Benjamin T. Peltier07.20.06
Comment Period on IPPS Closes; Device Manufacturers Express Concern
Benjamin T. Peltier
Last month, the US Centers for Medicare and Medicaid Services (CMS) closed the comment period on the agency’s most recent reform proposal of the Inpatient Prospective Payment System (IPPS). The 478-page rule was initially published in April and includes changes affecting nearly every sector of the hospital industry.
Medicare officials touted the scheduled increases in Medicare payments for hospitals—rural hospitals, for example, are expected to see a nearly 7% increase in reimbursement under the new rule. Device manufacturers, on the other hand, expressed significant concern about proposed changes in the payment methodology of the program and called for delays in implementation. They also asked the CMS to make changes to the New Technology Add-On program, which would provide enhanced reimbursement for new, expensive technologies.
The First Significant Revision of the IPPS
In announcing the rule, Medicare officials called this year’s IPPS rule “the first significant revision of the [IPPS] since its implementation in 1983.” The IPPS, which is updated annually by the CMS, establishes payment rates for hospitals that provide inpatient services to Medicare beneficiaries. Under current rules, all diagnoses—regardless of severity—are grouped together with other similar diagnoses into one of 526 diagnosis-related groups (DRG). Each DRG then has a payment level assigned based on the average amount the hospital charges to treat Medicare patients in that DRG.
Modification of the DRG process is a major component of the proposed rule, which seeks to change the way diagnoses are grouped and how the costs associated with specific DRGs are calculated. The change to the DRG system would occur in two stages, the first of which would occur this fall. Medicare would determine the payment levels for DRGs based on reported costs rather than charges. The following year, Medicare would increase the number of DRGs and add a component affected by the severity of the patient’s condition.
Medicare officials argue these changes would make payments under the IPPS more reflective of what it actually costs a hospital to provide services to Medicare beneficiaries. It would have the added benefit of reducing financial incentives for specialty hospitals because these institutions would no longer have a financial incentive to “cherry-pick” the easiest, most profitable cases.
The proposed changes have met significant opposition during the comment period, though. A number of organizations, including the major trade associations for medical device companies, have expressed concern about the data Medicare proposes to use and the proposed pace of change.
The Advanced Medical Technology Association (AdvaMed) and Medical Device Manufacturers Association (MDMA) both submitted extensive comments to CMS in response to the proposed rule. Both organizations recommended delaying the proposed DRG changes—though they differed on the length of the delay—until Medicare makes changes to enhance the accuracy of hospital cost reports.
The proposed rule would establish payment rates for DRGs based on cost reports from 2003—the most recent information verified by Medicare auditors. The trade associations contended in their formal comments that four-year-old data would not completely capture the costs of new technologies and result in under-payments for DRGs that rely on new technology. That would, in turn, reduce the incentive for hospitals to quickly integrate new technology into their services.
Even if the cost data were up to date, there is some question as to whether it is complete. For the most part, under current reimbursement systems, hospital payments are not affected by reported costs. Hospitals need not calculate costs in a manner that would easily translate into accurate data for a cost-based DRG system. Instead, current cost reports are based on a series of estimates and assumptions. CMS does audit approximately 15% of cost reports annually, but the auditing is limited in scope and urgency.
Making the change in two stages, as proposed by CMS, also has met resistance. Commentators recommended delaying the move to cost-based DRGs to a time when the change could be made in conjunction with the change to incorporate severity into the DRGs. According to advocates, this would lead to less disruption at the hospital level. In fact, the Medicare Payment Advisory Commission (MedPAC)—a federally appointed body that makes recommendations to Medicare on changes in the program and initially recommended the DRG reform—recommended implementing the two changes at the same time to avoid short-term distortions.
New Technology Add-On Program
An area where Medicare did not go as far as device manufacturers had hoped involved the IPPS New Technology Add-On Program. In 2003, Congress established a mechanism for new, expensive technologies to receive a reimbursement rate from Medicare that would provide an incentive to bring new products to the marketplace.
The statute gave Medicare the authority to establish criteria for determining when a new device would be eligible for higher payments. The criteria, established in 2005, basically require that the device be an advancement over available devices, with costs well above the rate that would be paid through the DRG system. The new device would be eligible for the Add-On payments for two to three years, providing time for the costs of the new device to be integrated into the DRG.
The New Technology Add-On has been only sparingly used since CMS established its criteria. This year, only three companies applied for the add-on payment. Device manufacturers complain that CMS has done little to help companies understand if they are eligible for the Add-On and that payment rates are too low. Under current law, Medicare reimburses the hospital for only 50% of the difference between the standard reimbursement rate applicable to the product and the actual cost of the product.
In the comments submitted to the CMS, both the MDMA and AdvaMed asked for higher payment rates for new technology, more opportunity for devices to qualify for the add-on program and more substantive feedback for new technology applicants.
Medicare is expected to take several months to review the comments submitted during the comment period prior to publishing a final rule.