As mentioned above, we have made changes to the original impact analysis published in the NPRM. In response to the public comments regarding the NPRM impact analysis, the Department did a thorough review of the original assumptions and data sources. In the review process, it became clear that the original data sources required updating and that there were some inconsistencies in the original assumptions. What follows is an explanation of each change and the rationale behind the new methodology.

** Ten Year Time-Frame:** This Impact Analysis changes the original NPRM’s time-frame from five years to ten years. The need for this change results from the nature of the HIPAA regulations: there will be significant one-time initial investments followed by many years of savings. Because a five year impact analysis will show the full cost of the regulations but truncate the savings significantly, a ten year time-frame allows for a fuller presentation of the benefits administrative simplification offers the health care industry. As an illustration of the difference between a five year and a ten year time frame, the initial NPRM Impact Analysis estimated $1.5 billion in net savings to the industry, but a ten year analysis using identical assumptions as the original NPRM would estimate $24.2 billion in net savings. The Department believes it is more appropriate to use a time frame that more accurately estimates the long term impact of the regulations.

** New Data:** Given the length of time between the publication of the NPRM and the final rule, it was necessary to update data for the number of plans and providers, the number of claims, and the current proportion of claims that are electronic in the health care industry. Updated data on the number of different types of plans and providers were obtained from a variety of sources, including the 1997 Economic Census, the

*1999 Statistical Abstract of the United States*, the American Medical Association and other industry groups, the Department of Labor, and the Department of Health and Human Services. In the NPRM, the 1993 WEDI report was used to determine the total number of claims in the health care industry for 1993, which was trended forward using data from the 1996 edition of Faulkner and Gray’s

*Health Data Directory*to estimate the number of claims annually over the 1998 to 2002 time frame. For the final impact analysis, we used 1999 data (the most recent available) from the 2000 edition of Faulkner and Gray’s

*Health Data Directory*to determine the total number of claims in the industry, the number of claims by provider type, and the percent of claims that are billed electronically by provider type.

The baseline rate of growth in the number of claims and the rate of growth in the proportion of electronic claims were revised using historical trend data from the 2000 Faulkner and Gray report. In the final impact analysis, the average annual rate of growth over the 1995 to 1999 period is used to determine the annual increase in the number of claims and in the proportion of claims that are electronic, for all claims in the industry and by provider type.

** New Electronic Claims Growth Assumptions:** This Impact Analysis makes a refinement to the original assumptions for determining the rate of increase in electronic claims due to HIPAA. The model assumes that electronic claims submissions will increase in the first three years after the implementation at a rapid pace as many health care providers and health plans make the switch to electronic formats but then the rate will decrease over time. The model also assumes some providers will not make the transition to EDI during the ten year period. Specifically, we assumed that the proportion of manual claims will decrease by twenty percent annually from 2002 to 2005 and then will decrease by ten percent annually from 2006 to 2011. By contrast, the original NPRM model assumed the rate of increase in electronic claims would grow by two additional percentage points above the baseline rate each year.

** Savings per Claim:** This impact analysis uses more consistent assumptions for the savings per claim. In the original NPRM, the savings per claim for payers and each provider type was based on the ranges developed by WEDI. However, the NPRM did not consistently pick from a given point in the WEDI ranges, but rather various points were chosen for different groups based on limited anecdotal information. Upon further analysis, the Department no longer believes there is a justifiable basis to pick from different parts of the WEDI ranges, given the lack of additional evidence to support more precise assumptions. Therefore, the final impact analysis assumes the savings per claim will be at the mid-point of the WEDI ranges for payers and all providers.

** Inflation Adjustment:** The final Impact Analysis corrects an inconsistency found in the NPRM regarding an inflation adjustment to the annual savings per claim assumptions. Specifically, the NPRM increased the savings per claim by 3% annually to account for inflation. This adjustment was an inconsistency because no other figures in the NPRM impact analysis were adjusted for inflation. Therefore, for the final impact analysis, all dollar estimates, including the savings per claim, are in current 2000 dollars.

** First Year Savings:** Another change made to the impact analysis was to include savings in the first year of mandatory compliance with the rule. The NPRM assumed that there would be no savings in the first year of mandatory compliance, yet we believe that this assumption was in error because most entities must comply no later than two years after the effective date of the final rule (three years for small health plans), and therefore some savings will begin two years after publication of the rule. In fact, it could be argued that some entities will come into compliance prior to the two year deadline and begin to produce savings, but in order to produce a conservative estimate, this analysis only assumes that savings begin in the first year of mandatory compliance.

** Impact of Changes:** The cumulative effect of the changes made to the impact analysis increases the net savings from administrative simplification. Although the NPRM only showed five year costs and savings, the underlying analysis included ten year estimates as well. Compared to the original impact analysis, the final impact analysis increases the estimated gross costs of the rule from $5.8 billion to $7.0 billion over ten years. The original impact analysis produced gross savings of $30 billion and net savings of $24.2 billion over ten years while the new impact analysis produces gross savings of $36.9 billion and net savings of $29.9 billion over ten years. Although the new impact analysis now shows an additional $5.7 billion in savings over ten years, the Department believes the revised assumptions underlying these estimates are based on better, more up-to-date data, are more consistent, and are more reasonable. The discounted present value of the savings is $19.1 billion over ten years. Furthermore, the updated impact analysis still produces a conservative estimate of the impact of administrative simplification. For example, the new impact analysis assumes that over the ten-year post- implementation period, only 11.2% of the growth in electronic claims will be attributable to HIPAA. Given the widely recognized benefits standardization offers the health care industry, assuming that only 11.2% of all health claims will be affected by HIPAA represents a reasonably conservative estimate of the impact .