Health Insurance Reform: Standards for Electronic Transactions. I. Cost/Benefit Tables

10/16/2000

The tables below illustrate the essential costs and savings for health plans and health care providers to implement the standards and the savings that will occur over time as a result of the HIPAA administrative simplification provisions. All estimates are stated in 2000 dollars. The costs are based on estimates of a moderately complex set of software upgrades, which were provided by the industry. The range of costs and savings that health plans and health care providers will incur is quite large and is based on such factors as the size and complexity of the existing systems, ability to implement using existing low-cost translator software, and reliance on health care clearinghouses to create standard transactions. The cost of a moderately complex upgrade represents a reasonable mid-point in this range. In addition, we assume that health plans and health care providers that operate EDI systems will incur implementation costs related to manual operations to make those processes compatible with the EDI systems. For example, manual processes may be converted to produce paper remittance advices that contain the same data elements as the EDI standard transaction. These costs are estimated to equal 50 percent of the software upgrade cost. Health care providers that do not have existing EDI systems will also incur some costs due to HIPAA, even if they choose not to implement EDI for all of the HIPAA transactions. For example, a health care provider may have to change accounting practices in order to process the revised paper remittance advice discussed above. We have assumed the average cost for non-EDI health care providers and health plans to be half that of already- automated health care providers and health plans.

Savings due to standardization come from three sources. First, there are savings due to increased use of electronic claims submissions throughout the health care industry. Second, there will be savings based on simplification of the manual claims that remain in the system. Finally, there will be savings due to increased electronic non-claims transactions, such as eligibility verifications and coordination of benefits. It is important to view these estimates as an attempt to furnish a realistic context rather than as precise budgetary predictions. The estimates also do not include any benefits attributable to the qualitative aspects of administrative simplification, nor is there any inclusion of secondary benefits. Industry people have argued that standardization will accelerate many forms of new e-commerce. These innovations may generate significant savings to the health care system or improvements in the quality of health but they have not been included here.

More detailed information regarding data sources and assumptions is provided in the explanations for the specific tables.

Table 1 below shows estimated costs and savings for health plans. The number of plans listed in the chart is derived from the 1993 WEDI report, trade publications, and data from the Department of Labor. The cost per health plan for software upgrades is based on the WEDI report, which estimated a range of costs required to implement a fully capable EDI environment, and more current estimates provided by the industry. The high-end estimates ranged from two to ten times higher than the low-end estimates. Lower end estimates were used in most cases because, as explained above, HIPAA does not require changes as extensive as envisioned by WEDI. The estimated percentages of health plans that accept electronic billing are based on reports in the 2000 edition of Faulkner & Gray’s Health Data Directory (5). The total cost for each type of health plan is the sum of the cost for EDI and non-EDI health plans. Cost for EDI health plans is computed as follows:

(Total Entities x EDI % x Average Upgrade Cost x 1.5)

(NOTE: As described above, EDI health plans would incur costs both to upgrade software and to make manual operations compatible with EDI systems. The cost of changing manual processes is estimated to be half the cost of system changes.)

Cost for non-EDI health plans is computed as follows:

Total entities x (1 - EDI %) x Average Upgrade Cost x 0.5

(NOTE: As described above, cost to non-EDI health plans is assumed to be half the cost of systems changes for EDI plans.)

The data available permit us to make reasonable estimates of the costs that will be borne by different types of health plans (Table 1). Unfortunately, though we can estimate the overall savings, we cannot reliably estimate their distributional effects. Hence, only the aggregate savings estimates are presented.

Table 1. Health Plan Implementation Costs and Savings (2002-2011)
Type of Health Plan Number of Health Plans Average Cost % EDI Total Cost (in Millions) Savings (in Millions)
Large commercials 250 $1,000,000 90 $ 350  
Small commercials 400 500,000 50 200  
Blue Cross/ Blue Shield 48 1,000,000 100 98  
Third-party administrators 750 500,000 50 375  
HMO/PPO 1,630 250,000 60-85 487  
Self-administered 50,000 50,000 25 1,875  
Other employer health plans 2,550,000 100 00 127  
TOTAL (Undiscounted)       $3,512 $16,600
TOTAL (Discounted)       $3,300 $11,600

Note: The estimates in Table 1 show cost savings in 2000 dollars (estimates in the proposed rule were in 1998 dollars). The Office of Management and Budget now requires all agencies to provide estimates using a net present value calculation. Furthermore, OMB recommends the use of a 7 percent discount rate based on the current cost of capital. The discounted totals in the table are based on this rate beginning in 2003.

Table 2 illustrates the costs and savings attributable to various types of health care providers.

The number of entities (practices or establishments, not individual health care providers) is based on the 1997 Economic Census, the 1999 Statistical Abstract of the United States, the American Medical Association’s Physician Characteristics and Distribution in the U.S. (2000- 2001 edition), and Department of Health and Human Services data trended to 2002. Estimated percentages of EDI billing are based on the 2000 edition of Faulkner & Gray’s Health Data Directory or are Departmental estimates.

The cost of software upgrades for personal computers (PCS) in provider practices or establishments is based on reports of the cost of software upgrades to translate and communicate standardized claims forms. The low end of the range of costs is used for smaller practices or establishments and the high end of the range of costs for larger practices/establishments with PCS. The cost per upgrade estimate for hospitals and other facilities is a Departmental estimate derived from estimates by WEDI and estimates of the cost of new software packages in the literature. The estimates fall within the range of the WEDI estimates, but that range is quite large. For example, WEDI estimates that the cost for a large hospital upgrade will be from $50,000 to $500,000.

The $20.2 billion in savings in Table 4 represents savings to health care providers for the first ten years of implementation. The discounted present value of these savings is $19.1 billion over ten years. They are included to provide a sense of how the HIPAA administrative simplification provisions will affect various entities.

Table 2. Health Care Provider Implementation Costs and Savings (2002-2011)
Type of Health Care Provider Number of Health Care Providers (2002 est.) Average Cost % EDI Total Cost ($ Millions) Savings ($ millions)
Federal Hospitals 266 $250,000 88 $ 92  
Non-Federal Hospitals <100 beds 2,639 100,000 88 364  
Non-Federal Hospitals 100+ beds 2,780 250,000 88 960  
Nursing facility <100 beds 9,606 10,000 90 134  
Nursing facility 100+ beds 8,833 20,000 90 247  
Home health agency 8,900 10,000 90 184  
Hospice 2,027 10,000 90 28  
Residential Mental Health/ Retardation/ Substance Abuse Facilities 22,339 10,000 10 134  
Outpatient care centers 24,034 10,000 75 300  
Pharmacy 43,900 4,000 96 256  
Medical labs 9,500 4,000 85 51  
Dental labs 7,900 1,500 50 12  
DME 112,200 1,500 50 168  
Physicians solo and groups less than 3 193,000 1,500 50 290  
Physicians groups 3+ with computers 20,000 4,000 90 112  
Physicians groups 3+ no automation 1,000 0 00 0  
Osteopaths 13,600 1,500 10 12  
Dentists 120,000 1,500 30 144  
Podiatrists 9,100 1,500 05 8  
Chiropractors 32,000 1,500 05 26  
Optometrists 18,800 1,500 05 16  
Other professionals 33,400 1,500 05 28  
TOTAL (Undiscounted)       $3,566 $20,200
TOTAL (Discounted)       $3,300 $14,100

Note: The estimates in Table 2 show cost savings in 2000 dollars (estimates in the proposed rule were in 1998 dollars). The Office of Management and Budget now requires all agencies to provide estimates using a net present value calculation. Furthermore, OMB recommends the use of a 7 percent discount rate based on the current cost of capital. The discounted totals in the table are based on this rate beginning in 2003.

Table 3 shows the estimates we used to determine the portion of EDI claims increase attributable to the HIPAA administrative simplification provisions. The proportion of claims that would be processed electronically even without HIPAA is assumed to grow at the same rate from 2002 through 2011 as it did from 1995-1999. The proportion of “other” health care provider claims is high because it includes pharmacies that generate large volumes of claims and have a high rate of electronic billing.

The increase in EDI claims attributable to HIPAA is highly uncertain and is critical to the savings estimate. These estimates are based on an analysis of the current EDI environment. Most of the growth rate in electronic billing is attributable to Medicare and Medicaid; smaller private insurers and third party administrators (who are not large commercial insurers) have lower rates of electronic billing and may benefit significantly from standardization.

Table 3. Percent Growth in EDI Claims Attributable to HIPAA AS Provisions (Cumulative)
Type of Health Care Provider 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Physician:
% before HIPAA 53% 55% 58% 61% 63% 65% 67% 69% 71% 73%
% after HIPAA 63 72 80 83 86 88 90 91 93 94
Difference 10 17 21 22 23 23 22 22 22 21
Hospital:
% before HIPAA 87 88 89 89 90 91 91 92 92 93
% after HIPAA 90 93 95 95 96 97 97 98 98 98
Difference 3 5 6 6 6 6 6 6 6 6
Other:
% before HIPAA 83 84 86 87 88 89 90 91 92 93
% after HIPAA 87 91 93 95 96 96 97 98 98 99
Difference 4 6 7 7 7 7 7 6 6 6

Table 4 shows the annual costs, savings, and net savings over a ten year implementation period which are gained by using the HIPAA standards. Virtually all of the costs attributable to HIPAA will be incurred within the first three years of implementation, since the statute requires health plans other than small health plans to implement the standards within 24 months and small health plans to implement the standards within 36 months of the effective date of the final rule. As each health plan implements a standard, health care providers that conduct electronic transactions with that health plan will also implement the standard. No net savings would accrue in the first year because not enough health plans and health care providers will have implemented the standards. Savings will increase as more health plans and health care providers implement the standards, thus exceeding costs in the fourth year. At that point, the majority of health plans and health care providers will have implemented the standards and, as a result, costs will decrease and benefits will increase.

The savings per claim processed electronically instead of manually is based on the mid- point of the range estimated by WEDI.: $1 per claim for health plans, $1.49 for physicians, $0.86 for hospitals and $0.83 for others. These estimates are based on surveys of health care providers and health plans. Total savings are computed by multiplying the per claim savings by the number of EDI claims attributed to HIPAA. The total number of EDI claims is used in computing the savings to health plans, while the savings for specific health care provider groups is computed using only the number of EDI claims generated by that group (for example, savings to physicians is computed using only physician EDI claims).

WEDI also estimated savings resulting from other HIPAA transactions, such as eligibility verifications, coordination of benefits, and claims inquiries (among others). The average savings per transaction was slightly higher than the savings from electronic billing, but the number of transactions was much smaller than the number of claims transactions. The estimates for transactions other than claims were derived by approximating a number of transactions and estimating the anticipated savings associated with each transaction relative to those assumed for the savings for electronic billing (see table 5). In general, the approximations are close to those used by WEDI. For these non-billing transactions, the Department assumed that the simplification promoted by HIPAA will facilitate a significant conversion from manual to electronic formats. While today it is estimated that about 44% of these non-billing transactions are electronic, by the end of the ten year period it is estimated that 92% will become electronic.

Savings can also be expected from simplifications in manual claims. The basic assumption is that the savings are ten percent of savings per claim that are projected for conversion from manual to electronic billing. However, it is also assumed that the standards will only gradually allow health care providers and health plans to abandon old manual forms and identifiers by 10% annually; this staged transition is inevitable because many of the relationships that have been established with other entities will require a period of overlap during transitioning with entities with which they do business.

Table 4. Ten Year Net Savings ($ Billions)
Costs and Savings 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total (Undiscounted) Total (Discounted)
Costs:
H. C. Provider 1.2 1.2 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.5 3.3
Health Plan 1.2 1.2 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.5 3.3
Total 2.4 2.4 2.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7.0 6.8
Savings from Claims Processing:
H. C. Provider 0.4 0.7 1.0 1.1 1.1 1.2 1.2 1.3 1.3 1.3 10.7 7.7
Health Plan 0.4 0.6 0.8 0.9 1.0 1.0 1.1 1.1 1.1 1.1 9.1 6.5
Total 0.8 1.4 1.8 2.0 2.0 2.2 2.3 2.4 2.4 2.5 19.8 14.2
Savings from Other Transactions:
H.C. Provider 0.1 0.3 0.5 0.7 0.9 1.0 1.2 1.4 1.5 1.7 9.3 6.2
Health Plan 0.1 0.2 0.4 0.6 0.7 0.8 0.9 1.1 1.2 1.4 7.3 4.9
Total 0.1 0.5 0.8 1.3 1.6 1.9 2.1 2.4 2.7 3.1 16.6 11.1
Savings from Manual Transactions:
H.C. Provider 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2
Health Plan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.1
Total 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.5 0.3
Total Savings:
H.C. Provider 0.5 1.0 1.5 1.8 2.1 2.3 2.5 2.7 2.9 3.1 20.2 14.1
Health Plan 0.4 0.8 1.2 1.5 1.7 1.9 2.0 2.2 2.4 2.5 16.6 11.6
Total 0.9 1.9 2.7 3.3 3.8 4.1 4.5 4.9 5.2 5.6 36.9 25.6
Net:                        
H.C. Provider -0.7 –0.3 0.4 1.8 2.1 2.3 2.5 2.7 2.9 3.1 16.7 10.8
Health Plan -0.8 -0.4 0.1 1.5 1.7 1.9 2.0 2.2 2.4 2.5 13.1 8.3
Total -1.5 -0.5 0.5 3.3 3.8 4.1 4.5 4.9 5.2 5.6 29.9 19.07

Note: Figures do not total due to rounding.

Note: The estimates in Table 4 show cost savings in 2000 dollars (estimates in the proposed rule were in 1998 dollars). The Office of Management and Budget now requires all agencies to provide estimates using a net present value calculation. Furthermore, OMB recommends the use of a 7 percent discount rate based on the current cost of capital. The discounted totals in the table are based on this rate beginning in 2003.

The ratios in Table 5 were derived from the WEDI Report, which estimated the volume and savings of the listed non-billing transactions. By comparing the relationship between billing volume and savings to non-billing volume and savings, it is possible to estimate total savings due to other transactions. These ratios were used because the billing data has been updated by the Faulkner and Gray Health Data Directory, but WEDI has not updated the estimates for non- billing transactions. Therefore, this model implicitly assumes that the ratio of billing transactions to non-billing transactions has remained constant since 1993.

Table 5. Relative Savings and Volume of Other Transactions
Transaction Savings Volume
Claim 1.0 1.0
Claims inquiry 4.0 0.5
Remittance advice 1.5 0.10
Coordination of benefits 0.5 0.10
Eligibility inquiry 0.5 0.05
Enrollment/ disenrollment 0.5 0.01
Referral 0.1 0.10