Originally Published MDDI August 2004

Reimbursement

The changes witnessed during the last quarter century are both confounding and simplifying. Although we now possess improved systems and capabilities for taking on tough reimbursement issues, many of them remain unresolved.

Ted Mannen

Ted Mannen is president and CEO of Aventor (Washington, DC) and a member of the MD&DI editorial advisory board.

I well remember my own introduction to reimbursement, at about the time of MD&DI's inception. It was not long after the hospital industry (with some device industry help) had defeated President Carter's cost-containment plan in Congress. People in Washington were afraid that the administration, having lost a very public, pitched battle, might next attempt to achieve its objectives by quieter means. These means included, for example, a rumored regulation that traveled under the shadowy moniker of “reasonable and necessary.” 

In those days, there were many whispered conversations about “reasonable and necessary.” One might occasionally receive by messenger (this being a prefax era) a bootlegged copy of a page or two of regulatory 
gobbledygook on the stationery of the recently created Department of Health and Human Services. In the end, all was for naught, and “reasonable and necessary” never became a final regulation—and to this day, it has not 
become one.

How Has Reimbursement Evolved?

“Reasonable and necessary” is, of course, reimbursement's Rosetta stone. It is the wording in the law that is supposed to translate for us Medicare's content. In other words, content is the services and devices that Medicare (and often, by implication, private insurers) will cover and thus pay for. We continue to puzzle over this Rosetta stone, but we do so in a reimbursement environment that has changed dramatically during the last 25 years.

Reimbursement Went from a Positive to a Negative. The term reimbursement itself mirrors a major evolution in attitudes and beliefs over the last 25 years. Originally referring to funds mechanistically paid for health services rendered, reimbursement today often conjures up a vision of barriers to such payments. For example: “Our company faces a lot of issues, including FDA and reimbursement.” 

Focus Shifted from Cost Reimbursement to Cost Controls. The system for which hospitals fought when they battled the Carter plan in Congress was cost reimbursement—and it operated pretty much like it sounded.

In the 1980s, however, the emphasis shifted from reimbursing costs to paying them prospectively—that is, setting out predetermined budgets for designated units of care. Medicare instituted its first prospective payment system in 1983, when it began paying for inpatient hospital services on the basis of diagnosis-related groups (DRGs). In subsequent years, forms of prospective payment spread to other Medicare services, such as hospital outpatient, skilled nursing facility, and home-health-agency care. Medicare also instituted a major new payment regime for physicians based on the “relative value” of their services. 

These continuous changes have conditioned the device community to expect (and sometimes to seek) nearly perennial reimbursement legislation in Congress. One study found that, on average, the Medicare statute undergoes some 50 changes each year. This study was completed before major new laws were enacted in 2000 and 2003. And so, if anything, it understates the huge number of changes in 
reimbursement legislation. 

Cost and Clinical Controls Blurred. With today's intense focus on healthcare spending, payer attention may be shifting. Paradoxically, the shift is from an emphasis on explicit cost controls to more-subtle, clinically based forms of cost restraint. This includes such approaches as disease management, under which physicians use evidence-based practice guidelines to help patients self-manage chronic afflictions. Disease-management plans have proliferated in the private managed-care environment, and Medicare is testing the approach in major demonstration projects.

This blurring of clinical and economic restraints results in part from payers having exhausted other (politically feasible) avenues of cost control. It also results from the demands of a new, politically engaged patient class for more influence over the decisions that affect their care.
Patients Organized and Became Foot Soldiers. The shaggy-haired 25-year-old of the late 1970s is today's 50-year-old, card-carrying AARP member, still jogging perhaps, but with more urgent motives. He or she must keep cholesterol down and heart rate up, all in the quest for a longer, healthier life. Not content to operate just on their own, the bulging baby-boom cohort is increasingly organizing itself into coalitions and disease groups. In this crucible of political opinion, boomers are having a profound and positive effect on research priorities and access to technology. 

Payers Emphasized Evidence over Criteria. The intractability of “reasonable and necessary” is leading payers to change the subject. Instead of focusing on the criteria for coverage, they look at the strength of a new device's medical evidence. Increasingly, the system will demand evidence from real-life clinical settings, delivered by information systems in real time. Every device company with a major innovation is considering (or should be considering) how to marshal its evidence for an increasingly discerning payer community.

Information Grew from a Trickle to a Flood. If early attempts to define “reasonable and necessary” were conducted behind closed doors, making it difficult for the public to understand what was taking place, the current situation is very nearly the opposite. We now have a transparent reimbursement system that gushes forth so much information that genuine understanding often still eludes us. Today, the click of a mouse button can deliver one to a plethora of reimbursement facts and figures. This includes everything from Medicare national and local coverage policies to the projected rate of growth in managed-care premiums, to the latest draft agenda of a specialized coding body. 

In this so-called overload environment, the coin of the realm is no longer information acquisition. Instead, the focus is on the ability to synthesize, simplify, and clarify—to triangulate on what is genuinely important. I first realized this when my firm's free daily “reimbursement wire”—an e-mail comprised solely of headlines and links—became a surprise hit.

Medicare Coverage became “FDA-ized.” Transparency of reimbursement information has led stakeholders to demand greater participation in decisions. This in turn has resulted in more-elaborate decision-making processes—some that are nearly as elaborate as those at FDA. The growing emphasis on process is most evident in Medicare national coverage decision making.

In the early 1980s, the term most often associated with the Medicare coverage process was black box, used because it was difficult to understand what the process entailed and when it would end. But today, one need only visit the CMS Web site to know the status of a national coverage decision: who requested it, when it was requested, what the key questions are, and when the process is scheduled to be completed. To be sure, there are subtle factors that influence decisions that lie beyond the reach of any Web site. But black box is not a term generally associated with the Medicare coverage process today.

Coverage Decision Making Grew More Centralized. In 1996, I wrote an article for MD&DI titled “The Device Industry in Little Unit America,” describing how the industry's issues were devolving into smaller, more decentralized clusters [MD&DI, October 1996, p. 30]. While I believe much of the article still rings true, one important element does not: coverage decision making, at least in Medicare, is not decentralizing; it is centralizing.

Twenty-five years ago, the locus of coverage decision making received little attention, because coverage decision making itself received little attention. But the last several years have been marked by growing dissatisfaction in the policy community over the manifest diversity of healthcare. The concern expressed, from Capitol Hill to the General Accounting Office to the Medicare Payment Advisory Committee, is that the nature of health services in, say, Maine, should not differ from those in, say, Illinois. The logical extension of this reasoning is to vest in a centralized body the power to decide coverage issues on a national basis.

While some 10% of Medicare's coverage decisions are already national in scope, new changes in the law seem intended to drive that percentage higher. One such change requires the secretary of health and human services to identify local policies that should be adopted nationally. Another seeks to promote consistency among local coverage policies. 

Local coverage has generally served as a device innovation safety valve, because it allows innovators to try approaches that may not yet enjoy a national consensus. The degree to which this important safety valve will remain available in the future seems very much an open question. 
Investors Discovered Reimbursement. Dominated by smaller companies, the device industry has always been sensitive to the need for capital to finance innovation. The governing risk associated with this capital investment has historically centered on FDA questions. Would marketing clearance be granted? If so, how long it would take?

Over the last 25 years, however, reimbursement's importance to investment decisions has grown to the point that today it seems at least on par with FDA's. Investors routinely require prospective capital recipients to document the reimbursement pathways for their devices and to explain the timelines and degree of controversy they are likely to experience.

Technologies Outran Benefit Structures. Twenty-five years ago, technologies were reasonably well calibrated to the benefit structures of major insurance plans. Implants, for example, were used in inpatient surgeries, and inpatient surgeries were explicitly recognized as an insurance benefit. With the introduction of Medicare DRGs in 1983, however, technologies began to help patients and their care migrate to new settings. Surgicenters and homes, for instance, did not always represent a precise match with benefit categories. 

Though many of the DRG-era disconnects have been remedied, benefit structures today show similar types of strains as telemedicine, remote monitoring, and other new technologies outrun the perimeters of traditional categories. 

Payers Reimbursed for Clinical Trials. “Reasonable and necessary” has traditionally marked a line between experimental and mainstream healthcare. Over much of the last 25 years, devices used in clinical trials were on the experimental, and thus unpaid, side of this line.

Beginning in 1995, however, those devices designated as “Category B,” representing incremental innovations, became eligible for Medicare reimbursement. Five years later, Medicare extended to certain routine clinical trials costs a similar eligibility—eligibility that, for some devices, will become more generous next year. Private payers have generally followed Medicare's lead, producing an upswing for the device industry that few in 1979 would have predicted.

Device Industry Gained Political Clout. The last quarter century has witnessed a transformation in the political influence of the medical device industry. Relegated to a small, reactive role in the Carter cost-containment debate, the device industry can today claim growing political influence on all things reimbursement. This is played out in Congress, at CMS, and in specialized technical and evidentiary bodies. 

The industry played a key role, for example, in making devices used in clinical trials eligible for Medicare reimbursement. Today, the industry routinely designs and advocates its own political agenda, drafts its own legislation, and appears at a multitude of stakeholder forums. 

Reimbursement Jobs within Companies Became Critical. It was the rare device company of the early 1980s that recognized reimbursement as a company function, let alone as a full-time responsibility. If reimbursement issues were addressed at all, they often fell into the purview of an executive who already held a full-time position, typically in marketing, regulatory affairs, or lobbying. 

Today, device companies with innovative products increasingly designate at least one full-time reimbursement executive. In addition, larger companies are experimenting with a variety of sophisticated organizational forms, including departments dedicated exclusively to reimbursement. 

Advocacy Moved to the Claims Level. In 1979, device companies had no urgent need to communicate with their provider customers about reimbursement claims. Most claims were simply paid. Today, however, public and private payers often scrutinize claims closely, and, when in doubt, seem to err on the side of rejection.

More-aggressive claims-review processes have stimulated a concomitant reaction in the device industry: many companies now use sophisticated telephone support systems to aid their sales forces and provider customers. By plugging into the nitty-gritty world of claims review, savvy device companies are helping provide their customers with tangible added value.

Conclusion

In all, many of the reimbursement changes since 1979 represent clear advantages for the device industry. Information is more transparent, processes are more open, and device companies have more say in decisions. There has also been exponential growth in the technical and political competencies developed within individual device companies and within the device industry as a whole. 

But despite these new systems and capabilities, the heart of reimbursement—deciding what care is worth paying for—still resists easy answers.    

Copyright ©2004 Medical Device & Diagnostic Industry