Medtech's Reimbursement Outlook for 2007

GOVERNMENTAL & LEGAL AFFAIRS

In today's healthcare environment, failing to plan a reimbursement strategy is a bit like depending on tomorrow's breezes to deliver your next paycheck. Both government and private thrid-party payers are expecting that medical device manufacturers will provide more and more data to support reimbursement determinations. And, with company revenues on the line, medtech companies are conducting more and more research in order to gather the required data. It's little wonder,then, that medical device executives are paying closer attention to proposed changes in reimbursement policy than ever before. Especially with regard to the Centers for Medicare and Medicaid Services (CMS; Baltimore), medtech company leaders are increasingly involved in developing and commenting on emerging policies that could have a profound impact on their companies' bottom lines.In this article, industry experts review some of the key reimbursement issues that are currently under consideration at CMS and elsewhere. With a close eye on these and related areas of concern, company executives will be able to anticipate emerging policies–and plan accordingly.

Inpatient Progress, Stepwise

Reform of Medicare's largest payment system—covering acute hospital inpatient care—was the dominant reimbursement policy issue for large medical device manufacturers in 2006. But the story isn't over. In 2007, CMS will pick up where it left off from August's final rule for the inpatient prospective payment system (IPPS), and the going could be tough once again.

Let's recap. First, the Medicare Payment Advisory Commission (MedPAC) issued a report that found physician-owned specialty hospitals tended to capitalize on profitable service lines and easier-to-serve patients. On the heels of that report, CMS moved to adopt a series of recommendations that would improve the accuracy of the diagnosis-related group (DRG) payment system and eliminate financial incentives contributing to the growth of specialty hospitals.

The proposed IPPS rule issued in April 2006 called for a switch from payment rates based on hospitals' billed charges to rates based on estimates of hospitals' costs. CMS also moved to implement a methodology known as 'hospital-specific relative values,' which would eliminate from the rate-setting process virtually all hospital-to-hospital variation in costs. Further, CMS said it would implement a new patient classification system, either in 2007 or 2008.

If implemented, the proposed inpatient rule would have had severe consequences. Payment rates for routine therapies such as alcohol rehabilitation and psychiatric treatment would have spiked upward, while those for device-intensive surgeries such as implanting coronary stents and defibrillators would have been slashed.

But the proposal met with resistance. Industry analyses demonstrated that certain assumptions in the new CMS methodology led to steep payment cuts for device-related procedures and skewed payment rates throughout the DRG system. There was little agreement on the need for the hospital-specific relative value approach. And the new patient classification system was criticized because it was based on a private, proprietary system whose details were not widely known and whose classifications diverged widely from existing Medicare DRGs.

Fortunately, CMS listened. It scaled back the final rule to incorporate only those elements of cost-based weights that were generally supported by public comments. It instituted a number of more-limited refinements to the patient classification system. And it initiated a three-year transition to the new weights. The final policy put CMS on the course of improving rates over the long run without destabilizing the system in the near term.

Yet CMS said it was not done. In 2007, it will address the issue of charge compression (described below), which is one of the key factors affecting payment rates for device-intensive procedures in a cost-based weighting system. It will reconsider hospital-specific relative values, which previous analyses have shown to negatively affect hospitals that focus on higher-technology services. And it will continue to explore how to classify patients more accurately based on the severity of their conditions—a goal supported by industry, but the devil is in the details.

Although the device industry weathered the reimbursement storms of 2006, another challenging forecast almost certainly lies ahead for 2007.—Jeff Farkas, senior director, health policy and payment, Medtronic Inc.

Charge Compression Brings Depression

Last April, when CMS released its proposed rule for the Inpatient Prospective Payment System (IPPS), the agency characterized it as "making meaningful first steps in diagnosis-related groups (DRG) reform" and "taking needed steps toward more-accurate payments."

CMS was responding to a concern raised by the Medicare Payment Advisory Commission (MedPAC) that the payment system had become inaccurate and was providing inappropriate financial incentives for certain physician-owned specialty hospitals to concentrate on the most profitable lines of service—namely cardiology, orthopedics, and surgery—and to target the least-complicated, easiest-to-serve patients.

Among MedPAC's recommendations for repairing the payment system, the biggest was to calculate DRG rates based on estimates of cost rather than on hospital charges, creating a system like that of Medicare's outpatient prospective payment system (OPPS), where cost-based weights are used (although their accuracy is frequently questioned). In April, CMS incorporated this concept and other MedPAC recommendations in its proposed IPPS rule, making it effective for all hospitals—not just specialty hospitals—and applying a revised methodology to which even MedPAC took exception.

Fearing the unintended consequences of a cost-based prospective payment system, the device industry inhaled.

The proposed changes would have severe impact on device-dependent DRG payments, said industry experts. The reason, they said, is a phenomenon dubbed charge compression, the practice of applying a lower-percentage markup to higher-cost services and a higher-percentage markup to lower-cost services. This phenomenon creates lower-than-expected charges for medical devices, and results in payment for technology-intensive DRGs that industry characterizes as 'inappropriately low.' Manufacturers quickly adopted the mantra that medical devices—particularly technologically advanced ones—are not marked up at the same level as consumables.

In its final rule, issued in August, CMS mitigated the impact of the proposed changes by agreeing to phase-in its cost-based system over the next three years. Payment reductions were tempered. CMS heard industry's mantra and agreed to conduct a study of the charge compression phenomenon. And industry exhaled.

But wait. In studying the charge compression issue, CMS said it wanted to "help accelerate the public release . . . of pricing information of medical devices." The release of company pricing information may not really get CMS any closer to identifying the costs of medical devices. Considering the value of engineering support and other services that manufacturers routinely provide to hospitals, many companies may not know the actual cost of their devices. And it is equally unlikely that hospitals know and can accurately report this information so that cost-based DRGs capture actual device costs rather than simply prices. Further, hospital cost reports have not been updated for more than a decade, so the vehicle for capturing this critical information may be inadequate.

CMS is going to study the charge compression question. Theoretically for better, and hopefully not for worse, it is a first step that will take time to play out. But it will be important to ensure that the study is designed to accurately capture costs rather than just prices, and that providers and manufacturers understand and report the information correctly. Otherwise, don't hold your breath for a meaningful answer to the cost question any time soon.—Jo Ellen Slurzberg, vice president for reimbursement and health policy, Almyra Inc.

New Coding, Soon

For many device manufacturers, coding for reimbursement is considered an issue perhaps best left to the experts. For executives in medical device companies that are developing new technologies, however, adoption of the long-anticipated coding system known as the International Classification of Diseases 10th edition (ICD-10) is an issue that should be high on the list of concerns. The new system is important because it will have a direct influence on whether the coding for a company's technology maps to an appropriate reimbursement category.

Currently, reimbursement coding in the United States is carried out using a 30-year-old, antiquated coding system—ICD-9—that is rapidly running out of codes. The new edition of the system, ICD-10, was completed in 1994 and has long since been adopted in the United Kingdom, Canada, and Australia. Because of opposition and foot-dragging by many private healthcare payers, however, adoption of the system in the United States has remained something of a pipe dream.

There is hope for adopting this more-robust and accurate coding system, however, as the transition to ICD-10 is an issue now being debated in the halls of Congress. Fortunately, the device industry has been an active participant in this debate and has put forth an intense advocacy effort to inform policymakers of the merits of and need to adopt ICD-10 as soon as possible.

In July, the House of Representatives passed the Health Information Technology Promotion Act of 2006 (H.R. 4157), which contains a provision mandating the implementation of ICD-10 by October 2010. However, the version of the healthcare IT bill passed by the Senate in November 2005, the Wired for Healthcare Quality Act (S. 1418), is silent on the issue of ICD-10 adoption. At present, the two pieces of legislation are awaiting reconciliation that many hope will take place during the lame-duck session that begins when Congress returns in mid-November.

Many companies in the medical device industry are among those hoping for early action on this issue. In order to meet the country's healthcare data needs, it is imperative that Congress pass a compromise bill mandating the adoption of ICD-10 by 2010.—Thomas C. Thompson, president and CEO, Neuro Resource Group Inc.

Sharing Quality

The issue of gainsharing has received considerable attention in 2006. This is in part due to the lack of a uniform definition or understanding of what the concept means. To some, gainsharing means providing incentives to physicians to improve the quality of care through reducing medical errors, complications, and process improvements. To others, it means payments to doctors for using a particular brand of device or for delivering less care. The former interpretation has the potential to enhance the healthcare system, while the latter will produce irreparable harm.

Currently, CMS has authorized two gainsharing demonstration programs consisting of 72 and six hospitals, respectively. While the solicitations are geared toward approaches that focus on improved quality and care through proper process improvements, CMS has given no assurances that it will prohibit programs that permit product standardization or the reduction of care.

Looking ahead, the device industry—along with patient groups, physicians, and other concerned stakeholders—must work closely with CMS to ensure that any gainsharing projects approved by the agency include proper patient safeguards and are geared toward improving quality of care. Such safeguards should include participation of the Department of Health and Human Services' Office for Human Research Protections, as well as the involvement of institutional review boards to monitor the programs.

Otherwise, the gain in gainsharing will never be realized.—Bill Kolter, president, Biomet Orthopedics Inc.

Pricing Transparency and the Medical Device Industry

Spending on healthcare has increased rapidly in recent years, causing payers to seek ways to manage budgets through increased coverage hurdles and pricing pressures. Globally, pricing transparency tactics such as foreign reference pricing (FRP), price data exchanges, and mandated reporting of proprietary data such as manufacturing costs and selling prices are increasingly being used by payers to help control spending on medical devices.

One should expect the pace of these efforts to increase in the coming years. In the United States, the Bush administration has embraced consumerism and price transparency in healthcare as a means to improve quality while reducing costs. In Asia, Japan continues to manage budgets though reference pricing, and China is debating reforms that could require mandatory reporting of proprietary data.

Medical device executives should be monitoring these efforts because they substantially increase market uncertainty, making it more difficult to accurately forecast the value of many markets. Industry has historically embraced market-based competition and value-based innovation. Pricing transparency tactics tend to focus on acquisition costs rather than total system value, which may ultimately put a damper on innovation.

Similar efforts—notably FRP in the pharmaceutical sector—have not produced the expected benefits for payers. How successful these other tactics will be in controlling costs is unclear.—Michael J. Lacey, director of health economics and outcomes research, Boston Scientific Corp.

A Critical Path for Novel Technology Payment

For decades, venture capital investment in the life sciences has played a major role in supporting the development of a steady stream of medical technology innovations. However, the intense regulatory environment of this industry poses critical challenges as it relates to both the FDA approval process and the CMS reimbursement pathway.

CMS acknowledges that there is not a clearly defined reimbursement pathway for novel medical technologies, and that the absence of such a route is proving increasingly problematic for venture-backed companies. This lack of clarity plays into the decision-making process of life science investors, who must evaluate the risk of commercial success for each novel technology presented to them. If the reimbursement pathway for these technologies were more streamlined and predictable, the investment risk would be better understood, and more revolutionary therapies would be brought to market.

The National Venture Capital Association has made it a priority to work with CMS to establish a road map that will provide clarity to the CMS process for novel technologies. The goal is to develop a well-defined process that enables novel, high-value technologies to be granted expedited reimbursement review and eliminates current unwarranted barriers and procedures. The group also seeks to ensure that reimbursement issues are considered as part of FDA's critical path discussions. Final recommendations are expected by early 2007. —Kelly Slone, director, medical industry group, National Venture Capital Association

Remote Patient Management Services

Clinical care is continually evolving. Today, advances that combine the promise of medical technology with the power of information technology are making it increasingly possible for doctors to manage patients who have chronic conditions without the need for an office visit or a costly emergency room admission.

Remote monitoring technologies that feature readings from clinical diagnostic devices as well as implanted devices and other types of therapeutic products offer new opportunities for preventive care, triggering timely interventions when early signs of worsening disease first appear.

In spite of such extraordinary promise, it often takes time for the Medicare program to acknowledge and embrace changes in the way clinicians provide care. Traditionally, CMS coding and payment systems have not been geared toward identifying and valuing physician services that take place outside of a face-to-face visit with a patient. And while limited coverage for some remote monitoring services is now in place, it does not sufficiently encompass the chronic-care services for diseases such as heart failure, diabetes, and sleep apnea that are enabled by today's remote monitoring technologies.

The 109th Congress saw some movement toward expanding coverage of remote patient management services for chronic conditions. In November 2005, Senators Norm Coleman (R–MN) and Jeff Bingaman (D–NM) introduced the Remote Monitoring Access Act of 2005 (S. 2022). The bill was referred to the Senate Finance Committee, where it is awaiting action. In September 2006, Representatives Charles Pickering (R–MS), J. D. Hayworth (R–AZ), Anna Eshoo (D–CA), and John Tanner (D–TN) cosponsored the corresponding bill in the House, the Remote Monitoring Access Act of 2006 (H.R. 6063). Before closing for its 2006 election recess, the House moved that version of the legislation to the Committee on Energy and Commerce, which in turn referred the bill to its subcommittee on health.

In order for the previously proposed legislation to be considered in the 110th Congress, which will convene in January 2007, both the House and Senate bills will have to be reintroduced. The continuing development of new remote therapies that improve care for patients with chronic conditions will drive the efforts for adoption in 2007.—Jeff Farkas, senior director, health policy and payment, Medtronic Inc.

Coverage, with Too Many Conditions

Stirred by the rising costs of healthcare, policy makers, payers, and purchasers are examining a wide range of approaches to control escalating expenses. From the largest government payers to single hospital purchasers, budget-holders are developing new policies and processes to harness unbridled spending. In recent years, even technology assessment—the use of comparative clinical evidence to evaluate the quality and effectiveness of procedures and biological interventions—has become a cost-containment tool in the budget-holders' armamentarium.

Reasoned, substantive evaluation of medical interventions leads to efficient, quality care with consequent reduction in overall costs. In the technology arena, strongly framed evidentiary guidance helps to ensure that only safe and effective technologies are permitted in clinical practice. The basic process of such technology assessment is the collection of clinical evidence to compare the effectiveness of one intervention to the 'gold standard' or current practice.

The use of technology assessment as a basis for making coverage determinations is common and well established outside the United States. But until recently, U.S. institutions have employed this technique somewhat randomly and with varying degrees of sophistication. Over the past few years, technology assessment criteria have been proposed or adopted by a wide range of stakeholders, including overseas regulators, U.S. federal and state agencies, private payers, group hospital networks, and individual hospitals. Most of these entities have embraced CMS guidelines for collecting sound clinical evidence as the model for their own technology assessment programs, suggesting that they have adopted a rational management and oversight plan for the dissemination of technology.

As the basis for developing a national technology assessment program, however, CMS notions about the collection of clinical data need important modifications.

CMS first proposed guidelines for evidentiary requirements in 1999, but has revised its recommendations several times since then. In July 2006, the agency formalized some of these recommendations in a guidance document titled Guidance Regarding National Coverage Determination with Data Collection as a Condition of Coverage with Evidence Development. This document explains the types of clinical evidence that CMS will require to demonstrate the value and effectiveness of a new intervention in order to grant coverage—thereby giving Medicare patients access to the treatment and all related technologies. The guidance also defines when and how CMS will apply standards for increased evidence collection (coverage with appropriateness determination, or CAD) and the coverage available to Medicare patients enrolled in clinical trials (coverage with study participation, or CSP).

Since CMS is not known for its transparency, publication of the coverage with evidence development (CED) guidance is a solid effort to provide a roadmap for applicants. Nevertheless, the guidance embodies a number of nuances that should concern medical technology innovators, including the following.