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Is EDI Taking Hold In The Property And Casualty Industry?

By Bill Dochterman

Electronic data interchange (EDI) for transaction processing involves a multitude of business and consumer transactions such as order entry and inventory management. Use of EDI dates back to the 1980s when some manufacturers, distributors, banks, financial institutions, and mass-merchandisers began to automate their transaction processing.

The adoption of EDI technology by the insurance industry for processing claims transactions has been slow, particularly for workers’ compensation. With many EDI solutions vendors entering the workers’ comp market, it would seem that this segment would be well on the way to developing EDI systems similar to those used in the banking and financial services industries. But such a system has not yet developed.

Now roughly five years after the appearance of the early EDI solutions, insurance carriers, regulatory entities, employers, and consumers are becoming increasingly frustrated with the exceedingly slow rate of change and adoption. This article explains the dynamics, problems and difficulties that have limited adoption of EDI systems in the insurance industry.

The History And Evolution Of EDI In Workers’ Compensation

EDI as an application to facilitate insurance claims processing became the source of much enthusiasm in the late 1990s. At the time, with large investments being made in the Internet and dot-com companies, it seemed likely that heavy investments would also be made in the workers’ comp infrastructure and that such investments would lead to an electronic network capable of enabling real-time transaction processing. An EDI network would enable injured workers to receive better care since all information would be recorded immediately and at the source. Physicians would receive better turnaround on billings and therefore improve their cash flow. Employers would have better communications with injured workers and better information from the insurance carrier and treating physician. All parties would benefit through the building of a single stream of data, as opposed to each entity capturing and recording the data multiple times, resulting in a process that is costly, time-consuming, prone to errors, and very inefficient.

By 1997, a number of vendors had announced solutions to create this electronic network — most notable among them were firms like WebMD (backed by Microsoft) and MedUnite, formed by an alliance of insurance carriers that included Aetna, CIGNA, Health Net, PacifiCare, and Well Point.

The electronic network that was envisioned was rich in functionality and required the capacity to handle hundreds of thousands of transactions on a daily basis. Unfortunately, it also represented a significant investment to build.

By late 1999, “retrenching” became the prevalent business strategy as organizations looked to regain profitability. Insurers focused on markets of greatest potential, market share, and most profitable lines of business. Eventually the vision of the electronic network quite simply fizzled out. Stakeholders in workers’ comp clung to the vision, however, and still wanted at least parts of it. As a result, stand-alone EDI applications began to take hold.

The Complications In Mandating EDI

Since 1997, ten states have mandated that First Reports of Injury (FROIs) be submitted electronically. These states include some of the largest volume states for workers’ compensation claims and related transactions. Within these ten states, some also require subsequent reports of injury to be submitted electronically. Additionally, two states require that medical bill information be transmitted to them electronically. Unfortunately, the requirements of each state are not uniform.

Claim payers, such as insurance carriers, third-party administrators, and self-insured employers, want a consistent and uniform processes that can be implemented throughout their organization. Under the present system, however, they must comply with the unique jurisdictional rules of each state. This complicates operations and increases costs for the payer. Additionally, there is a cost involved in having to keep up with changing state requirements that require updates of internal systems in order to remain compliant. For larger organizations, these costs can total hundreds of thousands of dollars annually, exclusive of staff salaries.

Fragmentation Because Of Too Many Standards

More than half of the states have considered — but do not yet require — electronic submission of transaction data. The lack of such a requirement is the result of too many choices and too many organizations that cloud the EDI decision-making process.

The insurance industry today utilizes two primary technologies for EDI transactions: The ANSI X.12 standard, and the International Association of Insurance Accident Boards and Commissions’ (IAIABC) Flat File standard. The ANSI standard is a universal EDI standard that is used in many industries for various types of transactions specified by ANSI. ANSI’s X.12 standard is a complex transaction set with looping structures that requires an in-depth understanding of the underlying technology. The IAIABC Flat File standard is a transaction set specifically designed for workers’ compensation insurance. The data structure it utilizes is very simple — an ASCII flat file format, as the name indicates. Both standards are widely used, and the IAIABC standard has enjoyed broad acceptance because of its ease of implementation.

The IAIABC, however, has had problems in recent years fulfilling its mission to promote and support EDI capability in the insurance industry. In July 2000, a long-awaited update to the IAIABC’s standard Release I was rolled out. Release II was the first update of the standard, but was adopted by only one state, Iowa. Problems found after the update was released were serious enough to deem Release II unworkable going forward. The end result was a “standard” that could be implemented in only one jurisdiction, yet represented significant costs to all workers’ comp insurers. As a result, a new standard called the “Combined Claims Product” (CCP) is in development.

The Health Information Portability And Accountability Act (HIPAA)

In 1996, the Health Information Portability and Accountability Act (also known as “HIPAA”), was passed by Congress and signed into law by President Clinton. This legislation mandated, among other things, that Internet-based electronic storage and transmission of patient data be standardized, secure, and subject to rigorous privacy rules.

HIPAA represents the most comprehensive and far-reaching set of transaction standards for health and insurance information ever conceived. The standards provide the foundation for the automation of electronic routing of data by addressing many of the shortcomings found in today’s system, such as the inability to identify employers, providers, and health plans uniquely. While HIPAA will eventually help to address these shortcomings, its timetable is lengthy and the dates for enforcement of the standards are still undefined.

At the same time that vendors are developing EDI standards, state jurisdictions and insurance carriers are moving forward on their own. Among these organizations, some are even evaluating File Transfer Protocol (FTP). While FTP does not satisfy the transactional requirements for security and capability, it appears to be a low-cost alternative. FTP should effectively transfer costs from claims payers and administrators to the state jurisdictions. Unfortunately, it may be five to seven years before the majority of claims are processed electronically. What can help bring these solutions to market sooner? Below are a few recommendations.

• Consolidate around a reasonable standard. There are currently two entrenched standards and one emerging standard (HIPAA). Of the three, HIPAA is the most robust set of data standards and initiatives. HIPAA is the only one that attempts to resolve long-standing issues such as the inability to uniquely identify a provider, employer, or health plan.
  
  
• Organize for success, not competition. In the past two years, many EDI solutions vendors have gone out of business, mainly due to the cost of doing business in this challenging environment. Some programs were extremely successful, and enough is known about successful operating models that jurisdictions can develop efficient, cost-effective, and successful EDI programs. States should collaborate, rather than compete, to define the ̶best practices” in implementing EDI programs.

Ultimately time will tell how quickly EDI capabilities will develop. How much time depends upon whether the insurance industry can collaborate with the states to make the implementation and transition to an electronic information network a reality.

ABOUT THE AUTHOR

Bill Dochterman is vice president of the Network Connectivity business unit of Fair, Isaac and Company. He can be reached via e-mail at billdochterman@fairisaac.com.

riskVue | The webzine for risk management profesionals
December 2002