Frederick Cahn, PhD09.08.06
Small Victory for Medtech Industry as Medicare IPPS Changes Are Delayed
By Frederick Cahn, PhD
BioMedical Strategies, LLC
The medical device industry recently dodged a significant reimbursement bullet—but the relief may only be temporary.
In April, the Centers for Medicare and Medicaid Services (CMS) issued its proposed rule for Medicare’s hospital inpatient payments. One of the proposals in this rule would establish an entirely new set of the payment categories known as Diagnosis Related Groups (DRGs).
The agency’s proposal generated serious objections from the medical industry since a consequence of the new DRGs would be large decreases in the amount of payment to hospitals for many technology-dependent medical procedures, such as insertion of coronary stents or pacemakers. By negatively affecting the finances of hospitals performing these important procedures, manufacturers would be faced with decreased product volume as well as increased pricing pressures. It’s not far-fetched to predict that many patients subsequently could be denied access to lifesaving technology.
On Aug. 2, the CMS issued its Final Rule, which acknowledged the criticism on DRG-related proposals and established a commitment to consider all the concerns prior to any implementation of the new DRG system (keep reading for more information). Recognizing the need for additional time to further refine the proposed changes, the CMS eliminated the implementation of its plan in the coming Federal 2007 Fiscal Year. Instead, CMS will follow a more routine process this year by making modifications to existing DRGs. The CMS also acknowledged the other serious concerns, such as the use of a proprietary classification system for DRGs.
In general, the industry has greeted the CMS retreat with great relief. Medtronic Chairman and CEO Art Collins observed that “the final rule preserved patient access to some of the newest, most innovative medical technologies by ensuring that adequate reimbursement exists for these procedures.”
Stephen J. Ubl, president of the Advanced Medical Technology Association (AdvaMed), also indicated his approval of these developments. The new rule removes “a dark cloud’’ that had been hovering over the industry, Ubl was quoted as saying in the New York Times, adding, “The worst is behind us.’’
Medicare’s Need and Rationale for Changes
To understand the issue, it is helpful to review the methodology that Medicare uses to pay acute-care hospitals for treatment of beneficiaries. Medicare pays more than $125 billion a year to nearly 5,000 hospitals. It does not pay for hospital services based on their “charges” but, instead, a system called the Inpatient Prospective Payment system (IPPS). In this system, hospitals are paid a fixed fee based on one of 526 DRG categories a hospital visit falls into.
The CMS uses a computer algorithm known as “Grouper” to compute the DRG based on diagnosis and procedure codes from the International Classification of Diseases 9th Edition, Clinical Modification (known as ICD-9-CM) that the hospital assigns by examination of the patient’s chart and includes on a claim form. (There are some adjustments of the DRG fee, depending on a hospital’s geographic location, whether it is a teaching hospital, etc., as well as possible “outlier” payments for unusually expensive or long hospital stays.) The intention of the IPPS is to place responsibility on the hospital for the appropriateness and costs of treatment.
There are two main factors in partitioning hospital diagnosis and treatment into categories: clinical coherence ensures that patients in the group have similar medical conditions and treatment; statistical similarity (based on historical data) ensures that patients in a group are similar in terms of the hospital resources required for treatment. Another statistical concern is to avoid the creation of groups with only a few Medicare patients in them, since there would not be enough historical data to determine the resource intensity (measured by hospital costs) from historical data. The DRG categories have been refined over the years by CMS according to the needs of the Medicare program.
The Severity Adjustment Problem
Many of the groups are broken into two levels of severity, depending on the presence of certain complications and comorbidities. The limitation of severity adjustment to only two levels has created certain problems that the proposed new IPPS system is intended to address. Sometimes general hospitals can “cherry pick” cases at the lower end of severity in a given DRG, while sending only the more complex cases to other institutions. The CMS is concerned that disparities in case severity and payment levels have created opportunities for physicians to establish “specialty hospitals” that can profit from certain types of patients while avoiding unprofitable patients.
The proposed solution is to adopt a different and more complex and proprietary classification system known as the “APR DRGs.” A potential advantage of the APR DRG system is that it incorporates four levels of severity instead of only two. However, the APR DRG system also creates too many groups with only a few patients within each of them. Typically, these occur at the most severe of the four levels. To deal with this problem, the CMS modified the APR DRG system to combine many of these high-severity groups to create its proposed “consolidated severity adjusted DRGs” (CS-DRGs).
Criticism From Industry and Congress
After the proposal was unveiled, the CMS received many critical comments from the medical device industry, many influential senators and representatives as well as other concerned stakeholders focusing on many flaws in the CMS proposal.
Among the most frequent objections have been the following:
• The new CS-DRGs are based on proprietary software, whereas the current DRG logic is in the public domain. Since DRG “grouper” software is built into most hospital information system software and is used by hospital financial offices and others to predict future payments, an entire software industry sector would become dependent on one supplier.
• Reliance of the CMS on proprietary software has presented minimal opportunities for other interested parties to test and model the new system and its assumptions and decision algorithms; thus, the proposed system lacks independent testing and validation.
• The CS-DRGs were developed by a process that lacked transparency or peer review before publication in the proposed rule.
• Important refinements present in the current DRGs would be lost under CS-DRGs.
• No attention was given to alternative methods to implement severity adjustment.
• Stakeholders lacked a sufficient amount of time to evaluate and critique the new system.
In addition to the vocal criticism from the healthcare industry, members of the Senate and House also wrote comments to the CMS. For example, Nancy L. Johnson (R-CT), Chairman of the Subcommittee on Health Human Resources of the Committee on Ways and Means, wrote that she was “deeply troubled about the lack of transparency in the development of the new groupers that are the basis of the new system. It is just plain wrong to have the basic logic and judgments made in developing this proposal unavailable to all interested parties…It also presents an opportunity for a single vendor to control a system that historically has maintained competition between highly skilled vendors offering various software options.”
Senate Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Senator Max Baucus (D-MT) recommended additional time to allow stakeholders to analyze the proposed changes and ensure that changes are implemented in the least disruptive manner. In addition, they urged the CMS to employ a “transparent process in which stakeholders have access to sufficient information and tools to analyze the changes.”
CMS Final Rule Lacks Finality
While the medical device industry can rest easier for now, the IPPS issue is not dead. The CMS left open the potential for implementation of a modified form of CS-DRGs in FY 2008, or an alternative system that would account for patient severity of illness. In addition, the agency will be evaluating alternative severity classification systems. During its announcement, the CMS stated that it was interested in public input and would involve hospitals and other stakeholders in any plans for moving to a severity-based DRG system in FY 2008.