Medtech's Reimbursement Outlook for 2007 4147

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. With company revenues on the line, it's little wonder that medical device executives are paying closer attention to proposed changes in reimbursement policy than ever before.

In this article, industry experts review some of the key reimbursement issues that are currently under consideration at the Centers for Medicare and Medicaid Services (CMS; Baltimore) 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 in the next section), 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 IPPS rule for 2007, 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 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.

Coverage, with Too Many Conditions

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 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 may need some important modifications.

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. However, the guidance embodies a number of nuances that should concern medical technology innovators, including the following.