicaid 
program.   ....................... 
..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   .. . . . . . . . . . . . . ....   
. . . ..  ..  ..  ..  ...   ...   ...   ...   ....    ....    ....    ....    .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     .....     ....    ....    ....    ...   ...   ...   ...   ..  ..  ..  ..  . . . . 
TABLE OF CONTENTS

PAGE 
SUMY 
EXECUTIVE 
INODUCTION. . 
. . . . . . . . . . . . 1

FINDINGS  . . . . . . . . . . . . . . . . . . . 3 
P~S systems in New York and Massachusetts  . . . . . . . . . . . . . . . . . . . . . . . . . 3 
Plans in other States  . . . . . . . . 4 
. . . . 6 
Barrers to implementation. 

Inadequate and confuing information 
RECOMMENDATIONS ....................

REPORT 
COMMENTS ON THE  DRA 
EPILOGUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
APPENDICES 
A. The Case for P~S Systems in Medicaid Programs  . . . . . . . . . . . . . . . . . . . . . A
B. Methodology  . . . . . . . . . . . . .. B
C. Exsting and Proposed Medicaid p~s Systems  . . . . . . . . . . . . . . . . . . . . . . .. C
D. Explanation of Savings 
Estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D
E. Detailed Comments on the Draft Report and 
OIG Response to the Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. E
F. Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. F  INTRODUCTION

PURE 
The purpose of this study is to examine the potential of point-of-servce 
cJaims 
management systems for State Medicaid programs. 
BACKGROUN 
Automated Medicaid 
cJaims processing has long been a goal of the Health Care 
Financing Administration (HCF A). Through its technical and financial support of 
Medicaid Management Information Systems (MMIS) and electronic cJaims submission 
HCF A has helped States reduce their claims-processing costs and increase their ability
to detect improper expenditures. 
A relatively new cJaims-processing method, known variously as point-of-servce (POS), 
point-of-sale, on-line, or real-time cJaims management Point-of
, is now availatle. 
service  and  point-of-sale  both abbreviated as P~S, refer to the site of cJaims 
processing. Claims are processed while recipients are in providers' stores or offices. 
On-line  refers to the connection, usuaJly through telephone Jines, between providers 
and claims processors during the transactions.  Real-time  simply means instant--cJaims 
are processed in a matter of seconds rather than days or weeks after submission. 
Real-time also implies interactive communication between providers and processors. 
This new technology is intended to improve the speed and power of claims-
processing
1 A 
systems while lowering their costs.  discussion of the potential benefits to Medicaid 
programs of P~S systems is presented in appendix A. 
P~S claims management systems use computers and telecommunications networks to 
perform one or more of four related but 
distinct claims management functions: 
(1) eligibiJty verification, (2) claims submission, (3) claims adjudication 2 and (4) 
utilization review. TheoreticaJly, any tye of provider can access P~S systems. But
most existing systems, which are in the private sector
, manage only prescription drug 
claims. 
The HCFA has the authority to provide Federal funding for P~S systems if they are
enhancements to the States' MMIS. Furthermore, the Omnibus Budget Reconciliation
Act of 199 (OBRA 90) requires the Secretary of Health and Human Servces (HHS) 
to encourage each State Medicaid program to implement P~S 
systems for managing 
3 The act 
prescription drug claims. provides 90 percent Federal Financial 
Participation (FFP) for the development of these systems and authorizes the Secretary
to waive certain paperwork requirements.  MEOOOLOY 
The data presented in this report were gathered through the 
foHowing methods: 
(1) telephone intervews with Medicaid cJaims management staff in 50 States; 
(2) a maiJ survey to which 45 State Medicaid agencies responded; 
(3) telephone intervews with HCF A systems staff in each of the 10 regional 
offices; 
(4) informal discussions with staff from HCFA' s Medicaid Bureau; 
(5) telephone intervews with representatives from 14 private companies 
involved in Medicaid and private-sector drug claims processing; 
(6) telephone intervews with 7 trade or professional organiztions representing 
pharmacists and other providers; 
(7) a review of advance planning documents and other materials concerning 
P~S systems prepared by 8 States; 
(8) a review of data coHected in surveys conducted by HCF A and the American 
PubJic Welfare Association; and 
(9) a review of professional and government literature. 
We present details on each of these methods in appendix B. 
We conducted our research from March through November 1991. Our intervews with 
Sta!es, which contributed the bulk of our data, were completed in June 1991. Where 
feasible, we have supplemented this final version of our report with more current 
information.  FINDINGS

ENCE 
POS SYSTMS HAVE SAVED MONEY AN  PROORA
ADMlTION  TH. 
IN TH ONLY TWO STATE USING 
As we explain in appendix A, P~S systems could perform a multitude of cJaims 
management functions and produce a number of benefits for the Medicaid program. 
They could reduce program and administrative expenditures, improve provider 
relations, offer better program utiliztion information, and help integrate multiple 
benefit programs. Unfortunately, their current use by State Medicaid programs is so 
Jimited that predictions of their overaJl value would be highly speculative. Rather than 
confuse theoretical benefits with actual experience, we focus here on their 
demonstrated effectiveness in Medicaid environments. 
elil 
mins 
New York's P~S system is savig  of doUa a yea by peormg 
veratin and uttin rev.

New York's Electronic Medicaid Eligibilty Verification System (EMEVS) has been in 
place since November 1986. AJI providers, incJuding pharmacists, physicians, hospitals 
and clinics, can access the system 24 hours a day through P~S terminals or standard 
telephones. The terminals accept information from providers, caJl the EMEVS 
contractor s computers automaticaJly, and respond with visual messages that can be 
sent to a small printer. Providers without P~S terminals use an automated voice 
response (A VR) system, which prompts them to input information on a touch-tone 
telephone and responds with audible messages. Human operators are used if the 
other two systems are not functioning. In addition to eligibility status, EMEVS gives 
providers information on servce restrictions and third-part coverage. The HCF A 
considered EMEVS to be an enhancement to New York's MMIS, and awarded the 
State enhanced FFP: 90 percent of development costs and 75 percent of operational 
costs. 
The high start-up and operating costs of EMEVS were justified by its ability to 
produce even higher savings for the Medicaid program. At least initially, most of the 
savings resulted from the State s conversion from month-specific to day-specific 
eligibility. Before EMEVS, New York's only method of terminating eligibility was to 
stop mailing Medicaid ID cards. If a recipient were terminated from the program on 
the day after a card was mailed to him, he could receive a full month of benefits that 
he was not entitled to. Now, however, the State can terminate a recipient s benefits 
instantly at any point during the month. EMEVS enforces the termination: each time 
a recipient requests medical services, the provider uses EMEVS to determine whether 
he is stil eligible. The State has 
calculated that the gross savings from day-specific 
eligibility are over $10 milion per year.  The State has estimated savings from EMEVS in two additional areas. When EMEVS 
was introduced, New York ceased mailng paper il cards to recipients every month 
and began issuing durable plastic il cards. The annual savings on postage from using 
s New York 
plastic ID cards is estimated at $4.5 milion. has just started to use 
EMEVS to enforce servce restrictions and thresholds. If its initial estimates are 
correct, the savings from this function wiU be much higher: perhaps $200 milion per 
year. 
EMEVS also monitors and controls servces ordered and dispensed by certain high-
volume providers. The State may require physicians to "post" prescriptions or 
laboratory tests to the system as the servces are ordered. Pharmacies and 
laboratories "cJear  , delete--each order from the system as they flU the orders. 
EMEVS keeps records that aUow the State to deny payment for servces that were not 
posted and cJeared. This function prevents laboratories from performing extra 
unnecessary tests and prevents pharmacies from filing prescriptions that were never 
written or were wrtten on stolen 
prescription pads. 
Masachutt  P~S syste for elgiil veratin onl. It is alo savig mins 
anulsles.  it 
of dollrs 
In Massachusetts, the Recipient Eligibility Verification System (REVS) has been 
operational since December 1988. Like New York, Massachusetts secured enhanced 
FFP from HCF A to develop and operate REVS. The system uses P~S terminals 
A VR, and human telephone operators to enforce day-specific eligibility. It also sends 
providers messages about potential third-party coverage, and servce restrictions. AIl 
tyes of providers use this system. 
Massachusetts estimates that day-specific eligibility saved $8.5 milion in REVS's first 
8 The State 
fuU year of operation (February 1989-January 199). predicts higher 
annual savings in future years. It estimates that it saves $800 00 a year by using 
plastic rather than paper ID cards. 
As of October 1991, neither EMEVS nor REVS were performing claims submission 
claims adjudication, or prospective drug utilization review (pro-DUR). New York had 
plans to add Jimited pro-DUR to EMEVS in November 1991 and full-scale pro-DUR 
with claims submission in June 1992. Massachusetts was considering expanding REVS 
to aUow pharmacy claims submission and pro-DUR as well. 
FEW STATE PLA TO ACQUI POS SYSTMS. 
Seerml Sata lce ohamve hma p. rliry dicuns ahow deelopig P~S sysrems hut few
have 
In the summer of 1991, there was a lot of discussion at the State level about improving 
eligibility policies and eligibility verification systems. Twenty-five States had definite 
plans for improvement, 19 had discussed it without making definite plans, and only 6  had no plans at aJI. Nevertheless, only 10 States had definite plans to develop P~S 
10 These plans are summaried in table 
eJigibility verification systems.
1. Several

other States were making improvements on a more limited sealeY 
TABLE 1: 
IMLE 
WI DEFI 
STATE  PLAS TO  PO SYSTS 
Claims 
State  Eligibilty Verification  Claims Submission  Adjudication 
Alabama  Multiple proder ty; MSE  Multiple proder 
Arkanss  Multiple proder ty; DSE  Multiple proder  Pharmacy only 
California  Multiple proder ty; DSE 
Idaho  Pharmacy only; MSE 
Iowa  Pharmacy only  Nc' 
Ilinois  Pharmacy only; MSE  Pharmcy only  Pharmacy only 
Maine  Add A VR only; DSE  Alredy panially  Multiple proder 
implemented 
Masschusetts  Alredy implemented  Pharmacy only 
Minnesta  Multiple provider ty; MSE 
Missuri  Pharmacy only; DSE  Pharmacy only  Pharmacy only 
New York  Alredy implemented  Pharmacy only 
Nonh Carolina  Multiple proder ty; DSE 
Rhode Island  Pharmacy and hospital only; DSE  Pharmacy and hospital only  Pharmacy and hospital 
only 
Texs  Pharmacy only; MSE  Pharmacy only  Pharmacy only 
DSE = Day-speific Eligibility MSE = Month-speific Eligibility; AVR = Automated Voice Response
Source: OIG SUlVey of 50 State Medicaid agencies, June 1991. 
Like eligibiJity verification, electronic cJaims submission was the subject of much 
discussion and planning at the State level. Twenty-five States had definite plans to 
improve their cJaims submission capabilities, 18 had discussed it without making 
definite plans, and 7 had no plans to change. Again, however, few States were 
designing P~S systems (table 1 ). 
Only 6 States had definite plans to perform P~S 
claims adjudication (table 1).
Another 29 States had discussed P~S claims adjudication without making definite 
plans, while 
15 States had no intention to change.  It is more difficult to determine States' plans regarding utiJiztion review , because we 
asked States only about their plans for utiJiztion review other than drug utiJiztion 
reviewP Arkansas and New York planned to impose servce limitations 
using P~S 
systems. Massachusetts win use REVS to transmit the names of primary physicians for
recipients enrolJed in its managed care program. Kansas, Montana, and New York 
were investigating ways for providers, when necessary, to obtain 
prior authorization 
electronicalJy. The American PubJic Welfare Association reports that" in April 1991
, 15 
States had P~S pro-DUR "under consideration or under development."14 
11 af  de 
im 
Eigh  th page of OBRA 90, on otnh S tiante ohar te  plns to
a P~S d1 claim malUgem syte  al fou P~S syte
futins. 
Congress s vision in OBRA 90 was that many if not aU States would procure 
comprehensive pharmacy cJaims management systems to perform eJigibility 
verification, cJaims submission, cJaims adjudication, and pro-DUR in real time. 5 As 
of June 1991, only Missouri had announced definite plans to procure that kind 
system. Arkansas and minois had plans for systems that would perform the first three 
functions, but not pro-DURo (A summary of their plans is presented in appendix C 
along with a summary of the New York and Massachusetts systems.
) Nearly half the 
States reported that they were considering fulJy functional P~S systems, but few had 
16 Iowa had for some time been contemplating 
gone beyond the discussion stage.
such a system, but had not reached the same level of commitment. Rhode Island 
planned to add P~S capabilities, but as part of a total MMIS 
procurement. Texas 
had similar plans for its next MMIS. Oregon took its first steps toward 
developing" a 
comprehensive system by issuingL a reqIues t for information in 
April 1991. 
BARRS 
SEVERA  HAVE  STATE' IMIEMENTATION OF POS 
SYSTEMS. 
sujJ 
State lack th mone reqed to adpt ne syste an do not have  staff to 
Fedl 
freseuarch g. th State fear th wi mi th OBRA 90  deadine for ennced 
Procuring a P~S system requires milions of dolJars and years of work. 
Massachusetts s REVS took over a year and $2.5 milion to develop and costs 
$3.5 milion a year to operateP New York's EMEVS took about two years and 
$3.5 milion to develop, and costs approximately $6 milion a year to operate. IS 
When we asked States to assign importance ratings to 12 potential barriers to 
comprehensive P~S system implementation, their number one response was "our state 
doesn t have the money necessary to procure a comprehensive real-time system, no
matter how much it might save in the future." Their number two response was "our 
staff doesn t have the time to assess, procure, and implement a real-time system. 
(Table 2 displays the mean ratings for each barrier.
) Several respondents noted that 
even if HCFA provided 90 percent of the funds for development and 
75 percent of
the funds for operations, their States stil could not come up with the rest of the money.  TABlE 2:

RAGS 
STATE  OF IMRTANCE OF VAROUS FAcrRS

PREVENTG TIM FROM AOPTG 
COMPRESIV PO SYSTS

SCALE: 1 = WNot at all a factor;W 5 = WAn extremely important factor 
FAcrOR  MEAN  NUMBER 
RATING  OF 5' 
necry 
Our State doen t have the money  to procre a comprehensive  3.55 
real-time sytem, no matter how much it might save in the future. 
Our staff doesn t have the time to asss, procure, and implement a real-
time sytem.

We are not convinced that real-time sytems will save money.

fil 
We may go to real time, but we want to wait until the current  agent 
contract expires to make the proc easier. 
We haven t gotten enough guidance from HCFA about why we should 
imQlement real-time sytems and what the Federal matching rate would 
be". 
Our current MMIS would not be compatible with a real-time sytem. 
Our staff doesn t have the technical exprtise to asss, procure, and  2.55 
implement a real-time sytem. 
fil 
Our current  agent contract makes it diffcult to add real-time 
capabilities. .

Our current computer sytems are not sophisticated enough for us to 
benefit from real-time capability. 
Current State laws or regulations prohibit us from implementing some or  1.45 
all of the functions that real-time sytems would perform. 
Real-time sytems would hurt our relationship with recpients.  1.45 
Real-time sytems would hurt our relationship with provders.  1.43 
SOURCE: OIG survey of 50 State Medicaid agencies, June 1991. (N=49 respondents 
except as noted. 
. The 15 States without fical agents did not respond to these questions. 
.. AIl 50 States responded to this question.  .. 
, "
Respondents from Arkansas and New York, who have recent experience in planning 
and implementing P~S systems, acknowledge that it is a costly and difficult process. 
An offcial from Arkansas told us  This has been lots and lots of work. It is 
tremendously time consuming to plan for these changes. .  It has taken us one and 
a half years to do this." In New York, EMEVS was developed at a time when staff 
and money were readily available. Medicaid staff there doubted that many States 
would face similar surpluses today. 
OBRA 90 may have inadvertently compounded the problem. As an incentive for 
States to adoptPOS pharmacy cJaims management systems quickJy, it specified that 
enhanced FFP would be granted for the systems in FY 1991 and 1992 only. Several 
States complained, both to us and to HCFA directly, that this time Jimit would prevent 
them from developing POS systems rather than encourage them. In fact, however 
enhanced FFP for P~S systems wi)) be available beyond fiscal year 1992. 
Combing P~S tehnlo wi extig claim-pesg syste ma be 
Exsting Medicaid Management Information Systems (MMIS) are designed to process 
claims in large batches, not in real time. Changing them to accommodate real-time 
p~s 
processing will be expensive and may be difficult because current MMIS 
operators, whether they are State agencies or fiscal agents under contract, have little 
or no experience with P~S technology. This fact might lead States to work with 
separate, specialized contractors in developing P~S systems, as New York and 
Massachusetts did. By retaining separate contractors, States would also benefit from 
competitive bidding--a process that should result in the lowest possible cost for the 
States. 
Hiring a separate P~S system contractor could cause problems, however. Medicaid 
agencies would have to incur the burden and expense 
of preparing and conducting the 
20 Furthermore
contract bid. , HCFA's Medicaid Bureau Director has warned: " 
States soJicit for a separate drug processor it may be necessary to renegotiate the 
terms of the present fiscal agent (FA) contract, since a large volume and low-
processing cost tye of claim will be removed from the FA.1I21 This would likely 
result in higher rates for processing the remaining claims. 
Apparently, many States interested in P~S technology plan to wait until their current 
fiscal agent contracts expire and then build P~S requirements into their next MMlS 
contracts. Ten States said this was an extremely important factor in their 
decision not 
to develop P~S systems (table 2). Alabama, Arkansas, and Missouri are already
working with their fiscal agents to add P~S technology. It may be that the States most
likely to hire separate P~S system contractors are those without fiscal agents. Ilinois
is an early example of a State in this position.  State Medaid ocfflis. f ea tht P~S sy wo hae seer neatie 
th  efects on
an 
State 
Many respondents noted a potential for POS systems, with their heavy reJiance on 
computers and telecommunications, to create quaJity control problems. 
Their concern 
is well founded. Any such system is vulnerable to natural disasters and industrial 
accidents. 
In addition to asking Medicaid officials about barrers to implementing comprehensive 
P~S systems, we soJicited advantages and disadvantages of having P~S systems 
perform each of the four cJaims management functions. Along with many advantages 
which mirrored the benefits of P~S systems described in appendix A, we heard a 
diverse set of disadvantages. Foremost among them, consistent with the discussion 
above, were the drain on States' funds and staff time. There were several others 
however, which help explain why there has been such reluctance to adopt P~S 
technology. 
Eligibilty verification

Although proponents beJieve that P~S systems would be popular with providers, some 
States feel that asking providers to use a P~S system each time they see a Medicaid 
recipient would be an added burden. Currently, providers in most States can verify 
eligibility simply by looking at an ID card; they need not make a telephone call as 
well. Furthermore, providers in fourteen States can already use A VR systems if they
doubt the validity of an ID card or if a patient forgets to bring 
his or her card. 
The costs of P~S systems in New York, Massachusetts, and Arkansas have been 
justified by the savings created by conversion to day-specific eligibility. However 
several respondents disagreed that day-specific eligibility was desirable. Some worried 
that by terminating eligibilty sooner they would deny medical care to those in need. 
Others feared that although the care would stil be provided at no cost to the patient 
the costs would be born wholly by the State or its medical community rather than 
shared with the Federal Government. A few respondents thought their States' master 
eligibility files could not be updated fast enough to take advantage of day-specific 
eligibility, and some thought that certain categories of recipients were guaranteed full-
month Medicaid eligibility by other entitlement programs. 
Reports from Massachusetts suggest that P~S eligibility verification systems can cause 
24 Apparently, recipients there are now 
problems for recipients. less sure whether 
they are eligible for Medicaid at any given time, because there is no expiration date on 
their plastic ID cards. Some recipients do not find out they are ineligible 
until they try 
to obtain servces. Also, REVS can make mistakes, and these mistakes are reportedly 
difficult to correct. Providers are apparently reluctant to call human operators to 
verify that recipients identified as ineligible are indeed so. Finally, replacing 
a plastic
REVS card can take weeks or months. In the meantime
, recipients must travel to 
local welfare offices every ten days to receive a temporary paper replacement card.  Claims submission

Many respondents were happy with their current 
cJaims submission capacities and did 
not believe that P~S submission would be a major improvement. States not 
contemplating changes in submission capabilties already have hi  her rates for 
electronic submission than states planning or discussing changes. Nine respondents 
felt that real-time submission offers no advantages over batched electronic submission. 
Medicaid officials in three States thought that real-time submission would be an 
undesirable burden on providers. This burden might fan most heavily on providers of 
long-tenn care, who submit dozens if not hundreds of cJaims on a regular basis. 
Because their cJaims are generany simple updates of prior cJaims, batch submission 
cJearly makes more sense for them than individual, real-time submission. The 
American Society of Consultant Pharmacists, whose members provide pharmacy 
servces to nursing homes, strongly opposes any requirements for real-time submission 
and adjudication. 
One of the expected advantages of P~S claims 
submission is lower denial rates. But 
pharmacy cJaims, which win probably be the first tye of cJaims submitted on-
line to 
Medicaid programs, are already denied less frequently than most other 
tyes of
c1aims. 
Claims adjudication 
Three respondents mentioned an interesting potential problem with P~S claims 
adjudication. Providers would have the opportunity to submit a claim before 
dispensing servces. If the cJaim were adjudicated instantly and the provider felt that 
the reimbursement calculated was inadequate, he or she could decide not to provide 
servces. One respondent told us that such a decision would be against the law, even 
if no reimbursement were claimed. 
Several respondents also thought that real-time adjudication would weaken States 
cash flow. This fear may be unfounded, because faster adjudication need not lead to 
faster payment. Even those States with real-time adjudication could maintain their 
current payment schedules. 
Respondents were particularly adamant that P~S claims adjudication would be too 
costly. Most Medicaid claims processing is now performed in the evenings and on 
weekends, when the demand for State computer time is low. States believe that 
processing cJaims during normal business hours would be far too expensive. They are 
also very concerned about the costs of keeping telephone lines between providers and 
the State or fiscal agent open during what could be a lengthy adjudication process.  .. 
. , 
. ' - ' ..,  ,. "
~~~ *:.y - : " : ' - ' ?-q  . '-" . ~~~ . ; ;:: - -"" -'.''' -' -...., ." . "".,  . -'  ,',.   .,  .~: --+~.,. -':~ :" ' q." , 
Utilization review 
Respondents' concerns about POS utiliztion review fell along the same lines as 
concerns about the other functions. Respondents felt that their current methods are 
adequate, and they worred about increasd burdens on providers, increased attempts 
at fraud, and negative effects on recipients. Several 
stressed that estabJishing, for 
other health care servces, the kind of prospective utilition review now available for 
pharmacy would be prohibitively complicateed.  l 
pa  cla 
Statiem an ptriant   do snoyt u s unor  for. 7h
th  an ad  th co 
of P~S  to 
POS cJaims management systems cannotfu  ction unless aU parties involved--providers
hardware and software developers, telecmmunications networks, and bil 
processors--agree on what inormatiQ 
D1 wiJlhandle and how it wiJI be 
organied.27 Standard fonpats all.ow  , SY  e identical claim forms for 
aJI bil 
processors and to communicate with:t #ir\:.  slrig t  e equipment and 
telecommunications networks of theirchoice;  Administrative costs ar  increased in 
the absence of standards because eachprov  processor pair must "
reinvent the 
wheeL" Currently, there is no sIngle  ctro licfotmat for any tye of cJaim that is 
acceptable by aU State Medicaidagen 
i : 
i;::' 
. The;:Nltionl ,Co.rinciLforPrescr( ,  (NCPDP), a nonprofit agency,
tia rliaditionally been' looked l(rby:  processing industry for 
standards. Their Uniyersal (paper  CF) and comparable electronic
fotm  0wi as  Versio  :r:  rby practicaJIy every pharmacy, 
claIms processor, and' drugb~nef!r '  tHe country, with the exception of 
government programs like Medi 
and Version 1 were designed 
, before the 34v  orpro..  aif  pha  acy claims processing, and 
ted a new electronic format: 
data -
' mP9n 
, parpcularly
. - so ,  us ,  esign1geirowp unique 
i;tIi
:f, 
, T

th ' Y ersion'3.2. This

but rec6i1l1rtends -three

I4aim  ope fOr wQrker

March l99, this,"\1ersidn

in Pharmacy,' which ha(j 
" d4hat,the recommended- . 
med in Arkansa 'antf: 
Jl:: 
tyes of
rmation 
t?j 
1-__  physician cJaim form--the HCF A 1500-did not have a standard electronic format until 
July 1991.28 A committee of the American National Standards Institute (ANSI) is 
planning to develop several standards for use in health care 
cJaims processing, but as 
of June 1991 none of their formats had progressed beyond draft status, and none had 
29 The "
been tested widely. 837 Health Oaim" standard should be available to the 
pubJic in October 1992. This standard, which is compatible with physician, hospital 
and even pharmacy cJaims, is designed for batch processing systems. But an ANSI 
workgroup is investigating ways to make it useable by P~S systems. 
MA  REIVD 
STATE HAVE  INADEQUATE OR CONFSING 
INORMTION ABUT PO SYSTS.

Key Medaid syst stff  State di not reeie infortin abou P~S tehnlo 
in  19
frm HCFA.

According to HCF A, HCF A regional office staff had informed most if not all States 
about P~S systems by mid-April 1991. Nevertheless, respondents from 19 States 
reported in Mayor June 
1991 that they had not received information about P~S 
systems from either HCF A headquarters in Baltimore or their local HCF A regional
office. It is possible that other Medicaid officials in those States had received the 
information from HCF A without informing our respondents. Even if this is the case 
we find it significant that our respondents--all senior cJaims systems staff--were 
unaware of the information. Another explanation of our survey results is that HCF A' 
information was not useful enough to have been recalled by our respondents. The 
information that HCF A did provide in most cases consisted of brief letters notifyng 
the States of OBRA 90's P~S sections and offering HCF A's initial interpretation of 
the statute s requirement. It does not appear that HCF A made a concerted effort to 
explain why States might or might not want to acquire P~S systems. 
That HCF A did not rush to promote P~S systems to States is understandable. 
Certainly, HCF A's top priority in implementing OBRA 90 concerned the drug rebate 
rather than the cJaims-processing provisions. Also, some regional offices apparently 
saw their proper role as evaluators of proposals brought to them by States, rather than 
as proponents of any particular technology. Finally, HCFA managers knew that 
private vendors were already selling P~S eligibility verification systems to providers in 
several States. The costs of these systems were borne entirely by providers, and it was 
suggested to us that HCF A saw no reason to replace these systems using Federal 
money. 
Lack of guidance from HCFA about P~S systems may have kept some States from 
moving to acquire them. Overall, it was the fifth most important factor restraining 
States (table 2), and 10 States rated it an "extremely important factor." However 
receive information about P~S systems from either 
respondents in 31 States  did 
HCF A headquarters, their HCF A regional office, or both. These respondents, not
surprisingly, rated lack of guidance from HCFA as a less important factor than did 
their counterparts who had not received information from HCF A.30 Regional offices  te 
did not appear to be systematic about providing information. In no region did an 
respondents either receive or not receive information. 
co 
Prate  tehn, an dr clae-prrees g  hae be actie in 
envinm. 
prmog P~S  but  in Medaid 
th lak 
By no means have States been deprived of information about P~S systems. Private 
vendors of POS technology have been more active than any other group in supplying 
it. Thirt-four States had received information from one or more vendors.  , it 
In fact
may have been the vendors who were most responsible for the electronic cJaims 
management provisions of OBRA 90 to begin with. They had developed P~S 
technology in anticipation of the Medicare drug benefit and accompanying P~S system 
development. When the drug benefit was repealed along with the bulk of the 
Catastrophic Coverage Act, the vendors started looking for new markets for their 
technology. Medicaid programs were a natural target. Congress, in fact, reJied on 
data suppJied by two vendors to estimate the cost-benefit of Medicaid P~S systems. 
The problem with relying entirely on private vendors to supply information about P~S 
systems is that their experience in the private sector is, in many ways, very different 
from what they would face in operating Medicaid systems: 
Private vendors' cJaims-processing rates cannot be compared to Medicaid 
cJaims-processing rates. Many private vendors process only drug cJaims 
whereas Medicaid programs process far more complicated claims as well. 
Private vendors were able to cJaim large savings for their clients largely because 
their cJients were previously using only paper cJaims. Medicaid programs, by 
accepting a large volume of electronic cJaims, have already realized much of 
those savings.

Private vendors now process a much smaller claim volume than Medicaid 
programs. For example, PCS, Inc., the oldest and largest drug cJaim processor 
handles 100 milion drug cJaims a year nationwide. In contrast, the annual 
combined volume of drug claims in the New York, California, and Ilinois 
Medicaid programs alone is over 77 milion. One cannot assume that vendors 
could absorb such an increase in volume with ease. 
Private-sector claims may be easier to process than Medicaid claims, even when 
only pharmacy cJaims are considered. Incoming claims of both 
tyes must be
compared to historical data to check for duplication and other problems. 
Private-sector processors generally use 3 to 13 months' worth of data for this 
procedure. State Medicaid programs, on the other hand, use between 8 and 96 
months of history, with an average of 24 months. Another factor making 
Medicaid claims more complex than private sector claims is third-party 
coverage identification and biling (see appendix A).  , . . .

is  stte 
unle poli  rearg sp reem 
pTh  rHgCF A hi sy.  for
P~S 
For a year after the passage of OBRA 90 it was difficult to determine exactly how 
FF. 
HCFA would respond to State requests for enhanced  The HCFA did not issue 
any final rules or guideJines regarding P~S systems until January 1992. In the interim 
HCFA' s draft poJicies and informal comments raised questions about which functions 
P~S systems had to perform in order to qualify for enhanced FF, and whether States 
had to procure POS systems by competitive bid. With regard to the functional 
specifications, HCFA's poJicy remains uncJear. 
Operarional requuemen 
OBRA 90 made specific reference to "electronic cJaims management" (ECM) systems 
and decJared them eligible for enhanced FFP. The enhanced funding, however, was to 
be provided under the same section of Title XIX as other MMIS enhancements. 
Operational requirements for funding under that section are wrtten by HCFA and 
pubJished in the State Medicaid Manual (SMM). Therefore, in specifyng what tyes
of P~S systems would be eJigible for enhanced FFP, HCFA had to reconcile 
Congress s directive regarding ECM systems for drug cJaims with its own rules for P~S 
systems in general. Early attempts led to confusion. They incJuded a memorandum in 
March 1991 and draft additions to the SMM released in April and October 
1991: 
1991. A memo on the subject of Electronic Claims Management (ECM) 
March 
systems dated March 15 , from the Medicaid Bureau Director to all 
, 1991
HCF A Regional Administrators, provided background information on the 
OBRA 90 legislation and included the following passage: 
The functional requirements listed below must be contained in the State s ECM 
system in order for (a Request For Proposals or Advanced Planning Document) 
for the development of an ECM system for drug cJaims to be approved at the 
enhanced matching rate of 90 percent.  must perform all of the 
The system 
on line using real-time processing: eligibility verifications 
following funcrions 

cJaims data capture. . . and claims adjudication. (emphasis added) 
1991. A draft SMM addition stated that P~S systems that performed 
April 
eJigibility verification alone would be eligible for enhanced FFP. Also eligible 
would be P~S systems that performed eligibilty verification and claims 
submission. The draft, however, specified that ECM systems for drug claims 
were subject to an entirely different set of rules. 
October  1991. The next draft SMM addition included rules for ECM systems.
It stated that "OBRA 90 contemplated the use of ECM for adjudicating 
outpatient drug claims. In fact, you may use an ECM system for adjudicating 
any or all claims on-line, and in a real time environment." It restricted  enhanced FFP for ECM systems to those that perform aU three functions-
eJigibiJty verification, cJaims submission  and  cJaims adjudication.
1992. The final version of the SMM addition contained two changes 
January 
from the October 1991 draft with respect to ECM. First, it struck the sentence 
may use an ECM 
stating that States "
system for adjudicating any or aU claims 
on-Jine, and in a real time environment." Second, it added language specifyng 
that "an ECM system is limited to processing covered outpatient drugs. . . . 
FF 
The SMM stil does not specificaUy state whether enhanced  is available for 
P~S systems which handle all  , including drug claims, but which 
tyes of cJaims
do not perform real-time adjudication. Nor does it state whether enhanced 
FFP is available for P~S systems that perform all functions for 
aU tyes of 
cJaims. 
It is difficult to reconcile the requirements.  process drug
For systems that do  not 
cJaims, the rules are cJear. To qualify for enhanced FFP, the systems must perform 
eJigibiJty verification cJaims submission, or eligibility 
, or eligibility verification  and 
verification  and  cJaims submission  and  cJaims adjudication. But OBRA 90 and the 
March memo indicated that drug cJaims processing systems had to perform aU three 
functions. What functions must be performed by 
systems that process drug cJaims and 
other claims is uncJear. 
Another problem for the States relating to P~S system functions involves prospective 
drug utilization review. In addition to providing enhanced FFP for P~S systems 
OBRA 90 provides funding (at an unspecified level) for up to 10 demonstration 
33 The projects would determine the 
projects. cost-effectiveness of adding pro-DUR 
capabiJties to P~S systems. Some States are already convinced that P~S systems are 
not worth having unless pro-DUR is included. These States have chosen to put their
P~S system development plans on hold, because demonstration project money and 
P~S system money are awarded by two separate HCF A offices. The solicitation for 
demonstration project applications wiU not be issued untiJ the spring of 1992. 
Although States are required to have some form of pro-DUR by January 1993, the 
Secretary s report to Congress on the results of the demonstration project is not due 
untiJ January 1994. 
Competitive biding 
The HCF A's requirements for competition were also unclear for several months after 
the passage of OBRA 90. The law aUows enhanced FFP for drug claim ECM systems 
if the State acquires (its system) through (the) applicable competitive procurement 
process." This was reinforced in a memorandum of understanding between staff of the 
Senate Special Committee on Aging and the Medicaid Bureau: "The requirement for
competitive procurement is specifically intended to preclude States from sim 
amending existing contracts in the absence of an open, competitive process, Ely
The 
HCFA, however, has for years aUowed enhanced FFP for MMIS enhancements, even
when they are procured through fiscal agent contract amendments Tather than  competitive bid. A few States (Arkansas and Missouri, for example) have already 
agreed with their fiscal agents on plans for P~S system implementation and have 
secured enhanced funding from their regional offces. 
HCF A' s interpretation of the OBRA 90 provisions and the Senate Aging Committee 
instructions were in flux during the summer of 1991. At a July conference on MMIS 
developments, an official from HCF A headquarters stated that OBRA 90 required 
competitive procurement under most if not 
aU circumstances. In the discussion that 
foUowed, it became cJear that some regional office staff disagreed with his 
interpretation. In a September letter to HCFA, the chairman of the Agng Committee 
reversed the Committee s position on the meaning of the competitive requirement 
provision: 
I beJieve that it would be consistent with the intent of the legislation to permit 
a state to amend its current FI (fiscal intermediary) contract to 
a))ow the FI to 
develop and implement the system (in lieu of holding a separate competition 
for the ECM system) as long (as J state competitive procurement processes for
any amendments or change orders are folJowed. 
FinaUy, on November 7, HCFA released a six-page memo to State Medicaid directors 
specifyng the circumstances under which separate competitive procurement is and is 
not required. Competitive procurement is mandated for new telecommunications 
networks, P~S devices for providers, and separate drug claims processors. Fiscal 
agent contract amendments are permitted, when cost justified, for other goods and 
servces.  RECOMMENDATIONS

Their apparent success in New York, Massachusetts, and the private sector indicates 
that P~S systems could be a valuable contribution to health 
care cJaims processing. 
States seeking to reduce administrative costs, having problems stemming from 
information or communication weaknesses, or needing to improve provider relations 
might we)) find solutions with POS systems. The HCFA, as a partial payer of 
Medicaid program and operating costs, would share in the benefits provided by these 
systems. Therefore, we recommend that HCFA take several steps to support and 
faciJtate State efforts to investigate and procure P~S systems. We also make a 
recommendation for States that do choose to procure P~S systems. 
reg 
sho  ditrut 
Th HCFA  coHect  P~S tehnlo an  it to 
sho informtin  on  meth  tehnlo, 
sSttJttees.  Th HpCFrAg    ilte alJtie  of usg P~S  offer
cost-eectie syste, an facite commatin betw Sta 
forp  re 
plnng to  or alrea usg P~S syste. 
State Medicaid agencies are so focused on day-to-day operations that they have little 
time even to research P~S technology, much less procure it. The HCFA could relieve 
States from having to conduct this research by doing much of it for them. An obvious 
way to start would be to request information from each potential vendor of P~S 
systems or parts thereof. The HCFA should not, however, rely solely on information 
from private vendors because the vendors are natura))y more concerned with their 
own interests than those of the States or of HCF A. 
The information HCF A provides should go beyond the general discussion of costs and 
benefits contained in this report. States wi)) need advice on system architecture 
options, desirable functional requirements such as response time and network 
redundancy, and cost containment strategies for requests for proposals. 
For example 
HCF A could distribute copies of advance planning documents, requests for proposals 
and contracts from States that have already procured P~S systems. 
States wi)) also need advance notice of policy changes, technological breakthroughs 
and lessons learned in other States. To keep States informed, HCF A could emulate 
the Department of Treasury s Financial Management Servce (FMS). The FMS uses 
newsletters and other publications to promote and pubJicize technological progress in 
electronic benefits transfer. The HCF A should also encourage State Medicaid staff to 
use its recently established electronic bulletin board to share their questions and 
experiences with counterparts in other States. 
Disseminating such information would provide a major opportunity for HCF A to exert 
leadership in this important field at relatively little cost. We strongly urge that HCF A 
take advantage of this opportunity.  sho cla th opetina reqem  ened Fed fug
HCFA 
Th  for 
P~S syst. 
The various documents that have emanated from HCFA since October 
199 have 
produced confusion. The HCF A should move quickly to resolve it by explaining 
FF 
requirements and available levels of  for P~S systems that manage drug claims 
and other claim tyes. One possible avenue for communicating this 
poJicy would be
further revisions to the State Medicaid Manual. Another would be releasing a 
memorandum similar to the one released in November 1991 which clarified the 
requirements for competitive procurement.  st 
sho  deelpm  eltrni 
Th  HCFA  prmote th  of  claim foArus ann, 
APthm urasn   bNy Sata tMendaia ag eSn.  ta Ins Th  HCFA, StatCe Moed aid PDrieectsot' i Dr
an Natna 
th  for 
shoul work toeth towar  goals. 
The advent of P~S technology presents a great opportunity for HCF A to encourage
uniformity in Medicaid claims. Without standard formats
, providers and vendors who
operate in multiple States will have higher costs than necessary, and the e costs will be 
passed along to the Medicaid program. Furthermore
, standard formats would yield 
uniform claims records, thus allowing the creation of a national Medicaid claims data 
base. This would greatly facilitate research on utiJization of the Medicaid program as 
a whole. 
The HCF A's first task must be to ensure that standard formats 
exist. For all claims 
other than pharmacy claims, HCFA should work with the American National 
Standards Institute (ANSI). This organization has already worked with HCFA in 
developing standards for Medicare claims and is universally 
recognized as an industry 
leader. Bringing the State Medicaid Directors' Association (SMDA) into the format 
development process would make acceptance of the formats by Medicaid 
agencies
more Jikely. The ANSI 837 health care 
cJaims standard is scheduled for release 
October 1992. Therefore, HCF A must act quickly to ensure that it can be used in a 
Medicaid environment. The HCFA should also work with ANSI in making this 
standard efficient for P~S transactions. 
Creating a standard for pharmacy claims has been an arduous process. The National 
Council for Prescription Drug Programs (NCPDP) seems to have won acceptance for 
its new standard, Version 3.
2. This standard includes a recommended Medicaid drug
claim format. The HCFA should work with SMDA, pharmacy and systems directors
from each State, provider groups, and systems vendors to promote its use by all 
Medicaid agencies. 
The HCF A could choose to promote the use of standard formats in several ways. It
could simply pubJicize them and advocate their use, devise a set of rewards for P~S 
systems that used them, or even deny enhanced funding for 
systems that did not use 
them. One option for HCF A would be to impose a deadline, perhaps six months to a  year in the future, after which State funding requests for POS systems that did not 
adhere to standard formats would not be approved. Because few States are poised to 
procure POS  , such a deadline would achieve widespread if 
systems in the near future
not total uniformity in P~S cJaims submission formats. It would also, however, give 
needed standards and would not 
the cJaims processing industry time to develop the 
prevent States that are now procuring P~S 
systems from moving forward. 
sy 
pres 
Sthtat ea Mre ecodmait ialge ewni  tsht rdedel pe lPt~rSn ic lcaliamim   f01 as th f0sh1o  ene tht 
avaible. 
The existence of standard cJaims formats is meaningless unless they are widely used. 
There win Jikely be ample incentive for States to ensure compatibilty of any new P~S 
cJaims submission systems with standard formats. These systems win probably be 
much cheaper to develop and operate than systems that require unique cJaims 
formats. Even if the cost differential in a particular State proves negligible, however 
we believe that uniform formats across States would offer additional advantages as 
outlined above. 
Requiring adherence to standard formats may delay the procurement of P~S systems 
because standards for many tyes of cJaims are stil under development. Nevertheless 
the costs of a delay would most likely be outweighed in the long run by the benefits of 
standardization. States that are now in the process of procuring P~S systems may not 
wish to wait. We urge these States at the very least to ensure that their 
systems can 
be easily modified to accept future standard formats.   COMMENTS ON THE DRAFT REPORT

From within the Department of Health and Human Servces, we received comments 
on our draft report from the Health Care Financing Administration (HCF A) and the 
Assistant Secretary for Planning and Evaluation (ASPE). We also received comments 
from the other organiztions to which we direct recommendations: the State Medicaid 
Directors' Association (SMDA), the American National Standards Institute (ANSI), 
and the National Council for Prescription Drug Programs (NCPDP). We reproduce 
these comments and provide detailed responses to each in appendix E. 
An organizations expressed support for recommendations relating to the development 
and promotion of standard claim formats. In fact, NCPDP suggested even stronger 
language. We have left these recommendations intact, but have modifed the 
supporting text of the first to reflect recent advances in format development. We look 
forward to widespread use of standard formats by Medicaid agencies. 
The HCF A and ASPE disagreed with our recommendation to produce a guide to P~S 
systems and distribute it to States. The HCF A believed that this woutd constitute a 
major effort to promote POSIt systems and would be premature, given the lack of 
knowledge about P~S systems' utilty in Medicaid environment. Both suggested a 
delay so that the guide could incorporate additional information: HCF A referred to 
the POS/pro-DUR demonstration projects and ASPE referred to the Secretary s task 
We revised the recommendation to better reflect our 
force on electronic biling. 
intent: that HCF A act as a clearinghouse to provide States with the best and most 
current information on p~s technology. We can for regular distribution of 
information. We note that both NCPDP and SMDA have offered to assist HCFA in 
this effort. Because several States are currently contemplating the procurement of 
P~S systems, we do not think it appropriate to delay until the work of the task force 
and the demonstration projects are complete. 
The HCFA disagreed with the recommendations to clarify enhanced Federal financial 
participation (FFP)  systems. The HCFA states that 
guidelines for P~S 
communications issued since our draft report was written address these 
recommendations. On one point, we agree with HCF A: it should now be clear that 
enhanced FFP for P~S systems is available indefinitely. We have deleted our 
recommendation that HCFA publicize this fact. We stil believe, however, that 
HCFA' s operational requirements for POS 
systems are confusing and require 
cJarification. 
In addition to the organizations providing formal comments, several other 
organizations interested in the subject of POS systems for Medicaid provided informal 
comments, including the following: 
The American Pharmaceutical Association (APhA), American Society for 
Automation in Pharmacy, and Pharmaceutical Society of the State of New York  , "

commented that New York's Electronic Medicaid Eligibilty Verification System 
(EMEVS) is unpopular with pharmacists in that State because it is not 
compatible with existing pharmacy computer systems. We understand their 
concern and note that HCFA's State Medicaid Manual now requires such 
compatibilty for aU new P~S systems. 
The APhA recommended that HCF A ''work with States to develop consensus 
regarding appropriate methodology for evaluating savigs" from P~S systems. 
The APhA was particularly interested in savigs resulting from pro-DURo 
note their recommendation in appendix D 
Exlanation of Savigs Estimates. 
The National Association of Chain Drug Stores suggested that the pro-DUR 
provisions of OBRA 90 should not be implemented as scheduled because the 
POS/pro-DUR demonstration projects have been delayed. We did not analyze 
the implications of the delay and cannot comment on this suggestion except to 
note that it would require a legislative change. 
The Massachusetts Department of Public Welfare disputed some of the charges 
made against the Recipient Eligibilty Verification System by recipient groups. 
It was beyond the scope of this report to investigate further, but we have noted 
this dispute in endnote 24. 
A number of private vendors commented that the draft report inaccurately 
portrayed the experience (or lack thereof) that private vendors have in 
Medicaid and the relative complexity of Medicaid 
versus private sector cJaims. 
We made slight changes to the relevant sections in response.  EPILOGUE

Much has happened since our draft report was wrtten in December 1991. We have 
incJuded some of these recent events in the text. For example, we mention the 
National Council for Prescription Drug Programs s new standard drug cJaim format 
intended for use in both private-sector and Medicaid programs. We also refer to the 
Health Care Financing Administration s final version of State Medicaid Manual 
sections dealing with POS systems. 
We are unable to provide complete and up-to-date information on State plans for 
P~S systems. Doing so would require us to repeat our telephone surveys. 
Nevertheless, we are aware of several important develCJpments. 
Work on P~S systems continues in the States mentioned in the draft report. In 
Alabama, a three-county pilot test is planned for April 1992 and fuU implementation is 
planned for the summer. There is no firm implementation date in Arkansas, but the 
summer of 1992 is a possibility. In Missouri, P~S eligibilty verification began in 
March 1992. P~S pharmacy cJaim adjudication was scheduled to begin in April, and 
pro-DUR in July. 
California, which in June 1991 had definite plans for P~S eligibility verification only, is 
now going much further. In February 1992 it released a request for bids on a new 
MMIS. The request incJuded P~S pharmacy cJaim submission and adjudication 
among the required MMIS functions. Maryland and Nebraska are expected to release 
similar requests in the coming months. 
It appears that the next generation of MMISs wiU support P~S technology. At a 
March 1992 demonstration of MMIS capabilities in Cheyenne, Wyoming, aU major 
MMIS vendors displayed P~S systems that were either operational or under 
development.   APPENDIX A

TI 
PO SYSTS  MEICAI PROGRA 
CASE FOR  IN 
Point-of-servce (POS) systems consist of a central computer or network operated by a 
cJaims processor; telephone lines connecting the processor to providers; and 
mainframe terminals, personal computers, or P~S terminals in providers' offices. 
The systems can perform several cJaims management functions and provide a wide 
range of benefits. 
Computers aHow point-of-servce communication between providers and Medicaid 
agencies in several States already. However, as of October 1991, only New York and 
Massachusetts could be said to have POS systems. What distinguishes EMEVS (New 
York) and REVS (Massachusetts) from systems in other States is the technology 
employed and the extent to which the technology is reJied upon for proper program 
administration. Only in New York and Massachusetts did a significant number of 
providers both send and receive messages from the State in electronic rather than 
audible form. In other States, most providers are limited to automated voice response 
(A VR) systems or human operators, and only a few can obtain eligibility information 
using personal computers or mainframe terminals. In some States, private companies 
have instaHed P~S terminals in many providers' offices. The terminals are used to 
obtain on-Jine eJigibilty information, as they are in New York and Massachusetts. 
However, unJike in New York and Massachusetts, providers using private companies 
P~S terminals must pay a fee each time they obtain information. 

This appendix summarizes what P~S systems can do, and why it would be 
advantageous for Medicaid programs to acquire them. The data presented were 
gathered from our survey of Medicaid agencies. The discussion is based on the survey, 
our discussions with experts in the public and private sectors, and our review of 
Jiterature and other documents. 
syte  ree  speg  reciie 
P~S  can  State  on inligile  adretcriteiner  wi th-part
coverge, an inpprprte seres.  can also rede  costs.
Th 
Ineligible recipients 
Distinguishing between eligible and ineligible recipients is a necessary but difficult 
chore for all Medicaid programs. Medicaid coverage, in contrast to Medicare or 
private health insurance coverage, can be highly transitory. Certain categories of 
P~S terminals, or wboxes w are small, desktop machines. They have keypads for providers to enter 
information, a small screen to convey messages to providcrs, and (usually) a slot through which plastic 
ID cards can be wswipe.w They are programmed to dial speific telephone numbers and 
communicate with the computers at the othcr end of thc lines. 
A - Medicaid recipients can (and do) lose their eJigibiJty at any time if they experience 
changes in their financial, marital, or other demographic status. Providers must be 
made aware of changes in eJigibiJty status, or they wiH continue to treat ineligible 
patients and expect reimbursement. Medicaid programs cannot justifiably withhold 
payment for ineligible recipients if they do not make a reasonable effort to inform 
providers of the change. Therefore, the sooner Medicaid programs are able to inform 
providers of eJigibiJty termination, the sooner they wiH be reJieved from making 
payments for ineligible recipients. 
The standard method for identifyng eligible recipients in aH health insurance 
programs is to issue an identity (ID) card. Medicaid programs, needing to 
accommodate frequent eJigibilty changes, have traditionaHy printed expiration dates 
on their ID cards and mailed new cards periodicaHy to recipients who remain covered. 
Most States, wishing to minimize both the cost of frequent maiJngs and the cost of 
extended eligibiJty, have settled on monthly card issuance. Massachusetts and New 
York, however, issue durable plastic cards. They use P~S systems to enforce eJigibility 
termination on a day-specific basis. Providers in those States no longer determine 
whether a patient is eligible for Medicaid on the basis of the expiration date printed 
on the patient's ID card--no date is printed. Instead , providers use the P~S systems 
to obtain the States' most current eligibiJty information. The States , meanwhile 
update their eJigibility data bases daiJy, aHowing them to change a recipient s status 
and communicate that change to providers at any time. 
Twenty-three Medicaid agencies gave us information sufficient to estimate the impact 
of day-specific eligibiJty in their States. We caJculated that if those States 
implemented day-specific eligibility, they would reduce annual program expenditures 
by an average of $7.7 milion (see appendix D). 
Third-part coverage 
Medicaid is not supposed to pay for health care servces until third-party coverage is 
exhausted. But providers do not always know that third-part liability (TPL) exists 
and they bil Medicaid programs when they should bil third-part 
insurers. This 
forces Medicaid programs to either pay providers and then try to coHect from third 
parties or return claims unpaid. The former is difficult and ineffective: and the latter 
angers providers. 
P~S systems would give States the  providers of potential TPL and 
abilty to notify 
require providers to submit claims to third parties before Medicaid. It is difficult to 
S. General Accunting Offce,  Medicaid: HCFA Nees Authority to Enforce Third-Party 
Requirements on States (HRD-91-60), April 1991. 
A - 2  ...
estimate how much could be saved if POS systems provided TPL information, but it 
may run into the hundreds of miJions of dolJars. 
Inappropriate services 
P~S systems are widely used in the private sector to conduct prospective drug 
utiliztion review (pro-DUR). Pro-DUR is intended to ensure that patients receive 
the most appropriate medications for their medical conditions by identifyng 
inappropriate prescriptions before drugs are dispensed.  In theory, pro-DUR saves 
program dolJars in two ways: (1) it reduces expenditures on unnecessary or fraudulent 
prescriptions, and (2) it reduces expenditures on other forms of medical care that are 
associated with poor drug therapy. Pharmacists are ab1e to perform Jimited pro-DUR 
on their own. P~S systems, however, assist them greatly by providing complete 
patient histories that are kept on fie by POS system operators. Unfortunately, it is 
impossible to estimate savings from P~S pro-DUR before further research is 
conducted. ... 
Prospective utilzation review for other tyes of mediCal care would also be possible 
with P~S systems. However, distinguishing between appropriate and inappropriate 
servces outside of pharmacy is more difficult. It may be some time before the 
standards necessary for P~S utilzation review are developed. 
Administrative savings

P~S systems that incorporate eligibility verification functions allow States to use plastic 
ID cards. These cards are much cheaper, primarily because they are permanent. 
S. General Accunting Offce  Medicaid 
, p. 6. 
For information on the problem of mismedication and on drug utilization review in general, se 
S. Senate Speial Committee on Aging,  The Cost-Effectiveness of Orug Utilzation Review: 
Annotated Bibliol!raphy, October 199. Before its repel, the Medicare Catastrophic Coverage Act of 
1988 laid the groundwork for a nationwide POS system to conduct pro-OUR for the Medicare 
population. For a discussion of this legislation and HCFA's response to it , se U.S. Department of
Health and Human Servce, Offce of Inspetor General,  Medicare Orul! Utilzation Review (OAl-Ol
88-0080), April 1989. Se also U.S. General Accunting Offce  Prescription Orul!s: HCFA' 
Proposed Orul! Utilzation Review System Il!nores Quality of Care Issues (PEMO-89-26BR), July 1989. 
PCS, Inc. has develope cost savings estimates for its Quantum Alert pro-OUR program. PCS 
estimates that every dollar spent on pro-DUR saves approximately $15. Their estimates do not 
include savings on medical care yielded by preventing adverse drug reactions; therefore, they are 
conservative. Experts have estimated that 3 to 8 percent of hospitalizations are 
caused by adverse drug 
reactions at a cost of $5 bilion to $13 bilion nationwide. Mismedication also increases other health

care expenditures, since it can cause or sustain health care problems. Studies have estimated that up to
7.3 percent of prescriptions have potentially serious errors (see U.S. Senate 
Speial C.ommillce on 
Aging, pp. 6, 12). 
A - 3  Most states using paper cards issue them 12 times a year.
. Plastic cards could 
conceivably last several years and could be saved by recipients who leave the program 
in case they are later reinstated. 
Fort-four States now issue paper ID cards. In 27 States that provided us with cost 
information, the average yearly cost for producing and mailng paper cards is $1.53 per 
eligible per year. In the 4 States that use plastic cards and provided us with cost 
information, the average cost is only $.50 per eligible per year. By switching to plastic
the States with paper cards could save from $6 00 to $2.
2 miJion a year on card 
00 
production and mailng, with an average of $570  (appendix D). 
P~S systems that perform eJigibilty verification, cJaims submission, and/or claims 
adjudication would reduce errant and invaJid claims. Providers would receive 
feedback from the systems and then either correct or cancel 
cJaims that are rejected. 
As a result, fewer Medicaid staff would be needed to handle errant claims and 
respond to provider inquiries. 
The tyes of errors P~S systems can detect depend on the 
functions the systems
perform. EJigibility verification systems can eJiminate claims submitted for ineJigible
recipients. Claims submission systems can detect such errors as wrong dates, invalid 
codes, and tyographical errors and can reduce data entry errors by State staff. Real-
time claims adjudication systems can detect higher-level problems such as cJaim 
dupJication or servce threshold restrictions. 
P~S systems that performed claims submission could reduce the volume of paper 
cJaims, which would reduce processing costs. States that currently receive a high 
proportion of claims via modem, disk, or tape have lower processing costs per 
cJaim. U Paper claims are more expensive because the State must pay both for data 
entry and for correcting the errors that are created in the process. 
prvi 
P~S syste can imve  relatins. 
Many observers have noted the difficulties Medicaid recipients have in accessing 
servces, particularly from primary care physicians. Part of the problem may be that 
providers are frustrated by the paperwork necessary to receive Medicaid 
reimbursement. P~S systems could relieve some of the administrative burdens 
associated with treating Medicaid recipients. Providers themselves favor P~S systems 
according to informal responses we received from provider associations. 
One exception is Pennsylvania, which issues paper cards every two weeks. 
The correlation between cost per claim and percentage of total claims submitted electronically 
was - 56 (for 31 States reporting suffcient data). 
A - 4  Because POS systems can, through a variety of functions, reduce cJaims denials 
providers can be more assured of payment. P~S eligibility verification 
guarantees 
providers that cJaims wil not be denied because of recipient ineJigibiJty and notifies 
part 
providers of third- coverage. P~S cJaims submission a))ows providers to check 
P~S 
and edit cJaims for simple errors.  cJaims adjudication a))ows providers to find out 
whether final payment wi)) be made and to adjust their accounts receivable 
accordingly. In addition, P~S utiJzation review messages inform providers of 
recipient-specific servce restrictions and potential therapeutic or administrative 
problems. 
Medicaid providers have often complained about payment delays. P~S systems could 
reduce the time between servce deJivery and payment by eJiminating delays due to 
shipping, handJing, and data entry. Currently, electronic cJaims are paid on average a 
week faster than paper cJaims.' Given that most electronic cJaims are now submitted 
on tape or diskette and that on-Jine cJaims would get to the State even quicker, the 
difference between on-Jine and paper cJaims should be even more pronounced. P~S 
cJaims adjudication would speed things up even further by replacing daily or weekly 
cJaims processing cycJes with instant, on-Jine processing. 
It is important to note that cJaims adjudication and cJaims payment are two separate 
processes. Even if States used P~S systems to adjudicate claims the moment servces 
were delivered, they could stil delay payment for those servces by whatever length of 
time they desired. This flexibiJty could lead to a compromise between providers, who 
seek the quickest possible payments, and State treasurers, who may seek the longest 
possible delays.

pr 
P~S syste can accelte th flw of informtin frm JHvirs to Slate, alwig
bett  adtrtin an planng. 
P~S cJaims submission systems would make information available to States much 
more quickly than traditional cJaims submission systems. New York now has a 
problem verifyng that patients actually received servces that the State was biled for. 
It can take so long for the cJaims to be processed that recipients may forget whether 
the servces were delivered or not. If New York' s P~S eligibility verification system 
performed claims submission as well, it could produce utilization reports at the end of 
the day. This would a))ow staff to verify the servces on the fo))owing day. 
respondent from South Carolina stated that on-line claims submission "could reduce 
the information float. It now takes a long time, about six months, to recognize the 
In 47 States responding to our survey. the mean payment time for electronic claims is 10 days. 
compared to 17 days for paper claims. The difference in payment times ranged from 0 to 23 days. 
. 5 to 15 days. We averaged the low and high estimate to asign each 
States often reported a range, 

State a single payment time for each ty of claim. Nevada was excluded from this analysis beus it 
does not accpt electronic claims. Maine was excluded beuse it could not report separate average 
procsing times for paper versus electronic claims. lIinois was excluded beuse at the time of our 
survey. owing to fiscal problems, it required 120 days to procs all typs of cIaims--an obvious outlier. 
A - 5
 need for a policy change and implement it. Three months of that delay could be 
eliminated if the cJaims were submitted and adjudicated faster. 
pr 
th eltr
P~S syste co ad Medaid to th lit of  avaible 
ben trer

Paper-based benefit programs may soon be extinct. The same technology used for 
P~S medical cJaims management can be used to replace paper checks and coupons 
with electronic transfers.. States issuing plastic cards for recipients to use in banks 
and supermarkets could use those cards for Medicaid as well. 
Se U.S. Department of the Treasury. Financial Managcmcnt  From Papcr to Plastic: The 
Service. 
Electronic Benefit Transfer Revolution. 199. 
A - 6  APPENDIX 
MEOOOLOY 
The data presented in this report were gathered through the foJIowing methods (dates 
for each method are given in parentheses; aJI occurred in 1991): 
Telephone intervews with Medicaid cJaims management staff in 50 States. 
Intervewees were identified during our conversations with HCF A regional 
office staff (see below) or by referral from other State Medicaid staff. We 
intervewed staff from the District of Columbia (referred to in the report as a 
State) and aJI States except West Virginia. (May-June) 
A mail survey to which 45 States responded. We sent a letter and wrtten 
questionnaire to the Medicaid Director or the MMIS Director in each State. 
We received at least partial responses from every State except Alaska, Arzona 
Arkansas, Delaware, and Ohio. The response we received from Maine came 
too late to be included in our analysis. (May-July) 
Telephone intervews with HCF A systems staff in each of the 10 regional 
offices. The names of the appropriate staff were given to us by HCFA' 
Medicaid Bureau. (April)

Informal conversations with staff from HCF A's Medicaid Bureau. (February-

September) 
Telephone intervews with representatives from 14 private companies involved 
in Medicaid and private-sector drug claims processing. The companies induded 
Medicaid fiscal agents (Consultec, EDS Federal, The Computer Company, 
Unisys), drug processors (Argus, PAID Prescriptions, PCS, Perform Cost 
Management Servces), telecommunications speciaJists known as "switches 
(Envoy, General Computer Corporation, National Data Corporation), and 
pharmacy computer systems manufacturers (3PM, Condor, QS!). (July) 
Telephone intervews with seven trade or professional organizations 
representing pharmacists and other providers. The organizations included the 
American Hospital Association, American Medical Association, American 
Pharmaceutical Association, American Society for Automation in Pharmacy, 
American Society of Consultant Pharmacists, National Association of Chain 
Drug Stores, and National Association of Retail Druggists. (March) 
A review of advance planning documents and other materials 
prepared by 
eight States (Alabama, Arkansas, Ilinois, Massachusetts, Missouri, New Jersey, 
New York, and Oregon) concerning point-of-servce systems. (May-September) 
A review of data coJIected in surveys of State Medicaid 
programs conducted by 
HCFA and the American Public Welfare Association (APWA). The HCFA 
survey addressed drug utilization review, and the APW A survey addressed 
recent MMIS improvements. Both surveys were conducted in the spring and 
summer of 1991. (July) 
A review of professional and government literature. (February-September)  Between wrting our draft report in December 1991 and preparing this final version 
we conducted additional discussions with States, industry organizations, and private 
vendors. Their input is reflected in the final report.  APPENDIX 
EXG 
AN PROPOED MEICAI PO SYSTS 
State  System  Equipment and Estimated  Estimated  Start  Status 
Functions  Servce Neeed  Cost  Savings  Date  (as of  9191) 
Arkans  Eligibility  Platic card  $8 milion  $10 milion  APD 
verification  production and  over 4 years  gros  approved; 
(day-speific)  distribution, pas  to develop  savings over  bids recived 
and claims  terminals, initial and  and operate  4 years  for card 
submision for  ongoing  (includes  production 
all provder  programming of  work by new  pas terminal 
ty; 
claims  terminals  contractor  supply, 
adjudication for  fil agent  maintenance 
pharmacists  and State)  programming 
Ilinois  Eligibilty  Telecmmunications  $20 00 to  $7 milion  119  Vendor 
verification  swtch" to link  develop;  gros  (pilot  selected; 
(month provders and state $1.65 millon  savings over  study)  contract 
spefic), claims  operated MMIS  over 5 years  fie years  award 
submission and  to operate 
pending 
adjudication for  HCFA 
pharmacists;  approvl 
pro-DUR 
anticipated 
Mass Eligibility  Plastic card  $19 milion  $30.  1189  System 
chusetts  verification  production  over 3.5  milion gros  operational; 
(day-specific)  telecommunications  years to  savings over  expnsion 
for all provder  network, pas  develop and  5 years  contemplated 
tys 
terminals  operate 
Missuri  Eligibility  Programming of  $507 00 to  $2.  819  APD 
verification  state-operated  develop;  milion gros  approved; 
(day-specific),  MMIS, maintenance  53,00 per  savings  projcct work 
for all provder  obf apr o-DUR data year to  annually  to start 10191 
tys; claims  (provders will  operate (not  from day-
submision  pay for equipment  including  specific 
adjudication  and line charges)  conversion to  eligibility 
and pro-DUR  day-specific  alone 
for pharmacists  eligibility) 
New  Eligibility  System design  S38 milion  S18 million  1118  System 
York  verification  plastic card  over first 7  gros  operational; 
(day-specific)  production  yers to  savings  contractor 
and utiliztion  telecmmunications  develop and  annually;  secured 
revew and  network, pas  operate; S30  S200 million  through 
control for all  terminals, evolution  milion over  annual gros  199; 
provder tys;  resu rces  next 6 years  savings  additional 
pot and clear  to operate  poiblc functions 
for pharmacy  from servce  contemplated 
and laboratory  retriction 
orders  enforcement 
SOURCE: Adance Planning Douments and additional information supplied to OIG by each State in Seplemt.r 1991. 
C -
  APPENDIX D

ESTE 
EXLAATION OF SAVIGS 
Da-sp eliJ

Our model of savigs from day-specific eJigibiJity (DSE) is nearly identical to that used 
by Massachusetts in its first-year evaluation of REVS. Although this model is 
convenient because it reJies on readily available program statistics and is 
logicaJIy 
sound, it does have some limitations. These Jimitations are described at the end 
this section. 
For each State, the total annual program savings resulting from DSE equals the total 
number of cases closed because of DSE times the average savings per dosing. The 
average savings per cJosing equals the average number of days between the cJosing 
and the end of the month in which the cJosing occurs times the average expenditure 
per eJigible per day. In any given year, the average expenditure per eJigible per day 
equals that year s total Medicaid spending that is subject to DSE divided by the total 
number of eJigibiJty days that year for the entire Medicaid recipient population. The 
number of eJigibiJity days for the population equals the number of fuJI-year eJigibJes 
times 365, plus the total number of months of eJigibility for partial-year eligibles times 
30.42 (365 + 12 = 30.42). This set of equations yields the formula 
cdx 
s =

365f+30.42m 
where S = Total annual savings from DSE 
= Total number of dosings from DSE 
= Average days saved per dosing 
= Total expenditures subject to DSE 
= Number of fulJ-year eligibles

= Number of months of 
eJigibilty for partial-year eligibles.

for each State for Federal FY 
We obtained the values  off  and  199 from HCF A' 
Division of Medicaid Statistics. The Division also provided each State 
s total 
expenditures by  (see below). We 
tye of servce, which we used to calculate 
from our mail survey of States. They provided, for either the 
obtained the value of 
Federal or the State fiscal year most recently concJuded, the "number of persons 
eJigible for Medicaid benefits at some point during this year who 
became ineJigible 
either permanently or temporarily, later this year. 
We assigned 
 a fixed value of 15
days, assuming a random distribution of case closings throughout each month. 
we subtracted from each State s total expenditures its expenditures on 
To calculate 

the foJIowing servces: inpatient hospital (general and mental health), intermediate 
care facility (mentalJy retarded and aJI others), skilJed nursing facility, and HMO 
D -
 ~~~~~~~~~~~~~~~~~
premiums. Day-specific eJigibilty is not likely to affect expnditures on these servces 
either because they are paid for in advance of case  (e.  HMO premiums) or 
cJosing 
because patients needing these servces are not Jikely to lose  (e. 
Medicaid eJigibilty 
inpatient hospital). 
Twenty-three States were able to supply values for  c:  AI CA, cr, FL GA, ID, KY 
but was not incJuded in this caJculation because it already 
also provided a value of 

uses DSE.) We caJculated values of S that fanged from under $100 00 (WY) to over 
$30 miJion (CA, PA, and TX). The sum of aU  equaled $177  677, yielding an
marithimJeitoic nme.a n of $7 716 029. The median State was Mississippi, with S = $4.
There are two primary limitations to the model developed by Massachusetts and used 
here. The first is that it assumes no effect of eJigibiJity termination on medical servce 
utilization patterns. It is possible that recipients who were aware of impending case 
cJosings would "load up" on servces such as physician visits and prescription refiJs 
before their eJigibiJty expired. Massachusetts might 
be able to obtain better estimates 
of the effect of DSE if it were able to track the utilzation patterns of recipients before 
and after they left the program. The second Jimitation is that the model does not 
account for differences in servce utilzation patterns between different categories of 
recipients. Elderly and disabled recipients are Jikely to have the highest medical biJs 
but they are least Jikely to lose Medicaid eligibiJity. Therefore, though we believe that 
this model can produce reasonable estimates of potential program savings from DSE 
we would not recommend that States rely entirely on it when comparing the costs and 
Association has 
benefits of P~S systems. The American Pharmaceutical 
recommended that "HCF A should work with States to develop consensus regarding 
appropriate methodology for evaluating savings." Certainly, consensus in this area 
would be helpful. 
car 
Plati ID 
Our maiJ survey asked States to report their annual expenditures for producing and 
mailing eligibility cards. To compute potential savings from conversion to plastic ID 
cards, we first divided the cost for producing and mailing cards in States already using 
plastic cards (DC, MD, MA NY) by the total number of unduplicated eligibles in 
those States. (The number of unduplicated eJigibles in each State for Federal FY 
1990 was provided by HCFA' s Division of Medicaid Statistics. ) We averaged the 
results from the four States and obtained a mean cost per eligible of $0.4978. We 
then multipJied, for each State using paper ID cards, the total number of eligibles by 
$0.4978 to estimate each State s cost if it were to use plastic cards. We subtracted this 
cost from the current cost to obtain a savings estimate for each State. For example 
Alabama spent $60 00 for paper cards in one year for 431 240 eligibles. At $.4978 
per eligible, it would have spent only $215 620. Savings for Alabama, therefore, were 
estimated to be $384 380. 
D - 2  These savings estimates represent ongoing, long-term savings on card production and 
mailng only. We did not consider the substantial start-up costs involved in procuring 
equipment to manufacture plastic cards and providing them to aU current recipients. 
Nor do our estimates  system required by plastic cards. 
incJude the costs of the  POS 
Also, our estimate assumes that the rate of card loss is constant across aU States 
regardless of the tye of card used. 
D - 3
  APPENDIX 

COMM  TI DRA RERT AN 
ETATT.F.O  ON 
TI 
OIG REPONSE TO  COMMNT 
In this appendix, we present in fulJ the comments on the draft report offered by the 
Health Care Financing Administration (HCF A), the Assistant Secretary for Planning 
and Evaluation (ASPE), the State Medicaid Directors' Association (SMDA), the 
American National Standards Institute (ANSI), and the National Council for 
Prescription Drug Programs. We also present our response to each set of comments. 
E -
 . "\lVIC,,,  Health Care 
sEi\6iiVED 
DEPARTMENT OF HEALTH & HUMAN 
Financing Administration 
Memora
"."4Ia 
1992 
Date 
Gail R. WiJensky, Ph.
D. 
From  Administrator 
OIG Draft Report - "Point-of-Servce Claims Management 
Systems for Medicaid," 
Subject 
(OEI-Ol-91-00820) 
Inspector General 
Offce of the Secretary 
We have reviewed the 
subject draft report which discusses the potential of point-
of-servce (POS) claims management systems for State Medicaid programs. 
general, we found this report to be quite useful, in that it has added to our 
understanding of POS claims management systems in the Medicaid envionment. 
The Offce of Inspector General (OIG) found that, although pas systems have 
great potential for improving the administration of Medicaid programs across the 
country, several barrers exist that impede broader adoption of these systems. The 
findings suggest that P~S is a concept whose time is not yet here
, at least for 
Medicaid. 
To address their findings, OIG recommends that HCFA should: (1) prepare a 
guide to P~S technology and distribute it to States; (2) make each State aware of 
possible exceptions to deadlines for Federal funding set by the Omnbus Budget 
Reconciliation Act of 1990 (OBRA 90); (3) clarify the operational requirements for 
enhanced Federal funding of pas systems; and (4) promote the development of 
standard electronic claims formats and their use by State Medicaid agencies. OIG 
pas 
also recommends that State agencies develop  claims processing systems that are 
compatible with available standard electronic 
claims formats. 
We agree with aU these recommendations in 
priciple and have already begun to 
implement several of them.  commit 
However, we believe it would be premature to 
ourselves to preparig a guide to pas technology for Medicaid programs. OIG' 
fidings are not sufciently conclusive to justif a major HCFA effort to promote P~S
at thi time. Our specific comments on the report s recommendations are attached 
for your consideration. 
Thank you for the opportunity to review and comment on this draft report. 
Please advise us whether you are in agreement with our position 00' the r port 
recommendations at your earliest convenience. 
Attachment 
E - 2  Comments of the Health Care Financing Administration

on the OIG Draft Report: "Point-of.Servce Claims Management Systems

for Medicaid," (OEI-Ol-91-00820)

Recommendation 
That HCF A should prepare a guide to Point-Of-Servce (POS) technology and distribute it to 
States. The guide should explain the costs and benefits of P~S technology, alternative 
methods of using P~S systems, and strategies for procuring cost-effective systems. 
HCFA Response 
We do not agree with this recommendation at this time. The report states, and we agree 
that our current knowledge of the utility of P~S in Medicaid is limited. 
Presently, the 
benefits of P~S systems for Medicaid are only specuJative. The findings of this report are not 
conclusive enough to justif, at this time, a major effort to promote POS.  Also  as the report 
itself indicates, States presently have few financial and staff 
resources to devote to these 
efforts. 
We suggest that development of a P~S guide be deferred until the current Electronic Claims 
Management (ECM) outpatient drug claim demonstrations have been completed and assessed. 
These studies are congressionally mandated under Section 4401(c)(1) of OBRA 90, and 
require the Secretary to report to Congress on the completed demonstrations by January 
1994. The study is expected to provide useful infonnation which will define the pros and cons 
of P~S  In the meantime, we wi keep P~S systems on the agendas of 
systems for  Medicaid. 
any HCF A-sponsored, Medicaid-oriented systems conferences and work5hops. 
Recommendation 2

That HCFA should make each State aware, through the State Medicaid Manual or other 
appropriate vehicles, that enhanced funding will be available under pre-existing authority 
beyond the deadline set by OBRA 90. 
Recommendation 3

That HCF A should clarify the operational requirements for enhanced Federal funding of POS 
systems. 
HCFA Response (to Recommendations 2 & 3) 
OIG has expressed concern that HCFA funding policy regarding POS and EC\1 systems is 
confsing. These concerns, however, are based upon a review of draft materials. HCF A has 
clarfied and resolved these problems. Since our actions were taken on our own irutiative and 
not based on the OIG report, we technically disagree with both these recommendations. 
E - 3
 " Page 2

Our fial policy is contaied in two documents. One is the Medicad Management 
Th 
Inormation System (MMIS) section of the State Medicad Manual.  issuance sets funding
policy for ECM without specifc reference to the deadlies set by OBRA 90. 
In addition, we also issued an all State Medicaid Directors letter on November 7, 1991. Ths
letter claried issues raised by the OBRA 90 provisions related to procurement of P~S ECM 
systems, including competition. 
Recommendation 4

That HCFA should promote the development of standard electronic clai formats and their 
use by State Medicaid agencies. HCFA, the State Medicaid Directors' Association 
, the
American National Standards Institute, and the National Council for Prescription Drug
Programs should work together toward these 
goals. 
Recommendation 5

That State Medicaid Agencies that develop p~s 
claims processing systems should ensure that 
they are compatible with standard electronic claims formats as the formats become avaiable. 
HCF A Response (Recommenqations 4 & 

We agree with these recommendations. We have already taken several steps in the diection 
suggested. As this report states, some of the most controversial formattig issues seem to be 
near resolution. We wish to note HCFA is fully commtted to the American National 
Standards Institute (ANSI) standard setting process. In fact, we publicly 
expressed our
support for ANSI at the Secretary s Administrative Cost Forum in November 
1991. 
HCFA will paricipate in workgroups dealing with P~S, and wi 
endeavor to see Medicaid 
agency interests are also represented. We point out that a State Medicaid Director already is
a member of the Steerig Commttee for 
the Workgroup on Electronic Data Interchange. 
Ths Commttee has been charged by the 
Secretary with promoting the use of electronic

claims submission in the health care industry.

Further, P~S formatting issues wi be put on the agenda of our Systems Techncal Advisory 
Group. When States submit requests for funding P~S systems, formatting issues wi be 
addressed as Advance Planning Documents (APDs) are 
reviewed. APDs are the basis of 
Medicad funding decisions. 
E - 4
 OIG REPONSE TO HCFA COMMNT

We agree that it is probably premature for HCFA to conduct a "major effort to 
promote POS." The primary intent of our recommendation to HCFA to produce and 
distribute a guide to States was for HCF A to take the lead in collecting and 
disseminating information. We never meant to imply that HCFA should 
unconditionaJIy promote P~S systems at this time. The HCFA correctly notes that 
more information wiJI be avaiJable when the pro-DUR P~S demonstration projects 
have been conducted and evaluated. We have therefore modified our 
recommendation to better reflect HCFA' s role as an information cJearinghouse. We 
beJieve it is now consistent with that outJined by the Assistant Secretary for Planning 
and Evaluation in his comments (see below). 
We stress, however, that HCFA should take immediate and continuing steps to 
distribute information on P~S systems. Keeping P~S on the agenda of conferences 
and workshops is not sufficient because, in an era of diminishing Federal and State 
travel funds, there is no guarantee that such meetings wiJI be held or widely attended. 
In the text supporting our recommendation we suggest less expensive methods of 
sharing knowledge. 
We agree that HCFA's policies are clear regarding ongoing availabilty of enhanced 
Federal Financial Participation (FFP) and assume that State officials are aware of the 
policies. We have deleted the draft recommendation on that subject. We disagree 
that the State Medicaid Manual explains the operational requirements with sufficient 
clarity. In particular, we wonder what rules would apply to P~S systems that 
performed all functions (including adjudication) for pharmacy cJaims but more limited 
functions for other claims. We urge HCF A to make these rules explicit. 
The HCFA comments that "when States submit requests for funding P~S systems 
formatting issues will be addressed. . .." Given the unanimous support expressed by 
readers of our draft report for standardizing claim formats, we hope that HCFA will 
devise review criteria that provide strong incentives for adhering to these standards. 
E - 5
 DEPARTMENT OF HEALTH &. HUM	 CELVEL_- - . Offce of the S  etarv 
C--02g(.J 
15bjnatorL D.
TO:	 Richard P. Kusserow 
Inspector General 
Assistant Secretary for 
FROM:	
Planning and Evaluation

SUBJECT:	 OIG Draft Report: "Point-of-Service Claims Management 
systems for Medicaid,  OEI-Ol-91-00820 
Thank you for providing me with an opportunity to review your

draft report on P~S claims management systems for Medicaid

providers. I found the report informative with regard to both

the potential benefits of P~S claims management systems for

Medicaid and the problems perceived by states considering such

systems. Clearly, the financial 
and staff resources states would 
have to commit represent the principal impediment to their 
adopting the technology. In addition, states have raised 
significant concerns that some of xhe advantages P~S systems 
typically offer may not materialize in the Medicaid context for 
both programmatic and practical reasons. 
Recommendations 
In light of the very limited Medicaid experience with P~S systems 
and their still speculative value to states , I believe that the 
reco  mendation that HCFA prepare a guide to P~S technology of the 
premature. 
scope you describe and distribute it to the states is 
While movement toward P~S systems is consistent with Secretary
Sullivan' 
s initiative to reduce administrative costs, in part by 
promoting increased use of electronic systems, development of a 
HCFA guide should be deferred, perhaps until the contributions of 
the task force on this subj ect , whose work is still underway, can
be incorporated. In  should, to 
the meantime, I believe that HCFA 
the extent possible , facilitate the exchange of information among 
states with respect to their experience in adopting P~S systems. 
Regarding your recommendation that HCFA clarify the operational

requirements for enhanced FFP, I believe that HCFA' s final State

Medicaid Manual instructions , issued since your draft report was

wri tten, do just that. The instructions also treat efforts

related to P~S system implementation as MMIS improvements, for 
which enhanced FFP is available on an on-going basis under the

law: the effect of construing these activities as MMIS improve

ments is to render the OBRA 90 two-year limit on enhanced FFP

(which applies only to P~S for drug claims processing)

immaterial. 
Relatedly, under the final instructions , a broader 
set of P~S systems will meet the requirements for enhanced FFP. 
E - 6
 Page 2 - Richard P. Kusserow

Finally, I concur with the recommendation that HCFA promote the 
development of standard electronic claims formats and their use
by state Medicaid agencies. 
I also concur with the reco 
mendation that state Medicaid agencies developing P~S claims 
processing systems should ensure that they are compatible with 
standard electronic claims formats, as the formats become
available. 
L- 1

Martin 
H. Gerry 
E - 7
 COMM

OIG REPONSE TO ASPE 
We agree that HCFA's preparation of a guide to P~S 
systems is not appropriate at 
this time and that "HCFA should, to the extent possible, faciltate the exchange of 
information among states. . .." In response, we have modified our recommendation 
and caJI for HCF A to coJIect information on P~S systems and regularly distribute it to 
States. 
E - 8
 STATE MEUJc.AJO DIRECTORS' ASSOCIATION

March 24, 1992 
Mr. Richard P. Kusserow, Inspector General 
Department of Health & Human Services 
Washington, D.C. 20201

Dear Inspector General Kusserow: 
I have reviewed your draft report, "Point of Service Claims Management Systems for Medicaid. 
I believe your report accurately" reflects both the benefits ,and drawbacks of Point of Service 
(POS) technology, from the state perspeve. Your roport also reflectS the confusion surrounding
the issIJc of federal payments for P~S system devclopment and operation. 
J do believe, however 
that the repurt 
 huuld place more emphasis on OBRA 90 provisions, which has provcn to be a
source of much confusion regarding when enhanced FFP is available. 
In general, I believe state Medicaid agencies wil support the recommendation!; of the draft
report. State agendes
, despite cunent fii;cal and other resource limitations, remain very interested
in improving the 
administrative efficiencies of their programs in the context of improving
provider paicipation and client accss. The State Medicaid Directors' Association is wiling to
work with the Health Cae Financing Administration to  cot 
disseminate information on  effective
technologies and to resolve outstanding issues of state and federal concern. 
Sincerely, 
Ray Hanley, Chairman 
State Medicaid Director ' Association and 
Director, Arkan 
Office of Medical Services 
An 4Ifiliare of rbi'  Americ-.U Public Welf. As  tHjon

810 First Street, N,  , Suite SOU,  hington , D.c. 20002.4205 (202) hR2-0100

E - 9  OIG REPONSE TO SMDA COMMNT

We appreciate the SMDA's support for our findings and hope that the States do 
indeed support our recommendations. We feel that our report adequately addresses 
the confusion caused by OBRA 90 (p. 8), especially in Jight of HCF A's more recent 
actions and their comments on our report. 
E - 10
 X12N Insurance Subcommittee
ABC X12-ELECTRONIC DATA INTERCHANGE (ED 
Le Barrett. Chairman 
The Travelers 
Accredited Standards Committee 
One Tower Square - 5 FP
operating under the procedures of the  Hartford, CT 06183 
American National Standards Institute  TEL: 203 277- FAX: 203 277. 2107 
Fe 
Oi.ump-nt Nn,

16, 1992 
InRric h 
Kr.  P.
Inr 
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pnm"n 
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parigva te paer do not us unfoI1 esliencc t hcl aai r fomat" elewcnoidc
clait ht ths is a major prolem  over 400 
fomats in 
us in th U. 
rkg  Elecc  TIntre e,  oo 
Tthh  WIDo s SUovna   ButB ineD Na tao BD 19s91t, aznwh eicsh d wa  intiabtye Joseh
Brhy of Treleard ainD    of Blue Crss Blue Sheld 
elecatcio n,c lias i,  th issu of  inlud  billiD,retta
eligiiliftyu a n paymt  elecnic 
adce  elecnic  trfereEF). Th rert  sc'l.
(ER) an 
for sussion in Juy  is 
1992. 
re 
In  tht LroT'  Intitu(ANI) 
ca Nationa  sbet , 
to th  ba  roess ma 
tIn  ron  tte eftftoert ,  signficat p
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Work to  6/92 
E - 11
 X12N Insurance Subcommittee
ABC X12-ELECTRONIC DATA INTERCHANGE (EDI) 
Le Barrett. Chairman 
Accreditd Standards Committee  The Travelers 
One Tower Square. 5 FP 
proedurs of the 
oprating under the  Hartford, CT 06183 
Instiut  7647 
American National Standards  TE: 203 277. FAX: 203 277.2107 
tr 
Document No. 
St  ap 
Pleaa JXpte t.h'1 t    (roef  al  uany pXe1   ar as
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fiD  for  Use  tforr tao pei osd  fouf y2 -3  prsora tlto p A aNeI:s
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tthr on an ba wthor k closeya l to mot tbh  835: Hretih 
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adtion  th 
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an oth aited Tm eht ion abpe rion di  th oppleratt cya  me at 
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In 
E - 12
 OIG REPONSE TO ANSI COMMNT

We have incorporated the additional information provided by ANSI's comments into 
our report. As noted in our recommendations, we agree that HCF A should continue 
to work with ANSI in developing standard claim formats. 
E - 13
 ....._.
_.._.._-- - 
. I 
National Council for Prescription Drug Programs 
February 13, 1992

Mr. Richard P. 
Kusserow 
Inspector General 
Department of Health & Human 
Services 
\Vashington, DC 20201 
RE: Draft 
OIG Report (OEI-
01-91-00820)  POINT-OF-SERVICE CLAMS 
MANAGEMENT SYSTEMS FOR MEDICAID 
Dear Mr. Kuserow: 
The National Council of Pre 
ription Drug Programs (NCPDP) is a non-
over seven hundred members  profit organization of
representing prescription drug providers
organizations , government agencies and others interested in prescrip,ti oinns udrreurgs,  service
program
administration stadardization. NCPDP is gratified by your offce 
s recognition of our role in
the drug delivery  plea 
industr and is  to provide official comment on the above cited report. 
NCPDP applauds the Offce of the Inspetor Genera' 
s continued interest in the delivery of high
quality and cost effcient 
presription drug therapy to the America public and more speificaly
within government programs. 
Past OIG report 
Review (OAI-D1- The Clinica Role of thseu ch as those on  Medicare Drug Utilization
and the draft-cmm8e8-Qn80t),  procss you utiiz in their proCduocmtimonu ,n hitayv Pe hbarromuagchits tf o(rOwEaIr-dO glr-e8a9t- i8n9s1ig60h)t
into many drug delivery issues. The insights your 
offce has presnted have 
peple  benefited numerous
charged with oversight and management of both private and 
public drug delivery
programs. Furter, your insights are in  caes 
activities within the drug  many  a clea predecessor to and influence on
delivery industr which result in direct 
recipients throughout our nation.  benefit to drug therapy
for Medicad  continues your offceTh itsr rdepiortti oonn   of thPoorionut-gohf -aSnedr vthicoeu gChlatfiuml sr Mesacnahg eimnteon ti mSypstoemrtst
subjects and the clea presntation of remmended 
actions. At the outst of our comments
wish to commend the work of your  , we
entie offce and the staff charged with production of this
report whom we have 
found to be most reptive, accsible, and 
presentation of a complete and accurate report.  sincerely interested in
4201 Nort 24th Street. Suite 365. Phoenix, A2 85016. 
(602) 957-9105. FAX (602) 955-0749 
E - 14  , "
Mr. 
Richard P. KU'iscrow 
t't:hruar)' 12, 1991 
NCPOP CClmmt:nL'i  Draft Report OEI-01.91-O820  aJ:t: # 2 
General Comments: 
Since 1977, NCPDP has provided a forum where the diverse interests of the drug delivery 
industry can find a common ground where voluntary agreement on standards can improve
effciencies for everyone involved. Our success to date has been unprecedented in health benefit 
delivery and we appreciate the recgnition of this provided within your report. As some of the 
statements in the report are necsaly dated, the primary focus of our general comments will 
be to update your offce on our stadardization activities. 
As your report section on Recommendations (page 18) notes 
creating a standard for pharmacy 
claims has been an arduous procss. . NCPDP's role within the drug delivery industry has never 
been an easy one, nor has NCPDP been immune from controversies which are often associated 
with insightful leadership within diverse groups. We 
are happy to report however, that we
continue to be thoroughly gratified by the unyielding support, encouragement and dedication of 
the vast majority of our membership and colleague trde organizations. 
Despite the periodic controversies which ca surround our mission, and recent significant
challenges we have face, NCPDP continues to be clearly recognized as the preeminent
authority on the creation of stadards for the prescription drug program delivery industry.
ary 
Attesting to this Jact are; 1) the vast  of organizations and companies which have already
provided written statements of support and implementation planning for our new 
Telecommunications Stadard Version 3.  , 2) the ninety seven percent affrmative vote to make 
V3. 2 an offcial stadard that ocurred at our Februar 11th annual meeting, and
, 3) the 
continued investment in our volunta stadard setting processes being made by companies
throughout the drug delivery industry. 
Although as of the writing of your report NCPDP was engrosse in a 
diffcult process of
consensus building, we feel that our work at that point was somewhat more positive than your 
report indicated. In the report our effort were tenned "promising  , but the report also stated:
If NCPDP is unable to produce an acceptable Medicaid-compatible format in 
a reaonable period of time  HCFA may nee to create its own Medicaid
stadard. 
As previously stated, our recnt effort to 
overcome industry criticisms of the Version 3.
replacement for our obsolete initial telecmmunications stadard 
have been succssful. The 
success of this effort was made possible by a thorough industry wide examination of a draft for 
increa 
comment and  involvement of a number of interested organizations in the NCPDP work 
group procs. NCPDP listened to the 
industr, responded to their criticisms and built industry
wide consensus. NCPDP actively solicite this increa input and involvement. Our stadards 
be 
development procss has always  an open one and everyone involved 
has always been
interested in additional constrctive asistace. NCPDP and its member companies have made 
significat investment in our stadads through their costly support of un-reimburse volunteer
work groups. Despite the controversy it was clea that no reanable organization within our 
industr ever intended to prevent our development of a useble stadard. There was never any
doubt that we would meet with 
succs. NCPDP's mission is dependent on building consensus
and we are dedicated to that mission. 
E - 15
 Mr. 
Richard P. Kus.seruw 
ft:hruarJ 12, 1992

NCPDP Comml'nt.o;  Draft Report OEI-OI-91-00820  II 3 
The rcport s suggestion that HCFA might create its own standard may be ill advised. 
Recent 
expericnce with related standards for the Medicaid rebate program appers 
to show that HCFA 
would have benefited from a closer working relationship and early involvement with NCPDP 
and our existing standards. The NCPDP Medicaid Work Group is now actively 
engaged in
work with industry representatives and HCFA offcials aimed at solving some related 
Medicaid 
Rebate program standard problems. We hope this work effort will be more formally encouraged 
by HCF A officials. Perhaps, to save ta dollars, government agencies should make use of
ca 
volunteer assistance that  serve them in meeting program goals. NCPDP offered early 
assistance in the rebate area. We also continue to offer our assistace in 
the creation of 
Medicaid POS stadards. We would heartily welcome the "cooperation...from HCFA" that your 
report suggests.

NCPDP has long been interested in helping the Medicaid program to the recognize value of
NCPDP stadards. A finding of the report indicates that the private side members of NCPDP
and our stadards do not have significat Medicad 
experience. This fact is not for a lack of 
trying nor a lack of applicability. NCPDP has spent much time on Medicad 
and other 
government d  g program effort. Many members of NCPDP are thoroughly familiar 
with
MMIS system stadards , Medicad benefit delivery hurdles , and the functional environment of
state Medicad benefit delivery that HCFA must work within. We feel the expertise available
within our membership and our organizations 
experience in the stadard development process
are invaluable r sources simply waiting for state and 
federal government gratis consumption. 
Our primar comment is that the report could realistically recmmend that: 
Stale and federa agencies involved in the development of point of sale systems
must be required to make use of available stndards 
as well as the existing
standard settng processes and organiz.ions if  utzefederafunds 
they plan to 
developmenJ or operaon. 
for system 
Anything less than this type of mandate wil cause 
neeless government program development
expenditures. In addition , any less of an effort by the 
government wiI cause disruption of
private side drug delivery procsses and 
ca  increased costs in an America heath care delivery
system than  little afford it. Not only are stadards meaingless if not widely 
use. The 
lack of the use of stadards creates ineffciencies and information 
procssing problems that can
impact all related benefit procssors. 
F.inally, an probably most importt, any less of an effort
may damage the Medicad recipients accs to and quality of cae due to provider dissatisfaction
with a public program that already faces many provider relations 
challenges. 
A finding of the report 
indicates that a lack of state resources and expertise are the primar
reans 
for state inaction on state of the 
ar P~S system development. NCPDP and ANSI are
stadard 
setting organizations with proven effective procsses and a 
weath of expert resurces. 
more concerned with their own interests than those of the States or of
These resources are  not 
HCFA" 
' In fact, many parcipants in our organization 
s stadard seting procsses
dedicated to quality cost effective public programs as many government employees. The,  raerpe oarst 

. OIG  \brd ..'"  ..CO 17.

E - 16
 Mr. 
Richard P. Kusserow  February 12, 1992

NCPDP Comments  Draft Report OEI-01-91-O820  PaJ.e # 4

may be doing a disservice to Medicaid by 
suggesting otherwise. 
More to the primary point of the report, we are convinced that your office is fully on target in 
suggesting that HCFA pursue nealy any available vehicle to encourage and assist 
states in 
moving drug program processing to point-of-sae management systems. Numerous statements 
in the report indicate that state Medicaid offcials do not grasp the true advantages of P~S 
processing and that they are quite often misguided in their perception of some potential pitfalls. 
In the interests of time we wil not provide a 
detaled counter argument to each of the problems 
cited under the finding  Stme Medicaid officials fear tha POS systems would have several 
negatve effects on Stmes and their citzens.  We would be happy to provide such a level of 
detaled rebutta if your offce is interested. 
NCPDP offers its assistace in the educational process that appes to be required in Medicaid
agencies. We pledge to assist HCFA in the 
development of the guide suggested by your first 
recommendation. In addition to promoting stadards, the send par of NCPDP's mission is 
to provide a continuing source of reliable information 
(on drug program administration) that 
supports the diverse interests of our membership. We 'find this educational charge to be
impOrtt 
extremely  when we work with novice POS procssors. In fact, some industry
criticisms of past NCPDP stadardization activities have had as a mot , the theme that NCPDP
should do more to  importce of 
educate processors about the  stadardization in the POS 
process. We feel we could assist HCFA in communicating the value of POS processing and 
s1aGardization. . We also feel capable of providing help in the development of strategies 
for cost 
effective state implementation of this technology. As another aside we shall not fully detal
her  , we do feel there is a strong potential that states may spend neelessly on duplication of
MMIS modifications neeed to 
support POS procssing as your report mentions. We pledge to
assist states in the development of NCPDP stadards that meet their nees 
for cost effective 
implementation. 
To some extent, the report also appes to extend some misunderstading of P~S system value
and capabilities through the statements on page 13 and elsewhere. 
Many private side vendors
using POS technology also process other complex heath claims with 
thoroughly integrated
systems much like MMIS. Although some large private side drug 
administration processors
process only drug claims that are in somewhat smaller volumes than large Medicaid programs 
numerous insurers integrate P~S 
processing with other claims that are as voluminous and 
complex as states face in Medicad. 
Only a few yeas ago, most claims processors in the drug
area where also dependent on batch oriented claims adjudication systems. 
These systems have
not always been totaly abandoned 
and completely replaced when P~S drug 
processing was
implemented. 
The statement that private side drug claims are easier to process than Medicaid drug claims may 
not be correct. The example cited 
, that of duplicate checking, is definitely incorrect and
indicates some misunderstading of P~S procssing. 
Private vendors check less history in
duplicate edits becuse long history checking is unnecessa in a POS environment. Medicad
agencies check far more history due to the slower process of paper 
claims submission and 
adjudication as well as the resultat manual claims suspense relief procssing 
present in batch
systems. 
E - 17
 Mr. 
Richard P. Ku.',serow 
Fehruary 12, 1992

NCPDP Comments  Draft Report OEI-Ol-91-00820 
PaJ.e # 5

In fact, if any example of more complex processing nees to be cited, Third Party Liability
(TPL) adjudication requirements in Medicaid may temporarily be the best example. The 
temporary appropriateness of this example of complexity may be short lived as TPL processing 
in pharmacy among private vendors through P~S is beginning to show some activity. 
Pharmacy
providers have never really faced the level of true other carrer liability 
adjudication influence 
affecting many other provider types. Medicaid states may be the first widespread
implementation of this diffcult area where we agree that P~S processing should potentially save 
significat amounts. NCPDP is interested in assisting Medicad in finding workable 
solutions
for the TPL area. 
Another area of complexity in which Medicad may be at the forefront is 
online-realtime or
prospetive Drug Utilization Review (DUR). NCPDP work groups have 
anticipated the 
Medicaid programs nee for sophisticated mechanisms to implement, track and measure the
effectiveness of this form of DUR. Our work groups on DUR and 
telecommunications have
added significat capability for these processes in the new Version 3. 
2. We look forward to 
working with state agencies and researchers that are engaged in the OBRA-
90 mandated studies
of DUR. Interest in this area has also been piqued on the private side through the 
anticipated
Medicaid activity. The DUR information trasmission and measurement capabilities initially
develoPe in NCPDP stadards fur Medicad have now been extended in Version 3.2 to all types
of cJaims covered by our recommended 
trasaction data sets. With regard to complexity, the
history analysis necessar for successful POS-DUR wil likely be more 
significat than Medicaid
duplicate checking. 
It rpight be successfully argued that the complexity of private side drug processing with

numerous benefit designs, recipient cost sharing mechanisms
, and reimbursement rules already
occurrng within the major private side administrators is far more complex than Medicaid. 
The
complexity of Medicaid should not be an impeiment to POS implementation. 
To conclude our general comments , we sincerely agree with your recommendations that HCFA 
NCPDP, the American National Stadards Institute (ANSI) 
and the State Medicaid Directors' 
Association (SMDA) should work together toward the goal of 
developing stadard electronic
claims formats for state 
Medicaid use. At our annual meeting this past week, the board of
trustees voted to 
make a two year commitment to ANSI 
membership and to support our
involvement in their stadard setting process. During this time, NCPDP will actively pursue
how our succssful drug standards may be brought in line with ANSI initiatives. 
We pledge to
continue ongoing efforts to work with government 
organizations and wil initiate 
contact with
SMDA. We strongly encourage more active state program involvement in our 
stadard 
setting
processes. NCPDP welcomes additional commentary on our new 
Medicad trasaction data sets
contaned in the Version 3. 
2. Please note that these new stadards for Medicad were 
created
with the help and involvement of a number of large state fisca 
agent organizations. NCPDP
is actively assisting the Arkasas Medicad Fibs 
development of POS drug processing. We shall 
continue to provide our expertise and consultative assistance to any 
state agency, fiscal
intermediar, processor or government agency that requests help. 
We strongly agree that HCFA must 
encourage standard use although we tend toward stronger 
wording. The suggestions that a set of rewards for 
stadard use or that enhanced 
funding be 
E - 18
 - ,  - (

.-.  /'  .. 
Mr. 
Richard P. Kusserow 
Fehruary 12, 1992
NCPDP Comment"  Draft Report OEI-OI-91-00820 
Page # 6 
denied for systems that do not use standards are 
perfectly appropriate in our opinion. History
shows that simple encouragement by HCFA may not be enough to bring about 
uniformity in
Medicaid. The definite financial value that exists in moving states to P~S 
processing can be
emphasized most effectively if the federal government provide direct financial incentives and dis
incentives to state agencies. 
NCPDP looks forward to working more closely with the Medicaid 
program on P~S
implementation and of developing P~S system capabilities to more positively influence drug
therapy quality and cost effciency. 
Thank you again for the opportunity to provide comment. If we ca provide any additional
information , please do not hesitate to contact us. 
LeAnn,Cle\'e'rly	 utive Director 
--./vL 
.J 
& Ronald P. Jordan  fedicaid Work Group Chainnan & Board Member 
cc:	 Regional Inspector General - Mark R. Yessian
, Ph.
OIG Report - Lead Program Analyst - David 
Schrag 
E - 19
 COMM 
OIG REPONSE TO NCPDP 
We have updated our report s sections on NCPDP standards to reflect the 
promulgation of Version 3.2. We hope that NCPDP is successful in securig the 
cJaims processing industry s commitment to using it. We have deleted language 
suggesting that HCFA create its own standard claims format and hope that HCFA' 
and the States' needs can be met with Version 3. 
We have chosen not to use stronger language in our recommendations on standard 
cJaim formats to HCFA and the States. WhiJe we beJieve that standards are 
essential component of cost-effective P~S systems, we also beJieve that they are more 
likely to win acceptance in an atmosphere of cooperation than one of requirements 
and penalties. 
In saying that private vendors "are more concerned with their own interests than those 
of the States or of HCF A, " we do not suggest that they seek to undermine public 
programs. Nor do we suggest that private vendors should not supply information on 
P~S technology; in fact, we suggest that HCFA seekit out. We merely suggest that
private companies are first and foremost responsible to their shareholders and to 
seeking profits. As these profits may come at the expense of the Medicaid program 
we warn HCF A and the States against relying too heavily on private vendors' advice. 
With regard to the relative 
complexity of private versus public health cJaims, we made 
a slight modification to the examples given on page 13. We note that regardless of
how much history checking is necessary in a P~S environment, States currently use
more history than private plans. This wil continue to be true unless States make 
deliberate efforts to adjust their policies as they move to P~S systems. 
E - 20
 , "
APPENDIX 
NOT 
For overvews of P~S cJaims management, see "Electronic Claims: A 
Revolution in Progress  ComputerTalk for the Pharmacist  September/October 
1988, pp. 15- , 22-26; and W. A. Lockwood The New Era of Paperless 
, Jr., "
Claims  s. 30, no. 1 (January 199), pp. 20-22. 
American Pharmacy, 
Adjudication involves checking a cJaim for errors, verifyng that the servce is 
covered, and determining the amount that should be paid. 
L. 101-508, Sec. 440l(a)(3), adds the foJIowing language as Sec. 1927(h)(1) of 
Title XIX of the  the Secretary shaJI encourage each State 
Social Security Act: "
agency to establish, as its principal means of processing cJaims for covered 
outpatient drugs under this title, a point-of-sale electronic cJaiMs management 
system, for the purpose of performing on-line, real time eligibility verifications 
cJaims data capture, adjudication of cJaims, and assisting pharmacists (and other 
authorized persons) in applying for and receiving payment. 
The State estimated savings of $2 538 112 over three months in 199 (New 
York State Department of Social Servces  Day Specifc Savings Quarterly Report 
Based on Disenrollments During Period: 07/90-09/90  April 2, 1991, p. 4.) We 
multiplied this figure by 4 to yield a 12-month estimate of $10 152 448. New 
York City residents are not yet subject to day-specific eligibility, because the 
city s master eligibilty file cannot be updated frequently enough. The State 
estimates that if New York City residents were also subject to day-specific 
eJigibility the savings would rise to $22 880 454 per quarter ($91 521 816 per 
year). The State s methodology is described in the report cited above. The 
Office of Inspector General has reviewed the report and we believe the logic to 
be sound and the estimate to be reasonably accurate. We did not, however 
conduct an independent analysis of the original data nor of the assumptions 
that underlie the model used for estimating savings. Therefore, although we
have no reason to doubt the vaJidity of New York' s estimate, we can neither 
vouch for its precision nor affirm that it is based on the best 
possible model. 
Telephone conversation with EMEVS Director, New York Department of 
Social Servces, July 17
, 1991. 
New York State Department of Social Services  Electronic Medicaid Eligibility 
Verification (EMEVS) Overview 
" no date (1989?), p. 2. The servce threshold 
function is described as foJIows: 'The Department wil implement 
a service 
limits systems (sic) which is expected to save over $200 milion annually.
Doctors, dentists, laboratories, pharmacies and clinics wil be required 
to call 
F - 1
 (EMEVS) at the time of servce to ascertain in addition to the eligibilty of a 
cJient, the cJient's status with respect to the number of servces the cJient has 
received in one year. A positive response from EMEVS will result in an 
authorition record generated and transmitted to the fiscal agent who will 
require this authorition before paying a Medicaid claim. 
A group of pharmacists sued New York State on the grounds that EMEVS' 
post and cJear function discriminated against them and that it imposed 
unreasonable delays in payment. The State 
won.  Sutphin Phannacy, Inc. 

Perales  S. District Court, Southern District of New York, No. 90 Civ. 760 
(WCC), July 26
, 1991. 
Commonwealth of Massachusetts  Operational Evaluation Report for the 
Departent of Public Welfare s Recipient Eligibilty Verification System  October 
199, p. A1S. This estimate incJudes total Medicaid savings, without regard to 
Federal matching rates. The State estimates an additional $3.2 milion in 
savings on 100 percent State-funded health care expenditures. A description of 
Massachusetts s methodology and its limitations is contained in appendix E. 
Commonwealth of Massachusetts  Operational Evaluation Report  p. A21. 
10.	 We define a P~S system as one that operates in real-time and uses advanced 
technology such as P~S terminals or personal computers at the providers 
locations. We excJude systems that operate in batch mode or are limited to 
automated voice response (A VR). Batch mode systems cannot process cJaims 
while recipients are stiI in contact with providers, and A VR systems cannot 
perform functions beyond eligibility verification. 
11.	 Seven States (Indiana, Michigan, Mississippi, Nevada, New Jersey, Oklahoma 
and Pennsylvania) are adding automated voice response systems for eligibility 
verification. Kansas, Maryland, and Massachusetts have plans to improve their 
existing eJigibiJty verification systems. Montana, North Dakota, and South 
Dakota plan to make other improvements in their eligibility systems. 
12.	 Eleven States have definite plans to improve their cJaims submission 
capabilties without implementing true P~S cJaims submission. Four (District 
of Columbia, Georgia, Nebraska, and North Dakota) will begin to allow on-line 
batch cJaims submission or will try to increase the percentage of claims that are 
submitted on-line. Seven (Delaware, Idaho, Kansas, Montana, Nevada, New 
Jersey, and South Dakota) will try to increase the percentage of 
claims that are 
submitted on disk or tape. 
13.	 Shortly before OIG, the American Public Welfare Association (APWA) and 
HCF A conducted their own surveys of State Medicaid programs. 
Their survey 
instruments incJuded questions about plans to develop P~S pro-DUR, so ours 
did not. However, some States gave us information about their plans to 
implement P~S pro-DUR anyway, and the other surveys' results did not 
F - 2  , "
address the issue of definite plans versus preliminary discussions. Because of 
differences in survey methodology and in interpretation of questions and 
responses, it is difficult to combine the responses from the three surveys. 
14.	 J. Horvath  Medicaid Management Information 
Systems: Provider Partcipation 
Cost Containment Initiatives: State Characteritics  American PubJic Welfare 
Association, Summer 1991
, p. 19. 
15.	 Pro-DUR is not among the functions of POS systems that OBRA 90 requires 
the Secretary to encourage. OBRA 90 does, however, require the States to 
implement pro-DUR (not necessarily as a component of P~S 
systems) by 1993 
and authories up to 10 demonstration projects to evaluate pro-DUR as a P~S 
system function. It seems cJear, therefore, that Congress envisioned pro-DUR 
as a natural, if not necessary, component of P~S systems. 
16.	 This is an approximation based on the OIG, APWA, and HCFA surveys. 
17.	 Commonwealth of Massachusetts  Evaluation Report p. A26.
Operational 
18.	 Telephone conversation with EMEVS Director, New York Department of 
Social Servces (DSS), July 17, 1991, and personal communication from DSS 
February 25, 1992. The $3.5 milion development cost included $2 milion for 
the purchase of point-of-servce terminals for provider offices. 
19.	 Congressional leaders, informed of States' complaints , admitted that the time 
Jimit was undesirable. They introduced a technical amendment to repeal it. 
However, HCF A then informed Congress that enhanced funding for P~S 
systems would be available after FY 1992 whether or not OBRA 90 were 
amended. Enhanced FFP would be granted under the same authority, HCFA 
said, as it was before OBRA 90, when it was granted for EMEVS and REVS. 
Congress dropped the technical amendment. 
20.	 For example, Arkansas s bid for P~S device and plastic ID card technology 
resulted in a protest by the losing bidder, adding even more time and expense 
to the effort. 
21.	 Memo from Director, Medicaid Bureau, to all HCF A Regional Administrators 
March 15, 1991 , p. 3. 
22.	 M. J. Richter  Staying Connected: Disaster Recovery for Government 
Telecommunications  September 1991, pp. 37-50. The potential for 
Governing, 
breakdowns was confirmed by a respondent from New York, who added that in 
comparison to traditional claims-processing systems, P~S systems can make 
bigger mistakes faster. 
23.	 Examining the Medicaid eligibility requirements of other benefit programs was 
beyond the scope of this inspection. However, if other programs do indeed 
F - 3  mandate whole-month eJigibilty, States wiJI not be able to implement day-
specific eligibilty. This subject is deservng of future study. 
24.	 In response to an OIG request, the Massachusetts Law Reform Institute 
(MLRI) surveyed legal servces programs throughout Massachusetts. Four 
programs responded. The text presented in this paragraph is based on a 
summary of those responses prepared by MLRI. In comments to our draft 
report, the Massachusetts Department of Public Welfare disputed some of the 
positions expressed by MLRI's respondents. 
25.	 In 8 States with no intention of changing their cJaims submission procedures, an 
average of 57 percent of cJaims are submitted 
electronicaJIy. In 31 States that 
were discussing or had definite plans to change, the average is 43 percent. 
(These figures are drawn from data we obtained in our survey of State 
Medicaid agencies. 
26.	 Pharmacy claims experienced a low denial rate (9.3%, n=27 States) in 
comparison to hospital claims (21.8%, n=25), physician cJaims (23.9%, n=25), 
and misceJIaneous cJaims (17.  , n=24). Only nursing home claims were 
denied less frequently (8.0%, n=24). (These figures are drawn from data we 
obtained in our survey of State Medicaid agencies. 
27.	 A bil processor is responsible for evaluating a claim and determining how 
much, if anything, should be paid. In the Medicaid environment, a bil 
processor could be the Medicaid agency itself, a designated fiscal agent, or 
another private contractor selected to operate the P~S system. 
28.	 Telephone conversations with chair of HCFA 1500 work group, April 18 and 
September 3, 1991. 
29.	 Telephone conversation with chair of ANSI ASC X12 Insurance Sub-
Committee, April 3, 1991. See also ANSI ASC X12 Insurance Sub-Committee 
Minutes, Tarpon Springs, Fla., June 2-8, 1991. 
30.	 For 31 respondents that had received information from HCFA, the mean rating 
for lack of guidance was 2.51. For 19 respondents  not received 
that had 
information from HCF A, the mean rating for lack of guidance was 3.57. (1 = 
not at aJI a factor; 5 = "extremely important factor. 
31.	 Telephone conversation with professional staff, Senate Special Committee on 
Aging, February 27
, 1991. 
32.	 Section 1903( a )(3) of Title XIX of the Social Security Act. 
33.	 See Sec. 4401(c)(1). 
F - 4  34.	 Comments submitted to the Health Care Financing Administration by the 
Office of the U. S. Senate Special Committee on Aging, Senator David Pryor 
Chairman  Implementation Issues Regarding the Medicaid Prent Pharmaceutical 
Purchasing Provisions of the Omnibus Budget Reconciliation Act of 1990 (PL. 
101-508),  April 1991, p. 11. 
35.	 Letter from Chairman, U.S. Senate Special Committee on Aging, to 
Administrator, Health Care Financing Administration, September 13
, 1991. 
F - 5