Department of Health and Human Servces


OFFICE OF


INSPECTOR GENERAL


ELECTRONIC FUNDS TRANSFER FOR


MEDICAID PROVIDERS


, StRV1Cen to\' u .

Richard P. Kusserow 

INSPECTOR GENERA 

1- JU 199 
OFFICE OF INSPECfOR GENERA


The mission of the Offce of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Servces' (HHS)

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three OIG operating components: the Office of Audit Servces, the 

Offce of Investigations, and the Offce of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program, and management problems, and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICES 

The OIG's Offce of Audit Servces (OAS) provides all auditing servces for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrng out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and effciency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIG's Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECfIONS 

The OIG's Offce of Evaluation and Inspections (OEI) conducts short-term management and 

program evaluations (called inspections) that focus on issues of concern to the Department 

the Congress, and the public. The findings and recommendations contained in these inspection 

reports generate rapid, accurate, and up-to-date information on the effciency, vulnerabilty, 

and effectiveness of departmental programs. 

This report was prepared under the direction of Mark R. Yessian, Ph. , Regional Inspector 

General, Office of Evaluation and Inspections, and Martha B. Kvaal, Deputy Regional 

Inspector General, Office of Evaluation and Inspections, Region I. Participating in this project 

were the following people: 

Boton Region Headquaers 

David R. Veroff Project Leader Vicki Greene David Schrag, 
 Lead Analyst 

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


OFFICE OF


INSPECTOR GENERAL


ELECTRONIC FUNDS TRANSFER FOR


MEDICAID PROVIDERS


SERVICf,f. 

'0 

Richard P. Kusserow 

INSPECTOR GENERAL 

"ItVc130 OEI-01-91-00821 

EXECUTIVE SUMMARY


PUROSE 

The purpose of this study is to examine the use of electronic funds transfer for 

reimbursing Medicaid providers. 

BACKGROUN 

Electronic funds transfer (EFT) has taken the place of paper checks for over 15 years. 

It is most commonly employed to make recurring payments, such as salary and 

retirement benefits. 

The Health Care Financing Administration (HCFA) has recently expressed interest in 

paying providers with EFT. The HCF A sees EFT as another step toward reducing 

administrative costs and improving provider relations in the Medicare and Medicaid 

programs. 

HCF A' s Medicaid Bureau has indicated its intention to support State use of EFT. 

draft revision of the State Medicaid Manual shows that HCF A plans to provide 

enhanced Federal Financial Participation (FFP) for expenses related to EFT and 

electronic remittance advisories (RAs). (Payers use RAs to inform providers of the 

status of any outstanding claims the providers have submitted. The RA show whether 

each claim has been paid, denied, or suspended for further review.) The HCFA would 

pay 90 percent of design and development costs and 75 percent of operational costs. 

In contrast, HCF A pays only 50 percent of the postage costs for mailing paper checks 

and RAs. 

This report details the extent to which State Medicaid programs are currently paying 

providers with EFT as opposed to paper checks. It also discusses problems with EFT 

that States have identified and suggests possible solutions. 

FIINGS 

Only eight States are usng EFT to reimbure Medicaid proviers. 

Many States see advantages to using EFT Several States are conserig EFT but few 

have defite plans to adopt it. 

States have identified a diverse set of problems with EFT Some of these are eas 

address, but others are more difcult. 

Three commonly cited obstacles to EFT--loss of cash flow, potential fraud 

and initial cost--seem easily surmountable. 
Additional obstacles to EFT may make it harder to implement in some States 

than in others. 

Greater use of EFT may not create substantial savings unless accompanied by 

lesser use of paper remittance advisories. 

RECOMMNDATIONS 

To address the problems and concerns HCF A should: 
 regarding EFT that States have identified, the

Work with the State Medicaid Directors' Assocition (SMDA) to identi aditonal 

problems with EFT facing States and to share other States' solutions to those problems. 

Work with the National Automated Clearing House Association (NACHA) both to 

exlore how the Automated Clearing House can be used for Medicaid EFT and RA and 

to provie information to States. 

Ast States in developing billng agreements for proviers who use electronic claim 

remittance advisories, and fu transers. In particular, HCF A could (1) specify 

wording for biling agreements that would satisfy Federal requirements, and (2) 

distribute to all States copies of biling agreements used by States that currently 

employ EFT. 

Develop guidelines for provider partcipation in EFT These guidelines should identify 

conditions that States could impose on providers receiving payment through EFT. 

COMMNT 

We solicited and received comments on our draft report from HCFA, the Assistant 

Secretary for Planning and Evaluation (ASPE), SMDA, and NACHA. The ASPE 

SMDA, and NACHA were supportive of our recommendations and provided only 

technical comments. The HCF A concurred with our first two recommendations but 

did not concur with the last two as originally drafted. In response to HCFA' 

comments, we modified those two recommendations. They now more accurately 

reflect our vision of HCFA's role in promoting EFT technology. An explanation of 

the changes is provided on pages 10- 11 and in appendix A. 
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . .. 

TABLE OF CONTENTS


PAGE 

EXECUTIVE SUMMARY . . . . . . . 1


INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

FINDINGS 

RECOMMENDATIONS ........................................... 9 

COMMENTS ON THE DRAF REPORT 

APPENDICES 

A. Detailed Comments on the Draft Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . AB. Notes . . . . . . . . . . . . . . . . . . . B­

INTRODUCTION


PUROSE 

The purpose of this study is to examine the use of electronic funds transfer for 

reimbursing Medicaid providers. 

BACKGROUN 

Electronic funds transfer (EFT) has taken the place of paper checks for over 15 years. 

It is most commonly employed to make recurring payments, such as salary and 

retirement benefits. About 17 000 banks and other financial institutions and 35 000 

businesses use EFT through the national Automated Clearing House (ACH) system. 

The Health Care Financing Administration (HCFA) already provides strong incentives 

for providers to bil the Medicare program in electronic form.2 It also bore 90 

percent of the development costs for each State s Medicaid Management Information 

System (MMIS)--a powerful computer system for processing claims and maintaining 

utilization data.3 The HCFA has recently expressed interest in paying Medicare and 

Medicaid providers through EFT, which it sees as another step toward automating 

claims processing. It believes that EFT can reduce administrative costs and improve 

provider relations in those programs. 

In July 1991 , at the request of providers and Medicare contractors, HCFA proposed a 

new payment system for Medicare.4 The system would give providers the option of 

receiving payments through EFT rather than by paper check. Providers support EFT 

because it would relieve them from delivering paper checks to their own banks and 

eliminate the time they have to wait for checks to clear before drawing upon them. 

The HCF A supports EFT because each transfer would cost only 3 to 10 cents, as 

opposed to the first-class postage costs for paper checks (now 29 cents before bulk 

discounts). 

The HCFA plans to use EFT as an incentive to automate other Medicare claimsprocessing functions. Only providers submitting electronic claims and agreeing to 

accept electronic remittance advisories (RAs) would be eligible for EFT. (Payers use 

RAs to inform providers of the status of any outstanding claims the providers have 

submitted. The RAs show whether each claim has been paid, denied, or suspended 

for further review. ) The RAs wil be sent back to providers over the same telephone 

Jines used by providers to submit claims. 

Unlike Medicare, Medicaid is a State-operated program. The HCFA does not 

reimburse providers directly, but reimburses States for a portion of their expenditures. 

Therefore, HCF A could not institute EFT for the Medicaid program unilaterally. It is 

in HCFA's interest for States to use EFT rather than paper checks, however, because 
a reduction in States' administrative costs would lead to a reduction in Federal 

reimbursement as well. 

The HCFA's Medicaid Bureau has indicated its intention to support State use of EFT. 

A January 1992 revision of the State Medicaid Manual indicates that HCFA will 

provide enhanced Federal Financial Participation (FFP) for expenses related to EFT 

and electronic RAs. The HCFA will pay 90 percent of design and development costs 

and 75 percent of operational costs. In contrast, HCF A pays only 50 percent of the 

postage costs for mailing paper checks and RAs. 

This report details the extent to which State Medicaid programs are currently paying 

provider claims through EFT as opposed to paper checks. It also discusses problems 

with EFT that States have identified and suggests possible solutions. 

METIODOWGY 

Data for this report were collected during a related project on point-of-servce (PaS) 

claims management systems (OEI-01-91-00820). Telephone intervews were conducted 

in May and June 1991 with Medicaid claims management staff in every State except 

West Virginia.6 We also held less formal telephone discussions with staff from HCFA 

and the Federal Reserve Bank. 
FINDINGS


ONLY EIGHT STATE AR USING EFf TO REIMURSE MEDICAI 

PROVIERS. 

In 42 States, all providers are paid with paper checks. The only States now using EFT 

are Arizona, Florida, Georgia, Nebraska, New Jersey, North Carolina, Pennsylvania 

and Texas. Respondents from Arizona, Georgia, Nebraska, New Jersey, Pennsylvania 

and Texas indicated that EFT is available only to a few tyes of providers.

7 These 

results are displayed in table 

MA STATE SEE ADVANAGES TO USING EFf. SEVERA STATE 

CONSIDERING EFf, BUT FEW HAVE DEFIN PLAS TO ADOPT IT. 

Respondents from the large majority of States identified at least one benefit of EFT. 

Not surprisingly, most pointed out that EFT would improve provider relations by 

speeding up payments and would reduce administrative costs for printing and 

postage.9 Respondents from two States also noted that EFT could eliminate lost 

checks. This could be a significant benefit: Medicaid officials in Idaho have estimated 

the replacement cost of a single lost check to be $47. 

Of the 42 States with no EFT capabilities, only 6 (Arkansas, California, Maine 

Maryland, Tennessee, and Utah) have definite plans to add EFT. Three States 

(Georgia, New Jersey and Texas) that use some EFT have definite plans to expand. 

Apart from these nine States, there is little or no movement toward the use of EFT. 

Nineteen States reported that EFT was under discussion, but 22 others reported no 

intention to change (table 1). 

STATE HAVE IDENTIED A DIVRSE SET OF PROBLEMS WI EFf. 

SOME OF THE AR EAY TO ADDRES, BUT OTHRS AR MORE 

DIFICUT. 

Three commonly cited obstacles to EFT--Ioss of cash flow, potentil fraud and initil 

cost--seem easly suountable. 

One of the more easily handled concerns involves cash flow. States fear that EFT wil 

loosen their control over bank balances and promote quicker fund depletion, leading to a loss of interest. There is no reason, however, why EFT must have these effects. 

Although it is true that EFT eliminates the "float" of funds that occurs while checks 

are in the mail, the transfers can be scheduled to compensate for that loss. In fact 

HCF A has already anticipated this problem with regard to Medicare payments. The 

new plans call for a three-working-day delay between the time paper checks would 

have been issued and the time EFTs are actually made. The delay is designed 
TABLE 1: 

STATE MEDICAI PROGRA'
 CUNT USE OF EFf AN STATUS OF PlAS TO CHGE


STATE USES EFT?


Alabama


Alaska


Ari zona Yes--Large health plans only

Arkansas 

Cal Hornia 

Colorado 

Connect i cut 

Delaware 

Florida Yes--All provider typs 

Georg i a Yes--Hospitals. nursing homs Hawa ii 

Idaho 

Illinois 

Indiana


Iowa


Kansas


Kentucky


Louisiana


Maine


Maryland


Massachusetts


Michigan


Minnesota


MississiDDi


Mi ssouri 

Montana


Nebraska Yes- -State institutions only


Nevada


New HalJh ire


New Jersey Yes--Hospitals only


New Mexico


New York 

North Carol ina Yes- -All provider types 

North Dakota 

Ohio 

Oklahom 

Oregon 

Pennsyl vani a Yes--Capitation providers only 

Rhode Island


South Carol i na 

South Dakota


Tennessee 

Texas Yes- -Contracted svstems only Utah 

Vermont 

Virginia 

Washin ton 

ST A TUS OF PLANS 

None


Non


None


Definlte--For PharmacIes onlv at firs t Definite--All provider typs 

Under discussion


None


Under di scuss I on


None


None


Definlte--Expand to all provi der typs
 None


None


Under dl scuss i on


None


None


Under discussion


Under discussion


None 

Definlte--EFT and electronic RAs for all provider typs 

Definite--All provider typs
 Non


None


Under dIscussion


Under discussion


Under discussion


Under discussion


None 

None 

Under discussion


Definite--EFT daily for hospitals , weekly for


LTC facilities other provider typs


Under discussion


Under discussion


None 

None 

None 

None 

Unde r discuss I 

Under discussion


None 

Under discussion


Non 

Definite--Weekly paymnts 

Definite--Avai lable to more Pharmaci es Definite--All provider typs 

Under discussion


None 

Under dl scuss Ion 

West Virginia Did not respond

Wi scons i n Under dIscussIon 

Wyom i ng Under dIscussion 

Source: OIG survey of State Medicaid agencies , June 1991.

specifically "to minimize the loss of interest to the Medicare Trust Fund."B States 

concerned about cash flow problems could impose similar delays. Of course, such 

delays might limit gains in provider satisfaction. Stil, the convenience of EFT and the 

abilty to draw on funds immediately after payment should make EFT attractive to 

providers anyway.


Another commonly expressed fear is fraud. Federal regulations require States to 

notify providers that fiing false claims and accepting payment for them are violations 

of law. The regulations specify that this notification must be printed either on the 

claim form or on the payment check. When prosecuting alleged fraud, many States 

rely on providers' signatures on these papers to prove that providers were aware of 

the penalties and knowingly submitted the claims or accepted payment. A number of 

respondents expressed concern that EFT would eliminate their opportunity to obtain 

providers' signatures , especially for those who submit claims electronically. 

The HCFA and several States, however, do not seem to share this concer-n. There are 

a number of ways to collect providers' signatures or an acceptable substitute, even for 

electronically submitted claims. Thirty-nine States use annual biling agreements, 12 

use cover sheets that accompany diskette and tape submissions, and 2 require 

passwords for on-line claims submission (table 2). Six States rely on check 

endorsements, either alone or in conjunction with other methods. The HCFA, in its 

revision to the State Medicaid Manual, has indicated that biling agreements "updated 

as needed" would satisfy the Federal requirements. It recommends that Medicaid 

agencies confer with their States' Attorneys General to ensure compliance with State 

laws. 

Some Medicaid officials responded that though EFT may simplify and economize 

program administration in the long run, it is difficult and costly to implement initially. 

These officials said their States had neither the staff time nor the money to commit to 

such an undertaking. Start-up costs are a major obstacle for States wishing to 

implement any type of advancement in computerized claims processing. 12 The 

HCFA has anticipated this problem and, as stated earlier, is offering enhanced 

matching funds as an incentive. 

Additional obstacles to EFT may make it harder to implement in some States than in 

others. 

In some States, payments to providers are made not by the Medicaid agency or fiscal 

agent but by another State agency such as the Treasury or Comptroller s Office. In 

those States, there may be any number of additional reasons the organizations 

responsible for payment have shied away from EFT. Whatever the reasons, HCF A 

might not have sufficient leverage with those other State agencies to bring about a 

conversion. 

Also, there may be circumstances peculiar to individual States that could pose diffcult 

problems. For example, one respondent expressed doubts about the sophistication 
TABLE 2: 

METHODS USED BY STATE MEDICAI AGENCIE


TO PROVE ACCOUNABILIT FOR ClS
 CHECK BILLING COVER 

STATE ENDORSEMENT AGREEMENT SHEET PASSWORD 

Alabama Yes 

Alaska Yes Yes 

Ari zona Yes Yes 

Arkansas Yes Cal ifornia Yes Yes 

Colorado Yes 

Connec t i cut Yes 

Delaware Yes Yes 

Florida Yes 

Yes 

GeorCli a Yes 

Hawaii Yes 

Idaho Yes 

III inois Yes 

Indiana Yes 

Iowa Yes Yes 

Kansas Yes 

Kentucky. Yes 

Loui s i ana Yes 

Maine Yes 

Maryland 

Massachusetts 

Yes 

Did not resDond 

Michigan 

Minnesota 

Yes Yes 

Yes 

Mississippi 

Missouri 

Yes 

Yes 

Montana Yes Yes 

Nebraska Yes Yes 

Nevada Did not resDond 

New Hamcshi re Yes New Jersev Yes 

New Mex i co Yes 

New York Yes 

North Carol ina Yes 

North Dakota Yes Yes 

Ohio Yes 

Ok lahoma Yes 

Oregon Yes 

Pennsvl vani a Yes 

Rhode Is land Did not resDond 

South Carol ina Yes 

South Dakota Yes 

Tennessee Yes 

Texas Yes 

Utah Yes Yes 

Vermont Yes Yes 

VirClinia Yes 

Wash i ngton Yes Yes 

West Virginia 

Wisconsin 

Did not 

Yes 

resDond 

Wyomi ng Yes 

Total "Yes" 

Source: OIG survey of State Medicaid agencies , June 1991.

, 

his State s banks and their ability to accommodate EFT. Clearly, HCFA cannot be 

responsible for upgrading banks' computer capabilities. Another respondent , this one 

from California, had other reservations about EFT. Medicaid providers there 

apparently change addresses and bank accounts at a high rate. Approximately 5 to 10 

percent make a change each month. This can negate the benefits of EFT, which is 

designed to take advantage of regularity in payments. The respondent, however 

thought that the problem might be unique to California, which has, he said a bank on 

every corner." Where providers have fewer choices in financial institutions, account 

changes may be less frequent. 

Greater use of EFT ma not create substantial savigs unless accompanied by leer use 

of paper remittance advisories. 

Four respondents questioned the ability of EFT to save money without a concurrent 

switch to electronic remittance advisories (RAs). This is a serious concern. 

At first glance, a comparison of the transaction cost per EFT (3 to 10 cents) with the 

paper and postage costs of each check (about 29 cents) makes EFT appear to be a 

clear money saver. But because paper checks are now usually packaged with paper 

remittance advisories, this comparison may be fallacious. 

When RAs are printed on paper and mailed to providers, the incremental costs of 

printing and including a reimbursement check in the same envelope are negligible-­

apparently even less than the cost of EFTP Therefore, few if any financial gains 

would result from substituting EFT for paper checks if the State continued to send 

paper RAs.


The decline of paper RAs may be imminent, however. Several States are already 

transmitting electronic RAs to at least some providers. In most of those States, the 

RAs are delivered on computer tape or diskette. I4 In those cases, the RAs must stil 

be mailed or hand-delivered, and a paper check can easily be included. But Hawaii 

and Kentucky have the ability to send RAs on-line--that is, over telephone lines--and 

Arkansas plans to add a similar ability in early 1992. States could save money by using 

EFT for providers who receive on-line RAs. 

On-line RAs wil soon become an option for many more States. The American 

National Standards Institute has created a nationwide standard for electronic 

remittance advisories. States should be able to use this standard to send on-line RA 

to providers' financial institutions through the Automated Clearing House-- the same 

network used to send EFT. Providers could arrange to obtain the RAs from their 

financial institutions in a variety of ways.


EFT could generate savings even without on-line RAs. It is well established that 

electronically submitted claims are cheaper to process than paper claims. I6 States 

could follow the Medicare example of using EFT as an incentive to promote electronic 
claims submission. In fact, some States now provide electronic RAs only to providers 

who submit electronic claims, thus creating a similar incentive. 

EFT might also save money by allowing States to prepare RAs less frequently. 

Providers might be satisfied with biweekly or monthly RAs if they stil received weekly

EFT. If this were true, States now sending weekly RAs could cut associated costs by 

50 to 75 percent.

RECOMMENDA TIONS


The HCF A has already taken a major step by offering enhanced funding for electronic 

funds transfer and remittance advisories. But it is unlikely that this step alone will 

motivate many States to use EFT, given the numerous problems with EFT that the 

States have identified. To address these concerns, HCFA should: 

Work with the State Medicaid Directors ' Association to identify additional problem wih 

EFT facing States and to share other States' solutions to those problem. 

Work with the National Automated Clearing House Association both to exlore how the 

Automated Clearig House can be used for Medicaid EFT and RA and to provi information to States. 

Assit States in developing biling agreements for providers who use electronic claim 

remittance adviories, and fu transers. Two actions in particular would be 

appropriate. (1) The HCFA could specify wording for biling agreements that would 

satisfy Federal requirements, as it has for claim forms and paper checks (42 CFR 

455. 18- 19). This wording could then be added to State-specific biling agreements. 

(2) The HCFA could distribute to all States copies . of biling agreements used by 

States that currently employ EFT. States choosing to implement EFT could use these 

current agreements as models.


Develop guidelines for provider partcipation in EFT These guidelines should identify 

conditions that States could impose on providers receiving payment through EFT. 

Possibilities include requiring electronic claims submission and electronic RAs (as 

HCFA has proposed for the Medicare program), or limiting changes in bank accounts. 

In developing these guidelines HCFA should draw on the experiences of the States 

already using EFT and of the Medicare program. 
COMMENTS ON THE DRAFT REPORT


We solicited and received comments on our draft report from two components of the 

Department of Health and Human Services--the Health Care Financing 

Administration (HCFA) and the Assistant Secretary for Planning and Evaluation 

(ASPE). We also solicited and received comments from two independent 

organizations--the State Medicaid Directors' Association (SMDA) and the National 

Automated Clearing House Association (NACHA). We reproduce these comments in 

appendix A; our response to the comments appears below. 

Commnts from HCFA 

The HCF A concurred with our recommendations that it work with SMDA and 

NACHA to investigate ways to facilitate adoption of EFT. It did not concur, however 

with our recommendations to develop a standard biling agreement and a set of rules 

for provider participation. (The draft version s recommendations are reprinted in 

HCFA' s comments, which are contained in appendix A.) The HCFA reiterated its 

support for EFT, but stated that it needed further analysis of our findings before 

agreeing to these recommendations. 

The HCFA believed that implementing our recommendations would constitute a 

nationwide, Federal mandate that State Medicaid programs implement EFT. That 

was not our intention. We firmly believe that EFT should remain an optional 

component of the Medicaid program, and that the decision to provide enhanced 

Federal funding of EFT should be made on a State-by-State basis. We see our recommendations as steps that HCF A should take to help those States 
 choosing 

adopt EFT to do so in a cost-effective manner. 

In response to HCFA' s concerns, we have modified our last two recommendations. 

We no longer call for HCFA to develop a provider biling agreement that would 

satisfy legal requirements in all States; instead, we call for HCFA to assist States in 

developing customized biling agreements. Also, we now describe the conditions for 

provider participation as "guidelines" rather than "rules " and make clear that the 

ultimate decision on whether to use the guidelines should be left to the States. 

believe that by implementing these recommendations, HCFA wil move toward its 

stated goal of supporting State use of EFT. At the same time, HCFA wil help ensure that if and when EFT is adopted by States it offers benefits to providers, States, and 

HCF A. 

The HCF A made two technical comments, both calling for further analysis of statements made in the report. 

California providers switching bank accounts We offered this example simply 

to ilustrate potential problems with EFT. We do not mean to suggest that all 
States would face similar problems on the same scale. Therefore, we did not 

feel that further analysis is necessary. 

Use of electronic RAs. The questions HCFA raises about electronic RAs are 

excellent and certainly need to be answered in the course of implementing 

EFT. It is precisely these sorts of questions that we think HCF A should 

address in consultation with SMDA and NACHA (see our first two 

recommenda tions). 

Comments from other organizationS 

The ASPE commented that the State Medicaid Manual revisions referred to as a draft 

in our draft report have now been finalized. Our report now reflects this update. 

The SMDA found our report useful and believes that State Medicaid agencies will 

support our recom endations to HCF A. We appreciate SMDA's comments and infer 

that SMDA is wiling to work with HCFA as suggested in our first recommendation. 

The NACHA expressed support for Medicaid agencies' use of EFT and identified 

three specific issues for HCFA and the States to consider. We appreciate NACHA' 

support and believe that these issues should be addressed jointly by HCFA and 

NACHA. 

APPENDIX A


DETAID COMMNT ON TH DRA REPORT 

OIG REPONSE TO TH COMMNT 

In this appendix, we present in full the comments on the draft report offered by the 

Health Care Financing Administration (HCFA), the Assistant Secretary for Planning 

and Evaluation (ASPE), the State Medicaid Directors' Association (SMDA), and the 

National Automated Clearing House Association (NACHA). Our response to each 

set of comments is contained in the section of the report titled "Comments on the 

Draft Report. 

A -

. / 

:

,(.".'0 

Date 

From 

Subject 

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


Memorandum 

APR I 4 


J. Michael Hudson 


Actig Admtrator 


Ii 

OIG Draf Report: fElectrorUc Funds Tranfer tor Medicad Provders,


(OEI-Ol-91-021)


Inpector General


Ofce of the Secreta 

Wt; have revewed the subject draft report which dicusses the degree to which 

States bave adopted Electonic Funds Tranfer (EFT for payment of Medicad provders. The report also identied a number of factors which prevented additional 

States from adopting thi fuds transfer method. 

OIG found that only eight States curently use EF. DIG indicates these States 

recogned several advantages through EFT use, includig additional admtrative 

savigs. In order to promote EFT, OIG recommends that HCFA: (1) work with the 

State Medicaid Directors' Association and (2) the National Automated Qearg House 

Association to promote EFT implementation among Medicaid provders; (3) work with State Medicad agencies to create a stadard, fraud-proof bilg agreement for provders using electronic claims, remittace advsories and fuds transfers, and ensure that this agreement satisfies legal signature requiements on both Federal and State 

levels; and (4) design reasonable rules for provders receivg EFT which require electronic clai submision and electonic remittance adviories or litig ban 

accunt changes. 

DIG' s recommendations are geared toward implementing EFT nationwide. 

Though we concur with the fit two recommendations, we do not believe the report

provdes conclusive evidence that nationwide implementation ca actua be 

accmplished at tbs tie. Since the purpse of funher implementation of EFT is to 

achieve savigs larger than those produced by the sytems most States cuentl 

employ, we believe DIG should investigate the costs and benefits of EF more 

thoroughly in accrdace with our attached comments. Consequentl, we defer 

concurg with the remaig two OIG recommendations unti a more comprehensive

report is completed. 

Thank you for the opportunty to review and comment on th draf report Please 

advse us whether you agree with our position on the report s recommendations at your 

earliest convenience. 

Attchment 

A - 2 

/r. 
Comments of the Health Care Financing Administration 

(HA) on the OIQraft Report: ' 'Eectronic funds 


edicaid Provders " OEI-OI-91-00821


Recommendation 1


That HCF A work with the State Medicad Diectors' Asocition to identi additional 

problems with Electronic Funds Tranfer (EF) facig States and to share other States 

solutions to those problems. 

ecommenqation 2


That HCF A work with the National Automated Clearg House Asocation both to 

explore how the Automated Clearg House ca be usd for Medicad EF and RA 

(remittace adviories) and to provde inormtion to States. 

esponse to Recommendations 1 and 2 

We concur with these recommendations, panicularly gien Secreta Sul' s cuent 

intiatie to reduce admistrative health cae expenses though increased use of 

electronic data submision. We believe it wi be fritful to work with the State 

Medicad Directors' Association on plans for comprehensive Medicad implementation of EFT. By doing so, we anticipate gaing a better understadig of the diculties 

States face and the solutions they fid. Workig with the National Automated Clearg House Association should funher faciltate ths process by explorig options for EFT, electronic RA and transferrg inormation electronica to States. 

RecommendMjon 3 

That HCF A work with State Medicad agencies to create a stadad, fraud-proof bilg 

agreement for provders using electonic clais, RA and fuds tranfers. The 

agreement should be wrtten to satisfy legal signature requirements in every State as 

well as Federal legal requiements. 

Recommendation 4


That HCF A design a reasonable set of rules to which provders must agree in order to 

receive EFT. These rules must include requirg electonic clai submiion, requig electonic RA, or liting changes in ban accounts. 

A - 3

Page 2 

BCFA Response to Recommenqations 3 and 

HCF A support the goal of the OIG report. We currently provde enhanced Federa 

Financial Parcipation to those States that wih to develop EFT sytems. Givg 

Medicad provders those same options would also be consistent with HCFA' s longterm goal. However, notwthstading our conceptual support for EFT, we caot 

concu with Recommendations 3 and 4. 

OIG' s recommendations are geaed towd nationa implementation of EF for 

Medicad. However, we believe EFT implementation on th sce inolves a 

considerably more complex set of isues th diusd with th report A more 

thorough analis of the relative costs and benefits of EF is alo requied for each 

dicrete par: the Federal governent, States, provders inurers etc Whe such 

anis m y be beyond the scpe of the origial study, we caot endors the key 

fidig supportg these recommendations without such effort Unti a more rigorous 

analyis is provded, we alo caot commt ourelves to developing a stadadid bilg agreement for pnmders using electonic cla electonic RA and EF. 

OIG needs to exame the varety of State sytems and the impact such vaety wi 

have on nationaJ implementation effort. Consideration of the multiplicity of State 

sytems, and concomitat effects on potential savigs, must be underten before the 

recommendations of th report ca be reconsidered. Though the report repetedl 

mentions that eight States now employ EFT, there are no defitie statements that 

EFT has been found to be cost-effecte in any of these intace. Moreover, OIG 

does not discuss the operational expriences of any of these States. Such dicuion 

would be invaluable in determg the benefits of national Medicad EFT 

implementation. We believe that a de facto mandating of EFT without fuher study 

would be counterproductie, because it would serve to retad rather than foster the 

interest of States in EFT. 

Techncal Comments 

Medcad provders there (Caorna) appaentl change addresss 

and ban accunts at a high rate. Approxately to 10 percent 

make a change each month. Ths can negate the benefits of EF, 

which is designed to tae advtage of reguarty in payments. The 

respondent, however, thought the problem might be unque to

Caorna.. 

OIG does not provde analyis of these statements. The report does not clar how 

comparable Caorna is to other States, nor how signcatly savigs in Caorna are 

afected by th problem. 

A - 4

Page 3


Pa,e 7. far&mpU 

The fial sentence of this paragraph reads .few, if any, fiancial gains would result from substitutig EFT for paper checks if States continue to send paper RA." Given 

that use of both EF and electonic RA is stated to be necessar to achieve costeffecteness, dicusion of the costs and impediments to accptace of RA among Medcad provders alo seems waanted. Subsequent statements that ''te declie of 

paper RA may be imminent" and "RA wi soon beme options for may more 

States" do not sufciently quell concern. 

For exple, there should be a dicusion of whether pnMders wi have to obta 

speial equipment to receive electonic RA. If obtag equipment is necess, what

are the costs per provder? Is there one preferred sytem compatIble with al State 

operations, or are multiple options necess? If dierent sytems must be us what 

are the prjce diferential, and how liely is it that each State s Medicad provders 

tae on such additional expenses? Could a national requirement for use of both 

and electonic RA have a negatie impact on beneficiar accss to medica cae? 

These questions need to be addressed. 

A - 5

.;.

DEPARTMENT OF HEALTH & HUMAN SERVICES OfIC of the Secety 

Washington, D.C. 20201


TO: Richard P. Kusserow 

Inspector General 

FROM: Assistant Secretary for 

Planning and Evaluation 

SUBJECT: OIG Draft Report: "Electronic Funds Transfer (EFT) for Medicaid Providers " OEI-Ol-91-00821 

Thank you for providing me with an opportunity to review your 

draft report on EFT for Medicaid providers. I would suggest only one change to reflect a development that has occurred since your 

report was drafted. The report should be revised to reflect that 

HCFA I s State Medicaid Manual revision concerning the enhanced 

match for EFT efforts has been finalized. It is currently at the printer and is expected to go out in the next four to six weeks. 

Martin H. Gerry 

A - 6

., ..._... , 

. ...... ,.., . .,.. ,., ... _p .

STATE MEDICAID DIRECTORS' ASSOCIATION . O . L' "h" 

March 24, 199 

Mr. RkhardP. Kusserow, Inspetor General 

S. Depaent of Health & Human Services


Washington,' D.C. 20201


Dear Inspector General Kusserow; 

I have reviewed your draft report entitled Electronic Funds Transfer for Medicaid Providc 

This report provides a useful anlysis of both benefits and poential problems with electronic funds transfer (EFT systems. Moreover, the report provides useful inormation on state activities which wil be of asistance to those states wishing to explure this technology further. I believe the report' s summation of the diversity of state concerns with EFT iJ be helpful in framing the discussion on how best to resolve those issues. 

r believe state Medicaid agencies wil support the recommendations contained in the druft report 

and wil support efforts to promote discussion of EFT. 

. Sincerely, 

Ray Haley I Chairman


State Mcdicajd Directors' Association and 

Director, Arkansas Office of Medical Services 

An affiliate of lbe Amelic:m PubLic lbre Astion 

tHO Fir.t Stret , N. , Suite SOO, Wd.o;i c. 2002-405 (202) 682.(lOO 
ACH


America s Laf1'C.st Electronic Payments Network 

NArIO:-AL AUlMATED 

CU-:AIU:-C HOUSE ASSOCIATION 

April 27, 1992


Mr. Richard P. K usserow


Inspector General


Department of Health & Human Services


Washington , D.C. 20201


Dear Mr. Kusserow:


nk you for the opportunity to comment on your draft report entitled ElectroniC' Funds Transfer for Medicaid Providers . The National Automated Clearing House Association (NACHA) is a trade association representing 42 member Automated Clearing House tACH) associa tions whose members comprise over 15 500 depository financial institutions. NACHA establishes the rules for the inter-regional exchange of commercial ACH payments and develops new ACH products and improves existing ones in order to meet the needs of financial institution participants and their customers. NACHA also provides marketing and educational services to its members. The ACH 

network is a nationwide payments system used by more than 22 500 participating fj nancial institutions , 120 000 corporations, and millions of consumers. In 1991 over 1.7 billion commercial and government ACH transactions with a value of over $6.9 trillion was sent over the ACH network. 

NACHA is pleased that the Health Care Financing Administration (HCFA) is encouraging the use of electronic funds transfer for reimbursing Medicaid providers and supports your efforts. Using the ACH for this purpose would be a natural fit. As you indicated in your report, effective April 3, 1992 the NACHA Operating Rules were amended to permit the use of the ANSI ASC X12.85 (Healthcare Claims Payment Order) transaction set to the table of permissible ANSI transactions be used in the CCD+ and CTX transactions. In addition, NACHA' s Board of Directors are currently reviewing a proposed rule amendment that would increase the number of addenda records accompanying a CTX from 4 

was set in motion 990 to 9 999. One of the reasons this proposed rule change was due to a request from the health care industry. 

I believe that several issues need to addre!; ed prior to using the ACH to reimburse Medicaid providers. Some of the issues identified include: 

Compliance with standards. As mentioned above, the ANSI ASC X12. transaction set has been approved for use with CCD+ and CTX. Compliance with these standards are extremely important in ensuring the integrity of the 

system. payment 

Payment remittance information. The ACH network is a payments system that permits payment related information to accompany the payment. The NACHA Operating Rules were recently amended to permit zero dollar corporate payments over the ACH so long as the entry carries an addenda which contains remittance information. If a format other than the ANSI ASC X12.85 is being considered for 

Suitc 200, 607 Hcrndon Parkw.y Ht'rndon, VA 22070 

703/742. 9190 . i83/787.096 

..cycled paper * 
R. Kusserow 

April 17, 1992


Page 2


use HCFA would need to receive approval of the proposed format by the NACHA Board of Directors. .At a minimum, proposals for rule changes must be received by NACHA at least one year prior to implementation. 

Awareness. The financial industry should be made aware of HCFA's plans to use the ACH for Medicaid payments. NACHA and its regional ACH associations publish newsletters and sponsor workshops that may be avenues for HCFA to keep financial institutions apprised. Support by the financial industry could assist HCFA in getting additional states to adopt electronic funds transfer for 

Medicaid payments.


HCFA' NACHA would be more than happy to sit down with you or your staff to discuss s plans for using the ACH for Medicaid payments. In addition, we would welcome your input to our Bankers EDI Council meeting. The Bankers EDI Council was formed by NACHA to address the needs of the financial community as it relates to financial ED!. If you are interested in interacting with this group, please let me know. If you have any questions or need more information please do not hesitate to contact me. I may reached at 703/742-9190. 

Si nee rei y, 

Linda O'Hara


Director of Rules & Operations


A - 9


APPENDIX 

NOTE 

National Automated Clearing House Association ACH: The Electronic 

Solution, no date. 

See Health Care Financing Administration Report to Congress on Electronic 

Media Claims (RC-90-028), October 23, 1990, p. 3. Until 1986, when Congress 

imposed a 14-day minimum delay before payment, providers using electronic 

biling were paid substantially faster. Recently, HCFA has helped develop a 

standard electronic physician claim form, which providers can use to bil private 

insurance companies and Medicaid as well as Medicare. 

Health Care Financing Administration State Medicaid Manual Section 11205. 

Medicare Program: Revised Procedures for Paying Claims from Providers of 

Services, II 56 Federal Register 31666 (July 11 , 1991). 

The announcement of the EFT proposal in the Federal Register did not 

estimate the number of providers who were expected to request EFT or the 

total anticipated savings. Under the proposal, HCFA would also allow 

payments to be made by wire transfer--a process similar to EFT. However 

because wire transfers are more expensive than EFT, providers would have to 

pay the costs associated with that service. 

The appropriate Medicaid agency official in West Virginia was unable to 

participate because of ilness. The District of Columbia also participated in the 

survey and is hereafter referred to as a State. 

In Arizona, EFT is available only to nine large health plans; in Nebraska, only 

to State-operated institutions and agencies; in New Jersey, only to hospitals; in 

Pennsylvania, only to pre-paid health plans; and in Texas, only to providers 

under contract. In Georgia, EFT was started as a pilot program for hospitals 

and nursing homes only, but it wil soon be available to all provider tyes. Only 

Florida and North Carolina currently make EFT available to all provider tyes. 

AIl but 16 respondents mentioned at least one advantage. It should be noted 

that respondents were not asked to identify advantages and disadvantages of 

EFT in general, but rather of real-time EFT in particular. Real-time EFT 

would transfer money to providers immediately after they dispensed services. 

The advantages of real-time and non-real-time EFT are generally the same. 

But real-time EFT carries some disadvantages that need not pertain to nonreal-time EFT. Because real-time EFT wil not likely be an option for 
Medicaid programs, these additional disadvantages are not discussed in this report. 

Twenty-five respondents mentioned provider relations; 13 mentioned reduced 

administrative costs. 

10.	 This estimate was set about three years ago and has not been adjusted for 

inflation. The costs represent staff salary and benefits for the time necessary to 

cancel one check and manually produce another. The State is not assessed 

charges by the bank for canceling checks. 

11.	 56 Federal Register 31667. 

12.	 For a discussion of other computerized claims-processing functions, see Office 

of Inspector General Point-of-Service Claims Management Systems for 

Medicaid, OEI-01-91-00820. 

13.	 In Utah, the printing and paper cost of each check is only 1.2 cents. In 

Oregon, the cost is only 0.75 cents. 

14.	 Twenty-nine States can send RAs on computer tape, and 7 States can send 

them on computer diskette. 

15.	 Telephone conversation with Karen Lyter, National Automated Clearing House 

Association, September 12, 1991. 

16.	 Health Care Financing Administration Report to Congress p. 2.