Department of Health and Human Servces


OFFICE OF


INSPECTOR GENERA


ELECTRONIC MEDIA CLAIMS AND


CONTRACTORS' FOR- PROFIT


SUBSIDIARIES


A MANAGEMENT ADVISORY REPORT 

SU.VICt,r 

Richard P. Kusserow 

INSPECfOR GENERA 

"'a OEI-12-91-01410 
EXECU SUMY


PUROSE To discuss current practices at several Medicare contractors which have 

an impact on electronic media claims (EMC) submission. 

BACKGROUN Both the Health Care Financing Administration (HCF A) and the OIG have become aware of allegations that certain contractors refuse to cooperate


with some biling servces which wish to submit EMC. This refusal would violate


HCF A' s instructions to provide the formats and edits needed to bil. These


contractors, among others, are also alleged to require use of their subsidiaries


software to submit EMC, which might violate antitrust law.


MAOR FIINGS The four contractors (three intermediaries and one carrer) 

reviewed appear to provide for EMC submission of Medicare claims for most tyes of providers, in accord with Transmittal 1507. 

The three intermediaries, however, refuse to accept direct computer-to-computer
 EMC submissions for their private line of business unless the provider uses their


subsidiary s software for the transaction.


The contractors' practices of requiring biling servces and health care providers to use 

the contractors' for-profit EMC subsidiaries may violate Federal antitrust laws. 

MAOR RECOMMNDATIONS To enhance increased EMC activity, the HCFA 

should: 

Monitor compliance with Transmittal 1507, particularly the timeliness with which contractors fulfil requests for lists of edits. 

Determine the number and tye of subsidiaries at each contractor, and their roles with respect to Medicare. 

Consider the use of a clearinghouse, which would receive and distribute claims from all providers for all payers. 

Remain aware of contractors' general business operations. Anti-competitive activity may have a negative effect on innovation and technological growth in 

the industry, and limit HCF A's future options. Consider requiring bidders on future contracts to guarantee equal acceptance of properly-formatted claims 

from all bilers to all payers, both private and Medicare. 

The HCFA's comments on the draft of this report were taken into consideration in 

revising the final report. The comments are appended in full. 
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TABLE OF CONTENTS


EXCU SUMY 

PUROSE. 

BACKGROUN. 

MEODS 

FIINGS 

RECOMMATIONS 

APPENIX HCFA' COMM 
PUROSE 

The purpose of this management advisory report is to discuss current practices 

several Medicare contractors which have an impact on electronic media clais (EMC) submission. 

BACKGROUN 

The director of the Health Care Financing Administration s (HCFA) Bureau of 

Program Operations asked the Offce of Inspector General to determe if EMC 

submision was being impeded by contractor policies. A national bilg servce has 

alleged that various contractors have not made avaiable to them the formats and edits 

needed to submit error-free electronic claims, which they believe has had the effect of

limting free and open competition and thus raising costs to Medicare. Additionally, 

both bilng servces and health-care providers have alleged that some contractors 

refuse to accept direct computer-to-computer EMC submissions except when submitted through the contractors' for-profit EMC subsidiaries. 

The HCF A had issued instructions to intermediaries (contractors which process claims 

for institutional providers, such as hospitals and skilled nursing facilties) in December 

199. These instructions, issued as Transmittal 1507 Medicare Intermediary Manual. 

Part 3 - Claims Process. require intermediaries to provide detailed copies of their 

consistency edits to all providers interested in EMC submission and to provide copies of edits and billng procedure changes to all providers and bil submitters from whom 

they receive EMC. 

The Secretary of Health and Human Servces has publicly supported uniform, 

automated record-keeping procedures, including EMC. Medicare is the largest single payment source for many hospitals. Since HCF A usualy contracts with only one 

intermediary per State, that State s intermediary has an disproportionate impact on 

the hospitals because of its unique status vis-a-vis Medicae. 

Hospitals have transferred many record-keeping functions to integrated computer 

systems. The advent of the Prospective Payment System (PPS) in 1983 generated

interest in computer systems which could lik the demographic, fiancial and clical 

data needed to generate a Medicare clai. For many hospitals, the ideal biling system would be one which would download inormation from a variety of sources into a computer program which would then create "claims" for every insurer responsible for the hospital's patients. Such a program could then send the claims electronically to 

computer systems for Medicare, Medicaid, Blue Cross, and other commercial 

insurance, without the need for rekeying or reformatting any of the necessary data. 
Some hospitals have created such programs, working with their various insurers; others 

have purchased such systems from or through billig servces; and stil others have 

access to clearighouses which redirect claims to various sources, with or without 

editing them. Being required by one insurer to use a certain softare program, or language inconsistent with other insurers , defeats the effciencies achieved by these 

sophisticated programs. 

The health insurance industry has changed greatly since Blue Cross plans came into 

existence in the 1930's. Two early advantages that allowed for the growth of the plans 

were their tax-exempt status and special relationships with hospitals, whose adminstrators and trustees formed the boards of the plans. Most Blue Cross plans 

provided servce benefits, rather than indemnifng the patient or employer against losses. Thus State insurance regulators required their reserves to be servces rather 

than cash. All these features have changed: Blue Cross plans lost their tax-exempt status in 1986; their boards are no longer composed of hospital representatives; some 

plans are now "mutual" plans, which return operating surpluses to policy-holders. 

Additionally, many plans have created for-profit subsidiaries which carr out functions 

formerly done "in-house " including marketing, claims processing, and product 

development, and own subsidiaries such as health maitenance organizations and life 

insurance companies. 

The practice of requiring customers to purchase one, possibly unwanted, good or servce before allowing them to purchase a desired goo or servce is known as "tyng. Antitrust law generally prohibits this practice. Similarly prohibited are price fing and allocation of terrtories by market rivals. Although the McCarran-Ferguson Act of 1945 exempts the ''business of insurance " from the antitrst laws, this exemption does not apply to activities of insurance companies unrelated to the underwting or spreading of risk and the relationship between the insurer and the insured. Legislation 

has been introduced in both the Senate (S. 430, introduced by Senator Metzenbaum) 

and House (H.R. 9, introduced by Representative Brooks) callng for modifications of 

the McCarran-Ferguson Act, which has over the years come to be widely interpreted 

as exempting insurance companies from antitrust laws. Both versions would outlaw 

tyg, among other anti-competitive behaviors, in the inurance industry. 

MEODS 

We conducted intervews with contractor personnel at thee intermediaries (Blue Cross of Arona, Blue Cross of South Caolina, and Blue Cross of Virginia) and one 

carrer (Blue Shield of Maryland), health-care providers and associations, biling agencies, and HCFA staff, regarding practices at these contractors. We did not 

attempt to verify allegations related to activity before Transmittal 1507 was issued. 

Our priary focus was the ease with which providers can electronically submit 

Medicare claims, but we also tried to determine the forces within the contractors 

which have an impact on EMC. 
FIINGS 

The four contractors reviewed appear to provide for EMC submission of Medicare 

claims for most tyes of providers, in accord with Transmittal 1507. We believe that 

they no longer refuse to cooperate with requests for edits. 

The three intermediaries, however, refuse to accept direct computer-to-computer EMC submissions for their private line of business unless the provider uses their subsidiary s software for the transaction. This subvert the prohibition in Transmittal 

1507 against requiring rekeying of claims data, since Medicare claims can be submitted 

electronically. The effect, however, is that hospitals have to use the subsidiary s system for all tyes of claims, or have two systems running concurrently, in order to bil 

computer-to-computer to all insurers. Biling servces which have devised systems 

better meet their customers needs must purchase the contractor s servces as well 

making their prices less competitive than they would otherwse be. 

Contractors may have a marketing advantage as a result of their Medicare contract. 

They market their EMC package as superior to competitors' in the servces offered 

since they have more direct access to the status of pending claims, including Medicare claims. However, this claim may not in fact be true, since private biling servces can offer hospitals other enhancements, tailored for the hospital's overall accounting 

system. 

Small providers or groups of providers may not be able to submit Medicare claims 

electronically in all jurisdictions, even when they have the capabilty (or have 

contracted with a billng servce) to do so, because contractors have not made the 

necessary modifications to their systems. Because the providers are small, the 

contractors feel they are a low priority. Their small siz, however, is what makes them 

financially vulnerable to delayed paper claims and the wait for a remittance advice in 

order to bil a supplemental payer. 

The contractors' practices of requiring biling servces and health care providers to use 

the contractors' for- profit EMC subsidiaries may violate Federal antitrust laws. 

RECOMMATIONS 

To enhance increased EMC activity, the HCF A should: 

Monitor compliance with Transmittal 1507, partcularly the timeliness with 

which contractors fulfill requests for lists of edits. 

Require regional office contractor representatives to determne the number and 

tye of subsidiaries at each contractor, and their roles with respect to Medicare. 
Work with contractors which are not able to accmmodate electronic bils from 

all tyes of providers to develop simple generic programs, for example, which 

small providers can use in different jurisdictions. This would be simplified by more consistent carrer programs and systems. 

Consider using a clearinghouse, which would receive and distribute claims from 

all providers for all payers. Effective and effcient administration of the 

Medicare program may require such an initiative, as EMC and computerized 

medical records form a larger part of the claims system. Such a clearinghouse 

could be an existing one, one created by a consortia of contractors, or one 

created centrally by HCFA. 

Remain aware of your contractor s general business operations. Those insurers 

which have used aggressive tactics to compel providers to use their subsidiary 

products or servces are then able to further aggandize their market share. 

This anti-competitive activity may have a negative effect on innovation and 

technological growth in the industry, and limit HCF A's future options. The 

HCF A may wish to consider requiring bidders on future contracts to guarantee 

equal acceptance of properly-formatted claims from all bilers to all payers 

both private and Medicare. 

In commenting on the draft version of this report, HCFA indicated they believe they 

lack the authority to address potentially-abusive behavior in the contractors' private lines of business. Thus, we have eliminated a recommendation that HCFA consult 

with the Antitrust Division of the Department of Justice concerning the contractors 

activities. We have kept and expanded upon the last recommendation regarding 

contractors' business activities in relation to their work for HCF A and added a 

recommendation that HCF A consider the use of a clearnghouse. These 

recommendations attempt to identify ways HCF A can address those contractor 

activities which inhibit electronic submission of claims while remaining within the 

scope of HCF A's current authority. 
APPENDIX: HCFA' s COMMENTS

\/ 

.._ . \. .. .. . .. . ... . , .::\ ,.. . .. 

"-t-­ .A- t.('7 Health Care DEPARTMENT OF HEALTH &. HUMAN SERVICES nJ

/- C/3 Financing Administration 

;:.J J..tt 100	 Memorandum

Date	 ' /+ AGail R. Wilensky, Ph.Da-i. From Admiistrator 

Subject	 OIG Draft Management Advisory Report - "Electronic Media Oaims and 

Contractors' For- profit Subsidiares " OEI- 12-91-01410 

Inspector General 

Offce of the Secretary 

We have reviewed the subject draft management advisory report. At the

Health Care Financing Administration s request, OIG reviewed current practices at Medicare contractors to determine if electronic media claims (EMC) submission was being impeded by contractor policies. 

The report found that three of the four contractors reviewed refuse to accept

direct computer-to-computer EMC submissions for their private line business unless the provider uses its subsidiary s softare for the transaction. OIG alleges that this practice could then make bilng servces that have devised systems for Medicare biling less competitive, since the provider would be required to purchase the contractor s se ces in any case. 

The report contains five recommendations. Our comments on these recommendations, as well as a general comment on the report, are attached. 

Thank you for the opportunity to review this drat management advisory report. Please advise us whether you agree with our position on the report recommendations at your earliest convenience. 

Attachment 

iG 

?DIG 

CTG.AS 

DIG. c;.r 


DIG- or 


AIG-Ml) 

OGC/IG 

EXSEC 

DAT SEN 

\.::.t 

. - r 
Comments of the Health Care Financing Administrtion ( A) on t
 OIG Draft Management Advsory Report - "Electronic


Media Oaims and Contractors' For- profit Subsidiaries


OEI- 12-91-01410 

Recommendation 

HCF A should monitor compliance with Tramitt 1507, parcularly the timeliness with which contractors fi requests for lits of edits. 

Response 

We agree with thi recommendation. In addition, we are drafg electronic media claims (EMC) instructons which wi prohibit contrctors from favorig 

providers or billig servces that submit claim through the parent companies 

for-profit subsidiaries. 

Recommendation 2


HCFA should consult with the Antitrt Divion of the Deparment of Justice to detennine whether the contractors' actions violate antitrt laws. 

Response 

We disagree with this recommendation. As the report points out, the 

questionable actions on the par of contrctors occ only in their priate lies of business with which HCF A is not diectly involved Therefore, we believe it would be inappropriate for us to approach the Deparent of Justice (DOJ) concerng possible antitrt violations in these prite businesses. Such action should be taken by the company or entity that believes it is being hared by contractor s policies. 
Page 2


Recommendation 3


HCFA should require regional offce (RO) contractor representatives to determe the number and tye of subsidiaries at each contractor, and their 

roles with respect to Medicare, perhaps as part of the Annual Contractor 

Evaluation Report (ACER). 

Response 

We agree and have already undertaken such action. On May 21, 1991, we sent a memorandum to all the ROs directing them to obtain this information from their contractors. We will update this data periodically, although we are not yet sure that the ACER is the proper means for doing so. 

Recommendation 4


HCFA should work with contractors who are not able to accommodate 

electronic bill from all tyes of providers to develop simple generic programs for example, which small providers can use in different juridictions. This would be simplified by more consistent carrt;r programs and systems. 

Response 

We agree with this recommendation. Ths will be an ongoing process. The recently implemented Carrer National Standard EMC Format will help eliinate inconsistent requirements among the caers, thereby improving the EMC situation for multi-jurisdiction providers. In addition, we are currently expanding the Medicare Manual instructions to require contractors to accept all bil and media tyes electronically. 

Recommendation 5


HCFA should consider contractors' general busines operations when awarding Medicare contracts. 
Page 3


Response 

We do not agree with this recommendation. We agree the idea has merit. 

However, neither sections 1816 and 1842 of the Social Security Act nor the 

Federal Acquisition Regulations extends to HCFA the authority to delve into a

contractor s priate lies of business as pan of the contractg process. Unless a contractor has been convicted or is under indictment for some violation of the law, or we have received substantial evidence of miconduct, we have no 

way of knowig what a contractor does in its non-Medicae lies of business. 

General Comment 

TIs draft report is rather sparse with respect to specifc facts. For example four intennediares are mentioned in the draft report but are not identifed. While we have learned informally which intennediares were investigated, it is difcult to respond to GIG' s findings without knowig specific facts concerning each intermediary. It would be helpful to us if the final version of thi report

included more specific details.