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An MD&DI November 1997 Column

A HIMA executive ponders the changes Medicare reform will bring to the device industry.

Ted Mannen

In the 14 years since the prospective payment system was established under the Medicare program, the trend toward cost containment in the United States has become strongly evident. That new system had a profound effect on the health-care industry as well as on medical device manufacturers. And now, another new law that will have perhaps greater ramifications has been enacted.

As part of the recent budget agreement, the new law not only cuts Medicare spending growth by $115 billion during the next five years, it also alters the payment structures of Medicare itself--a program that today accounts for some 20% of all U.S. personal health expenditures and represents the nation's single largest purchaser of health-care services.

POSSIBLE EFFECTS BY SECTOR

Like the original prospective payment system that established preset prices for diagnosis-related groups (DRGs), the new law unleashes powerful incentives in health-care delivery. But the new system's effects are not confined to inpatient services. Instead, it affects the care delivered by virtually every type of device industry customer.

Hospitals. One of the fastest-growing areas of Medicare is hospital outpatient services--as evidenced by double-digit expenditure increases each year from 1967 to 1994. To contain this kind of growth, the law creates a new DRG-like prospective payment system that covers outpatient care ranging from clinic visits to same-day surgery. Hospitals will have strong incentives to economize in the services they provide, in how and what they purchase, and in how they utilize technology. The law also creates new rules for teaching hospitals and a new prospective payment system for hospitals specializing in inpatient rehabilitation services.

Physicians. Since 1992, physicians have been reimbursed through a fee schedule that has shifted payments away from specialists, who tend to use high-tech equipment. The new law continues this process. Physician specialties that have traditionally offered technology-intensive services--such as gastroenterology, cardiology, orthopedic surgery, ophthalmology, and radiology--will probably experience payment curbs. Physicians offering cognitive services--including patient evaluation and management--will experience payment increases.

Managed Care. Projections show that within five years, one in four Medicare beneficiaries will be enrolled in a managed-care plan. That trend could further accelerate under provisions of the law that will allow new types of managed-care organizations to enter the Medicare program, including plans sponsored by health-care providers. In starting these plans, hospitals and physicians will assume the role of insurers and thus may acquire new incentives. In addition, the law shifts payments toward managed-care plans in historically underserved regions of the country--a change that could increase those regions' investments in technology. Finally, the new law restricts the ability of plans to limit coverage of technology for particular Medicare patients. It does so, in part, by making coverage more open and timely, instituting appeals mechanisms when coverage is denied, and involving physicians and independent review bodies to help resolve certain denials.

Alternate Sites. Much like hospital outpatient care, skilled nursing facilities and home-health agencies are about to experience drastic changes in their payment system. In the past, they have been reimbursed through a cost-based system and have experienced the growth that often accompanies relatively open-ended financing. Medicare payments to skilled nursing facilities rose 35% annually from 1986 to 1996, while payments for home-health services increased 25% annually during the same period. Because of this growth, the law institutes a new prospective payment system for both types of providers. By setting fixed prices for bundles of services, these prospective payment systems will change the incentives for utilizing devices. Beyond this, the law calls for severe spending cuts for home-care suppliers.

Clinical Laboratories. These device industry customers have borne significant cuts in Medicare payments for several years and will continue to do so under the new law. In addition, the law provides for national coverage policies that could allow payment for some lab tests but not for others. The law also authorizes competitive bidding for lab services on a pilot basis. If Medicare decides to undertake this project, competitive bidding could lead to new price pressures on lab equipment and supplies manufacturers. At the same time, the law introduces important new benefits for Medicare enrollees, thereby potentially expanding certain device markets. Enrollees will have new or enhanced access to Pap smears, mammograms, prostate and colorectal cancer screening tests, bone-density measurement tests, and diabetes self-management services.

IMPACT ON DEVICE MANUFACTURERS

What do all these changes mean for the device industry? While it is too early to predict, it is at least clear that the law creates new incentives and structural changes in areas of Medicare that the original prospective payment system never touched, that the changes will alter the Medicare landscape for years to come, and that few device companies will entirely escape the impact of these changes.

After the Medical Device Amendments of 1976 were enacted, the medical device industry worked with Congress and various administrations to ensure that the system of regulation was as quality-oriented and efficient as possible--a task that continues to this day. The industry knew that the device law would have a sweeping effect on how device manufacturers met patient needs, how they innovated, and how well they succeeded in the future.

Many of these same kinds of dynamics surround the new Medicare law. We may look back in 20 years and conclude that the Balanced Budget Act of 1997 holds the same kind of significance for the future of this industry.

In light of this potential impact, the first order of business for every company in the device industry is to understand the new law. Companies should also consider how the Health Care Financing Administration--which is itself undergoing significant restructuring--will implement the new law, as well as how implementation will affect customer behavior in purchasing and using devices.

Identifying the bottom line of these changes will not be easy. For example, utilization of certain screening tests could increase as Medicare includes these tests in its benefits package. But price pressures could offset this growth if Medicare implements competitive bidding for lab services. Likewise, the emergence of provider-sponsored managed-care companies may mean greater focus on quality and patient satisfaction. Or it may mean that the cost-control reach of managed care has simply extended further into health-care delivery and the medical device marketplace.

In the face of these possibilities, a device company's immediate objective should be to focus on the basics of the new Medicare terrain­a prerequisite to evaluating the law's effects on specific customers and markets. At HIMA, we've published analyses of the new law and convened an in-depth conference.

But while education is a necessary first step, it is by no means the only step. Many new regulations will emerge as the law is implemented over the years, and the device industry must be an active participant in that process.

ONLY THE BEGINNING

Despite the challenge presented by the new law, this may be only the beginning. As the baby-boom generation reaches Medicare age, the number of retirees will increase 15 times faster than the population as a whole. That means Medicare receipts will decline at the same time that demand for program services will grow. The net effect will be that Medicare will run out of money--despite the significant changes President Clinton signed into law.

For that reason, the new law creates a commission to look at the longer-term financial condition of Medicare and to report recommendations by March 1999. Given the impending fiscal challenges, it seems likely that the commission's recommendations will be much farther reaching than anything we've seen to date.

All told, the device industry's venture into uncharted Medicare waters may be a long voyage indeed.

Ted Mannen is executive vice president of HIMA.

Those interested in reading the specifics of the law as it relates to devices should visit the Congress Internet site http://thomas.loc.gov/. Go to Committee Information, Committee Reports, and 105th Congress. Enter "105-217" under "report number." Device-related information can be found under "Title IV: Medicare, Medicaid, and Children's Health Provisions."

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