[Federal Register Volume 70, Number 226 (Friday, November 25, 2005)]
[Rules and Regulations]
[Pages 71008-71020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-23080]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 424

[CMS-0008-F]
RIN 0938-AM22


Medicare Program; Electronic Submission of Medicare Claims

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule adopts as final, and makes amendments to, the 
interim final rule published on August 15, 2003. That interim final 
rule implemented the statutory requirement that claims for 
reimbursement under the Medicare Program be submitted electronically as 
of October 16, 2003, except where waived. These regulations identify 
those circumstances for which mandatory submission of electronic claims 
to the Medicare Program is waived.

DATES: Effective date: These regulations are effective on December 27, 
2005.

FOR FURTHER INFORMATION CONTACT: Kathleen Simmons, (410) 786-6157. 
Stewart Streimer, (410) 786-9318.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 3 of the Administrative Simplification Compliance Act 
(ASCA), Pub. L. 107-105, was enacted by the Congress to improve the 
administration of the Medicare Program by facilitating program 
efficiencies gained through the electronic submission of Medicare 
claims. Section 3 of ASCA amends subsection (a) of section 1862 of the 
Social Security Act (the Act) (42 U.S.C. 1395y(a)) and adds a new 
subsection (h) to section 1862 (42 U.S.C. 1395y). The amendment to 
subsection (a) requires the Medicare Program, subject to subsection 
(h), to deny payment under Part A or Part B for any expenses for items 
or services ``for which a claim is submitted other than in an 
electronic form specified by the Secretary.'' Subsection (h) provides 
that the Secretary shall waive such denial in two types of cases and 
may also waive such denial ``in such unusual cases as the Secretary 
finds appropriate.''
    Section 3 of ASCA operates in the context of the Administrative 
Simplification provisions of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), Pub. L. 104-191. Those provisions 
require the Secretary to adopt, among other standards, standards for 
financial and administrative transactions for the health care industry, 
including health claims transactions (see section 1173(a) of the Act). 
In the August 17, 2000 Federal Register (65 FR 50311), the Secretary of 
Health and Human Services (the Secretary) published a final rule 
(generally known as the Transactions Rule) that adopted standards for 
eight electronic transactions. The transactions standards adopted by 
that final rule, as subsequently modified by final rule published on 
February 20, 2003 (68 FR 8381), are codified at 45 CFR part 162, 
subparts A and I through R.
    The HIPAA standards apply to health plans, health care 
clearinghouses, and certain health care providers; collectively, these 
entities are known as ``covered entities.'' An additional category of 
covered entities--prescription drug card sponsors--was added by the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA), Pub. L. 108-173. Covered entities are required to comply not 
only with the standards established by the Transactions Rule, but also 
with those established via other HIPAA Administrative Simplification 
rules--such as the Privacy Rule, the Employer Identifier Rule, the 
Security Rule, and the National Provider Identifier Rule--by the 
respective applicable compliance dates specified in those rules.
    Compliance with the standards for the electronic transactions 
established by the Transactions Rule was required for all covered 
entities other than small health plans by October 16, 2002; compliance 
by small health plans was required by October 16, 2003. However, 
section 2 of ASCA extended the October 16, 2002 compliance deadline to 
October 16, 2003 for covered entities that were not small health plans 
and that submitted a compliance plan by October 15, 2002. In accordance 
with 45 CFR 162.900(c), covered entities that were not small health 
plans and that did not timely submit a compliance plan under ASCA were 
required to comply by October 16, 2002. Thus, all covered entities, 
regardless of type, were required to be in compliance no later than 
October 16, 2003.
    Since a significant number of covered entities had expressed strong 
concern over the health care industry's state of readiness to conduct 
fully compliant HIPAA transactions and we wanted to promote compliance 
while ensuring that cash flow and health care operations would not be 
unnecessarily disrupted, the Department of Health and Human Services 
(HHS) issued guidance on the approach CMS would take to enforce the 
HIPAA electronic transactions and code sets provisions. In accordance 
with the July 24, 2003 guidance, the Secretary explained that we would 
focus on voluntary compliance, use a complaint-driven approach, and 
would not impose penalties on covered entities that deployed temporary 
contingency plans, if they made reasonable and diligent efforts to 
become compliant and, in the case of health plans, facilitated the 
compliance of their trading partners.
    By statute, the Medicare Program is a health plan under HIPAA (see 
section 1171(5)(D) of the Act). It is, therefore, a covered entity. In 
45 CFR 160.102(a)(3), we specify that, in accordance with section 
1172(a)(3) of the Act, health care providers are covered entities if 
they transmit health information in electronic form in connection with 
a transaction for which the Secretary has adopted a standard (covered 
transaction). In 45 CFR 162.923(a), we specify that if a covered entity 
electronically conducts a covered transaction with another covered 
entity, it must conduct it as a standard transaction.
    Approximately 86.1 percent of claims submitted to the Medicare 
Program are submitted electronically, which means that approximately 
139 million claims are submitted on paper per year (fiscal year (FY) 
2002). Section 3 of ASCA required Medicare providers to submit Medicare 
claims electronically by October 16, 2003, unless one of the specified 
grounds for waiver applies. As the October 16, 2003 deadline 
approached, we made the decision to implement our own contingency plan 
after reviewing statistics showing that an unacceptably low number of 
Medicare providers would likely be capable of submitting compliant 
claims

[[Page 71009]]

by the compliance date. Concerned that many of its trading partners 
were still completing their transition to HIPAA-compliant transactions, 
Medicare implemented a contingency plan permitting the submission and 
processing of claims in electronic formats that were then in use and 
giving providers additional time to complete the testing processes. 
Neither CMS's contingency plan for Medicare nor HHS's enforcement 
guidance modified the October 16, 2003 compliance date for HIPAA 
transactions.
    Section 3 of ASCA, thus, in general has the effect of requiring 
Medicare providers that are not already covered entities to conduct a 
covered transaction (the health claim transaction) electronically and, 
thereby, become covered entities. In submitting claims electronically, 
the providers are required to comply with the applicable HIPAA standard 
for the health claim transaction. Thus, section 3 of ASCA promotes the 
submission of standard transactions and will further the goal of 
improved health care delivery by reducing the administrative burden and 
paperwork associated with Medicare claims submissions.
    Although 86.1 percent of Medicare claims are submitted 
electronically, the volume of Medicare claims submitted in paper form 
is substantial. Moving from paper to electronic submission has the 
potential for significant savings and efficiencies for Medicare 
physicians, practitioners, facilities, suppliers, and other health care 
providers, as well as for the Medicare program itself. Although these 
Medicare physicians, practitioners, facilities, suppliers, and other 
health care providers would incur a cost to comply with the mandatory 
electronic billing requirement, we believe their savings will offset 
the costs they incur. Further, the use of the HIPAA electronic claim 
standards could result in additional savings if these entities begin 
electronically billing other payers. However, the statute recognizes 
that certain circumstances may effectively prevent some providers from 
transacting claims with Medicare electronically or as standard 
transactions. ASCA, thus, identifies exceptions to the mandatory 
submission of electronic Medicare claims. This final rule reiterates 
and interprets these exceptions.
    We considered whether the amendment to section 1862(a) of the Act 
in section 3 of ASCA could be interpreted to apply to payments made by 
Medicare + Choice (M+C) organizations to providers for services 
provided to Medicare beneficiaries. (Note: The MMA, enacted December 8, 
2003, changed and renamed M+C to Medicare Advantage. For discussion 
purposes and to remain consistent with the interim final rule, the term 
``M+C'' will continue to be used in this preamble.) The question was 
raised by the provision in section 4 of ASCA that expressly adds 
Medicare Part C, found in Part C of Title XVIII, to the definition of 
Medicare ``health plans'' found in section 1171(5)(D) of the Act.
    The plain language of section 1862(a) of the Act, however, provides 
that ``payment may not be made under Part A or Part B'' for a number of 
activities. The Congress could have amended this provision, just as it 
amended section 1171(5) of the Act, if it had wanted to prohibit M+C 
organizations from paying for claims for services given to M+C 
enrollees by the M+C organization's participating providers if those 
claims were not submitted electronically. The fact that it did not so 
amend this provision indicates that it did not intend to apply the ASCA 
payment prohibition to the M+C organizations. The Congress's intent to 
apply the broader definition of ``health plan'' in section 4 of ASCA 
solely to the Administrative Simplifications provisions of HIPAA and 
not to the electronic submission requirement for Medicare claims is 
further suggested by the title of section 4 of ASCA: ``Clarification 
with Respect to Applicability of Administrative Simplification 
Requirement to M+C Organizations.''
    The M+C organizations, as health plans for the purposes of HIPAA 
Administrative Simplification, were required to come into compliance 
with the regulatory requirements related to transactions no later than 
October 16, 2003. We understand that all M+C organizations properly 
filed ASCA compliance plans before October 16, 2002. Therefore, they 
obtained extensions and had a compliance date of October 16, 2003.
    An M+C organization that pays a non-compliant electronic claim 
after October 16, 2003, would accordingly be out of compliance with the 
HIPAA transactions regulations, but would not violate the provisions of 
section 1862(a)(22) of the Act or the requirements of this regulation. 
This final rule applies only to providers, practitioners, and suppliers 
who submit claims under Part A or Part B of Medicare. It does not apply 
to the submission of claims by providers to M+C organizations. 
Moreover, the waiver provisions for small providers, practitioners, and 
suppliers established by section 3 of ASCA and this regulation do not 
extend to claims submitted by these providers to any health plans other 
than Medicare.
    Section 902 of the MMA amended section 1871(a) of the Act and 
requires the Secretary, in consultation with the Director of OMB, to 
establish and publish timelines for the publication of Medicare final 
regulations based on the publication of Medicare proposed or interim 
final regulations. Section 902 of the MMA also states that the 
timelines for these regulations may vary but shall not exceed 3 years 
from the previous publication of the proposed or interim final rule, 
except under exceptional circumstances.
    The MMA also introduced Part D of the Medicare Program. Future 
rulemaking may be needed to explore the applicability of section 3 of 
ASCA to Part D. We will initiate such rulemaking, if needed, upon 
further evaluation as we get closer to the Part D implementation date.
    We note that this rule finalizes the provisions of the August 15, 
2003 interim final rule. The final rule is, thus, being published 
within the 3-year time period identified in section 902 of the MMA.

II. Provisions of the Interim Final Rule

    Section 3 of ASCA established the requirements and exceptions under 
the Medicare Program for the mandatory submission of claims in 
electronic form. In the August 15, 2003 Federal Register (68 FR 48805), 
we published an interim final rule that implemented these statutory 
requirements.

A. Definitions Used for Electronic Claim Submission

    The interim final rule added a new paragraph (d) to Sec.  424.32. 
Section 424.32(d)(1) specified the following definitions for the 
purposes of paragraph (d): Claim; electronic claim; direct data entry; 
electronic media; initial Medicare claim; physician, practitioner, 
facility, or supplier; provider of services; and small provider of 
services or small supplier. We defined ``claim'' to mean the 
transaction defined at 45 CFR 162.1101(a) (that is, ``health care 
claim''). We specified the definition of ``electronic claim'' to mean a 
claim that is submitted via electronic media. In addition, we specified 
that the definitions of ``direct data entry'' and ``electronic media'' 
are defined as those terms are defined in 45 CFR 162.103 and 160.103, 
respectively.
    In Sec.  424.32(d)(1)(v) of the interim final rule, we defined an 
``initial Medicare claim'' as a claim submitted to Medicare for payment 
under Part A or Part B of the Medicare Program for the first time for 
processing, including claims sent to

[[Page 71010]]

Medicare for the first time for secondary payment purposes. This 
definition also specified that an initial Medicare claim excludes any 
adjustment or appeal of a previously submitted claim. This final rule 
adds the phrase ``for initial processing'' to the definition of 
``initial Medicare claim'' to clarify that the requirement for 
electronic submission applies to claims that have been previously 
rejected before being accepted into the Medicare processing system.
    In Sec.  424.32(d)(1)(vi), we defined a ``physician, practitioner, 
facility, or supplier'' as a Medicare provider other than a provider of 
services. The final rule adds the words ``or supplier'' to make the 
definition precise, so that the term is defined as ``a Medicare 
provider or supplier other than a provider of services.'' In Sec.  
424.32(d)(1)(vii), we defined a ``provider of services'' as a provider 
of services as defined in section 1861(u) of the Act. In Sec.  
424.32(d)(1)(viii), we defined a ``small provider of services or small 
supplier'' as a provider of services with fewer than 25 full-time 
equivalent employees; or a physician, practitioner, facility, or 
supplier (other than provider of services) with fewer than 10 full-time 
equivalent employees.

B. Submission of Electronic Claims Required

    Electronic submission of Medicare claims is required for initial 
Medicare claims, including initial claims with paper attachments, 
submitted for processing by the Medicare fiscal intermediary (FI) or 
carrier that serves the physician, practitioner, facility, supplier, or 
other health care provider. No other transactions, including changes, 
adjustments, or appeals to the initial claim, are required to be 
submitted electronically in accordance with ASCA.
    In Sec.  424.32(d)(2), we specified that, except for claims to 
which Sec.  424.32(d)(3) or (d)(4) applies, an initial Medicare claim 
under Part A or Part B or both may be paid only if submitted as an 
electronic claim for processing by the Medicare FI or carrier that 
serves the physician, practitioner, facility, supplier, or other health 
care provider. This requirement does not apply to any other 
transactions, including adjustment or appeal of the initial Medicare 
claim.

C. Exceptions to Requirement To Submit Electronic Claims

    The regulations at 45 CFR 162.923 state that, ``except as otherwise 
provided in this part, if a covered entity conducts with another 
covered entity (or within the same covered entity), using electronic 
media, a transaction for which the Secretary has adopted a standard 
under this part, the covered entity must conduct the transaction as a 
standard transaction.'' HIPAA does not require that a health plan be 
able to accept claims via every type of electronic media, only that 
claims received via such media comply with the standard format and 
content requirements of HIPAA (www.wpc-edi.com/HIPAA). The reference in 
section 3 of ASCA to the filing of claims ``in electronic form'' does 
not dictate the use of a particular electronic form. Thus, the Medicare 
program will continue to accept only those forms identified in Chapter 
24 of the Medicare Internet Only Claims Processing Manual (IOM Pub. L. 
100-04) that we issue. At present, Medicare does not accept claims via 
the Internet, an extranet or, in many cases, via removable/
transportable storage media. This final rule does not change this 
Medicare policy. The interim final rule stated that an advance notice 
of any future plans for expansion or contraction in the electronic 
media accepted for submission of Medicare claims would be published in 
Medicare program instructions and via routine contractor notification 
and instructional media.
    In the interim final rule, we specified that we will consider 
claims submitted via a direct data entry screen maintained for 
Medicare, and as permitted by 45 CFR 162.923, to be electronic claims 
for purposes of this requirement. Also, we stated that claims 
transmitted to a Medicare contractor using the free or low cost claims 
software issued by Medicare fee-for-service plans will be considered 
electronic claims for purposes of this requirement.
    The ASCA provided for exceptions to the requirement for mandatory 
electronic submission of Medicare claims. In accordance with ASCA, the 
interim final rule established that the Secretary of HHS could waive 
the application of the electronic claim requirement in specific cases. 
To implement the statutory mandate, we provided more explicit 
requirements that are specified in Sec.  424.32(d). Specifically, Sec.  
424.32(d)(3) states that there are two exceptions to electronic 
submission of initial Medicare claims.
    The first exception, specified in Sec.  424.32(d)(3)(i), applies 
when there is no method available for the submission of an electronic 
claim. For example, we could not reasonably expect Medicare 
beneficiaries to submit electronic claims. Even though the statute 
requires, with very few exceptions, that providers of health care bill 
Medicare on behalf of a beneficiary (sections 1814(a) and 1848(g)(4) of 
the Act), some beneficiaries will still submit claims to Medicare. 
However, those relatively few beneficiaries who submit claims are not 
likely to possess the capability to submit a HIPAA compliant claim. 
Further, there are situations in which the standard adopted by the 
Secretary at 45 CFR 162.1102 does not support all of the information 
necessary for payment of the claim. We identified three other 
situations that fall into this category:
    <bullet> Roster billing of vaccinations covered by the Medicare 
Program. In order to promote an increase in the flu vaccinations for 
Medicare beneficiaries, since 1993 Medicare has allowed mass immunizers 
to bill the program using a single claim form with an attached list of 
beneficiaries to whom a flu vaccine was administered. Many mass 
immunizers bill electronically, but in a non-standard format. This 
roster billing simplifies provider billing but is not available in 
electronic form under the Transactions Rule.
    <bullet> Claims for payment under Medicare demonstration projects. 
Medicare demonstration projects often allow for unusual situations not 
normally handled by the transactions standards; and
    <bullet> Claims where more than one health plan is responsible for 
payment before Medicare. The interim final rule indicated that efforts 
were underway to resolve the confusion in the reporting of per service 
payments by more than one primary payer and allowed these claims to 
continue to be submitted to Medicare on paper for the time being. 
Although a number of alternatives were considered, a clear process for 
electronic billing of Medicare in this case is not yet finalized. Once 
a solution is reached, we will then notify the public of the effective 
date of the change.
    Providers to whom an exception does not apply will then be required 
to submit Medicare claims electronically. In the interim final rule, we 
established that specific program guidance would be issued to Medicare 
providers concerning submission of these claims on paper effective 
October 16, 2003. We stated that we would also issue specific guidance 
or regulations, as necessary, informing covered entities if this or 
another exception no longer applies.
    The second exception, described in Sec.  424.32(d)(3)(ii), provided 
that electronic submission would be waived when the entity submitting 
the claim is a small provider of services or small supplier. The 
statute is quite specific as to the size requirements, and the interim 
final rule simply incorporated the statutory requirements. This final 
rule

[[Page 71011]]

makes a slight technical revision, in order to use a defined term 
consistently.

D. Unusual Cases

    In the interim final rule, we established that the Secretary may 
waive the electronic submission requirement in certain unusual 
situations as the Secretary finds appropriate. In Sec.  424.32(d)(4), 
we specified that such an exception would exist in the following three 
situations:
    <bullet> The submission of dental claims. This exception is being 
included because, under HIPAA, dentists who are covered entities are 
required to submit electronic transactions to other payers in a format 
different from that generally used in the Medicare Program. Since 
Medicare does not generally cover dental services, this exception is 
added to minimize the burden on dentists who may, at times, need to 
bill the Program.
    <bullet> A service interruption in the mode of submitting the 
electronic claim that is outside of the control of the entity 
submitting the claim, for the period of the interruption. This 
exception would apply only if the physician, practitioner, facility, 
supplier, or other health care provider temporarily loses electricity, 
or telephone or other communication service. If electricity, telephone, 
or other communication services exist, but one or the other is 
unavailable for a period of time (for example, because of inclement 
weather or due to telephone company technical breakdowns), paper claims 
will be accepted during the period of disrupted power or communication 
service.
    <bullet> On demonstration, satisfactory to the Secretary, of other 
extraordinary circumstances precluding submission of electronic claims.
    The interim final rule specified that entities would not generally 
need to make a special request to determine whether an exception 
applies that would make them eligible for a mandatory waiver under 
Sec.  424.32(d)(3) or a discretionary waiver under Sec.  424.32(d)(4). 
A special request would have to be submitted to a Medicare FI or 
carrier when an entity did not meet the mandated exceptions at Sec.  
424.32(d)(3), or the specified discretionary waiver criteria at Sec.  
424.32(d)(4)(i) and (d)(4)(ii), but believed there were other 
extraordinary circumstances that precluded its submission of electronic 
claims. We also proposed to issue program guidance to Medicare FIs and 
carriers to enable them to handle, on a case-by-case basis, requests 
for relief in extraordinary circumstances. This program guidance was 
issued on December 19, 2003 (Transmittal 44, CR 2966, Instructions for 
the Mandatory Electronic Submission of Medicare Claims), and may be 
found at www.cms.hhs.gov/manuals/. Publication of this final rule will 
result in some changes to Transmittal 44, CR 2966, which will be 
reissued following publication of this final rule.
    This final rule adds two more unusual situations under Sec.  
424.32(d)(4) for which an exception would exist. Specifically, the 
requirement to submit electronic claims may be waived when the entity 
submitting the claim (1) submits, on average, less than 10 claims per 
month, or (2) furnishes services only outside of the U.S. territory. 
See our response to comments in section III of this preamble for 
further discussion regarding these additional exceptions.

E. Enforcement

    ASCA's amendment to section 1862(a) of the Act prescribes that ``no 
payment may be made under Part A or Part B of the Medicare Program for 
any expenses incurred for items or services'' for which a claim is 
submitted in a non-electronic form. Consequently, absent an applicable 
exception, paper claims submitted to Medicare will not be paid.
    We specified that the Secretary may review entities that bill 
Medicare non-electronically. We stated that entities determined to be 
in violation of the statute or the interim final rule would be subject 
to claim denials, overpayment recoveries, and applicable interest on 
overpayments.

F. Effective Date

    In accordance with section 3(b) of ASCA, we specified, in Sec.  
424.32(d)(5) of the regulations, that the effective date for these 
amendments would be for claims submitted on or after October 16, 2003.

III. Analysis of and Responses to Public Comments

    We received 17 timely public comments on the August 15, 2003 
interim final rule. Based upon some of the comments we received from 
members of the health care provider community who bill Medicare, there 
remain questions about Medicare's electronic claim submission 
requirement and how this rule applies in certain situations. Additional 
information was provided through Medicare manual instructions to FIs 
and carriers (Transmittal 44, CR 2966, December 19, 2003, which may be 
found at www.cms.hhs.gov/manuals/). Several providers are uncertain 
about how to determine if they meet the definition of ``small provider 
of services or small supplier,'' especially when deciding who should be 
included in the ``full time equivalent'' (FTE) employee calculation. 
Furthermore, some providers have questions concerning whether they are 
required to submit a request to HHS for a small provider waiver, which 
would allow them to continue submitting their claims to Medicare on 
paper.

A. General Issues

    Comment: One commenter stated that the August 15, 2003 interim 
final rule did not provide sufficient time for providers to comply with 
the October 16, 2003 statutory effective date and that we should change 
the implementation date.
    Response: We understand the commenter's concern. However, we are 
not able to change the effective date of implementation and compliance, 
because the October 16, 2003 effective date is mandated by the statute.

B. Determining Small Provider Status

    To qualify for a waiver as a small provider of services or small 
supplier, and thus, be permitted to continue billing Medicare on paper, 
the entity submitting a claim must be either: (1) A provider of 
services with fewer than 25 FTEs that submits its claims to a Medicare 
FI; or (2) a physician, practitioner, facility, or supplier with fewer 
than 10 FTEs who bills a Medicare carrier or Durable Medical Equipment 
Regional Carrier (DMERC).
    Comment: Several commenters believe many in the provider community 
remain unaware that providers do not need to request a waiver for a 
small provider exception from Medicare electronic claims submission. In 
addition, other commenters requested a small provider waiver.
    Response: Providers who in good faith believe they qualify as 
``small providers of services or small suppliers'' automatically 
qualify for the small provider waiver unless, upon subsequent review, 
the Department determines that the waiver requirements in fact are not 
met. In that case, if the Department finds that none of the exceptions 
applies, the provider must submit all claims to Medicare 
electronically. Providers must assess their own situation and determine 
for themselves whether they meet the small provider criteria.
    Small providers of services and small suppliers may elect to submit 
some of their claims to Medicare electronically, and some claims on 
paper. Submission of some claims electronically does not revoke or 
cancel their status as a small provider of services or small supplier,

[[Page 71012]]

nor obligate them to submit all of their claims electronically. (More 
information about this will be published through the Medicare 
contractors. The first in a series of publications was Transmittal 44, 
CR 2966 dated December 19, 2003.)
    Comment: Several commenters requested additional guidance on the 
term ``FTE,'' including direction on who is considered an FTE and how 
the number of FTEs should be calculated for a small provider of 
services or small supplier. One commenter suggested that only clinical 
staff should be included in the FTE count. Other commenters believe 
owners of practices should not count toward the FTE total.
    Response: ASCA and its implementing regulation do not modify pre-
existing laws or employer policies defining full-time employment. 
Employers have established policies and practices, subject to State and 
Federal laws, which define ``full-time equivalent'' and provide methods 
for calculating the number of hours their employees must work on 
average on a weekly, biweekly, monthly, or yearly basis to constitute a 
``full-time equivalent'' employee. Some employers classify employees 
who work an average of 32 hours per week as one FTE, whereas other 
employers consider only employees who work 35 to 40 hours per week on 
average as one FTE. An employee who works an average of 40 or more 
hours a week would virtually always be considered full-time and one 
FTE, but employees who work fewer hours weekly could also be considered 
full-time and one FTE according to the policies of, and laws applicable 
to, a different employer.
    Everyone on staff for whom a health care provider withholds taxes 
and files reports with the Internal Revenue Service (IRS) using an 
Employer Identification Number (EIN) is considered an employee 
including, if applicable, the physician(s) who owns a practice and 
provides hands-on services, and those support staff who do not furnish 
health care services but do retain records of, perform billing for, 
order supplies related to, provide personnel services for, and 
otherwise perform support services to enable the provider to function. 
Unpaid volunteers would not be considered employees for purposes of 
calculating FTEs. Individuals who perform services under independent 
contract for a provider, such as individuals employed by a billing 
agency or medical placement service, for whom a provider does not 
withhold taxes, are not considered members of a provider's staff for 
FTE calculation purposes when determining whether a provider of 
services or supplier can be considered as ``small'' for electronic 
billing waiver purposes.
    Medical staff members may sometimes work part-time, or may work 
full-time but their time is split among multiple providers. Part-time 
employee hours must also be counted when determining the number of FTEs 
employed by a provider. For example, if a provider has a policy that 
anyone who works at least 35 hours per week on average qualifies as 
full-time (that is, as one FTE), and has five full-time employees and 
seven part-time employees, each of whom works 25 hours a week, that 
provider would have ten FTEs (5+[7 x 25 = 175 divided by 35 = 5]).
    In some cases, the employer identification number (EIN) of a parent 
company may be used to file employee tax reports for multiple providers 
under multiple Medicare provider numbers. In that instance, it is 
acceptable to consider only those staff, or staff hours worked for a 
particular provider as identified by Medicare provider number to 
calculate the number of FTEs employed by that provider. For example, 
ABC Health Care Company owns hospital, home health agency (HHA), 
ambulatory surgical center (ASC), and durable medical equipment (DME) 
subsidiaries. Some of those providers bill intermediaries and some 
carriers. All have separate provider numbers, but the tax records for 
all employees are reported under the same EIN to the IRS. There is a 
company policy that staff must work an average of 40 hours a week to be 
considered full-time.
    Some of the same staff split hours between the hospital and the 
ASC, or between the DME and HHA subsidiaries. To determine total FTEs 
by provider number, it is acceptable to base the calculation on the 
number of hours each staff member contributes to the support of each 
separate provider by provider number. First, each provider would need 
to determine the number of staff members who work on a full-time basis 
under a single provider number only; not more than 40 hours a week 
should be counted for these employees. Then each provider would need to 
determine the number of part-time hours a week worked on average by all 
staff who furnished services for the provider on a less than full-time 
basis, and divide that total by 40 hours to determine their full-time 
equivalent total. If certain staff members regularly work an average of 
60 hours per week, but their time is divided 50 hours to the hospital 
and 10 hours to the ASC, for FTE calculation purposes, consider the 
person as one FTE for the hospital and .25 FTE for the ASC.
    In some cases, a single provider number and EIN may be assigned, 
but the entity's primary mission is not as a health care provider. For 
instance, a grocery store's primary role is the retail sale of 
groceries and ancillary items including over-the-counter medications, 
but the grocery store has a small pharmacy section that provides 
prescription drugs and some DME to Medicare beneficiaries. A large drug 
store has a pharmacy department that supplies prescriptions and DME to 
Medicare beneficiaries, but most of the store's revenue and most of 
their employees are not involved with prescription drugs or DME and 
concentrate on non-related departments of the store, such as groceries, 
film development, cosmetics, electronics, cleaning supplies, etc. A 
county government uses the same EIN for all county employees but their 
health care provider services are limited to furnishing of emergency 
medical care and ambulance transport to residents.
    For FTE calculation purposes, it is acceptable to include only 
those staff members of the grocery store, drug store, or county 
government involved with, or that support the provision of, health care 
in the FTE count when assessing whether a small provider waiver may 
apply. Support staff who are to be included in the FTE calculation in 
these instances include, but are not necessarily limited to, those that 
restock the pharmacy or ambulance, order supplies, maintain patient 
records, or provide billing and personnel services for the pharmacy or 
emergency medical services department if under the same EIN. FTEs 
should be calculated according to the number of hours on average that 
each staff member contributes to the department that furnishes the 
services or supplies for which the Medicare provider number was issued.
    Neither unpaid volunteers nor individuals that perform services for 
a provider under independent contract, such as individuals employed by 
a billing agency or medical placement service, for whom a provider does 
not withhold taxes, should be considered toward an entity's FTE count 
when determining if a provider of services or supplier can be 
considered as ``small'' for electronic billing waiver purposes.

C. Contingency for Paper Billers

    Comment: Several commenters requested that the Medicare HIPAA 
contingency plan extend to paper claims so as to avoid cash flow 
problems among providers.
    Response: The ASCA enacted on December 27, 2001 (Pub. L. 107-105)

[[Page 71013]]

requires the electronic submission of Medicare claims in an electronic 
form specified by the Secretary of the HHS. The statute waives this 
requirement only in limited situations, which are detailed in Sec.  
424.32 of this regulation. The ``electronic form'' specified by the 
Secretary generally means the electronic transactions and code sets 
standards adopted as part of the HIPAA as detailed in 45 CFR parts 160 
and 162.
    In response to HHS contingency plan guidance for the electronic 
transactions and code sets standards under HIPAA, issued on July 24, 
2003, Medicare announced its HIPAA contingency plans on September 23, 
2003. Medicare's contingency plans allowed for the submission of claims 
in non-compliant electronic formats on and after October 16, 2003, for 
an unspecified period of time. However, Medicare has revised its 
contingency plan; it is paying electronic, HIPAA non-compliant claims 
no sooner than 27 days after receipt, beginning with claims received on 
or after July 1, 2004. Continued paper submission of Medicare claims is 
not a part of Medicare's HIPAA transactions contingency plan. The 
statute affords no latitude for those who do not meet one of the 
exceptions, but Medicare will take into consideration the good faith 
efforts by a provider to comply with the electronic billing requirement 
when enforcing the provision.
    Comment: One commenter expressed concerns that Medicare would not 
be able to handle an increase in paper claims submission if a larger 
portion of providers eligible for the ``small provider of services or 
supplier'' waiver opted to continue, or drop back to, paper claims 
submission.
    Response: Approximately 98 percent of claims submitted to FIs, and 
83 percent of carrier claims are electronic. With the benefits and 
efficiencies gained through electronic billing, we do not believe that 
electronic billers who are eligible to bill on paper will indeed revert 
to paper. Paper claims are more cumbersome to complete and are paid 
less timely than electronic claims. Moreover, we do not expect 
difficulty with Medicare contractors' ability to handle paper claims if 
there were an increase in volume. Since the interim final rule's 
October 16, 2003 effective date, Medicare contractors have not 
experienced any problems in receiving and processing electronic claims, 
and we have not observed any increase in electronic billers who are 
eligible to bill by paper reverting to paper claims submissions.

D. Definition of Initial Medicare Claim

    We received a number of comments related to our definition of 
``initial Medicare claim.'' In the interim final rule, this term was 
defined in Sec.  424.32(d)(1)(v) as a claim submitted to Medicare for 
payment under Part A or Part B of the Medicare program for the first 
time for processing, including for secondary payment purposes. Some 
disagree with our decision to require electronic submission of Medicare 
Secondary Payer (MSP) claims. We have responded to comments submitted 
on this definition below and provided added clarity. Some commenters 
also expressed concerns with their ability to submit an electronic MSP 
claim with a paper attachment.
    Comment: We received one comment on resubmission of initial 
Medicare claims. The commenter was concerned that claims submitted 
before the compliance deadline of October 16, 2003 on paper and then 
resubmitted after the deadline on paper would be rejected.
    Response: We understand the concerns of the provider community 
regarding resubmission of claims previously submitted on paper in an 
electronic format; however, the statute does not afford us any 
flexibility in allowing for paper claims submission following the 
compliance deadline.
    We have interpreted the intent of the statute to mean claims 
submitted to the Medicare claims processing system for the first time, 
including claims submitted after having been previously rejected (which 
were not previously considered as submitted claims since they were 
never accepted into the processing system), claims with paper 
attachments, demand bills, claims where Medicare is secondary and there 
is only one primary payer, and non-payment claims, as claims that must 
be submitted electronically barring any waiver or exception. Initial 
Medicare claims do not include adjustments submitted to intermediaries 
on previously submitted claims or appeal requests.
    Comment: One commenter expressed concerns with our inclusion of a 
claim sent to Medicare for secondary payment (MSP) purposes in our 
definition of ``initial Medicare claim.'' They argued that although 
primary claims and MSP claims use the same HIPAA 837 standard, the 
HIPAA regulations make a distinction between the two transactions and, 
as a result, MSP claims should be treated differently than other 
Medicare claims.
    Response: While MSP claims were not specifically highlighted, the 
statutory language does not exclude them from consideration as initial 
Medicare claims. Furthermore, we do not believe that MSP claims should 
be treated as a different type of claims transaction for purposes of 
Medicare electronic claims submission, because submission of a 
secondary claim would still constitute an initial submission of a claim 
to Medicare. Therefore, we have interpreted the statute to mean they 
must not be excluded from the electronic submission requirement. Our 
definition of an ``initial Medicare claim'' is consistent with this 
interpretation.
    Claims submitted to Medicare when there is more than one primary 
payer must be submitted on paper as it is difficult to submit service 
level data for more than one primary payer electronically at this time. 
The only alternative is for providers to submit those claims to 
Medicare on paper with copies of the explanation of benefits (EOBs)/
remittance advices (RAs) from the primary payers attached.
    Comment: We received comments from providers concerning submission 
of EOBs/RAs. For instance, one commenter was under the impression that 
an 835 electronic remittance advice transaction is needed to submit an 
837 MSP claim. The commenter proposed as an alternative that the 
electronic submission of claims for which Medicare is secondary be 
phased in and only required when providers receive an 835.
    Response: In order for a provider to be reimbursed for an MSP 
claim, the provider must submit to Medicare certain payment information 
contained in the EOB/RA from the primary payer(s). We encourage 
providers to work with their payers to receive the remittance advice in 
the 835 electronic format, but that is not mandated by HIPAA or ASCA. A 
provider may receive this information from the primary payer(s) either 
on paper or electronically. A provider does not need to receive an 835 
electronic remittance advice transaction from a primary payer, however, 
in order to generate a secondary claim for Medicare.

E. Attachments

    Comment: We received some comments on timely reimbursement of 
electronic claims submitted with paper attachments. In one case, a 
provider believed that it was unable to receive reimbursement for an 
electronic claim unless a paper claim was also submitted.
    Response: Transmittal 44, CR 2966, December 19, 2003, required 
Medicare contractors to issue further guidance to providers and 
submitters on the

[[Page 71014]]

submission of electronic claims when there are paper attachments. 
Providers and submitters who experience difficulty getting their 
electronic claims that have paper attachments processed must first 
contact their Medicare contractor. If problems persist, providers and 
submitters are encouraged to contact their regional CMS office to 
troubleshoot these issues. Phone numbers for Medicare contractors and 
CMS regional offices can be found on our Web site at: http://www.cms.hhs.gov/physicians/default.asp.
    Comment: Another commenter was concerned with Medicare connecting 
paperwork and hard copy EOBs with an electronic claim, resulting in 
untimely reimbursement and extra follow-up time.
    Response: Once the electronic claims attachment standard is adopted 
and entities have properly implemented it, this issue will be resolved. 
In the meantime, and prior to the claims attachment standard compliance 
date, paper attachments must be properly associated with the 
corresponding electronic claims by incorporating correct and 
appropriate data and indicating in the electronic claims transaction 
that separate paper documentation is being sent. Separate submission of 
electronic claims and related paper attachments should consequently not 
cause a discernable delay in payment of claims. Providers and other 
electronic claim submitters are advised to contact the Medicare 
contractor to which they submit their claims if they have further 
questions about the locally published process.
    Pending issuance of the future instructions concerning submission 
of medical records for electronic claims, providers and Medicare 
contractors can continue current policies and practices regarding 
submission of attachments with claims, whether in a proprietary format, 
on paper, via fax, or by other means.

F. Unusual Cases

    While commenters expressed their support for electronic claims 
submission, they were also pleased with the flexibility afforded by the 
outlined exceptions, which permit continued paper claims submission 
such as in the case of roster vaccinations billing and certain Medicare 
demonstration claims. We received a number of comments on ``unusual 
cases,'' asking for further clarity.
    Comment: One commenter stated the interim final rule was unclear 
concerning whether paper claims would be allowable after the compliance 
deadline. The commenter proposed designating the HIPAA transition 
period to a largely electronic submission environment for Medicare, an 
``unusual case.''
    Response: The ``unusual case'' provision is intended to operate as 
an exception to a situation in which Medicare providers are generally 
submitting claims electronically. The commenter, however, proposes 
making the exception to be the norm, which would appear to be contrary 
to what the Congress intended.
    Comment: Another commenter suggested we expand the criteria for the 
service interruption to include power outages, which result in a phone 
or communication service interruption.
    Response: We have interpreted an ``unusual case'' exception to be 
one applied to a temporary situation outside of a provider's control 
that effectively precludes electronic submission of claims. For a 
situation to fall under an ``unusual case'' exception, the 
circumstances must be truly out of the ordinary and they must genuinely 
prevent the provider from complying with the applicable electronic 
submission requirement.
    In the August 15, 2003 interim final rule, we described three 
situations that we believe meet the criteria for an unusual case 
exception. The three situations we listed were submission of dental 
claims, a service interruption outside the control of the submitter, 
and other extraordinary circumstances deemed satisfactory to the 
Secretary.
    We also specified that the service interruption exception is 
limited to submitters who have experienced a loss of phone or 
communication service. We agree with the commenter that it may be 
possible for an interruption in the mode of service used to submit a 
claim to occur resulting from something other than inclement weather or 
phone company problems. We further recognize that a loss of power could 
occur that does not result in the loss of the use of a phone or other 
communication services but precludes or severely inhibits a submitter 
from sending claims electronically. In this rare and unanticipated 
situation, a waiver may be granted for service interruption. This is 
addressed in Medicare manual instructions, Transmittal 44, CR 2966, 
December 19, 2003.
    Based on comments received and our assessment of the reasonableness 
of an entity's ability to comply, we have identified the following two 
additional ``unusual case'' situations we consider to be eligible for a 
waiver under Sec.  424.32(d)(4). First, an unusual case is deemed to 
exist when an entity submits fewer than 10 claims to Medicare per month 
on average. We believe entities that submit such low volumes of 
Medicare claims are ``unusual cases'' in that the volume does not 
support mandating the acquisition of hardware/software to submit claims 
electronically. The exception for small providers indicates to us the 
Congress's intention that the electronic submission requirement not 
apply to providers for whom the electronic submission requirement of 
claims would be truly burdensome. This would be the case for providers 
who submit fewer than 10 claims per month, as the cost of converting 
their billing systems for so few claims would be uneconomic. If the 
volume increases, then electronic claim submission would be required, 
unless another exception applies. This is self-assessable and the 
entity need not submit a waiver request. Second, it is deemed to be an 
unusual case when the entity submitting a claim furnishes services only 
outside of the U.S. territory. The HIPAA transactions and code sets 
standards are consensus-based, American National Standards Institute 
(ANSI)-accredited standards that rely upon hardware and software that 
meet certain specifications, which may not be readily available outside 
of the U.S. territory. We believe that entities furnishing services 
solely outside of the U.S. in many cases could not properly submit 
electronic claims. Moreover, we think those entities are few in number 
and truly constitute an unusual case. This is also self-assessable and 
the entity need not submit a waiver request. Section 424.32(d)(4) is 
revised to include these two additional ``unusual case'' situations.
    Instructions to the Medicare contractors that describe how to go 
about requesting an ``unusual case'' waiver were issued December 19, 
2003 (Transmittal 44, CR 2966).
    Comment: One commenter urged Medicare contractors to furnish all 
providers and mass immunizer billers and suppliers with free electronic 
roster billing software, in order to reduce dependence on paper roster 
billing and increase cost savings to the program. Another commenter 
suggested there remains a need for continued outreach to educate 
providers on these topics.
    Response: We are considering these suggestions; however, claims 
submission for roster billing for vaccinations is still considered 
exempt from the electronic claims submission requirement. To the extent 
certain Medicare contractors' software permits electronic submission of 
roster bills, we

[[Page 71015]]

encourage providers to use it; however, it is not required.
    We have issued instructions to the Medicare contractors that 
describe in greater detail how this regulation is operationalized, 
including instructions for requesting an ``unusual case'' waiver (refer 
to Transmittal 44, CR 2966, dated December 19, 2003). In addition, 
Medicare contractors will be instructed to include information on their 
provider Web sites and in their newsletters that addresses these and 
other issues pertinent to operationalization of the regulation.

G. Testing With Medicare

    Comment: Several commenters expressed concerns regarding low HIPAA 
transaction testing rates between providers and Medicare.
    Response: Medicare testing has increased over the past several 
months and rose steadily in the weeks leading up to the HIPAA 
compliance deadline. As of September 10, 2004, approximately 97.7 
percent of inbound claims were being submitted to Medicare in the 
HIPAA-compliant format.
    Medicare invoked its HIPAA contingency plan to afford added 
flexibility to providers and submitters who were not ready to submit 
claims in the HIPAA electronic format on the deadline of October 16, 
2003, to continue to prepare for the electronic claims submission 
requirement in the adopted formats. Many Medicare contractors were 
ready to test the 837 and 835 for 6 or more months before the October 
16, 2003 deadline. Medicare's revised HIPAA contingency plan encourages 
further HIPAA compliance because, effective July 1, 2004, non-compliant 
electronic claims are paid no sooner than 27 days after the date of 
receipt while compliant claims are paid sooner.
    Comment: Another commenter requested that Medicare relax the 
technical edits to HIPAA transactions so that claims may continue to be 
processed after the deadline.
    Response: We believe that Medicare has tried to make reasonable 
accommodations regarding its technical edits, while remaining 
considerate of how changes in its claims processing systems may affect 
various other submitters (some of whom could be adversely affected by 
inappropriate technical edits).

H. Impact of HIPAA Standards

    Comment: Several commenters expressed concerns surrounding the 
overall level of readiness by the industry for implementing the HIPAA 
transaction and code set standards due to possible industry variations 
in the interpretation of the standards. They were concerned that 
unresolved questions pertaining to complying with the HIPAA standards 
could impact a provider's ability to submit claims electronically and, 
therefore, comply with the Medicare electronic claims submission 
requirement.
    Response: We recognize that a number of HIPAA implementation issues 
exist and present obstacles to HIPAA compliance; however, these issues 
and obstacles extend beyond the scope of this regulation. We are 
addressing these concerns through other channels. Medicare's HIPAA 
contingency plan may afford some additional latitude to entities as 
they work toward compliance with the HIPAA standards. In the meantime, 
Medicare's contingency plan allows for providers, under specified 
circumstances, to continue to send HIPAA non-compliant electronic 
claims to Medicare and, therefore, facilitate compliance with the ASCA 
mandate.

I. Enforcement

    Comment: One commenter identified a few issues related to 
compliance with HIPAA's electronic transactions and code sets standards 
such as a request for new data elements, which could impact compliance 
with the Medicare electronic claims submission requirement.
    Response: For any change to a standard to become effective and 
compliance required, the designated standard maintenance organization 
would first have to hold public hearings and ultimately the Secretary 
would need to adopt the change formally.
    Comment: Another commenter suggested we find an alternate term for 
``audit'' when discussing enforcement.
    Response: We accept this comment; therefore, in the future we will 
reference the Secretary's ability to ``audit'' an entity as the ability 
to ``review'' an entity for compliance. In addition, the preliminary 
enforcement process will be conducted on a prospective basis and will 
focus on providers that appear to be submitting extraordinarily high 
numbers of paper claims. If a review establishes that a provider is 
submitting paper claims without properly qualifying for a waiver, the 
provider will be notified that any paper claims submitted after a 
certain date will be rejected by Medicare. However, providers will be 
afforded a reasonable amount of time under the circumstances to come 
into compliance with the electronic claim submission requirement.
    A future Medicare manual instruction to Medicare contractors will 
explain the criteria for review and the enforcement requirements for 
providers that are determined to have incorrectly submitted paper 
claims.

J. Costs To Convert From the Submission of ``Paper Claims'' to 
``Electronic Claims''

    Comment: One commenter requested that we provide a more realistic 
estimate of the costs associated with converting from paper claims 
submission to electronic claims submission. Several commenters believe 
that the requirement to submit Medicare claims electronically 
represents a costly expense without the potential for reimbursement to 
providers.
    Response: When considering this comment, we reviewed again the 
basis for the cost estimate and considered further possible paperwork 
burden and capital investment issues in the impact analysis of the 
interim final rule. We concluded that the cost estimate remains the 
most accurate, given the data that were available.
    Due to the high number of Medicare claims already submitted 
electronically and the waivers issued for ``small providers,'' 
moderately sized providers are most likely to be affected by this 
requirement. While we do agree that a provider's staff will need some 
time to become fully familiar and proficient with the use of the free/
low cost Medicare billing software, a physician's office (which 
presently submits claims on paper) can purchase hardware to enable 
compliance with this requirement for less than $1,000. Although the 
electronic conversion will not be reimbursed, we continue to believe 
that we have tried to provide the most economical software for 
providers, and we will even provide free technical support on the 
installation and usage through our Medicare contractors.

K. Outside the Scope of This Rule

    Comment: One commenter requested that Medicare guidance 
communications or program changes to physicians be completed on paper 
rather than electronically.
    Response: Although we appreciate this commenter's concern, because 
these issues were not addressed in the August 15, 2003 interim final 
rule, we are not able to address this concern in this final rule.
    Comment: Another commenter suggested that we reimburse for nursing 
service claims.
    Response: Although we appreciate the commenter's concerns, nursing 
service claim reimbursement was not covered

[[Page 71016]]

in the August 15, 2003 interim final rule. Therefore, we are unable to 
address this concern in this final regulation.

IV. Provisions of This Final Rule

    With some minor editing and modification to include two additional 
``unusual cases'' for an automatic exception and changed ``unusual 
circumstances'' to ``unusual cases'', we are adopting all of the 
provisions set forth in the August 15, 2003 interim final rule as 
final.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act (PRA) of 1995, we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA of 1995 requires that 
we solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comments on each of these 
issues for the information collection requirements discussed below.
    The information collection requirements and associated burdens in 
Sec.  424.32 are subject to the PRA. The burden of submitting the 
information required is addressed under OMB approval number:
    0938-0866, HIPAA Standards for Coding Electronic Transactions, with 
a one-time burden of 34,000,000 hours. The current approval expires 5/
31/05.
    0938-0279, Medicare Uniform Institutional Provider Bill, with an 
annual burden of 1,666,208 hours (form CMS-1450). The current approval 
expires 12/31/05.
    0938-0008, Common Claim form, instructions, and supporting 
regulations at Sec.  414.40, Sec.  424.32, and Sec.  414.40, with an 
annual burden of 44,189,007 hours (form CMS-1500). The current approval 
expires 3/31/06.
    Approximately 205,409 providers and suppliers will be affected by 
this final rule and will have to change the format for the claims they 
submit. They will incur some costs, either that of switching to 
clearinghouses, which will not affect the time it takes to submit the 
information for a claim, but may cost them approximately $.30 per 
claim, or that of purchasing computer equipment, which we estimate at 
$500 to $1,000.
    In the final rule published to implement the electronic 
transactions and code sets standards, we estimated that it would take 
an average of 10 hours per entity to switch over to the mandated 
standard transaction. (The switch could be from paper to electronic or 
from another electronic format to the standard format.)
    For purposes of this discussion, we are estimating that 37.5 
percent of the affected providers and suppliers (that is, those not 
meeting one of the exceptions) already own computers and will not incur 
capital costs. We are also estimating that 50 percent of the affected 
providers and suppliers will start using a clearinghouse or billing 
service, which will not impose any capital costs subject to the PRA. 
The remaining 12.5 percent (25,676) will buy computers at an average of 
$750, for a total capital cost of $19.3 million.
    On the other hand, the providers and suppliers who own or who will 
buy a computer will require less time to submit claims. Form CMS-1450 
takes approximately 9 minutes to submit in hard copy and 0.5 minutes to 
submit electronically; form CMS-1500 takes 15 minutes and 1 minute, 
respectively.
    If 50 percent of the entities that will bill us directly are 
responsible for 25 percent of the paper bills (we assume that half of 
the bills are submitted by entities that will be excepted from the 
requirements, and that 25 percent will be submitted through an 
intermediate party), they will save 7,651,089 million hours for form 
1500 and 129,196 hours for form 1450. Mailing costs will be reduced by 
approximately $.40 per claim on average and the cost of the forms by 
$.03 for the form 1450 and form 1500 (the third form is furnished by 
us).
    As required by section 3504(h) of the PRA of 1995, we have 
submitted a copy of the revision to Sec.  424.32 to OMB for its review 
of the information collection requirements. The revision is not 
effective until OMB has approved it.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:
    Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development and 
Issuances Group, Attn: Jimmy Wickliffe, CMS-0008-F, Room C5-11-04, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    Office of Information and Regulatory Affairs, Office of Management 
and Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Christopher Martin, Desk Officer, CMS-0008-F.
    Comments submitted to OMB may also be e-mailed to the following 
address: e-mail: <a href="/cdn-cgi/l/email-protection#65060d170c16110a150d0017080417110c0b250a08074b000a154b020a13"><span class="__cf_email__" data-cfemail="81e2e9f3e8f2f5eef1e9e4f3ece0f3f5e8efc1eeece3afe4eef1afe6eef7">[email protected]</span></a>; or faxed to OMB at 
(202)395-6974.

VI. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    For the purpose of this analysis, we use a pre-statute baseline; 
therefore, all costs and benefits identified in this impact analysis 
are attributed to this final rule. Nevertheless, the ASCA mandates most 
aspects of this final rule. In particular, the ASCA requires Medicare 
providers to submit claims electronically and stipulates the exceptions 
that will and may be granted. However, we did have discretion in 
setting the conditions for exceptions, and believe that these 
exceptions reduce the burden relative to the burden that was imposed by 
ASCA without this implementing regulation.
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more in any 1 year). This is not a 
major rule. While additional costs will be imposed on those entities 
that do not meet any of the exception requirements and which must 
purchase the capability to bill Medicare electronically, we estimate 
the impact to be less than $100 million. Our estimates of the cost 
impact are based on the following analysis. (Note: The primary sources 
of data contained herein are the Medicare Program's ``Contractor 
Reporting of Operational Workload Data'' (CROWD), the ``2002 CMS 
Statistics'' Handbook, and the Year

[[Page 71017]]

2000 ``Statistics of U.S. Business'' issued by the U.S. Census Bureau.)
    The Administrative Simplification provisions under HIPAA establish 
the standards for electronic data transmission when transactions are 
conducted electronically, but they do not require physicians, 
practitioners, facilities, suppliers, and other health care providers 
to transmit claims and other transactions electronically. ASCA, 
however, does require Medicare physicians, practitioners, facilities, 
suppliers, and other health care providers (except those for which this 
rule provides for an exception) to submit claims electronically to 
Medicare. Consequently, Medicare claims must be submitted in the HIPAA-
prescribed electronic format. Thus, this rule will only have an impact 
on that group of entities that now submit paper claims to the Medicare 
Program and that do not fall into one of the excepted groups.
    Approximately 139 million paper claims were submitted to Medicare 
in FY 2002. This represents about 13.9 percent of all claims processed. 
Broken down between paper claims submitted to FIs and carriers, the 
number of paper claims in FY 2002 was 3.4 million and 136 million, 
respectively (source of data is CROWD).
    Over the past 4 years, Medicare's electronic media claims (EMC) 
rate has slowly grown at an average of 0.3 percent per year for FIs and 
0.9 percent per year for carriers (source of data is CROWD). We do not 
expect a change in this trend for the immediate future. Therefore, we 
assume that similar changes will continue for FY 2004, the first year 
of implementation of mandatory Medicare electronic media claims (EMC). 
Using workload growth projections from our FY 2004 budget submission to 
the Congress, we estimate the FY 2004 volume of paper claims impacted 
by the ASCA, factoring out Medicare's continuing trend of higher EMC 
rates, will be 2.5 million for Medicare FIs and 133.7 million for 
carriers. These volumes could be even smaller in FY 2004 due to the 
simultaneous implementation of HIPAA. However, the impact of HIPAA, 
coupled with Medicare's EMC trends, cannot be quantified, though the 
impact would only further reduce the cost/savings impact of ASCA and 
further support that a RIA is not needed.
    We do not know at this time how many providers will be excepted 
from the ASCA requirements, but projections have been made based upon 
the percentage of health care providers reported in the Census Bureau's 
``Year 2000 Statistics of U.S. Businesses,'' which includes data on the 
number of health care providers by type with fewer than 20 employees 
and the numbers of physician, practitioner, and supplier entities with 
fewer than 10 employees. The Census figures do not differentiate 
between part-time and full-time employees, and would be expected to 
result in inflated numbers on the whole when applied to Medicare, but 
that is acceptable for impact assessment purposes. The Census did not 
have a category for fewer than 25 employees; fewer than 20 employees 
was their closest statistic. Overall, the Census data would still be 
reliable indicators of the anticipated worse case scenario of the 
maximum number of Medicare providers, physicians, practitioners, and 
suppliers likely to be impacted by this regulation. The percentages of 
small providers, physicians, practitioners, and suppliers based on 
employment numbers for the universe of all U.S. providers, physicians, 
practitioners, and suppliers should be comparable to the percentage of 
the subset of those providers that bill the Medicare program.
    The Census figures did not include each of the same provider, 
physician, practitioner, and supplier breakouts as tracked by 
Medicare's statistics, but the Census figures did include the largest 
provider, physician, practitioner, and supplier types. The Census 
figures included 90 percent of all Medicare providers, physicians, 
practitioners, and suppliers by type. The provider types, tracked 
differently by the Census Bureau and us, include regional referral 
centers, Christian Science Sanitoria, rural health clinics, critical 
access facilities, and hospices. The ``2002 CMS Statistics'' directory 
(number of providers) and the 2000 Census data health care 
establishment totals (percentage of providers with less than 20 
employees) reported the following:

----------------------------------------------------------------------------------------------------------------
                                                                                   Percentage of
                                                                     Number of    providers with   Likely number
                          Provider type                              providers     less than 20      excepted
                                                                                     employees
----------------------------------------------------------------------------------------------------------------
Hospitals.......................................................           6,031            10.6             639
Home Health Agencies............................................           7,099            69.2           4,913
ESRD Facilities.................................................           3,991            16.6             663
Skilled Nursing Facilities......................................          14,841            25.7           3,814
                                                                 -----------------
    Totals......................................................          31,962            31.4          10,029
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                                                   Percentage of
                                                                     Number of    providers with   Likely number
           Type of physician, practitioner or supplier               providers     less than 10      excepted
                                                                                     employees
----------------------------------------------------------------------------------------------------------------
Clinical Labs...................................................         168,333            41.4          69,690
Ambulatory Surgical Centers.....................................           3,147            34.9           1,098
Physicians......................................................         567,412            70.6         400,593
All Other Practitioners.........................................         297,967            71.8         213,940
 
    Totals......................................................       1,036,859            66.1         685,321
----------------------------------------------------------------------------------------------------------------

    As there was a 10 percent difference between the Census provider, 
physician, practitioner, and supplier types and the Medicare provider 
types, due to differences in type of collection, the numbers impacted 
would need to be increased by 10 percent to account for the difference. 
Increased by 10 percent, approximately 11,032 (31.4 percent) of all 
Medicare providers, and 753,853 (66.1 percent) of all Medicare 
physicians, practitioners, and suppliers

[[Page 71018]]

could qualify for an exception of the electronic claim-filing 
requirement based on provider size, leaving approximately 24,126 
providers and 386,692 physicians, practitioners, and suppliers (a total 
of 410,818) potentially affected by the ASCA Medicare requirement 
nationally.
    Approximately 98 percent of providers, and 83 percent of 
physicians, practitioners, and suppliers already submit claims to 
Medicare electronically, and are expected to continue doing so, so the 
total impacted must be further reduced to determine the approximate 
number of current paper claim submitters that would likely be affected. 
It is reasonable to assume that the majority of the paper claims 
received by Medicare are submitted by smaller providers, physicians, 
practitioners, and suppliers. As a result, it would not be accurate to 
reduce the number of affected providers by the full 98 percent or 83 
percent. In the absence of reliable statistics to project the current 
source of all paper claims, however, the number of providers 
potentially affected by the mandatory Medicare electronic claim 
requirement will be conservatively estimated at a maximum of 50 percent 
of the entities that would not qualify for a waiver. This leaves 12,063 
providers and 193,346 physicians, practitioners, and suppliers (a total 
of 205,409) that would need to begin submitting claims to Medicare 
electronically.
    Statistics collected for PRA clearance of the Medicare paper claim 
forms and referenced in the ``Collection of Information Requirements'' 
section of this preamble indicate that, in the absence of a mandatory 
electronic claim requirement effective for FY 2004, 2.5 million paper 
claims are expected to be sent to Medicare intermediaries and 133.7 
million paper claims are to be sent to Medicare carriers.
    Prior to HIPAA, many Medicare providers used billing agents or 
clearinghouses to bill the Medicare program. Many providers, 
physicians, practitioners, and suppliers that submitted paper claims 
indicated anecdotally that they used paper as they would rather avoid 
the ``hassle'' of dealing with the multiple electronic claim formats 
required by payers, and the need to have staff keep abreast of the 
updates to those formats. HIPAA largely eliminates format differences 
among payers, but there will always be differences concerning use of 
certain ``situational'' segments and data elements in the formats. It 
is reasonable to assume that up to half (205,409 x 50 percent = 
102,704) of those entities that do not submit claims to Medicare 
electronically today would prefer to contract with a third party to 
deal with such differences on their behalf.
    A small sampling of Medicare contractors indicated an average cost 
of $0.30 per claim for billing agent and clearinghouse services. The 
total cost to physicians, practitioners, facilities, suppliers, and 
other health care providers to use a billing agent or clearinghouse 
should not be more than $7,055,895 (that is, $.30 x {the sum of 2.5 
million paper claims sent to intermediaries as estimated previously for 
FY 2004 multiplied by the 68.6 percent of providers that would not meet 
the exception criteria, plus 133.7 million paper claims estimated to be 
sent to carriers multiplied by the 33.9 percent of physicians, 
practitioners, and suppliers that would not meet the exception 
criteria{time} ).
    Finally, in regard to the balance of 102,704 (205,409 x 50 percent) 
providers, physicians, practitioners, and suppliers that would not be 
expected to meet the criteria to submit paper claims, we conservatively 
estimate that approximately 75 percent of these already own personal 
computers that are used to prepare the paper claim forms they currently 
submit to Medicare. Very few hand-written or manually typed claims are 
submitted to Medicare. Although many paper claim submitters have not 
used personal computers for electronic billing, they have used them for 
claims preparation, patient scheduling, and other aspects of their 
practice.
    We estimate that, at a maximum, the remaining total of 25,676 (25 
percent of 102,704) providers, physicians, practitioners, and suppliers 
will obtain personal computers to allow them to submit their claims 
directly to Medicare electronically. A recent review of computer costs 
in the marketplace indicated that personal computers sufficient to meet 
the mandatory electronic claim requirement could be obtained for $500 
to $1,000 for hardware (personal computer, monitor, printer, and 
modem). Billing software is available free or at low cost (less than 
$25 for shipping and handling) from Medicare. At the average rate of 
$750, it would cost $19.3 million to purchase 25,676 personal computer 
systems. More expensive equipment and peripherals could be used, but 
would not be necessary for basic compliance. Therefore, the total 
maximum cost should be no higher than $26.4 million ($7.1 million for 
users of clearinghouses or billing services, and $19.3 million for 
those that obtain personal computers).
    Following the HIPAA savings calculation used in the Transaction 
Rule, but projected to FY 2004 to account for inflation, a savings of 
$615 per provider could result in a total provider savings of 
approximately $15.8 million (that is, 25,676 times $615).
    We note that the Transaction Final Rule (65 FR 50353 through 50359) 
used a 10-year timeframe to capture the full extent of costs and 
savings that could be attributed to the use of the transactions adopted 
under HIPAA. Data from the 2000 edition of Faulkner and Gray's ``Health 
Data Directory,'' from a Workgroup for Electronic Data Interchange 
study report, and from the Department of Labor was used in those 
calculations to determine total claims in the health care industry, 
costs to use the transactions electronically, savings expected to be 
realized, the historical growth rate for claims overall as well as 
electronic claims, the percentage of electronic health care claims 
nationally in 2000, and the anticipated inflation rate for the 10-year 
period.
    Thus, we estimate that the total cost-plus savings would be 
approximately $42.2 million, which is less than the $100 million 
threshold for an RIA. Again, these total costs and savings attributable 
to ASCA could be even less if we were able to factor in the impact 
HIPAA may have on electronic billing growth.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
According to the Small Business Administration's (SBA's) data, 
approximately 95 percent of offices of physicians are considered small 
businesses (see the Small Business Administration's final rule titled 
``Small Business Size Standards, Health Care,'' published in the 
Federal Register on November 17, 2000, 65 FR 69432). Most 
practitioners, facilities, suppliers, and other providers are small 
entities either because of nonprofit status or because of having 
revenues of $6 million to $29 million or less in any 1 year. For 
purposes of the RFA, all physicians, practitioners, facilities, 
suppliers, and other health care providers that serve Medicare 
beneficiaries are considered to be small entities. However, as stated 
earlier, this rule in and of itself does not impose a regulatory 
burden. The ASCA mandates most aspects of this rule, in particular, the 
ASCA requires Medicare providers to submit claims electronically and 
stipulates the exceptions that will and may be granted. We did have 
discretion however, in setting conditions for exceptions, and believe 
these exceptions reduce the burden relative to the burden

[[Page 71019]]

that may have been imposed by ASCA without this implementing 
regulation. If this final rule has an average annual impact that 
exceeds 3 to 5 percent of total costs or revenues, it would be 
considered significant according to the Department of Health and Human 
Services (HHS) Guidelines. However, at a cost of $750 per computer and 
savings of $615 ($750-$615), we expect this to fall significantly below 
the revenue rule given by the HHS. Therefore, we have determined that 
this rule will not have a significant economic impact on a substantial 
number of small entities. Individuals and States are not considered 
small entities. Therefore, no regulatory relief options are considered.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. As indicated above, this 
rule could have an impact on those small rural hospitals that bill 
Medicare and that do not meet one of the exceptions. However, we do not 
believe the impact is significant since the cost of compliance is 
relatively small ($500 to $1,000) and small rural hospitals may be able 
to qualify for the small provider exception. Therefore, no regulatory 
impact analysis is required as the impact on small rural hospitals is 
not significant.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $100 million. This final rule will not have an impact of 
that size on State, local, or tribal governments or on the private 
sector. Instead, the primary impact on State, local, or tribal 
governments, or the private sector will be that entities that must 
begin billing Medicare electronically as a result of the ASCA are 
likely to use that capability to also bill other payers (such as State, 
local, or tribal governments and the private sector).
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it publishes a final rule that imposes 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism implications. This 
final rule will not have a substantial effect on State or local 
governments for the reasons noted in this section of this final rule.

B. Anticipated Effects

1. Effects on Beneficiaries, Physicians, Practitioners, Facilities, 
Suppliers, and Other Health Care Providers
    The anticipated effects on Medicare's beneficiaries will be that 
additional attention and services may be provided by their health care 
physician because, for example, electronic billing should reduce 
administrative paperwork. (This assertion was made by the medical 
community in numerous forums over the years, although documentation to 
this effect is not available.)
    The anticipated effects on the entities required to bill 
electronically will reduce or eliminate paper in their administrative 
operations, realizing increased efficiencies and indeterminable 
savings. These savings may be increased by the fact that the 
Administrative Simplification provisions of HIPAA mandate a standard 
transaction for electronic claim submissions, and this will facilitate 
electronic claims submissions to all health care payers. At this time, 
we do not have additional data to estimate those savings to Medicare 
physicians, practitioners, facilities, suppliers, and other healthcare 
providers. As previously stated, there will be a cost incurred by those 
entities that cannot satisfy one of the exceptions and would be 
required to bill Medicare in electronic form.
2. Effects on the Medicare and Medicaid Programs
    Implementation of this final rule will result in a savings to the 
Medicare program. If the FY 2004 projected paper claims submissions of 
136.2 million (HHS FY 2004 Budget submission to the Congress and 
estimated electronic media claims rate), are reduced by half and we 
assume a savings of $1.40 per claim as a result, the program could 
realize administrative savings of over $95 million per year. (Note: The 
$1.40 per claim savings is our estimate of savings based upon a 1990 
Industrial Engineering Study, contracted by CMS (then HCFA). The study 
documented that FI paper claims cost about $3.30 more to process than 
electronic claims and, similarly, carrier paper claims cost about $1.00 
more to process than electronic claims. Weighing these differences by 
the 2004 workloads and combining them yields the $1.40 estimated per 
claim savings.)
    We might expect similar types of savings for the States, which 
administer the Medicaid Program. That is, Medicare providers who become 
electronic billers due to ASCA may decide to begin billing Medicaid 
electronically as well. However, this would depend on which of the 
affected Medicare physicians, practitioners, facilities, suppliers, and 
other healthcare providers also bill Medicaid. Again, the fact that the 
Administrative Simplification provisions of HIPAA mandate a standard 
transaction for electronic claim submissions will facilitate electronic 
claims submissions to all health care payers.

C. Alternatives Considered

    Section 3 of the ASCA mandated that all Medicare claims on or after 
October 16, 2003, be submitted electronically. Since the statute 
requires the electronic submission of claims, no alternatives to 
electronic submission were considered. However, we are interpreting the 
statutory provisions of the ASCA to allow for reasonable and limited 
exceptions to the electronic submission requirement.

D. Conclusion

    As described above in section VI.A., this final rule establishes 
the requirements for implementing the statutory provisions under 
section 3 of the ASCA. The statute requires, with few exceptions, that 
physicians, practitioners, facilities, suppliers, and other health care 
providers that bill Medicare do so electronically. Coupled with the 
electronic standard transaction requirements under HIPAA, this rule 
facilitates greater administrative efficiencies for the Medicare 
program as well as for those that bill Medicare. There will be a cost 
incurred for those entities that are unable to meet one of the 
statutory exceptions, but we expect these initial costs to be offset by 
increased efficiencies and lower ongoing costs attributable to Medicare 
claims processing.
    In accordance with the provisions of Executive Order 12866, the 
Office of Management and Budget reviewed this regulation.

List of Subjects in 42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare, Reporting and recordkeeping requirements


0
For the reasons set forth in the preamble, the interim rule amending 42 
CFR part 424 that CMS published on August 15, 2003 (68 FR 48805) is 
adopted as a final rule with the following amendments:

[[Page 71020]]

PART 424--CONDITIONS FOR MEDICARE PAYMENT

0
1. The authority citation for part 424 continues to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).


0
2. Amend Sec.  424.32 by--
0
A. Revising paragraphs (d)(1)(v); (d)(1)(vi); (d)(3)(ii), and (d)(4) 
introductory text.
0
B. Redesignating (d)(4)(iii) as paragraph (d)(4)(v).
0
C. Adding paragraphs (d)(4)(iii) and (iv).
    The revisions and additions read as follows:


Sec.  424.32  Basic requirements for all claims.

    (d) * * *
    (1) * * *
    (v) Initial Medicare claim means a claim submitted to Medicare for 
payment under Part A or Part B of the Medicare Program under title 
XVIII of the Act for initial processing, including claims sent to 
Medicare for the first time for secondary payment purposes. Initial 
Medicare claim excludes any adjustment or appeal of a previously 
submitted claim, and claims submitted for payment under Part C of the 
Medicare program under title XVIII of the Act.
    (vi) Physician, practitioner, facility, or supplier is a Medicare 
provider or supplier other than a provider of services.
* * * * *
    (3) * * *
    (i) * * *
    (ii) The entity submitting the claim is a small provider of 
services or small supplier.
    (4) Unusual cases. The Secretary may waive the requirement of 
paragraph (d)(2) of this section in unusual cases as the Secretary 
finds appropriate. Unusual cases are deemed to exist in the following 
situations:
* * * * *
    (iii) The entity submitting the claim submits fewer than 10 claims 
to Medicare per month, on average.
    (iv) The entity submitting the claim only furnishes services 
outside of the U.S. territory.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.774, 
Medicare--Supplementary Medical Insurance Program)

    Dated: May 2, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: August 15, 2005.
Michael O. Leavitt,
Secretary.

    Editorial Note: This document was received at the Federal 
Register on November 17, 2005.

[FR Doc. 05-23080 Filed 11-23-05; 8:45 am]
BILLING CODE 4120-01-P


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