January 31, 1997



The current lack of payment for telemedicine services is considered to be one of the major barriers to telemedicine's rapid deployment. For example, most third party payers have taken a "wait and see" approach toward telemedicine payments. On the Federal government side, Medicare and Medicaid, which are wholly or partly administered by the Health Care Financing Administration (HCFA), have varying policies covering telemedicine. Under Medicare, if standard medical practice does not require face-to-face contact between patient and health professional, then it will cover the service, as in the case of teleradiology. Medicaid coverage for telemedicine varies from state to state. Thus, health professionals and services that are covered vary greatly by state.

On the private sector side, very little information exists about private payer coverage of telemedicine. Evidence to date(1), however, suggests that few private payers cover telemedicine consultation services, although most cover radiology and similar imaging services. Regardless of the payers involved, the major issue is whether any additional benefits provided to patients and health care professionals by telemedicine are worth the potential additional costs. This is of particular concern to the Medicare and Medicaid programs which are facing consistent threats to their financial solvency.

Given the lack of substantial information concerning the private sector's involvement in telemedicine payment, this chapter's discussion focuses largely on the Medicare and Medicaid programs, where the Federal government has a direct role in policy making. In Section B we discuss these programs; in Section C, we touch briefly upon private payer coverage and in Section D. we discuss some of the concerns that third party payers see as barriers to reimbursement. Finally, in Section E. we look at some of the future directions for the JWGT's involvement in the ongoing discussions on telemedicine payments.


Telemedicine advocates have called for payment of telemedicine by the Medicare program because Medicare is the largest health insurance program in the United States and, as a result, the private sector generally follows its lead. According to statute, the Medicare program covers only those health care services and procedures that are determined to be "reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member"(2). Coverage is not available for experimental or investigational technologies. Despite these restrictions and its concerns about increased volume cost, technology costs, efficacy, quality, as well other issues highlighted in Section III, HCFA recognizes that telemedicine holds great promise for breaking down barriers to quality medical care, particularly specialty care in rural underserved areas. Telemedicine may also save health care expenditures for beneficiaries, providers, and payers through reduced costs for patient and/or health professional travel, medical education, interhospital transfers of patients, and patient record keeping. Thus, Medicare is helping to finance several studies and projects that examine the clinical and cost effectiveness of telemedicine. HCFA has awarded nearly $9 million from its appropriated funds to related research and demonstrations. These studies are closely coordinated with those of the ORHP, which is collecting broad evaluative information on rural telemedicine programs and on other agencies such as AHCPR and NLM. We also note that the Health Insurance and Portability Act of 1996 calls for HCFA to "...submit a report to Congress on Medicare reimbursement for telemedicine services no later than March 1, 1997 (which shall) include a proposal for Medicare reimbursement of such services." Unfortunately, since HCFA's three-year demonstration is barely underway, little data from this initiative will be available for inclusion.

Medicare Fee-for-Service Coverage and Payment

Medicare defines physicians' services as "a service where the physician either examines the patient in person or is able to visualize some aspect of the patient's condition without the interposition of a third person's judgement." Therefore, payment from the Medicare trust funds is limited to those telemedicine applications where, under conventional health care delivery, face-to-face contact is not required between patient and physician. Thus, Medicare covers teleradiology as well as long distance ECG and EEG interpretations. (See Box 19) By contrast, Medicare does not cover consultations and other physicians' services delivered through telecommunications because, under the conventional delivery of medicine, those services are furnished in person.

Medicaid Fee-for-Service Coverage and Payment

Coverage of Medicaid Telemedicine Applications

Telemedicine has only recently been introduced to Medicaid through the innovative programs of individual states. Operating within the broad parameters of Federal laws and regulations, each state establishes its own eligibility standards; determines the type, amount, duration, and scope of services; and sets the rate of payment for services. Typically, when establishing coverage criteria for services, states consider factors such as the availability of less expensive alternative treatments, conformance with commonly accepted health care procedures, and the safety and effectiveness of the service. States have utilized telemedicine technology for a number of different medical services. Radiology and interactive video consultations remain the most frequent uses of telemedicine under Medicaid; as technology improves, dermatology, digitized mammograms, neurosurgery, and pathology are also likely to be considered for Medicaid coverage. Transmitting CAT Scans, MRIs, and ECGs for review and interpretation by an offsite physician has also been covered, at the discretion of the state.

As noted previously, telemedicine also has gained increasing popularity in the provision of mental health and substance abuse services for Medicaid beneficiaries. For example, the Montana Medicaid program has been a leader in supporting telemedicine for providing these services to patients who are frequently more than 100 miles away from the nearest mental health or substance abuse practitioner. Nancy Ellery, Administrator of the Health Policy and Services Administration of Montana, believes that telemedicine has saved the state substantial transportation and other costs, while expanding access for rural Montana residents.

Payment for Medicaid Telemedicine Applications

Under fee-for-service systems, state Medicaid agencies decide whether or not to cover and reimburse for services furnished through telemedicine applications as an optional cost-effective alternative to direct consultations or examinations . Reimbursement for all Medicaid covered services, including those that employ telemedicine applications, must satisfy Federal requirements of efficiency, economy, and quality of care; and states are required to utilize the least costly means of providing quality health care services. States are also encouraged to use the flexibility inherent in the Federal guidelines to create innovative payment methodologies in reimbursing services that incorporate telemedicine technology. For example, states covering health care services under Medicaid that utilize telemedicine may develop a number of different strategies for reimbursing both the health professional (specialist) at the hub site for the consultation and the health professional caring for the patient at the spoke site for the office visit.

Telemedicine services also involve expenses that are not traditionally billed to Medicaid for medical services, such as equipment and transmission costs. While the cost of electronic transmissions may not be separately billed to Medicaid, these costs could be justifiably incorporated into the fee for a coverable service.

Medicare Managed Care

The use of telemedicine/telecommunications networks and techniques in the Medicare managed care program can be viewed as a means of:

increasing access to quality health care for rural and under-served Medicare beneficiaries;

reducing distance and isolation in patient/ practioner encounters, and;

developing a baseline of information for on-going evaluation of utilization and outcomes.

Telemedicine is viewed by HCFA as a potential change agent and more managed care plans, hospitals, and practitioner groups are contacting the agency about grants and contracting options for developing telemedicine networks.

HCFA has recently informed managed health care plans and Federally qualified health maintenance organizations with TEFRA(3) risk based contracts, that they do not need a waiver to offer telemedicine services. Such plans, however, would not receive additional reimbursement for covering telemedicine services. HCFA's primary goal in establishing the risk contracting program was to reduce Medicare's growing financial exposure by paying managed care plans 95% of comparable costs under fee-for-service. These risk contracting plans are expected to promote healthy lifestyles, disease prevention and apply increased efficiencies in coordinating the delivery of health care services to offset the loss in Medicare revenue. For this reduced rate, risk contracting plans are expected to deliver all Medicare covered services and such other additional or optional services that the plan may elect to provide such as telemedicine. Funding of ongoing operational costs, including connection, transmission and equipment maintenance can be allocated under administrative and marketing expenses in managed care proposals forwarded to HCFA for contract consideration. To the extent that equipment acquisition costs can be amortized, these too can be reflected in itemized expenses.

Medicaid Managed Care

The number of states enrolling Medicaid recipients into managed care has greatly increased over the past few years. Facing fiscal pressure due to the explosive growth in their Medicaid populations and the growing cost of medical care, states are responding to these pressures by developing Medicaid managed care programs.

In general, when a state Medicaid agency contracts with a managed care plan, no mention is made in the contract about coverage or payment for telemedicine services. Thus, it is usually left to the managed care plan to decide whether or not to utilize telemedicine.

Medicaid Waivers

A limited number of states are testing new approaches to their Medicaid programs by obtaining waivers of statutory requirements and limitations from the Secretary of the Department of Health and Human Services. In obtaining waivers, many states incorporate managed care as the delivery system to Medicaid beneficiaries.

Two states in particular are working to develop a telemedicine network within their waiver programs. For example, Oklahoma has used the waiver program to link rural health professionals with their urban counterparts. (See Box )

The state of California is also interested in using telemedicine in their managed care programs. The state's legislature has recently passed legislation that would cover telemedicine and has consulted with HCFA's San Francisco Regional Office for technical advice. The areas the state has considered using telemedicine for are: practitioner consultations, second opinions in the delivery of specialty services, or for diagnosing or treating rare or more complex medical conditions. Because both managed care and telemedicine are such new areas to some states, there has not been much thought to coordination of the two.


Coverage and Payment by Private Sector Fee-for-Service

From a review of the literature, HCFA was able to identify only one private insurer that currently has a formal policy to pay for telemedicine services beyond case-to-case considerations: Blue Cross/Blue Shield of Kansas pays for certain services furnished by physicians licensed to practice in that State.(4) Anecdotal information indicates that at least two other Blue Cross/Blue Shield plans in Montana and West Virginia have paid for telemedicine services on some occasions. Other insurers may pay for telemedicine on a fee-for-service basis but they have not been specifically identified as such. For example, the Health Insurance Association of America (HIAA) recently completed a periodic survey of members. The survey was sent to 120 insurers, of whom 53 responded. The survey found that 15 percent of the respondents pay for physicians' professional services furnished through telecommunications media. More specific information about the type of services and costs was unavailable.

In addition to HCFA's findings, the ORHP/Abt Associate's study has attempted to identify the extent of private third party coverage of rural telemedicine. At the time of the survey, approximately 8% of the telemedicine facilities reporting had successfully negotiated payment with private third-party payers.

Coverage and Payment by Private Sector Managed Care Plans

The interest in telemedicine by the private sector managed care plans primarily stems from the reality that this technology may be the most effective way for plans to penetrate, expand or hold their market share in rural, under populated areas. The availability of telemedicine may be a tool by itself to facilitate marketing of plans. Telemedicine also has the potential to decrease costs associated with: health care professional travel, patient transfers between hospitals, duplication of records and overhead costs such as excess paper and film.

Despite these inducements, the managed care community has been slow to deploy telemedicine. However, there are a growing number of successful managed care models that have recently begun utilizing telemedicine applications. Two of these plans are Allina Health Systems of Minneapolis, MN and Methodist Hospital of Indianapolis, IN. Allina Health Systems is a large managed care provider in Minnesota and Wisconsin. Its telemedicine network was formed with the Rural Health Alliance, a group of rural communities in central Minnesota, and currently consists of 15 rural and 7 urban sites. Allina anticipates adding three to five additional sites per year.

An even more important trend to watch are changes made by the states of California and Louisiana. Louisiana recently passed a law dealing with telemedicine reimbursement that

specifies a certain reimbursement rate for physicians at the originating site and also includes language prohibiting insurance carriers from discriminating against telemedicine as a medium for delivering health care services. California also recently passed California State Bill 1665 (1996) requiring private managed care plans to establish policies regarding coverage of telemedicine services.


The absence of more widespread reimbursement payments for telemedicine is the result of many factors and concerns. Although telemedicine has the long term potential to improve patient access to the best health care possible, it presents a host of issues and concerns for payers such as efficacy, quality, technology cost, volume of care and potential over utilization--just to name a few. Box 24 highlights some of these issues.

It is important to point out that, regardless of any cost savings that may be gained from telemedicine, greater access to medical care, particularly specialty care which involves expensive diagnostic and therapeutic procedures, could very likely generate greater expenditures for payers. In the private sector, added expenses resulting from broadened coverage and new technologies are financed by higher enrollees premiums. For Medicare, growth in spending is of critical concern because of its effects on the continued viability of the program and the implications for the Trust Funds. As a result, Medicare increases in spending associated with telemedicine coverage may have to be at least partially absorbed by reductions in expenditures for other services.


The overall benefits to society that telemedicine could potentially bring in terms of greater access, more efficient delivery and lower hospitalization costs must be weighed together with potential additional costs. While the advent of new technologies, aimed at improving access to care is welcomed, it is important to ensure that these technologies are used in appropriate ways that benefit the patient, are consistent with good medical practice, and represent a wise investment of taxpayer resources.

The survival of telemedicine in this country ultimately rests, in part, on ensuring a steady funding stream through payments for telemedicine services. However, although necessary, these payments are unlikely to be sufficient to support some of the high costs of current projects. The challenge still remains to demonstrate the value-added of telemedicine and reduce its costs. The member agencies of the JWGT have engaged in a number of evaluative projects to help demonstrate its value (see Evaluation Chapter).

In particular, HCFA is sponsoring a demonstration to look at payment policy that will be closely coordinated with ORHP's general evaluation of telemedicine in rural areas and NLM's and AHCPR's activities looking at clinical efficacy.

Additionally, the JWGT will be working with various organizations, such as the National Governors Association, the Western Governors Association, state offices of rural health, HCFA regional offices, and others, to develop evaluation strategies for assessing Medicaid payment policies.

Finally the JWGT plans to work with several managed care plans to evaluate the barriers and opportunities to the adoption of telemedicine in managed care settings.


1. Grigsby,J, Kaehny, M., and Sandberg,E. Effects and Effectiveness of Telemedicine. Health Care Financing Review, 1995.

2. 1862(a) (1)(A) of the Social Security Act

3. Tax Equity and Fiscal Responsibility Act of 1982.

4. Grigsby,J.; Sandberg, E.; Kaehny M.; Kramer,A. Schlenker,R.;Shaughnessy,P.,(1994), "Analysis of Expansion of Access to Care Through Use of Telemedicine and Mobile Health Services, Report 2: Case Studies and Current Status of Telemedicine," 2.7