Health Insurance Reform: Standards for Electronic Transactions. A. Executive Summary


Title II of the Health Insurance Portability and Accountability Act (HIPAA) provides a statutory framework for the establishment of a comprehensive set of standards for the electronic transmission of health information. Pursuant to this Title, the Department of Health and Human Services published proposed regulations concerning electronic transactions and code sets (May, 1998), national standard health care provider identifier (May, 1998), national standard employer identifier (June, 1998), security and electronic signature standards (August, 1998), and standards for privacy of individually identifiable health information (November, 1999).

Currently, there are numerous electronic codes available in the market. Without government action, a common standard might eventually emerge as the result of technological or market dominance. However, the uneven distribution of costs and benefits may have hindered the development of a voluntary industry-wide standard. Congress concluded that the current market is deadlocked and that the health care industry would benefit in the long run if government action were taken now to establish an industry standard. This approach, however, does entail some risks. For example, whenever the government chooses a standard, even one that is the best available at any point in time, the incentives to develop a better standard may be diminished because there is virtually no market competition and government-led standards often take longer to develop than those developed as the result of market pressures. The approach taken in this regulation is designed to encourage and capitalize on market forces to update standards as needs and technology change and have the government respond as quickly and efficiently as possible to them.

As discussed in the proposals, the regulations will provide a consistent and efficient set of rules for the handling and protection of health information. The framework established by these administrative simplification regulations is sufficiently flexible to adapt to a health system that is becoming increasingly complex through mergers, contractual relationships, and technical and telecommunication changes. Moreover, the promulgation of a final privacy standard will enhance public confidence that highly personal and sensitive information is being properly protected, and therefore, it will enhance the public acceptance of increased use of electronic systems. Collectively, the standards that will be promulgated under Title II can be expected to accelerate the growth of electronic transactions and information exchange in health care.

The final Impact Analysis provides estimates based on more current information and more refined assumptions than the original NPRM analysis. Since the original estimates were made, some of the voluntary development and investment in technology that was anticipated at the time of the proposal was diverted or delayed because of Y2K concerns; the investment is still expected but the timing of it has been delayed. The analysis utilizes more current data and reflects refinements in underlying assumptions based on the public comments and other information that has been collected on market changes. In addition, this analysis extended the time period for measuring costs and savings from five years to ten years. Given that the HIPAA provisions require initial expenses but subsequently produce a steady stream of savings, a ten year analysis more accurately measures the impact of the regulations.

This final rule has been classified as a major rule subject to Congressional review. The effective date is October 16, 2000. If, however, at the conclusion of the Congressional review process the effective date has been changed, we will publish a document in the Federal Register to establish the actual effective date or to issue a notice of termination of the final rule action.

Therefore, the following analysis includes the expected costs and benefits of the administration simplification regulations related to electronic systems for ten years. Although only the electronic transactions standards are being promulgated in this regulation, the Department expects affected parties to make systems compliance investments collectively because the regulations are so integrated. Moreover, the data available to us are also based on the collective requirements of the regulations; it is not feasible to identify the incremental technological and computer costs for each regulation based on currently available data. The Department acknowledges that the aggregate impact analysis does not provide the information necessary to assess the choice of specific standards.

The costs of implementing the standards specified in the statute are primarily one-time or short-term costs related to conversion. These costs include system conversion/upgrade costs, start-up costs of automation, training costs, and costs associated with implementation problems. These costs will be incurred during the first three years of implementation. Although there may be some ongoing maintenance costs associated with these changes, vendors are likely to include these costs as part of the purchase price. Plans and providers may choose to upgrade their systems beyond the initial upgrade required by the rule as technology improves over time. Since the rule only requires an initial systems upgrade, the costs of future upgrades are not included in the cost estimate of the rule. The benefits of EDI include reduction in manual data entry, elimination of postal service delays, elimination of the costs associated with the use of paper forms, and the enhanced ability of participants in the market to interact with each other.

In this analysis, the Department has used conservative assumptions and it has taken into account the effects of the trend in recent years toward electronic health care transactions. Based on this analysis, the Department has determined that the benefits attributable to the implementation of administrative simplification regulations will accrue almost immediately but will not exceed costs incurred by health care providers and health plans until after the second year of implementation. After the second year, however, the benefits will continue to accrue for an extended period of time. The total net savings for the period 2002-2011will be $29.9 billion (a net savings of $13.1 billion for health plans, and a net savings of $16.7 billion for health care providers). The single year net savings for the year 2011 will be $5.6 billion ($2.5 billion for health plans and $3.1 billion for health care providers). The discounted present value of these savings is $19.1 billion over the ten years. These estimates do not include the sizeable secondary benefits that are likely to occur through expanded e-commerce resulting from standardized systems.

In accordance with the provisions of Executive Order 12866, this rule was reviewed by the Office of Management and Budget.