Top Reimbursement Developments of 2006

Events in 2006 regarding reimbursement could affect the medical device industry for years to come.

16 Min Read
Top Reimbursement Developments of 2006


In 2006, there were several reimbursement developments that affect the medical device industry. CMS issued a guidance document on coverage with evidence development (CED). It also approved two initiatives to explore the benefits of gainsharing between hospitals and physicians. In addition, the centers issued a proposed rule containing new coverage and payment policies for certain diagnostic imaging services. And it proposed a competitive acquisition program for durable medical equipment (DME).

By learning about these events, medical device makers have an opportunity to prepare for the subtle changes that could lead to big problems (or solutions) down the road. This article discusses each development and offers analysis on how industry is responding.

Guidance on CED


2006: Key Coverage Developments at a Glance

CMS issues national coverage decisions (NCDs) in response to requests from entities that believe a new device or service meets CMS's conditions for Medicare coverage. Traditionally, a favorable NCD leads to Medicare's decision to provide coverage either with or without special conditions.

On July 12, 2006, CMS issued a guidance document titled, “NCDs with Data Collection as a Condition of Coverage: Coverage with Evidence Development.” The guidance establishes the parameters that CMS follows for NCDs. These parameters include a special condition of payment that requires device makers to develop and capture additional patient data to supplement standard claims data. NCDs might also require that the data be collected in a research setting such as a clinical trial.

According to CMS, devices that require a CED must generate information on use and effect as evaluated in an NCD. Medicare uses that data to document the item's appropriateness of use on beneficiaries. With such data, Medicare can decide future changes in coverage. It can also generate clinical data to improve the evidence that providers use for recommendations to Medicare.

The CED guidance describes two subtypes of CED. The first type is coverage with appropriateness determination (CAD). Under CAD, providers must collect and submit data that are above and beyond the usual requirements of a standard Medicare claim form. CAD is required when CMS is concerned that the data collected on the standard form are insufficient to determine whether the device was used as outlined in the NCD. Providers seeking reimbursement must submit this extra information to a database or registry specifically designed for collecting the data specified in the NCD.

Under the second type of CED, known as coverage with study participation (CSP), in addition to data collection requirements, coverage is conditional on the care delivered in research settings such as clinical trials, with additional protections for patients. The guidance states that CMS will not be involved in the design, review, or execution of the research studies required by CSP. The agency will only provide payment under CSP for clinical research that meets the standards of a qualified trial, as outlined by CMS in its coverage policy for clinical trials.

CSP should enable CMS to provide coverage for a product even if existing evidence is insufficient. It means that CMS thinks that additional evidence—collected in a controlled clinical research setting—could be useful to establish a basis for coverage. CSP is also intended to produce information that will influence clinical practice and help Medicare beneficiaries and providers make appropriate diagnostic and therapeutic decisions.

The CED guidance sets forth CMS's plans for issuing NCDs requiring each type of CED. It also establishes general requirements for data collection, collection funding, and determining how the data are used by CMS. The guidance also gives parameters for granting access to outside researchers and deciding when the required conditions will end, as well as what occurs following such termination.

The guidance sets forth several principles for CMS to follow in the application of CED. It states that CED should expand rather than restrict access to technologies and treatments for Medicare beneficiaries. However, the guidance also states that CED should not be used when available evidence justifies another form of coverage (e.g., coverage without conditions). Therefore, CED will be used infrequently.

The CED guidance was initially issued as a draft in June 2005. CMS incorporated numerous changes suggested in public comments into the final version in July 2006. Although industry was generally pleased with many of the changes, industry stakeholders have continued to express concern about a number of issues and have urged CMS to revise the guidance further.

For example, one industry group urged CMS to revise the guidance to make it clear that only the minimum data necessary for the specified purpose should be required. That way, the burdens on OEMs and CED providers would not outweigh the benefits. There is also concern about CMS's intention to own all CED data. It could discourage third parties from collaborating or funding the required data registries or using such data for research.

Another concern with respect to CSPs is that the CED guidance states that Medicare coverage will revert to the pre-NCD coverage policy. Some stakeholders recommended that when a study protocol calls for an end to the data collection, CMS should be willing to entertain requests from study sponsors to extend the studies to enable patients to continue receiving coverage until a revised NCD can be issued.

Gainsharing Demonstrations

In September of 2006, CMS issued solicitations for two separate gainsharing demonstration pilot projects that involve a number of hospitals, health systems, and physician groups. One program was authorized by the Medicare Modernization Act of 2003 (MMA). The Deficit Reduction Act of 2005 (DRA) established the other. The two programs reflect congressional acceptance of a concept that has been met with some concern and skepticism by industry and among patient advocates.

Gainsharing refers to programs in which hospitals provide financial incentives to physicians to reduce the cost of care for Medicare inpatients under the inpatient prospective payment system (IPPS). Under IPPS, hospitals receive a set payment amount, based on the patient's diagnostic related group, or DRG. In addition, hospitals are responsible for most of the costs of providing care to the patient, including medical supplies.

In a typical gainsharing program, a hospital and a subset of its physicians establish measures for reducing the hospital's costs. The hospital then pays those physicians a part of any savings achieved. Among other benefits, the program encourages physicians to order less costly items and services.

Gainsharing programs raise issues for a number of Medicare prohibitions. Medicare rules state that it is unlawful for a hospital to pay physicians to reduce or limit services to Medicare or Medicaid beneficiaries. Consequently, gainsharing programs require special authorization from the federal government. The HHS Office of Inspector General (OIG) has permitted some individual hospitals to begin gainsharing programs after those hospitals submitted requests for advisory opinions. The programs approved by OIG include mechanisms to ensure that cost-cutting measures do not compromise patient care. The MMA and DRA programs will have to include similar protections.

Such safeguards notwithstanding, critics of gainsharing contend that the programs inevitably jeopardize patient care by placing cost above quality. The medical device industry has expressed concern that gainsharing arrangements will stifle innovation by encouraging physicians to use the least costly devices, even when a more expensive product may be more effective.

The MMA demonstration project, the Physician-Hospital Collaboration Demonstration, is a three-year project scheduled to begin during 2007. In the solicitation, CMS invited groups of medical practices and up to 12 affiliated hospitals to participate in each consortium. No more than 72 hospitals will be included in all of the programs collectively. To evaluate the success of this project, CMS will measure the effect on quality and costs for patients on a long-term basis. Such measurements include outcomes such as mortality and readmissions that could be attributable to changes in practice patterns caused by the gainsharing.

The solicitation indicates that CMS will approve programs that propose multiple ways to reduce costs. The success of each program will be evaluated based on net savings (i.e., reductions in patient care cost attributable to the gainsharing activity, offset by corresponding cost increases associated with the same patients owing to complications, readmissions, or other problems).

The second demonstration project, the Medicare Hospital Gainsharing Demonstration, is authorized by section 5007 of the DRA. This is also a three-year project scheduled to begin in 2007. It will involve only six programs, each consisting of one hospital. Two of the programs must be rural. Unlike the Physician-Hospital Collaboration Demonstration, CMS considers only short-term improvements that occur during the inpatient stay and immediately following discharge.

These projects are significant because they could lead to permanent legislative changes that would encourage the widespread use of such programs.

In addition to the general concern that physicians might place costs ahead of patient benefit, critics fear that such programs could segregate patients. That is, physicians might be tempted to assign relatively healthy patients to hospitals that offer gainsharing, while sicker (and more costly) patients are relegated to hospitals that do not offer such arrangements. And if gainsharing proliferates, hospitals might compete to offer the programs that pay physicians the most revenue, thereby exacerbating these problems.

Proposed Physician Fee Schedule Rule

In August 2006, CMS published the proposed Physician Fee Schedule rule for 2007, which contains a number of policies related to coverage and payment for diagnostic imaging services. Of particular importance for medical diagnostic providers are the technical but significant proposed changes to the Medicare reassignment and purchased diagnostic test rules. These proposed changes are intended to address what CMS considers potential abusive billing arrangements that enable physicians to profit from referring patients for MRI scans and other diagnostic tests.

CMS has proposed changes to clarify how the requirements of the purchased diagnostic test rule apply to what is known as the contractual reassignment exception. The MMA created the contractual reassignment exception. It says that practitioners can reassign their rights to payment for performing professional interpretation services pursuant to a contractual arrangement, regardless of where the services are performed.

The purchased diagnostic test rule prohibits physicians from marking up the technical component of a purchased test. It does so by limiting payments to the lowest cost of the purchased test or the actual change.

Through the purchased interpretation rule, diagnostic-imaging providers could only bill for professional interpretations performed off-site. The purchased interpretation rule only enables a diagnostic-imaging provider to submit a claim for the professional component of a diagnostic test performed by another physician if certain requirements are met. This is regardless of whether the interpretation is performed at the provider's site. One requirement is that diagnostic tests be ordered by a physician or medical group that is independent of both the entity that performed the technical component and the physician or medical group that performed the interpretation.

This requirement also effectively kept orthopedic, cardiology, or other group practices that own diagnostic imaging equipment from referring patients to their own interpretation service facilities, even if those facilities were off-site. The impetus for the rule was to prevent practices from both ordering and performing the technical component for their own patients. However, the reassignment change enables some providers to perform services off-site.

In the proposed rule, CMS amends the reassignment rule so that it applies the requirements of the purchased diagnostic test rule to any arrangement in which a physician bills for the technical component of a diagnostic test under the contractual reassignment exception. This enables the service to be billed, regardless of where it is performed. CMS would also require that the billing entity (i.e., the physician) be the entity that performs the interpretation for the technical component.

CMS is also considering the possibility of further amending the reassignment rule. It would state that any contract arrangement between the billing physician and the professional interpretation group is subject to the purchased interpretation rule requirements. These changes may also keep certain groups, such as hospital-based radiology groups, from billing Medicare for professional interpretations performed by a teleradiology service for hospital patients. The hospital-based group would not satisfy the requirement that the group perform and bill for the technical component of the test.

CMS is seeking public comment on these additional changes, in particular whether there should be an exception from the purchased interpretation requirements for diagnostic radiology and related imaging tests.

In addition, the proposed rule would change the physician self-referral rules (referred to as the Stark Law), specifically to the in-office ancillary services exception. As it stands, this exception allows physicians who work in group practices to self-refer for diagnostic tests provided in the group's offices (or in a separate building leased full-time by the practice for this purpose).

The changes would revise the definition of centralized building to stem the proliferation of pod laboratory arrangements. Pod laboratories are arrangements in which laboratories for several group practices are located in small offices in the same building. The physician group typically pays a management fee to the pod laboratory company to cover rent and salaries for individuals who perform lab testing services. CMS plans to tighten the definition of centralized building to mean space that is more than 350 sq ft.

However, the proposed changes to the Stark Law also highlight CMS's larger concern with physician practices that purchase diagnostic tests and then realize a profit when they bill Medicare for the difference. Such practices are considered program abuse and overuse of services.

CMS has also proposed a revision to the Stark Law definition of a physician in the group practice to incorporate the proposed reassignment and purchased diagnostic test rules changes discussed above. CMS believes that these changes in tandem will “prevent abusive practices while preserving legitimate small physician offices.”

CMS released the final Physician Fee Schedule rule on November 1, 2006, but did not address the proposed Stark Law and reassignment changes or the purchased diagnostic test rule changes. Rather, CMS will issue a rule finalizing the proposals later. These changes could be modified in the final rule.

With respect to other imaging changes, the final rule released on November 1 implements a policy that makes full payment for the first of multiple imaging services furnished on contiguous body parts during the same session and maintains a 25% reduction in payment for each additional imaging procedure. This payment cut applies to the second and subsequent diagnostic imaging procedures belonging to one of nine imaging families when certain MRI, CAT scan, or ultrasound procedures are performed on the same day on contiguous body parts. The reduction applies only to the technical component of imaging services and does not affect the professional component, regardless of whether the service is billed separately or globally.

In 2005, CMS said it would consider increasing the reduction to 50% in 2007. However, after receiving comments from the American College of Radiology showing that such a payment cut was not justified, CMS decided to maintain the 25% cut. Also, the final rule implements a provision in DRA that caps payments for imaging procedures at the amount paid for the same services when performed in hospital outpatient departments. For imaging services that are subject to both the multiple-procedure reduction and the outpatient hospital cap, CMS proposes to first apply the multiple procedure reduction and then apply the outpatient cap. CMS said this approach would usually result in higher payments than if the hospital outpatient cap were applied first.

DME Competitive Bidding

In the MMA, Congress mandated that CMS establish a competitive bidding program to pay for DME beginning in 2007. DME is equipment that can be reused and is primarily for medical purposes, such as infusion pumps, wheelchairs, and prosthetic devices or orthotics. Currently, Medicare pays for most DME based on a fee schedule. The competitive bidding program will change this payment methodology by accepting bids from suppliers to establish payment amounts.

In May 2006, CMS issued a proposed rule instruction that would establish a bidding procedure to set Medicare payment amounts for DME. Initially, 10 of the largest metropolitan statistical areas were to be included, with some exceptions. The largest metropolitan statistical areas (New York City, Los Angeles, and Chicago) were excluded so that CMS has time to obtain additional experience with the competitive bidding program. CMS ran DME competitive bidding demonstrations in Florida and Texas from 1999 to 2002.


Top 20 Categories: Durable Medical Equipment

The procedure would allow CMS to use the bids submitted by suppliers to establish Medicare payment amounts. Similar items are grouped into product categories to allow beneficiaries to receive related items in the product category from one supplier. The top-20-spending product categories are identified for inclusion in the initial phase (see the sidebar, “Top 20 Categories: Durable Medical Equipment”). CMS expects the program to save Medicare more than $1 billion annually. Because prices would be lower, the program would reduce copayments and reduce beneficiaries' out-of-pocket costs.

One proposal under the rule, however, has drawn significant criticism. CMS has proposed allowing suppliers whose bids are lower than the Medicare payment amounts to offer a rebate to beneficiaries. CMS has said that the overall concept of the bidding program is to lower costs of the DME program and the rebate program would give beneficiaries a way to receive added savings.

Some, including the independent Medicare Payment Advisory Commission (MedPAC) and industry trade associations, have criticized this proposal as potentially inducing fraud. They have urged CMS to eliminate this section in the final rule. MedPAC, which advises Congress on Medicare policy, has said in comments to the proposed rule that the rebate program is not advisable because it will “complicate the design and administration of the program and possibly induce additional demand for DME, as well as raise the risk of fraud and abuse.”

The comment period on the proposed rule closed in June 2006. At press time, CMS had not issued the final rule. However, in October 2006 CMS awarded a contract to the entity that will prepare the request for bids, perform bid evaluations, select qualified suppliers, and set payments for all competitive bidding areas.

In August 2006, CMS published another rule. It is a drastically scaled-back version of a rule establishing quality standards for suppliers of DME, prosthetics, and orthotics. The MMA requires CMS to issue quality standards for DME suppliers to be reimbursed under Medicare Part B. CMS issued draft standards in September 2005 and received more than 5600 comments.

The final rule should reduce the burden on DME suppliers subject to the standards by shortening the draft rule from 80 pages of product-specific requirements to seven pages. As an example, CMS said that, instead of a requirement in the draft that a supplier be open 40 hours a week, businesses must maintain posted hours. Also, the requirements for a toll-free beneficiary number and the maintenance of a list of equipment have been eliminated.


Many developments are still playing out, and OEMs should come to understand the implications of the reimbursement issues. Through participation and by writing comments, OEMs might be able to influence the final rules on CED, gainsharing, the Physician Fee Schedule rule, and competitive bidding.

Michael Scarano is a partner of Foley & Lardner's life sciences industry team in the firm's San Diego office. Contact him at [email protected]. Lena Robins is senior counsel for the firm's healthcare industry team in the Washington, DC office. E-mail her at [email protected].

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