Frederick Cahn01.11.07
Final OPPS Rule Avoids Sweeping Change for '07
Frederick Cahn
BioMedical Strategies LLC
In November, the Centers for Medicare and Medicaid Services (CMS) issued its final 2007 Outpatient Prospective Payment System (OPPS) rule, which outlines the agency’s payment policies for medical procedures and devices under the OPPS for calendar year 2007. Many of the changes in the final rule that are pertinent to the medical device industry represent incremental changes to CMS methodologies in calculating payment rates, and they spare the industry from sweeping payment reforms such as those proposed earlier this year for the Inpatient Prospective Payment System (IPPS).
Under the OPPS, hospitals are reimbursed for outpatient services they provide to Medicare beneficiaries on the basis of fixed payment rates set by the CMS. Services and items that are comparable clinically and that use a similar amount of resources are classified into groups called Ambulatory Payment Classifications, or APCs, which are determined by the Healthcare Common Procedure Coding System (HCPCS) codes for the procedures performed. APC payment rates are derived by the CMS using historical hospital charges submitted to the agency as a component of hospital claims for payment—thus, when paying current claims, the CMS ignores the actual charges but instead pays a fixed payment for the APC. However, the charges, together with cost to charge ratios (CCR) from hospital cost reports, will be used to compute the payments in a subsequent year.
An important issue for the device industry is the quality and nature of the hospital claims data that the CMS uses to derive its payment rates. This is of critical importance, and the industry has long complained about the quality and “oldness” of the claims that are used to derive the payment weights for each APC. Unlike the IPPS, in which a medical procedure falls into only one diagnostic-related group (DRG), in the outpatient system a procedure can have more than one APC applied to it.
In the past, the CMS based payment rates primarily using hospital charge data from single procedure claims submitted by hospitals. However, this results in the agency using data from only about half of all hospital outpatient claims for major procedures, as many claims are submitted as multiple procedure claims, which contain more than one APC. Many frequently performed procedures commonly are
performed in combination with other procedures, and charge data on these procedures are being missed with this method.
The use of primarily “single procedure claims” to derive payment weights also may bias the weights toward the least costly services, thus introducing downward bias to the medians on which the APC weights are based. To address the issue of multiple procedure claims, the CMS created a process that uses information on date of service, in combination with a list of “bypass codes” to create “pseudo single claims” from the charge data contained in multiple procedure claims. This allows them to use more of the available claims data in deriving APC payment weights.
Although it’s helpful that the CMS now is using a greater proportion of the available claims data to set payment rates, the process for handling multiple procedure claims continues to have limitations, particularly for “device-dependent” APCs (eg, cochlear implantation) for procedures that are routinely performed in conjunction with other procedures. Placing HCPCS codes on the bypass list may lead to these codes being undervalued, because no “packaging” from the multiple procedure bill is being attributed to them.
According to industry representatives, significant reductions in calendar year 2006 payment rates for a number of device-related APCs directly resulted from the inaccurate capture of device costs, which were estimated using the “psuedo single claim” procedure. Large annual fluctuations in payment rates can be devastating to many small medical device manufacturers, which tend to be single-product companies. In the final 2007 OPPS rule, the CMS stated that it will adopt as final its existing method to incorporate hospital charge data from multiple procedure claims. However, the agency will continue to explore methodological options that will allow it to use all of the available claims data in the estimation of APC costs, and will discuss its findings in the calendar year 2008 proposed rule. In particular, the agency will focus on ways that packaging can be correctly allocated from multiple procedure claims to pseudo single claims.
Poor-quality claims data also impact payment rates in device-dependent APCs, which remain a major thorn in the industry. Device-dependent APCs are populated by HCPCS codes that usually require that a device be implanted or used to perform the procedure. However, hospitals often fail to adequately code claims (particularly where device use is concerned) and fail to update their chargemasters to incorporate new device charges into their claims data. The end result is that APC payment rates are based on incomplete and inaccurate claims data.
In 2005, the CMS mandated that hospitals report device codes on submitted claims, in those cases where an appropriate code is available to describe a device used in a procedure. In the final 2007 OPPS rule, the agency announced that in 2007 it will use only those claims that include the appropriate device codes to derive payment rates for device-dependent APCs. Claims that do not contain appropriate devices (as ascertained by the device codes) will be excluded to increase the chances that the CMS will be using claims that contain the full charge for the service, including the device.
Industry Reacts to Charge Compression
“Charge compression” is a major issue contributing to payment rates that do not reflect the true relative costs of services in device-dependent APCs, according to industry representatives. The hospital charges reported in claims are multiplied by the cost to charge ratio to estimate the true cost of the service or procedure. These estimated costs then are used to derive the payment weights for the APCs. However, hospitals continue to apply smaller markup rates to higher-cost items than they do to lower-cost items. The result of this charge compression under the OPPS system (and the IPPS system as well) is that, when CMS calculates the weights for APCs, the more expensive items end up being underpriced. This particularly hurts payment rates for APCs that include the use of expensive medical devices, such as pacemakers. Another example of a device-dependent APC for which costs are not being accurately estimated is implantation of a neurological device.
To address charge compression, the device industry has requested that the CMS deal with the issue in one of several ways: make adjustments to the 2007 payment rates for device-dependent APCs to more accurately represent the cost of performing the device and technology-related services; provide payment “thresholds” for these APCs; or develop more accurate estimates of device acquisition costs using external cost data (confidential “price list” provided by manufacturers, physicians, and hospitals). Early in 2006, the APC advisory committee recommended the latter option. However, in the final 2007 rule, the CMS rejected use of payment thresholds and external data to set rates, citing that external data may be biased. The agency justified its methodology by claiming that the OPPS system is a system of relative weights that are based on the costs of services relative to one another—an argument that ignores that these relative weights are also biased by charge compression.
One positive note is the agency’s acknowledgment in the final OPPS rule that charge compression may, indeed, be an issue of at least some potential concern to the OPPS. (However, in an aside, the agency stated that this is really the hospitals’ problem and not the CMS’s.) This year, the agency will study the potential use of regression analysis to identify adjustments that could be made to the cost to charge ratios to account for charge compression, having noted, “There may be value in exploring the extent to which the estimated relative costs derived from claims and cost report data deviate so substantially from acquisition costs that payment adjustments may be appropriate.” To the extent that the agency finds charge compression does exist, the CMS will study potential models that could adjust for it.
Finally, the CMS ruled that it may sometimes move a service from a New Technology APC to a clinical APC in less than two years’ time. The CMS’s policy is to place new services within New Technology APC groups until they had sufficient claims data to assign the service to a clinically appropriate APC. This year, the APC advisory panel recommended that a service should remain in a New Technology APC for at least two years, until sufficient claims data are collected. The CMS rejected this recommendation and reiterated its earlier rule that “it may sometimes be appropriate” to move a service to a clinical APC in less than two years, if the available claims data are adequate and there is an appropriate clinical APC to which the service can be assigned.
What Type of Reform Is in Store?
In sum, this year represented incremental change in CMS methodologies to calculate outpatient payment rates, with no major payment reforms. With the incoming Democratic Congress will come an intense and renewed focus on healthcare reform. However, it is likely that much of the political reform energy will be directed to the pharmaceutical industry and Part D of Medicare. Rapidly rising costs and Democrats’ concerns about Part D almost ensure that Medicare and Medicaid issues will top the concerns of the 110th Congress.
Rep. Pete Stark (D-CA) has already pledged to use his role as chair
of the Ways and Means Health Sub-committee to conduct extensive oversight hearings on the Medicare and Medicaid programs, including the prescription drug program. A report from the Medicare Payment Advisory Commission is due in March and may add to the political ripples that may turn into a rainstorm. While it’s difficult to anticipate how much support House Democrats will receive on their Medicare drug reform intentions, medical devices are not directly affected, and it’s likely that less reform energy will be left over to initiate new policy initiatives in the medical device arena.
Then again, watch for the re-emergence of this year’s proposed but defeated inpatient prospective payment reforms in 2007 or 2008.