Department of Health & Human Services 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid, CHIP, and Survey & Certification 
                   
SMDL # 10-011 
 
 
June 21, 2010 
 
                  Re:  Third Party Liability 
 
Dear State Medicaid Director: 
 
This letter is to provide additional guidance to State Medicaid agencies on the implementation of 
section 6035 of the Deficit Reduction Act (DRA) of 2005.  This legislation provides tools to 
strengthen States ability to identify and collect payments from liable third parties.  This letter 
addresses the DRA requirement that the Secretary of Health and Human Services specify a 
manner in which State Medicaid agencies and health plans may exchange eligibility and 
coverage data.   
 
Health insurers, including self-insured plans, often contract with other entities (e.g., third party 
administrators (TPAs) and pharmacy benefit managers (PBMs)), for the purpose of verifying 
plan eligibility, authorizing benefits, and paying claims.  While we recognize that entities such as 
TPAs and PBMs do not necessarily have ultimate financial liability, to the extent that they are 
required -- by contract or otherwise -- to pay medical claims, these entities are included in the 
definition of a health insurer for purposes of complying with the DRA.  For purposes of this 
guidance, we refer to health insurers as plans.  When used in the context of verifying eligibility 
and/or processing claims, the term plans includes entities that are under contract to perform 
such activities.   
 
This guidance announces recommended transmission formats for sharing eligibility and benefit 
information between the State, or its agent, and health plans.  These recommended formats will 
serve as a tool to enable States to comply with the DRA data exchange requirements.  The 
transmission formats are: 
 
  Payer Initiated Eligibility/Benefit (PIE) Transaction 
  Accredited Standards Committee (ASC) X12 270/271 Health Care Eligibility/Benefit 
Inquiry and Response Standard Transactions (270/271 Transactions) 
 
CMS is seeking formal approval for the use of these formats through the Paperwork Reduction 
Act.  In the meanwhile, we strongly recommend that States begin using these formats.  One 
major concern is that plans avoid the need to provide data in a variety of different formats in 
order to accommodate multiple States requirements.  Use of these formats will help to ensure  Page 2  State Medicaid Director 
 
standardization among plans, particularly those that operate in multiple States, as well as 
minimize administrative cost and burden on States and plans.  
The enclosed questions and answers explain in more detail the specific DRA changes to the 
Medicaid statute governing third party liability.  These questions and answers also supplement 
the guidance the Centers for Medicare & Medicaid Services provided in State Medicaid Director 
Letter #06-026 issued on December 15, 2006, which can be accessed at: 
http://www.cms.hhs.gov/SMDL/SMD/.   
 
We hope you will find this information helpful.  If you have any questions regarding this 
guidance, please contact Ms. Barbara C. Edwards, Director, Disabled and Elderly Health 
Programs Group, at 410-786-7089 or by e-mail at Barbara.Edwards@cms.hhs.gov. 
 
          Sincerely, 
 
          /s/ 
 
          Cindy Mann 
Director 
Enclosure 
cc: 
CMS Regional Administrators 
 
CMS Associate Regional Administrators  
Division of Medicaid and Childrens Health 
 
Ann C. Kohler 
NASMD Executive Director 
American Public Human Services Association 
 
Joy Wilson 
Director, Health Committee 
National Governors Association 
 
Matt Salo 
Director of Health Legislation 
National Governors Association 
 
Debra Miller 
Director for Health Policy 
Council of State Governments  
 
Christine Evans, M.P.H. 
Director, Government Relations 
Association of State and Territorial Health Officials 
 
    Page 3  State Medicaid Director 
 
Alan R. Weil, J.D., M.P.P. 
Executive Director 
National Academy for State Health Policy  Page 4  State Medicaid Director 
 
Enclosure 
 
Third Party Liability Provisions of the Deficit Reduction Act of 2005 
Questions and Answers #14  35 
(For Qs and As #1  13, see SMD letter dated December 15, 2006 at: 
http://www.cms.hhs.gov/smdl/downloads/SMD121506QandA.pdf) 
 
 
Standards for Transmitting Eligibility and Coverage Information 
 
Q14:  What Electronic Data Interchange (EDI) transactions are being recommended by 
the Secretary of Health and Human Services for transmitting plan eligibility and 
coverage information to State Medicaid agencies?   
 
A14:  Section 1902(a)(25)(I)(i) of the Social Security Act directs States to enact laws requiring 
health insurers to provide the requisite information in a manner prescribed by the 
Secretary.  CMS collaborated with States and representatives of the health care industry 
to determine the most efficient way to transmit the required data elements.  As a result of 
this collaboration, CMS is recommending the following transmission formats for 
exchanging eligibility and benefit information between the State, or its agent, and the 
health plans or their agent(s) that are under contract to maintain eligibility records and 
process claims.   
        
  Payer Initiated Eligibility/Benefit (PIE) Transaction  
 
  Accredited Standards Committee (ASC) X12 270/271 Health Care 
Eligibility/Benefit Inquiry and Response Standard Transaction (herein referred to 
as a 270/271 Transaction or referenced separately as a 270 inquiry and a 271 
response) 
 
In the December 15, 2006, guidance, we referred to the method of transmission as the 
eligibility transmission format (ETF).   We have decided not to continue to use this 
terminology, but instead we will refer to the specific name of the transaction as indicated 
above. 
 
Q15:   What is the PIE Transaction? 
 
A15:  The PIE Transaction is a cumulative listing to be used as a one-way transaction to 
identify plan members eligibility for health coverage and their associated benefits.  The 
PIE Transaction was developed to transmit benefit and membership information from the 
plan to the State (or a designated contractor) in one single, unsolicited transaction.  It is 
not necessary for the State to generate an inquiry to obtain a PIE Transaction.  The PIE 
Transaction is not an adopted Health Insurance Portability and Accountability Act 
(HIPAA) standard.   However, it uses some of the same identifiers as the 271 Response 
Transaction and, therefore, mirrors the format of the 271 standard. 
  Page 5  State Medicaid Director 
 
Prior to enactment of the DRA, Medicaid agencies had difficulty obtaining information 
about eligibility from plans using the 270/271 Transaction because the Medicaid agencies 
did not have information that plans required for eligibility inquiries.  Most plans require 
plan identifiers (i.e., group or Member ID) be supplied on eligibility inquiries.  Medicaid 
agencies do not often have plan identifiers.  The PIE Transaction allows the Medicaid 
agency to match the plans subscribers and dependents with their Medicaid database 
recipients, thereby capturing plan identifiers as well as coverage information.  These 
identifiers can then be used to request subsequent updates and to submit claims when 
appropriate.  
 
Q16:  What is the 270/271 Transaction and how will it be used? 
 
A16:  The 270/271 Transaction is an adopted HIPAA standard that was developed by the 
American National Standards Institute (ANSI) ASC for use in exchanging eligibility 
information.  The 270 is used to transmit Health Care Eligibility Benefit Inquiries from 
health care providers to health plans, and from one health plan to another.  The 271 is a 
response to the 270 inquiry. 
 
HIPAA mandates use of Version 4010/4010A1 of the 270/271 Transaction for capturing 
eligibility and coverage information exchanged among plans, as well as between 
providers and plans.  Version 4010A1 represents an addendum to Version 4010.  The 
ASC X12 Version 5010 will replace the 4010/4010A1 version.  Covered entities must be 
in compliance with Version 5010 no later than January 1, 2012.  The compliance date for 
small health plans is January 1, 2013. 
 
  In todays environment, Version 4010/4010A1 of the 270/271 Transaction is used among 
providers and plans for patient eligibility and benefit inquiries.  However, much of the 
potential value of the 270/271 Transaction is not being utilized among plans, partially 
because the 271 requires only a yes or no response, indicating whether individuals are 
eligible.  Although plans are not restricted from providing additional information, the 
Version 4010/4010A1 270/271 does not require additional benefit coverage information.  
Therefore, use of the 270/271 Transaction has produced different levels of information 
ranging from a yes or no response to a full explanation of coverage.  While limited 
information is permitted under HIPAA, it often necessitates manual follow-up, using the 
telephone to ascertain more specific eligibility information that is needed to bill 
appropriately.  This results in significant administrative costs to providers and plans.    
 
In the future, because the 270/271 can supplement the PIE Transaction, Medicaid 
agencies will be able to use the plan identifiers provided by the PIE Transaction when 
sending a 270 inquiry.  This will produce more successful matches and provide States 
with additional eligibility information.  The 271 responses will still vary with respect to 
the types of information provided.  Plans will still have the option of providing additional 
benefit coverage information.  When the Version 5010 of the 270/271 is implemented, 
coverage information will no longer be optional.  It will become required by the standard.  
The 270 standard queries can be used to support prior approval of services, request 
updated information prior to submitting claims, or verify non-coverage when a provider 
reports that a claim has been denied.  The combined eligibility and coverage information  Page 6  State Medicaid Director 
 
derived from the PIE Transaction and the 270/271 Transactions will be used by State 
Medicaid programs to determine the correct payer sequence and whether a claim 
submission is appropriate.  
 
Q17:   Can States use formats other than the PIE Transaction? 
 
A17:  Yes.  Although we strongly recommend that States utilize the PIE Transaction, 
particularly with plans that operate in multiple States, States and plans may implement, or 
continue to use, alternate proprietary formats to share eligibility information. 
   
Q18:  Are there guides available to assist in implementing the PIE and the 270/271 
Transactions?     
   
A18:   Yes.  CMS has developed a DRA Companion Guide to assist State Medicaid agencies and 
plans in implementing the PIE Transaction.  This will enable plans to use the same 
implementation to construct the PIE Transaction for each Medicaid agency.  The official 
version of the DRA Companion Guide can be found at: 
www.cms.hhs.gov/ThirdPartyLiability/DRA/CompanionGuide.  States may download 
and reproduce the Guide to use as a technical reference for plans.  However, the language 
in the official Guide must not be altered, except to include State-specific information 
where permitted.   
 
  The DRA PIE Transaction Companion Guide is written to support both Version 4010/4010A1 
and Version 5010 270/271 standards.  The Implementation Guides for the 4010/4010A1 and 5010 
are available for a fee from X12 at www.X12.org. 
 
Q19:  How were specific data elements determined for inclusion in the PIE transaction?   
 
A19:  CMS collaborated with States and industry representatives to determine what information 
is needed by States as well as the most effective method for transmitting the information.  
All of the transaction-specific information, including the data elements, can found in the 
Companion Guide.  
 
In the December 15, 2006, guidance, we indicated that we would identify specific data 
elements and we would refer to them as the Plan Eligibility Data Elements (PEDE).  
Subsequently, we identified the elements and have incorporated them into the DRA PIE 
Companion Guide.  We have determined that it is not necessary to make a specific 
reference to the elements.  Rather, it is sufficient to simply refer to the data elements 
included in the PIE Companion Guide.  We will no longer refer to the elements as the 
PEDE.   
  Page 7  State Medicaid Director 
 
Q20:  Entities that are responsible for paying pharmacy claims (e.g., pharmacy benefit 
managers (PBMs)), use standards developed by the National Council of Prescription 
Drug Programs (NCPDP) which are different from the 270/271 Transaction.  How 
will these entities provide information to States? 
 
A20:  States may negotiate with plans to utilize an agreed upon method to acquire updates.  
Alternatively, PBMs and other payers of pharmacy claims may provide PIE Transactions 
to States as well as providing subsequent updates.   
 
Entities that have responsibility for paying pharmacy claims generally use the 5.1 
Eligibility (E1) Transaction developed by the NCPDP for transmitting eligibility 
information.  As of January 2012, Version D.0 will replace the Version 5.1 Standard.  
The NCPDP standard is designed as a point of sale transaction and therefore, does not 
supply historical information or the date range of coverage.  Since Medicaid agencies 
need access to historical information, the E1 Transaction is not sufficient to meet their 
needs.     
 
  Although there is some utilization of the 270/271 Transaction by the pharmacy industry 
(e.g., e-prescribing programs), it is not widely used by PBMs and other payers of 
pharmacy claims.  In order to minimize financial burden on those payers, States should 
work with payers to adopt a viable method of acquiring eligibility updates.  Examples of 
other methods could include the use of a proprietary file, through a PC-based transaction 
or a clearinghouse.  Alternatively, payers and States may agree to adopt the 270/271 
standard.  
 
A21:  How will the passage of the Affordable Care Act impact the 270/271 and the PIE 
Transactions? 
Q21:  The Affordable Care Act (ACA) includes a number of changes that will impact health 
information technology.  For instance, the Administrative Simplification provisions of the 
ACA are designed to accelerate the standardization of transactions.  Such standardization 
could necessitate revisions of existing standards such as the 270/271 Transaction.  Since 
the PIE Transaction is built on the 271 Response Transaction, any forthcoming changes 
made to the 271 as a result of the ACA may necessitate changes to the PIE Transaction in 
the future.    
Scope and Frequency of Sharing Third Party Eligibility and Coverage Information 
 
Q22:  Does a health plans submission of information from their full eligibility file, for the 
purpose of matching that information to the Medicaid eligibility file, violate HIPAA 
privacy rules? 
 
A22:  No.  The disclosure and use, pursuant to State law, of insurer eligibility files containing 
private health information (PHI) are permitted under the HIPAA privacy provisions.  
Background on this issue can be found at:  
www.cms.hhs.gov/ThirdPartyLiability/DRA/SharingPrivateHealthInformation.    Page 8  State Medicaid Director 
 
 
Q23:  Should States request information on subscribers and dependents 
covered in other States? 
 
A23:  Yes.  There is a significant amount of third party coverage derived from health plans 
licensed in a different State than where the Medicaid beneficiaries reside.  This can 
happen when policyholders work in one State and live in another State.  For example, 
there may be policyholders who are enrolled in Maryland Medicaid, or have dependents 
that are enrolled, who work in Delaware, the District of Columbia, Pennsylvania, 
Virginia, or West Virginia and have coverage through their employer in that State. This 
points to the need for Medicaid agencies to obtain plan eligibility information from 
contiguous States in addition to their respective State.   
 
Another primary example is when Medicaid-eligible children are covered through the 
insurance of non-custodial parents who live in a different State than their child(ren).  This 
would not be limited to contiguous States because non-custodial parents could reside in 
any State in the country.  Depending on the size of a plans file, it may be beneficial for 
the State to obtain the plans entire eligibility file.  The specific geographical areas to be 
included in the data exchange should be negotiated with the plans.  We recommend use 
of a Trading Partner Agreement in the exchange of electronic data.   
 
Q24.  How far back can States go in requesting eligibility and coverage information?   
 
A24:  The DRA requires States to have laws in effect that require health insurers to honor 
claims submitted by the Medicaid agency within 3 years of the date of service.  
Therefore, it is prudent for Medicaid agencies to request up to 3 years worth of 
eligibility information in the initial PIE Transaction in order to bill for older claims.   
 
Plans do not always maintain 3 years worth of eligibility information in their databases.  
Most plans maintain one to two years worth of data.  As a practical matter, it may be 
more beneficial for the Medicaid agency to acquire whatever data is readily available, 
rather than wait for the plan to complete complex development efforts needed to access 
older data.  Where data is available, it should be provided to the State.  Medicaid 
agencies and plans should negotiate the most feasible approach.   
 
Q25.  After States receive an initial PIE Transaction from a plan, should subsequent PIE 
Transactions include only updates since the previous PIE, or should it be a full file 
replacement? 
 
A25.  States may require plans to provide a full file replacement or States may opt to receive 
updates only.  The amount of file information should be negotiated between the States 
and the plans. 
  Page 9  State Medicaid Director 
 
Q26:  How often should a third party provide eligibility information to the State? 
 
A26:  In accordance with section 1902(a)(25) of the Act, States are required to take all 
reasonable measures to ascertain the legal liability of third parties.   It would be 
reasonable for States to require health plans to share a complete record of eligibility and 
coverage information annually, at a minimum.  States may opt to require plans to share 
information on a more frequent basis.    
 
Administrative Issues 
 
Q27:   Are the DRA third party liability requirements applicable to the territories? 
 
A27:  Yes.  In addition to the 50 States and the District of Columbia, the DRA also applies to 
Puerto Rico, the Virgin Islands, and Guam.   The other two territories, American Samoa 
and the Northern Marianas, have received a waiver of the DRA third party liability 
provisions.     
 
Q28:  Are third parties allowed to charge transaction fees for electronically transmitting 
eligibility and coverage information? 
 
A28:  The 270/271 Transaction is a HIPAA standard and covered entities must comply with 45 
CFR 162.925(a)(5).  This provision requires that a health plan that operates as a health 
care clearinghouse or requires an entity to use a health care clearinghouse to receive, 
process, or transmit a standard transaction, may not charge fees or costs in excess of the 
fees or costs for normal telecommunications that the entity incurs when it directly 
transmits or receives a standard transaction to or from a health plan.  
 
  There is no Federal law that would prohibit a third party from charging a fee for 
transmitting the PIE Transaction.  States may have laws in effect that prohibit or limit the 
charging of fees to Medicaid.   
  
Q29:  Is enhanced funding available for States to upgrade their Medicaid Management 
Information Systems (MMIS)? 
 
A29:  Yes.  States that upgrade their MMIS to accommodate the PIE Transaction will be 
eligible to receive enhanced Federal funding at the 90 percent match rate under an 
approved Advance Planning Document.    
 
 
Clarifying Claims Processing Requirements  
 
Q30:  Does the 3-year claim filing period apply to Medicare? 
 
A30:  State law requiring plans to honor claims submitted within 3 years from the date on 
which the item or service was furnished would apply to Medicare Part C and D plans.   Page 10  State Medicaid Director 
 
The State law would not apply to the traditional Medicare fee-for-service program, 
Medicare fiscal intermediaries and carriers, or other Medicare contractors. 
 
Q31:  Are States precluded from having laws that require third parties to accept claims 
beyond the 3-year filing period prescribed in the DRA? 
 
A31:  No.  Section 1902(a)(25)(I)(iv) of the Act requires States to pass laws that would require 
health insurers to accept claims submitted by the State within the 3-year period beginning 
with the date on which the item or service was furnished.  States are not precluded from 
having laws or regulations that would require insurers to accept claims for a period of 
time longer than 3 years.     
 
Q32:  In cases where a Medicaid individual fails to obtain a plans required authorization 
prior to receiving a service for which Medicaid subsequently pays, are health plans 
that are regulated by the Employee Retirement Income and Security Act (ERISA) 
permitted to preempt Medicaids claim for reimbursement solely on the basis that 
the individual failed to receive prior authorization?   
 
A32:  No.  The plan is to determine if the claim would have met their authorization standards 
and consider the claim for Medicaid reimbursement accordingly.  
 
On March 21, 2008, the Department of Labor (DOL) issued Advisory Opinion 2008-03A 
addressing the applicability of prior authorization in regard to Medicaid claims.  DOL 
stated that it is the Departments view that ERISA would not preempt a State cause of 
action to recoup Medicaid payments made for covered expenses to the extent that the 
private plan would have been liable for those expenses if the participant had followed the 
appropriate prior authorization procedures under the plan before the State made the 
payment for the items or services.  The Advisory Opinion can be found at:   
http://www.dol.gov/ebsa/regs/AOs/main.html#2008. 
 
Q33:  Are plans permitted to require a National Provider Identifier (NPI) for transactions 
with Medicaid programs? 
 
A33:   No.  States typically do not meet the definition of a covered health care provider, and 
therefore, are not eligible to receive an NPI.  If States encounter situations where plans 
are requiring them to submit an NPI, they can submit a formal complaint to the Office of 
E-Health Standards and Services (OESS) in CMS by using the online Administrative 
Simplification Enforcement Tool (ASET).  ASET allows individuals or organizations to 
electronically file a complaint against an entity whose actions they believe violate an 
Administrative Simplification provision of HIPAA. 
 
    States may submit a formal complaint electronically at:  https://htct.hhs.gov/aset/.    
ASET users are required to register with OESS and create a user identification name and 
password.  States also may submit a paper complaint.  The form is available at:  
www.cms.hhs.gov/Enforcement/Downloads/HIPAANon-PrivacyComplaintForm.pdf.     
  Page 11  State Medicaid Director 
 
Other Clarifications of the DRA Provisions 
 
Q34:  When are the provisions of section 6035 of the DRA effective? 
 
A34:  These provisions were effective on January 1, 2006. In Question 10 of the December 15, 
2006, SMD letter, we noted that a technical error had been made in the law which cited a 
specific section in reference to the effective date that was non-existent.  On December 20, 
2006, the President signed into law the Tax Relief and Health Care Act of 2006 which 
included a correction to the technical error.   
 
  We are also correcting another error made in the December 15, 2006, letter.  We 
indicated that States that need to amend their legislation to comply with the DRA 
provisions are given until the first day of the first calendar quarter beginning after the 
close of the first regular session of the State legislature that begins after the January 1, 
2006, effective date.  This should have read, after February 8, 2006, the date of 
enactment. 
 
Q35:  How long should third parties be given to come into compliance with the DRA 
requirements? 
 
A35:  Federal law does not address how long States should allow for third parties to upgrade 
their systems in order to provide the State with eligibility and coverage data; therefore, it 
should be determined by the States.  Based on discussions with industry leaders, it would 
not be unreasonable to allow 12 to 18 months for a plan to implement the PIE 
Transaction once an agreement has been negotiated with the State.