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 David Schrag, 
 Lead Analyst


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 

P~S syste have SQved mone and ennced pr adtrtin 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. 
Few State pl 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 

four POS system functions. 

Seer ba hae Ii Sta' im of P~S sy. 

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. 

Many State have receied inte 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 

EXECUTIVE SUMY 

INODUCTION. . . . . . . . . . . . . . 1


FINDINGS . . . . . . . . . . . . . . . . . . . 3 

P~S systems in New York and Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . 3 

Plans in other States . . . . . . . . 4 Barrers to implementation. 
 . . . . 6 

Inadequate and confuing information 

RECOMMENDATIONS ....................


COMMENTS ON THE DRA REPORT 

EPILOGUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

APPENDICES 

A. The Case for P~S Systems in Medicaid Programs . . . . . . . . . . . . . . . . . . . . . AB. Methodology . . . . . . . . . . . . .. BC. Exsting and Proposed Medicaid p~s Systems . . . . . . . . . . . . . . . . . . . . . . .. CD. Explanation of Savings Estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DE. Detailed Comments on the Draft Report and 

OIG Response to the Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. EF. 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, is now availatle. Point-of­ 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 systems while lowering their costs. 1 A 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 

prescription drug claims.3 The act 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


POS SYSTMS HAVE SAVED MONEY AN ENCE PROORA ADMlTION IN TH ONLY TWO STATE USING TH. 

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. 

New York's P~S system is savig mins of doUa a yea by peormg elil 

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 

plastic ID cards is estimated at $4.5 milion.s New York 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 highvolume 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 uses it P~S syste for elgiil veratin onl. It is alo savig mins 

of dollrs anll. 

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 

fuU year of operation (February 1989-January 199).8 The State 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. 

Seerl Stale have ha prliry dicuns ahow deelopig P~S sysrems hut few have ma comm. 

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 

eJigibility verification systems.10 These plans are summaried in table 1. Several


other States were making improvements on a more limited sealeY 

TABLE 1: 

STATE WI DEFI PLAS TO IMLE 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 

Eigh 11 af th page of OBRA 90, on on State ha de plns to im a P~S d1 claim malUgem syte th inorte 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 

gone beyond the discussion stage.16 Iowa had for some time been contemplating 

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 issuing a request for information in April 1991. 

SEVERA BARRS HAVE LI STATE' IMIEMENTATION OF POS 

SYSTEMS. 

State lack th mone reqed to adpt ne syste an do not have sujJ staff to research th fug. State fear th wi mi th OBRA 90 deadine for ennced Fedl 

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:


STATE RAGS 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' 

Our State doen t have the money necry 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 realtime sytem.


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


We may go to real time, but we want to wait until the current fil 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. 

Our current fil 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 

contract bid.20 Furthermore, 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 lowprocessing 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 offls fea tht P~S sy wo hae seer neatie efects on State an th ci. 

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 fullmonth Medicaid eligibility by other entitlement programs. 

Reports from Massachusetts suggest that P~S eligibility verification systems can cause 

problems for recipients.24 Apparently, recipients there are now 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 complicated. 

State an prat pa do not us unor el cla for. 7h th imtin of P~S sy an ad to th co 

POS cJaims management systems cannotfu ction unless aU parties involved--providers hardware and software developers, telecmmunications networks, and bil 

processors--agree on what inormatiQ , SY D1 wiJlhandle and how it wiJI be 

organied.27 Standard fonpats all.ow 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 -i;tIi

' mP9n , parpcularly . - so , us , esign1geirowp unique 

: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 

been tested widely.29 The "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 STATE HAVE REIVD INADEQUATE OR CONFSING 

INORMTION ABUT PO SYSTS.


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

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 

respondents in 31 States did receive information about P~S systems from either 

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 
did not appear to be systematic about providing information. In no region did an 

respondents either receive or not receive information. 

Prate te an dr cla-presg co hae be actie in 

prmog P~S tehn, but th lak ere in Medaid envinm. 

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. In fact, it 

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). 
, 

Th HCFA hi is unle poli stte rearg sp reem for prg P~S sy. 

For a year after the passage of OBRA 90 it was difficult to determine exactly how 

HCFA would respond to State requests for enhanced FF. 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: 

March 1991. A memo on the subject of Electronic Claims Management (ECM) 

systems dated March 15, 1991 , from the Medicaid Bureau Director to all 

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. The system must perform all of the 

on line using real-time processing: eligibility verifications 

cJaims data capture. . . and claims adjudication. (emphasis added) 

following funcrions 


April 1991. A draft SMM addition stated that P~S systems that performed 

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 

from the October 1991 draft with respect to ECM. First, it struck the sentence 

January 

stating that States "may use an ECM 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. . . . 

The SMM stil does not specificaUy state whether enhanced FF is available for 

P~S systems which handle all tyes of cJaims, including drug claims, but which 

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. For systems that do not process drug

cJaims, the rules are cJear. To qualify for enhanced FFP, the systems must perform 

eJigibiJty verification, or eligibility verification and cJaims submission, or eligibility 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 

projects.33 The projects would determine the 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, ElyThe 

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. 

Th HCFA sho coHect informtin on P~S tehnlo an reg ditrut it to 

StJtes. Th HCFA sho ilte alJtie meth of usg P~S tehnlo, offer stte for prg cost-eectie syste, an facite commatin betw Sta 

plnng to pre 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. 
Th HCFA sho cla th opetina reqem for ened Fed fug 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 

requirements and available levels of FF 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. 

Th HCFA sho prmote th deelpm of st eltrni claim foru an 

th us by Sta Medai agen. Th HCFA, State Medaid Diecto' Asn, Aman Natna Sta Ins an Natna Co for Presti Dr Pr shoul work toeth towar th 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 systems in the near future, such a deadline would achieve widespread if 

not total uniformity in P~S cJaims submission formats. It would also, however, give 

the cJaims processing industry time to develop the needed standards and would not 

prevent States that are now procuring P~S systems from moving forward. 

State Medai agen th deelp P~S claim pres sy sho ene tht 

th are comtile wi strd eltrni claim f01 as th f01 

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 

force on electronic biling. We revised the recommendation to better reflect our 

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) guidelines for P~S systems. The HCFA states that 

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 CASE FOR PO SYSTS IN MEICAI PROGRA 

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. 

P~S syte can ree State speg on inligile reciie recienr wi th-part coverge, an inpprprte seres. Th can also rede adtrtie costs.

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 abilty to notify providers of potential TPL and 

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-Ol88-0080), 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 

production and mailng, with an average of $570 00 (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. Realtime 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. 

P~S syste can imve prvi 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 

providers of third-part coverage. P~S cJaims submission a))ows providers to check 

and edit cJaims for simple errors. P~S 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.


P~S syste can accelte th flw of informtin frm JHvirs to Slate, alwig bett pr 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. 

States often reported a range, 
 . 5 to 15 days. We averaged the low and high estimate to asign each 

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. 

P~S syste co ad Medaid to th lit of pr avaible th eltr 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 Service. From Papcr to Plastic: The 

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 

Functions 

Equipment and

Servce Neeed 

Estimated 

Cost 

Estimated 

Savings 

Start 

Date 

Status 

(as of 9191) 

Arkans Eligibility Platic card $8 milion $10 milion APD 

verification 

(day-speific) 

production and 

distribution, pas 

over 4 years 

to develop gros 

savings over 

approved; 

bids recived 

and claims terminals, initial and and operate 4 years for card 

submision for ongoing (includes production 

all provder 

ty; claims 

adjudication for 

programming of 

terminals 

work by new 

contractor 

fil agent 

pas terminal 

supply, 

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 

adjudication for 

to operate pending 

HCFA 

pharmacists; 

pro-DUR approvl 

anticipated 

Masschusetts 

Eligibility 

verification 

Plastic card 

production 

$19 milion 

over 3.5 

$30. 

milion gros 

1189 System 

operational; 

(day-specific) 

for all provder 

tys 

telecommunications 

network, pas 

terminals 

years to 

develop and 

operate 

savings over 

5 years 

expnsion 

contemplated 

Missuri Eligibility Programming of $507 00 to $2. 819 APD 

verification state-operated develop; milion gros approved; 

(day-specific), 

for all provder 

tys; claims 

submision 

adjudication 

MMIS, maintenance 

of pro-DUR data ba (provders will 

pay for equipment 

and line charges) 

53,00 per 

year to 

operate (not 

including 

conversion to 

savings 

annually 

from dayspecific 

eligibility 

projcct work 

to start 10191 

and pro-DUR day-specific alone 

for pharmacists eligibility) 

New 

York 

Eligibility 

verification 

(day-specific) 

and utiliztion 

System design 

plastic card 

production 

telecmmunications 

S38 milion 

over first 7 

yers to 

develop and 

S18 million 

gros 

savings 

annually; 

1118 System 

operational; 

contractor 

secured 

revew and 

control for all 

network, pas 

terminals, evolution 

operate; S30 

milion over 

S200 million 

annual gros 

through 

199; 

provder tys; resu rces next 6 years savings additional 

pot and clear 

for pharmacy 

and laboratory 

to operate poiblc

from servce 

retriction 

functions 

contemplated 

orders enforcement 

SOURCE: Adance Planning Douments and additional information supplied to OIG by each State in Seplemt.r 1991. 

C -


APPENDIX D


EXLAATION OF SAVIGS ESTE 

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.


We obtained the values off and for each State for Federal FY 199 from HCF A' 

Division of Medicaid Statistics. The Division also provided each State s total 

expenditures by tye of servce, which we used to calculate (see below). We obtained the value of from our mail survey of States. They provided, for either the 

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. 

To calculate 
 we subtracted from each State s total expenditures its expenditures on 

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 cJosing (e. HMO premiums) or 

because patients needing these servces are not Jikely to lose Medicaid eJigibilty (e. 

inpatient hospital). 

Twenty-three States were able to supply values for c: AI CA, cr, FL GA, ID, KY 

also provided a value of 
 but was not incJuded in this caJculation because it already 

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 arithmetic mean of $7 716 029. The median State was Mississippi, with S = $4. miJion. 

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 

benefits of P~S systems. The American Pharmaceutical Association has 

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. 

Plati ID car 

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 incJude the costs of the POS system required by plastic cards. 

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 


ETATT.F.O COMM ON TI DRA RERT AN 

OIG REPONSE TO TI 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,,, 

"."4Ia 

Date 

From 

Subject 

Health Care 

DEPARTMENT OF HEALTH & HUMAN sEi\6iiVED Financing Administration 

1992 Memora

Gail R. WiJensky, Ph. D. 

Administrator 

OIG Draft Report - "Point-of-Servce Claims Management Systems for Medicaid," 

(OEI-Ol-91-00820) 

Inspector General 

Offce of the Secretary 

We have reviewed the subject draft report which discusses the potential of pointof-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 

also recommends that State agencies develop pas 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. However, we believe it would be premature to commit 

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 systems for Medicaid. In the meantime, we wi keep P~S systems on the agendas of 

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 

Inormation System (MMIS) section of the State Medicad Manual. Th 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 

15bjnatorL D.C--02g(.J 

TO:	 Richard P. Kusserow 

Inspector General 

FROM:	 Assistant Secretary for 

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 

scope you describe and distribute it to the states is premature. 

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 the meantime , I believe that HCFA should, to 

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

OIG REPONSE TO ASPE COMM


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 disseminate information on cot 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 

Accredited Standards Committee The Travelers 

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 

Oi.ump-nt Nn,
 Fe 16, 1992 

Kr. Rich P. Inr 

Office of DetInr 

Was, of Heth anDC 20201 

pnm"n Sece 

De Kr. RUse: 

I hae reew th dr rert entitled "Point of sece Clai Maemt sy for Mecad" an hae th ts. on Pae 11 of 

th rert th's on seon whch discse th fac tht "state an private paer do not us unfoI1 elecc clai fomat". I wod ag tht ths is a major prolem sin th ar over 400 elecnic clai fomats in us in th U. 

Th Workg on Elecc Data Intee, whch wa intiate th IDs SUva But in NoBD 1991, an is oo by Joseh Brhy of Treler an Be Tr of Blue Crss Blue Sheld 

ation, is adiD th issu of stzed billiD, elecc clai, eligiility an paymt inlud elecnic retta adce (ER) an elecnic fu trfereEF). Th rert is sc€'l. for sussion in Juy 1992. 

In re to th ca Nationa tLroT' Intitu(ANI) In tte effort, th ba be signficat proess ma sin ;ng tte in Feb. 1991. Th follCI heth tron hae be aproed as drt st, as of ths lette: 

835 

834 

Heth Enllmt Pat ER

Th aM tien heth ca trons hae be 8Wroed to se th Xl 
 hip for balot: 

837 Heth Clai Anticipate fonn apro is 10/92 

Th foll heth ca trons ar un deelopt: 

Elgiility - Anticipate apro 2/93 Cazed Patient Rerd - Work to st 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 

oprating under the proedurs of the Hartford, CT 06183 

American National Standards Instiut TE: 203 277.7647 FAX: 203 277. 2107 

Document No. 

St Plea JXte tht ap of al tr un X1 ar as for '1 Use (re for a peod of 2-3 ye pror to ANI: fiD ap. '1 sT-mrb1' ho, is fuy ap by al paes an inxprate into ver trto as a mr.


As yo ca se, mu work ha be 1; R em heth st with


X1 aver th pa ye. &: ba al be -- a mo acve pacipat th pro an ba work closey to mo th 835 Heth Pat tron to met th re :m tb of th t-A i "Ties. 

'l X1 pr, qu base, ba be :riw to &:'s 

an rets an wi oo to do so. B: ba incate th intetiem to migrte to AN X1 st an to coti to ): acvely inlved in th st pr. :I 9U, I: fee tht th re is we wrtt an th ne for pe Clai St sy is th th en heth C&1' in.

ar dselcpil at a raid pa with th AN ent, I: wod stly en Mecad/ an al inte paes coti to work with th AmI pr to dscp th st an moe 

to a st siar st platfozm. AN X1 is wo with oth orzation su as H:P to as we migrte to ANI:. We 

wi oc beeve ths in th ooelqmt betw ne tu. st orzation th

I:f yo wod li an adtion inomatiem em AN X1, th pr, an oth ite metion abe in th let plea ca me at 

203-277-7647. Th yo for prodi me th oprtty to reew rert in ad an to prode my 

Siny,


le Bat
 Ch, ANI: X1 In S!1hr; tte 

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-profit organization of over seven hundred members representing prescription drug providers organizations , insurers , service , government agencies and others interested in prescription drug administration stadardization. program NCPDP is gratified by your offce s recognition of our role in the drug delivery industr and is plea 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 within government programs. speificaly Past OIG report Review such as those on Medicare Drug Utilization (OAI-D1- 88-Q80), The Clinica Role of the Community Pharmacist and the (OEI-Ol-89-89160) draft-cmment procss you utiiz in their production , have brought forward great insight into many drug delivery issues. The insights your offce has presnted have benefited numerous peple charged with oversight and management of both private and 

programs. Furter public drug delivery , your insights are in many caes a clea predecessor to and influence on activities within the drug delivery industr which result in direct benefit to drug therapy recipients throughout our nation. This report on Point-of-Service Claims Management Systems for Medicad continues your offce trdition of thorough and thoughtful subjects and the resch into importt 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

presentation of a complete and accurate report. , accsible, and 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. Attesting to this Jact are; 1) the vast ary 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 

comment and increa 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 

development procss has always be 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 volunteer assistance that ca 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 they plan to utzefederafunds 

for system developmenJ or operaon. 

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 increased costs in an America heath care delivery system than ca 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. These resources are not more concerned with their own interests than those of the States or of

HCFA" ' In fact, many parcipants in our organization s stadard seting procsses , are as
 dedicated to quality cost effective public programs as many government employees. The report 

. 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 extremely impOrtt 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 educate processors about the importce of 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 disincentives 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

OIG REPONSE TO NCPDP COMM 

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, Jr., "The New Era of Paperless 

Claims American Pharmacy, s. 30, no. 1 (January 199), pp. 20-22. 

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 Social Security Act: "the Secretary shaJI encourage each State 

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 Operational Evaluation Report p. A26.

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 Governing, September 1991 , pp. 37-50. The potential for 

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 dayspecific 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 SubCommittee, 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 that had not received 

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