The PPACA 2014 Deadline Will Spur Electronic Payments

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1 SEPTEMBER 2012 The PPACA 2014 Deadline Will Spur Electronic Payments Table of Contents EXECUTIVE SUMMARY Electronic Payments Remain Limited...2 The PPACA Changes Everything...2 New Operating Rules...3 Building Critical Mass...4 Time to Prepare...5 Following the Supreme Court s June 28, 2012 decision to uphold the Patient Protection and Affordable Care Act (PPACA), the move towards electronic payments in the healthcare industry has even more momentum. Payers and providers can reap the efficiency benefits of administrative simplification by working with their banks to position themselves for important elements of the PPACA that take effect on January 1, 2014.

2 PPACA s 2014 deadline will spur electronic payments 2 ELECTRONIC PAYMENTS REMAIN LIMITED Efforts to make the U.S. system of sending medical claims and associated payments less paper-intensive have been underway for almost two decades. Large payers in particular have made significant progress increasing the volume of payments made electronically. But even the most efficient payers electronic payment rates seldom exceed 50% of transaction volume, and the average for the industry is just below that. At the same time, while payments (routed through the banking system) have become more efficient, that achievement has been lessened by the failure to find an effective way to link associated remittance data (routed through multiple channels) so that the provider can apply the payment, follow-up unpaid claims, and enable patient billing. As a result, electronification of the entire payment chain remains some way off and large volumes of paper-based data are still prevalent and costly. The Patient Protection and Affordable Care Act (PPACA) is expected to play a major part in helping the industry overcome many of the challenges associated with electronic payments and associated data. In particular, the administrative simplification provisions of the PPACA are spurring fresh thinking on how to bring medical claim payments fully into the electronic age. THE PPACA CHANGES EVERYTHING Two requirements of the administrative simplification provisions of the PPACA are prompting renewed efforts on electronification: ymedicare must make 100% of claims payments electronically both the financial payments and associated data by January 1, yfrom the same date, all payers must be able to pay electronically if the provider requests it. As almost all healthcare providers have some Medicare patients, they will all effectively have to be able to accept electronic transactions. Consequently, many in the banking and healthcare industries believe that January 1, 2014 may finally prove the tipping point for electronic payment and data acceptance. Electronic payments, which currently account for approximately 40% of claim payment volumes, should become the vast majority of all payments. WHO DEVELOPED THE NEW OPERATING RULES? As part of the PPACA, the U.S. Department of Health & Human Services selected non-profit organizations to create the operating rules for both the electronic funds transfer (EFT) element of payments and the electronic remittance advice (ERA), or data element. The National Automated Clearing House Association (NACHA), representing financial institutions and ACH operators, was appointed to work in collaboration with healthcare entities to draft the EFT operating rules. The Committee on Operating Rules for Information Exchange (CORE), which was established by the Council for Affordable Quality Healthcare (CAQH), was selected for the ERA operating rules. CAQH is a collaboration of more than 130 organizations, including providers, health plans, vendors, government agencies, and standard-setting bodies.

3 PPACA s 2014 deadline will spur electronic payments 3 While the drivers to prompt a switch to electronic payments are now in place and the industry is supportive of the move the complexity of healthcare transactions continues to present hurdles for all parties. These difficulties are exacerbated by a number of additional regulations that necessitate system changes and compete for investment resources and attention. For example, the recently implemented HIPAA-mandated 5010 format for electronic transactions has had a marked impact on the systems managing claims and payments, while ICD-10, the latest, deeply expanded, medical diagnosis code classification registry, will drive significant changes across claims and patient accounting systems. NEW OPERATING RULES Industry groups NACHA and CAQH CORE were named to develop operating rules that built on the 1996 HIPAA standards for electronic transactions; while those standards aided the development of the market, the absence of operating rules resulted in an environment that was too broad and unstructured to facilitate easy understanding or efficient transactions. The new operating rules have three main components: ytimeframes: Historically, payments and their associated data have been sent days or weeks apart, making it difficult to re-associate them. Under the new rule, the EFT and ERA have to be available to the provider within three business days of the other s receipt. yinformation: In the past, enrolling for electronic transactions has been time-consuming and complex for providers as payers require different types of information in different formats. The new rules still allow for some flexibility in the information that payers can request but establish a maximum amount of data that any payer can ask for. As a result, the enrollment process will be more consistent for providers. yformat and Data: EFT payments must use the familiar CCD+ format and include specific data elements in the addenda record to allow them to be easily re-associated with the ERA information.

4 PPACA s 2014 deadline will spur electronic payments 4 BUILDING CRITICAL MASS Most large healthcare providers and payers have already found it worthwhile to collaborate and resolve their impediments to electronic payments, given their large volume and dollar flows. They have accomplished this through normal electronic data interchange channels. However, large payers have not gone downstream to create acceptable solutions with small providers. Similarly, to date small payers have not had a catalyst to make changes. Now the deadline of January 1, 2014 is looming for all payers large and small. While banks have developed products to help solve the problem, adoption has been limited, mainly because such solutions need a large number of both payers and providers involved in order to become viable. No single bank solution has yet gained critical mass. The problem is compounded by the fact that EFTs are currently transacted through the banking system while ERA data is mainly processed by medical claims clearing houses. A few leading firms in the banking and healthcare industries are separately seeking to create neutral third party utilities. Such a utility would be a central place for providers to input banking account information and necessary enrollment data, which could then be available to all payers making enrollment significantly more straightforward. Payers would no longer have to retain bank account information. Ideally, such a utility would offer access to a large number of providers, payers and involve multiple banks to create the scale needed. A long-term objective of such a utility must be that both payments and data flow through the same system. Given the sensitivity of banking information, the role of banks in providing a trusted and secure environment, and the comfort that both payers and providers have in working with their banks, a compelling case can be made to leverage the security and privacy protections of the banking system for the utility. Banks are best positioned to reach the smaller providers and payers given that the common attribute of all parties is the necessity of a bank account. Overall, the benefit for both payers and providers of a bank-based system is the removal of much of the complexity from the payments process. Use of the banking system for both payments and data transmission is a work in progress. Yet all current trends and anticipated future challenges indicate that a banking-led solution coupled with the standardization benefits forthcoming from the new rules will be the best pathway to achieve the electronic mandates resulting from the PPACA.

5 PPACA s 2014 deadline will spur electronic payments 5 TIME TO PREPARE Every healthcare provider and payer needs to prepare for the elements of PPACA that come into effect on January 1, All providers must accept electronic transactions for their Medicare patients, while all payers must pay electronically at the provider s request. Bethann Johnston Treasury Product Management Executive Healthcare Banking Bank of America Merrill Lynch Providers and payers face many difficulties in preparing for the administrative simplification requirements of the PPACA. At the same time, they also need to address numerous competing regulatory demands and given the wave of mergers and acquisitions sweeping the healthcare sector prompted in part by the PPACA in many cases need to integrate legacy systems. It is therefore essential that companies in the healthcare sector work with their banks and others to get the support they need to help make administrative simplification a reality. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation