SMDL #02-003 
 
March 7, 2002 
 
Dear State Medicaid Director: 
 
I am writing to you regarding the Administrative Simplification Compliance 
Act (ASCA), P.L. 107-105, signed into law by President Bush on December 27, 
2001. This new law enables health plans, including the plans administered by 
the single state Medicaid agencies, to obtain a one-year delay in the date by 
which they must comply with the requirements of the rule titled &quot;Standards 
for Electronic Transactions,&quot; published at 65 F.R. 50312, August 17, 2000. 
Under the delay legislation, a health plan, clearinghouse, or provider 
otherwise required to come into full compliance with the Transactions Rule by 
October 17, 2002, may obtain the one-year extension by filing a compliance plan 
with the Secretary by October 16, 2002. HHS will promulgate a model form to use 
for filing these plans on or before March 31, 2002. Our intent is to make the 
process as simple and straightforward as possible. 
 
The extension is intended to provide time for all of the affected parties to 
achieve full compliance. Obviously this is a very large task, which needs to be 
pursued aggressively if states and their trading partners are to implement the 
standards for electronic transactions successfully by October 16, 2003. Any 
delay in state implementation activities is likely to jeopardize success and 
also increase the ultimate cost of achieving compliance. The ASCA requires that 
your compliance plan include a timeframe for testing that begins not later than 
April 16, 2003. If your HIPAA activities are stopped or severely curtailed, 
your agency may not even be able to meet these new compliance deadlines. We 
note also that the ASCA does not delay the compliance date for the HIPAA 
Privacy Rule, which remains April 14, 2003 for all covered entities (April 14, 
2004 for small health plans). Delays by Medicaid agencies in implementing the 
Transactions rule may lead to delays in meeting the requirements of the Privacy 
Rule. 
 
We recognize that all states are facing severe fiscal constraints for the 
coming year and possibly beyond. It is critically important that you maintain 
your level of effort to achieve HIPAA compliance. There are a wide variety of 
reasons why you should continue your efforts: 
 
&middot; The Centers for Medicare &amp; Medicaid Services has approved 
enhanced funding at the 90-percent Federal financial participation level for 
many of the Medicaid Management Information Systems (MMIS)-related HIPAA gap 
analysis and remediation activities. 
 
&middot; Using HIPAA standards to process crossover and third party 
liability (TPL) claims will accelerate reimbursement and facilitate the use of  electronic data interchange. Any delay may prevent you from realizing 
significant cost savings anticipated from the use of a standard coordination of 
benefit and TPL process and may exacerbate state fiscal pressures. 
 
&middot; Standardization of health care transaction information is expected 
to greatly facilitate fraud detection, which has been estimated to cost payers 
as much as eleven cents of every health care dollar spent. 
 
&middot; It is essential to maintain state leadership in national HIPAA 
workgroups and standard setting organizations. Lack of state representation 
reduces your ability to get modifications adopted by national standard-setting 
organizations, modifications that are critically needed to meet Medicaid 
business needs within the mandated HIPAA standards. 
 
&middot; HIPAA implementation does not lend itself to being stopped and then 
restarted later without serious project compromises, inefficiencies, and cost 
increases. 
 
It is important to keep in mind that the HIPAA administrative simplification 
requirements are expected to result ultimately in substantial savings to health 
providers and payers, including Medicaid agencies. Thank you for your efforts 
to date, and I look forward to succeeding together in meeting the initial HIPAA 
challenge. 
 
Sincerely, 
 
/s/ 
 
 Dennis G. Smith 
 
 Director 
 
cc: 
 
State Chief Information Officer 
 
State HIPAA Coordinator 
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators for Medicaid and State Operations 
 
Lee Partridge 
 
Director, Health Policy Unit 
  American Public Human Services Association 
 
Joy Wilson 
 
Director, Health Committee 
 
National Conference of State Legislatures 
 
Brent Ewig 
 
Senior Director, Access Policy 
 
Association of State and Territorial Health Officials 
 
Matt Salo 
 
Director of Health Legislation 
 
National Governors Association 
 
Jennifer King 
 
Director of Health and Human Services Task Force 
 
American Legislative Exchange Council 
 
Dr. Michael H. Trujillo, MD, MPH, MS 
 
 Director 
 
Indian Health Service 
 
Trudi Matthews 
 
Senior Health Policy Analyst 
 
Council of State Governments