Health Insurance Reform: Standards for Electronic Transactions. D. Overall Cost/Benefit Analysis


To assess the impact of the HIPAA administrative simplification provisions, it is important to understand current industry practices. A 1993 study by Lewin-VHI estimated that administrative costs comprised 17 percent of total health expenditures. Paperwork inefficiencies are a component of those costs, as are the inefficiencies caused by the more than 400 different data transmission formats currently in use. Industry groups such as ANSI ASC X12N have developed standards for EDI transactions which are used by some health plans and health care providers. However, migration to these recognized standards has been hampered by the inability to develop a concerted approach. For example, even “standard” formats such as the Uniform Bill (UB-92), the standard Medicare hospital claim form (which is used by most hospitals, skilled nursing facilities, and home health agencies for inpatient and outpatient claims) are customized by health plans and health care providers.

Several reports have made estimates of the costs and/or benefits of implementing EDI standards. In assessing the impact of the HIPAA administrative simplification provisions, the Congressional Budget Office reported that:

“The direct cost of the mandates in Title II of the bill would be negligible. Health plans (and those health care providers who choose to submit claims electronically) would be required to modify their computer software to incorporate new standards as they are adopted or modified...Uniform standards would generate offsetting savings for health plans and health care providers by simplifying the claims process and coordination of benefits.” (Page 4 of the Estimate of Costs of Private Sector Mandates in the Congressional Budget Office report)

The most extensive industry analysis of the effects of EDI standards was developed by WEDI in 1993, which built upon a similar 1992 report. The WEDI report used an extensive amount of information and analysis to develop its estimates, including data from a number of EDI pilot projects. The report included a number of electronic transactions that are not covered by HIPAA, such as materials management. The WEDI report projected implementation costs ranging between $5.3 billion and $17.3 billion (3, p. 9-4) and annual savings for the transactions covered by HIPAA ranging from $8.9 billion and $20.5 billion (3, pp. 9-5 and 9-6). Lewin estimated that the data standards proposed in the Healthcare Simplification and Uniformity Act of 1993 would save from 2.0 to 3.9 percent in administrative costs annually ($2.6 to $5.2 billion based on 1991 costs) (1, p.12). A 1995 study commissioned by the New Jersey Legislature estimated yearly savings of $760 million related to EDI claims processing, reducing claims rejection, performing eligibility checks, decreasing accounts receivable, and other potential EDI applications in New Jersey alone (4, p.316).

We have drawn on the 1993 WEDI report for many of our estimates because it is the most comprehensive available. However, our conclusions differ, especially in the area of savings, for a number of reasons. The WEDI report was intended to assess the savings in an EDI environment that is much broader than is covered by HIPAA. Furthermore, EDI continued to grow through the 1990's (see Faulkner & Gray, 2000) , and it is reasonable to assume that EDI would continue to grow for the foreseeable future even without HIPAA. The Department’s objective in this analysis is to assess the effect of the legislation and these regulations on the health care sector; only a portion of the benefits of EDI identified by WEDI would be attributable to HIPAA.