Introduction

As we begin the 21st century, people in the United States are living longer, healthier lives. In 1998, life expectancy at
birth increased to an all-time high of 76.7 years for men and women, and life expectancy for black males increased for
the fifth year in a row. Death rates for heart disease, cancer, and stroke decreased.
Heart disease continues to be the leading cause of death for men and women of all races. The good news is that in 1998,
the age-adjusted death rate for heart disease was about one-half of what it was in 1970. Deaths from cancer—the
second leading cause of death—are also falling, continuing a trend that began in 1990. Between 1970 and 1990, age-
adjusted cancer death rates had steadily increased. And finally, stroke deaths are continuing a steady decline that began
in 1992.
Despite these encouraging gains in life expectancy and substantial progress on other health care fronts—such as
increased use of early prenatal care and preventive services and rapid advances in new treatment regimens for HIV and
AIDS—there are incredible challenges ahead for the U.S. health care system. These include rising health care costs,
concerns about patient safety and medical errors, variations in clinical practice and patient outcomes, and barriers to
care for our most vulnerable populations.
Disparities are substantial among racial and ethnic groups for many causes of death. Disparities also occur between
men and women and among people with different education levels. Men and women with less than a high school
education have death rates at least double those of people who have education beyond high school. The Department of
Health and Human Services is the United States government's principal agency for protecting the health of all
Americans and providing essential human services, especially for those who are least able to help themselves.

Department of Health and Human Services

One of the largest federal agencies, the Department of Health and Human Services is the principal agency for
protecting the health of all Americans. Comprising, 12 operating divisions HHS responsibilities include public health,
biomedical research, Medicare and Medicaid, welfare, social services, and more. The 12 operating divisions are :

Office of the Secretary of Health and Human Services (OS)

Administration for Children and Families (ACF)
Administration on Aging (AOA)
Agency for Healthcare Research and Quality (AHRQ)
Agency for Toxic Substances and Disease Registry (ATSDR)
Centers for Disease Control and Prevention (CDC)
Centers for Medicare & Medicaid Services (CMS)
Food and Drug Administration (FDA)
Health Resources and Services Administration (HRSA)
Indian Health Service (IHS)
National Institutes of Health (NIH),
Program Support Center (PSC),
Substance Abuse and Mental Health Services Administration (SAMHSA)

The Department Includes More than 300 programs, covering a wide spectrum of activities. Some highlights include:
 Medical and social science research
  Preventing outbreak of infectious disease, including immunization services
 Assuring food and drug safety
 Medicare (health insurance for elderly and disabled Americans) and Medicaid (health insurance for low-income
people)
 Financial assistance and services for low-income families
 Improving maternal and infant health
 Head Start (pre-school education and services)
 Preventing child abuse and domestic violence
 Substance abuse treatment and prevention
 Services for older Americans, including home-delivered meals
 Comprehensive health services for Native Americans

Health Care Financing Administration (HCFA)

The Health Care Financing Administration (HCFA) is a federal agency within the U.S. Department of Health and
Human Services. HCFA runs the Medicare and Medicaid programs — two national health care programs that benefit
about 75 million Americans. And with the Health Resources and Services Administration, HCFA runs the Children’s
Health Insurance Program, a program that is expected to cover many of the approximately 10 million uninsured
children in the United States.

HCFA also regulates all laboratory testing (except research) performed on humans in the United States. Approximately
158,000 laboratory entities fall within HCFA’s regulatory responsibility. And HCFA, with the Departments of Labor
and Treasury, helps millions of Americans and small companies get and keep health insurance coverage and helps
eliminate discrimination based on health status for people buying health insurance.
HCFA spends over $360 billion a year buying health care services for beneficiaries of Medicare, Medicaid and the
Children’s Health Insurance Program. HCFA:
 assures that the Medicaid, Medicare and Children’s Health Insurance programs are properly run by its
contractors and state agencies;
 establishes policies for paying health care providers;
 conducts research on the effectiveness of various methods of health care management, treatment, and financing;
and
 accesses the quality of health care facilities and services and taking enforcement actions as appropriate.

HCFA has a comprehensive program to combat fraud and abuse. Working with other federal departments and state and
local governments, HCFA takes strong enforcement action against those who commit fraud and abuse, protects
taxpayer dollars, and guarantees security for the Medicare, Medicaid and Child Health programs.

Medicare

Title XVIII of the Social Security Act, designated "Health Insurance for the Aged and Disabled," is commonly known
as Medicare. As part of the Social Security Amendments of 1965, the Medicare legislation established a health
insurance program for aged persons to complement the retirement, survivors, and disability insurance benefits under
Title II of the Social Security Act. When first implemented in 1966, Medicare covered most persons age 65 or over. In
1973, the following groups also became eligible for Medicare benefits: persons entitled to Social Security or Railroad
Retirement disability cash benefits for at least 24 months, most persons with end-stage renal disease (ESRD), and
certain otherwise non-covered aged persons who elect to pay a premium for Medicare coverage. The Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Public Law 106-554) allowed persons with
Amyotrophic Lateral Sclerosis (Lou Gehrig's Disease) to waive the 24-month waiting period. Medicare has
traditionally consisted of two parts: Hospital Insurance (HI), also known as Part A, and Supplementary Medical
Insurance (SMI), also known as Part B. A new, third part of Medicare, sometimes known as Part C, is the
Medicare+Choice program, which was established by the Balanced Budget Act (BBA) of 1997 (Public Law 105-33)
and which expanded beneficiaries' options for participation in private-sector health care plans. When Medicare began
on July 1, 1966, approximately 19 million people enrolled. In 2001, about 40 million people are enrolled in one or both
of Parts A and B of the Medicare program, and 5.7 million of them have chosen to participate in a Medicare+Choice
plan.

Medicare is a Health Insurance Program for:

1) People 65 years of age and older.
2) Some people with disabilities under age 65.
3) People with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant).

HCFA runs Medicare, the nation’s largest health insurance program, covering over 38 million Americans at a cost of
just under $200 billion.
Benefits
Medicare has two parts: Hospital Insurance (Part A) and Medical Insurance (Part B).
Medicare Part A helps pay for inpatient hospital services, skilled nursing facility services, home health services, and
hospice care.
Medicare Part B helps pay for doctor services, outpatient hospital services, medical equipment and supplies, and other
health services and supplies.

Medicaid

Medicaid is a health insurance program for certain low-income people. It is funded and administered through a state-
federal partnership. Although there are broad federal requirements for Medicaid, states have a wide degree of flexibility
to design their program. States have authority to:
 establish eligibility standards;
 determine what benefits and services to cover;
 set payment rates.

On any given day, there are about 33 million people who are eligible for Medicaid. These people include: certain low-
income families with children; aged, blind or disabled people on Supplemental Security Income; certain low-income
pregnant women and children; and people who have very high medical bills.

Benefits
Because states have flexibility in structuring their Medicaid programs, there are variations from state to state. All states,
however, must cover these basic services: inpatient and outpatient hospital services; laboratory and X-ray services,
skilled nursing and home health services, doctors’ services; family planning; and periodic health checkups, diagnosis
and treatment for children. Thus, the Medicaid program varies considerably from State to State, as well as within each
State over time.
Medicaid - Medicare Relationship

The Medicare program (Title XVIII of the Social Security Act) provides hospital insurance (HI), also known as Part A
coverage, and supplementary medical insurance (SMI), also known as Part B coverage. Coverage for HI is automatic
for persons aged 65 and older (and for certain disabled persons) who have insured status under Social Security or
Railroad Retirement. Coverage for HImay be purchased by individuals who do not have insured status through the
payment of monthly Part A premiums. Coverage for SMI also requires payment of monthly premiums.
Medicare beneficiaries who have low income and limited resources may receive help paying for their out-of-pocket
medical expenses from their State Medicaid program. There are various benefits available to "dual eligibles" who are
entitled to Medicare and are eligible for some type of Medicaid benefit.
For persons who are eligible for full Medicaid coverage, the Medicaid program supplements Medicare coverage by
providing services and supplies that are available under their State's Medicaid program. Services that are covered by
both programs will be paid first by Medicare and the difference by Medicaid, up to the State's payment limit. Medicaid
also covers additional services (e.g., nursing facility care beyond the 100 day limit covered by Medicare, prescription
drugs, eyeglasses, and hearing aids).
Limited Medicaid benefits are also available to pay for out-of-pocket Medicare cost-sharing expenses for certain other
Medicare beneficiaries. The Medicaid program will assume their Medicare payment liability if they qualify. Qualified
Medicare Beneficiaries (QMBs), with resources at or below twice the standard allowed under the SSI program and
income at or below 100% of the Federal poverty level (FPL), do not have to pay their monthly Medicare premiums,
deductibles, and coinsurance. Specified Low-Income Medicare Beneficiaries (SLMBs), with resources at or below
twice the standard allowed under the SSI program and income exceeding the QMB level, but less than 120% of the
FPL, do not have to pay the monthly Medicare Part B premiums. Qualifying Individuals (QIs), who are not otherwise
eligible for full Medicaid benefits and with resources at or below twice the standard allowed under the SSI program,
will get help with all or a small part of their monthly Medicare Part B premiums, depending upon whether their income
exceeds the SLMB level, but is less than 135% of the FPL, or their income is at least 135%, but less than 175% of the
FPL.Individuals who were receiving Medicare due to disability, but have lost entitlement to Medicare benefits because
they returned to work, may purchase Part A of Medicare. If the individual has income below 200% of the FPL and
resources at or below twice the standard allowed under the SSI program, and they are not otherwise eligible for
Medicaid benefits, they may qualify to have Medicaid pay their monthly Medicare Part A premiums as Qualified
Disabled and Working Individuals (QDWIs).

Health Maintenance Organization (HMO)

An HMO is a Health Maintenance Organization. As a member of an HMO, you select a primary care physician from a
list of doctors in that HMO's network. Your primary care physician will be the first medical provider you call or see for
a medical condition. He or she will make any needed referrals to a medical specialist. Typically, these specialists will be
part of the HMO network.
 If you obtain care without your primary care physician's referral or obtain care from a non-network member,
you may be responsible for paying the entire bill. (with exceptions for emergency care)
 With some HMOs, you pay nothing when you visit in-network doctors. With other HMOs there may be a small
co-payment for the visit or service.
 With most HMOs you will not be responsible for paying a deductible.
If you join an HMO, you should find that you have few out-of-pocket expenses for medical care -- as long as you use
doctors or hospitals that are part of the HMO.

HMO plans are very different from traditional health insurance plans. HMOs work on the premise that you can avoid
future medical problems by "maintaining" your health now. HMOs usually offer you broader coverages and lower out-
of-pocket expenses than traditional insurance, but you must use the HMO's health care providers.
 An HMO may operate only in certain counties and zip codes called a "service area." It is important that you
live within your HMO's service area since you must travel there for all medical treatment. If you live elsewhere,
but work within an HMO service area, you may still be able to join.
If you travel a lot, are outside the HMO service area for long periods of time, or have a child attending college outside
the service area, an HMO may not be the best choice for you. Most HMOs provide limited coverage for emergency
treatment you get outside the service area.
 In an HMO, you must get all medical care from their network of health care providers (doctors, hospitals and
pharmacies). If you want to go to any doctor, hospital or pharmacy, at any time, an HMO is probably not for
you.
 HMOs require you to choose a Primary Care Physician (PCP) to manage all your health care needs. You must
always contact your PCP first. If your PCP decides you need services from a specialist, he or she will refer you
to another provider in the HMO network. If the HMO network doesn't include a specialist qualified to treat your
condition, your PCP will give you a referral to a provider outside the network.
 Female enrollees may also choose a Woman's Principal Health Care Provider (WPHCP) in addition to their
PCP. The WPHCP is an obstetrician or gynecologist who is in the HMO's network. You can visit your WPHCP
without a referral from your PCP.

An HMO is a group that contracts with medical facilities, physicians, employers and sometimes individual patients to
provide medical care to a group of individuals. Enrolling in an HMO gives you access to a "primary provider" who
knows your personal, family, social, and financial situations well enough to coordinate your care in an effective
manner. Your primary care provider (usually a doctor or nurse practitioner) will be available to see you for basic care
and for illnesses. They run tests or prescribe treatments before referring you to a specialist if necessary. If you did need
a specialist, he/she would be a member of a network who had contracted work with the HMO. Examples
Blue Cross of California , Blue Shield of California, Health Net, Universal Care

Preferred Provider Organizations (PPO’s)

A PPO is a Preferred Provider Organization. As a member of a PPO, you can use the doctors and hospitals within the
PPO network or go outside of the network for care. You do not need a referral to see a specialist.
 If you obtain care from a medical provider outside of the PPO network, you will pay more for the service. For
example, a PPO might pay 90 percent of the cost for a visit with an in-network doctor but only 70 percent of the
cost for a visit to a non-network doctor.
 You will typically pay a co-payment for each visit/service. These co-payments are typically higher than an
HMO co-payment but not always.
 You will usually be responsible for paying an annual deductible.
If you join a PPO, you should find you have more flexibility than with an HMO, but your total out of pocket costs are
likely to be somewhat higher.

In a PPO insurance companies offer the insurance to you, but they have contracted with networks of doctors and
hospitals that are 'preferred' by the company. Typically when using the preferred providers, the client will only have to
pay a small CO-PAYMENT to the doctor ($15.00 or $20.00) before and deductible must be met. The preferred
providers are contracted to charge a set amount for their services, the majority of which can be performed in the
doctor's office. Because of this, the insurance company can pass the savings along to you, the consumer, in the form of
lower premiums, although there is a minor penalty for going out of the network. Example
Blue Shield of California, CalFarm, Health Net

Provider

A provider is a hospital, health care facility, physician or other medical professional that provides health care services.

Primary Care Physician (PCP)

A physician or other medical professional who serves as a group member's first contact with a plan's health care
system. Also known as a primary care provider, personal care physician, or personal care provider.

Deductible
A deductible is the amount of annual medical expenses that a health plan member must pay before the plan will begin
to cover expenses. For example, if your plan has a $500 deductible, you will pay the first $500 of your medical
expenses before your health plan begins paying the expenses. Only expenses for covered services apply towards the
deductible. For example, if you paid $100 for a visit to a chiropractor but the plan does not consider chiropractic care a
covered expense, then the $100 will not apply toward your annual deductible.

Difference between an in-network and an out-of-network medical provider

An in-network medical provider is within the approved network of providers for a particular health plan. Out-of-
network providers are not on the list. If you visit a doctor within the network, the amount you will be responsible for
paying will be less than if you go to an out-of-network doctor. In many cases, the insurance company will not pay
anything for services your receive from outside their network, however, there are exception to this. As a general rule,
HMOs tend to have smaller provider networks than PPOs. In HMO and PPO plans, referrals to specialists will be to
doctors within the network. Indemnity plans typically do not have networks; you go to whatever doctor you want.

Sponsor
A sponsor is the party that ultimately pays for the coverage, benefit, or product. A
sponsor can be an employer, union, government agency, association, or insurance
agency.

Payer/Insurer
The payer is the party that pays claims and/or administers the insurance coverage,
benefit, or product. A payer can be an insurance company; Health Maintenance
Organization (HMO); Preferred Provider Organization (PPO); a government
agency, such as Medicare or Civilian Health and Medical Program of the
Uniformed Services (CHAMPUS); or another organization contracted by one of
these groups.

Secondary Payer
The term “secondary payer” indicates any payer who is not the primary payer.
The secondary payer may be the secondary, tertiary, or even quaternary payer.
Health Care Providers
Health care providers are individuals and organizations that provide health care services. Health care providers can
include physicians, hospitals, clinics, pharmacies, and long-term care facilities.

Third Party Administrator (TPA)

A sponsor may elect to contract with a Third Party Administrator (TPA) or other vendor to handle collecting insured
member data if the sponsor chooses not to perform this function.

Patient
The term “patient” is intended to convey the case where the Patient loop is used. In that case, the patient is not the same
person as the subscriber, and the patient is a person (e.g., spouse, children, others) who is covered by the subscriber’s
insurance plan. However, it also happens that the patient is sometimes the same person as the subscriber. In that case,
all information about the patient/subscriber is carried in the Subscriber loop.

Subscriber
The subscriber is an individual eligible for coverage because of his or her association with a sponsor. The subscriber is
the person whose name is listed in the health insurance policy. Other synonymous terms include “member” and/or
“insured.” In some cases the subscriber is the same person as the patient.
Examples of subscribers include the following: employees; union members; and individuals covered under government
programs, such as Medicare and Medicaid.

Dependent
A dependent is an individual who is eligible for coverage because of his or her association with a subscriber. Typically,
a dependent is a member of the subscriber’s family.

Insured or Member
An insured individual or member is a subscriber or dependent who has been enrolled for coverage under an insurance
plan. Dependents of a Subscriber who have not been individually enrolled for coverage are not included in Insured or
Member.

Plan Administrator
The plan administrator is the entity that administers a benefit plan and determines the amount to be paid on a claim but
does not actually make the payment.

Vendors/Intermediaries
Vendors and intermediaries are organizations that distribute information about eligibility for specific benefits, but they
do not actually administer the plan or make payments.

Transmission Intermediary
A transmission intermediary is any entity that handles the transaction between the provider (originator of the
claim/encounter transmission) and the destination payer.
Health Insurance

To understand Health care systems and Health Insurance in particular, we’ll first examine the cost of healthcare in the
U.S. The cost of health care in the U.S is a very expensive proposition. To give you a rough idea about how expensive
it is, let us look at some examples.

Suppose you are suffering from chest congestion and decide to visit a doctor. The doctor is going to charge you on an
average $40/- to $50/- for just the visit. If he decides that you need to have a chest X-Ray done, it’ll be another 80-100
dollars. And then the doctor will prescribe some antibiotics to be taken for a week. The cost of this medicine would be
another $50/-. So, you are looking at about 200 dollars expense for a simple condition.

Let us take another example of getting admitted in a hospital for couple of days to recover from dehydration. You are
looking at an expense of not less than 1200 – 1500 dollars for this. And if you have to undergo a surgery , even a simple
one, the expense will be in thousands of dollars.
This is not something a person can afford . So, one needs to have an insurance policy to cover for these expenses. If
you have an insurance policy, in the above cases, the payment out of your pocket will be minimal.
In the first example , you’ll pay $10/- for the office visit, $10/- for the X-Ray and $10/- for the medicine. The rest will
be paid by the Insurance company to the doctor, Lab and Pharmacy. The 10 dollars you pay is termed ‘Co-pay’.
In the 2nd and 3rd example you might pay around $200/- out of your pocket and the rest will be paid by the Insurance
company.

Now , having an insurance policy would mean that you’ll have a pay a premium amount every month to the Insurance
company . This typically would be around $500/- a month. For an individual , $500/- per month is a substantial sum.
This is where an employer comes into the picture. In general, it’ll be the employer who will have the contract with the
Insurance company. The premium will be fixed at , let us say, $500/- per month for each employee. When an individual
joins this employer, along with salary, the employee is offered a health benefit package. Some employers will pay the
whole premium amount for the employee. Some will pay 90 % of the premium amount and the 10% will be paid by the
employee. Another term one has to be aware of is ‘dependent’. This typically means the spouse and children of the
employee. If the employee has dependents the premium amount will also be more than that of an individual coverage.

So far, we only talked about employee-employer-Insurance Co scenario. You could also have an individual-Insurance
Co. scenario. An example would be a businessman . Here the person will have a direct deal with the Insurance
company . The person will pay a monthly premium to the Insurance company directly. The insurance companies in the
above situations are all privately owned companies. We also have government sponsored programs to take care of the
less fortunate ones like low-income families . When these people have to visit a doctor or hospital, those expenses will
be covered by the Government sponsored programs. Two such programs are called Medicare and Medicaid.

We have roughly outlined the general scenarios in the US Health care system. It’s much more complicated than this.
But, at least this gives you a rough idea about the whole system.
 eligibility Insurance Carriers payments Financial Institutions
Health Plans

Premium
Enrolment /
payments Claims
disenrolment

Members Employers Providers

Other Doctors
Participating Dentists
Providers Pharmac
Behavioral y
-Labs Health
-Opticians Providers
-Medical Natural
Equipment Alternativ
Suppliers etc. Hospitals e
Providers

Enrollment- When a person joins the firm as an employee, he’s enrolled into the insurance policy the firm has with an
Insurance company. Let us say that this person has a family , meaning there are dependents .
In simple terms , enrollment means that the employee and his/her dependents have health insurance coverage. Typically
the employee and dependents will be issued an insurance card with a unique policy number.

Now let us say, the employee or one of the dependents has to make a visit to the doctor. The doctor’s office will ask for
the insurance card and with the Policy number and name, the office will check with the Insurance company whether
this person has coverage for this particular service. The insurance company will inform the doctor’s office whether the
patient is covered or not. This process is termed ‘Eligibility verification’.
Let us say the policy states that the person has $10/- Co-pay (refer to earlier section for this term) for an office visit.
This is the information that will be given by the Ins co. to the doctor’s office. The doctor will perform the service and
will charge $50/- for it. The patient will pay $10/- and leave.

Now we come to ‘Claims processing’ . The doctor’s office will send a Claim to the Insurance company with details on
the service rendered asking the Ins. Co. to pay them $40/- . The Ins. Co will process this claim by checking the
insurance plan and if everything is found to be in order, will send this payment to the doctor’s office. This process is
called ‘Claim Payment’. Sometimes , it’s not this simple. There could be a delay in the Insurance co. processing the
claim and making the payment for any number of reasons. In such a situation, the doctor’s office will send an inquiry to
the Insurance co. asking about the status of the claim and the Insurance co. will give them an answer stating the status.
This process is called ‘Claims Status Inquiry’. There are some more processes involved in this , but we will not go
into those at this stage. Again, these processes are not as simple as mentioned above. This is just to get an idea of how
the whole process works.

Why HIPAA

As you can see from the above examples , a regular office visit by a Patient to a doctor`s office involves so many
different transactions to complete the entire process. This in the current world is not all automated. Many of these
processes require manual intervention. Let us take, eligibility verification as an example. This is sometimes achieved by
a phone call from the doctor`s office to the Ins. Co. and getting the verification over the phone. Or for a claim
submission, the data is input into the stand alone PC based system in the doctors office. Then a claims report is printed .
This report is then faxed to the Ins. Co. The data entry person at the Ins. Co. will use this report and enter all the
required data into their system. The claim is then processed and another system will issue a check to the doctors office.
Here you can see that theres lot of manual involvement and greater chances of errors.
There are other issues like frauds where people are submitting fraudulent claims ,another issue of long processing times
because of manual processing and many more issues like this.
Taking all these into consideration , the federal government decided to come out with a plan to revamp the whole
Health care system to make it more efficient and secure. And an act was passed in 1996 , named HIPAA, which stands
for Health Insurance Portability and Accountability Act. This calls for all parties involved in Health Care transactions to
use standard formats for every transaction like enrollment, claims etc.. . These transactions will be electronically
transmitted between concerned parties.

Once you start going through the docs, you’ll see that this HIPAA project basically involves the generation of various
transaction in a pre-defined EDI format. Each of these transactions is defined by a 3 digit number to be followed as an
industry standard. And the standards for each of these transactions are defined.

The basic ones are

834 – Enrollment
270/271 – Eligibility verification
837 – Claims
835 – Claims payment
276/277 – Claims status enquiry
278 – Referral Authorization
820 – Remittance Advice
Transactions/Code Sets

The transactions and code set standards of the Health Insurance Portability and Accountability Act (HIPAA) will take
effect in October 2003.Essentially, they are national standards for the electronic exchange of patient-identifiable health
information. The standards will replace the hundreds of local and proprietary formats and codes currently in use.
All practices will be affected in some way by the HIPAA transactions and code set standards. The health plans,
insurance plans and clearinghouses practice deals will have to convert to using the standards in order to comply with
HIPAA. However, somewhere in the exchange between provider and payer, non-standard transactions must be
converted to the HIPAA standard format. Under HIPAA, medical practices that submit claims electronically are
guaranteed prompt responses from payers. It may be to some practices advantage to computerize their claims processes.
The administration simplification that HIPAA mandates is expected to save the health care industry billions of dollars.
Physician practices will save on overhead because they will no longer have to deal with innumerable payer-specific or
location-specific instructions and formats. A recent survey showed the savings resulting from the implementation of the
transactions standards to be approximately $7,200 per physician annually. The purpose of the transactions and code set
standards is to simplify the processes and decrease the costs for payment of health care services.

HIPAA transactions and code set standards

The HIPAA transactions and code set standards are rules to standardize the electronic exchange of patient-identifiable,
health-related information. They are based on electronic data interchange (EDI) standards, which allow the electronic
exchange of information from computer to computer without human involvement.

Prior to the passage of HIPAA in 1996, Congress determined that to improve the efficiency and effectiveness of the
health care system and decrease administrative burdens on providers (i.e., medical practices, hospitals and health care
plans) it was necessary to have national standards for the electronic exchange of health care transactions. These
standards apply to nine types of administrative and financial health care transactions used by payers, physicians and
other providers, including claims submission, claims status reporting, referral certification and authorization, and
coordination of benefits. HIPAA also requires that medical data code sets be standardized and all local and proprietary
codes be eliminated. Conforming to the code set standards is not expected to pose much difficulty for most practices
since many of the code sets that have been adopted are already in common use.
Many of the code sets that have been adopted are already in common use. All practices will be affected in some way by
the HIPAA transactions and code set standards, whether their claims are submitted electronically or on paper. Why?
Because all the payers, health plans, clearinghouses and insurance plans you deal with will have to convert to using the
standards in order to comply with HIPAA.

To simplify the electronic exchange of financial and administrative health care transactions, the Health Insurance
Portability and Accountability Act (HIPAA) transactions standards will require all health plans, health care
clearinghouses and health care providers to use or accept the following electronic transactions. The following formats
will replace the hundreds of proprietary and local formats used throughout the health insurance industry when the
transactions standards take effect in :

Claims submission : The X12-837 HIPAA format will be used when a physician or other health care provider (e.g.
hospital) files an electronic claim for payment for the delivery of care. This format is similar in many respects to the
UB-92 and the HCFA-1500 formats.
Enrollment and disenrollment in a health plan : The X12-834 format will be used to establish communication
between the sponsor of a health benefit and the health plan.

Eligibility: The X12-270 (inquiry) and X12-271 (response) formats will be used to inquire about the eligibility,
coverage or benefits associated with a benefit plan, employer, plan sponsor, subscriber or a dependent under the
subscriber's policy.

Health care payment to provider (with remittance advice): The X12-835 format will be used by a health plan to make
a payment to a financial institution for a health care provider (sending payment only), to send an explanation of benefits
or remittance advice directly to a health care provider (sending data only),or to make payment and send an explanation
of benefits and remittance advice to a health care provider via a financial institution (sending both payment and data).

Premium payment to health insurance plans: The X12-820 format will be used by employers, employees, unions and
associations to make and track premium payments to their health insurers.
Claim status request and response: The X12-276 and X12-277 formats will be used by health care providers and
recipients of health care products or services (or their authorized agents) to request the status of a health care claim or
encounter from a health plan.

Referral certification and authorization: The X12-278 format will be used to transmit health care service referral
information between health care providers and health plans. It will also be used to obtain authorization for certain
health care services from a health plan.

Claims attachment: Some insurers also require additional records for each claim submitted. For example, the insurer
may wish to review subscriber, patient, demographic, diagnosis or treatment data.

First report of injury: This transaction will be used to report information pertaining to an injury, illness or incident to
entities interested in the information for statistical, legal, claims and risk management processing requirements. A
standard format is expected soon.

The HIPAA regulations say that somewhere in the exchange between provider and payer, a non-standard transaction
must be translated to the HIPAA standard format. Medical practices may continue to submit claims on paper or in non-
standard electronic data formats, but this translation may ultimately be something you have to pay for. Practices that
submit information electronically using the HIPAA standards will have some advantages: A payer may not refuse to
accept a HIPAA-standard transaction, must respond to the provider with the appropriate electronic message standard
format and may not delay payment because the transactions are submitted electronically. The HIPAA rules do seem to
give the advantage to medical practices that submit claims electronically, as they guarantee those practices prompt
responses from payers. Because of this, more physician practices may want to use computers instead of paper for
submitting and receiving claims.

Finally, you can continue to store data in any format as long as they can be translated into the standard transaction
format when being transmitted. Most third-party payers already process claims electronically. The problem is that
electronic claims transmission and processing developed in an environment where information systems and software
were designed to handle specific payers' formats and coding requirements - not to communicate with other information
systems. Under HIPAA, a handful of standard formats will replace the hundreds of proprietary and local formats
currently in use, enabling health care providers to submit the same transaction to any health plan in the United States.
 Enrollment
(834)

EMPLOYER
Premium
Payment 834
820 820

R Eligibility
270/271 270 270
E NCPDP
D
271
I Authorization/ PAYER
278
V Certification-278
837
PATIENT Claim 837 P/D/I
275 NCPDP
276 277
O
997 835
R Claim Attachments
P 275

Claim
Acknowledgment
997

Claim Status
Inquiries
276/277

Payment
835
The cycle of HIPAA Transactions :

When an Employee joins a company, he is being given some Health Insurance Benefits by the Employer.Now in order
to enroll the employee, the employer/sponsor will send an 834 transaction to the Insurance Company/Payer asking the
Payer to enroll the employee in a particular health service. The premium which will be paid to the Payer will be sent by
820 transaction. The premium will be paid to the Insurance Company/Payer by the Employer.
Now suppose the Employee which had a particular health plan fall sick and visits a Physician . The Physician
before rendering any services will check that the Patient is eligible for the particular service or not. So he sends a 270-
eligibility verification transaction to the Payer. The Payer in turn sends 271-eligibility response transaction back to the
Physician indicating whether the patient is eligible or not for the service.When the patient is eligible ,he renders the
services and after providing the services , the Physician or on his behalf someone sends 837-Claims transaction to the
Payer. If the Payer is satisfied, he will send the 835-Payment Remittance or if he is not then he sends 277-Claim Status
Inquiries for some more information. This more information is send by the Provider in the form of 275-Claim
Attachments transaction. If the Provider wants to inquire about the Claim Status then he sends 276 and in return he gets
the response in form of 277-Claim Status Inquiries transaction.
The 278-Authorization/Certifiaction transaction is there which authorizes the Provider to give some special
services to the Patients. 278 is sent to the Provider by the Payer to perform some special services. NCPDP is the
transaction which all the Pharmacies send to the Payer in order to get the Claim. Whenever any entity receives a
transaction in batch mode that entity has to send 997-Functional Group Acknowledgement transaction to the originator
of the transaction.

EDI

EDI stands for Electronic Data Interchange.

Electronic Data Interchange (EDI) is the electronic exchange of routine business transactions. These transactions
include such documents as purchase orders, invoices, inquiries, planning, acknowledgements, pricing, order status,
scheduling, test results, shipping and receiving, payments, and financial reporting.
Industries currently using EDI include retail, insurance, education, entertainment, mortgage banking, and
numerous departments of the U.S. Government. Note, however, that this list is far from complete! As more and
more businesses turn to EDI, several standards committees—including the Accredited Standards Committee
X12 (ASC X12) and EDIFACT—are working to include appropriate transactions in its body of standards.
EDI permits hundreds of unrelated companies to communicate and process business transactions electronically.
EDI works because it relies on a standard system that everyone can use, developed under the guidelines of the
American National Standards Institute (ANSI), the coordinator for national standards in the United States.
The ANSI committee ensures that everyone using a process such as EDI follows the same rules and methods,
making the program universally accessible. As a result of the standard, all businesses share a common
interchange language, which minimizes the need for users to reprogram their internal data processing systems.

The major elements and information flow is shown in the diagram below.
EDI has two primary functions:

Translate Data from a computer file into a format that both trading partners can recognize and understand.
Communicate this information between computer systems.

EDI STRUCTURE

Communication Transport Protocol

Interchange Control Header (ISA)
Functional Group Header (GS)
Transaction Set Header (ST)

Detail Segments
Transaction Set Trailer (SE)

IM
NM
O

TUN

RA
C

HO

GN
C

E
ANS
EI

CTI

N
Transaction Set Header
Detail Segments
Transaction Set Trailer
U
N

O
N
A

O
U
C

R
T

L
F

P
I
Functional Group Trailer (GE)
Interchange Control Trailer (IEA)
Communication Transport Trailer