[Federal Register: May 7, 1998 (Volume 63, Number 88)]
[Proposed Rules]
[Page 25271-25320]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07my98-25]

[[Page 25271]]

_______________________________________________________________________

Part II

Department of Health and Human Services

_______________________________________________________________________

Health Care Financing Administration

_______________________________________________________________________

45 CFR Part 142

Health Insurance Reform: Standards for Electronic Transactions;
National Standard Health Care Provider Identifier; Proposed Rules

[[Page 25272]]

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of the Secretary

45 CFR Part 142

[HCFA-0149-P]
RIN 0938-AI58


Health Insurance Reform: Standards for Electronic Transactions

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This rule proposes standards for eight electronic transactions
and for code sets to be used in those transactions. It also proposes
requirements concerning the use of these standards by health plans,
health care clearinghouses, and health care providers.
    The use of these standard transactions and code sets would improve
the Medicare and Medicaid programs and other Federal health programs
and private health programs, and the effectiveness and efficiency of
the health care industry in general, by simplifying the administration
of the system and enabling the efficient electronic transmission of
certain health information. It would implement some of the requirements
of Administrative Simplification subtitle of the Health Insurance
Portability and Accountability Act of 1996.

DATES: Comments will be considered if we receive them at the
appropriate address, as provided below, no later than 5 p.m. on July 6,
1998.

ADDRESSES: Mail written comments (1 original and 3 copies) to the
following address:

Health Care Financing Administration, U.S. Department of Health and
Human Services, Attention: HCFA-0149-P, P.O. Box 31850, Baltimore, MD
21207-8850.

    If you prefer, you may deliver your written comments (1 original
and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201,
    or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    Comments may also be submitted electronically to the following e-
mail address: transact@osaspe.dhhs.gov. E-mail comments should include
the full name and address of the sender and must be submitted to the
referenced address to be considered. All comments should be
incorporated in the e-mail message because we may not be able to access
attachments. Electronically submitted comments will be available for
public inspection at the Independence Avenue address below.
    Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code HCFA-0149-P and the specific section of this proposed
rule. Comments received timely will be available for public inspection
as they are received, generally beginning approximately 3 weeks after
publication of a document, in Room 309-G of the Department's offices at
200 Independence Avenue, SW., Washington, DC, on Monday through Friday
of each week from 8:30 a.m. to 5 p.m. (phone: (202) 690-7890).
Electronic and legible written comments will also be posted, along with
this proposed rule, at the following web site:
<http://aspe.hhs.gov/admnsimp>.
    Copies: To order copies of the Federal Register containing this
document, send your request to: New Orders, Superintendent of
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date
of the issue requested and enclose a check or money order payable to
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number and expiration date. Credit card orders can also be placed by
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $8. As an alternative, you can view and
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libraries throughout the country that receive the Federal Register.
    This Federal Register document is also available from the Federal
Register online database through GPO Access, a service of the U.S.
Government Printing Office. Free public access is available on a Wide
Area Information Server (WAIS) through the Internet and via
asynchronous dial-in. Internet users can access the database by using
the World Wide Web; the Superintendent of Documents home page address
is
http://www.access.gpo.gov/su__docs/, by using local WAIS client
software, or by telnet to swais.access.gpo.gov, then login as guest (no
password required). Dial-in users should use communications software
and modem to call 202-512-1661; type swais, then login as guest (no
password required).

FOR FURTHER INFORMATION CONTACT:

Pat Brooks, (410) 786-5318, for medical diagnosis, procedure, and
clinical code sets.
Joy Glass, (410) 786-6125, for the following transactions: Health
claims or equivalent encounter information; health care payment and
remittance advice; coordination of benefits; and health care claim
status.
Marilyn Abramovitz, (410) 786-5939, for the following transactions:
Enrollment and disenrollment in a health plan; eligibility for a health
plan; health plan premium payments; and referral certification and
authorization.

SUPPLEMENTARY INFORMATION:

I. Background

[Please label written or e-mailed comments about this section with
the subject: Background]

    Electronic data interchange (EDI) is the electronic transfer of
information, such as electronic media health care claims, in a standard
format between trading partners. EDI allows entities within the health
care system to exchange medical, billing, and other information and
process transactions in a manner which is fast and cost effective. With
EDI there is a substantial reduction in handling and process time, and
the risk of lost paper documents is eliminated. EDI can eliminate the
inefficiencies of handling paper documents, which will significantly
reduce the administrative burden, lower operating costs and improve
overall data quality.
    The health care industry recognizes the benefits of EDI and many
entities in that industry have developed proprietary EDI formats.
Currently, there are about 400 formats for electronic health care
claims being used in the United States. The lack of standardization
makes it difficult to develop software, and the efficiencies and
savings for health care providers and health plans that could be
realized if formats were standardized are diminished.
    Adopting national standard EDI formats for health care transactions
would greatly decrease the burden on health care providers and their
billing services, as would standardized data content. Standard EDI
format allows data interchange using a common interchange structure,
thus eliminating the need for users to reprogram their data processing
systems for multiple formats. Standardization of the data content
within the interchange structure involves: (1) Uniform definitions of
the data elements that will be exchanged in each type of electronic
transaction, and

[[Page 25273]]

(2) for some data elements, identification of the specific codes or
values that are valid for each data element. The code sets needed for
EDI in the health care industry include large coding and classification
systems for medical diagnoses, procedures, and drugs, as well as
smaller sets of codes for such items as types of facility, types of
currency, types of units, and specified State within the United States.
Standardized data content is essential to accurate and efficient EDI
between the many producers and users of administrative health data
transactions.

A. Legislation

    The Congress included provisions to address the need for electronic
transactions and other administrative simplification issues in the
Health Insurance Portability and Accountability Act of 1996 (HIPAA),
Public Law 104-191, which was enacted on August 21, 1996. Through
subtitle F of title II of that law, the Congress added to title XI of
the Social Security Act a new part C, entitled ``Administrative
Simplification.'' (Public Law 104-191 affects several titles in the
United States Code. Hereafter, we refer to the Social Security Act as
the Act; we refer to the other laws cited in this document by their
names.) The purpose of this part is to improve the Medicare and
Medicaid programs in particular and the efficiency and effectiveness of
the health care system in general by encouraging the development of a
health information system through the establishment of standards and
requirements to facilitate the electronic transmission of certain
health information.
    Part C of title XI consists of sections 1171 through 1179 of the
Act. These sections define various terms and impose several
requirements on HHS, health plans, health care clearinghouses, and
certain health care providers concerning the electronic transmission of
health information.
    The first section, section 1171 of the Act, establishes definitions
for purposes of part C of title XI for the following terms: code set,
health care clearinghouse, health care provider, health information,
health plan, individually identifiable health information, standard,
and standard setting organization.
    Section 1172 of the Act makes any standard adopted under part C
applicable to (1) all health plans, (2) all health care clearinghouses,
and (3) any health care providers that transmit any health information
in electronic form in connection with transactions referred to in
section 1173(a)(1) of the Act.
    This section also contains requirements concerning standard
setting.
    <bullet> The Secretary may adopt a standard developed, adopted, or
modified by a standard setting organization (that is, an organization
accredited by the American National Standards Institute (ANSI)) that
has consulted with the National Uniform Billing Committee (NUBC), the
National Uniform Claim Committee (NUCC), the Workgroup for Electronic
Data Interchange (WEDI), and the American Dental Association (ADA).
    <bullet> The Secretary may also adopt a standard other than one
established by a standard setting organization, if the different
standard will reduce costs for health care providers and health plans,
the different standard is promulgated through negotiated rulemaking
procedures, and the Secretary consults with each of the above-named
groups.
    <bullet> If no standard has been adopted by any standard setting
organization, the Secretary is to rely on the recommendations of the
National Committee on Vital and Health Statistics (NCVHS) and consult
with the above-named groups.
    In complying with the requirements of part C of title XI, the
Secretary must rely on the recommendations of the NCVHS, consult with
appropriate State, Federal, and private agencies or organizations, and
publish the recommendations of the NCVHS in the Federal Register.
    Paragraph (a) of section 1173 of the Act requires that the
Secretary adopt standards for financial and administrative
transactions, and data elements for those transactions, to enable
health information to be exchanged electronically. Standards are
required for the following transactions: health claims, health
encounter information, health claims attachments, health plan
enrollments and disenrollments, health plan eligibility, health care
payment and remittance advice, health plan premium payments, first
report of injury, health claim status, and referral certification and
authorization. In addition, the Secretary is required to adopt
standards for any other financial and administrative transactions that
are determined to be appropriate by the Secretary.
    Paragraph (b) of section 1173 of the Act requires the Secretary to
adopt standards for unique health identifiers for all individuals,
employers, health plans, and health care providers and requires further
that the adopted standards specify for what purposes unique health
identifiers may be used.
    Paragraphs (c) through (f) of section 1173 of the Act require the
Secretary to establish standards for code sets for each data element
for each health care transaction listed above, security standards for
health care information systems, standards for electronic signatures
(established together with the Secretary of Commerce), and standards
for the transmission of data elements needed for the coordination of
benefits and sequential processing of claims. Compliance with
electronic signature standards will be deemed to satisfy both State and
Federal requirements for written signatures with respect to the
transactions listed in paragraph (a) of section 1173 of the Act.
    In section 1174 of the Act, the Secretary is required to adopt
standards for all of the above transactions, except claims attachments,
within 24 months after enactment. The standards for claims attachments
must be adopted within 30 months after enactment. Generally, after a
standard is established it cannot be changed during the first year
except for changes that are necessary to permit compliance with the
standard. Modifications to any of these standards may be made after the
first year, but not more frequently than once every 12 months. The
Secretary must also ensure that procedures exist for the routine
maintenance, testing, enhancement, and expansion of code sets and that
there are crosswalks from prior versions.
    Section 1175 of the Act prohibits health plans from refusing to
process or delaying the processing of a transaction that is presented
in standard format. The Act's requirements are not limited to health
plans, however; instead, each person to whom a standard or
implementation specification applies is required to comply with the
standard within 24 months (or 36 months for small health plans) of its
adoption. A plan or person may, of course, comply voluntarily before
the effective date. A person may comply by using a health care
clearinghouse to transmit or receive the standard transactions.
Compliance with modifications to standards or implementation
specifications must be accomplished by a date designated by the
Secretary. This date may not be earlier than 180 days after the notice
of change.
    Section 1176 of the Act establishes a civil monetary penalty for
violation of the provisions in part C of title XI of the Act, subject
to several limitations. Penalties may not be more than $100 per person
per violation and not more than $25,000 per person per violation of a
single standard for a calendar year. The procedural provisions in
section 1128A of the Act, ``Civil Monetary Penalties,'' are applicable.

[[Page 25274]]

    Section 1177 of the Act establishes penalties for a knowing misuse
of unique health identifiers and individually identifiable health
information: (1) A fine of not more than $50,000 and/or imprisonment of
not more than 1 year; (2) if misuse is ``under false pretenses,'' a
fine of not more than $100,000 and/or imprisonment of not more than 5
years; and (3) if misuse is with intent to sell, transfer, or use
individually identifiable health information for commercial advantage,
personal gain, or malicious harm, a fine of not more than $250,000 and/
or imprisonment of not more than 10 years.
    Under section 1178 of the Act, the provisions of part C of title XI
of the Act, as well as any standards established under them, supersede
any State law that is contrary to them. However, the Secretary may, for
statutorily specified reasons, waive this provision.
    Finally, section 1179 of the Act makes the above provisions
inapplicable to financial institutions or anyone acting on behalf of a
financial institution when ``authorizing, processing, clearing,
settling, billing, transferring, reconciling, or collecting payments
for a financial institution''.
    (Concerning this last provision, the conference report, in its
discussion on section 1178, states:

    ``The conferees do not intend to exclude the activities of
financial institutions or their contractors from compliance with the
standards adopted under this part if such activities would be
subject to this part. However, conferees intend that this part does
not apply to use or disclosure of information when an individual
utilizes a payment system to make a payment for, or related to,
health plan premiums or health care. For example, the exchange of
information between participants in a credit card system in
connection with processing a credit card payment for health care
would not be covered by this part. Similarly sending a checking
account statement to an account holder who uses a credit or debit
card to pay for health care services, would not be covered by this
part. However, this part does apply if a company clears health care
claims, the health care claims activities remain subject to the
requirements of this part.'')

(H.R. Rep. No. 736, 104th Cong., 2nd Sess. 268-269 (1996))

B. Process for Developing National Standards

    The Secretary has formulated a 5-part strategy for developing and
implementing the standards mandated under part C of title XI of the
Act:
    1. To ensure necessary interagency coordination and required
interaction with other Federal departments and the private sector,
establish interdepartmental implementation teams to identify and assess
potential standards for adoption. The subject matter of the teams
includes claims/encounters, identifiers, enrollment/eligibility,
systems security, and medical coding/classification. Another team
addresses cross-cutting issues and coordinates the subject matter
teams. The teams consult with external groups such as the NCVHS''
Workgroup on Data Standards, WEDI, ANSI's Healthcare Informatics
Standards Board (HISB), the NUCC, the NUBC, and the ADA. The teams are
charged with developing regulations and other necessary documents and
making recommendations for the various standards to the HHS'' Data
Council through its Committee on Health Data Standards. (The HHS Data
Council is the focal point for consideration of data policy issues. It
reports directly to the Secretary and advises the Secretary on data
standards and privacy issues.)
    2. Develop recommendations for standards to be adopted.
    3. Publish proposed rules in the Federal Register describing the
standards. Each proposed rule provides the public with a 60-day comment
period.
    4. Analyze public comments and publish the final rules in the
Federal Register.
    5. Distribute standards and coordinate preparation and distribution
of implementation guides.
    This strategy affords many opportunities for involvement of
interested and affected parties in standards development and adoption
by enabling them to:
    <bullet> Participate with standards setting organizations.
    <bullet> Provide written input to the NCVHS.
    <bullet> Provide written input to the Secretary of the HHS.
    <bullet> Provide testimony at NCVHS' public meetings.
    <bullet> Comment on the proposed rules for each of the proposed
standards.
    <bullet> Invite HHS staff to meetings with public and private
sector organizations or meet directly with senior HHS staff involved in
the implementation process.
    The implementation teams charged with reviewing standards for
designation as required national standards under the statute have
defined, with significant input from the health care industry, a set of
principles for guiding choices for the standards to be adopted by the
Secretary. These principles are based on direct specifications in HIPAA
and the purpose of the law, principles that support the regulatory
philosophy set forth in Executive Order 12866 and the Paperwork
Reduction Act of 1995. To be designated as an HIPAA standard, each
standard should:
    1. Improve the efficiency and effectiveness of the health care
system by leading to cost reductions for or improvements in benefits
from electronic health care transactions.
    2. Meet the needs of the health data standards user community,
particularly health care providers, health plans, and health care
clearinghouses.
    3. Be consistent and uniform with the other HIPAA standards--their
data element definitions and codes and their privacy and security
requirements--and, secondarily, with other private and public sector
health data standards.
    4. Have low additional development and implementation costs
relative to the benefits of using the standard.
    5. Be supported by an ANSI-accredited standards developing
organization or other private or public organization that will ensure
continuity and efficient updating of the standard over time.
    6. Have timely development, testing, implementation, and updating
procedures to achieve administrative simplification benefits faster.
    7. Be technologically independent of the computer platforms and
transmission protocols used in electronic health transactions, except
when they are explicitly part of the standard.
    8. Be precise and unambiguous, but as simple as possible.
    9. Keep data collection and paperwork burdens on users as low as is
feasible.
    10. Incorporate flexibility to adapt more easily to changes in the
health care infrastructure (such as new services, organizations, and
provider types) and information technology.
    A master data dictionary providing for common data definitions
across the standards selected for implementation under HIPAA will be
developed and maintained. We intend for the data element definitions to
be precise, unambiguous, and consistently applied. The transaction-
specific reports and general reports from the master data dictionary
will be readily available to the public. At a minimum, the information
presented will include data element names, definitions, and appropriate
references to the transactions where they are used.

C. ANSI-Accredited Standards Committee Standard Setting Process

    ANSI chartered the X12 Accredited Standards Committee (ASC) a
number of years ago to design national electronic

[[Page 25275]]

standards for a wide range of business applications. A separate ASC
X12N Subcommittee was in turn chartered to develop electronic standards
specific to the insurance industry, including health care insurance.
Volunteer members of the ASC X12N Subcommittee, including health care
providers, health plans, bankers, and vendors involved in software
development/billing/transmission of health care data and other business
aspects of health care administrative activities, worked to develop
standards for electronic health care transactions. ANSI accredits
standards setting organizations to ensure that the procedures used meet
certain due process requirements and that the process is voluntary,
open, and based on obtaining consensus. Both Accredited Standards
Committee (ASC) X12 and the National Council for Prescription Drug
Programs (NCPDP) are ANSI-accredited standards developers.
    Each of the two standards setting organizations has written
procedures for the establishment of, and revisions to, established
standards. All of the X12 Subcommittee N: Insurance (to which we refer
hereafter as X12N) standard implementations mentioned in this
regulation are ASC X12 standards and are published under the
designation ``Draft Standard for Trial Use (DSTU)''. These standards
are fully accepted and published national standards for use in
electronic data exchanges. The DSTU designation is used to distinguish
ASC X12 standards from those standards that have been forwarded to the
American National Standards Institute for acceptance as American
National Standards. ASC X12 creates a family of standards that are
related and therefore only forwards standards to ANSI every five years.
Although the official designation of X12 standards includes the word
``Draft'', these standards are final, published national standards.
    The ASC X12 development process involves negotiation and consensus
building, resulting in approval and publication of DSTU and American
National Standards. The ASC X12 committee maintains current standards,
proposes new standards and embraces new ideas.
    The ASC X12N Subcommittee is the decision-making body responsible
for obtaining consensus, which is necessary for approval of American
National Standards in the field of insurance. The ASC X12N Subcommittee
has the responsibility for specific standards development and standards
maintenance activities, but its work must be ratified by the membership
of ASC X12 as a whole.
    Members of the ASC X12 committee are eligible to vote on ASC X12N
issues. ASC X12N votes technical issues by letter ballot.
Administrative issues may be voted by letter ballot or at general
sessions during ASC X12N meetings.
    The NCPDP Telecommunication Standard 3.2 specifies the rules
regarding the creation of a new version and release. The NCPDP
standards development process involves additions of new data elements
or additional values to existing data elements. Updated documentation
of existing or new data elements and a new version is created with
changes to: (1) The definition of an existing data element, (2)
deletions of values of an existing data element, (3) deletions of
existing data elements, (4) major structural changes to the formats,
(5) changes in the size of data elements, or (6) changes in the formats
of data elements.
    These rules were confirmed by the Board of Trustees in June, 1995
and ensure that the health plan explicitly knows which Data Dictionary
to apply to the transaction when processing the claim. Likewise, the
pharmacy needs to know what are the acceptable fields in the response
returned from the health plan.
    In addition, the Telecommunication Standard Format Version/Release
changes anytime there is an approved change to the Professional
Pharmacy Services (PPS) standard, Drug Utilization Review (DUR)
standard, Billing Unit standard or to the data elements for the claim
itself.
    All NCPDP implementation guides must be reviewed and approved by
the Maintenance and Control Work Group prior to release to the
membership. All proposed standards will have an implementation guide
developed and approved prior to the proposed standard being balloted.
Once balloted, the originating committee may work with individual
disapproval votes to accommodate their concerns and convert their votes
to approval. If the changes made to accommodate disapproval votes are
considered substantial, then the item under consideration must be
balloted again.
    After the originating group has reviewed all comments received
during the letter ballot period, the Co-Chairs of the originating group
make a written request to the Board of Trustees for the ballot results
collected from the Standardization Co-chairs and the Board of
Directors. The Board of Trustees retains final authority over the
certification of these ballot results.
    Two types of code sets are required for data elements in ASC X12N
and NCPDP health transaction standards: (1) Large coding and
classification systems for medical data elements (for example,
diagnoses, procedures, and drugs), and (2) smaller sets of codes for
data elements such as type of facility, type of units, and specified
State within address fields. Federal agencies (NCHS, HCFA, FDA) and
some private organizations (the AMA and the ADA) have developed and
maintained standards for large medical data code sets. In the past,
these code sets have been mandated for use in some Federal and State
programs, such as Medicare and Medicaid, and the ASC X12N and NCPDP
standards setting organizations have adopted these code sets for use in
their standards. For the smaller sets of codes needed for various
transaction data elements they have designated other de facto
standards, such as the 2-character state abbreviations used by the U.S.
Postal Service, or developed code sets specifically for their
transaction standards.
    This proposed rule would establish the standards for code sets to
be used in seven of the transactions specified in section 1173(a)(2) of
the Act, and for a transaction for coordination of benefits. We
anticipate publishing several regulations documents altogether to
promulgate the various standards required under the HIPAA. The other
proposed regulations cover security standards, the seventh and ninth
transactions specified in the Act (first report of injury and claims
attachments), and the four identifiers.

II. Provisions of the Proposed Regulations

[Please label written comments or e-mailed comments about this
section with the subject: Provisions]

    In this proposed rule, we propose standards for eight transactions
and for code sets to be used in the transactions. We also propose
requirements concerning the implementation of these standards. This
proposed rule would set forth requirements that health plans, health
care clearinghouses, and certain health care providers would have to
meet concerning the use of these standards.
    We propose to add a new part to title 45 of the Code of Federal
Regulations for health plans, health care providers, and health care
clearinghouses in general. The new part would be part 142 of title 45
and would be titled ``Administrative Requirements.'' Subparts J through
R would contain the provisions specifically concerning the standards
proposed in this rule.

[[Page 25276]]

A. Applicability

    Section 262 of HIPAA applies to all health plans, all health care
clearinghouses, and any health care providers that transmit any health
information in electronic form in connection with transactions referred
to in section 1173(a)(1) of the Act. Our proposed rules (at 45 CFR
142.102) would apply to the health plans and health care clearinghouses
as well, but we would clarify the statutory language in our regulations
for health care providers: we would have the regulations apply to any
health care provider only when electronically transmitting any of the
transactions to which section 1173(a)(1) of the Act refers.
    Electronic transmissions would include transmissions using all
media, even when the transmission is physically moved from one location
to another using magnetic tape, disk, or CD media. Transmissions over
the Internet (wide-open), Extranet (using Internet technology to link a
business with information only accessible to collaborating parties),
leased lines, dial-up lines, and private networks are all included.
Telephone voice response and ``faxback'' systems would not be included.
    Our regulations would apply to health care clearinghouses when
transmitting transactions to, and receiving transactions from, any
health care provider or health plan that transmits and receives
standard transactions (as defined under ``transaction'') and at all
times when transmitting to or receiving transactions from another
health care clearinghouse.
    Entities that offer on-line interactive transmission must comply
with the standards. The HyperText Markup Language (HTML) interaction
between a server and a browser by which the data elements of a
transaction are solicited from a user would not have to use the
standards, although the data content must be equal to that required for
the standard. Once the data elements are assembled into a transaction
by the server, the transmitted transaction would have to comply with
the standards.
    The law would apply to each health care provider when transmitting
or receiving any of the specified electronic transactions. Transactions
for certain services that are not normally considered health care
services, but which may be covered by some health plans, would not be
subject to the standards proposed in this rule. These services would
include, but not be limited to: nonemergency transportation, physical
alterations to living quarters for the purpose of accommodating
disabilities, and case management. Other services may be added to this
list at the discretion of the Secretary.
    We invite comments on this list and ask for identification of other
types of services that may fall into this category. We will publish a
complete list of these services and a process to request an exemption
in the final rule.
    The law applies to health plans for all transactions.
    Section 142.104 would contain the following provisions (from
section 1175 of the Act):
    If a person conducts a transaction (as defined in Sec. 142.103)
with a health plan as a standard transaction, the following apply:
    (1) The health plan may not refuse to conduct the transaction as a
standard transaction.
    (2) The health plan may not delay the transaction or otherwise
adversely affect, or attempt to adversely affect, the person or the
transaction on the ground that the transaction is a standard
transaction.
    (3) The information transmitted and received in connection with the
transaction must be in the form of standard data elements of health
information.
    As a further requirement, we would provide that a health plan that
conducts transactions through an agent assure that the agent meets all
the requirements of part 142 that apply to the health plan.
    Section 142.105 would state that a person or other entity may meet
the requirements of Sec. 142.104 by either--
    (1) Transmitting and receiving standard data elements, or
    (2) Submitting nonstandard data elements to a health care
clearinghouse for processing into standard data elements and
transmission by the health care clearinghouse and receiving standard
data elements through the health care clearinghouse.
    Health care clearinghouses would be able to accept nonstandard
transactions for the sole purpose of translating them into standard
transactions for sending customers and would be able to accept standard
transactions and translate them into nonstandard formats for receiving
customers. We would state in Sec. 142.105 that the transmission of
nonstandard transactions, under contract, between a health plan or a
health care provider and a health care clearinghouse would not violate
the law.
    Transmissions within a corporate entity would not be required to
comply with the standards. A hospital that is wholly owned by a managed
care company would not have to use the standards to pass encounter
information back to the home office, but it would have to use the
standard claims transaction to submit a claim to another health plan.
Another example might be transactions within Federal agencies and their
contractors and between State agencies within the same State. For
example, Medicare enters into contracts with insurance companies and
common working file sites that process Medicare claims using government
furnished software. There is constant communication, on a private
network, between HCFA Central Office and the Medicare carriers,
intermediaries and common working file sites. This communication may
continue in nonstandard mode. However, these contractors must comply
with the standards when exchanging any of the transactions covered by
HIPAA with an entity outside these ``corporate'' boundaries.
    Although there are situations in which the use of the standards is
not required (for example, health care providers may continue to submit
paper claims and employers are not required to use any of the standard
transactions), we stress that a standard may be used voluntarily in any
situation in which it is not required.

B. Definitions

    Section 1171 of the Act defines several terms and our proposed
rules would, for the most part, simply restate the law. The terms that
we are defining in this proposed rule follow:
    1. ASC X12 stands for the Accredited Standards Committee chartered
by the American National Standards Institute to design national
electronic standards for a wide range of business applications.
    2. ASC X12N stands for the ASC X12 subcommittee chartered to
develop electronic standards specific to the insurance industry.
    3. Code set.
    We would define ``code set'' as section 1171(1) of the Act does:
``code set'' means any set of codes used for encoding data elements,
such as tables of terms, medical concepts, medical diagnosis codes, or
medical procedure codes.
    4. Health care clearinghouse.
    We would define ``health care clearinghouse'' as section 1171(2) of
the Act does, but we are adding a further, clarifying sentence. The
statute defines a ``health care clearinghouse'' as a public or private
entity that processes or facilitates the processing of nonstandard data
elements of health information into standard data elements. We would

[[Page 25277]]

further explain that such an entity is one that currently receives
health care transactions from health care providers and other entities,
translates the data from a given format into one acceptable to the
intended recipient, and forwards the processed transaction to
appropriate health plans and other health care clearinghouses, as
necessary, for further action.
    There are currently a number of private clearinghouses that perform
these functions for health care providers. For purposes of this rule,
we would consider billing services, repricing companies, community
health management information systems or community health information
systems, value-added networks, and switches performing these functions
to be health care clearinghouses.
    5. Health care provider.
    As defined by section 1171(3) of the Act, a ``health care
provider'' is a provider of services as defined in section 1861(u) of
the Act, a provider of medical or other health services as defined in
section 1861(s) of the Act, and any other person who furnishes health
care services or supplies. Our regulations would define ``health care
provider'' as the statute does and clarify that the definition of a
health care provider is limited to those entities that furnish, or bill
and are paid for, health care services in the normal course of
business.
    For a more detailed discussion of the definition of health care
provider, we refer the reader to our proposed rule, HCFA-0045-P,
Standard Health Care Provider Identifier, published elsewhere in this
Federal Register.
    6. Health information.
    ``Health information,'' as defined in section 1171 of the Act,
means any information, whether oral or recorded in any form or medium,
that--
    <bullet> Is created or received by a health care provider, health
plan, public health authority, employer, life insurer, school or
university, or health care clearinghouse; and
    <bullet> Relates to the past, present, or future physical or mental
health or condition of an individual, the provision of health care to
an individual, or the past, present, or future payment for the
provision of health care to an individual.
    We propose the same definition for our regulations.
    7. Health plan.
    We propose that a ``health plan'' be defined essentially as section
1171 of the Act defines it. Section 1171 of the Act cross refers to
definitions in section 2791 of the Public Health Service Act (as added
by Public Law 104-191, 42 U.S.C. 300gg-91); we would incorporate those
definitions as currently stated into our proposed definitions for the
convenience of the public. We note that many of these terms are defined
in other statutes, such as the Employee Retirement Income Security Act
of 1974 (ERISA), Public Law 93-406, 29 U.S.C. 1002(7) and the Public
Health Service Act. Our definitions are based on the roles of plans in
conducting administrative transactions, and any differences should not
be construed to affect other statutes.
    For purposes of implementing the provisions of administrative
simplification, a ``health plan'' would be an individual or group
health plan that provides, or pays the cost of, medical care. This
definition includes, but is not limited to, the 13 types of plans
listed in the statute. On the other hand, plans such as property and
casualty insurance plans and workers compensation plans, which may pay
health care costs in the course of administering nonhealth care
benefits, are not considered to be health plans in the proposed
definition of health plan. Of course, these plans may voluntarily adopt
these standards for their own business needs. At some future time, the
Congress may choose to expressly include some or all of these plans in
the list of health plans that must comply with the standards.
    Health plans often carry out their business functions through
agents, such as plan administrators (including third party
administrators), entities that are under ``administrative services
only'' (ASO) contracts, claims processors, and fiscal agents. These
agents may or may not be health plans in their own right; for example,
a health plan may act as another health plan's agent as another line of
business. As stated earlier, a health plan that conducts HIPAA
transactions through an agent is required to assure that the agent
meets all HIPAA requirements that apply to the plan itself.
    ``Health plan'' includes the following, singly or in combination:
    a. ``Group health plan'' (as currently defined by section 2791(a)
of the Public Health Service Act). A group health plan is a plan that
has 50 or more participants (as the term ``participant'' is currently
defined by section 3(7) of ERISA) or is administered by an entity other
than the employer that established and maintains the plan. This
definition includes both insured and self-insured plans. We define
``participant'' separately below.
    Section 2791(a)(1) of the Public Health Service Act defines ``group
health plan'' as an employee welfare benefit plan (as currently defined
in section 3(1) of ERISA) to the extent that the plan provides medical
care, including items and services paid for as medical care, to
employees or their dependents directly or through insurance, or
otherwise.
    It should be noted that group health plans that have fewer than 50
participants and that are administered by the employer would be
excluded from this definition and would not be subject to the
administrative simplification provisions of HIPAA.
    b. ``Health insurance issuer'' (as currently defined by section
2791(b) of the Public Health Service Act).
    Section 2791(b)(2) of the Public Health Service Act currently
defines a ``health insurance issuer'' as an insurance company,
insurance service, or insurance organization that is licensed to engage
in the business of insurance in a State and is subject to State law
that regulates insurance.
    c. ``Health maintenance organization'' (as currently defined by
section 2791(b) of the Public Health Service Act).
    Section 2791(b) of the Public Health Service Act currently defines
a ``health maintenance organization'' as a Federally qualified health
maintenance organization, an organization recognized as such under
State law, or a similar organization regulated for solvency under State
law in the same manner and to the same extent as such a health
maintenance organization. These organizations may include preferred
provider organizations, provider sponsored organizations, independent
practice associations, competitive medical plans, exclusive provider
organizations, and foundations for medical care.
    d. Part A or Part B of the Medicare program (title XVIII of the
Act).
    e. The Medicaid program (title XIX of the Act).
    f. A ``Medicare supplemental policy'' as defined under section
1882(g)(1) of the Act.
    Section 1882(g)(1) of the Act defines a ``Medicare supplemental
policy'' as a health insurance policy that a private entity offers a
Medicare beneficiary to provide payment for expenses incurred for
services and items that are not reimbursed by Medicare because of
deductible, coinsurance, or other limitations under Medicare. The
statutory definition of a Medicare supplemental policy excludes a
number of plans that are generally considered to be Medicare
supplemental plans, such as health plans for employees and former
employees and for members and former members of trade associations and
unions. A number of these health plans may be included under the

[[Page 25278]]

definitions of ``group health plan'' or ``health insurance issuer'', as
defined in a. and b. above.
    g. A ``long-term care policy,'' including a nursing home fixed-
indemnity policy. A ``long-term care policy'' is considered to be a
health plan regardless of how comprehensive it is. We recognize the
long-term care insurance segment of the industry is largely unautomated
and we welcome comments regarding the impact of HIPAA on the long-term
care segment.
    h. An employee welfare benefit plan or any other arrangement that
is established or maintained for the purpose of offering or providing
health benefits to the employees of two or more employers. This
includes plans and other arrangements that are referred to as multiple
employer welfare arrangements (``MEWAs'') as defined in section 3(40)
of ERISA.
    i. The health care program for active military personnel under
title 10 of the United States Code.
    j. The veterans health care program under chapter 17 of title 38 of
the United States Code.
    This health plan primarily furnishes medical care through hospitals
and clinics administered by the Department of Veterans Affairs for
veterans with a service-connected disability that is compensable.
Veterans with non-service-connected disabilities (and no other health
benefit plan) may receive health care under this health plan to the
extent resources and facilities are available.
    k. The Civilian Health and Medical Program of the Uniformed
Services (CHAMPUS), as defined in 10 U.S.C. 1072(4).
    CHAMPUS primarily covers services furnished by civilian medical
providers to dependents of active duty members of the uniformed
services and retirees and their dependents under age 65.
    l. The Indian Health Service program under the Indian Health Care
Improvement Act (25 U.S.C. 1601 et seq.).
    This program furnishes services, generally through its own health
care providers, primarily to persons who are eligible to receive
services because they are of American Indian or Alaskan Native descent.
    m. The Federal Employees Health Benefits Program under 5 U.S.C.
chapter 89.
    This program consists of health insurance plans offered to active
and retired Federal employees and their dependents. Depending on the
health plan, the services may be furnished on a fee-for-service basis
or through a health maintenance organization.

    Note: Although section 1171(5)(M) of the Act refers to the
``Federal Employees Health Benefit Plan,'' this and any other rules
adopting administrative simplification standards will use the
correct name, the Federal Employees Health Benefits Program. One
health plan does not cover all Federal employees; there are over 350
health plans that provide health benefits coverage to Federal
employees, retirees, and their eligible family members. Therefore,
we will use the correct name, the Federal Employees Health Benefits
Program, to make clear that the administrative simplification
standards apply to all health plans that participate in the Program.

    n. Any other individual or group health plan, or combination
thereof, that provides or pays for the cost of medical care.
    We would include a fourteenth category of health plan in addition
to those specifically named in HIPAA, as there are health plans that do
not readily fit into the other categories but whose major purpose is
providing health benefits. The Secretary would determine which of these
plans are health plans for purposes of title II of HIPAA. This category
would include the Medicare Plus Choice plans that will become available
as a result of section 1855 of the Act as amended by section 4001 of
the Balanced Budget Act of 1997 (Pub. L. 105-33) to the extent that
these health plans do not fall under any other category.
    8. Medical care.
    ``Medical care,'' which is used in the definition of health plan,
would be defined as current section 2791 of the Public Health Service
Act defines it: the diagnosis, cure, mitigation, treatment, or
prevention of disease, or amounts paid for the purpose of affecting any
body structure or function of the body; amounts paid for transportation
primarily for and essential to these items; and amounts paid for
insurance covering the items and the transportation specified in this
definition.
    9. Participant.
    We would define the term ``participant'' as section 3(7) of ERISA
currently defines it: a ``participant'' is any employee or former
employee of an employer, or any member or former member of an employee
organization, who is or may become eligible to receive a benefit of any
type from an employee benefit plan that covers employees of such an
employer or members of such organizations, or whose beneficiaries may
be eligible to receive any such benefits. An ``employee'' would include
an individual who is treated as an employee under section 401(c)(1) of
the Internal Revenue Code of 1986 (26 U.S.C. 401(c)(1)).
    10. Small health plan.
    We would define a ``small health plan'' as a group health plan with
fewer than 50 participants.
    The HIPAA does not define a ``small health plan'' but instead
leaves the definition to be determined by the Secretary. The Conference
Report suggests that the appropriate definition of a ``small health
plan'' is found in current section 2791(a) of the Public Health Service
Act, which is a group health plan with fewer than 50 participants. We
would also define small individual health plans as those with fewer
than 50 participants.
    11. Standard.
    Section 1171 of the Act defines ``standard,'' when used with
reference to a data element of health information or a transaction
referred to in section 1173(a)(1) of the Act, as any such data element
or transaction that meets each of the standards and implementation
specifications adopted or established by the Secretary with respect to
the data element or transaction under sections 1172 through 1174 of the
Act.
    Under our definition, a standard would be a set of rules for a set
of codes, data elements, transactions, or identifiers promulgated
either by an organization accredited by ANSI or the HHS for the
electronic transmission of health information.
    12. Transaction.
    ``Transaction'' would mean the exchange of information between two
parties to carry out financial and administrative activities related to
health care. A transaction would be (a) any of the transactions listed
in section 1173(a)(2) of the Act and (b) any determined appropriate by
the Secretary in accordance with section 1173(a)(1)(B) of the Act. We
present them below in the order in which we propose standards for them
in the regulations text.
    A ``transaction'' would mean any of the following:
    a. Health claims or equivalent encounter information.
    This transaction may be used to submit health care claim billing
information, encounter information, or both, from health care providers
to health plans, either directly or via intermediary billers and claims
clearinghouses.
    b. Health care payment and remittance advice.
    This transaction may be used by a health plan to make a payment to
a financial institution for a health care provider (sending payment
only), to send an explanation of benefits or a remittance advice
directly to a health care provider (sending data only), or to

[[Page 25279]]

make payment and send an explanation of benefits remittance advice to a
health care provider via a financial institution (sending both payment
and data).
    c. Coordination of benefits.
    This transaction can be used to transmit health care claims and
billing payment information between health plans with different payment
responsibilities where coordination of benefits is required or between
health plans and regulatory agencies to monitor the rendering, billing,
and/or payment of health care services within a specific health care/
insurance industry segment.
    In addition to the nine electronic transactions specified in
section 1173(a)(2) of the Act, section 1173(f) directs the Secretary to
adopt standards for transferring standard data elements among health
plans for coordination of benefits and sequential processing of claims.
This particular provision does not state that there should be standards
for electronic transfer of standard data elements among health plans.
However, we believe that the Congress, when writing this provision,
intended for these standards to apply to the electronic form for
coordination of benefits and sequential processing of claims. The
Congress expressed its intent on these matters generally in section
1173(a)(1)(B), where the Secretary is directed to adopt ``other
financial and administrative transactions * * * consistent with the
goals of improving the operation of the health care system and reducing
administrative costs.''
    d. Health claim status.
    This transaction may be used by health care providers and
recipients of health care products or services (or their authorized
agents) to request the status of a health care claim or encounter from
a health plan.
    e. Enrollment and disenrollment in a health plan.
    This transaction may be used to establish communication between the
sponsor of a health benefit and the health plan. It provides enrollment
data, such as subscriber and dependents, employer information, and
health care provider information. The sponsor is the backer of the
coverage, benefit or product. A sponsor can be an employer, union,
government agency, association, or insurance company. The health plan
refers to an entity that pays claims, administers the insurance product
or benefit, or both.
    f. Eligibility for a health plan.
    This transaction may be used to inquire about the eligibility,
coverage, or benefits associated with a benefit plan, employer, plan
sponsor, subscriber, or a dependent under the subscriber's policy. It
also can be used to communicate information about or changes to
eligibility, coverage, or benefits from information sources (such as
insurers, sponsors, and health plans) to information receivers (such as
physicians, hospitals, third party administrators, and government
agencies).
    g. Health plan premium payments.
    This transaction may be used by, for example, employers, employees,
unions, and associations to make and keep track of payments of health
plan premiums to their health insurers.
    h. Referral certification and authorization.
    This transaction may be used to transmit health care service
referral information between health care providers, health care
providers furnishing services, and health plans. It can also be used to
obtain authorization for certain health care services from a health
plan.
    i. First report of injury.
    This transaction may be used to report information pertaining to an
injury, illness, or incident to entities interested in the information
for statistical, legal, claims, and risk management processing
requirements. Although we are proposing a definition for this
transaction, we are not proposing a standard for it in this Federal
Register document. (See section E.9 for a more in-depth discussion.) We
will publish a separate proposed rule for it.
    j. Health claims attachments.
    This transaction may be used to transmit health care service
information, such as subscriber, patient, demographic, diagnosis, or
treatment data for the purpose of a request for review, certification,
notification, or reporting the outcome of a health care services
review. Although we are proposing a definition for this transaction, we
are not proposing a standard for it in this Federal Register document
because the legislation gave the Secretary an additional year to
designate this standard. We will publish a separate proposed rule for
it.
    k. Other transactions as the Secretary may prescribe by regulation.
    Under section 1173(a)(1)(B) of the Act, the Secretary shall adopt
standards, and data elements for those standards, for other financial
and administrative transactions deemed appropriate by the Secretary.
These transactions would be consistent with the goals of improving the
operation of the health care system and reducing administrative costs.

C. Effective Dates--General

    Health plans would be required by Part 142 to comply with our
requirements as follows:
    1. Each health plan that is not a small health plan would have to
comply with the requirements of Part 142 no later than 24 months after
the effective date of the final rule.
    2. Each small health plan would have to comply with the
requirements of Part 142 no later than 36 months after the effective
date of the final rule.
    Health care providers and health care clearinghouses would be
required to begin using the standard by 24 months after the effective
date of the final rule.
    (The effective date of the final rule will be 60 days after the
final rule is published in the Federal Register.)
    Provisions of trading partner agreements that stipulate data
content, format definitions or conditions that conflict with the
adopted standard would be invalid beginning 36 months from the
effective date of the final rule for small health plans, and 24 months
from the effective date of the final rule for all other health plans.
    If HHS adopts a modification to an implementation specification or
a standard, the implementation date of the modification would be no
earlier than the 180th day following the adoption of the modification.
HHS would determine the actual date, taking into account the time
needed to comply due to the nature and extent of the modification. HHS
would be able to extend the time for compliance for small health plans.
This provision would be at Sec. 142.106.
    The law does not address scheduling of implementation of the
standards; it gives only a date by which all concerned must comply. As
a result, any of the health plans, health care clearinghouses, and
health care providers may implement a given standard earlier than the
date specified in the subpart created for that standard. We realize
that this may create some problems temporarily, as early implementers
would have to be able to continue using old standards until the new
ones must, by law, be in place.
    At the WEDI Healthcare Leadership Summit held on August 15, 1997,
it was recommended that health care providers not be required to use
any of the standards during the first year after the adoption of the
standard. However, willing trading partners could implement any or all
of the standards by mutual agreement at any time during the 2-year
implementation phase (3-year implementation phase for small health
plans). In addition, it was recommended

[[Page 25280]]

that a health plan give its health care providers at least 6 months
notice before requiring them to use a given standard.
    We welcome comments specifically on early implementation as to the
extent to which it would cause problems and how any problems might be
alleviated.

D. Data Content

[Please label any written comments or e-mailed comments about this
section with the subject: Data Content]

    We propose standard data content for each adopted standard. There
are two aspects of data content standardization: (1) Standardization of
data elements, including their formats and definition, and (2)
standardization of the code sets or values that can appear in selected
data elements. A telephone number is an example of a data element that
has a standard definition and format, but does not have an enumerated
set of valid codes or values. A patient's diagnosis is an example of a
data element that has a standard definition, a standard format, and a
set of valid codes. Information that would facilitate data content
standardization, while also facilitating identical implementations,
would consist of implementation guides, data conditions, and data
dictionaries, as noted in the addenda to this proposed rule, and the
standard code sets for medical data that are part of this rule. Data
conditions are rules that define the situations when a particular data
element or record/segment can be used. For example, ``the name of the
tribe'' applies only to Indian Health Service claims. The defining rule
for that data element would be ``must be entered if claim is Indian
Health Service''.
1. Data Element and Record/Segment Content
    Once we publish the final rule in the Federal Register and it is
effective, there will be no additional data element or record/segment
content modifications in any of the transactions for at least one year.
    In our evaluation and recommendation for each proposed standard
transaction, we have tried to meet as many business needs as possible
while retaining our commitment to the guiding principles. We encourage
comments on how the standards may be improved.
    It is important to note that all data elements would be governed by
the principle of a maximum defined data set. No one would be able to
exceed the data sets defined in the final rule, until that rule is
amended one or more years from the effective date of the final rule.
This means that if a transaction has all of the data possible--based on
the appropriate implementation guide, data content and data conditions
specifications, and data dictionary--then a health plan would have to
accept the transaction and process it. This does not mean, however,
that the health plan would have to store or use information that it
does not need in order to process a claim or encounter, except for
audit trail purposes or for coordination of benefits if applicable. It
does mean that the health plan would not be able to require additional
information, and it does mean that the health plan would not be able to
reject a transaction because it contains information the health plan
does not want. This principle applies to the data elements of all
transactions proposed for adoption in this proposed rule.
2. Code Sets
[Please label any written comments or e-mailed comments about this
section with the subject: Code Sets]
a. Background
    The administrative simplification provisions of HIPAA require the
Secretary of HHS to adopt standards for code sets for administrative
and financial transactions. Two types of code sets are required for
data elements in the transaction standards to be established under
HIPAA: (1) Large code sets for medical data, including coding systems
for:
    <bullet> Diseases, injuries, impairments, other health related
problems, and their manifestations;
    <bullet> Causes of injury, disease, impairment, or other health-
related problems;
    <bullet> Actions taken to prevent, diagnose, treat, or manage
diseases, injuries, and impairments and any substances, equipment,
supplies, or other items used to perform these actions; and (2) smaller
sets of codes for other data elements such as race/ethnicity, type of
facility, and type of unit.
    A separate HIPAA implementation team co-chaired by representatives
from HCFA, the Centers for Disease Control/National Center for Health
Statistics, and the National Institutes of Health/National Library of
Medicine, and including members from other interested HHS agencies and
Federal Departments, was established to recommend the code sets that
should become HIPAA standards for medical data. HHS efforts to identify
candidate medical data code sets were coordinated with the NCVHS
Subcommittee on Health Data Needs, Standards, and Security. The smaller
sets of codes for other data elements in transactions standards are
part of the transaction standards themselves and are specified in their
implementation guides.
    The following medical data code sets are already in use in
administrative and financial transactions:
    ICD-9-CM: The International Classification of Diseases, Ninth
Revision, Clinical Modification, classifies both diagnoses (Volumes 1
and 2) and procedures (Volume 3). All hospitals and ambulatory care
settings use it to capture diagnoses for administrative transactions.
The procedure system is used for all in-patient procedure coding for
administrative transactions. The ICD-9-CM was adopted for use in
January 1979.
    The ICD-9-CM Coordination and Maintenance Committee is a Federal
interdepartmental committee charged with maintaining and updating the
ICD-9-CM. Requests for modification are handled through the ICD-9-CM
Coordination and Maintenance Committee; no official changes are made
without being brought before this committee. Suggestions for
modifications come from both the public and private sectors and
interested parties are asked to submit recommendations for modification
prior to a scheduled meeting.
    Modifications are not considered without the expert advice of
clinicians, epidemiologists, and nosologists (both public and private
sectors). The meetings are open to the public and are announced in the
Federal Register; all interested members of the public are invited to
attend and submit written comments. Meetings are held twice each year.
    Approved modifications become effective October 1 of the following
year. Changes to ICD-9-CM are published on the NCHS and HCFA websites,
as well as by the American Hospital Association (AHA) and other private
sector vendors.
    CPT: Physicians' Current Procedural Terminology is used by
physicians and other health care professionals to code their services
for administrative transactions. CPT is level one of the Health Care
Financing Administration Procedure Coding System (HCPCS).
    CPT codes are updated annually by the AMA. The CPT Panel is
comprised of 15 physicians, 10 nominated by the AMA and one each
nominated by Blue Cross/Blue Shield of America (BCBSA), HIAA, HCFA, and
AHA. Meetings are not open to the public.
    Alpha-numeric HCPCS: Alpha-numeric Health Care Financing
Administration Procedure Coding System (HCPCS) contains codes for
medical equipment and supplies;

[[Page 25281]]

prosthetics and orthotics; injectable drugs; transportation services;
and other services not found in CPT. Alpha-numeric codes are level 2 of
HCPCS. Its use is generally limited to ambulatory settings. The Omnibus
Budget Reconciliation Act of 1986 requires the use of HCPCS in the
Medicare program for services in hospital outpatient departments.
    Level II of HCPCS is updated annually and is maintained jointly by
the BCBSA, the Health Insurance Association of America and HCFA.
    HCFA's regional offices assure coordination of local code
assignments among the payers in a State; local codes must be approved
by HCFA's central office to assure they do not duplicate national codes
in CPT or Level II of HCPCS.
    Decisions regarding additions, deletions and revisions to Level II
of HCPCS are made by the Alpha-Numeric Editorial Panel. This Panel,
which meets three times a year, is comprised of representatives of the
BCBSA, HIAA, and HCFA; the meetings are not open to the public. There
are formal mechanisms to coordinate this Panel's activities with CPT
and the American Dental Association's (ADA) procedure coding system.
    The revised HCPCS is available free of charge as a public use file.
    CDT: Current Dental Terminology is used in reporting dental
services. CDT codes are also included in alpha-numeric HCPCS with a
first character of D.
    Codes are revised on a five-year cycle by the ADA through its
Council on Dental Benefits Program. Meetings are not open to the
public.
    NDC: National Drug Codes are used in reporting prescription drugs
in pharmacy transactions and some claims by health care professionals.
The codes are assigned when the drugs are approved or repackaged and
may be found on the packaging of drugs.
i. Candidates for the Standards
    The principal sources of input to the recommendations for medical
data code sets were:
    (a) The ANSI HISB Standards Inventory.
    The inventoried code sets are:
    ICD-9-CM, which consists of both diagnoses and procedure sections.
The diagnosis system is widely used in the health care industry. All
hospitals and ambulatory care settings use it to capture diagnoses. The
procedure system is used for all in patient procedure coding.
    ICD-10-CM for diagnosis, which is under development as a
replacement to the diagnosis section of ICD-9-CM and not yet in use in
this country. ICD-10 was developed by the World Health Organization and
has been implemented in approximately 37 countries to report mortality
data. These are data that are taken and coded from death certificates.
However, since our country's need for morbidity data cannot be
satisfied by ICD-10, the United States is preparing a clinical
modification of ICD-10 (ICD-10-CM). The public has been given an
opportunity to review and comment on the current draft of ICD-10-CM.
The final draft should be available in the summer of 1998.
    <bullet> ICD-10-PCS for procedures, which is under development for
use in the U.S. only as a replacement to the procedure section of ICD-
9-CM.
    <bullet> CPT, which is used by all physicians and many other
practitioners to code their services. It is also used by hospital
outpatient departments to code certain ambulatory services.
    <bullet> SNOMED (Systematized Nomenclature of Medicine), which is
being used by the developers of computer-based patient record systems.
It is not used in administrative transactions.
    <bullet> CDT, which is used by all practicing dentists to code
their services for administrative transactions.
    <bullet> NIC (Nursing Interventions Classification), which is not
used in administrative transactions in this country.
    <bullet> LOINC (Logical Observation Identifier Names and Codes),
which is being used in a pilot-test by the Centers for Disease Control
to report tests as evidence of a communicable disease. It is also being
tested in electronic transactions involving detailed clinical
laboratory tests and results. It is not used in administrative
transactions.
    <bullet> HHCC (Home Health Care Classification system), which is
not being used as a reporting system in this country.
    (b) A more extensive inventory of existing coding and
classification systems prepared by the coding and classification
implementation team itself and evaluated against the general HIPAA
standards evaluation criteria (as found in section I.B., Process for
developing standards for this proposed rule).
    This larger inventory (which will be placed on the home page of the
National Center for Health Statistics at: http://www.cdc.gov/nchswww/
nchshome.htm) does not include any additional viable candidates for the
initial standards for administrative code sets to be established under
this proposed rule. It does contain some additional systems that may be
applicable to elements of the claims attachments standard (to be issued
on a later timetable) and to eventual HIPAA recommendations to the
Congress regarding full electronic medical records.
    (c) The oral and written testimony submitted at an NCVHS public
hearing to discuss medical/clinical coding and classification issues in
connection with the requirements of HIPAA on April 15-16, 1997. The
following entities presented testimony at the hearing: AMA, AHA,
American Health Information Management Association, American College of
Obstetricians and Gynecologists, American Academy of Pediatrics,
American Nurses Association, National Association for Home Care, ADA,
Family Practice Primary Care Work Group, National Association of
Children's Hospitals and Related Institutions, Food and Drug
Administration, College of American Pathologists, the Omaha System,
developers of new nomenclature systems, research groups, publishers,
consultants in coding, managed care organizations, software vendors,
and informatics specialists.
    (d) The NCVHS' recommendations to the Secretary, HHS regarding
codes and classifications.
    (e) Comments received in response to presentations at professional
meetings and at the July 9, 1997, public meeting held by HHS on
progress on selecting the initial HIPAA standards.
    For the hearing on April 15-16, 1997, the NCVHS invited interested
organizations representing both the users and developers of medical/
clinical classification systems to present written and/or oral
testimony responding to the following questions.

``--What medical/clinical codes and classifications do you use in
administrative transactions now? What do you perceive as the main
strengths and weaknesses of current methods for coding and
classification of encounter and/or enrollment data?
``--What medical/clinical codes and classifications do you recommend
as initial standards for administrative transactions, given the time
frames in the HIPAA? What specific suggestions would you like to see
implemented regarding coding and classification?
``--Prior to the passage of HIPAA, the National Center for Health
Statistics initiated development of a clinical modification of the
International Classification of Diseases-10 (ICD-10-CM), and HCFA
undertook development of a new procedure coding system for inpatient
procedures (called ICD-10-PCS), with a plan to implement them
simultaneously in the year 2000. On the pre-HIPAA schedule, they
will be released to the field for

[[Page 25282]]

evaluation and testing by 1998. If some version of ICD is to be used
for administrative transactions, do you think it should be ICD-9-CM
or ICD-10-CM and ICD-10-PCS, assuming that field evaluations are
generally positive?
``--Recognizing that the goal of P.L. 104-191 is administrative
simplification, how, from your perspective, would you deal with the
current coding environment to improve simplification, reduce
administrative burden, but also obtain medically meaningful
information?
``--How should the ongoing maintenance of medical/clinical code sets
and the responsibility, intellectual input and funding for
maintenance be addressed for the classification systems included in
the standards? What are the arguments for having these systems in
the public domain versus in the private sector, with or without
copyright?
``--What would be the resource implications of changing from the
coding and classification systems that you currently are using in
administrative transactions to other systems? How do you weigh the
costs and benefits of making such changes?
``--A Coding and Classification Implementation Team has been
established within the Department of Health and Human Services to
address the requirements of P.L. 104-191; the Team's charge is
enclosed. Does your organization have any concerns about the process
being undertaken by the Department to carry out the requirements of
the law in regard to coding and classification issues? If so, what
are those concerns and what suggestions do you have for
improvements?''

    In general, those testifying at the April 15-16 hearing recommended
that systems currently in use be designated as standards for the year
2000, since potential replacements were not yet fully tested and could
not be implemented throughout the health care system by 2000. Testimony
supported moving to ICD-10-CM for medical diagnoses after the year 2000
(different timetables were mentioned). Testimony provided by
representatives from the American Psychiatric Association described the
ongoing efforts to make the Diagnostic and Statistical Manual of Mental
and Behavioral Disorders (DSM) completely compatible with ICD. The
American Psychiatric Association has crosswalked the appropriate ICD-9-
CM codes to what appear in the DSM for its diagnostic categories and is
doing the same for ICD-10-CM for diagnosis. The mapping between DSM and
ICD-10-CM for diagnosis is more precise than is possible for ICD-9-CM
so the APA favors moving to ICD-10-CM for diagnosis as soon as
possible.
    Many of those testifying emphasized the need to change to a less
fragmented, overlapping, and duplicative approach to procedure coding,
but sometime after the year 2000. Different potential approaches to
achieving a more integrated procedure coding system were mentioned.
Many identified current variations in the implementation of coding
systems and the use of local HCPCS codes as problems that should be
addressed.
    In general, those testifying approved the implementation team's
charge, which includes an initial focus on the administrative standards
for the year 2000 and longer term attention to recommendations for the
more clinically-detailed vocabulary needed for full electronic medical
records. Some of the developers of vocabularies and classifications who
presented testimony emphasized the potential usefulness of their
systems for full computer-based patient records, rather than for the
administrative transactions that are the focus of the initial HIPAA
standards.
    Comments on codes and classifications sets made at the June 3-4,
1997, Health Data Needs, Standards and Security Subcommittee hearings
in San Francisco, California echoed those heard at the April hearing.
    On June 25, 1997, the NCVHS submitted the following recommendations
to the Secretary of HHS regarding standards for codes and
classifications for administrative transactions:
    The Committee recommends that diagnosis and procedure coding
continue to use the current code sets because replacements will not
be ready for implementation by the year 2000. ICD-9-CM diagnosis
codes, ICD-9-CM Volume 3 procedure codes, and HCPCS (including
Current Procedural Terminology (CPT) and Current Dental Terminology
(CDT)) procedure codes should be adopted as the standards to be
implemented by the year 2000. Annual updates to ICD-9-CM and HCPCS
should continue to follow the schedule currently used. In addition,
we recommend that you advise industry to build and modify their
information systems to accommodate a change to ICD-10-CM diagnosis
coding in the year 2001 and a major change to a unified approach to
coding procedures (yet to be defined) by the year 2002 or 2003. We
recommend that you identify and implement an approach for procedure
coding that addresses deficiencies in the current systems, including
issues of specificity and aggregation, unnecessary redundancy, and
incomplete coverage of health care providers and settings.

    At the July 9, 1997, public meeting on progress on selecting the
HIPAA standards, the implementation team presented an overview of its
planned recommendations for coding and classification standards for the
year 2000. The team's recommendations were similar to those of the
NCVHS but included the use of NDC codes for pharmacy transactions that
the NCVHS did not address. The implementation team did not recommend a
specific timetable for changes in the standards after the year 2000.
The team believed that its recommendations for changes after the year
2000 should await the results of field testing of ICD-10-CM for
diagnosis and ICD-10-PCS for procedures (which should be available in
March 1998) and further consideration of options for moving toward a
more integrated approach to procedure coding.
    One of the coding systems that the implementation team considered
to be promising for future implementation was the Universal Product
Numbers (UPNs) system. The UPN system is a product numbering technology
that uses human readable and bar code formats to identify products. A
bar code and human readable number, which is unique to a particular
product, is printed on the label or box as part of the production line
process. There are currently two separate and different UPN coding
systems that are generally accepted and recognized for health care
products. One is numeric, a fixed 14 digit number, and the other an
alpha-numeric format, a variable length number 8 to 20 digits. The
numeric format is the system of the Health Care Uniform Code Council
(UCC) and the alpha-numeric format is used by the Health Industry
Business Communications Council (HIBCC). The first series of digits are
assigned by one of these two private companies and identify the
manufacturer or a repackager. The remaining digits are assigned by the
manufacturer or repackager and are assigned according to the user's own
standards and specifications. A manufacturer or repackager can apply to
either one of these companies to use its system. The application fees,
which are collected by either UCC or HIBCC, vary based on the
manufacturer's or repackager's sales volume.
    The Department of Defense has started to use UPNs for its prime
vendor program. Currently, there are purchasers and providers of
medical equipment that are using the UPN system for inventory purposes,
but, at this time, there are no insurers that pay for health care
products using the UPN system. California Medicaid, however, has plans
to begin using UPNs as part of its system.
    At this time, approximately 30 percent of the health care products
do not have a UPN assigned to them. For this reason, in addition to the
fact that no insurer currently uses UPNs for reimbursement, UPNs were
not included in the initial list of standards.

[[Page 25283]]

However, it is a coding system that bears close examination during the
next few years as a possible replacement for alpha-numeric HCPCS codes
for health care products. Some consideration is being given to
conducting a demonstration study in the Medicare program on the use of
UPNs for reimbursement.
    Comments on the use of the UPNs as a national coding system are
being sought. In particular, comments on issues such as timing of
implementation, any complications presented by the existence of
multiple bodies issuing UPN codes, the acceptability of varying lengths
and formats, and the frequent changes in manufacture and packaging size
would be helpful.
ii. Changes to HCPCS for Implementation in the Year 2000
    In proposing the use of the existing coding systems as the
standards for the year 2000, many participants at public meetings
voiced concern about overlaps in several of the coding systems,
problems with HCPCS local codes, differences in implementation of NDC
codes in different systems, and differences between the CDT codes in
HCPCS and those issued by the ADA. It was repeatedly suggested that
these issues be resolved and overlaps be eliminated for standards
adopted in the year 2000. After careful consideration of all public
input and of the options for modifying HCPCS in the relatively near
term, the implementation team is recommending that changes be
implemented in HCPCS in the year 2000 to reduce its overlap with other
coding systems.
    HCPCS contains three levels. Level 1, CPT, is developed and
maintained by the AMA and captures physician services. Level 2, alpha-
numeric HCPCS, contains codes for products, supplies, and services not
included in CPT. Level 3, local codes, includes all the codes developed
by insurers and agencies to fulfill local needs.
    We are proposing the adoption of HCPCS levels 1 and 2 for
implementation in the year 2000. In addition, we are proposing to
modify HCPCS level 3 for the year 2000 to eliminate overlaps and
duplications.
    Most third-party public and private health insurers (such as
Medicare contractors, Medicaid program and fiscal agents, and private
commercial health insurers) use HCPCS as a basis for paying claims for
medical services provided on a fee-for-service basis and for monitoring
the quality and utilization of care. In addition, integrated health
systems, such as managed care organizations, also use HCPCS as a basis
for monitoring utilization and quality of care and for negotiating
prospective fees and capitated payments. Research organizations use the
HCPCS data collected by health insurers to monitor and evaluate these
programs and regional/national patterns of care.
    As previously stated, HCPCS alpha-numeric codes capture products,
supplies, and services not included in CPT. The ``D'' codes in the
HCPCS system are dental codes created by the ADA and published as CDT.
However, in HCPCS, the first digit ``0'' in CDT is replaced by a ``D''
to eliminate confusion and overlap with certain CPT codes. The ADA has
agreed to replace their first digit ``0'' with a ``D'' so that CDT can
become the national standard. There would no longer be dental codes
within HCPCS. Consequently, CDT codes will no longer be issued within
HCPCS as of the year 2000. The ADA will be the sole source of the
authoritative version of CDT.
    The ``J'' codes within alpha-numeric HCPCS are for drugs. A
separate coding system, the NDC developed by the Food and Drug
Administration, is also used to report drug claims in the ANSI X12N
837--Health Care Claim: Professional and in pharmacy transactions. The
NDC system, which has 11-digit codes, is more precise and more current
than the HCPCS ``J'' codes. NDC identifies drugs prescribed down to the
manufacturer, product name and package size. NDC codes are assigned on
a continuous basis throughout the year as new drug products are issued;
``J'' codes are assigned on an annual basis. Many providers are
currently forced to maintain both ``J'' and NDC codes to provide data
to different insurers. The majority of the local codes currently
created were developed because of the lack of a ``J'' code for a new
drug. Local codes are level 3 of the HCPCS and are assigned by local
insurers or agencies where there is no national code. By eliminating
``J'' codes from alpha-numeric HCPCS codes and utilizing only NDC codes
for drugs, greater national uniformity can be achieved, the workload of
providers who previously had to utilize two drug coding systems will be
reduced, and the need for local codes will diminish substantially.
    HHS is, therefore, proposing that NDC codes become the national
standard in the year 2000 for all types of transactions requiring drug
codes and that ``J'' codes be deleted from alpha-numeric HCPCS. This
would require those handling electronic administrative transactions to
process 11-digit NDC codes in the year 2000.
    Level 3 of HCPCS is intended to meet local needs and is established
on a local basis by health insurers. There is no national registry for
these local codes. We propose that, beginning in the year 2000, local
codes be eliminated and that a national process be established for
reviewing and approving codes that are needed by any public or private
health insurer.
    The first step in this process would be to ask public and private
health insurers to review the local codes they use and to immediately
eliminate those that duplicate a national HCPCS code or NDC code
already in existence. (See the previous section for a discussion of NDC
codes.) They would also be asked to eliminate those local codes for
which there are few claims submissions (for example, fewer than 50 per
year) and that could reasonably and effectively be reviewed by the
health insurer. Health insurers would also be asked to eliminate those
local codes which were established for administrative purposes, to
facilitate claims payment, rather than to identify and describe medical
services, supplies and procedures. (A code for ``administration of
immunization at public health clinic'' is an example of a code that
includes administrative information in addition to information about
the clinical content of the service.) This purging would result in the
elimination of the vast majority of local codes now in use. Any
remaining local codes would then have to be submitted by the health
insurer to HCFA for review and approval as temporary codes. The HCPCS
panel currently meets every two to three months to approve requests for
temporary codes. This process will be re-examined to determine if more
frequent meetings are required.
    The process would be modeled after the one that is currently used
to review and approve code requests from Medicare and its contractors.
Codes that are approved by HCFA would be established as national
temporary codes that would be posted electronically and would be
available for use by all health insurers. National temporary codes
would be reviewed on an annual basis to make sure they are not
duplicative of CPT codes or alpha-numeric codes that are newly
established.
    This new centralized process for establishing national temporary
codes would run parallel to the process for establishing national CPT
codes, alpha-numeric HCPCS codes, and NDC codes. It is expected that
most of the codes submitted for approval by HCFA in this process would
be for new medical technologies and services not yet approved for codes
by CPT or the alpha-

[[Page 25284]]

numeric process or for other medical services/procedures covered by
health insurers which have no associated CPT or alpha-numeric codes.
    These recommendations are based on the following:
    As stated earlier, many participants at public meetings voiced
concerns about overlaps in codes that are used and the proliferation of
local codes. Local codes that are duplicative of national codes create
extra work and confusion for providers who must submit different codes
to different health insurers. Local codes also make it more difficult
for researchers and programs such as Medicaid and Medicare to evaluate
and monitor patterns of care and the utilization and quality of care on
a regional or national basis.
    The use of local codes established for administrative purposes, to
facilitate claims payment rather than to identify medical services,
supplies and procedures, is contrary to the intent of the medical
coding system, which is intended to describe medical services used to
prevent, diagnose, treat or manage diseases, injuries, and impairments.
Administrative functions necessary to process and facilitate claims by
health insurers can be achieved by using ``administrative'' codes
placed in fields other than those used for medical diagnosis and
procedure codes or by attaching a modifier to a medical code. Because
the need for new temporary codes is not unique to an individual health
insurer, the new codes that are created as a result of this centralized
process would be useful not just to the health insurer who submitted
the original request for a code but also to many other health insurers
across the country. By eliminating duplicative and otherwise
unnecessary local codes and adding national temporary codes through the
centralized process discussed above, we believe we are being consistent
with the intent of HIPAA to simplify the administration of the claims
review, payment and monitoring process.
    We welcome comments and suggestions on this proposal for
eliminating unnecessary local codes and establishing a centralized,
national process for establishing national temporary codes. We seek
input specifically on the problems and barriers to creating this type
of process. We are also specifically looking for examples of the kinds
of local codes that are now being used that would have to be replaced
with national codes or for alternatives to the above-described process.
iii. Recommended Standards and Implementation Guides
    The proposed standard code sets for different types of medical data
are outlined below:
    (a) Diseases, injuries, impairments, other health related problems,
their manifestations, and causes of injury, disease, impairment, or
other health-related problems.
    The proposed standard code set for these conditions is the
International Classification of Diseases, 9th edition, Clinical
Modification, (ICD-9-CM), Volumes 1 and 2, as maintained and
distributed by the National Center for Health Statistics, Centers for
Disease Control and Prevention, U.S. Department of Health and Human
Services. The specific data elements for which ICD-9-CM is the required
code set are enumerated in the implementation guides for the
transactions standards that require its use.
    An area of weakness of the ICD-9-CM is that it is not always
precise or unambiguous. However, there are no viable alternatives for
the year 2000. Many problems cannot be resolved within the current
structure, but are being addressed in the development of ICD-10-CM for
diagnosis, which is expected to be ready for implementation some time
after the year 2000.
    The official coding guidelines for this proposed standard code set
are in the public domain and available at no cost on the NCHS website
at: http://www.cdc.gov/nchswww/about/otheract/icd9/icd9hp2.htm. Users
without access to the Internet may purchase the official version of
ICD-9-CM on CD-ROM from the Government Printing Office (GPO) at 1-202-
512-1800 or fax 1-202-512-2250. The CD-ROM contains the ICD-9-CM
classification and the coding guidelines. The guidelines are also
included in code books and coding manuals published by not-for-profit
(for example, the American Hospital Association and the American Health
Information Management Association) and other private sector vendors.
    (b) Procedures or other actions taken to prevent, diagnose, treat,
or manage diseases, injuries and impairments.
(1) Physician Services
    The proposed standard code set for these entities is the Current
Procedural Terminology (CPT) (level 1 of HCPCS) as maintained and
distributed by the AMA. The specific data elements for which CPT
(including codes and modifiers) is a required code set are enumerated
in the implementation guides for the transaction standards that require
its use.
    Narrative coding guidelines are presented at the beginning of each
of the six sections of print edition of CPT and, in addition, special
instructions for specific codes or groups of codes appear throughout
CPT. CPT is available from the AMA at a charge as well as from several
not-for-profit and other private sector vendors.
    An area of weakness of the CPT is that it is not always precise or
unambiguous. However, there are no viable alternatives for the year
2000.
(2) Dental Services
    The proposed standard code set for these services is the Current
Dental Terminology (CDT) as maintained and distributed by the ADA for a
charge. The specific data elements for which CDT is a required code set
are enumerated in the implementation guides for the transaction
standards that require its use.
    The official implementation guidelines for this standard appear in
CDT as descriptors that explain the appropriate use of the codes.
Copies of the ADA Current Procedural Terminology Second Edition (CDT-2)
may be obtained by calling 1-800-947-4746. The ADA is in the process of
developing CDT-3 for introduction in the year 2000.
(3) Inpatient Hospital Services
    The proposed standard code set for these services is the
International Classification of Diseases, 9th edition, Clinical
Modification, Volume 3, as maintained and distributed by the Health
Care Financing Administration, U.S. Department of Health and Human
Services. The specific data elements for which ICD-9-CM, Volume 3, is a
required code set are enumerated in the implementation guides for the
transactions standards that require its use.
    As stated earlier, an area of weakness of the ICD-9-CM is that it
is not always precise or unambiguous. However, there are no viable
alternatives for the year 2000 that are more precise or less ambiguous.
Many problems cannot be resolved within the current structure but are
being addressed in the development of ICD-10-PCS for procedures, which
is expected to be ready for implementation some time after the year
2000.
    The official coding guidelines for this standard are in the public
domain and available at no cost on the NCHS website at http://
www.cdc.gov/nchswww/about/otheract/icd9/icd9hp2.htm. Users without
access to

[[Page 25285]]

the Internet may purchase the official version of ICD-9-CM on CD-ROM
from the Government Printing Office at 1-202-512-1800 or fax 1-202-512-
2250. The CD-ROM contains the ICD-9-CM classification and the coding
guidelines. The guidelines are also included in code books and coding
manuals published by not-for-profit (for example, the American Hospital
Association and the American Health Information Management Association)
and private sector vendors.
(c) Other Health-Related Services
    The proposed standard code set for other health-related services is
the Health Care Financing Administration Procedure Coding System
(alpha-numeric HCPCS) as maintained and distributed by the Health Care
Financing Administration, U.S. Department of Health and Human Services.
We are proposing to make significant modifications to alpha-numeric
HCPCS for the year 2000. These modifications are described in Section
II.D.2.a.ii of this proposed rule.
    The specific data elements for which alpha-numeric HCPCS (including
codes and modifiers) is a required code set are enumerated in the
implementation guides for the transaction standards that require its
use.
    Alpha-numeric HCPCS codes meet all but one of the guiding
principles for choosing standards. An area of weakness is that it is
not always precise or unambiguous. However, there are no viable
alternatives for the year 2000 that are more precise or less ambiguous.
Some of the areas of ambiguity in HCPCS (the ``J'' codes for drugs,
local codes, variant CDT codes) have been addressed in the changes
recommended for the year 2000.
    The 1998 alpha-numeric HCPCS file (excluding the D procedure codes
copyrighted by the ADA) is available from the HCFA website at http://
www.hcfa.gov/stats/pufiles.htm. Users can also access this page by
taking the Stats and Data link to the Browse/Download available PUFs
link. The 1998 alpha-numeric HCPCS file is on the HCFA Public Use Files
page under the Utilities/Miscellaneous heading.
    The HCPCS is in an executable format, which includes 1998 alpha-
numeric HCPCS in both Excel<SUP>/</SUP> and text, the 1998 Alpha-
Numeric Index in both Portable Document Format<SUP>/</SUP> (PDF) and
text, the 1998 Table of Drugs in both PDF and text, the 1998 HCPCS
record layout in WordPerfect<SUP>/</SUP> and text, and a read me file
in WordPerfect<SUP>/</SUP> and text.
(d) Drugs
    The proposed standard code set for these entities is the National
Drug Codes as maintained and distributed by the Food and Drug
Administration, U.S. Department of Health and Human Services, in
collaboration with drug manufacturers. The specific data elements for
which NDC is a required code set are enumerated in the implementation
guides for the transaction standards that require its use.
    NDC codes as established by the Food and Drug Administration are
made available on the individual drug package inserts and product
labeling. The Food and Drug Administration, Center for Drug Evaluation
and Research, Office of Management, Division of Database Management,
prepares an annual update, with periodic cumulative supplements of the
Approved Drug Products with Therapeutic Equivalence Evaluations for
prescription drug products, over the counter drug products and
discontinued drug products. The supplements are available on diskette,
on a quarterly basis, from the National Technical Information Service
at 703-487-6430. The files are also available on the Internet's World
Wide Web on the CDER Home Page at http://www.fda.gov/cder. The NDC
codes are also published in such drug publications as the Physicians'
Desk Reference under the individual drug product listings and ``How
supplied.''
(e) Other Substances, Equipment, Supplies, or Other Items Used in
Health Care Services
    The proposed standard code set for these entities is the Health
Care Financing Administration Procedure Coding System (alpha-numeric
HCPCS) as maintained and distributed by the Health Care Financing
Administration, U.S. Department of Health and Human Services. We are
proposing to make significant modifications to alpha-numeric HPCPS for
the year 2000. These modifications are described in Section II.D.2.a.ii
of this proposed rule. The specific data elements for which alpha-
numeric HCPCS is a required code set are enumerated in the
implementation guides for the transactions standards that require its
use.
    The recommended code sets adhere to the principles for guiding
choices for the standards to be adopted under HIPAA as follows:
    <bullet> Improve the efficiency and effectiveness of the health
care system by leading to cost reductions for or improvements in
benefits from electronic health care transactions.
    Improvements in efficiency and effectiveness over the current
status quo will result from: (a) The requirement for all those
exchanging electronic transactions to use a single official
implementation guide for each recommended code set; and (b) the
proposed changes to HCPCS, which will eliminate overlap between NDC and
HCPCS, eliminate one of the two current versions of CDT codes, and
eliminate the use of local HCPCS codes that are known only to
institutions that developed them.
    <bullet> Meet the needs of the health data standards user
community, particularly health care providers, health plans, and health
care clearinghouses.
    The recommended code sets meet some of the needs of the community.
To meet all of the community's needs (e.g., elimination of overlap in
procedure coding systems and better coverage of nursing and allied
health services) will require changes to the code sets recommended or
their replacement by newer systems, once these have been fully tested
and revised. Essentially all segments of the health care community
testified that there was no practical alternative to the recommended
code sets for the year 2000, although they recommended changes after
that time.
    <bullet> Be consistent and uniform with the other HIPAA standards--
their data element definitions and codes and their privacy and security
requirements--and, secondarily, with other private and public sector
health data standards.
    All of the recommended code sets are required for selected data
elements in more than one of the recommended transaction standards.
    <bullet> Have low additional development and implementation costs
relative to the benefits of using the standard.
    The recommended code sets are currently used by many segments of
the health care community.
    <bullet> Be supported by an ANSI-accredited standards developing
organization or other private or public organization that will ensure
continuity and efficient updating of the standard over time.
    All of the recommended code sets are supported by U.S. government
agencies or private sector organizations that have demonstrated a
commitment to maintaining them over time.
    <bullet> Have timely development, testing, implementation, and
updating procedures to achieve administrative simplification benefits
faster.
    All of the recommended code sets have existing procedures for
updating at

[[Page 25286]]

least annually. NDC updates continually throughout the year.
    <bullet> Be technologically independent of the computer platforms
and transmission protocols used in electronic health transactions,
except when they are explicitly part of the standard.
    All of the recommended code sets are technologically independent of
computer platforms and transmission protocols.
    <bullet> Be precise and unambiguous, but as simple as possible.
    There are some problems with lack of precision and ambiguity in all
the recommended code sets, but there are no viable alternatives for the
year 2000. In the case of ICD-9-CM, many problems cannot be resolved
within the current structure but are being addressed in the development
of ICD-10-CM for diagnosis and ICD-10-PCS for procedures, which are
expected to be ready for implementation some time after 2000. Some of
the sources of ambiguity in HCPCS (the ``J'' codes for drugs, local
codes, variant CDT codes) have been addressed in the changes
recommended for the year 2000. The movement to a single framework for
procedure coding, sometime after the year 2000, will address other
known problems with the procedure codes.
    <bullet> Keep data collection and paperwork burdens on users as low
as is feasible.
    Because the recommended code sets are currently used throughout the
health care community, they should not add substantially to data
collection or paperwork burdens.
    <bullet> Incorporate flexibility to adapt more easily to changes in
the health care infrastructure (such as new services, organizations,
and provider types) and information technology.
    Some of the recommended code sets lack a desirable level of
flexibility; e.g., they use hierarchical codes and may therefore ``run
out of room'' for additional codes required by advances in medicine and
health care. Since they appear to be the only feasible alternatives for
the year 2000, steps should be taken to improve their flexibility--or
replace them with more flexible options--sometime after the year 2000.
iv. Probable Changes to Coding and Classification Standards After 2000
    Although the exact timing and precise nature of changes in the code
sets designated as standards for medical data are not yet known, it is
inevitable that there will be changes to coding and classification
standards after the year 2000. As indicated in testimony at the NCVHS
hearings previously discussed, changes will be required to address
current coding system deficiencies that adversely affect the efficiency
and quality of administrative data creation and to meet international
treaty obligations. For example, ICD-10-CM for diagnosis is highly
likely to replace ICD-9-CM as the standard for diagnosis data, possibly
in 2001. When any of the standard code sets proposed in this rule are
replaced by wholly new or substantially revised systems, the new
standards may have different code lengths and formats. The current
draft of ICD-10-CM for diagnoses contains 6 digit codes; the longest
ICD-9-CM codes have 5 digits. In addition to accommodating the initial
code sets standards for the year 2000, those that produce and process
electronic administrative health transactions should build the system
flexibility that will allow them to implement different code formats
beyond the year 2000.
    As also clearly expressed in the hearings and other input to HHS,
any major change in administrative coding systems involves significant
initial costs and dislocations, as well as some level of discontinuity
in data collected before and after the change. These factors must be
weighed against expected improvements in the efficiency of data
creation and in the accuracy and utility of the data collected. In the
future, more flexible health data systems may assist in reducing the
costs of implementing changes in administrative coding and
classification standards, especially if administrative codes can be
generated automatically from more granular clinical data.
b. Requirements
    In Sec. 142.1002, we would state that health plans, health care
clearinghouses, and health care providers must use in electronic
transactions the diagnosis and procedure code sets as prescribed by
HHS. The names of these diagnosis and procedure code sets are published
in a notice in the Federal Register. The implementation guides for the
transaction standards in part 142, Subparts K through R would specify
which of the standard medical data code sets should be used in
individual data elements within those transaction standards.
    In Sec. 142.1004, we would specify that the code sets in the
implementation guide for each transaction standard in part 142,
subparts K through R, are the standard for the coded nonmedical data
elements present in that transaction standard.
    In Sec. 142.1010, The requirements sections of part 142, subparts K
through R, would specify that those who transmit electronic
transactions covered by the transaction standards must use the
appropriate transaction standard, including the code sets that are
required by that standard. These sections would further specify that
those who receive electronic transactions covered by the transaction
standards must be able to receive and process all standard codes,
without regard to local policies regarding reimbursement for certain
conditions or procedures, coverage policies, or need for certain types
of information that are not part of a standard transaction.

E. Transaction Standards

    The HISB prepared an inventory of candidate standards to be
considered by HHS in the standards adoption process. HHS wrote letters
to the NUBC, the NUCC, the ADA, and WEDI in order to consult with them
as required by the Act. HHS also consulted with them informally and
received their support on all the transactions at various meetings and
at the public meeting we held on July 9, 1997, in Bethesda, Maryland.
The NCVHS held public hearings during which any person could present
his or her views. There also were opportunities for those who could not
attend the public hearings to provide written advice, and many did take
advantage of that opportunity. In addition, HHS welcomed informal
advice from any industry member, and that advice was taken into
consideration during the decision making process.
    Recommendations for enrollment and disenrollment in a health plan,
eligibility for a health plan, health care payment and remittance
advice, health plan premium payments, first report of injury, health
claim status, and referral certification and authorization were
overwhelmingly in favor of ASC X12N implementations. Also, the
recommendation for the National Council of Prescription Drug Programs
(NCPDP) version 3.2 telecommunication standard format was not
controversial and was nearly unopposed.
    The recommendations for the professional and institutional claims
were quite controversial, with some factions supporting the de facto
flat file standards that have been in use for many years and others
supporting X12N standards.

[[Page 25287]]

    (A flat file is a file that has fixed-length records and fixed-
length fields.) Some associations proposed dual standards with the flat
file claim standards (National Standard Format for professional claims
and electronic UB-92 for institutional claims) to sunset on a specified
date, at which time the parallel ASC X12N claim implementations would
become the sole standards to be used.
    The HHS claims implementation team recommended, and we are
proposing for adoption, the following standards as implemented through
the appropriate implementation guides, data content and data conditions
specifications, and data dictionary:
    <bullet> Health care claim and equivalent encounter:
    + Retail drug: NCPDP Telecommunication Claim version 3.2 or
equivalent NCPDP Batch Standard Version 1.0.
    + Dental claim: ASC X12N 837--Health Care Claim: Dental.
    + Professional claim: ASC X12N 837--Health Care Claim:
Professional.
    + Institutional claim: ASC X12N 837--Health Care Claim:
Institutional.
    <bullet> Health care payment and remittance advice: ASC X12N 835--
Health Care Payment/Advice.
    <bullet> Coordination of benefits:
    + Retail drug: NCPDP Telecommunication Standard Format version 3.2
or equivalent NCPDP Batch Standard Version 1.0.
    + Dental claim: ASC X12N 837--Health Care Claim: Dental.
    + Professional claim: ASC X12N 837--Health Care Claim:
Professional.
    + Institutional claim: ASC X12N 837--Health Care Claim:
Institutional.
    <bullet> Health claim status: ASC X12N 276/277--Health Care Claim
Status Request and Response.
    <bullet> Enrollment and disenrollment in a health plan: ASC X12
834--Benefit Enrollment and Maintenance.
    <bullet> Eligibility for a health plan: ASC X12N 270/271--Health
Care Eligibility Benefit Inquiry and Response.
    <bullet> Health plan premium payments: ASC X12 820--Payment Order/
Remittance Advice.
    <bullet> Referral certification and authorization: ASC X12N 278--
Health Care Services Review--Request for Review and Response.
    We chose version 4010 of X12 for each ASC X12N transaction. Later
in this proposed rule is a list of candidates for most transactions.
The ASC X12N transactions listed as candidate standards in this section
were originally specified as version 3070 because at the time of HISB
inventory version 3070 was the most current DSTU version. However, we
are proposing that version 4010 would be proposed in lieu of version
3070 for the following reasons:
    <bullet> Version 4010 is millennium ready.
    <bullet> Version 4010 allows for up-to-date changes to be
incorporated into the standards.
    We will propose a claims attachment standard in a separate document
as the statute gives the Secretary an additional year to designate this
standard. The attachment standards are likely to be drafted so that
health care providers using Health Level 7 (HL7) for their in-house
clinical systems would be able to send HL7 clinical data to health
plans. Anyone wishing to use the HL7 may want to consider a translator
that supports the administrative transactions proposed in this proposed
rule and the HL7.
    We will also propose a standard for first report of injury
transactions in a later rule for reasons explained in depth under
section II.E.9.
1. Standard: Health Claims or Equivalent Encounter Information (Subpart
K)
[Please label any written comments or e-mailed comments about this
section with the subject: Health Claims]
a. Background
    By the mid-1970s, several health care industry associations had
formed committees to attempt to standardize paper health care claim or
equivalent encounter forms. By the mid-1980s, those committees were
standardizing electronic formats with equivalent data. By the early
1990s, some of these committees were working with the ASC X12N
Subcommittee. Nevertheless, many health plans continued to require
local formats, revising the formats to suit their own purposes rather
than following procedures in order to revise the standards. As a
result, it is not unusual for health care providers to support many
electronic health care claim formats, either directly or by using
clearinghouse services, in order to do business with the many health
plans covering their patients.
    The committees that pursued organizational goals (such as a more
cost-efficient environment for the provision of health care, more time
and resources for patient care, and fewer resources for administration)
were usually sponsored by health care provider associations such as the
National Council of Prescription Drug Programs, the AMA, the American
Hospital Association, and the ADA. Each association contributed to the
development of the four corresponding accredited claims standards
proposed for adoption, with content based on de facto standards derived
over time.
i. Candidates for the Standard
    The HISB developed an inventory of health care information
standards for HHS to consider for adoption. The candidate standards for
health claims or equivalent encounter information were:
    <bullet> Retail drug: NCPDP Telecommunications Standard Format
Version 3.2.
    <bullet> Dental claim: ASC X12N 837--health care claim: dental,
version 3070 implementation.
    <bullet> Professional claim: ASC X12N 837--health care claim:
Professional, version 3070 implementation and HCFA National Standard
Format (NSF), version 002.00.
    + Institutional claim: ASC X12N 837--health care claim:
institutional, version 3070 implementation and HCFA Uniform Bill (UB-
92) version 4.1
ii. Recommended Standards
    The four standards for claims or equivalent encounter information
we are proposing in this proposed rule are:
    <bullet> Retail drug: NCPDP Telecommunications Standard Format
Version 3.2 and equivalent NCPDP Batch Standard Version 1.0.
    The NCPDP was formed in 1977 as the result of a Senate Ad Hoc
Committee to study standardization within the pharmacy industry. The
NCPDP was specifically named in HIPAA as a standards setting
organization accredited by ANSI. The first NCPDP Telecommunications
Standard was developed in 1988 and allowed pharmacists to process
claims in an interactive environment. The NCPDP developed the
Telecommunications Standard Format for electronic communication of
claims between pharmacy providers, insurance carriers, third-party
administrators, and other responsible parties. The standard addresses
the data format and content, the transmission protocol, and other
appropriate telecommunications requirements. The NCPDP received input
from all aspects of the prescription drug industry and designed the
standard to be easy to implement and flexible enough to respond to the
changing needs of the industry. The NCPDP also provides changes and
additions to the standard to support unique requirements included in
government mandates.
    The NCPDP telecommunications standard for claim and equivalent
encounter data is on-line interactive. There is also a batch
implementation of this standard, the NCPDP Batch Standard Version 1.0.
The

[[Page 25288]]

telecommunications standard data set includes eligibility/enrollment,
claim, and remittance advice information. When the transaction is
complete, the sending pharmacy knows whether the customer is covered by
the health plan, the health plan knows all of the details of the claim,
the pharmacy knows whether the claim will be paid, and how much it will
be paid, and any pertinent details regarding the amount of payment or
the reason for denial of payment. This standard met all 10 of the
criteria used to assess standards.
    Since retail drug claims are a specialized class and the NCPDP
structure contains claims, enrollment/eligibility and remittance advice
data, we did not recommend the ASC X12N 837 for the retail drug
standard.
    <bullet> Dental claim: ASC X12N 837--Health Care Claim: Dental.
    The ADA recommended adoption of the ASC X12N 837, version 3070.
This standard met all of the criteria used to assess standards.
    Professional claim: ASC X12N 837--Health Care Claim: Professional.
    HHS consulted with external groups in accordance with the
legislation. These groups included the NCVHS, WEDI, the NUCC, the NUBC,
the ADA, and many others.
    In a letter, dated March 12, 1997, the NUCC stated,

    The NUCC recommends to the Secretary of HHS that the ANSI ASC
X12 837 transaction be adopted as a standard for electronically
transmitting professional claims or equivalent encounters, including
coordination of benefits information, as per the Administrative
Simplification provision of the HIPAA.
    The NUCC recommends that a migration plan be adopted to allow
current trading partners who use the National Standard format (NSF)
to convert to a standard NSF, which will be implemented by the
Secretary per the HIPAA, by February 2000 and to convert to the
standard ANSI ASC X12 837 by February 2003.

    The AMA also supported the NUCC recommendation. However, the NCVHS
and WEDI recommended adoption of the ASC X12N 837 transaction. The
claims implementation team decided that, since the NUCC was clear that
it wanted the ASC X12N 837 transaction in the end, it would be better
to invest in migrating to that, rather than support two standards and
take more time for the transition.
    Our recommendation takes into account the advice we received from
organizations that we consulted directly and indirectly and from those
who testified before the NCVHS subcommittee on Health Data Needs,
Standards, and Security. These organizations included entities
representing all parts of the health care industry--health care
providers, health plans, and vendors/clearinghouses--to which the
standard will apply.
    The ASC X12N 837 standard met all 10 criteria used to assess
standards. The NSF met 5 of the criteria. The NSF does not improve the
efficiency and effectiveness of the health care system (#1) because a
standard implementation does not exist. The NSF meets the needs of many
users, particularly Medicare, but not all of the needs of the user
community (#2). It is not supported by an ANSI-accredited SDO (#5).
There are no testing or implementation procedures in place (#6). Due to
its fixed-length structure, it does not incorporate flexibility to
adapt easily to change (#10).
    Institutional claim: ASC X12N 837--Health Care Claim--
Institutional.
    HHS consulted with the groups identified under our discussion of
the standard for professional claims above in this section and also
consulted with the NUBC on the selection of an institutional standard.
In a letter dated March 11, 1997, the NUBC stated,

    The NUBC recommends the use of the EMC V.4 (UB-92) as the single
electronic standards transaction for institutional health claims and
encounters. We recommend the EMC V.4 for the following reasons:

--Nearly all institutional providers already use the EMC V.4 with a
high level of success.
--The EMC V.4 has been in full production for over four years.
--There is no additional cost for providers to adopt the EMC V.4.
--It reduces the risks associated with the adoption of a new,
complex and relatively untested transaction.
--It allows for a more successful transition to the 837.

    We agree with HCFA that coordination of benefits transactions
(COB) do not require a fully separate transaction for the health
care claim or encounter. The NUBC also believes that the EMC V.4
should be used as the platform for transmitting COB data elements.
    At the present time, the NUBC cannot recommend the use of the
837 as the electronic institutional claim standard.
    We recommend that larger scale testing of the 837 proceed. Once
the transaction has proven that it can successfully handle the
claim/encounter, the NUBC will consider endorsing the 837 as a
successor standard.

    The American Hospital Association also supported NUBC's
recommendation. The NCVHS and WEDI recommended adoption of the ASC X12N
837 transaction.
    Due to the batch nature of the ASC X12N transactions, each
transaction type and its corresponding data elements are separated by
function. The adoption of the transactions for those functions (such as
claims and remittance advice), with the exception of the NCPDP
transaction, have all been recommended to be ASC X12N transactions. The
ASC X12N 837 met all 10 criteria used to assess the standards. The UB-
92 met 5 of the criteria. The UB92 does not improve the efficiency and
effectiveness of the health care system (#1) because a standard
implementation does not exist. The UB92 is not supported by an ANSI-
accredited SDO (#5). There are no testing or implementation procedures
in place (#6). The UB92 documentation is ambiguous in some instances
and not always precise (#8). Due to its fixed-length structure, it does
not incorporate flexibility to adopt easily to change (#10). The NUBC
stated it would consider the 837, once successfully tested. For these
reasons, we have concluded that the ASC X12N 837 should be adopted as
the standard format implementation of the institutional claim.
    For the most part, a health care provider would use only one of
these four health care claim implementations, although a large
institution might use the institutional claim for inpatient and
outpatient claims, the professional claim for staff physicians who see
private patients within the institution, and the retail pharmacy claim,
if applicable, which typically would be administered separately from
the rest of the institution.
    Data elements for the various standards and other information may
be found in Addendum 1.
b. Requirements
    In Sec. 142.1102, we would specify the exact standards we are
adopting: the NCPDP Telecommunications Standard Format Version 3.2 and
equivalent NCPDP Batch Standard Version 1.0; the ASC X12N 837--Health
Care Claim: Dental, the ASC X12N 837--Health Care Claim: Professional,
and the ASC X12N 837--Health Care Claim: Institutional. We would
specify where to find the implementation guide and incorporate it by
reference.
    i. Health plans.
    In Sec. 142.1104, Requirements: Health plans, we would require
health plans to accept only the standards specified in Sec. 142.1102
for electronic health claims or equivalent encounter information.
    ii. Health care clearinghouses.
    We would require in Sec. 142.1106 that each health care
clearinghouse use the standard specified in Sec. 142.1102 for health
claims or equivalent encounter information transactions.
    iii. Health care providers.

[[Page 25289]]

    In Sec. 142.1108, Requirements: Health care providers, we would
require each health care provider that transmits health claims and
encounter equivalent electronically to use the standard specified in
Sec. 142.1102.
c. Implementation Guide and Source
    The source of implementation guides for the NCPDP telecommunication
claim version 3.2 and equivalent NCPDP Batch Standard Version 1.0 is
the National Council for Prescription Drug Programs, 4201 North 24th
Street, Suite 365, Phoenix, AZ, 85016; telephone 602-957-9105; FAX 602-
955-0749. The web site address is: http://www.ncpdp.org.
    NCPDP standards are available to the public on a 3\1/2\'' diskette
for a fee. A set is defined as containing the Telecommunications
Standard, Standard Claims Billing Tape Format, Eligibility Verification
and Response, and Enrollment. Membership in the NCPDP is not a
requirement for obtaining the standards and associated implementation
guides. The website contains information and instructions for obtaining
these documents.
    The implementation guides for the ASC X12N standards are available
at no cost from the Washington Publishing Company site at the following
Internet address: http://www.wpc-edi.com/hipaa/.
    Users without access to the Internet may purchase implementation
guides from Washington Publishing Company directly: Washington
Publishing Company, 806 W. Diamond Ave., Suite 400, Gaithersburg, MD,
20878; telephone 301-590-9337; FAX: 301-869-9460. The data definitions
and description of data conditions may also be obtained from this
website.
    The names of the implementation guides are:

ASC X12N 837--Health Care Claim: Professional (004010X098)
ASC X12N 837--Health Care Claim: Institutional (004010X096)
ASC X12N 837--Health Care Claim: Dental (004010X097)
2. Standard: Health Care Payment and Remittance Advice (Subpart L)
[Please label any written comments or e-mailed comments about this
section with the subject: Payment]
a. Background
    The filing of claims for reimbursement (especially when a large
number of patients have more than one insurer), control of those
claims, association of payments, denials or rejections received with
the patient records, posting of adjudication data to those records,
reconciliation of payments sent to financial institutions, and storage
and retrieval of patient accounts is a very labor intensive process
when conducted manually. The process is further complicated by the
diverse requirements and processes for activities such as billing,
payment, and notification of the large number of health plans, which
requires that health care provider staff stock multiple types of forms,
be trained in the variety of requirements, be able to interpret the
wide range of coding schemes used by each health plan, and maintain
billing and payment manuals for each health plan.
    We believe that automation can greatly reduce the labor required
for these processes, especially if every health plan becomes automated
around a standard model so that health care providers are not required
to deal with different requirements and software. Automation of the
payment and remittance advice process can provide many benefits: health
care providers can post claim decisions and payments to accounts
without manual intervention, eliminating the need for re-keying data;
payments can be automatically reconciled with patient accounts; and
resources are freed to address patient care rather than paper and
electronic administrative work.
    The ASC X12N Subcommittee established a workgroup in late 1991 to
develop the ASC X12N 835--Health Care Claim Payment/Advice, since there
was no existing standard capable of handling the large datasets
necessary for health care.
i. Candidates for the Standards
    Prior to development of the ASC X12N 835, there were very few
electronic formats available for the health care claim payment and
remittance advice function. As researched by the HISB, existing
standards that could be considered for national implementation under
HIPAA for health care claim paym