EDI Cuts Paper

States and localities are beginning to expand the number of electronic data interchange applications.

by / May 31, 1995 0
June 95

Problem/Situation: State and local governments swamped in paper-based transactions.

Solution: Electronic data interchange.

Jurisdictions: Fairfax County, Va., Massachusetts, South Carolina, Texas .

Vendors: KPMG Peat Marwick, Sterling Software, Frank Gates Software Systems, EDS.

Contacts: Jan Key, South Carolina Department of Revenue, 803/737-4913; Nancy Burke, Massachusetts Office of State Comptroller, 617/727-5000 x391; Pat Cannon, Texas Workers' Compensation Commission, 512/440-3768



Mind your X12's



By Tod Newcombe

News Editor

In South Carolina, government agencies use electronic data interchange (EDI) for accepting individual and corporate tax filings and Workers' Compensation injury reports. In Massachusetts, the state is beginning to process purchase orders and invoices via EDI. Numerous other states are using EDI for similar projects. In fact, a large percentage of state governments are involved with EDI in one way or another.

But try to get a fix on the actual amount of EDI transactions taking place in state government and the numbers are hard to find. "The large amount of interest in EDI at the state and local government level hasn't translated into new systems," commented David Halwig, a partner with the public sector division of KPMG Peat Marwick.

The growth problem doesn't stem from a lack of knowledge. EDI has been around since the 1960s, when the transportation industry began pursuing computer-based techniques for exchanging routine business transactions, such as purchase orders, invoices, shipping and receiving reports as well as financial information, including payments. In the 1980s, a host of standards - commonly known as X12 - were developed, dozens of which pertain to government transactions.

Hard costs for developing EDI are also less of an issue. Thanks to more EDI software, choices abound for products that exchange and extract information. Commercial value-added networks for the secure transmission of EDI messages offer competitive rates. As a result, the amount of money a government agency must spend to send and receive EDI transactions is lower than ever.

The reason for the slow growth in EDI for state and local government has to do with change. In order for EDI to work, government bureaucracies have to retool existing computer systems so they can accept EDI transactions. Agencies have to reengineer work processes from the existing manual, paper-based approach to ones that are virtually electronic. "A fair degree of retrofitting must take place," said Howard Stern, director of EDI services at Sterling Software, "before any EDI user can benefit from the technology."

Equally daunting is the task of "mapping" the information on a paper document to the EDI standard. "Sometimes it's easier to put information on paper than try to figure out how to extract it electronically," said Pat Cannon, chief of planning and analysis in the records division of the Texas Workers' Compensation Commission. Simply because an EDI standard exists for transacting a particular type of business doesn't mean it's plug-and-play. "We're blazing new trails here," added Cannon.



EASING THE PAIN OF TAX FILING

Since the U.S. Internal Revenue Service began accepting returns electronically, states have benefitted by piggybacking their returns on the federal system. As of Fall 1994, more than 29 states were involved in the federal-state individual income tax filing program.

But persuading individual taxpayers to file electronically is not an easy job. Individuals must file their returns via a certified tax processing firm, such as H & R Block. The number of people who use this approach remains small.

Where states see a bigger payback is with business tax filings. Corporations file tax returns several times a year and their filings are complex, involving a variety of forms. Studies have shown that the six hours required to file a complex sales tax return can be cut to 30 minutes with EDI.

For that and other reasons, the Federation of Tax Administrators and the Multistate Tax Commission created Taxconnect, a cooperative effort to aid the electronic filing of business taxes. (Taxconnect also provides EDI services for filing individual state tax returns.) When the idea of Taxconnect was first introduced to states through a survey back in 1992, 33 responded favorably to the idea.

Taxconnect uses Electronic Data Systems to provide network services for handling EDI-related tax data, tax payments and reconciliation for matching payments to returns. Today, 14 states use Taxconnect for corporate tax filing. Terry Garber, manager of technical services for South Carolina's Department of Revenue puts the number of states planning, developing and implementing EDI for tax purposes at more than 20.



SOUTH CAROLINA

South Carolina was one of the first states to accept individual tax returns electronically and is now actively pursuing EDI in areas such as Workers' Compensation claims and purchasing.

South Carolina's business tax application is still in the formative stage, with the state yet to accept its first transaction from a business partner. Garber, along with Jan Key, the Department of Revenue's EDI coordinator, are quick to point out the numerous hurdles to setting up EDI in state government.

First and foremost is the need to standardize 92 different taxes onto a single X12 format, known as the 813 transaction set for the electronic filing of tax return data. Mapping the data from the paper documents to X12 standard is a time-consuming task, especially since it calls for customizing the 813 transaction set to fit the South Carolina tax system. The mappings then must be published so that firms that produce the software translators for conducting EDI transactions can use them.

Equally challenging is the logistical nightmare of bringing all parties on board EDI. "Unlike typical business transactions which involve two partners, the tax industry must deal with three parties: the state, the business and the bank," explained Garber.

Since the state can't mandate that businesses use EDI for tax filings, they must try and persuade companies to take the necessary steps to file electronically. South Carolina receives more than 100,000 tax filings per month from businesses. Key estimates some 65,000 are potential EDI filings. But converting all those filings into electronic transactions is not going to be easy, according to Key. "We don't have the marketing staff to recruit businesses to join," she said.

Instead, the Department of Revenue relies on the work of software vendors to market the service. According to Stern, marketing is a crucial factor in whether or not EDI will succeed. "EDI is not a one-sided equation," he said. "Organizations that get involved with EDI have to convince partners to join in." Sterling Software provides customers with market development services, which range from general recruitment of partners to defining which partners to recruit first and the pace at which to advance EDI initiatives.



ELECTRONIC PURCHASING POWER

When President Clinton launched the federal government into the age of electronic commerce back in the fall of 1993, he did it with the knowledge that a lot of waste could be trimmed by converting the existing paper procurement into an electronic processing system.

A recent Texas study revealed that government spends 5.5 cents to process every dollar of purchase while the private sector spends 1 cent. Once government agencies start using EDI, the feds hope to save as much as $22.5 billion in a five-year period, .

States hope to trim the same fat from their procurement process using EDI. California's Department of General Services (DGS) has been running several EDI pilot projects for purchasing and other transactions. Last year, DGS began testing the waters with three EDI pilots. One was aimed at the commodity bid process, another was to automate the service bid process for simple quotes. The third pilot was to automate the processing of utility invoices.

Also launched last year was ProConnect, an EDI network for government purchasers. Developed by a partnership between the National Institute of Governmental Purchasing Inc., and EDS, the network provides the institute's 2,000 state, local and provincial members with a host of EDI-related services.

Fairfax County, Va., ProConnect's first customer, is in the midst of setting up EDI for procurement and financial transactions. According to Larry Wellman, director of purchasing and supply management for the county, the service will be operational by September. The system will enable the county to submit electronic invoices to vendors and receive an immediate acknowledgement. Eventually, the system will process invoices and electronic funds transfer.

Perhaps one of the more advanced EDI purchasing systems to date is the multi-agency system implemented in Massachusetts. In October 1994, the state began EDI transactions with four large trading partners: an office supply vendor and three technology firms.

According to Nancy Burke, the state's EDI project manager, six state agencies are electronically exchanging order receipts, purchase orders and vendor orders. The EDI system runs on a PC as a front-end to the mainframe-based Massachusetts Management and Accounting Reporting System (MMARS), the statewide accounting system. Burke added that the state expects to rollout EDI rapidly to the other 155 state agencies. "When that happens, then we'll start to build volume," she said.

What makes Massachusetts' approach to EDI so effective is that the individual agencies don't have to make any technical changes to participate. They are already linked to MMARS, from which they can dial into the EDI system to carry out purchasing transactions. What they do have to change is their existing paper-related processes for purchasing goods and services.



EDI CUTS TO THE CLAIM

Another potentially bright spot for EDI in government is Workers' Compensation (WC). A $70 billion per year industry has grown up around compensating injured workers, with much of the work drowning in paper.

A major contributor to the rising costs of compensation claims is the slow process for filing injury notifications. The injury report, which starts a claim process, often takes 30-45 days to make its way to the claims payer. The longer a payer (insurance carrier) has to wait to receive the first report, the longer the employee is out of work. A study by a national insurance company found that claims reported after 30 days cost 55 percent more than claims filed within 10 days. Late claims also are more likely to end up in litigation.

Insurance carriers and states have turned to EDI to help speed up the notification process. Using the X12 standard, they have developed the 148-transaction set for electronic filing of the first injury report. EDI will enable all parties involved in compensation claims - insurance carriers, third party administrators, government agencies - to respond faster to injury notifications from businesses, commented Shawn Maloney, manager of product development at Frank Gates Software Systems. "Faster notification mitigates legal action," he added.

Gates developed Employer Connect - software that allows business firms to electronically file claims with insurance carriers, which then forward the claim to the state for processing. To handle transmission of injury reports via EDI, Gates also provides the services of a value-added network. "VANs insure the delivery of the electronic transaction," said Maloney. "They also act as a buffer between business partners, making it possible to carry out EDI transactions regardless of computer platform."

In 1994, the Texas Workers' Compensation Commission received 263,046 reports of workers' injuries. While only 64,586 of the reports ended up as paid claims, the amount of paperwork has driven the commission to launch a major EDI initiative. The commission has mandated that all insurance carriers must implement an EDI system for filing injury reports by the end of 1995. that and other reasons, the Federation of Tax Administrators and the Multistate Tax Commission created Taxconnect, a cooperative effort to aid the electronic filing of business taxes. (Taxconnect also provides EDI services for filing individual state tax returns.) When the idea of Taxconnect was first introduced to states through a survey back in 1992, 33 responded favorably to the idea.

Taxconnect uses Electronic Data Systems to provide network services for handling EDI-related tax data, tax payments and reconciliation for matching payments to returns. Today, 14 states use Taxconnect for corporate tax filing. Terry Garber, manager of technical services for South Carolina's Department of Revenue puts the number of states planning, developing and implementing EDI for tax purposes at more than 20.



SOUTH CAROLINA

South Carolina was one of the first states to accept individual tax returns electronically and is now actively pursuing EDI in areas such as Workers' Compensation claims and purchasing.

South Carolina's business tax application is still in the formative stage, with the state yet to accept its first transaction from a business partner. Garber, along with Jan Key, the Department of Revenue's EDI coordinator, are quick to point out the numerous hurdles to setting up EDI in state government.

First and foremost is the need to standardize 92 different taxes onto a single X12 format, known as the 813 transaction set for the electronic filing of tax return data. Mapping the data from the paper documents to X12 standard is a time-consuming task, especially since it calls for customizing the 813 transaction set to fit the South Carolina tax system. The mappings then must be published so that firms that produce the software translators for conducting EDI transactions can use them.

Equally challenging is the logistical nightmare of bringing all parties on board EDI. "Unlike typical business transactions which involve two partners, the tax industry must deal with three parties: the state, the business and the bank," explained Garber.

Since the state can't mandate that businesses use EDI for tax filings, they must try and persuade companies to take the necessary steps to file electronically. South Carolina receives more than 100,000 tax filings per month from businesses. Key estimates some 65,000 are potential EDI filings. But converting all those filings into electronic transactions is not going to be easy, according to Key. "We don't have the marketing staff to recruit businesses to join," she said.

Instead, the Department of Revenue relies on the work of software vendors to market the service. According to Stern, marketing is a crucial factor in whether or not EDI will succeed. "EDI is not a one-sided equation," he said. "Organizations that get involved with EDI have to convince partners to join in." Sterling Software provides customers with market development services, which range from general recruitment of partners to defining which partners to recruit first and the pace at which to advance EDI initiatives.



ELECTRONIC PURCHASING POWER

When President Clinton launched the federal government into the age of electronic commerce back in the fall of 1993, he did it with the knowledge that a lot of waste could be trimmed by converting the existing paper procurement into an electronic processing system.

A recent Texas study revealed that government spends 5.5 cents to process every dollar of purchase while the private sector spends 1 cent. Once government agencies start using EDI, the feds hope to save as much as $22.5 billion in a five-year period, .

States hope to trim the same fat from their procurement process using EDI. California's Department of General Services (DGS) has been running several EDI pilot projects for purchasing and other transactions. Last year, DGS began testing the waters with three EDI pilots. One was aimed at the commodity bid process, another was to automate the service bid process for simple quotes. The third pilot was to automate the processing of utility invoices.

Also launched last year was ProConnect, an EDI network for government purchasers. Developed by a partnership between the National Institute of Governmental Purchasing Inc., and EDS, the network provides the institute's 2,000 state, local and provincial members with a host of EDI-related services.

Fairfax County, Va., ProConnect's first customer, is in the midst of setting up EDI for procurement and financial transactions. According to Larry Wellman, director of purchasing and supply management for the county, the service will be operational by September. The system will enable the county to submit electronic invoices to vendors and receive an immediate acknowledgement. Eventually, the system will process invoices and electronic funds transfer.

Perhaps one of the more advanced EDI purchasing systems to date is the multi-agency system implemented in Massachusetts. In October 1994, the state began EDI transactions with four large trading partners: an office supply vendor and three technology firms.

According to Nancy Burke, the state's EDI project manager, six state agencies are electronically exchanging order receipts, purchase orders and vendor orders. The EDI system runs on a PC as a front-end to the mainframe-based Massachusetts Management and Accounting Reporting System (MMARS), the statewide accounting system. Burke added that the state expects to rollout EDI rapidly to the other 155 state agencies. "When that happens, then we'll start to build volume," she said.

What makes Massachusetts' approach to EDI so effective is that the individual agencies don't have to make any technical changes to participate. They are already linked to MMARS, from which they can dial into the EDI system to carry out purchasing transactions. What they do have to change is their existing paper-related processes for purchasing goods and services.



EDI CUTS TO THE CLAIM

Another potentially bright spot for EDI in government is Workers' Compensation (WC). A $70 billion per year industry has grown up around compensating injured workers, with much of the work drowning in paper.

A major contributor to the rising costs of compensation claims is the slow process for filing injury notifications. The injury report, which starts a claim process, often takes 30-45 days to make its way to the claims payer. The longer a payer (insurance carrier) has to wait to receive the first report, the longer the employee is out of work. A study by a national insurance company found that claims reported after 30 days cost 55 percent more than claims filed within 10 days. Late claims also are more likely to end up in litigation.

Insurance carriers and states have turned to EDI to help speed up the notification process. Using the X12 standard, they have developed the 148-transaction set for electronic filing of the first injury report. EDI will enable all parties involved in compensation claims - insurance carriers, third party administrators, government agencies - to respond faster to injury notifications from businesses, commented Shawn Maloney, manager of product development at Frank Gates Software Systems. "Faster notification mitigates legal action," he added.

Gates developed Employer Connect - software that allows business firms to electronically file claims with insurance carriers, which then forward the claim to the state for processing. To handle transmission of injury reports via EDI, Gates also provides the services of a value-added network. "VANs insure the delivery of the electronic transaction," said Maloney. "They also act as a buffer between business partners, making it possible to carry out EDI transactions regardless of computer platform."

In 1994, the Texas Workers' Compensation Commission received 263,046 reports of workers' injuries. While only 64,586 of the reports ended up as paid claims, the amount of paperwork has driven the commission to launch a major EDI initiative. The commission has mandated that all insurance carriers must implement an EDI system for filing injury reports by the end of 1995.

But the state's own efforts at using EDI have been affected by the arduous task of conversion to an electronic system. As of March 1995, the commission was receiving only a limited number of EDI transactions from three carriers. Part of the problem, according to Pat Cannon, has been defining and designing the commission's business needs as they relate to processing claims electronically.

Another stumbling block has been the difficulty in mapping the information on the reports to the EDI data sets. Few states are using EDI for Workers' Compensation, so much of the work is being done from scratch. According to Maloney, 11 states are in various stages using EDI for claims filing. In Texas, few insurance carriers have experience with EDI.

But the promise of quicker response times on claims, reductions in manual labor for data entry and cost savings in a number of key areas has led the Texas Workers' Compensation Commission and other states to forge ahead with EDI, despite the sometimes grinding work to get going. While 1995 might turn out to be a quiet year in the number of EDI transactions that take place, it will certainly go down as one of the busiest in terms of new initiatives.



----------SIDEBAR----------



EDI FACTS

- It is estimated that 34,000 organizations use EDI standards.

Source: Data Interchange Standards Association, Inc.

- Government EC (electronic commerce) expenditures will grow from an estimated 5 percent of the market to 9 percent by 1996.

Source: Gartner Group



X12 EDI Transaction SETS Relevant to Government:

130 Student Educational Record (transcript)

131 Student Educational Record (transcript) Acknowledgment

135 Student Loan Application

139 Student Loan Guarantee Result

148 Report of Injury or Illness

150 Tax Rate Notification

151 Electronic Filing of Tax Return Data Acknowledgment

152 Statistical Government Information

175 Court Notice

176 Bankruptcy Proof of Claim

190 Student Enrollment Verification

191 Student Loan Preclaims

309 U.S. Customs Manifest

311 Canadian Customs Information

257 Health Care Eligibility/Benefit Inquiry Immediate Response

258 Health Care Eligibility/Benefit Information Immediate Response

813 Electronic Filing of Tax Return Data

819 Operating Expense Statement

820 Payment Order/Remittance Advice (Payroll and EFT)

821 Financial Information Reporting

822 Customer Account Analysis

826 Tax Information Reporting

827 Financial Return Notice

828 Debit Authorization

829 Payment Cancellation Request

834 Benefit Enrollment and Maintenance

848 Material Safety Data Sheet

863 Report of Tax Results

Source: Gartner Group



Government Electronic Commerce Issues:

- Access: Minorities, Women, Small, Remote Businesses

- Ownership and Control of Government Purchasing Information

- Human Resources/Union Issues

- Commercial or Government Operated Systems

- Standards - Unique formats vs. X12 or UN/EDIFACT

- Accountability Built-in

- Legislated Restricted Access to Government Networks

- What is a VAN?

- Too Many Uncoordinated Projects

- Standard Trading Partner Agreement

- Vendor Registration and Supplier ID Codes

Source: Gartner Group