DEPARTMENT OF HEALTH AND HUMAN SERVICES Office of the Secretary

45 CFR Parts 160 and 162 [CMS-0032-IFC] RIN 0938-AQ12 Administrative Simplification: Adoption of Operating Rules for Eligibility for a Health

Plan and Health Care Claim Status Transactions

AGENCY: Office of the Secretary, HHS.

ACTION: Interim final rule with comment period.

SUMMARY: Section 1104 of the Administrative Si mplification provisions of the Patient

Protection and Affordable Care Act (hereafter referred to as the A ffordable Care Act) establishes new requirements for administrativ e transactions that will improve the utility of the existing

HIPAA transactions and reduce administrative cost s. Specifically, in section 1104(b)(2) of the Affordable Care Act, Congress required the adoption of operating rules for the health care industry and directed the Secretary of Health a nd Human Services to "a dopt a single set of operating rules for each transaction . . . with th e goal of creating as much uniformity in the implementation of the electroni c standards as possible." This interim final rule with comment period adopts operating rules for two Health Insurance Portability and Acc ountability Act of 1996 (HIPAA) tr ansactions: eligibility for a health plan and health care clai m status. This rule also defines the term "operating rules" and explains the role of operating rule s in relation to the adopted trans action standards. In general, transaction standards adopted under HIPAA enab le electronic data in terchange through a common interchange structure, thus minimizing the industry's reliance on multiple formats.CMS-0032-IFC 2

Operating rules, in turn, attempt to define the ri ghts and responsibilities of all parties, security requirements, transmission formats, response times, liabilities, exception processing, error resolution and more, in order to facilitate succes sful interoperability be tween data systems of

different entities.

DATES: Effective Date : These regulations are effectiv e on [OFR—insert date of public inspection in the Federal Register ]. The incorporation by referen ce of the publications listed in this interim final rule is approved by the Director of the Office of the Federal Register [OFR— insert date of public inspection in the Federal Register ]. Compliance Date : The compliance date for this regulation is January 1, 2013.

Comment Date : To be assured consideration, comment s must be received at one of the addresses provided below, no later than 5 p.m. on [ OFR--insert date 60 da ys after date of publication in the Federal Register]

. ADDRESSES: In commenting, please refer to file code CMS-0032-IFC. Because of staff and resource limitations, we ca nnot accept comments by facsimile (FAX) transmission. You may submit comments in one of four ways (please choose only one of the ways listed) 1. Electronically . You may submit electronic comments on this regulation to http://www.regulations.gov . Follow the "Submit a comment" instructions. 2. By regular mail . You may mail written comments to the following address ONLY:CMS-0032-IFC 3

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-0032-IFC, P.O. Box 8013, Baltimore, MD 21244-8013

Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. By express or overnight mail . You may send written comments to the following

address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-0032-IFC, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. 4. By hand or courier . If you prefer, you may deli ver (by hand or courier) your

written comments before the close of the comment period to either of the following addresses: a. For delivery in Washington, DC--

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201CMS-0032-IFC 4

(Because access to the interior of the Hube rt H. Humphrey Building is not readily available to persons without Federal government identification, commenters are encouraged to leave their comments in the CMS drop slots lo cated in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of f iling by stamping in and retaining an extra copy of the comments being filed.) b. For delivery in Baltimore, MD--

Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850 If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-1066 in advance to schedule your arrival with one of our staff members.

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period. For information on viewing public co mments, see the beginning of the

"SUPPLEMENTARY INFORMATION" section.

FOR FURTHER INFORMATION CONTACT: Shannon Whetzel (410) 786-3267. Matthew Albright (410) 786-2546. Denise Buenning (410) 786-6711.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public , including any persona lly identifiable orCMS-0032-IFC 5

confidential business information that is included in a comment. We post all comments received before the close of the comment period on the fo llowing Web site as soon as possible after they have been received: http://regulations.gov . Follow the search instructions on that Web site to view public comments. Comments received timely will be also av ailable for public inspection as they are received, generally beginning approximately 3 w eeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951. I. Background

A. Introduction The background discussion below presents a partial statutory a nd regulatory history related only to the statutory pr ovisions and regulations that are important and relevant for purposes of this interim final ru le with comment period. For furt her information about electronic data interchange, the complete statutory backgr ound, and the regulatory hi story, see the proposed rule entitled "Health Insurance Reform; Modifica tions to the Health In surance Portability and Accountability Act (HIPAA) Electronic Tr ansaction Standards," published in the Federal Register on August 22, 2008 (73 FR 49742). Congress addressed the need for a consistent framework for electronic health care

transactions and other admini strative simplification issues through the Health Insurance Portability and Accountability Act of 1996 (HIPAA), (P.L. 104-191), enacted on August 21, 1996. HIPAA amended the Social Security Act (hereinafter referred to as the Act) by adding Part C–Administrati ve Simplification–to Title XI of the Act requiring the Secretary of theCMS-0032-IFC 6

Department of Health and Human Services (hereinafter referred to as the Secretary) to adopt

standards for certain transactions to enable health information to be exch anged electronically and to achieve greater uniformity in the transmi ssion of health information. Electronic Data interchange (EDI) enables provi ders and payers to process financial and administrative

transactions faster and at a lower cost than manual transactions. In the August 17, 2000 Federal Register (65 FR 50312) we published a final rule

entitled "Health Insurance Reform: Standards for Electronic Transa ctions" (hereinafter referred to as the Transactions and Code Sets rule). This rule implemented some of the HIPAA Administrative Simplification requirements by adopting standard s for electronic health care transactions developed by standa rd setting organizations (SSOs), and medical code sets to be used in those transactions. Accordingly, we adopted the Accredited Standards Committee (ASC)

X12 standards Version 4010 and the National Council for Prescription Drug Programs (NCPDP) Telecommunication standard Version 5.1, which are specified at 45 CFR part 162, subparts K through S. All health plans, health care clear inghouses, and health care providers who transmit health information in electronic form (referred to as covered entities) are required to comply with these adopted standards. In the January 16, 2009 Federal Register , we published a final rule entitled, "Health Insurance Reform; Modifications to the Health Insurance Portability and Accountability Act (HIPAA) Electronic Transaction Standards" (74 FR 3296) (herei nafter referred to as the Modifications final rule), that, among other thin gs, adopted updated versions of the standards [(ASC X12 Version 5010 (hereinaft er referred to as Version 5010)] and NCPDP Version D.0) for the electronic health care transactions origin ally adopted in the Transactions and Code SetsCMS-0032-IFC 7

final rule. Covered entities are required to co mply with the updated standards for electronic health care transactions on January 1, 2012. Ta ble 1 lists HIPAA sta ndard transactions.

TABLE 1. CURRENT ADOPTED ST ANDARDS FOR HIPAA TRANSACTIONS

Standard Transaction ASC X12 837 D Health ca re claims – Dental. ASC X12 837 P Health care claims – Professional. ASC X12 837 I Health care claims – Institutional. NCPDP D.0 Health care claims – Retail pharmacy drug. ASC X12 837 P and NCPDP D.0 Health care claims – Retail pha rmacy supplies and professional services. NCPDP D.0 Coordination of Bene fits – Retail pharmacy drug. ASC X12 837 D Coordination of Benefits – Dental. ASC X12 837 P Coordination of Benefits – Professional. ASC X12 837 I Coordination of Benefits – Institutional. ASC X12 270/271 Eligibility for a health plan (request and response) – dental, professional, and institutional. NCPDP D.0 Eligibility for a health pl an (request and response) – Retail pharmacy drugs. ASC X12 276/277 Health care clai m status (request and response). ASC X12 834 Enrollment and disenrollment in a health plan. ASC X12 835 Health care payment and remittance advice. ASC X12 820 Health plan premium payment. ASC X12 278 Referral certification and authorization (request and response). NCPDP D.0 Referral certification and au thorization (request and response) – retail pharmacy drugs. NCPDP 5.1 and D.0 Retail pharmacy drug claims (telecommunication and batch standards). NCPDP 3.0 Medicaid pharmacy subrogation (batch standard).

In general, the transactio n standards adopted under HI PAA enable electronic data interchange using a common interchange structur e, thus minimizing the industry's reliance on multiple formats. While the standards significantly decrease administrative burden on covered entities by creating greater uniformity in data exchange, and reduce the amount of paper forms needed for transmitting data, gaps created by the flexibility in the standards permit each health plan to use the transactions in very differe nt ways, which remains an obstacle to achievingCMS-0032-IFC 8

greater health care industry ad ministrative simplification. Th ese gaps include all of the following:

• Performance and system availability. Because the standards permit the flexibility of conducting the transactions in ba tch mode or real-time, in order to minimize the number of different implementations, some submitters have re sorted to contracting with clearinghouses for transaction exchanges that requ ire batch submissions, and simulta neously are util izing internal

resources for real-time submissions. Some ba tch submissions are only conducted overnight. Typically batch submissions can be substantia lly slower than real-time transmissions, and systems may be available only at certain times for conducting certain transactions.

• Connectivity and trans portation of information. In traditional trading partner agreements, health plans specify their conn ectivity options for conducting the standard transactions. These options can vary from plan to plan. For example, some payers only conduct the transactions through a contr acted clearinghouse. Others offe r a direct conn ection to their system. Still others use both --contract with a clearinghouse for some transactions, and offer

direct connect solutions for other transactions. Also, there are some plans that offer a number of options, and negotiate a choice with each trading partner, including providers.

• Security and authentication. Currently, secu rity standards do not prescribe requirements for levels of security and au thentication when conducting the st andard transactions and accessing protected health information. A covered en tity's level of security and authentication requirements is determined by the individual entit y's periodic assessments for security risk and vulnerabilities. Organizations have latitude to determine and document the number and types of security safeguards that they implement. Alt hough this flexibility s upports the implementationCMS-0032-IFC 9

of security safeguards that are consistent with the uniqueness of various organizations, it also limits standardization for security compliance. • Business scenarios and expected respons es. The standards do not define methods by which trading partners, including providers, estab lish electronic communica tion links, or types of hardware and software to exchange EDI data . Each trading partner, including providers, separately provides specific requirements; for ex ample, the number of transactions that are submitted in a file. Transaction processing in each entity's system will vary from one trading partner, including providers, to another. Th e responses to compliantly implementing these various transaction processing syst ems are identified by trading pa rtners, including providers, in documentation that is in addition to the adopt ed implementation guide s. These types of documented business requirements can vary in terms of number and complexity

.

• Data content refinements. In accordance with trading pa rtner agreements, plans can ignore certain data that are submitted if not need ed by them to conduct the transaction. They also can refine certain data elements and requi re their submission. Trading partner agreements

and additional documentation that plans develop permit plans to defi ne specific types of data and to clarify the specific data that is required to be submitted for successful completion of a transaction. Although the standards limit the number of data elements that can be defined or optionally submitted, a plan's individual business flow and operations may impose specific data definition and submission requirements. These gaps, among other challenges in the impl ementation of the standards, have spurred the creation of companion guides by health plans. Health plans have created these companion guides to describe their unique implementation of HIPAA transactions and how they will work with their business partners. Historically, companion guides ha ve been used to establishCMS-0032-IFC 10

business practices such as response time, system availability, communica tion protocols, hours of operation, amount of claim history available for i nquiries and real-time adjustments, security practices, and more. Health plans' companion guides vary in format and structure. Such variance can be confusing to trad ing partners (those entities, in cluding providers, who exchange HIPAA compliant electronic transactions), w ho must implement them in addition to the specifications in the transaction standard implem entation guides. Further, each companion guide is unique for each different health plan. Currently, according to the American Medi cal Association (AMA ) there are over 1,200 such companion guides in ex istence (http://www.ama-assn.or g/ama1/pub/upload/mm/368/hipaatcs.pdf ). As mentioned previously, companion gui des require providers and trading partners, including providers, to adhere to different transaction implementa tion rules for different health plans. Therefore, the widespread proliferation of health plan companion guides is particularly burdensome to health care providers, and we be lieve has subverted the goal of administrative simplification. Over the past 5 years, this proliferation of health plan companion guides has given rise to the development of operating rules. To facilitate successful interoperability between data systems of different entities, operati ng rules more clearly define the rights and responsibilities of all parties, security requirements, transm ission formats, response times, liabilities, exception processing, error resolution and more. Operating rules have been

shown to reduce costs and admini strative complexities as will be described later in this interim final rule with comment period. The use of operating rules is widespread and varied among other industries. For example, uniform operating rules for the exch ange of Automated Clearing House (ACH)CMS-0032-IFC 11

payments among ACH associations are used in compliance with U.S. Federal Reserve regulations (12 CFR Part 370), and maintained by the Federal Reserve and the Electronic Payments Network. Additionally, credit card is suers employ detailed operating rules (for example, Cirrus Worldwide Operating Rule s) describing types of members, their responsibilities and ob ligations, licensing and display of service marks, etc. B. Operating Rules Mandated by the Affordable Care Act Congress sought to address the aforementione d problems in the health care industry by requiring the adoption of operating rules for the h ealth care industry as outlined in the Patient Protection and Affordable Care Act (Pub L. 111-148), enacted on March 23, 2010, and by the

Health Care and Education Reconciliation Ac t of 2010, (Pub. L. 111-152), which was enacted on March 30, 2010 (hereinafter referred to as the Affordable Care Act). Section 1173(g)(1) of the Act, as added by section 1104(b)(2) of the Affordab le Care Act, requires the Secretary to "adopt a single set of operating rules for each transaction ...with the goal of creating as much uniformity in the implementation of the el ectronic standards as possible." The role of operating rules is to support the adopted standards for health care transactions

in order to foster and enhance uniform use of the adopted standards and implementation guides across the health care industry. Standards and op erating rules overlap in their functions to increase uniformity, but differ in their purposes. While standards are mainly concerned with the content transmitted in a transaction, operati ng rules provide for the method of how the information should be transmitted, as well as the elim ination of certain situa tionality in the use of

data content contained in the sta ndards. Situationality refers to the fact that many transaction requirements only apply if the situation is presen ted. For example, in the 271 eligibility responseCMS-0032-IFC 12

transaction, the health plan name is only required when a specific plan name exists for the plan for which the individual has coverage. Operating rules augment the standards in the following three important ways:

• They contain additional requirements that help implement the standard for a transaction in a more consistent manner across health plans. For example, when a provider currently sends an eligibility for a health plan inquiry to a he alth plan, the standard allows responses ranging from a simple "yes" or "no", to the inclusion of a complete range of information. The operating rule requires the health plan to return patient eligibility and financial responsibility for a specified list of service type codes including, but not limited to, dental, vision, medical, hospital inpatient, and emergency care. This requirement ensures that a provider, who submits the same inquiry to multiple payers, receives a consistent response for an eligibil ity for a health plan inquiry. This reduces the number of customized transactions when dealing with multiple health plans, thus saving bot h time and money. • They address ambiguous or conditional requir ements in the standard and clarify when

to use or not use certain data elements or code va lues. For example, the standard may leave it to the discretion of the health plan whether or not to retu rn the health plan's name in a particular field, creating the possibility of inconsistency in health plan responses. An operating rule may require that the health plan name always be re turned and that it alwa ys be returned in one particular specified manner. This encourages un iformity and alleviates the problem of providers receiving inconsistent information.

• They specify how trading partners, includ ing providers, should communicate with each other and exchange patient information, w ith the goal of elim inating connectivity inconsistencies. Currently, individual health plan s specify the transmission methods they expectCMS-0032-IFC 13

each of their trading partners, including providers , to use for electronic transactions. Mandating

one uniform method decreases th e amount of work and inconsistencies providers experience when dealing with multiple payers with differing transmission methods. The Affordable Care Act presents a definition of operating rules and pr ovides a great deal of guidance about the role Congre ss envisioned for operating rules in relation to the standards. Operating rules are defined by s ection 1171(9) of the Act (as a dded by section 1104(b)(1) of the Affordable Care Act) as "the necessary business rules and guidelines for the electronic exchange of information that are not defined by a standard or its implementation sp ecifications as adopted for purposes of this part." Additionally, secti on 1173(a)(4)(A) of the Act (as added by section 1104(b)(2) of the Affordable Care Act) requires that-- The standards and associated operating rules adopted by the Secretary shall— (i) to the extent feasib le and appropriate, enable determination of an individual's eligibility and financial responsib ility for specific services prior to or at the point of care; (ii) be comprehensive, requiring minimal augmentation by paper or other communications; (iii) provide for timely acknowledgment, response, and status reporting that supports a transparent claims and denial ma nagement process (inc luding adjudication and appeals); and (iv) describe all data elements (inclu ding reason and remark codes) in unambiguous terms, require that such data elements be required or conditioned upon set values in other fields, and prohibit additional conditions (ex cept where necessary to implement State or Federal law, or to protect against fraud and abuse)."

Section 1104(b)(2) of the Affordable Care Act also amended section 1173 of the Act by adding new subsection (a)(4)(B), which states th at, "[i]n adopting standards and operating rules for the transactions..., the Secretary shall seek to reduce the number and complexity of forms (including paper and electronic forms) and data entry required by patients and providers." Section 1104(b)(2) of the Affordable Care Act added section 1173(g)(1) to the Act, which states that, "[s]uch operating rules shall be consensus-based and reflect the necessaryCMS-0032-IFC 14

business rules affecting health plans and health care providers and the manner in which they operate pursuant to standards issued under Health Insurance Portability and Accountability Act

of 1996." New sections 1173(g)(2)(D), (g)(3)(C), and (g)( 3)(D) of the Act also clarify the scope of operating rules. They provide that, In adopting operating rules under this subs ection, the Secretar y shall consider recommendations for operating rules developed by a qualified nonprofit entity that meets the following requirements . . . (D) The entity builds on the transactions issued under H ealth Insurance Portability and Accountability Act of 1996. . . . The National Committee on Vital and Health Statistics shall . . . (C) determine whether such operating rules repr esent a consensus view of health care stakeholders and are consistent with and do not conflict with other existing standards; (D) evaluate whether such opera ting rules are consistent with electronic standards adopted for hea lth information technology

We take from the statutory context the follo wing information about operating rules to be adopted under HIPAA: • They are business rules and guidelines; • They are necessary for the electronic exchange of information; • They are not defined by a standard; • They do not conflict with the existing HIPAA standards; • They are consensus based; • They are consistent with HIPAA and H ealth Information Technology (HIT) standards adopted by the Secretary; and • Together with standards they encourage the use of electronic tr ansactions by reducing ambiguities currently permitted by the standard, resulting in better-def ined inquiries and responses that add value to provider practice management and health plan operations.CMS-0032-IFC 15

II. Provisions of the Interim Fi nal Rule with Comment Period A. Definition of Operating Rules Section 1171(9) of the Act, as added by sect ion 1104(b)(1) of the Affordable Care Act, defines operating rules as "the necessary busin ess rules and guidelines for the electronic exchange of information that are not defined by a standard or its implementation specifications as adopted for purposes of this part." We are ad ding the term "operating rules" to the definitions in regulations at 45 CFR 162.103, and defining it just as it appears in the st atute. We note that, in the statutory reference, "this part" refers to Part C of Title XI of the Act, Administrative Simplification. In the regulation at 45 CFR 162. 103, "this part" refers to Part 162 of the CFR, the part in which the definition appears, which contains the regulations that pertain to, among other things, the HIPAA transact ions and code sets. The follo wing discussion further explains operating rules and their scope , in light of their relati onship to the standards. Business rules and guidelines are not defined by the statute, nor has the health care industry specifically defined business rules or gui delines for itself. These are very broad terms and there are many ways to define them. Genera lly, business rules and guidelines are statements that refine and specify. For purposes of ope rating rules, business ru les and guidelines are statements that refine and specify. While operating rules may have a very broad scope as business rules and guidelines in order to cover the full spectrum of data content, from data elements to standards, we believe

there are limitations. To meet the definition of operating rules, business rules and guidelines

must be " necessary . . . for the electronic exchange of information that are not defined by a standard or its implementation specifications." We interpret the term "necessary" to be those operating rules needed to facilitate better communication between tradin g partners, includingCMS-0032-IFC 16

providers, to fill gaps in the standards, and to fulfill the purposes and principles set out in sections 1173(a)(4)(A)(i) through (iv) and (B) of the Act. If a business rule or guidelin e is necessary for the electronic exchange of information, it

must also be one that is "not defined by" a HIPAA standard or its implementation specifications

in order to meet the definition of an operating rule. We consider a business rule or guideline that does not duplicate what is in the standard to be one that is not defined by the standard. Business rules and guidelines that duplic ate what is in the standard are not operating rules under our interpretation.

The National Committee on Vital and Health Statistics (NCVHS) is tasked with reviewing any operating rule developed and recommended to the Secretary for adoption. The

NCVHS is to make recommendations to the Secr etary and determine whether such operating rules represent a consensus view of the health care stakeholders and are consistent with and do not conflict with other existing standards under section 1173(g)(3)( C) of the Act. The NCVHS must also determine if such operating rules are consistent with electronic standards adopted for health information technology under section 1173(g )(3)(D) of the Act. From these statutory provisions, we understand that ope rating rules should be consistent with and not be in conflict with the adopted HIPAA standards and HIT standard s (for example, those st andards that address governance, funding and infrastructure of contro lled vocabularies, value sets and vocabulary subsets to be used primarily to further interoperability between providers and systems). We believe that, if an operating rule imposes a requ irement that would make it impossible for a party to comply with both the associated HIPAA sta ndard and the operating ru le, then the operating

rule conflicts with the standard. This interpretation is consistent with fundamental principles and precedents regarding when a conflict exists. If a party is able to satisf y both the requirements ofCMS-0032-IFC 17

the standard and the requirements of the operating rule, there is no conflict and the operating rule

is consistent with the standard. Table 2 illu strates what we consid er to be a conflict by presenting hypothetical scenarios that illustrate when an operating rule could or could not

conflict with a standard.

TABLE 2. COULD AN OPERATING RUL E CONFLICT WITH A STANDARD?

Statement in the Standard Statement in the Operating Rule Does the Operating Rule's Statement Conflict with the Standard's Statement? Justification

"X is recommended." "X is "required." No It is possible for an entity to comply with both the standard and the operating rule.

"X is not required." "X is required." No It is possible for an entity to comply with both the standard and the operating rule.

"X cannot be required." "X is required." Yes It is impossible for an entity to comply with both the standard and the operating rule.

"X is required." "X is required." No It is possible for an entity to comply with both the standard and the operating rule. (However, to the extent that the statement in the operating rule duplicates the statement in the standard, the operating rule statement would not be considered an operating rule.) "X is at the discretion of

person #1. Person #2

cannot require it." "X is required." No It is possible for an entity to comply with both the standard and the operating rule. "X is required." "X is required, so is Y." No It is possible for an entity to comply with both the standard and the operating rule. "X is required. No other can be required." "X is required, so is Y." Yes It is impossible for an entity to comply with both the standard and the operating rule.

Our current definition of standa rd at 45 CFR 160.103 is very broad. In fact, it is so broad that it could include operating ru les as we are defining that te rm at §162.103. Therefore, we are revising the definition of standa rd at §160.103 to be clear that st andards and operating rules are separate and distinct. See the "Additional Require ments" section for discussion of this change.CMS-0032-IFC 18

B. National Committee on Vital and Health Statistics and the Affordable Care Act The National Committee on Vital and Health Statistics (NCVHS) was established by Congress to serve as an advisory body to the De partment of Health and Human Services (DHHS) on health data, statistics and national health information policy, and has been assigned a significant role in the Secretar y's adoption of operating rules unde r section 1173(g)(3) of the Act (as added by section 1104(b)(2) of the Affordable Care Act). In July 2010, the NCVHS' Subcommittee on St andards convened a hearing to discuss the Affordable Care Act's provisions pe rtaining to operating rules for th e eligibility for a health plan

and health care claim status transactions. Section 1173(g)(3) requires the NCVHS to do the following: • Advise the Secretary whether a n onprofit entity meets the requirements for development of operating rules. • Review the operating rules develope d and recommended by such nonprofit entity. • Determine whether such operating rules represent a consensus view of the health care

stakeholders and are consistent with and do not conflict with other existing standards. • Evaluate whether such operating rules are consistent with electr onic standards adopted for health information technology. • Submit to the Secretary a recommendation as to whether the Secretary should adopt such operating rules. The NCVHS engaged in a comprehensive review of health care operating rules and their authors, with the goal of determining whether an entity was qualified to develop operating rules

for transactions and to evaluate existi ng operating rules for purposes of making a recommendation to the Secretary as to whether those operating rules should be adopted. TheCMS-0032-IFC 19

process consisted of a full day of public te stimony on July 20, 2010, with participation by more than 20 stakeholders representing a cross secti on of the health care i ndustry, including health plans, provider organizations, health care clea ringhouses, pharmacy industry representatives, health care industry associations, standards developers, professiona l associations, representatives of Federal and State health pl ans, the banking industry, and the entities proposing to serve as operating rules authoring entities. During the hearing, testifiers reiterated the need fo r greater consistency and

standardization in HIPAA transactions consistent with the Affordable Care Act amendments to the HIPAA, which highlight the need to improve the use of standard transactions, increase industry adherence to the implementation specific ations of the standards, encourage greater adoption of electronic tr ansactions, and enable more timely updates and adoption of the HIPAA

standards. Testifiers claimed that all of th ese could help reduce the clerical burden on the industry in the use of paper a nd the non-standard use of the cu rrent transaction standards. We believe that the considerable public par ticipation in the NCVHS hearings for adoption of operating rules demonstrates an increasing level of suppor t and interest from broader segments of the health care industry. Per the NCVHS' recommendation, we will work with industry to continue this public exchange of information regardi ng operating rules, standards and their respective ro les in administrative simplification. Based on the NCVHS testimony (http://www.ncvhs.hhs.gov/100719ag.htm ) and the NCVHS' analysis of the operating rules and qualifications of the ca ndidate authoring entities, the NCVHS developed a set of recommendations to the Secretary, which are outlined in the following discussions.CMS-0032-IFC 20

C. Operating Rules Authoring Entities Section 1173(g)(3)(A) of the Ac t charges the NCVHS with a dvising the Secretary as to whether a nonprofit entity meets th e statutory requirements for de veloping the operating rules to be adopted by the Secretary. Those requirements, at section 1173(g)(2) of the Act, include all of the following: • The entity focuses its mission on administrative simplification.

• The entity demonstrates a multi-stakeholder and consensus-based process for development of operating rules, including represen tation by or participation from health plans, health care providers, vendors, relevant Federal agencies, an d other standards development organizations.

• The entity has a public set of guiding prin ciples that ensure the operating rules and process are open and transparent, and supports n ondiscrimination and conflic t of interest policies that demonstrate a commitment to open, fair, and nondiscriminatory practices.

• The entity builds on the transaction sta ndards issued under the Health Insurance Portability and Accountability Act of 1996.

• The entity allows for public review and updates of its operating rules. Of those organizations tes tifying at the July 2010 NCVHS hearing, two organizations formally requested to be considered authoring en tities for operating rules. These entities were the Council for Affordable Quality Healthcar e's (CAQH) Committee on Operating Rules for Information Exchange (CORE) and the Na tional Council for Prescription Drug Programs (NCPDP). The CAQH, a nonprofit alliance of health plans and trade asso ciations, supports industry collaboration on initiatives that simplify health care administrationCMS-0032-IFC 21

(http://www.caqh.org/about.php ). The CAQH launched the CORE with the goal of giving providers access to eligibility and benefits information before or at the time of service. The CAQH CORE is engaged in the development of voluntary operating rules fo r the facilitation of

administrative health care transactions. It has already developed operating rules for the eligibility for a health plan and health care claim status tr ansactions. The CAQH CORE has also demonstrated that the use of these rules yi elds a return on investment for both business operations and systems within today' s complex health care environment (http://www.caqh.org/COREIBMstudy.php ). The NCPDP is a not-for-prof it standards development orga nization (SDO) accredited by the American National Standards Institute ( ANSI), with over 1,500 members representing the pharmacy services industry (http://ncpdp.org/WP.aspx ). It is one of several SDOs involved in health care information technology and standardization, with a focu s on retail pharmacy services, and has member representation from the pha rmacy services sector of health care (http://ncpdp.or g/about.aspx ). The operating rules the NCPD P brought forth to NCVHS focus on the retail-pharmacy sector. The July 2010 NCVHS hearings were followed by a request from the NCVHS Subcommittee on Standards to both the CAQH CORE and the NCPDP as authoring entity candidates, to respond to detailed questionnaires about their ability to meet the statutory requirements of the Affordable Care Act as auth oring entities for health care operating rules. The NCVHS request solicited spec ific documentation from the tw o candidates to validate their previous testimony, including minutes, voting record s and copies of bylaws. Both the CAQH CORE and the NCPDP responded to the Subcomm ittee's request and submitted their respectiveCMS-0032-IFC 22

applicable materials. A synopsis of the candida tes' responses can be found on the internet at http://www.ncvhs.hhs.gov/100930lt2.pdf

. Upon review of the CAQH CORE's and th e NCPDP's respective responses to the NCVHS questionnaire, the NCVHS determined that both organizations met the statutory requirements to be an operating rules authori ng entity. The NCVHS noted, however, that there are still adjustments to process and procedures that may be required of both organizations to enhance transparency, citing the need for more fo rmalized relations with each other and with other SDOs, inclusion of a more diverse cadre of stakeholders, and a more formal public review process. Both the CAQH CORE and the NCPD P acknowledged these issues in their submitted responses to the NCVHS (http://www.ncvhs.hhs.gov/100930lt2.pdf ). The NCVHS advised the Secretary in its letter dated September 30, 2010, (http://www.ncvhs.hhs.gov/100930lt2.pdf ) that the CAQH CORE meets the requirements of section 1173(g)(2) of the Act to be the operating rules author ing entity for the non-retail pharmacy-related eligibility for a he alth plan and health care claim status standard transactions with additional qualifying requireme nts. In the same letter, the NCVHS stated that the NCPDP met the requirements to be the authoring entity for operating rules for retail pharmacy-related eligibility transactions (as outlined in the Te lecommunications Standard Implementation Guide Version D.0) also with additional qualifying requirements. Those requirements for both the CAQH CORE and the NCPDP are as follows: • Require authoring entities to maintain minutes, attendance, voti ng records, and other appropriate documentation that will help the NC VHS conduct verificatio n that the authoring entities have utilized an open, consensus-driven process with broad stake holder participation and provided an opportunity for public comment in authoring any new ope rating rules or newCMS-0032-IFC 23

versions of existing operating rules, consistent with such processes fo llowed by ANSI-accredited standards development organizations. • Continue to use the NCVHS and its open process to evaluate, select, and recommend any new qualifying operating rules au thoring entities when it come s time to adopt operating rules for other transactions, or for newer versions of the operating rules for the transactions for which the CAQH CORE and the NCPDP are being recomme nded to be named author ing entities at this

time.

After our own review and anal ysis of the CAQH CORE and the NCPDP applications for consideration to be authoring entities for thei r respective developed ope rating rules, and the NCVHS' recommendation, we have determined that the CAQH CORE is qualified to be the operating rules authoring entity for non-retail phar macy-related eligibility for a health plan and

health care claim status sta ndard transactions per secti on 1173(g)(2) of the Act. At the time of the hearing, the NCVHS base d its recommendation to appoint the NCPDP as an operating rules authoring entity on the testimony presented. However, upon further review and consultation, we have determined that the NCPDP's standard provides enough detail and clarity to operationalize the sta ndards to the point where no gaps exist that operating rules would

need to fill and no further infrastructure or data content rules need to be adopted. (For a more detailed discussion, see section III. of this inte rim final rule with comment period). D. Adoption of Operating Rules 1. Adoption of the CAQH CORE Phase I and Phase II Operating Rules for the Non-Retail Pharmacy Eligibility for a Health Plan and Health Care Claim Status Transactions (updated for Version 5010)CMS-0032-IFC 24

The CAQH CORE builds consensus among health care industry stakeholders on a set of operating rules that facilitate administrative inte roperability between health plans and providers by building on applicable HIPAA transaction requirements, enabling providers to submit transactions from any system, and facilitating ad ministrative and clinical data integration. The CAQH CORE uses a phased approach for developi ng operating rules. This approach allows for developing rules and implementing them via incr emental, achievable milestones, and helps to maximize rule adoption. The CAQH CORE Phase I operating rules were developed in 2006 and focused on the eligibility for a health plan transaction. The CAQH CORE Phase II rules, developed in 2008, added operating rules for the h ealth care claim status transaction, and more rules for the eligibility for a health plan transact ion that were not included in Phase I. Both the CAQH CORE Phase I and Phase II operating ru les were updated to accommodate the Version 5010 HIPAA standards, which were adopted by the Secretary via the final rule published in the Federal Register on January 16, 2009 (74 FR 3296) and with which HIPAA covered entities must be compliant on January 1, 2012. The CAQH CORE operating rules (updated for Version 5010) in clude both infrastructure

rules and data content rules. The infrastructur e rules help improve data content flow between provider and payer. They improve interope rability by addressing all of the following: • Connectivity--provide a uniform way for stakeholders to connect (through the internet). • Response Times--specify that inform ation will be availa ble in real time. • System Availability--specify systems de livering information be available a certain

amount of time.

• Patient Identification --help assure patient matching/identification can occur.CMS-0032-IFC 25

The CAQH CORE's first set of operating rules (updated for Version 5010) are Phase I rules for eligibility for a health plan transaction. They help electronically confirm patient benefit coverage, copay, coinsurance, and base deducti ble. In addition, through requirements to use common internet protocols, they allow providers to access needed patient information prior to or at the point of care. The CAQH CORE's s econd set of operating rule s (updated for Version 5010) are the Phase II rules for the eligibility for a health pl an and health care claim status transactions. They expand on the first set by addi ng a requirement for transaction recipients to send back patient remaining deductible amounts, rules to improve patient matching, health care

claim status infrastructure re quirements (for example, respon se time) and more prescriptive connectivity requirements. We have examined each of the CAQH CORE Phase I and Phase II operating rules and are adopting those that we believe further enha nce the HIPAA transactions by better facilitating communication between trading partners, includi ng providers, filling gaps in the associated standards, and fulfilling the requirements, purposes, and principles set out in the statute at sections 1173(a)(4)(A)(i through iv) and (B). Of the eigh t CAQH CORE Phase I operating rules (updated for Version 5010), we are adopting the following six: • Phase I CORE 152: Eligibility and Benef it Real Time Companion Guide Rule, version 1.1.0, March 2011, and CORE Version 5010 Master Companion Guide Template, 005010, 1.2,

March 2011. • Phase I CORE 153: Elig ibility and Benefits Connec tivity Rule, version 1.1.0, March

2011. • Phase I CORE 154: Elig ibility and Benefits 270/271 Da ta Content Rule, version 1.1.0,

March 2011.CMS-0032-IFC 26

• Phase I CORE 155: Eligib ility and Benefits Batch Resp onse Time Rule, version 1.1.0,

March 2011. • Phase I CORE 156: Eligib ility and Benefits Real Time Response Time Rule, version 1.1.0, March 2011. • Phase I CORE 157: Eligib ility and Benefits System Av ailability Rule, version 1.1.0,

March 2011. We are adopting all five of the CAQH CORE Phase II operating rules (updated for Version 5010). They include the following:

• Phase II CORE 250: Claim Status Rule, version 2.1.0, March 2011, and CORE Version 5010 Master Companion Guide Template, 005010, 1.2, March 2011. • Phase II CORE 258: Eligib ility and Benefits 270/271 Normalizing Patient Last Name Rule, version 2.1.0, March 2011. • Phase II CORE 259: Eligibility a nd Benefits 270/271 AAA Error Code Reporting Rule, version 2.1.0, March 2011. • Phase II CORE 260: Eligibility & Bene fits Data Content (270/271) Rule, version 2.1.0, March 2011. • Phase II CORE 270: Connectivity Rule, version 2.2.0, March 2011. Both the CAQH CORE Phase I and Phase II operating rules (updated for Version 5010) that we are adopting in this interim final ru le with comment period can be found on the CAQH CORE website at http:// www.caqh.org/COREVersion 5010.php . Below we briefly describe those operating rules. The Phase I CORE 152: Elig ibility and Benefit Real Time Companion Guide Rule (updated for Version 5010) and CORE Vers ion 5010 Master Companion Guide TemplateCMS-0032-IFC 27

provide a standardized format for health plan companion guides. As mentioned previously, health plans have the option of creating a compan ion guide that describe s the specifics of how they implement the HIPAA transactions. Curren tly, health plans have independently created companion guides that vary in format and structur e, which can be confusing to trading partners, including providers, and providers who must review numer ous companion guides along with the Version 5010 Implementation Guides. To addres s this issue, the CAQH CORE developed the CORE Version 5010 Master Companion Guide Templa te to ensure that the structure of each health plan's companion guide is similar to ev ery other health plan's companion guide, making it easier for providers to find information quickly. Developed with input from multiple hea lth plans, system vendors, provider representatives and healthcare and HIPAA i ndustry experts, the CAQH CORE template organizes information into several sections incl uding, general information (sections 1 through 9) and transaction-specific information (section 10) , as well as appendices that provide helpful information, such as an information checklist, descriptions of typical business scenarios, transmission examples, FAQs, and a summary of the changes between companion guides. The CAQH CORE recognizes that different health pl ans may have different requirements, so the CORE v5010 Master Companion Guide Template gi ves health plans the fl exibility to tailor companion guides to meet each of their own particular needs. The Phase I CORE 153: Eligib ility and Benefits Connectivity Rule (updated for Version 5010) addresses usage patterns for both batch and r eal time transactions, the exchange of security identifiers, and communications-level errors and acknowledgements. It does not define the specific content of the message.CMS-0032-IFC 28

Currently, multiple connectivity methods, some based on open standards, others on proprietary approaches, are in us e for administrative electronic transactions in the health care industry. Health care providers and health plans support multiple connectivity methods to connect to different health pl ans, clearinghouses, provider organi zations and others, which add costs for health plans and providers. This rule is designed to pr ovide a "safe harbor" that providers and health plans can be assured will be supported by any trading partner, including providers. Safe harbors are es sentially connectivity requirement s. When trading partners including providers, agree to fo llow the same connectivity requirements, connectivity is better

enabled

. This rule is not intended to require trading partners, in cluding providers, to remove existing connections that do not match the rule, nor is it intended to require that all trading partners, including providers, must use this meth od for all new connections. It is expected that some trading partners, including providers, may agree to use di fferent communication mechanism(s) and/or security requirements than that described by this rule. The rule simply provides a secure connection for those ent ities that do not currently have one. The Phase I CORE 154: Eligib ility and Benefits 270/271 Data Content Rule (updated for Version 5010) provides more robust a nd consistent information prior to or at the point of care. It specifies the minimum requirements for usi ng the ASC X12 005010X279A1 Eligibility Benefit Request and Response (270/271) to inquire about health plan insu rance coverage and to respond to such an inquiry using the ASC X12 005010X279A 1 Eligibility Benefit Request and Response (270/271). The requirements address certain situa tional elements and codes and are in addition to requirements contained in the Version 5010 270/271 implementation guides. This rule provides for not only determination of an indi vidual's eligibility but also his financialCMS-0032-IFC 29

responsibility information for co-p ay, deductible, and coinsurance prio r to or at the point of care. This rule covers, for example, the following content in the Version 5010 271: • The dates of eligibility under the health pl an (contract) level for past and future dates and the dates of eligibility at the benefit level if different from the contract level. • The patient financial responsibility for each specified benefit at the base contract

amounts for both in-network and out-of-network. • The name of the health plan when it exists in the health plan's system. Compliance with the requirements of this operating rule will ultim ately reduce the time it takes providers to track down such information after the service has been rendered, and decrease the provider's accounts receivable. The Phase I CORE 155 and 156: Eligibility a nd Benefits Batch Response and Real Time Response Rules (updated for Version 5010) streamlin e and improve the flow of transactions by imposing timeframe requirements for when a response is to be submitted for an eligibility for a health plan inquiry. For a Version 5010 270 batch mode response to a provider's inquiry submitted by 9:00 pm Eastern time of a business day, the respon se must be returned by 7:00 am Eastern time the following business day. The maximum res ponse time when processing in real time mode

must be 20 seconds or less. The Phase I CORE 157: Eligib ility and Benefits System Av ailability Rule (updated for Version 5010) also streamlines and improves the fl ow of transactions. It recognizes that many institutional providers need to be able to conduct health pl an eligibility activities at any time. It also recognizes that health plans have a business need to take their eligibility and other systems offline periodically in order to perform system maintenance, which means that some systems willCMS-0032-IFC 30

not be available for eligibility inquiries and responses on certain nights and weekends. The rule requires that systems be available to process e ligibility inquiries no less than 86 percent of the time per calendar week for real and batch modes, and requires health pl ans to publish regularly scheduled downtime. It ensures that systems ar e up and running in a consistent manner and that trading partners, including providers, are aware of any downtime so they can plan accordingly.

The Phase II CORE 250: Claim Status Rule (updated for Version 5010) encourages and

increases the use of the health care claim status transaction by providing for batch and real-time response times, system availability, the use of a companion guide template, and support for the CORE "safe harbor" connectivity requirement. These elements included in the CORE 250 rule follow the same requirements as and build upon the same requirements as for the eligibility for a health plan transaction infrastructure rules included in Phase I CORE 152, Phase I CORE 155,

Phase I CORE 156 and Phase I CORE 157 rules we ar e adopting in this interim final rule with comment period. This means that Phase II CORE 250 rule (updated for Version 5010) requires each health plan to: follow the companion guide format requirement as provided in CORE 152, which is the CORE Version 5010 Master Compan ion Guide Template; support the CORE "safe harbor" connectivity requirements; support a ma ximum response time of 20 seconds from the

time of submission of a Version 5010 276 for r eal time and for batch mode response to a provider's inquiry submitted by 9:00 pm Eastern ti me of a business day, the response must be returned by 7:00 am Eastern time the following busin ess day; ensure system availability of no less than 86 percent per calenda r week for both real time and batch modes; and follow the companion guide format requirement as pr ovided in CORE 152, which is the CORE v5010 Master Companion Guide Template.CMS-0032-IFC 31

The CORE 258: Eligibility a nd Benefits 270/271 Normalizing Patient Last Name Rule (updated for Version 5010). Health plans and hea lth care providers must be able to uniquely identify patients in order to ascertain pa tient eligibility. Although the Version 5010 270/271 standards specify data elements and data elemen t attributes that may be used to identify an individual, the standards do not address the use of punctuation and special ch aracters. Therefore, the way health plans identify individuals does not always ma tch the way providers identify individuals, which results in the rejection or denial of eligibil ity transactions. The CAQH CORE 258 rule addresses certain aspects of individual identification that e nhance the real time processing of eligibility i nquiries and responses. The Phase II CORE 259: Eligibility a nd Benefits 270/271 AAA Error Code Reporting Rule (updated for Version 5010) provides cons istent and specific pa tient identification information on reasons for patient id entification errors on an eligibil ity for a health plan inquiry. This allows providers to know specifically why they did not receive a match in an eligibility for a health plan inquiry, instead of trying to determine for themselv es the reasons for the error and

what corrective action is needed. This rule improves the specific ity and standardized use of the AAA codes that would give provid ers better feedback to understa nd what information is missing

or incorrect in order to obtain a valid match. It defines a standard way for health plans to report errors in the eligibility response that cause a health plan not to be able to respond with a Version 5010 271 showing eligibility informati on for the requested patient or subscriber. The goal is to use a unique error code wherever possible for a given error conditi on so that the re-use of the

same error code is minimized. Where this is no t possible, the goal (when re-using an error code) is to return a unique combination of one or more AAA segments along with one or more of theCMS-0032-IFC 32

submitted patient identifying data elements such that the provider will be able to determine as precisely as possible what data elements are in error and take the appr opriate corre ctive action. The Phase II CORE 260: Eligibility & Be nefits Data Content (270/271) Rule (updated for Version 5010) builds on and enhances the Ph ase I CORE 154: Eligibility and Benefits 270/271 Data Content Rule (updated for Vers ion 5010) by requiring the provision in the eligibility response of th e remaining patient deductible amount s for certain service type codes.

The use of this rule further reduces the time it takes to track down this information manually or eliminates the time completely after the service has been rendered and decreases the provider's

accounts receivable. The CAQH CORE determined that Phas e I CORE rules should focus on improving electronic eligibility and benefits verification, as eligibility is the first transaction in the claims process. Thus, if eligibility and benefits are accurately known to health care providers, all the

associated electronic transactions that follow will be more effective and efficient. The Phase I CORE 154: Eligibility and Be nefits 270/271 Data Content Ru le (updated for Version 5010) primarily outlined a set of requirements for health plans to return base (not remaining or accumulated) patient financial responsibility rela ted to the deductible, co-pay and co-insurance

for a set of 12 services in the ASC X 12 005010X279A1 Eligibility Benefit Request and Response (270/271), and for vendors, clearinghouse s and providers to transmit and use that financial data. The Phase II CORE 260: Eligib ility & Benefits Data Content (270/271) Rule (updated for Version 5010) extends and e nhances the CORE Phase I Version 5010 271 transaction by requiring the pr ovision of remaining deductible amounts for both the Phase I required 12 service type codes and an additional set of 39 ot her service type codes.CMS-0032-IFC 33

The Phase II CORE 270: Connectivity Rule (updated for Version 5010), which applies to both the eligibility for a health plan and health care claim status trans actions, builds on CORE 153: Eligibility and Benefits Connectivity Rule (updated for Version 5010) by requiring additional connectivity specifications which further facilitate interoperability. This rule addresses the message envelope metadata (tha t information which defines the context for interpretation of the rest of the data in th e message, for example, response codes, request methods, etc.) and the message envelope, (a fixed nu mber of fields that sh ow source, destination, tag, and communicator. and the submitter authentication requirements for both batch and real time transactions, and comm unications-level errors. This rule improves utilization of electroni c transactions by enabling more entities to interoperate with other entities, including reduc ing the implementation barrier for small entities (for example, small providers). It also extends the Phase I CORE 153: Eligibility and Benefits Connectivity Rule (updated for Version 5010) and es tablishes a safe harbor by further specifying the connectivity that all c overed entities must demons trate and implement. Tables 3 and 4 summarize each of the CAQH CORE Phase I and Phase II Version 5010 operating rules, which we are adopting in this interim final rule with comment period, as reflected in 45 CFR 162.920, 162.1203, and 162.1403.CMS-0032-IFC 34

TABLE 3. THE CAQH CORE PHASE I OPERATING RULES (UPDATED FOR VERSION 5010)

Rule High Level Requirements Phase I CORE 152: Eligibility and Benefit Real Time Companion Guide Rule, Version 1.1.0, March 2011 and CORE Version 5010 Master Companion Guide Template, 005010, 1.2, March 2011 Goal : Standardize template/common structure of companion guides for more efficient reference. Requirements : Standard template/structure for companion guides.

Phase I CORE 153: Eligibility and Benefits Connectivity Rule, Version 1.1.0, March 2011 Goal : Provide a "safe harbor" that ap plication vendors, providers, and health plans can be assured will be supported by any trading partner including providers, to facilitate connectivity standardization and interoperability across the exchange of health information. Requirements : Supports data exchange over the public internet (HTTP/S). Phase I CORE 154: Eligibility and Benefits 270/271 Data Content Rule, Version 1.1.0, March 2011 Goal: Enable more robust and consistent exchange of eligibility information. Requirements : Specifies what is to be included in the 271 eligibility for a health plan response to a 270 eligibility for a health plan inquiry. Phase I CORE 155: Eligibility and Benefits Batch Response Time Rule, Version 1.1.0, March 2011 Phase I CORE 156: Eligibility and Benefits Real Time Response Time Rule, Version 1.1.0, March 2011 Goal: Streamline and improve flow of transactions. Requirements : Response time is 20 seconds or less for real time, next day for batch.

Phase I CORE 157: Eligibility and Benefits System Availability Rule, Version 1.1.0, March 2011 Goal: Streamline and improve flow of transactions. Requirements : Systems must be available 86 percent per calendar week, and regular downtime must be published.

TABLE 4. THE CAQH CORE PHASE II VERSION 5010

Rule High Level Requirements Phase II CORE 250: Claim Status Rule, Version 2.1.0, March 2011 Goal: Promote increased availability and usage of the health care claim status transaction through rules fo r real-time and batch response times, system availability, and connectivity. Requirements: Application of real-time and batch response times, system availability, and connectivity rules for health care claim status transactions, which were derived from the eligibility Phase I infrastructure rules. Phase II CORE 258: Eligibility and Benefits 270/271 Normalizing Patient Last Name Rule, Version 2.1.0, March 2011 Goal: Improve patient matching. Requirements: Normalize the submitted and stored last name (e.g., remove special characters, suffixes/p refixes) before trying to match.CMS-0032-IFC 35

Rule High Level Requirements Phase II CORE 259: Eligibility and Benefits 270/271 AAA Error Code Reporting Rule, Version 2.1.0, March 2011 Goal: Provide better information on why a match did not occur in an eligibility for a health plan request. Requirements: Return specified AAA codes for each error condition. Phase II CORE 260: Eligibility & Benefits Data Content (270/271) Rule, Version 2.1.0 , March 2011 Goal: Provide additional financial responsibility/patient liability information in response to an inquiry and support more high volume service type codes. Requirements: Includes remaining deductible amount (plus static copay and coinsurance information) in response to an eligibility for a health plan inquiry, along with 39 additional service type codes beyond the service type codes provided in Phase I. Phase II CORE 270: Connectivity Rule, Version 2.2.0, March 2011 Goal: Provide more comprehensive connectivity specifications to further interoperability. Requirements: Includes requirements for two message envelope standards submitter authentication (i.e., username /password, digital certificates) and metadata.

In 45 CFR 162.103, we provide th at a standard transaction means "a transaction that complies with an applicable standard adopted under this part." In this interim final rule with comment period we are adopting op erating rules and requiring that covered entities comply with those operating rules when conducting a transaction for which we have adopted a standard. In order to reflect that requirement in regulation text, in part, we need to modify the definition of

standard transaction to be clear that a standard transaction is on e that complies with the adopted standard and the adopted associated operating rule . Therefore, we are amending the definition of

standard transaction at 45 CFR 162.103. S ee the "Additional Requirements" section for discussion of this change. In the following sections, we identify and discuss several specific CAQH CORE operating rule requirements that we believe require further explanation. These include acknowledgements, certification, and the use of the CAQH CORE companion guide template. We believe these topics require additional explanation because in this interim final rule with comment period, we are not adopting the operating rules that pertain to acknowledgements or theCMS-0032-IFC 36

requirements within the adopted operating rules that pertain to acknowledgements, nor are we adopting the CAQH CORE certific ation policies. Additionally, we believe we need to be especially clear that we are adopting the CAQH CORE companion guide template to avoid any confusion as to whether the companion guide te mplate is included as part of the companion guide rules under CAQH CORE Phase I a nd Phase II rules we are adopting. a. Acknowledgements Operating Rules Acknowledgements are responses transmitted by EDI that inform submitters whether or

not their transaction has been received or if th ere are problems with the transaction. The use of acknowledgements adds a great deal of value to the underlying tr ansactions for which they are sent by informing the sender that a transaction has been received or has been rejected. Without acknowledgements, it is difficult fo r the sender to know whether the intended recipient received the transmission, which often results in the sender repeatedly querying the intended receiver as to

the status of the transmission. In the February 2010 report to the NCVHS , the Designated Standards Maintenance Organization (DSMO), which receives and proc esses requests for adopting new standards or modifying adopted standards recommended th at the NCVHS consider acknowledgements for adoption as HIPAA transactions, using the Version 5010 999, 271, 277, and TA1 standards. In the DSMO recommendation, it was noted that ack nowledgements help the health care industry better reconcile the status of transmitted EDI transactions, especially when sending claims and

remittance transactions. The transaction sender benefits from knowing that the receiving party has successfully received the transaction or has enc ountered errors that need to be reconciled. We have received anecdotal reports of wi de-spread industry use of acknowledgements on a voluntary basis, and we understand that pr ovisions for acknowledgements are contained inCMS-0032-IFC 37

many health plans' companion guides. It is our understanding also that the health care industry has long supported, and even anticipated, the adoption of an acknowledgement transaction standard under HIPAA. The CAQH CORE 150 and 151 rules (updated for Version 5010) specifically pertain to requiring the use of the Version 5010 999, 271, and 277 acknowledgements. Additionally, the use of ack nowledgements is referenced throughout many of the other CAQH CORE rule s adopted in this interim fi nal rule with comment period, including the CORE v5010 Master Companion Guide Template. Section 1173(a)(4)(A)(iii) of the Act, as added by secti on 1104(b) of the Affordable Care Act, provides that standards and associated operating rules shall "provide for timely acknowledgement, response, and status reporting th at supports a transparent claims and denial management process (including adju dication and appeals)." This new provision is an indication of Congress' recognition of the important role acknowledgements play in EDI. Although we are not requiring compliance with any of th e CAQH CORE rule requirements regarding acknowledgements, we are addressing the importa nt role acknowledgements play in EDI by strongly encouraging the industr y to implement the acknowledgements requirements in the CAQH CORE rules we are adopting herein. We re flect the exclusion of the requirement to use acknowledgments in regulati on text at §162.1203 and §162.1403. Until such time as the Secretary adopts a standard for acknowledgments, we support the industry's ongoing voluntary use of acknowledgeme nts and encourage even more widespread use. We welcome industry and stakeholder comments on this topic. b. CAQH CORE Opera ting Rules Certification Currently, the CAQH CORE admini sters a voluntary certifica tion process, for a fee. Once the entity passes the certif ication requirements, the CAQH CORE assigns the status ofCMS-0032-IFC 38

"CORE-certified Entity" and require s those entities to adhere to the CAQH CORE policies. The CAQH CORE operating rules are free and availa ble for voluntary use today, and any trading partner, including providers, can op t to use them, they would simply not be able to claim that they were "CORE certified entities." Throughout the CAQH CORE rules we are adopt ing, there are also many references to CORE certification. For example, the rules refe rence CORE-certified entity, CORE-authorized testing vendor, CORE-certified pa rticipant, and the like. In ma ny places, the rules describe what is required for the successful completion of the approved CORE test suite, CORE testing requirements, etc. In this interim final rule with comment period, we ar e not requiring covered entities to obtain the CAQH CORE certification or to adhere to the CAQH certification policies for Phase I and Phase II operating rules. We wa nt to be clear that we are not requiring compliance with any aspect of CORE certification. We note that section 1173(h )(1)(A) of the Act (as added by section 1104(b)(2) of the Affordable Care Act) requires that health pl ans certify to the Secretary no later than December 31, 2013 that they are in compliance with any applicable HIPAA standards and associated operating rules for the eligibility for a health plan, health care claim status, and health care payment and remittance advice transactions. Until we develop a certification process in accordance with section 1173(h) of the Act specifying health plan compliance requirements, health plans and all other covered entities are not required to certify compliance with the CAQH CORE Version 5010 operating rules we are adopt ing. We reflect the exclusion of CORE certification in regulati on text at §162.1203 and §162.1403. c. Use of the CAQH CORE Companion Guide TemplateCMS-0032-IFC 39

During the July 2010 NCVHS hearing, the NC VHS also heard testimony concerning the continued use of companion guides when opera ting rules are adopted. The NCVHS indicated

that it does not wish to encour age the perpetual use of compan ion guides, which subvert the goals of administrative simplif ication; however, it acknowledge d that companion guides may continue to be necessary for proprietary inform ation, transmission instructions, and other limited business purposes, and will likely never be to tally replaced by operating rules or updated

versions of the standards. The NCVHS recommended that the Secretary require that any companion guides deemed necessary by health plans not conflict with th e HIPAA standards, implementation specifications and operating rules, and that th ey follow a standard format and content agreed upon by industry

consensus across all sectors. The NCVHS stat ed that companion guides should be limited to providing basic trading partner, including providers, facts, such as contact information, websites, service phone numbers, and other necessary in formation for conducting business, etc. With input from health plans, system vendors, provider representatives and healthcare/HIPAA industry experts, the C AQH CORE has developed a companion guide template as part of their Phase I and Phase II operating rules (updated for Version 5010) that organizes information into several simple sections and gives health plans the flexibility to tailor the document to meet their particular needs. The CORE 152: Eligibility and Benefit Real Time Companion Guide Rule states that the ASC X12 005010X279A1 Eligibility Benefit Request and Response (270/271) transactions must follow th e format/flow as defined in the CORE v5010 Master Companion Guide Template. The CORE 250: Claim Status Rule (updated for Version 5010) includes a requirement that entities using the ASC X12N/005010X212 Health Care Claim Status Request and Response (276/2 77) transactions must follow the format/flow as defined inCMS-0032-IFC 40

the Phase I CORE 152, which is the CORE v501 0 Master Companion Guide Template. The CAQH CORE companion guide template can be found on the CAQH CORE website at http://www.caqh.org/pdf/CLEAN5010/Ma sterCompGuidTemp-Version 5010.pdf. We are requiring that covered entities that use or plan to use companion guides comply with the CORE 152 and CORE 250 rules requ irement to use the CORE v5010 Master Companion Guide Template for the eligibility for a health plan and health care claim status

transactions. d. Updates to Standa rds and Operating Rules Section 1173(i) of the Act provides for the establishment of a review committee for the purposes of reviewing and amending the adopted standards and operating ru les. It calls for a hearing of this review committee no later than April 2014 and not le ss than biennially thereafter as well as a report outlini ng recommendations for updating and improving the standards and operating rules. Per the stat ute, this review committee can include the NCVHS, or any appropriate committee as determined by the Secretary. Additionally, section 117 3(a)(5) of the Act provides for th e solicitation of input from the NCVHS and the Health Information Technology St andards Committee, as well as the standards setting organizations and stakeholders as de termined appropriate by the Secretary for the purposes of describing "(i) wh ether there could be greater uniformity in financial and administrative activities and items, as determined appropriate by the Secret ary; and (ii) whether

such activities should be considered financial and administrative trans actions...for which the adoption of standards and operati ng rules would improve the operati on of the health care system

and reduce administrative costs."CMS-0032-IFC 41

Finally, we note that this interim final ru le with comment period does not specify the timing or the process for updating operating rules. The timing and process for updating these, as well as future operating rules will be forthcoming.

e. Additional Information

The current definition of standard at 45 CFR 160.103 is written so broadly that it could include operating rules as we are defining that term at §162.103. However, as we have determined that operating rules are separate and distinct from standards, and that standards do not encompass operating rules, we believe it is nece ssary to revise the defi nition of standard to specifically exclude operating rules. Therefore, we have amended the definition of standard at §160.103 to exclude operating rules. Currently, 45 CFR 162.103 provides that a standard transaction means "a transaction that complies with an applicable standard adopted under this part." In this interim final rule with comment period we are adopting op erating rules and requiring cove red entities to comply with those operating rules when conducting a transaction for which we have adopted a standard. We believe it is necessary to revise the definition of a standard transaction in or der to be clear that a standard transaction is one that uses the adopted standard as well as th e adopted operating rule for that transaction. Therefore, we are amendi ng the definition of a st andard transaction at 45 CFR 162.103 to mean "a transaction that complies with an applicable standard and associated operating rules adopted under this part." Section 1173(a)(4)(A)(iv) of the Act provides that the standards a nd associated operating rules must "describe all data elements (inc luding reason and remark codes) in unambiguous terms, require that such data elements be requi red or conditioned upon set va lues in other fields, and prohibit additional conditions (e xcept where necessary to implem ent State or Federal law, orCMS-0032-IFC 42

to protect against fraud and abuse) ." We interpret this provisi on to mean that covered entities may not require additional data conditions of th eir trading partners, in cluding providers, outside of those already included in the adopted standard s and associated operating rules, except where it is necessary to implement State or Federal law, or to protect against fraud and abuse. Our regulations at 45 CFR 162.915 already place restrictions on covered en tities with regard to what they may require of their tradi ng partners including providers, c oncerning standards. Currently, under §162.915(a), covered entities may not enter in to a trading partner agreement that would change the definition, data conditi on, or use of a data element or segment in a standard. We do not need to do anything to incor porate the statutory requirement of section 1173(a)(4)(iv) of the Act into our regulations with rega rd to standards; however we belie ve it is appropriate to revise §162.915(a) to expand the restriction to include operating rules. Therefore, we are amending §162.915(a) to include operating rules. The law permits limited circumstances under which covered entities may require additional data c onditions where necessary to implement State or Federal law, or to protect against fraud and a buse. Therefore, we are also amending §162.915(a) to reflect that narrow exception.

f. Conclusion Based on our analysis of the CAQH CORE operating rules and th e recommendations of the NCVHS, and for the reasons provided in th e previous discussions, we are adopting the CAQH CORE operating rules ( updated for Version 5010), in cluding the companion guide template, for the non-retail pharmacy eligibility for a hea lth plan and health care claim status transactions, as reflected at 45 CF R 162.920, 162.1203, and 162.1403. We are not requiring compliance with any of the requirements of the operating rules that pe rtain to the use of acknowledgements and CAQH CORE certification.CMS-0032-IFC 43

2. NCPDP Telecommunication Standard Implem entation Guide Version D.0 Operating Rules for Retail Pharmacy Transactions In its testimony before the NCVHS, the NC PDP stated that th e NCPDP Version D.0 standard represents retail pharmacy industry cons ensus on clarification of transactions, data elements, data values, and situations of usage. Additionally, the NCPDP testified at the July 2010 NCVHS hearing that it also publishes a free NCPDP Vers ion D.0 Editorial document, which is updated quarterly, and contains fre quently asked questions, examples, and further clarifications, as well as addr esses Medicare Part D prescrip tion drug program needs that the industry brings forward. As business requirements change, as clarifications are needed, and as questions are asked, the NCPDP has indicated that, where possi ble, the information in the NCPDP Version D.0 Editorial will be incorporated into future versions of the NCPDP Version D.0 standard to further support ongoing retail pharmacy business needs. The NCPDP formally requested that the NC VHS recommend to the Secretary that the NCPDP Version D.0 standard be adopted as the operating rule for use wi th the retail pharmacy eligibility for a health plan transaction, a nd the NCVHS included this recommendation in its September 30, 2010 letter to the Secretary. The pharmacy industry has long been utilizi ng NCPDP standards to conduct electronic transactions. These standards pr ovide for real-time claims adj udication, eligibil ity and benefit verification, real-time ordering by the physician, and shar ing of medication hi story. We believe that the NCPDP Version D.0 standard itself provid es enough detail and clar ity to operationalize the standards to the point where no gaps exist that operating rules would need to fill, so that no

further infrastructure or data content rules need to be adopted at this time. Additionally, we

believe that the NCPDP Version D.0 standard al ready fulfills the purposes and principles ofCMS-0032-IFC 44

sections 1173(a)(4)(A) a nd (B) of the Act so that the adopt ion of operating ru les to supplement

or enhance the standard is not appropriate at this time. III. Effective and Compliance Dates Section 1173(g)(4)(B)(i) of the Act states that "[t]he set of operating rules for eligibility for a health plan and health claim status transa ctions shall be adopted not later than July 1, 2011, in a manner ensuring that such operating rules are effective not later than January 1, 2013." In each of our previous HIPAA rules, the date on which the rule was effective was the date on

which the rule was considered to be established or adopted, or, in other words, the date on which adoption took effect and the CFR was accordingly amended. Typically, the effective date of a rule is 30 or 60 days after publication in the Federal Register . Under certain circumstances the delay in the effective date can be waived, in whic h case the effective date of the rule may be the date of filing for public inspection or the date of publication in the Federal Register

. The effective date of standards, impl ementation specifications, modifications, or operating rules that are adopted in a rule, however, is different than the effective date of the rule. The effective date of standards, implementati on specifications, modifica tions, or operating rules

is the date on which covered entities must be in compliance with the standards, implementation specifications, modifications, or operating rules. Here, the Act requires that the operating rules be effective not later than January 1, 2013. Th is means that covered entities must be in compliance with the operating rules by January 1, 2013. If we receive comments that compel us to change any of the policies we are finalizing in this interim final rule with comment period, we will seek to finalize any such changes by January 1, 2012, to allow sufficient time for industry preparation for compliance.CMS-0032-IFC 45

IV. Waiver of Proposed Rulemaking Under 5 U.S.C. 553(b) of the Administrative Procedure Act (APA), we are required to publish a notice of propo sed rulemaking in the Federal Register . In addition, the APA mandates a 30-day delay in the effective date. Sec tions 553(b) and (d) of the APA provide for an exception from these APA requirements. Section 553(b)(B) of the APA authorizes an agency to dispense with normal rulemaking requirements fo r good cause if the agency makes a finding that notice and comment procedures are impracticable, unnecessary, or contrary to the public interest. Section 553(d)(3) of the APA allows the agency to avoid the 30-day delay in effective date where the agency finds good cause to do so and includes a statement of support. Subsection (C) of section 1173( g)(4) of the Act is titled "Expedited Rulemaking" and provides that "[t]he Secretary sh all promulgate an interim final rule applying any standard or operating rule recommended by the [NCVHS] pursua nt to paragraph (3). The Secretary shall accept and consider public comments on any interi m final rule published under this subparagraph for 60 days after the date of such publication." It is clear to us the statute intends that the ordinary notice and comment rulemaking procedur es of the APA do not apply here. We are statutorily required to proceed with an interim final ru le with comment period, which means we are compelled by the statute to dispense with normal APA notice and comment procedures. In light of the statutory requirement for us to publish an IFC for the adoption of these operating rules, we conclude that it is unnecessary fo r us to undertake ordina ry notice and comment procedures and therefore, for good cause, we waiv e them. In accordance with the requirements of section 1173(g)(4)(C) of th e Act, we are providing a 60-day public comment period. We also find good cause for waiving the 30-day de lay in the effective date of this interim final rule with comment period. The 30-day delay is intended to give affected parties time toCMS-0032-IFC 46

adjust their behavior and make pr eparations before a final rule takes effect. Sometimes a waiver of the 30-day delay in the effective date of a rule directly imp acts the entities required to comply with the rule by minimizing or even eliminating the time during which they can prepare to comply with the rule. That is not the case here. In this case, covered ent ities are not required to comply with the adopted opera ting rules until January 1, 2013, n early one-and-one-half years after the publication of this interim final rule w ith comment period; a waiver of the 30-day delay in the effective date of the rule does not change that fact. A waiver is in fact inconsequential

here to covered entities—the ir statutorily-prescribed date of compliance remains January 1, 2013. Because we believe the 30-day delay is unnecessary, we find good cause to

waive it. V. Collection of Information Requirements Under the Paperwork Reduction Act of 1995, we are required to provi de 60-day notice in

the Federal Register and solicit public comment before a collection of information is submitted to the Office of Management and Budget (OMB) fo r review and approval. In order to fairly

evaluate whether an information collection s hould be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 require s that we solicit comment on the following

issues:

• The need for the information collection and its usefulness in carrying out the proper functions of our agency. • The accuracy of our estimate of the information collection burden. • The quality, utility, and clarity of the information to be collected.

• Recommendations to minimize the inform ation collection burden on the affected public, including automate d collection techniques.CMS-0032-IFC 47

We are soliciting public comment on each of thes e issues for the following section of this

document that contains information collection re quirements (ICRs): Specifications: Companion Guides Template. In current practice, companion guides ar e developed by individual health plans and require providers to adhere to different transa ction implementation rules for each health plan. Health plans have created these companion gui des to describe the specifics of how they implement the HIPAA transactions and how they w ill work with their trading partners. Health plans' companion guides vary not only in format and structure, but also in size, being anywhere from a few to 60 pages or more. Such varian ces can be confusing to trading partners and providers who must implement them along with the standard implementation guides, and who must refer to different companion guides for differe nt health plans. As previously stated, there are currently more than 1,200 such compani on guides in use today. Use of the CORE 152: Eligib ility and Benefit Real Time Companion Guide Rule and the CORE 250: Claim Status Rule, two of the operating rules adopted in this in terim final rule with comment period provide a standard template/common structure that health plans must use that is more efficient for providers to reference, gi ven the multiple industry companion guides they must consult today. The increasing use of health care EDI standard s and transactions has raised the issue of the applicability of the PRA. The OMB has determined that this regulatory requirement (which mandates that the private sector disclose informa tion and do so in a particular format) constitutes an agency-sponsored third-party disc losure as defined under the PRA. The burden associated with the requirements of this interim final rule with comment period, which is subject to the PRA, is the initial onetime burden on health plans to use aCMS-0032-IFC 48

standardized template for companion guides. The burden associated with the routine or ongoing maintenance of the information reported in the standard template format for companion guides is exempt from the PRA as de fined in 5 CFR 1320.3(b)(2). Based on the assumption that the burden associ ated with systems modifications that need to be made to implement the standard templa te for companion guides may overlap with the systems modifications needed to implement ot her HIPAA standards, and the fact that the standard template for companion guides will replace the use of multiple companion guides, resulting in an overall reducti on of burden for providers, commenters should take into consideration when drafting commen ts that: (1) one or more of these current companion guides may not be used; (2) companion guide modificati ons may be performed in an aggregate manner during the course of routine business; and/or (3) systems modifications may be made by contractors such as practice management vendors, in a single effort for a multitude of affected

entities. Health plans that issue companion guides do so, in part, to direct providers on how to implement the ASC X12 and, in the case of th e NCPDP standards, they issue payer sheets specific to their requirements and often times pr ovide other plan-specific information, such as contact information, address, etc. It is expected that even with the advent of operating rules, companion guides will never be completely el iminated, but the companion guides themselves may be greatly reduced in size and complexity as a result of the use of operating rules. The companion guide templates serve the purpose of pr oviding a uniform structure for health plans to use when preparing companion guides. The use of these templates by health plans currently issuing companion guides is considered to be a one-time action and is considered a permanent standard template for a hea lth plan companion guide.CMS-0032-IFC 49

The information collection burden associated with this interim final rule with comment period is for the costs for adapting a health pl an companion guide(s) to the CORE v5010 Master Companion Guide Template, 005010, 1.2, Marc h 2011 as required by the CAQH CORE operating rules for the eligibility for a health plan and health care claim status standard

transactions. This is a one-time burden on h ealth plans that will commence no later than January 1, 2013, the date by which HIPAA covered entities must be usin g the adopted operating rules for eligibility for a health plan a nd health care claim status transactions. Common practice in the industry is for comp anion guides to be pub lished as electronic documents and updated periodically in the routin e course of business. Companion guides are posted to and made available on health plan we bsites trading partners, including providers, to access; therefore, printing and shipping costs ar e not considered. As the transition to the template is a one-time requirement, we do not estimate any ongoing labor co sts associated with the use of this template beyond th e initial first year conversion. We have estimated the one-time conversion to the template will cost industr y $3,028,000. Our calculations were determined as

follows: The current length of health plan companion guides related to the eligibility for a health plan and health care claim status transactions, is anecdotally estimated at anywhere from just a few, to 60 or more pages. We estimate it will take a health plan staff person, most likely a technical writer, from 1 to 4 hours per page to reformat companion guides into the standard template for companion guides. This burde n would involve re-entering of information, reconfiguration of the sequence in which informa tion appears, addition of information, and other word processing and related tasks. It also w ould require specific technical knowledge, such as expertise in the Version 5010 standa rd transactions. We estimate that a technical writer, at anCMS-0032-IFC 50

estimated hourly salary rate of $31.55, would make these revi sions. Using the high estimate obtained in testimony to the NCHVS by the Amer ican Medical Associa tion of 1,200 companion guides currently in use, we calculate an estima ted average of 40 pages, (48,000 responses) at an average rate of 2 hours per page (1,200 guides x 40 pages x 2 hour s per page x hourly rate of $31.55), for a one-time burden of $3,028,800 across the industry for health plans that issue companion guides to adopt the standard template for health plan companion guides. As existing word processing capabilities would be used for th is task, we do not anticipate any software, hardware or other specialized equipment to be purchased and/or maintained for this specific

purpose. If you comment on these information collecti on and recordkeeping requirements, please do either of the following: 1. Submit your comments electronically as sp ecified in the ADDRESSES section of this interim final rule; or 2. Submit your comments to the Office of In formation and Regulator y Affairs, Office of Management and Budget,

Attention: CMS De sk Officer, CMS-0032-IFC Fax: (202) 395-6974; or Email: OIRA_submission@omb.eop.gov VI. Response to Comments Because of the large number of items of correspondence we normally receive on Federal Register documents published for comment, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in theCMS-0032-IFC 51

DATES section of this preamble, and, if we proceed with a subsequent document, we will respond to the comments in the preamble to that document. VII. Regulatory Impact Analysis

A. Introduction We have examined the impacts of this inte rim final rule with comment as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), the Regulatory Flexibility Act (RFA) (Septemb er 19, 1980, Pub. L. 96–354) (as amended by the Small Business Regulatory Enforcement Fa irness Act of 1996, Pub. L. 104–121), section 1102(b) of the Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104–4), Executive Order 13132 on Federali sm (August 4, 1999), and the Congressional Review Act (5 U.S.C. 804(2)). We have prepared a Regulatory Impact Analysis that, to the best of our ability, presents

the costs and benefits of this interim final rule with comm ent period. Executive Orders 12866 and 13563 direct agencies to assess all costs and be nefits of available regul atory alternatives and, if regulation is necessary, to se lect regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety eff ects, distributive impacts, and equity). Executive Order 13563 emphasizes th e importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexib ility. Executive Order 13563 also directs agencies to not only engage public comment on all regulations, but to also calls for greater communication across all agencies to elimin ate redundancy, inconsistency and overlapping, as well as outlines processes for improving regulation and regulatory review. A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million in 1995 dollars or more in any 1 year). This rule has beenCMS-0032-IFC 52

designated an "economically" significant regulat ory action, under secti on 3(f)(1) of Executive Order 12866 as it will have an impact of over $100 million on the economy in any 1 year. Accordingly, the rule has been reviewed by the Office of Management and Budget. We anticipate that the adopt ion of these operating rules would re sult in benefits that outweigh the costs to providers and health plans. Our Regulatory Impact Analysis also meets the various requirements of the Unfunded Mandates Reform Act of 1995 (URMA). Secti on 202 of the URMA requires that agencies assess the anticipated costs and benefits befo re issuing any rule whose mandate requires spending in any 1 year of $100 million in 1995 do llars, updated annually for inflation in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector. That threshold level is currently approximately $136 million. Based on our analysis, we anticipate that the private sector would incur costs exceeding $136 million per year in the first 2 years following publication of the rule. In addition, under section 205 of the UMRA (2 U.S.C. 1535), having considered at least

three alternatives that are refere nced in the RIA section of this rule, HHS has concluded that the provisions in this rule are the most cost-effective alternative for implementing HHS' statutory obligation of administra tive simplification. B. Current State, Need for Mandated Operati ng Rules and General Impact of Implementation Based on the current environment, there is a need for operating rules. When a patient calls to set up an appointment with a provider, or comes into the office or hospital for an appointment, a staff member will often verify the patient's eligibility, coverage, and cost-sharing requirements. However, not all providers will verify the eligibility of their patients, and even for providers' offices that do, often just a subset of patients are verified. Some providers, however,CMS-0032-IFC 53

do not conduct eligibility verification at all, and a claim is submitted to the health plan without an eligibility inquiry. Eligibility verification is done in a variety of ways including the following: • Accessing patient "eligibility" informati on via a health plan's secure website. • Telephone. • The ASC X12 270 eligibility for a health plan inquiry. This is an electronic data interchange (EDI).

After an actual claim has been submitted to a health plan, the need sometimes arises for a provider to follow-up on the claim re garding where it is in the paym ent process. This is called a claim status inquiry and, again, th is inquiry is conducted via webs ite, telephone, or through EDI. Currently, many providers do not use EDI at all as a means to conduct these two transactions and, of those that do, do not necessa rily conduct them through EDI for every patient. Rather, most providers that use EDI transactions to verify a patient's eligibility or claim status also use telephone or other means. In a larger context, most providers use EDI, but only for some transactions. For instance, according to the Healthcare Efficiency Index and the Oregon Study, over 75 percent of health care claims are now submitted by providers through EDI.

Because of the infinite number of variations of a specific provider's use of EDI, it is very difficult to determine the following: (1) the num ber of providers who us e the eligibility for a health plan or the claim status tr ansactions (or any other specific transaction) via EDI; and (2) the percent of eligibility for a health plan or clai m status transactions that the average provider makes through EDI. However, studies have estima ted the total number of electronic transactionsCMS-0032-IFC 54

conducted by all providers, even at the level of a specific transaction, and we will use such estimates to arrive at our saving assumptions. We assume that most providers have the t echnological capacity to perform EDI (or have hired a trading partner w ith that capacity). We base this assumption on-- (1) the high percentage of claim submissions that are conducted through EDI; (2) responses to the Oregon study from providers indicating that 96 per cent of hospitals and 93 percent of ambulatory clinics (that is, physicians offices) are ready or would be ready fo r EDI transactions within 2 years; and (3) the impact analysis in the Modifications propos ed rule (73 FR 49757 th rough 49790) that, through industry interviews, stated "we do not believe that the number of providers who have no electronic capability is very high."

There are a number of studies that have illustrated the bene fits and savings in conducting EDI in contrast to manual or paper-based transact ions. We have noted a number of them in the Impact Analysis Resources section in this inte rim final rule with comment period. The basic idea is that systems can conduct these transactions faster, less expensive, and more accurate than human intervention. Specific to ou r purpose, it is faster, less expe nsive, and more accurate than human intervention for a provider's system to comm unicate with a health plan's system to verify the eligibility of a patient or check the status of a claim. So, why do not the majority of providers who have EDI capacity: (1) use EDI to conduct the eligibility for a health plan or the claim stat us transaction; or (2) ve rify all their patients' eligibility through EDI inst ead of just a few? In the Oregon Survey, the most robust study with regard to a provider environment, 87 percent of hospitals and 60 pe rcent of physician clinics said that the barrier to using the electronic eligibility for a health plan transaction is that health plans "do not provide enough information in response to this type of inquiry." This was the mostCMS-0032-IFC 55

frequently selected response am ong the providers surveyed. In addition, 16 percent of hospitals and 20 percent of physician clinics stated that th e barrier was that health plans "do not provide fast enough responses." The June 22, 2009 AMA document entitled "Sta ndardization of the Claims Process: Administrative Simplification White Paper" (h ereinafter referred to as the 2009 AMA White Paper) describes the importance of a robust resp onse in the eligibility for a health plan transaction: "Receiving an explic it answer can quickly assist in patient scheduling, billing the appropriate payer with financia l responsibility for the service, communicating the patient's financial responsibility and reducing the number of denied claims which the physician practice must manually handle." (http://www.ama-a ssn.org/ama1/pub/upload/mm/368/admin-simpwp.pdf ) The picture that emerges is that providers conduct the electronic elig ibility for a health plan transaction only with health plans that return robust eligib ility information and return the response quickly. If a provider's staff will get mo re and faster eligibility information out of a specific health plan by picking up the phone or looking up the patient online, then the manual

transaction will be used instead of the electronic transaction. In terms of the claim status inquiry, we know that the average providers' office telephones the health plan in or der to check on claim status. The "Health Care Administration Expense Analysis", produced by the State of Wa shington Office of the Insurance Commissioner, found that 37 percent of the tele phone calls from providers to th e State's largest insurer were claim status inquiries (costing the plan $4 million a year on staffing costs to answer only claim status calls) (Health Care Administration Expense Analys is: Blue Ribbon Commission Recommendation #6, Final Report, 11-16-2007,CMS-0032-IFC 56

http://www.insurance.wa.gov/consumers/ documents/BRC_Efficiencies_Report.pdf .) Other

studies indicate that less than 40 percent of all claim status inquir es are conducted electronically. Although we do not have direct data that info rms the reasons why provi ders use the telephone

instead of EDI for claim status inquiries, we can assume that th e same dynamic as the eligibility verification is at play: If the electronic transaction is slower and produces less information, than a manual process will be used instead. Operating rules address this need for more and faster information. As noted in the provision section, this interim fina l rule with comment period is adopting specific operating rules with requirements regarding response times and robust responses about a patient's eligibility from health plans. A number of extensive surveys, both priv ate and governmental, have reinforced the causal link between requiring health plans to return fast, robust responses to the eligibility for a health plan electronic request a nd an increased use in the trans action itself. In its Blue Ribbon report, the state of Washington re ported that less than 9 percent of eligibility verification requests are conducted electronically in the state, while the state of Utah reported closer to 50 percent usage. The report credited Utah's adoption rate with the State having an "enhanced transaction" in place for the eligibility verification in which pr oviders are told exactly the benefits a particular patient has. The report conclude d that "improving the enhanced message [of the eligibility for a health plan response]... will greatly imp rove this area of administration." The Oregon Survey explicitly expressed the causal link betwee n "standardizing the standard" and greater use of EDI by concluding from its research that "the healthcare industry is unlikely to take major strides toward automated pr ocesses until there is greater standardization of the methods for conducting the tr ansactions electronically."CMS-0032-IFC 57

The 2009 AMA White Paper also speaks to providers' need for robust health plan responses to the eligibil ity for a health plan transactions and how such a response would affect providers: "Such information would also be extr aordinarily valuable to physicians to ensure accurate and timely payment, and this value w ould encourage wide-sprea d utilization of the standard transactions by physicians and in creased physician automation. The AMA strongly supports the efforts of the Council on Affordab le Quality Healthcare Committee on Operating Rules for Information Exchange [CAQH CORE] to not only expand the value of the eligibility

standard transaction but also continue its effort s of adding value to electronic remittance advice

and other standard transactions..." The IBM study demonstrates that electronic el igibility for health plan transactions would increase with use of operating rule s. The study illustrates that providers' use of the eligibility for a health plan transaction increa ses on two levels after operating rules are adopted. First, more patients as a whole are having their eligibility ve rified, either electroni cally or otherwise. Second, there is an increased use of the electron ic transaction. The participating health care entities in the study report ed increases in use of the eligibility for a health plan electronic transaction at the average rate of 33 percent in the first year after adop ting CORE Phase I rules – a rate that participants of the study credited to operating rules. Additionally, the IBM study showed that providers saw on aver age 20 percent increase of patient s verified prior to a visit, significantly reducing practice admi nistrative and financial burden at the point of care. On a more general level, in both the Transactions and Code Sets final rule and the update

to the standards in the Modifi cations final rule, the savings analysis has been based on the

increased use of electronic transactions due to the implementation of standards (in the Transactions and Code Sets final rule) and incr eased use of electronic transactions due toCMS-0032-IFC 58

improved standards (in the Modifications final rule). The cost benefit of both these rules rested on the causal relationship between improved standa rds and the predicted increased use of EDI (and the cost savings that use of EDI brought with it). The impact analysis for this interim final rule with comment period rests on the same causa lity, except that we are more specific in how operating rules cause increased use of electronic transactions. As an example, the need for more robust and fa ster response to the el igibility for a health plan transaction has been realized by states seek ing to reduce the administ rative costs of health care in general. In the "Hea lth Care Administration Expens e Analysis, required by Colorado state law and developed under the state's Commis sioner of Insurance, recommendations included requiring all health plans and providers to us e CAQH CORE Phase I and II data content and infrastructure rules for the eligibility for a hea lth plan and the claim status transactions "as a means of streamlining and standardizing admini strative interoperability between plans and providers." (Senate Bill 08-135 Work Group to De velop Standardized El ectronic Identification System for Health Insurance: Final Repor t and Recommendations. September 3, 2009; http://caqh.org/Host/C ORE/SB135_COreport.pdf ) As well, Minnesota has a set of companion gui des for the HIPAA standard transactions. These companion guides are analogous to the oper ating rules developed by the CAQH CORE in that they are intended to standardize "adminis trative processes when implementation of the processes will reduce administrative costs." We have already mentioned initiatives and reports by Oregon and Washington that seek to achieve similar savings. (http://www.health.state.mn.us/auc/mn270271guide.pdf ). It is evident that both state government s and private industry recognize the cost advantage to operating rules and similar "enhanced transaction" business rules to accompany theCMS-0032-IFC 59

HIPAA standard transactions, in this case with regard to the eligibil ity for a health plan transaction. However, both state governments and private industry recognized the need for the adoption of operating rules on the federal level b ecause of the clear advantages to a faster adoption by all covered entities that a federal mandate would engender. As illustrated by the numerous State and private initiatives, there is the danger that, wit hout Federally mandated operating rules, different sets of "operating rules" will emerge, on a State by State or health plan by health plan basis. In such a case, both pl ans and providers would have to continue to customize their EDI transactions depending on th e operating rules required under a particular

state or contract. As well, some health care entities may be slow to adopt and implement any "operating rules" voluntarily for fear that the federal government, or a particular State government, will adopt "operating rules" that re quire a new set of implementati on requirements with associated

costs. Finally, most providers now have to conduct transactions such as the eligibility for a health plan and the claim status transaction through two differe nt processes, electronic and manual and paper-based, depending on the health plan that covers the patient or processes the claim. As long as some health plans continue to conduct standard transactions that are not fast or robust enough for providers' needs, providers may c ontinue to conclude th at manually processing

all such transactions is easier and more economical. C. Regulatory Flexibility Analysis: Impact on Small Entities The Regulatory Flexibility Act (RFA) of 1980, Pub. L. 96–354, requires agencies to describe and analyze the impact of the rule on sm all entities unless the Secretary can certify that the regulation will not have a significant impact on a substantial number of small entities. In theCMS-0032-IFC 60

health care sector, a small entity is one with between $7 million to $34.5 million in a nnual revenues or is a nonprofit or ganization. For details, see the SBA's Web site at http://www.sba.gov/sites/default/ files/Size_Standards_Table.pdf (refer to Sector 62 - Health Care and Social Assistance). (Accessed 2–1–11). For the purposes of this analysis (pursuan t to the RFA), nonprof it organizations are considered small entities; however, individuals a nd States are not included in the definition of a small entity. We attempted to estimate the number of small entities and provided a general

discussion of the effects of this interim fina l rule with comment period, and where we had difficulty, or were unable to find information, we solicited industry comment. We discuss the impact of the rule on small entities in section V II.K. of this interim final rule with comment period. As well, section 1102(b) of the RFA requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the opera tions of a substantial number of small rural hospitals. This analysis must conform to the pr ovisions of section 603 of the RFA. For purposes of section 1102(b) of the RFA, we define a sm all rural hospital as a hos pital that is located outside of a Metropolitan Statis tical Area and has fewer than 100 beds. (See the discussion at

section VII.K. of this interim final rule with comment period for our discussion of the expected impact on small rural hospitals.)

D. Alternatives Considered In deciding to adopt operating rules for the eligib ility for a health plan and the health care claim status transactions, we considered a numbe r of alternatives, on which we solicit public and industry comments. 1. Do Not Adopt Operating Rules for Non-Retail Pharmacy IndustryCMS-0032-IFC 61

We considered this option, but determined that this would only be appropriate if operating rules for use in the hea lth care industry were not availabl e, or available and already in use on a voluntary basis. Per the aforemen tioned NVCHS hearings, public testimony and analysis, the NCVHS deemed that two authoring entities who came forward and applied to be candidates as authoring entitie s were qualified unde r the stipulations for the adoption of operating rules in the Affordable Care Act to ac t as authoring entities, namely the Council for Affordable Quality Healthcare's (CAQH) Co mmittee on Operating Rules for Information Exchange (CORE) and the National Council fo r Prescription Drug Progr ams (NCPDP). The CAQH CORE offered operating rules that, with so me exceptions, have been determined to be feasible for use with the eligibil ity for a health plan transaction, and the health care claim status transaction under HIPAA, as specified in the A ffordable Care Act. The NCPDP also offered operating rules, which are already in use in all retail pharmacies by virtue of the pharmacies' use

of the NCPDP Telecommunications standard Version 5.1, and which will be updated on January 1, 2012, when the update to this st andard, NCPDP Telecommunications standard Version D.0, goes into effect. Additionally, not adopting any operating rules for the eligibility for a health plan transaction and health car e claim status transact ion, as required by the Affordable Care Act, would violate the Act' s statutory requirement s under section 1104(c) "Promulgation of Rules", which requires the Secretary to adopt operating rules for the two

aforementioned electronic hea lth care transactions by no later than July 1, 2011 with a compliance date of January 1, 2013. 2. Adopt Another Authoring Entity's Operating Rules As previously discussed in section II.B. of this interim final rule with comment period, section 1104(b)(3) of the Affordable Care Ac t amends section 1173(g)(3)(a) of the Act byCMS-0032-IFC 62

charging the NCVHS with advising the Secretary as to whether a nonprofit entity meets the statutory requirements for developing the opera ting rules to be adopted by the Secretary, and outlines the entity's specific qualification requireme nts. Of those organizations testifying at the NCVHS hearing, two organizations formally reques ted to be considered authoring entities for operating rules, namely the CAQH CORE and the NCPDP. In its testimony before the NCVHS, the ASC X12, the standards development organization responsible for the development of the Version 5010 standards for electronic health care transactions, expressed its support for the NCPDP being named as an operating rule authoring entity not only for the pharmacy industry, but for the entire health care industry (transcript of the July 20, 2010 NCVHS Subcommittee on Standards hearing at http://www.ncvhs.hhs.gov ). The ASC X12's support was based upon their belief that--

• The NCPDP's ANSI-approved organization status supports consensus building and open participation;

• The infrastructure for the NCPDP is able to handle the development of operating rules in the associated workgroup task group without a ny modifications to proce dures or processes;

• The NCPDP members are frequent users of the ASC X12 standards and thus the NCPDP is familiar with them; and

• The pharmacy industry's growing experience with real-time eligib ility, real-time claim status, and real-time submission of claims beyond pharmacy. Based on the ASC X12 testimony, the NCPDP st ated that it would consider playing a larger role if the NCVHS deemed that there shou ld only be one authoring entity, and would take on the role of more than just the NCPDP standards, as appropriate.CMS-0032-IFC 63

However, with respect to the requirements for the operating rules themselves, neither the NCPDP nor the CAQH CORE met all of the requirem ents for operating rules for both health care segments. As noted earlier, th e July 2010 NCVHS hearings were followed by a request from the NCVHS to each candidate to respond to a detailed questionnaire about the statutory requirements. The questionnaire solicited sp ecific documentation to validate the testimony. Based on review of the CAQH CORE and the NC PDP submissions to this questionnaire the NCVHS determined, and we have concurred, that neither organization ca n unilaterally provide operating rules to support both retail pharmacy and non-retail pharmacy health care segments. The NCPDP naturally focuses on the NCPDP reta il pharmacy standards, while the CAQH CORE

has focused on the ASC X12 administrative health care transactions. While both entities have similar policies related to secu ring a consensus view of health care stakeholders and ensuring

that rules are consistent with (and do not conflict with) othe r existing standards, neither organization has rules in place for both health care segments. While addressing the retail pharmacy industry's needs relative to operating ru les, the NCPDP did not present to the NCVHS for their consideration any existing NCPDP operating rules to accommodate the ASC X12 standards. The CAQH CORE has phases of operating rules that accommodate the ASC X12

standard for electronic health care transactions, but are no t specific to retail pharmacy

transactions. 3. Wait for Resolution of all Outstanding Techni cal and Administrative Issues Before Adopting the Operating Rules Develope d by the Authoring Entities Both the CAQH CORE and the NCPDP demonstr ated to the NCVHS that their operating rules were based upon broad public and stakeholder i nput. However, as previously discussed in

section II. of this interim fina l rule with comment period, there are certain exceptions that existCMS-0032-IFC 64

with regard to our adoption of the CAQH CORE ope rating rules in their en tirety. Upon analysis, we declined to adopt the CAQH CORE opera ting rules for the ASC X12 999 acknowledgement transaction, and the references to being "COR E certified" contained in the CAQH CORE Operating Rules as we have already described in section II.F. of this interim final rule with comment period. If we had opted to wait until the resolution of the ad ministrative issues affecting the adoption of the en tire CAQH CORE operating rules, it would seriously delay the health care industry's ability to begin to achieve the benefits of administrative simplification. Additionally, as described in section III of this interim final rule with comment period, we have declined to adopt the NCPDP business rules and guidelines as embedded in its NCPDP Telecommunication Standard Version D.0, as they do not qualify as operati ng rules as defined in

section II.A. of this interim final rule with comment period. The NCPDP business rules and guidelines are embedded within the NCPDP Te lecommunications Standard Version D.0, and while technically not oper ating rules as defined by this inte rim final rule with comment period, they function as such nonethele ss in that they provide robust business rules and guidelines for use in retail pharmacy transacti ons. The pharmacy industry is already preparing to use the

NCPDP Version D.0 standard in their day-to-day pharmacy tran sactions as required by the January 16, 2009 final rule (74 FR 3296) adopt ing the NCPDP Telecommunication Standard Version D.0 for use in retail pharmacy transa ctions, effective January 1, 2012. The NCPDP

Telecommunications Standard Version D.0 alrea dy provides a full and robust array of tools for the retail pharmacy industry to re alize the potential benefits of administrative simplification. E. Impact Analysis Resources

We have considered a number of different cost benefit studies that have been conducted by industry and independent entiti es in recent years. The ba ckground and conclusions on theseCMS-0032-IFC 65

studies and surveys will illuminate how we calcu lated our assumptions an d how we applied them to this impact analysis. In this section, we briefly describe these studies, as well as an explanation of all of the following: • The depth and completeness of the analysis and supporting evidence for the

conclusions. • Data sources and a presentation of the data limitations. • The perceived objectivity of the analysis as demonstrat ed by the discussion of data sources and the rigor of the analysis. • Our ability to explain and justify the findi ngs and conclusions presented in the study. We then present assumptions and an impact anal ysis for each of the covered entity types, referencing the data and conclusions of the various studies. The fo llowing is a description of the studies and reports referenced fo r this impact analysis. 1. The Milliman Study Electronic Transaction Savings Opportunities fo r Physician Practices, hereinafter referred to as the Milliman study, was published by Milliman in January 2006 (http://transact.emdeon.com/documents/milliman_study.pdf ). Milliman is an international consulting and actuarial firm serving health care payers, se rvice providers and consumer organizations. The Milliman study was commi ssioned by the Emdeon Corporation, a nationwide clearinghouse that provides a wide variety of in formation exchange services that connects payers, providers and patients in the U.S. hea lth care system. The study's main objective focused on how much providers could save by implemen ting electronic transactions. The Milliman study's calculations are based on examining labor time and costs required to perform both

manual and electronic transactions . These labor costs include em ployee benefits, payroll taxes,CMS-0032-IFC 66

and general and administrative overhead. Notably, the study comp ensated for related fees for transactions and set-up costs fo r electronic transactions. The Milliman study's methodology was basically mathematical, using factors established through payrolls and average administrative costs, as opposed to research based on surveys or interviews with providers. Milliman's calculations were based on a model of a provider's administrative processes developed with assump tions about the operating environment of the typical solo physician practice. Ultimately, Milliman tested its results "by observing administrative procedures in actual physician practices and medical groups." The study reflected other indus try research that found that , while manual processes are very similar among physicians, "there is much greater variance among practices... in the use of technology and the associated costs for electronic transactions." In some cases, providers are fully automated. In the majority, however, there is a mix of electronic a nd manual processes, as well as processes that require a wide range of levels of human intervention. Milliman found that a single- physician practice could save as much as $42,000 a year by moving processes from manual to electronic. This estimate is based on a physician office that moves from all manual transactions to fully elec tronic for six standard transactions. For our impact analysis, this savings could not be used as a factor to project sa vings for all physicians ($42,000 X the number of physicians), as other studi es have demonstrated that most providers are already using some of the electronic transactions. Milliman's approach was to look at provide r costs and benefits, and we opine that it appears to be objective in its assumptions. Th e Milliman study will be useful in our impact analysis as it provides labor a nd administrative overhead costs.CMS-0032-IFC 67

The Milliman study was published in 2006. In its calculations, it acc ounted for inflation and other factors that may have changed since its source data were gathered and the study was finally published. However, its final conclusions are somewhat dated, and we will consider this in our assumptions. 2. The AHIP Survey (2006) America's Health Insurance Plans' (AHIP) Center for Policy and Research conducted a survey of its member s to examine the issu e of claims processing and turnaround times for claim payments. The survey is summa rized in the document entitled " An Updated Survey of Health Care Claims Receipt a nd Processing Times, May 2006" at http://www.ahipresearch.org/ pdfs/PromptPayFinalDraft.pdf AHIP is a national association representi ng nearly 1,300 companies providing health insurance coverage to more than 200 million Am ericans. The study is a follow-up to a survey

done in 2002. We took data from the AHIP study to develop assumptions about savings calculations for health plans. 3. The McKinsey Analysis Overhauling the U.S. Healthcare Payment System conducted by McKinsey & Company,

hereinafter referred to as the Mc Kinsey analysis, was published in The McKinsey Quarterly on June 2007 (http://www.mckinseyqu arterly.com/Overhauling_the_US _health_care_payment_system_2012 ). McKinsey & Company is an international mana gement consulting firm advising companies on strategic, organizational, tec hnology, and operational i ssues. The McKinsey analysis relies on a

number of different resources in order to ca lculate the cost of non- electronic transactions compared with the cost of electronic transact ions. As in the Milliman study, the McKinseyCMS-0032-IFC 68

analysis makes the case for the move from paper to electronic transactions . Their analysis used sources including Faulkner & Gray Health Data Directory; Health Da ta Management; HIPAA Survey - Claims and Payment Practices; Millim an; National Health Expenditures, Centers for Medicare & Medicaid Services (C MS); U.S. Department of Hea lth and Human Services (HHS); and McKinsey's own analysis. For its analysis' cost per transaction, it ap pears McKinsey relied mostly on the Milliman study. As noted, the McKinsey anal ysis brings togeth er secondary sources to make its assumptions, so it is not based on any primary re search or surveys. However, the McKinsey analysis does summarize these secondary sources in to quantitative ranges that are useful to our impact analysis. For instance, based on secondary sources, the McKinsey analysis gives a range

of 1.4 to 3.5 billion tota l eligibility verificati ons annually, both electr onic and non-electronic, across the health care industry. While this is a br oad range, it is useful in estimating the low and high estimates for our calculations. The McKinsey analysis suggest s that making the flow of do llars in the health care industry more efficient through electronic means w ill trim the administrative costs that are spent on the payment system, which its analysis calculates as 15 percen t of every healthcare dollar. The McKinsey analysis was objective in its appr oach, especially with regard to its data on eligibility for a health plan transactions because it was focused on claim-centered transactions. Its emphasis was mostly on the de ficiencies and possibilities regarding payment flow between payers and providers, with co mmentary on the involvement of financial

institutions. Its recommendations did not include mention of operati ng rules or the eligibility for a health plan transaction, so we find its data neutral with regard to the purpose of this impact analysis. The McKinsey analys is, presented in June 2007, is used by other related industryCMS-0032-IFC 69

studies, and, because we could not identify st udies or analyses that argued against its conclusions, we presume that it reflects industry assumptions. 4. The Healthcare Efficiency Report The National Progress Report on Healthcare E fficiency, hereinafter referred to as the Healthcare Efficiency Report, is the first annual report from the U.S. Healthcare Efficiency Index (USHEI), (http://www .ushealthcareindex.com ). an industry forum for monitoring business efficiency in healthcare USHEI's advisory counc il consists of representatives from hospitals, clearinghouses, health care consultant s, health plans and other entities (http://www.ushealthcareindex.com/advisorycouncil.php ). The USHEI was launched in 2008 to raise awareness of the cost savings associated with the adoption of electronic transactions in health care. The USHEI National Progress Re port takes the Milliman, McKinsey, and other studies and applies them to a tool that measures current status of electron ic transaction usage (in percentages of transactio ns) and projects possible cost savings if those percentages are increased. The Healthcare Efficiency Report analyzed the eligibility for a health plan transaction as a part of its Phase 1, which relied on the Millim an study and the McKinsey report for most of its data. Nevertheless, the Healthcare Efficiency Report consolidates the secondary sources in an original and illustrative manner, and appears to be an accepted yardstick for administrative simplification in the health care industry. The Healthcare Efficiency Report repeats an important point presented by Milliman and which we considered in our analysis: Even among providers that use electronic means to

conduct some of their transactions , there is a broad range of how much they utilize standard transactions, which standard elect ronic transactions they use, a nd which transactions are still conducted manually.CMS-0032-IFC 70

5. The Oregon Provider and Payer Survey Like the Milliman, McKinsey, and the Health care Efficiency Report, the Oregon Provider and Payer Survey, hereinafter re ferred to as the Oregon Survey, (http://www.oregon.gov/OHPPR/HEA LTHREFORM/AdminSimplification/Docs/FinalReport_A dminSimp_6.3.10.pdf ) sought to estimate the possible cost sa vings that would be realized if there

was a continual shift from nonelectronic to elec tronic transactions among healthcare entities in Oregon. The survey was conducted by the Oregon Health Authority, Office for Oregon Health Policy and Research, which conducts impartial, non-partisan policy an alysis, research, and evaluation, and provides technical assistan ce to support health reform planning and implementation in Oregon. The Office serves in an advisory capacity to Oregon Health Policy Board, the Oregon Health Authority, the Governor , and the Legislature. The survey asked payers, providers, and clearinghouses a numbe r of qualitative questions in terms of how administrative simplification can best be realized. The study was comprehensive, and used both secondary sources and a survey in which responses were gathered from 55 percent of the State's hospitals and 225 of the State's "ambulatory clinics." Of those 225 ambulatory clin ics, 69 percent were clinics with less than 9 clinicians, and 23 percent were clinics with only 1 clinician. In our impact analysis on providers, the category of "physicians" corresponds to the Oregon Survey's category of "ambulatory

clinics." Of all the studies cited in this impact anal ysis, the Oregon Survey had the most recent and statistically valid data with rega rd to provider use of electronic tr ansactions and gave the clearest picture of how providers verify eligibility. The study received quantitative and qualitative data from a large number and range of providers. Oregon itself is a mix or rural and urbanCMS-0032-IFC 71

communities. However, we recognize that ther e are regional differences in the health care industry and the fact that only Oregon health care entities were surveyed. 6. The IBM Study In 2009, the CAQH CORE contracted with IB M's Global Business Services, the world's largest business and te chnology services provider with the aim towards helping companies manage their IT operations and resources, to cond uct a study (hereinafter referred to as the IBM study) (http://www.caqh.org/COREIBMstudy.php ) to assess the costs and benefits to health plans, provider groups, and ve ndors of adopting the CAQH CORE Phase I rules, which include the operating rules for the electron ic eligibility for a health pl an transaction, as adopted under

this interim final rule with comment period. According to the IBM study, industry-wide adoption of the CAQH CORE Phase I rules could potentially yield $3 bil lion in savings in 3

years. The IBM study consisted of interviews duri ng which participants answered a set of questions geared towards assessing the cost s and savings of adopting the CAQH CORE operating rules. Participants in the study included six national and regional health plans, five clearinghouses and vendors, and si x providers. The health plans together represented 33 million commercial members, 1.2 million providers, 22 milli on eligibility verifications per month, and 30 million claims per month. The providers in cluded hospitals, physician groups, and a surgery

center. The IBM study did not track the costs and bene fits of adopting the operating rules for the

health care claim status transac tions. It did attempt to track the costs and benefits of the infrastructure elements of the operating rules (c onnectivity, response time, system availability, acknowledgements, and companion gui des) but health plan study par ticipants were not able toCMS-0032-IFC 72

fully account for the costs related to implementa tion, citing that they may have allocated some costs to IT overhead. , Highlights of the IBM study clos ely parallel the three key ob jectives outlined above that necessitate the adoption of operating rules: • Providers rapidly took advantage of the new capabilities that the operating rules provided; for example, real-time trans actions (page 20 of IBM study report). • The average return on investment (ROI) fo r health plans surveyed in the study was less than a year. Average initial and on-going co st of implementing the operating rules for an individual health plan was $592,000. The averag e savings, due mostly to moving away from telephone to electronic transaction over the sa me time period, was nearly $2.7 million for an individual health plan (page 23 of the IBM study report). The ratio of verifications to claims was up from .63 to .73 after the operating rules were adopted (page 20 of IBM study report). 7. The 2009 Health Affairs Survey In 2009, Health Affairs published survey results in an article entitled "What Does It Cost Physician Practices to Interact With Health Insu rance Plans," authored by Lawrence P. Casalino, Sean Nicholson, David N. Gans, Terry Hammons , Dante Morra, Theodore Karrison, and Wendy Levinson (Health Affairs, 28, no. 4(2009) :w533-w543, published online May 14, 2009; 10:1377hlthaff.28.4.2533). The surv ey collected data from physicians from those identified as working in solo or two-physician practices, and physicians from those working in practices of three or more. Selection was stratified by specialty type—primary care (including family physicians, general internists, and general pedi atricians), medical speci alists, and surgical specialists, for a total of 895 physician practices. The survey asked about the physicians' offices' interactions with health plan s by the physicians themselves and by staff at the administrativeCMS-0032-IFC 73

level, including the nursing st aff, clerical staff, senior administrators, and lawyers and

accountants. The survey was able to calcu late the mean time and cost that a physician's office spent interacting with health plans according to the size of the practice and according to the level at which the interaction took place, th at is, whether the interaction was with the physicians themselves, the nursing staff, the ad ministrative staff, or with the accountants,

etc. Among other conclusions, th e study demonstrated that a single physician spent a mean average of 3 hours a week interacting with plans, while nursing and clerical staff spent much larger amounts of time.

We find the conclusions of the survey to be valid base d on the large sampling of physicians' offices that were used. We will be applyi ng some of the results of the survey to our calculation of savings for providers. 8. The Project SwipeIt (MGMA) Study In 2009, the Medical Group Management Association (MGMA) launched an industry wide effort calling on health insurers, vendors, and healthcare providers to adopt standardized, machine-readable patient ID cards by Jan. 1, 2010. In support of the effort, the MGMA developed costs estim ates of implementing a machine -readable patient ID card. Ultimately, the project's aim is for administrative simplification

. The Project SwipeIt study demonstrated the quantifiable benefits to admi nistrative simplification. Therefore, some of Project SwipeIt study's estimates, especially the base assumptions used in the savings calculations can be applied to our impact anal ysis of the implementation of operating rules.CMS-0032-IFC 74

Through their study, the MGMA estimated that it costs $25 to resubmit a denied claim. Additionally they found that 50 percent of the time claims are being denied because of incorrect patient information. We believe this could al so be alleviated through the implementation of operating rules since eligibility information, incl uding patient information, will be returned prior to or at the point of care. The MGMA cites many resources th at were used to gather thei r data for their analysis. We find that the data used in the MGMA study ar e relevant to our anal ysis and therefore we will use some of this data in our calculations of provider savings. We invite public and industry stake holder comments on our assumptions. F. Impacted Entities

All HIPAA covered entities woul d be affected by this interim final rule with comment period, as well as software vendors and any othe r business associates providing transaction related services, such as billi ng support and third party administ rators (TPAs). Covered entities include all health plans, health care clearinghouses, and health care providers that transmit health information in electronic form in connection with a transaction for which the Secretary has adopted a standard. We note that health care providers may choose not to conduct transactions electronically. Therefore, they would be required to use thes e operating rules only for HIPAA transactions that they conduct el ectronically. However, one of the objectives of operating rules is to not only decrease manual transactions by entities that currently co nduct some health care transactions electronically, but to make electronic transactions, specifically the eligibility for a health plan and health care cl aim status transactions attractiv e to those entities that do not currently use the HIPAA standards in EDI transactions to verify eligibility or claim status. (SeeCMS-0032-IFC 75

the Transactions and Code Sets rule (65 FR 50361) for a more detailed discussion of affected entities under the HIPAA.) As mentioned previously in this interim fi nal rule with comment period, the barrier to adoption of the HIPAA standards is due to their fl exibility and "situationality" that allows health plans to implement them in very different ways. It allows plans to send back information that is inconsistent from plan to plan. By making th ese optional or situati onal elements mandatory, more entities, especially provide rs, will have more consistent data across health plans, making it easier to determine what information they will be receiving in a transact ion, thus increasing the

use of electronic transactions. We recognize that a few health plans have already embraced the use of the CAQH CORE operating rules and have, in a published report on th e utility of operating ru les in the health care industry, noted substantive return on investment (ROI) derived fr om reduced costs associated with avoidance of manual (both paper and staff time) response to provider i nquiries. This raises the question of why all health plans would not voluntarily adopt the use of operating rules (or standards, for that matter) given the benefits. We opine that there are a number of barriers, including a tendency by providers to simply accept the status quo, for example, whatever information currently is provided to them by a he alth plan; a health plan's lack of experience with, and knowledge of, the role that operating rules play in making a standard work more efficiently, given that the use of operating rules is not yet widesp read throughout the health care industry; and the expense to a he alth plan of systems and othe r business transitions without a regulatory mandate for adoption. Despite projecte d savings, health plan system managers would be hard pressed to obtain from their managements the upfront funds, staff a nd/or contractors, and corporate commitment needed for such a transi tion without a regulatory requirement. AbsentCMS-0032-IFC 76

specifications as codified in regulation, health pl ans could be confused as to which operating rule version to use, and/or any ex ceptions to the use of operating rules that may or may not be effective, which would adversely affect enforcemen t of the HIPAA transacti on and code sets. In our impact analysis, we analyze the impact of moving from non-elec tronic to electronic transactions among all entities, wh ether they currently use some el ectronic transactions or not. We assume that most providers and health plans use some electronic transactions and very few if any use none. Through the use of operating rules, we assume that all entiti es will increase their use of electronic transactions. The total savings and return on investment for each category of covered entity will not include the costs associat ed with setting up the basic infrastructure to

send and receive standard health care transact ions. Those costs are accounted for in the May 7, 1998 (63 FR 25300) proposed rule entitle d, "Health Care Reform: Standards for

Electronic Transactions". The costs included in th is impact analysis incl ude only those that are necessary to implement the operating rules as adop ted for the two HIPAA tr ansactions stipulated in this interim final rule with comment period. Based on industry surveys and research refe renced herein, we do not believe there are many entities that are not capable of conducting elec tronic transactions. As stated previously, according to the Oregon Survey, 96 percent of hos pitals and 93 percent of ambulatory clinics (physicians) in that state indicate d that they were rea dy, or could be ready within 2 years, to implement a system for electronic informa tion exchange. Although the study only reflects Oregon providers, we believe the study's findi ngs demonstrate that there will be very few

covered entities that will not ha ve the ability to conduc t electronic health car e transactions by the time the operating rules are required to be implemented.CMS-0032-IFC 77

The segments of the health care industry th at will be affected by the implementation of operating rules include the following: • Providers: Physicians and Hospitals

• Health Plans • Clearinghouses and Vendors Please note that we have not included an imp act to pharmacies because this interim final rule with comment period adopts only operating rules for the eligibility for a health plan (270/271) and the health care claim status (276/277) transactions wh ich are not used by the retail pharmacy industry for drugs and medications. Theref ore, we assume no impact to pharmacies of

this interim final rule with comment period.

Table 5 outlines the number of entities in th e health care industry that we use in our analysis along with the sources of those numbers. We have not apportioned the data to reflect any particular sub-segment of the industry, othe r than "physicians" and "hospitals" in general terms. In this impact analysis, the number of pr oviders impacted is not a factor in our calculation of the benefits of the adoption of these operating rules. (The numb er if providers are a factor in our calculation of providers costs.) Rather, bene fits for providers are based on the total number of all health care claims throughout the health care system, including non- hospital institutions. We invite public comment on our assumptions and es timates, particularly as they related to nonhospital institutions.

TABLE 5. TYPE AND NUMBER OF AFFECTED ENTITIES Type Number SourceCMS-0032-IFC 78

Type Number Source

Providers – Offices of Physician Offices(includes offices of mental health specialists) 234,222 Health Insurance Reform; Modifications to the Health Insurance Portability and Accountability Act (HIPAA) Electronic Transaction Standards; Proposed Rule http://edocket.access.gpo.gov/2008/pdf/E8- 19296.pdf (based on the AMA statistics)

Providers – Hospitals 5,764 Health Insurance Reform; Modifications to the Health Insurance Portability and Accountability Act (HIPAA) Electronic Transaction Standards; Proposed Rule http://edocket.access.gpo.gov/2008/pdf/E8- 19296.pdf Providers – All 239,986 Physicians Offices + Hospitals

Health Plans – Commercial 4,523 The # of health plans was obtained from the 2007 Economic Census Data – Finance and Insurance (sector 52) – NAICS code 5241114 (Direct health and medical insurance carriers). (n=4,523) http://factfinder.census.gov/servlet/IBQTable?_b m=y&-ds_name=EC0752A1&- geo_id=01000US&-dataitem=*

Health Plans – Government 54 Represents the 51 state Medicaid programs, Medicare, the Veteran's Administration (VA), and Indian Health Service (IHS)

Health Plans – All 4577 Census Data for commer cial plans (n=4,523) + Medicaid agencies (N=51) + Medicare, VA and IHS = 4,577 total health plans Clearinghouses 51 EC EDI Vantage Point Healthcare Directory – 6thEdition (n=51) http://www.ecedi.biz/content/en/ dir-guest-login.asp

Vendors 51 EC EDI Vantage Point Healthcare Directory – 6thEdition (n=51) http://www.ecedi.biz/content/en/dir-guestlogin.asphttp://www.ec-e di.biz/content/en/dirguest-login.aspCMS-0032-IFC 79

Also, although we acknowledge the impact to ERISA (Employee Retirement Income Security Act) plans , we did not include them in our analysis due to the complexity involved with describing downstream costs to these plans, as we ll as members/beneficiaries of health plans, tax payers, etc. While it is understood that the approximately 2.5 million ERISA plans (and, ultimately, their members) may be charged by their third party administrators (TPAs) and health insurance companies to comply with any Federa l regulation, ultimately we assume that the 4, 577 plans that do business as health plans, or their business asso ciates, are the entities conducting

the transactions and that is where the costs will be incurred. We assume that few, if any, of the ERISA plans do their own transactions. Additi onally, because not all ERISA plans are required to report, it is difficult to determin e the exact number of ERISA plans. G. Impact Analysis Approach This impact analysis is framed by the two ke y objectives that operati ng rules will achieve by augmenting the eligibility for a health plan and health care claim status transactions:

• Decrease covered entities' use of more costly manual activities, including telephone and paper-based transactions, by addressing am biguous requirements of the standards and clarifying when to use or not use certain elements or code values. We assume that the cost and benefits of these operating rules will be directed toward covered entities that currently perform some or no eligibility for a hea lth plan and claim status trans actions. For those who currently perform these two standard transa ctions, we assume that their vol umes of electroni c transactions will increase due to operating rules.

• Decrease the clerical burdens that are asso ciated with the inconsistent use of these two standard transactions; for example, the instan ces of denied claims and pended claims that burdens patients, providers, and health plans in terms of time and money.CMS-0032-IFC 80

Our overall calculation for this analysis is as follows: ( X * Y) + C-Z = Annual Return on investme nt of operating rules implementation Where-- X = annual increase in number of electronic elig ibility for a health plan and health care claim status transactions due to operating rules implementation Y = savings per transacti on conducted electronically C = savings through decrease in claim denials for providers and pended claims for health plans Z = cost of operating rules implementation

In order to make this calculation, we need to describe baseline assumptions, transaction increase assumptions, and cost assumptions that correspond to the X, Y, C, and Z factors in the calculation before arriving at costs and benefits.

In section VII.H. of this interim final rule with comment period, we describe the baseline assumptions for each of the two transactions. The baseline assumptions include, first, an

estimate on the number of electronic and non-electronic eligibility for a health plan transactions and health care claim status transactions, respec tively, that physicians, providers, and health plans will be conducting in 2012, th e year before the operating rule s take effect. Second, from those estimates, we will estimate the number of eligibility for a health plan transactions and

health care claim status tran sactions that are conducted electronically starting in 2012. For the baseline assumption on the number of electroni c transactions in 2012, we have developed a range of high and low estimates derived from da ta gathered from a numb er of studies. This range of high and low reflects different estimates that are presented by industry studies that have attempted to arrive at a similar baseline. The final baseline assumption is an estimate on the rate

of increased use of each of th e two transactions due to operating rules adopted herein for 10 years after implementation of the operating ru les (X factor in the calculation).CMS-0032-IFC 81

The transaction increase estim ate (X factor in the calcu lation) assumes an annual percentage increase in the use of the eligibility for a health plan and health care claims status

electronic transactions due to th e implementation of opera ting rules. In this specific baseline assumption, we will be giving a range of high and low estimates. Although these estimates on the increase in usage due to operating rules are informed by industry studies, specifically the IBM study, they also illustrate the uncertainty inhere nt in such a predictive estimate. As we have described, there is a causal link be tween operating rules and increased use of EDI. However, the

rate of increased use of the two transactio ns is dependent on many factors above and beyond operating rules. For instance, vi sits to physicians' offices and hospital emergency and outpatient departments are experiencing a steady rise, transl ating into an accompanying rise in health care transactions in general. (The CDC reports that health care visits in creased 25 percent from 1997 to 2007: http://www.cdc.gov/nchs/data/seri es/sr_13/sr13_169.pdf accessed on June 21 ). The range of estimates on the increased use of the two electronic transactions in cluded in our baseline assumptions should be viewed as a re flection of the un certainties involved. For our cost assumptions, Z in the calculat ion is the total cost of implementing the operating rules for both the eligibility for a hea lth plan transaction and the health care claim

status transaction. The costs will be analyzed according to each impacted category of health care entity. Many of our estimates in terms of co st are derived from the cost estimates in the Modifications final rule because industry studies we surveyed focused on savings rather than costs. These costs will be presented in a rang e of high and low estimates to reflect the broad range in readiness for operating rule impl ementation among covered entities in terms of infrastructure, software, and busines s process. In section VII.I. of this interim final rule with comment period, we describe our cost assumptions.CMS-0032-IFC 82

For our savings assumptions, Y and C in th e calculation, Y is the dollar savings per eligibility of a health plan and health care cl aim status transaction th at is saved when the

transactions are conducte d electronically as opposed to non-el ectronically, and C is the dollar saved, or cost avoided, of a decrease in claim denials for providers and a decrease in pended claims for health plans. For the C estimate, we will again provide a high and low range of estimates. Industry studies indicate that more robus t eligibility for a health plan transactions will result in a decrease in pended and denied clai ms (which, in turn, will result in savings). However, we are less certain of the percent of decrease that ope rating rules will effect, so we have reflected this uncertainty with a range. In section VII.J. of this interim final rule with comment period, we describe our savings assumptions. Our analysis begins with a description of the baseline and tr ansaction increase assumptions; that is, how we arrived at the numbers of eligibility for a health plan transactions

and health care claim status conducted electr onically as of 2012, and our assumptions on what percentage of annual increase in the transactions are due to the implementation of operating rules. We will subsequently describe our cost assumptions, savings assumptions, and finally summarize the costs and savings. The costs and savi ngs will also be presented in a range of high

and low estimates. In general, the high and low range approach us ed in this impact analysis illustrates both the range of probable outcomes, based on state an d industry studies, as we ll as the uncertainty germane to a mandated application of busine ss rules on an industry with highly complex business needs and processes. Within those ranges, however, the summary demonstrates that

there is considerable return on investment resulting from the implementation of operating rules.CMS-0032-IFC 83

We solicit comments on these assumptions as we ll as the direct costs of implementing these operating rules adopted under this interim final rule with comment period. H. Baseline Assumptions 1. Baseline Assumption A Total number of electronic and nonelectronic elig ibility for a health pl an and health care

claim status transactions conducted by providers.

We estimate that the total number of claims submitted, both electronically and manually, for the year 2012 is 5.6 billion. This estimate is the average of the high and low estimates given in the January 2009 Modifications final ru le, http://edocket.access.gpo.gov/2009/pdf/E9-740.pdf

. In order to arrive at the number of eligibility verifi cations conducted in 2012, both electronic and non-electronic, we applied the per claim ratio as concluded by the Oregon Survey. The Oregon Survey concluded that, for every claim submitted, the low estimate was 0.68 eligibility verifications per claim; the high esti mate was 1.12 eligibility verifications per claim submitted. We use the average of these two esti mates, 0.9 eligibility verifications per claim submitted. We then assume that of the 5.6 billion claims submitted, 0.9 of those were preceded by an eligibility inquiry to come up with appr oximately 5 billion eligibility verifications.

In order to arrive at the number of claim status inqu iries conducted in 2012, both electronic and non-electronic, we again applied th e per claim submitted ratio as concluded by the Oregon Survey. The Oregon Survey concluded th at, for every claim submitted, they estimated that 0.14 claim status inquiries were submitted. We looked at other studies that included various

numbers for claim status transact ions, but we believe the Oregon Survey to be the most valid picture of providers' use of thes e transactions based on the inte rviews conducted. Based on ourCMS-0032-IFC 84

previous assumptions, we estimate that there wi ll be 784 million claim st atus inquiries conducted

in 2012. To find the total number of eligibility for a h ealth plan transactions and health care claim status transactions that phys icians and hospitals conducted in dividually, we divided the total number of eligibility for a health plan transact ions and health care claim status transactions between physicians and hospitals by a factor of 9 to 1; that is, approximately 90 percent of all eligibility for a health plan and health care claim status i nquiries, electronic and non-electronic, are conducted by physicians, while 10 percent are conducted by hospitals. We have taken this physician to hospital ratio from the Oregon Survey due to its reliance on direct provider input. The survey indicated that physicians are responsible for 91 percent of all e ligibility for a health plan transactions and 89 to 90 percent of h ealth care claim status transactions.

TABLE 6. ESTIMATES ON TOTA L NUMBER OF ELIGIBILITY AND HEALTH CARE CLAIM STATUS INQUIRIES, ELECTRONIC AND NON-ELECTRONIC CO NDUCTED ANNUALLY Total Number of Transactions, Electronic and Non-electronic, Conducted Per Year (in millions) Number Conducted by Physicians (90%) Number Conducted by Hospitals (10%) Claim submissions 5,600 N/A N/A Eligibility inquiries 5,040 4,536 504 Claim status inquiries 784 705.6 78.4

For the health plan eligibility transacti on, we determined that the total number of eligibility for a health plan inquiries conducted electronica lly by physicians to be between 453.6 million, and 201.6 million for hospitals. The Or egon Survey found that approximately 10 percent of all eligibility for a health plan tr ansactions conducted by physicians are electronic. Other studies appear to contradi ct Oregon’s findings by a considerab le margin. For instance, the Healthcare Efficiency Index reports that 40 percent of all eligibility for a health plan transactions are conducted electronically and th e McKinsey report estimates 40 to 50 percent. We weighedCMS-0032-IFC 85

the Oregon Survey more heavily, and estimated th at 10 percent, or 453.6 million, of all eligibility for a health plan transactions conducted by phys icians are electronic. (Table 7). For the percentage of hospitals’ us e of the electronic eligibil ity for a health plan tr ansaction, we relied on the Oregon Survey’s finding that 40 percent, or 201.6, of a ll eligibility for a h ealth plan inquiries conducted by hospitals are electronic. This Or egon estimate appears to be more in line with other industry studies on the use of these transactions. (Table 7).

For the health care claim stat us electronic transaction, the Oregon Survey found that none of the physicians or hospitals it surveyed uses th e health care claim status electronic transaction. Instead, physicians and hospitals use the telephone and, to a lesse r extent, a secure internet website provided by the health plan or contract or to check the status of health care claims. Although, as we have stated before, the Ore gon Survey appears to have the most valid methodology, the McKinsey study's conclusion imp lies that many providers do conduct the

health care claim status transaction electronica lly (30 to 50 percent). The two studies are basically incompatible with respect to conclusion s about usage of the elec tronic health care claim status transaction. As noted, a percentage of the h ealth care claim status checks are conducted through the Internet. It is possi ble that the numbers of the McKinsey analysis are affected by considering web-based health care claim status transactions as "electronic." Only the Oregon Survey is clear in its methodology to make a dis tinction between electronic data interchange of

HIPAA transactions and electronic web-based tran sactions. Still, the McKinsey analysis has been used by others, for example, the Health care Efficiency Report, to demonstrate the frequency of use of HIP AA standard transactions. We assume that there are some physicians who use the electronic health care claim status and response transaction, but believe that the Mc Kinsey study’s high estimate of 30 to 50 percentCMS-0032-IFC 86

of health care claim status transactions bei ng electronic is too high given the Oregon Survey finding. We estimate that 10 percent of all heal th care claim status inquiries, 70.56 million for physicians and 7.84 million for hospitals, will be made electronically in 2012. Again, we weigh the Oregon Survey more heavily. (See Table 7). In order to determine the number of eligibil ity for a health plan and health care claim

status transactions that health plans respond to electronically, we us e the number of eligibility for a health plan inquiries for physic ians and hospitals added to the number of health claim status inquiries for physicians and hospi tals, based on our assumption that for all inquiries submitted by physicians and hospitals, health plans will subm it the same number of responses. We assume that health plans will conduct 655.2 million el ectronic eligibility re sponses and 78.4 million claim status responses.

TABLE 7. ESTIMATES ON NUMBER OF ELECTRONIC ELIGIBILITY FOR A HEALTH PLAN AND HEALTH CARE CLAIM STATUS TRANSACTIONS CONDUCTED BY PROVIDERS AND HEALTH PLANS

For 2012 Number of Total Eligibility for a Health Plan and Health Care Claim status Inquiries

(Non-electronic and Electronic) Conducted (in millions) Percentage of Inquiries that are Electronic Total Number of Electronic Eligibility for a Health Plan and

Health Care Claim Status as of 2012 (in millions) Physicians Eligibility for a Health Plan 4,536 10% 453.6 Health Care Claim Status 705.6 10% 70.56 Hospitals Eligibility for a Health Plan 504 40% 201.6 Health Care Claim Status 78.4 10% 7.84 Health Plans Eligibility for a Health Plan N/A N/A 655.2 Health Care Claim Status N/A N/A 78.4 2. Baseline Assumption B Transaction Increase Assumpti ons: Annual increase in use of electronic eligibility for a health plan and health care cl aims status transactions due to implementation of operating rules

.CMS-0032-IFC 87

a. Providers As stated, there is a direct causal link betw een the implementation of operating rules and an increase in the use of eligibility for a health plan and health care claim status transactions industry-wide. In its conclusions, the IBM st udy estimated the baseline grow th of total health care eligibility for a health plan transaction tran sactions (electronic a nd non-electronic) to be 10 percent without operating rules over a period of 3 years. It then estimated a 25 percent

increase in the use of electronic eligibility for a health plan tr ansaction across the entire industry if operating rules are implemented. For our an alysis, we have assumed a more conservative growth rate in the use of the elect ronic eligibility for a health plan transactions than that of the IBM study both in general (that is, not attributed to any particular factor) and as a result of the implementation of operating rules. We have estimated a 15 percent annual growth rate in generalfrom 2013 through 2017, and then an 8 percent annual growth for 5 years thereafter. This ge neral growth rate is reflected

in Table 8. In general , eligibility for a health plan inquiries, electronic and non electronic, for both physicians and hospitals, are expected to increase annually due to a number of market forces. For one, it is anticipate d that population trends will incr ease the total overa ll number of patient visits and claims in the United States, especially in regards to baby-boomers who will require more care in the coming years. (h ttp://www.cdc.gov/nchs/data/databriefs/db41.htm ). It is probable that this increase alone will account for our 15 percent estimated annual growth rate of the use of the eligibil ity for a health plan transaction. As well, it is probable that providers will adopt EDI out of necessity from the sheer numb er of health care visits and claims that willCMS-0032-IFC 88

experienced. In summary, we have chosen this estimate as our general predicted increase because it is a probable increase, even without the mandated implementation of operating rules. With the implementation of operating rules, the estimate on the increased use of transactions by providers moves from probable to practical. Th e estimate on the percentage increase due to operating rules is the primary savings driver in our per transaction benefit analysis. Again, we assume a more conservative growth rate due to operating rules than the IBM study. In this regard, our analysis of the IBM study follows: Although the IBM study did not control for other factors that may have contribut ed to an increased use of the eligibility for a health plan transaction, the study was based on in terviews which directed respondents to isolate the costs and benefits of operating rules in part icular. While it is probable that other factors

contributed to the extreme incr ease in the use of the transact ion among the study's participants, the participants themselves believed that both th e costs and benefits were a consequence of the operating rules and CAQH CO RE certification. However, because the IBM study analyzed a comparably small number of entities that have adopted operating rules, we are hesitant to accept the study's conclusions as the normative result of implementing operating ru les for the eligibility for a health plan transaction. There may be entities that have implemented (or will implem ent) the operating rules that did not experience

the same success as those that were surveyed in the study. With this in mind, we have given a high and low range of probable increase usage rates due to operating rules. Our low and high estimate of 10 to 12 percent annual for the first 5 years falls far below the IBM study’s average rate ( 25 percent annual increase). We believe these estimates are conservative, but do not believe that we are justified in estimating a more aggressive growth.CMS-0032-IFC 89

We also assume that 5 years after implem entation of the operating rules the 10 to 12 percent annual growth due to operating rules will decrease to 5 percent a year. We assume this will be due to the fact that by this time the health care industry will have implemented the operating rules thus making the use of the electron ic transactions more widespread, resulting in

market stabilization and less of an increase in the number of elec tronic transactions.

We then estimate the annual increase in the num ber of electronic elig ibility for a health plan inquiries from physicians and hospitals respec tively due to operating rule s. It is calculated by multiplying the range of total number of electroni c eligibility for a health plan inquiries by the range of total percent increase in electronic tr ansactions due to opera ting rules per year.TABLE 8. ANNUAL INCREASE IN NUMBER OF ELECTRONIC ELIGIBILITY FOR A HEALTH PLAN TRANSACTIONS FORPHYSICIANS DUE TO IMPLEMENTATION OF OPERATING RULESI II III IV V VI VIIYearNumber ofElectronicEligibility for aHealth PlanTransactions (inmillions).Assumes 15%increases first 5yrs/8% increasesecond 5 yrsNumber Increasein ElectronicEligibility for aHealth PlanTransactions fromPrevious Year(in millions)(HIGH = LOW)Total PercentageIncrease inElectronicEligibility for aHealth PlanTransactions fromPrevious Year dueto OperatingRules (LOW)Total Percentageincrease inElectronicEligibility for aHealth PlanTransactions fromPrevious Year dueto OperatingRules (HIGH)Number Increasein ElectronicEligibility for aHealth PlanTransactions fromPrevious Year dueto OperatingRules (in millions)(LOW)Number Increasein ElectronicEligibility for aHealth PlanTransactions fromPrevious Year dueto OperatingRules (in millions)(HIGH)2012 453.6 0.0 0% 0% 0.0 0.02013 521.6 68.0 10% 12% 45.4 54.42014 599.9 78.2 10% 12% 52.2 62.62015 689.9 90.0 10% 12% 60.0 72.02016 793.3 103.5 10% 12% 69.0 82.82017 912.4 119.0 10% 12% 79.3 95.22018 985.3 73.0 5% 5% 45.6 45.62019 1064.2 78.8 5% 5% 49.3 49.32020 1149.3 85.1 5% 5% 53.2 53.22021 1241.2 91.9 5% 5% 57.5 57.52022 1340.5 99.3 5% 5% 62.1 62.1Totals 573.5 634.6CMS-0032-IFC 91

TABLE 9. ANNUAL INCREA SE IN NUMBER OF ELECT RONIC ELIGIBILITY FOR A HEALTH PLAN TRANSACTIONS FOR HOS PITALS DUE TO IMPLEMENTATION OF OPERATING RULES

I II III IV V VI VII

Year Number of Electronic Eligibility for a Health Plan Transactions (in millions).

Assumes

15% increases

first 5 yrs/8% increase second 5 yrs Number Increase in Electronic Eligibility for a Health Plan Transactions from Previous Year (in millions) (LOW=HIGH) Total Percentage Increase in Electronic Eligibility for a Health Plan Transactions from Previous Year due to Operating

Rules (LOW) Total Percentage increase in Electronic Eligibility for a Health Plan Transactions from Previous Year due to Operating

Rules (HIGH) Number Increase in Electronic Eligibility for a Health Plan Transactions from Previous Year due to Operating Rules (in millions) (LOW) Number Increase in Electronic Eligibility for a Health Plan Transactions from Previous Year due to Operating Rules (in millions) (HIGH) 2012 201.6 0.0 0% 0.0 2013 231.8 30.2 10% 12% 20.2 24.2 2014 266.6 34.8 10% 12% 23.2 27.8 2015 306.6 40.0 10% 12% 26.7 32.0 2016 352.6 46.0 10% 12% 30.7 36.8 2017 405.5 52.9 10% 12% 35.3 42.3 2018 437.9 32.4 5% 5% 20.3 20.3 2019 473.0 35.0 5% 5% 21.9 21.9 2020 510.8 37.8 5% 5% 23.6 23.6 2021 551.7 40.9 5% 5% 25.5 25.5 2022 595.8 44.1 5% 5% 27.6 27.6 254.9 282.1

We assume that health care claim status i nquiries will increase annually for all providers in general at a rate of 20 percent a year for the first 5 years, for many of the same reasons as our estimates on the usage rate of th e eligibility for a health plan tr ansaction. We also assume that

this rate of increase will slow af ter 5 years to about 10 percent a year. This general growth rate

is reflected in Tables 10 and 11. We expect health care claim status transactions to be adopted at a higher rate than the eligibility for a health pl an transaction because th ere is significantly less use of the transaction now (and so th ere is more room for growth). We again have given a range of high and low es timates for the rate of increase that can be attributed to the implementation of operating rules. We have estimated a 12 to 15 percent annualCMS-0032-IFC 92

growth in usage attributable to operating rules from 2013 through 2017, and then a 7 percent annual growth in usage fo r 5 years thereafter.TABLE 10. ANNUAL INCREASE IN NUMBER OF HEALTH CARE CLAIM STATUS TRANSACTIONS FOR PHYSICIANSDUE TO IMPLEMENTATIONOF OPERATING RULESI II III IV V VI VIIYearMINIMUMNumber ofElectronic HealthCare ClaimStatustransactions (inmillions).Assumes 20%increases first 5yrs/10% increasesecond 5 yrsNumber Increasein ElectronicHealth CareClaim StatusTransactions fromPrevious Year(in millions)(HIGH = LOW)Total PercentageIncrease inElectronic HealthCare Claim StatusTransactions fromPrevious Year dueto OperatingRules (LOW)Total Percentageincrease inElectronic HealthCare Claim StatusTransactions fromPrevious Year dueto OperatingRules (HIGH)Number Increase inElectronic HealthCare Claim Statustransactions fromPrevious Year dueto Operating Rules(in millions)(LOW)NumberIncrease inElectronicHealth CareClaim StatusTransactionsfrom PreviousYear due toOperating Rules(in millions)(HIGH)2012 70.6 0.0 0% 0% 0.0 0.02013 84.7 14.1 12% 15% 8.5 10.62014 101.6 16.9 12% 15% 10.2 12.72015 121.9 20.3 12% 15% 12.2 15.22016 146.3 24.4 12% 15% 14.6 18.32017 175.6 29.3 12% 15% 17.6 21.92018 193.1 17.6 7% 7% 12.3 12.32019 212.4 19.3 7% 7% 13.5 13.52020 233.7 21.2 7% 7% 14.9 14.92021 257.1 23.4 7% 7% 16.4 16.42022 282.8 25.7 7% 7% 18.0 18.0Totals 138.0 153.8CMS-0032-IFC 94TABLE 11. ANNUAL INCREASE IN NUMBER OF HEALTH CARE CLAIM STATUS TRANSACTIONS FOR HOSPITALSDUE TO IMPLEMENTATIONOF OPERATING RULESIII III IV V VI VIIYearMINIMUMNumber ofElectronic HealthCare Claim StatusTransactions (inmillions).Assumes 20%increases first 5yrs/10% increasesecond 5 yrsNumber Increasein ElectronicHealth Care ClaimStatusTransactions fromPrevious Year (inmillions)(HIGH = LOW)Total PercentageIncrease inElectronic HealthCare Claim StatusTransactions fromPrevious Year dueto OperatingRules (LOW)Total Percentageincrease inElectronic HealthCare Claim StatusTransactions fromPrevious Year dueto OperatingRules (HIGH)Number Increasein ElectronicHealth CareClaim StatusTransactionsfrom PreviousYear due toOperating Rules(in millions)(LOW)Number Increasein ElectronicHealth CareClaim StatusTransactions fromPrevious Year dueto OperatingRules (in millions)(HIGH)2012 7.8 0.0 0% 0% 0.0 0.02013 9.4 1.6 12% 15% 0.9 1.22014 11.3 1.9 12% 15% 1.1 1.42015 13.5 2.3 12% 15% 1.4 1.72016 16.3 2.7 12% 15% 1.6 2.02017 19.5 3.3 12% 15% 2.0 2.42018 21.5 2.0 7% 7% 1.4 1.42019 23.6 2.1 7% 7% 1.5 1.52020 26.0 2.4 7% 7% 1.7 1.72021 28.6 2.6 7% 7% 1.8 1.82022 31.4 2.9 7% 7% 2.0 2.0Totals 15.3 17.1CMS-0032-IFC 95

b. Health Plans To find the increase in electronic eligibility for a health plan and health care claims status transactions annually for health plans, we add the total annu al increase usage of the two transactions by providers. The su m again gives us a low to high range of increased usage of the two transactions due to operating rules. We solicit comments on these baseline assumptions.

TABLE 12. ANNUAL INCREASE IN NUMBER OF ELIGIBILITY FOR A HEALTH PLAN TRANSACTIONS DUE TO IMPLEMENTATION OF OPERATING RULES

I II III IV V VI VII

Year Physician Number increase in electronic eligibility for a

health plan transactions from previous year DUE TO

OPERATING RULES in millions Hospital Number increase in electronic eligibility for a health plan transactions from previous year DUE TO

OPERATING RULES in millions Plan Number increase in electronic eligibility for a health plan transactions from previous year due to operating rules in millions LOW HIGH LOW HIGH LOW HIGH 2012 0.0 0.0 0.0 0.0 0.0 0.0 2013 45.4 54.4 20.2 24.2 65.5 78.6 2014 52.2 62.6 23.2 27.8 75.3 90.4 2015 60.0 72.0 26.7 32.0 86.7 104.0 2016 69.0 82.8 30.7 36.8 99.6 119.6 2017 79.3 95.2 35.3 42.3 114.6 137.5 2018 45.6 45.6 20.3 20.3 65.9 65.9 2019 49.3 49.3 21.9 21.9 71.2 71.2 2020 53.2 53.2 23.6 23.6 76.9 76.9 2021 57.5 57.5 25.5 25.5 83.0 83.0 2022 62.1 62.1 27.6 27.6 89.6 89.6 Totals 573.5 634.6 254.9 282.1 828.3 916.7CMS-0032-IFC 96

TABLE 13. ANNUAL INCREASE IN NUMBER OF HEALTH CARE CLAIM STATUS TRANSACTIONS FOR HEALTH PLANS DUE TO IMPLEMENTATION OF OPERATING RULES

I II III IV V VI VII

Year Physician Number increase in electronic Health Care Claim Status transactions from previous year DUE TO OPERATING RULES in millions Hospital Number increase in electronic Health Care Claim Status transactions from previous year DUE TO OPERATING RULES in millions Plan Number increase in Health Care Claim Status transactions from previous year DUE TO OPERATING RULES in millions LOW HIGH LOW HIGH LOW HIGH 2012 0.0 0.0 0.0 0.0 0.0 0.0 2013 8.5 10.6 0.9 1.2 9.4 11.8 2014 10.2 12.7 1.1 1.4 11.3 14.1 2015 12.2 15.2 1.4 1.7 13.5 16.9 2016 14.6 18.3 1.6 2.0 16.3 20.3 2017 17.6 21.9 2.0 2.4 19.5 24.4 2018 12.3 12.3 1.4 1.4 13.7 13.7 2019 13.5 13.5 1.5 1.5 15.0 15.0 2020 14.9 14.9 1.7 1.7 16.5 16.5 2021 16.4 16.4 1.8 1.8 18.2 18.2 2022 18.0 18.0 2.0 2.0 20.0 20.0 Totals 138.0 153.8 15.3 17.1 153.4 170.9 I. Cost Assumptions

1. Providers We assume that physicians and hospitals wi ll incur some start-up costs for implementing operating rules. These include tr aining of staff and changes to internal business processes. Unlike the costs to health plans, we assume th at the costs are less likely to be expensive infrastructure updates, because we assume mo st providers will already have the necessary infrastructure in place to accommodate the opera ting rules adopted under this interim final rule with comment period. We base this assumption on industry studies that dem onstrates that EDI is utilized in over 75 percent of claim submissions. This means that the majority of providers or their business partners are capable of transmitting EDI. While we assume that there may remain some providers who do not conduct any EDI, the operating rules adopted herein do not apply to providers who prefer paper-based or manualCMS-0032-IFC 97

transactions. If such a provider were to move to EDI after learning of the advantages of operating rules, the provider's co sts for initial EDI infrastructure can be found in the Transaction and Code Sets final rule, and impacts of the ope rating rules per se can be found in this interim final rule with comment period. In summary, co sts regarding initial EDI infrastructure to

transmit HIPAA transactions are not a factor in our estimates. We solicit comments on these assumptions. We assume the costs of implementing operati ng rules will mostly be borne by health plans. However, we expect that some costs wi ll be borne by providers in the form of increased fees from vendors and clearinghouses, such as upgr aded software costs and an increase in perclaim transaction fees based on the increase in vol ume of transactions. These fees are variable depending on existing infrastructure, number of pr oviders in a practice, geographic areas, etc. To account for possible costs to providers, we have assumed that the costs attributed to implementing the Modifications final rule are applicable here. We estimate the cost for providers to implement operating rules will be 25 percent of the total unadjusted costs estimated by the Modifications rule. We use this estimate based on the fact that most of the costs of implementing operating rules will be realized by health plans due to the more robust information they will be required to send in these transacti ons. As well, any softwa re updates that providers will need may only apply to the eligibility for a health plan and health care claim status transactions, unlike the Modificatio ns rule, which required software updates that applied to up to seven transactions. (See Table 14.) We base our estimates on provider costs sole ly on the Modifications final rule because the types of costs included in that impact anal ysis are similar to those that would be borne byCMS-0032-IFC 98

implementing operating rules: software upgrad es; training; and test ing of transaction improvements. We believe that these costs are high consider ing the fact that the Modifications rule applies to seven different transactions, while the operating rules adopted in this interim final rule

with comment period only applies to two. However, we have no evidence or justification for supporting a lower cost.

TABLE 14. PROVIDER COSTS

Unadjusted Total Physicians' Cost from Modifications

Final rule Physicians' Cost to Implement Operating Rules for Eligibility for a Health Plan

and Health Care Claim Status Transactions (25% of Modifications

Final rule estimates) Unadjusted Total Hospital's Cost from Modifications

Final rule Hospitals' Cost to Implement Operating Rules for Eligibility for a Health Plan

and Health Care Claim Status Transactions (25% of Modifications

Final rule estimates) Total Cost to Providers 5010 Implementation Costs - Low $370 $93 $792 $198 $291 5010 Implementation Costs - High $740 $185 $1,584 $396 $581 5010 Transition Costs - Low $174 $44 $373 $93 $137 5010 Transition Costs - High $348 $87 $746 $187 $274 Total Costs - Low $544 $136 $1,165 $291 $427 Total Costs - High $1,088 $272 $2,330 $583 $855

2. Health Plans As stated earlier, we assume that health plan s will bear the majority of costs of adopting operating rules. All of the studies that were considered for this im pact analysis provided qualitative descriptions of the possible costs of adoption; however, the IBM study was the only one to attribute specific costs of operating rule adoption for health plans. The IBM study gave a range of costs: $8,000 to $1.7 million total cost of adoption including IT staff services such as programming, software, and hard ware across a number of syst ems; and annual ongoing costs ofCMS-0032-IFC 99

$0 to $79,000 for IT staff services such as pr ogramming, and minor hardware and software upgrades to annually update operating rules. In contrast, total implementation costs to implement the updated Version 5010 of the HIPAA standards ranged from an average of $1.14 to $2.28 million per health plan, excluding government health plans. We assume that implementing Version 5010 may be comparable to implementing the operating rules adopted herei n. However the Modifications rule broadly

amends or alters seven HIPAA standard transact ions. This interim final rule with comment period adopts operating rules for only two transactions. To calculate the range of costs for health pl ans we start with the low and high costs to health plans estimated in the Modifications ru le. We increased these costs by 14 percent to account for the 14 percent increase in the number of health plans from the Modifications rule. We estimate the cost for health plans to implemen t operating rules will be 50 percent of the total costs estimated by the Modificati ons rule. We estimated a low cost of $ 2.6 billion and a high $5.1 billion for health plans. We reduced the estimate of health pl ans costs based upon the Modifications final rule because, unlike the M odifications final rule, operating rules adopted herein only apply to the eligibil ity for a health plan and health care claim status transactions. We will assume that the ongoing cost to maintaining operating rules for eligibility for a health plan and health care cl aim status will continue 2 years after implementation. However, since we do not know what updates will be needed at this time, we cannot determine costs for those updates. Afterwards, we will assume that ongoing costs will decrease to zero. We base this assumption on the IBM study finding that the majority of the ongoing cost was due to IT staff services for programming, and after 2 year s we assume that this programming will no longer be necessary.CMS-0032-IFC 100

Note that by using 4,577 as the total number of health plans, we have not adjusted for the number of health plans that have already updated their infras tructure and communications, and have already implemented the operating rules. This includes not only those health plans that have been certified by the CAQH CORE as having implemented portions of Phase I and, perhaps, Phase II, but also health plans th at have done so without going through the CAQH CORE certification process. As we have noted, a num ber of states have statutes that are similar, to the CAQH CORE operating rules with which all health care entities operating in the same state must comply. Therefore, we believe our costs may be overstated. We invite public and

interested stakeholder commen ts on our cost assumptions.

TABLE 15. COST TO HEALTH PL ANS OF OPERATING RULE ADOPTION FOR ELIGIBILITY FOR A HEALTH PL AN AND HEALTH CARE CLAIM STATUS TRANSACTIONS

Total Health Plans' Cost from Modifications Final rule (+14% to account for increase in number of plans) Health Plans' Cost to Implement Operating Rules

for Eligibility for a Health

Plan and Claim Status Transactions (50% of Adjusted Modifications Final rule estimates) 5010 Implementation Costs – Low $3,483 $ 1,742 5010 Implementation Costs – High $6,968 $3,484 5010 Transition Costs – Low $1,640 $820 5010 Transition Costs – High $3,279 $1,639 Total Costs – Low $5,123 $2,562 Total Costs – High $10,246 $5,123

3. Vendors and Clearinghouses

None of the studies considered for this impact analysis were able to quantify the costs and savings, or the return on investment of adopting operating rules for vendors or clearinghouses. As previously mentioned, we expect that some costs will be borne by providersCMS-0032-IFC 101

in the form of increased fees from vendors and clearinghouses, such as upgraded software costs and an increase in per-claim transaction fees based on the increase in volume of transactions.

Because of this we believe that costs to ve ndors will be the same as the costs expected by providers since vendors pass along th eir costs to their provider clie nts in the form of increased fees, which are included as the costs to provide rs of implementing thes e operating rules. Additionally, we believe that costs to clea ringhouses for routing of additional electronic transactions, which we assume will be due to implementation of the operating rules, are included in the costs expected by health plans. We i nvite interested stake holder comments regarding these costs and assumptions for vendors and clearinghouses. J. Savings Assumptions

1. Providers We have analyzed two areas in which provi ders will find savings or avoid costs upon implementation of the operating rules for eligibilit y for a health plan and health care claim status transactions. The first area that provides consid erable cost savings is the avoidance of claim denials that implementation of the eligibility fo r a health plan operating rules is estimated to provide. The second area of savi ngs for providers will be the pe r transaction savings of moving eligibility for a health pl an and health care claim status trans actions from non-electronic to EDI. It is difficult, if not impossibl e, to estimate the number of e ligibility for a health plan and

claim status transactions conducte d per provider, even as an aver age. Given the added difficulty of the range of technological capab ilities of providers, it would be difficult, if not impossible, to make any assumptions on the cost or benefit on a pe r provider basis, or to project an estimate of increased EDI use for any one provider.CMS-0032-IFC 102

This impact analysis will not base its cost or benefit to provid ers on the number of providers or on a per-provider or average provider basis. It would be specious to presume that such numbers reflect any real situation in a prov ider's office. Rather, we will look at the total number of eligibility for a health plan and claim status transactions that we estimate all providers conduct through a given year, and estimate an in crease based on the implementation of operating rules. In the same vein, we will calculate a savi ngs based on an estimate of the total number of denied claims, instead of attempting to calculate an average of denied claims per provider. In the area of claims denials, we assume that there will be a low to high range of $$560 million to $700 million annual cost savings in the reduction of denied claims once the eligibility for a health plan transaction operating rules ar e implemented. We base this assumption on a

number of studies. We use the total annual num ber of claims submitted from the Modifications final rule as mentioned above, 5.6 billion, and divide it between phys icians and hospitals according to the Oregon Survey’s 9 to 1 ratio of phys ician to hospital transactions. We then take the 5 billion annual claims for physicians and 560 million for hospitals and apply the 5 percent of denied claims as outlined in the MGMA Project Swipe IT study. With this number, we consider the IBM study data that found that the implementation of eligib ility for a health plan operating rules resulted in a 10 percent to 12 percent decrea se in denied claims. We have consistently created low to high ranges in this impact analysis that uses the results of the IBM study as the “best case” or high estimates, and we will do so here as well. We have provided a range of 8 to 10 percent decrease in denied cl aims due to operating rules.

This results in a total of 22.4 million to 28 m illion denied claims for providers that could be avoided through eligibility for a health plan op erating rules. We then take these numbers and apply them to the cost to providers of processi ng denied claims, which is $25 per denied claimsCMS-0032-IFC 103

according to a December 2000 study sponsored by the Medical Group Management Association http://www.acpinternist.org/ar chives/2000/12/claimsdenied.htm ). This results in $560 million to $700 million in annual savings for providers due to implementation of operating rules for the eligibility for a health plan transaction . X * Y * Z * A = Total annual savings to providers by avoiding denied claims Where X = Total number of claims (Column II) Y = Percent of claims that are denied (Column III) Z = Percent of denied claims that will be av oided by implementing eligibility for a health plan operating rules (Column V) A = Cost for providers to resubmit a single denied claim (Column VII)CMS-0032-IFC 104TABLE 16. ANNUAL SAVINGS TO PROVIDERS FOR AVOIDING CLAIMS DENIALS AFTER IMPLEMENTATION OFOPERATING RULES FOR ELIGIBILITY FOR A HEALTH PLANIIIIIIIVVVIVIIVIIIIXXXITotalNumberof Claims(inmillions)Percentofclaimsdenied(MGMA2007)Numberof claimsdenied inmillions=(ColII)x(ColIII)Percent of deniedclaims that will beavoided througheligibility for a healthplan operating rules(IBM: 10%-12%)Number of denied claimsthat will be avoidedthrough eligibility for ahealth plan operatingrules in millions =(ColIV)x(Col V/VI)Cost toresubmit adenied claim(Larch 2000,ACP-ASIMObserver)Total annual savingsof eligibility for ahealth plan operatingrules throughreduction in claimsdenial in millions (ColVII/VIII)x(Col IX)LOWHIGHLOWHIGHLOWHIGHPhysician5,0405%2528%10%20.1625.2$25504630Hospital5605%288%10%2.242.8$255670Totals22.428560700CMS-0032-IFC 105

In the area of per transaction savings, we a ssume that the move from non-electronic to electronic transmission of the eligibility for a health plan transaction will save providers, physicians and hospitals, $2.10 per transaction. Th is number reflects the difference in labor time and costs required to conduct the el ectronic transaction compared to the manual transaction. It

includes the difference in the cost of labor – em ployee salary, benefits, and payroll taxes – as well as the difference in general overhead. We arrived at $2.10 savings per transaction after analyzing a numb er of the studies already mentioned, including the Health Effici ency Report, the Milliman study, and the IBM study. We decided that the IBM st udy's estimate of a savings of $2.10 per eligibility for a health plan transaction that moves from non-electronic to electronic was the be st starting estimate because, unlike the other studies, the IBM study su rveyed entities that actually realized costs savings as a result of the use of operating rules for the electronic eligibility for a health plan transactions. As well, the IBM study gives us th e most conservative estimate, as can be seen by comparing it with other studies' conclusions.

We assume that the move from non-electroni c to EDI transmission of the health care claim status transaction will save physicians and hospitals $3.33 per transaction. The benefits to physicians in streamlining the health care claim status transaction thro ugh operating rules are potentially significant if, as we assume, it lead s to less dependence on more time consuming and costly manual means, and increa sed use of the EDI transaction. Unlike the eligibility for a heal th plan transaction analysis, we did not base our savings per health care claim status transaction for providers on the IBM study, as the IBM study did not measure the impact of the operating rules for the h ealth care claim status tr ansaction. Instead, we took our assumptive savings of $3.33 per transaction from the number that is used in all studiesCMS-0032-IFC 106

we analyzed and which was first illustrated in the Milliman study. We will use this assumption

as this is the number on which i ndustry studies appear to agree. However, we note that, as the health care claim status transaction is very seldom used, there is very little data on which to base actual savings. Note that the low to high estimates on the es timated increase in the transactions based on operating rules are carried through th is calculation. We arrived at this range in our calculations described in the baseline assumptions.

TABLE 17. SAVINGS FOR PROVIDERS PER ELIGIBILITY FOR A HEALTH PLAN AND HEALTH CARE CLAIMS STATUS TRANSACTION THAT MOVES FROM NONELECTRONIC TO ELECTRONIC FOR PROVIDERS

Source Savings for Every Eligibility for a Health Plan Transaction that Moves

from Non-electronic to Electronic Savings for Every Health Care Claim Status Transaction that Moves from Non-electronic to Electronic Health Efficiency Report $2.95 $3.33 Oregon Survey (low estimate) $2.46 $3.33 Milliman study $2.44 $3.33 IBM study $2.10 NA Our assumption $2.10 $3.33CMS-0032-IFC 107

TABLE 18: PROVIDER (PHYSICIAN AND HOSPITALS) SAVINGS FOR ELIGIBILITY

I II III IV V VI

Year LOW Number increase in eligibility for a health plan transactions from previous year DUE TO OPERATING

RULES in millions (from Table 12) HIGH Number increase in eligibility for a health plan transactions from previous year DUE TO OPERATING

RULES in millions (from Table 12) Savings per transaction LOW Annual Savings in

millions HIGH Annual Savings in

millions 2012 0.0 0.0 $0.0 $0.0 $0.0 2013 65.5 78.6 $2.10 $137.6 $165.1 2014 75.3 90.4 $2.10 $158.2 $189.9 2015 86.7 104.0 $2.10 $182.0 $218.4 2016 99.6 119.6 $2.10 $209.3 $251.1 2017 114.6 137.5 $2.10 $240.6 $288.8 2018 65.9 65.9 $2.10 $138.4 $138.4 2019 71.2 71.2 $2.10 $149.4 $149.4 2020 76.9 76.9 $2.10 $161.4 $161.4 2021 83.0 83.0 $2.10 $174.3 $174.3 2022 89.6 89.6 $2.10 $188.3 $188.3 TOTAL $1,739.5 $1,925.0

TABLE 19: PROVIDER (PHYSICIAN AND HOSPITALS) SAVINGS FOR CLAIM STATUS

I II III IV V VI Year LOW Number increase in health care claim status transactions from previous year DUE TO OPERATING

RULES in millions (from Table 13) HIGH Number increase in health care claim status transactions from previous year DUE TO OPERATING

RULES in millions (from Table 13) Savings per transaction LOW Annual Savings in

millions HIGH Annual Savings in

millions

2012 0.0 0.0 $0.0 $0.0 $0.0 2013 9.4 11.8 $3.33 $31.3 $39.2 2014 11.3 14.1 $3.33 $37.6 $47.0 2015 13.5 16.9 $3.33 $45.1 $56.4 2016 16.3 20.3 $3.33 $54.1 $67.7CMS-0032-IFC 108

I II III IV V VI Year LOW Number increase in health care claim status transactions from previous year DUE TO OPERATING

RULES in millions (from Table 13) HIGH Number increase in health care claim status transactions from previous year DUE TO OPERATING

RULES in millions (from Table 13) Savings per transaction LOW Annual Savings in

millions HIGH Annual Savings in

millions

2017 19.5 24.4 $3.33 $65.0 $81.2 2018 13.7 13.7 $3.33 $45.5 $45.5 2019 15.0 15.0 $3.33 $50.0 $50.0 2020 16.5 16.5 $3.33 $55.0 $55.0 2021 18.2 18.2 $3.33 $60.5 $60.5 2022 20.0 20.0 $3.33 $66.6 $66.6 TOTAL $ 510.8 $ 569.0CMS-0032-IFC 109TABLE 20: PROVIDER SAVINGS SUMMARIZEDLOW SAVINGSHIGH SAVINGSYearAnnual ProviderSavings due toIncreased use ofElectronicTransactionsAnnual ProviderSavings due to Decreasein Claim DenialsTotal AnnualSavings toProviders(in millions)AnnualProviderSavings due toIncreased use ofElectronicTransactionsAnnualProviderSavings due toDecrease inClaim DenialsTotal AnnualSavings toProviders(in millions)2013$168.92$560$729$204.27$700$9042014$195.83$560$756$236.87$700$9372015$227.08$560$787$274.75$700$9752016$263.40$560$823$318.78$700$1,0192017$305.61$560$866$369.98$700$1,0702018$183.85$560$744$183.85$700$8842019$199.46$560$759$199.46$700$8992020$216.42$560$776$216.42$700$9162021$234.84$560$795$234.84$700$9352022$254.83$560$815$254.83$700$955CUMULATIVE TOTALS$7,850$9,494CMS-0032-IFC 110

2. Health Plans We have analyzed two areas in which health plans will find savings or avoid costs upon implementation of the operating rules for eligibility for a health plan and health care claim status transactions. The first area that provides considerab le cost savings is a de crease in the number of pended claims that implementation of the eligibility for a health plan operating rules is estimated to provide. Pended claims are claims that necess itate a manual review by the health plan. The second area of savings for health plans will be the per transacti on savings of moving eligibility for a health plan and health care claim status transactions from non-elect ronic to EDI transmittal. In the area of pended claims, we base this assumption on a study by the America's Health Insurance Plans in 2006 (AHIP Center for Policy and Research, An Updated Survey of Health Care Claims Receipt and Processing Times (May 2006) at http://www.ahipresearch.org/ pdfs/PromptPayFinalDraft.pdf ).

We start our calculation with the total annua l number of claims submitted based on the Modifications final rule as mentioned previous ly, 5.6 billion. AHIP repor ted that 14 percent of all claims were pended by health plans, which calculates to 784 million pended claims. The AHIP study broke down the reasons why claims we re pended. Four of those categories, including lack of necessary information, no covera ge based on date of service, non-covered/nonnetwork benefit or service, and coverage de termination, we believe can be avoided by implementing operating rules for the eligibility for a health plan transaction and the increased use of the eligibility for a health plan transactions. These categories comprise 31 percent of all pended claims. We also assume that many pended claims can be avoided with increased use of the claim status transaction and its operating ru les. However, we were unable to establish aCMS-0032-IFC 111

correlation between use of claim status operating rules and a decrease in pended claims, and have not included any savings at tributable to the claim status operating rules. To reflect the uncertainty of this effect of operating rules on a “downstream” process, we estimate that 20 to 25 percent of pended claims could be avoided through use of operating rules. (See Table 21.) AHIP estimated that $0.85 was the cost to reply electronically to a “clean” claim submission, while $2.05 was the cost to claims that “necessitate manual or other review cost,” according to the study. The difference is $1.20, whic h is the per pended claim factor we use for our cost savings analysis. (See Table 21.) This results in $188 million to $235 million fo r health plans in annual savings of eligibility for a health plan operating ru les through reduction in pended claims. X * Y * Z * A = Total annual savings to providers by avoiding denied claims Where X = Total number of claims (Column I) Y = Percent of claims that are pended (Column II) Z = Percent of pended claims that will be av oided by implementing eligibility for a health plan operating rules (Column IV) A = Cost for health plans to manually review a pended claim (Column VI)CMS-0032-IFC 112TABLE 21. ANNUAL SAVINGS TO PLANS FOR AVOIDING PENDED CLAIMS AFTER IMPLEMENTATION OFOPERATING RULES FOR ELIGIBILITY FOR A HEALTH PLANI II III IV V VI VII VIII IX XTotalNumberofClaimsinmillionsPercentof claimspended(AHIP2006)Number ofclaimspendedclaims inmillions=(Col I)x(ColII)Percent ofpendedclaims thatwill beavoidedthrougheligibilityfor a healthplanoperatingrules(AHIP2006)LOWPercentofpendedclaimsthat willbeavoidedthrougheligibilityfor ahealthplanoperatingrules(AHIP,2006)HIGHNumber ofpendedclaims thatwill beavoidedthrougheligibilityfor a healthplanoperatingrules inmillions =(ColIII)x(ColIV)LOWNumber ofpendedclaims thatwill beavoidedthrougheligibility fora health planoperatingrules inmillions =(Col III)x(ColV)HIGHCost toreview apendedclaim(AHIP,2006)Total annualsavings ofeligibility fora health planoperatingrules throughreduction inpendedclaims inmillions (ColVI)x(ColVIII) LOWTotal annualsavings ofeligibility fora health planoperatingrules throughreduction inpendedclaims inmillions (ColVII)x(ColVIII) HIGH5,600 14% 784 20% 25% 156.8 196 $1.20 $188 $235CMS-0032-IFC 113

The second area of savings for health plans is the per transaction savings of moving eligibility for a health plan and health care claim status tr ansactions from non-electronic to

electronic transmittal. We assume that the average savings for health plans in adopting operating rules for eligibility for a health plan is approximately $3.13 per transaction that moves from nonelectronic to electronic, and $3.75 for health care claim stat us transactions that move from nonelectronic to electronic. To determine these savings, we assumed th at the IBM study and the Oregon Survey were

the most recent and the most valid with regard to eligibility for a health plan savings, as they are based on detailed surveys with hea lth plans. To arrive at our savings assumption, therefore, we averaged the two studies. (See Table 22) For health care claim status transactions, we relied solely on the Oregon Survey, again based on the validity of its results. (See Table 22)

TABLE 22. SAVINGS PER ELIGIBILITY FOR A HEALTH PLAN AND HEALTH CARE CLAIM STATUS TRANSACTION TH AT MOVES FROM NON-ELECTRONIC TO ELECTRONIC FOR HEALTH PLANS Source Savings for Every Eligibility for a Health Plan Transaction that

Moves from Nonelectronic to Electronic Savings for Every Health Care Claims Status Transaction that Moves from Non-electronic to Electronic Oregon Survey $3.75 $3.75 IBM study $2.50 NA Our assumption $3.13 $3.75 Note that the low to high estimates on the es timated increase in the transactions based on operating rules are carried through this calculation (in Tables 23 and 24). We arrived at this range in our calculations describe d in the baseline assumptions.

TABLE 23: SAVINGS FOR ELIGI BILITY FOR A HEALTH PLAN OPERATING RULES FOR HEALTH PLANSCMS-0032-IFC 114

I II III IV V VI

Year Number increase in electronic eligibility for a

health plan transactions from previous year DUE TO OPERATING RULES (in millions) LOW Number increase in electronic eligibility for a

health plan transactions from previous year DUE TO OPERATING RULES (in millions) HIGH Savings per Transaction Annual Savings (in millions) LOW Annual Savings (in millions) HIGH 2012 0.0 0.0 $0.0 $0.0 $0.0 2013 65.5 78.6 $3.13 $205.1 $246.1 2014 75.3 90.4 $3.13 $235.8 $283.0 2015 86.7 104.0 $3.13 $271.2 $325.5 2016 99.6 119.6 $3.13 $311.9 $374.3 2017 114.6 137.5 $3.13 $358.7 $430.4 2018 65.9 65.9 $3.13 $206.2 $206.2 2019 71.2 71.2 $3.13 $222.7 $222.7 2020 76.9 76.9 $3.13 $240.6 $240.6 2021 83.0 83.0 $3.13 $259.8 $259.8 2022 89.6 89.6 $3.13 $280.6 $280.6 TOTAL $2,592.7 $2,869.2

TABLE 24. SAVINGS FOR HEALTH CARE CLAIM STATUS OPERATING RULES FOR HEALTH PLANS

I II III IV V VI

Year Number increase in health care claim status transactions from previous year DUE TO OPERATING RULES (in millions) LOW Number increase in claim status health care transactions from previous year DUE TO OPERATING RULES (in millions) HIGH Savings per Transaction Annual Savings (in millions) LOW Annual Savings (in millions) HIGH 2012 0.0 0.0 $0.0 $0.0 $0.0 2013 9.4 11.8 $3.75 $35.3 $44.1 2014 11.3 14.1 $3.75 $42.3 $52.9 2015 13.5 16.9 $3.75 $50.8 $63.5 2016 16.3 20.3 $3.75 $61.0 $76.2 2017 19.5 24.4 $3.75 $73.2 $91.4CMS-0032-IFC 115

I II III IV V VI

Year Number increase in health care claim status transactions from previous year DUE TO OPERATING RULES (in millions) LOW Number increase in claim status health care transactions from previous year DUE TO OPERATING RULES (in millions) HIGH Savings per Transaction Annual Savings (in millions) LOW Annual Savings (in millions) HIGH 2018 13.7 13.7 $3.75 $51.2 $51.2 2019 15.0 15.0 $3.75 $56.3 $56.3 2020 16.5 16.5 $3.75 $62.0 $62.0 2021 18.2 18.2 $3.75 $68.2 $68.2 2022 20.0 20.0 $3.75 $75.0 $75.0 TOTAL $575.2 $640.8CMS-0032-IFC 116TABLE 25: HEALTH PLAN SAVINGS SUMMARIZEDLOW SAVINGSHIGH SAVINGSAnnual HealthPlan Savings due toIncreased use ofElectronicTransactionsAnnual Health PlanSavings due toDecrease in ClaimDenialsTotal AnnualSavings toHealth Plans(in millions)AnnualHealth PlanSavings dueto Increaseduse ofElectronicTransactionsAnnualHealth PlanSavings due toDecrease inClaim DenialsTotal AnnualSavings to HealthPlans (in millions)2013$240.4$188$429$290.19$235$5252014$278.2$188$466$335.93$235$5712015$322.0$188$510$388.96$235$6242016$372.9$188$561$450.48$235$6862017$431.8$188$620$521.86$235$7572018$257.5$188$446$257.45$235$4932019$279.1$188$467$279.07$235$5142020$302.5$188$491$302.52$235$5382021$328.0$188$516$327.97$235$5632022$355.6$188$544$355.57$235$591TOTALS$5,049$5,862CMS-0032-IFC 117

3. Vendors and Clearinghouses

None of the studies considered for this analysis were able to quantify the costs and savings, or the return on investme nt of adopting operating rules fo r the eligibility for a health plan and health care claim status inquir y and response transactions for vendors and clearinghouses. As noted previously, we expect that some costs will be borne by providers in the

form of increased fees from vendors and cleari nghouses such as upgraded software costs. We would anticipate that the savings, as well as the costs, to vendors of upgrading provider software will be passed along to their provider clients. Therefore, we assume that the costs and benefits for vendors in implementing th e operating rules will be same as those for providers. Additionally, since clearinghouses work on behalf of health plans and act as intermediaries between providers an d health plan in regards to elec tronic transacti ons, we believe that the savings, as well as the costs, to cl earinghouses for routing of additional electronic transactions will be the same savings and costs as those expected by health plans. We invite public and interested stakehol der comments on our assumptions. K. Summary

1. Providers As previously noted, providers will assume the least cost and see the greatest benefit from the implementation of operating rules as re quired by this interim final rule with comment period. Within 10 years of implementation of the operating rules for eligibility for a health plan and health care claim status transactions, we estimate that there will be $7.9 billion to $9.5 billion in savings for providers at a cost of up to $855 million.

TABLE 26: SUMMARY OF PROVIDER SAVINGS AND COSTS OVER 10 YEARS (IN MILLIONS)CMS-0032-IFC 118

LOW HIGH Provider Savings $7,850 $9,494 Total Provider Costs $427 $855

2. Health Plans We estimate that health plans will see a sa vings of $5 billion to $5.8 billion within 10 years of the implementation of operating rules (bot h for eligibility for a health plan and health care claim status transactions). We believe that this is a conservative estimate. The IBM study found an average return on investment of over $2 million per health plan within 1 year of implementation. If multiplied by the number of h ealth plans, this results in over $9 billion savings after the first year. We estimate that cost s to health plans will range from $2.6 billion to $5.1 billion over 10 years. In March 2010, the Congressional Budget Office (CBO) (http://www.cbo.gov/ftpdocs/113xx/doc11379/AmendReconProp.pdf ) estimated that the administrative simplification requirements in the Affordable Care Act would produce savings to the Federal budget. In contrast to the CBO analysis, government h ealth plans are not considered separately in our impact analysis and summary estimate, and were in stead included along with private health plans. When considering the im pact on the federal government of this interim final rule with comment period, note that the ope rating rules adopted herein are only one part of the broader administrative simplification mandate s outlined in section 1104 of the Affordable Care Act, from which a greater return on investment (ROI) in total is antic ipated. Also, because we are addressing requirements that will impact the entire health care industry, we again reiterate

that we choose to make conservative estimates based on the variation within the studies on which

to base such estimates.CMS-0032-IFC 119

TABLE 27: SUMMARY OF HEALTH PLAN SAVINGS AND COSTS OVER 10 YEARS (IN MILLIONS)

LOW HIGH Health Plan Savings $5,049 $5,862 Health Plan Costs $2,562 $5,123

TABLE 28: SUMMARY OF PROVIDER AND HEALTH PLAN SAVINGS AND COSTS OVER 10 YEARS (IN MILLIONS)

LOW HIGH Provider and Health Plan Savings $12,899 $15,356 Total Provider and Health Plan Costs $2,989 $5,978

L. Regulatory Flexibility Analysis The Regulatory Flexibility Act (RFA) of 1980, Public Law 96–354, requires agencies to describe and analyze the impact of the interim final rule with comment on small entities unless the Secretary can certify that the regulation will not have a significant impact on a substantial number of small entities. In the healthcare sector, the Small Business Administration (SBA) size standards define a small entity as one w ith between revenues of $7 million to $34.5 million in any 1 year. For details, see the SBA's Web site at http://www.sba.gov/sites/default/ files/Size_Standards_Table.pdf (refer to Sector 62 - Health Care and Social Assistance). (Accessed 2–1–11). For the purposes of this analysis (pursuan t to the RFA), nonprof it organizations are considered small entities; however, individuals a nd States are not included in the definition of a small entity. We have attempted to estimate the number of small entities and provide a general

discussion of the effects of this interim fina l rule with comment period, and where we had difficulty, or were unable to find information, we solicit industry comment. Because mostCMS-0032-IFC 120

medical providers are either nonprofit or meet th e SBA's size standard for small business, we treat all medical providers as small entities.

1. Number of Small Entities The following sections discuss which entitie s across the health care industry, that are impacted by this interim final rule with comment period, are considered small entities as part of this Regulatory Flexibility Analysis.

• Providers - All health care providers are assumed to be sm all entities. The number of providers utilized in this analysis is taken from the August 21, 2008 HIPAA Electronic Transaction Standards proposed rule, as well as the U.S. Census Bureau, Detailed Statistics, 2007 Economic Census, August 31, 2010. The determination to include all health care providers as small entities is modeled after many previous HHS rules which utilized the same assumption.

• Clearinghouses – All cleari nghouses were assumed to not be small entities. Three

national association websites were consulted (EHNAC, HIMSS and the Cooperative Exchange). Additionally, the Health Data Di ctionary by Faulkner and Gray wh ich was last published in 2000 determined that the number of clearinghouses th at would be considered small entities was negligible. The top 51 clearinghouse entities were listed, and the range of monthly transactions was 2,500 to 4 million, with transaction fees of $ 0.25 per transaction to $2.50 per transaction. It was determined that even based on this data, few of the entities would fa ll into the small entity category, and as such, we did not count them in this RFA analysis.

• Health Plans – All health plans are assu med to not be small entities. Based on the available public data, the number of plans that meet the SBA size standard of $7 million in annual receipts was unable to be determined; ther efore we did not include an analysis of the impact on health plans.CMS-0032-IFC 121

• Software Vendors – Vendors are not c onsidered covered en tities under HIPAA;

however we assume that all vendors are small en tities based on their relation to providers. Based on our analysis in the regulatory impact analys is, we assume that the costs and benefits for

software vendors would be the sa me as those for providers. We solicit industry comment on our above assumptions. In total, we estimate that there are approxi mately 300,000 health care organizations that may be considered small entities either because of their nonprofit status or because of their revenues. On the provider side, practices of doctors of osteopathy, podiatry, chiropractors, mental health independent practitioners with annual receipts of less than $7 million are considered to be small entities. Solo and group physicians' offices with annual receip ts of less than $9 million (97 percent of all physician practi ces) are also considered small entities, as are clinics. Approximately 92 percent of medical la boratories, 100 percent of dental laboratories and 90 percent of durable medical equipment suppliers are assumed to be small entities as well. The American Medical Billing Association (AMBA) (http: //www.ambanet.net/AMBA.htm ) lists 97 billing companies on its web site. It notes that these are only ones with web sites.

The Business Census data shows that there are 4,526 (plus Medicare, VA, and IHS) firms considered as health plans and/or payers respons ible for conducting trans actions with health care providers (not including State Me dicaid Agencies). For purposes of the RFA, we did not identify a subset of small plans, and instead so licit industry comment as to the percentage of plans that would be considered small entities. State Medicaid agencies were also excluded from the analysis as well because Stat es are not considered small entit ies in any Regulatory Flexibility Analysis. We solicit industry comment on this assumption.CMS-0032-IFC 122

We identified the top 51 clea ringhouses/vendors in the Faulkner and Gray health data directory from 2000, the last year this documen t was produced. Health care clearinghouses provide transaction processing a nd translation services to both providers and health plans. The following table outlines the estimated number of small entities utilized in the preparation of the initial re gulatory flexibility analysis.

TABLE 29. NUMBER OF IMPACTED SM ALL ENTITIES (I N WHOLE NUMBERS) Type Number Source Hospitals (NAICS 622) 6,505 U.S. Census Bureau, Detailed Statistics, 2007 Economic Census, August 31, 2010 Ambulatory health care services (NAICS code 6211) 547,561 U.S. Census Bureau, Detailed Statistics, 2007 Economic Census, August 31, 2010 Clearinghouses 0 Survey of EHNAC, HIMSS, th e Cooperative Exchange, and the Maryland Commission for Healthcare)Assume, all clearinghouse are not small entities Health Plans (including Government Health Plans such as Medicare, VA and IHS) 0 Assume all health plans are not small entities

Vendors (NAICS code 5415 – Computer design and related services) 51 EC EDI Vantage Point Healthcare Directory – 6th Edition (n=51) http://www.ec-edi.biz/content/en/dir-guest-login.asp

Health Plans – Medicaid 0 State Medicaid agencies were excluded from the analysis because States are not considered small entities in any Regulatory Flexibility Analysis.

2. Cost for Small EntitiesCMS-0032-IFC 123

To determine the impact on health care provi ders we used Busine ss Census data on the number of establishments for hospitals and firm s for the classes of providers and revenue data reported in the Survey of Annual Services for each NAICS code. Because each hospital maintains its own financial records and reports sepa rately to payment plans, we decided to report

the number of establishments rather than firms. For other providers, we a ssumed that the costs to implement the operating rules for eligibility for a health plan and health care claim status

transactions would be accounted for at the level of firms ra ther than at the individual establishments. Therefore, we reported th e number of firms for all other providers. In the following tables, we take the informa tion from the impact analysis and break out the costs for both physicians and hospitals. As stat ed earlier in the impact analysis, we assume

that vendor costs will be the same as those fo r providers because of our assumption that vendors will pass along their costs in the form of increased fees to their provider clients. As we are treating all health care providers as small entities for the purpose of the regulatory flexibility analysis, we allocated 100 percent of the implementation costs reported in the impact analysis for physicians and hospitals . Accordingly we treat all software vendors as small entities based on their relationship to prov iders and allocate the same costs. Table 30 shows the impact of the implementation costs of operating rules as a percent of the provider revenues. Data on the number of entities for these tables were gathered from the 2007 census (http://factfinder.censu s.gov/servlet/IBQTable?_bm=y&- geo_id=&-fds_name=EC0700A1&- _skip=0&-ds_name=EC0762SSSZ1&-_lang=en ).We used the NAICS code 5415 computer system design and related services for software vendors.CMS-0032-IFC 124TABLE 30. ANALYSIS OF THE BURDEN OF IMPLEMENTATION OF OPERATING RULES ON SMALL COVEREDENTITIESNAICSNumberEntitiesTotalNumber ofEntitiesNumber ofSmallEntitiesRevenues orReceipts($ in millions)Small EntityReceipts ofTotal Receipts(percent)Op Rules CostsAnnual($ in millions)ImplementationCost RevenueReceipts (Percent)6211 Ambulatory health careservices 547,561 547,561 668,453 100 136 - 272 0.0002 - 0.004622 Hospitals 6,505 6,505 702,960 100 291 - 583 0.0004 - 0.00085415 Computer system design and related services 105,710 105,710 297,200 100 136 - 272 0.0005 - 0.0009CMS-0032-IFC 125 In Column I we display the NAICS code for class of entity. Column II shows the number of entities that are reported in the Business Census for 2002 and Column III

shows the number of small entities that we re computed based th e Business Census and Survey of Annual Service. As mentioned previously, we assume that all health care providers are small. Column IV shows re venues that were reported for 2008 in the Survey of Annual Services (http: //www.census.gov/services/sas_data.html ). Column V shows the percent of small enti ty revenues. Column VI shows the costs to providers for implementation of eligibility for a health plan and health care claim status operating

rules. Column VII shows the costs allocated to the small entities ba sed on the percent of small entity revenues to total revenues. Column VIII presents the percent of the small entity share of implementation costs as a percent of the small entity revenues. We have established a baseline threshold of 3 percent of revenues that would be c onsidered a significant economic impact on

affected entities. None of the entities exceeded or came close to this threshold. We note that the impact in our scenarios is consistently under the estimated impact of 3 percent for all of the entities previously listed, which is below the threshold we consider as a significant economic im pact. As expressed in the guidance on conducting regulatory flexibility analyses, the threshold for an economic impact to be considered significant is 3 percen t to 5 percent of either recei pts or costs. As is clear from the analysis, the impact does not come close to the threshold. Thus, based on the foregoing analysis, we conclude that some small health care providers may encounterCMS-0032-IFC 126 some burdens in the course of implementing th e eligibility for a health plan and health care claim status operating rules. However, we are of the opinion that, for most small providers, the costs will not be significant, and for provide rs who are not HIPAA covered

entities and do not conduct el ectronic health care transa ctions, there is no cost. We did not include an analysis of the im pact on small health plans here, because

we were not able to determine the number of plans that meet the SBA size standard of $7 million in annual receipts. In evaluating whether there were any cl earinghouses that could be considered small entities, we consulted with three na tional associations (EHNAC, HIMSS, and the Cooperative Exchange), as well as the Ma ryland Commission for Health Care, and determined that the number of clearinghouses th at would be considered small entities was negligible. Revenues cited on the Cooperative Exchange Web site (www.cooperativeexchange.org/faq.html ) divided clearinghouses into three revenue categories—small ($10 million); medium ($10 million to $50 million) and large ($50 million or greater). We identified the top 51 clearinghouses, and determined that they are typically part of large electronic health ne tworks, such as Siemen s, RxHub, Availity, GE Healthcare etc., none of which fit into the cate gory of small entity. As referenced earlier, in a report by Faulkner and Gray in 2000, the top 51 entities were list ed, and the range of monthly transactions was 2,500 to 4 milli on, with transaction fees of $0.25 per transaction to $2.50 per transaction. We determ ined that even based on this data, few ofCMS-0032-IFC 127

the entities would fall into th e small entity category, and we do not count them in this analysis. Based on the results of this analysis, we are reasonably confident that the rule will not have a significant impact on a substantial number of small entities. Nevertheless, we are specifically requesting comments on our an alysis and asking for any data that will help us determine the number and sizes of firms implementing the operating rules adopted in this interim fina l rule with comment period. We solicit industry comment on our above assumptions.

3. Alternatives Considered

As stated in section VII.D. of this interim final rule with comment period, we considered various policy alternatives to adopting operating rules, including not adopting operating rules, adopting another authori ng entity's operating rules, or waiting for resolution of all outstanding technical and administrative issues before adopting the operating rules developed by the au thoring entities. For reason cited in section VII.D. of this interim final rule with comment peri od we have determined that none of these options were viable. Please see section VII.D. of this interim final rule with comment period for a discussion of these options and w hy we determined they were not viable.

4. Conclusion As stated in the HHS guidance cited earlier in this section, HHS uses a baseline threshold of 3 percent of revenues to dete rmine if a rule would have a significant economic impact on affected small entities. No ne of the entities ex ceeded or came closeCMS-0032-IFC 128 to this threshold. Based on the foregoing analys is, we could certify th at this interim final

rule with comment would not have a si gnificant economic impact on a substantial

number of small entities. However, because of the relative uncertaint y in the data, the lack of consistent industry data, and our general assumptions, we invite public comments on the analysis and request any additional data that would help us determin e more accurately the impact on the various categories of small entities affected by this interim final rule with comment period. In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule would have a significant impact on the operations of a substantial number of small rural hospitals. Th is analysis must conf orm to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located out side of a metropolitan st atistical area and has fewer than 100 beds. Based on the analysis above, including that the overall costs to small hospitals is under the $136 million thre shold, we do not believe this rule would have a significant impact on small rural hos pitals, for the reasons stated above in reference to small entities. Therefore, the S ecretary has determined that this interim final rule with comment period would not have a significant impact on the operations of a substantial number of small rural hospitals.CMS-0032-IFC 129 M. Accounting Statement

TABLE 31. ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM FY 2011 TO FY 2023 (IN MILLIONS) Category Primary Estimate (millions) Minimu m Estimate (millions ) Maximum Estimate (millions) Source Citation

(RIA, preamble, etc.) BENEFITS Annualized Monetized benefits 7% Discount Not estimated $1,124 $1,347 RIA 3% Discount Not estimated $1,153 $1,376 RIA Qualitative (un-quantified) benefits Wider adoption of standards due to consistent use of standards and responses robust in data; increased productivity due to decrease in manual intervention requirements; avoidance of pended claims, claim denials, and other obstacles to expedited billing Benefits generated from plans to providers, and providers to plans. COSTS Annualized Monetized costs 7% Discount Not estimated $373 $745 RIA 3% Discount Not estimated $314 $627 RIA Qualitative (un-quantified) costs None None None Providers will pay costs to vendors and clearinghouses. Health plans will pay costs to software vendors, programming and IT staff/contractors, and clearinghouses. Clearinghouses will pay costs to programming and IT staff/contractors and software developers. Government w ill pay costs to vendors and staff. TRANSFERS Annualized monetized transfers: “on budget” N/A N/A N/A

From whom to whom? N/A N/A N/A Annualized monetized transfers: “off-budget” N/A N/A N/ACMS-0032-IFC 130 List of Subjects

45 CFR Part 160 Administrative practice and procedure, Computer technology, Health care, Health facilities, Health insurance, Health record s, Hospitals, Medicaid, Medicare, Penalties, Reporting and recordkeeping requirements.

45 CFR Part 162 Administrative practice and pr ocedures, electronic trans actions, health facilities, health insurance, hospitals, incorporati on by reference, Medicaid, Medicare, Reporting and recordkeeping requirements.CMS-0032-IFC 131 For the reasons set forth in this preamble, th e Department of Health and Human Services amends 45 CFR parts 160 and 162 to read as follows:

PART 160 – ADMINISTRATIVE DATA STANDARDS AND RELATED REQUIREMENTS 1. The authority citation for part 16 0 is revised to read as follows: Authority: 42 U.S.C. 1302(a), 42 U.S.C. 1320d–1320d–8, sec. 264 of Pub. L. 104–191, 110 Stat. 2033–2034 (42 U.S.C. 1320d–2 (note)), 5 U.S.C. 552; secs. 13400 and 13402, Pub. L. 111–5, 123 Stat. 258–263, and sec. 1104 of Pub. L. 111-148, 124

Stat. 146-154. Subpart A-- General Provisions §160.101 [Amended] 2. Amend §160.101 by removing the phrase “and section 13410(d) of Public Law 111-5.” and adding in its place the phrase “section 13410(d) of Public Law 111-5, and

section 1104 of Public Law 111-148.” 3. Amend §160.103 by adding a paragraph (3) to the definition of "standard" to

read as follows: §160.103 Definitions.

* * * * *

Standard * * * (3) With the exception of ope rating rules as defined at §162.103.

* * * * *CMS-0032-IFC 132 PART 162—ADMINISTRATIVE REQUIREMENTS 4. The authority citation for part 16 2 is revised to read as follows: Authority: Secs. 1171 through 1180 of the Social Security Act (42 U.S.C. 1320d–1320d–9), as added by sec. 262 of Pub. L. 104–191, 110 Stat. 2021–2031, sec. 105 of Pub. L. 110–233, 122 Stat. 881–922, and sec. 264 of Pub. L. 104–191, 110 Stat. 2033–2034 (42 U.S.C. 1320d–2(note), and s ecs. 1104 and 10109 of Pub. L. 111-148, 124

Stat. 146-154 and 915-917. Subpart A--General Provisions 5. Amend §162.103 as follows: A. Adding the definition of "operating rules". B. Revising the definitio n of "standard transaction".

The revision and addition read as follows: §162.103 Definitions.

* * * * * Operating rules means the necessary business rules and guidelines for the electronic exchange of information that are not defined by a standard or its implementation specifications as ad opted for purposes of this part.

* * * * *

Standard transaction means a transaction that co mplies with an applicable standard and associated operating rules adopted under this part. Subpart I--General Provisions for TransactionsCMS-0032-IFC 133 6. Amend §162.915 by revising paragr aph (a) to read as follows: § 162.915 Trading partner agreements

. * * * * * (a) Change the definition, data condition, or use of a data element or segment in a standard or operating rule, except where necessa ry to implement State or Federal law, or to protect against fraud and abuse.

* * * * *

7. Amend §162.920 as follows: A. Revising the section head ing and introductory text. C. Adding paragraph (c).

The revisions and addition read as follows: §162.920 Availability of implementation specifications and operating rules. Certain material is incorpor ated by reference into this subpart with the approval of the Director of the Federal Register unde r 5 U.S.C. 552(a) and 1 CFR part 51. To enforce any edition other than that specified in this section, the Depa rtment of Health and Human Services must publish notice of change in the Federal Register and the material must be available to the public. All approved material is available for inspection at the

National Archives and Records Administ ration (NARA). For information on the availability of this material at NARA, call (202) 714–6030, or go to: http://www.archives.gov/federal

_ register/code

_ of

_

federal

_ regulations/ibr

_ locations.htmlCMS-0032-IFC 134

. The materials are also available for inspec tion by the public at the Centers for Medicare & Medicaid Services (CMS), 7500 Security Boulevard, Baltimore, Maryland 21244. For more information on the availability on the materials at CMS, call (410) 786–6597. The

materials are also available from the sources listed below.

* * * * * (c) Council for Affordable Qual ity Healthcare's (CAQH) Committee on Operating Rules for Information Exchange (CORE), 601 Pennsylvania Avenue, NW South Building, Suite 500 Washington, DC 20004; Telephone (202) 861-1492; Fax (202) 861- 1454; E-mail info@CAQH.org ; and Internet at http ://www.caqh.org/benefits.php

. (1) CAQH, Committee on Operating Rule s for Information Exchange, CORE Phase I Policies and Operating Rules, Approved April 2006, v5010 Update March 2011.. (i) Phase I CORE 152: Eligibility and Benefit R eal Time Companion Guide Rule, version 1.1.0, March 2011, as referenced in § 162.1203. (ii) Phase I CORE 153: Eligibility a nd Benefits Connectivity Rule, version 1.1.0, March 2011, as referenced in § 162.1203. (iii) Phase I CORE 154: Eligibility and Benefits 270/271 Data Content Rule, version 1.1.0, March 2011, as referenced in § 162.1203. (iv) Phase I CORE 155: Eligibility and Benefits Ba tch Response Time Rule, version 1.1.0, March 2011, as referenced in § 162.1203. (v) Phase I CORE 156: E ligibility and Benefits Real Time Response Time Rule, version 1.1.0, March 2011, as referenced in § 162.1203.CMS-0032-IFC 135 (vi) Phase I CORE 157: Eligibility and Benefits Sy stem Availability Rule, version 1.1.0, March 2011, as referenced in § 162.1203. (2) ACME Health Plan, HIPAA Transact ion Standard Companion Guide, Refers to the Implementation Guides Based on ASC X12 version 005010, CORE v5010 Master Companion Guide Template, 005010, 1.2, (CORE v 5010 Master Companion Guide Template, 005010, 1.2), March 2011, as referenced in §§ 162.1203 and 162.1403. (3) CAQH, Committee on Operating Rule s for Information Exchange, CORE Phase II Policies and Operating Rules, Approved July 2008, v5010 Update March 2011. (i) Phase II CORE 250: Claim Stat us Rule, version 2.1.0, March 2011, as referenced in § 162.1403. (ii) Phase II CORE 258: Eligibility and Benefits 270/271 Normalizing Patient Last Name Rule, version 2.1.0, March 2011, as referenced in § 162.1203. (iii) Phase II CORE 259: Eligibility and Benefits 270/271 AAA Error Code Reporting Rule, version 2.1.0, Marc h 2011, as referenced in § 162.1203. (iv) Phase II CORE 260: Eligibility & Benefits Data C ontent (270/271) Rule, version 2.1.0, March 2011, as referenced in § 162.1203. (v) Phase II CORE 270: Connectiv ity Rule, version 2.2.0, March 2011, as referenced in § 162.1203 and § 162.1403. Subpart L--Eligibility for a Health Plan 8. Adding a new §162.1203 to read as follows: §162.1203 Operating rules for eligibility fo r a health plan transaction.CMS-0032-IFC 136 On and after January 1, 2013, the Secretary adopts the following: (a) Except as specified in paragraph (b) of this section, the following CAQH CORE Phase I and Phase II operating rules ( updated for Version 5010) for the eligibility for a health plan transaction: (1) Phase I CORE 152: Eligibility and Benefit R eal Time Companion Guide Rule, version 1.1.0, March 2011, and CORE v5010 Master Companion Guide Template. (Incorporated by reference in § 162.920). (2) Phase I CORE 153: Eligibility and Benefits C onnectivity Rule, version 1.1.0, March 2011. (Incorporated by reference in § 162.920). (3) Phase I CORE 154: Eligibility and Benefits 270/271 Data Content Rule, version 1.1.0, March 2011. (Incorp orated by reference in § 162.920). (4) Phase I CORE 155: Eligibility and Benefits Ba tch Response Time Rule, version 1.1.0, March 2011. (Incorp orated by reference in § 162.920). (5) Phase I CORE 156: Eligibility and Benefits Real Time Response Rule, version 1.1.0, March 2011. (Incorp orated by reference in § 162.920). (6) Phase I CORE 157: E ligibility and Benefits Sy stem Availability Rule, version 1.1.0, March 2011. (Incorp orated by reference in § 162.920). (7) Phase II CORE 258: Eligibility and Benefits 270/271 Normalizing Patient Last Name Rule, version 2.1.0, March 2011. (Incorporated by reference in § 162.920). (8) Phase II CORE 259: Eligibili ty and Benefits 270/271 AAA Error Code Reporting Rule, version 2.1.0. (Incor porated by reference in § 162.920).CMS-0032-IFC 137 (9) Phase II CORE 260: Eligibility & Benefits Data C ontent (270/271) Rule, version 2.1.0, March 2011. (Incorp orated by reference in § 162.920). (10) Phase II CORE 270: Conn ectivity Rule, version 2.2.0, March 2011. (Incorporated by reference in § 162.920). (b) Excluding where the CAQH CORE rules reference and pertain to acknowledgements and CORE certification. Subpart N--Health Care Claim Status 9. Add §162.1403 to read as follows: §162.1403 Operating rules for health ca re claim status transaction. On and after January 1, 2013, the Secretary adopts the following: (a) Except as specified in paragraph (b) of this section, the following CAQH CORE Phase II operating rules (updated fo r Version 5010) for the health care claim

status transaction: (1) Phase II CORE 250: Claim St atus Rule, version 2.1.0, March 2011, and CORE v5010 Master Companion Guide, 00510, 1.2, March 2011. (Incorporated by reference in § 162.920). (2) Phase II CORE 270: Connectivity Rule, version 2.2.0, March 2011. (Incorporated by reference in § 162.920). (b) Excluding where the CAQH CORE rules reference and pertain to acknowledgements and CORE certification.CMS-0032-IFC

Dated: __May 26, 2011

__________

___________________________________ Donald M. Berwick , Administrator

. Centers for Medicare & Medicaid Services

.

Dated: June 29, 2011

___________________________________ Kathleen Sebelius , Secretary, Department of Health and Human Services

.

BILLING CODE: 4120-01-PCMS-0032-IFC

[FR Doc. 2011-16834 Filed 06/30/2011 at 2:00 pm; Publication Date: 07/08/2011]