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Industry Speaks, CMS Listens


Maria Fontanazza

October 1, 2006

5 Min Read
Industry Speaks, CMS Listens


Gathering input from industry was key to creating the revised rule, according to Stephen Chan.

After an uproar from stakeholders and manufacturers over CMS's proposed rule for the hospital inpatient prospective payment system (IPPS), the agency released a more practical and improved final rule on August 1.

The main complaints with the proposed rule were its potential significant cuts for certain procedures and the lack of time to assess its consequences. While there is still a lot of information to sift through, the device industry's response to this rule has been much more positive than the dissatisfaction expressed a few months ago.

“The final rule underscores the importance of gathering input from stakeholders throughout the health system and mobilizing patient, provider, and industry groups to respond to the most significant revisions to IPPS since its inception in 1983,” says Stephen Chan, director at Boston Healthcare (Washington, DC). “The community's input and action were critical to developing a final rule that meets everyone's goal of ensuring that beneficiaries receive quality care.”

The final rule's key policies focus on diagnosis-related group (DRG) reform, basing relative weights on hospital-specific costs, and improving the system's recognition of patient disease severity to avoid underpayments.

Although DRG payments will shift from charge-based weights to cost-based, the transition will occur over a three-year period, rather than a complete launch in FY 2007. Although payment reductions for certain DRGs still exist, Chan says the phased implementation reduces the drastic payment swings suggested in the proposed rule. Wide swings in payments would have cost hospitals money each time they performed procedures using certain lifesaving technologies.
CMS is addressing the discontent over outdated cost calculations and will continue to apply add-on payments for new technologies. Cost reports from FY 2004 will be used to calculate the national average cost-to-charge ratios, rather than the originally proposed reports from FY 2003.

An agency-appointed contractor will assess charge compression in cost-based weights. Charge compression includes applying a lower percentage markup to higher-cost services and a higher-percentage markup to lower-cost services. The results of the contractor's research, which will include public comments on how to adjust for charge compression, will be used by CMS to decide whether more must be done during the cost-based implementation in FY 2008.

The Medical Device Manufacturers Association (MDMA) supports the move to cost-based weights, because it more accurately reflects the real cost of performing a procedure. “We want to ensure that CMS will use the most recent cost report data so that it captures the full breadth of devices being used in the hospital setting,” says Jori Frahler, director of federal affairs at MDMA. “That's why we recommended that CMS validate current cost reports ahead of other years and that the cost reports should be resolved with a mechanism to adjust for charge compression of expensive devices. We believe this is critical for appropriately reimbursing newer treatments and technologies that aren't captured in the older data.”

AdvaMed is also pleased with the stabilization of the payment rates. “Smaller companies create the majority of breakthrough, lifesaving medical technologies and depend on stable payment rates to encourage greater innovation,” says an association spokesperson who asked not to be identified.

To prevent underpayments for treating severely ill patients, 20 new DRGs have been created, 32 DRGs have been modified, and eight DRGs have been deleted. A contractor will be researching alternative DRG severity systems, and CMS plans on putting one of the systems into practice by FY 2008.

An interim report that compares the systems will be completed by the end of the year and released for public comment. “MDMA looks forward to being a part of that discussion,” says Frahler. “We believe that any refining of the DRG system should take into consideration not only a patient's severity of illness, but also the complexity of the medical procedure.” Specifically, MDMA recommended that device-dependent surgical DRGs should be elevated in severity. However, it would prefer that DRGs include both a patient severity and a procedural complexity weighting to account for device cost, the complexity of the procedure, and aftercare of the patient.

The incremental transition of cost-based and severity-adjusted payments is also supposed to have a limited effect on hospitals. Payments to hospitals will increase, on average, by 3.5% in FY 2007. About 2% of hospitals will see a reduction in payment. However, CMS says that the reduction has nothing to do with the changes being made to improve the IPPS.

The effect on payments to specific DRGs should also be limited, and no DRG payment will be cut more than 5.4%. This means that some cardiovascular technologies won't experience a 30% reduction, as previously feared. Chan is advising clients to examine how payments will change for the DRGs related to their technologies during the next three years. He believes that the fully implemented changes could add up to reductions that are more meaningful. “Boston Healthcare will also advise its clients to continue to monitor and provide input to the implementation of the severity-adjusted DRGs scheduled for next year, as they are still in development and may have a significant effect on manufacturers.”

The changes in CMS's final rule are effective October 1. Industry should continue providing input on DRG severity-adjusted systems and cost-based payments, since both should be seeing improvements in FY 2008.

“We dodged a bullet on this one,” says Tony Freeman, managing director and principal at Manning Advisors LLC (New York City). “The challenge is going to be, as people start dealing with the fact that the Medicare system is insolvent in the foreseeable future, that more radical change may be proposed more frequently.” He added that lobbying in the industry must be a critical, ongoing effort to help maintain the transparency of the benefits of certain devices, along with the importance of funding for new products and processes.

“Creating a more-accurate payment system is a formidable challenge for everyone involved,” the AdvaMed spokesperson states. “This was an unusually complex regulation and the final rule reflects input from a variety of groups. We're pleased that the comments were carefully considered and that patient, physician, hospital, and manufacturer comments were addressed in the final rule.”

All 1468 pages of the final IPPS rule are available online at www.cms.hhs.gov/AcuteInpatientPPS/downloads/cms1488f.pdf.

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