This article is reprinted from "The Gray Sheet" – April 21, 2008
CMS plans to take steps next year to improve the accuracy of its payments to hospitals for high-cost devices, though the agency does not promise as quick of a remedy as sought by manufacturers.
The so-called "charge compression fix" is included in the agency's fiscal year 2009 inpatient prospective payment system 1proposed rule, which was released April 14.
Charge compression, as described in a March 2007 CMS-commissioned report from research firm RTI International, relates to variations in hospital markup practices for certain products, and most notably affects devices and medical supplies.
Hospitals generally mark up charges for relatively inexpensive supplies at a higher rate than expensive devices. But CMS payment calculations, which are based on hospitals' cost reports, group all the products together to derive an overall payment for a procedure or diagnosis. Based on the math, the costs for services that include expensive products with low markups tend to be underestimated in the payment rates.
According to RTI, if the payment calculations for devices and implants were performed separate from the calculations for lower cost medical supplies, the "cost ratios" used in the calculations would average about 17 points higher for the devices compared to the medical supplies.
RTI made several recommendations to remedy the problem, but despite device makers' urging, CMS did not make changes to the supplies and equipment payment calculations for 2008 (2"The Gray Sheet" Aug. 6, 2007, p. 6).
No Proposal For Quick-Fix Regression Analysis
In the new proposal, CMS outlines steps to adopt at least one of RTI's recommendations for a longer-term fix to the charge compression issue. The agency proposes changing hospital cost reports in fiscal 2009 to differentiate between relatively inexpensive medical supplies and costly devices.
If the change is finalized in this year's rulemaking, hospital payments for high-cost devices could go up in both the inpatient and outpatient settings in 2012.
CMS does not propose, however, what would be a more immediate change to address charge compression - using regression analysis to separate devices from supplies in current cost report data. This approach, supported by the device industry, was proposed by RTI as a short-term fix.
"Although what CMS is proposing for 2012 is a step forward in laying the groundwork for more accuracy, the regression-based approach for supplies could be implemented as early as '09," said AdvaMed's Ann-Marie Lynch, executive VP-health care delivery and policy, in an interview.
The agency says it had intended to discuss the regression-based strategy in the proposed rule, but a RAND report examining its effects when implemented simultaneously with other changes to the payment calculations was not completed in time.
The RAND report has since been finalized and will be released in the near future, and CMS welcomes comments on its findings. In addition, a follow-up RTI report has been completed and will be made public soon, the agency notes.
Cost Report Change Would Capture Implantables
Under CMS' cost report proposal, a product would be classified as a device if it is used for one patient only, contacts human tissue, is surgically implanted or inserted, and remains in the patient after he or she is discharged from the hospital.
Materials furnished incident to a service, such as surgical staples or clips, would be classified as medical supplies.
CMS says the proposed criteria "would have the benefit of capturing virtually all costly implantable devices (for example, implantable cardioverter defibrillators, pacemakers and cochlear implants) for which charge compression is a significant concern."
Some products may still be subject to mild charge compression under the new groupings, CMS acknowledges. For instance, relatively low-cost implantables such as urinary catheters, could be classified as devices, while relatively expensive technologies, such as cryoablation probes or angioplasty catheters that do not remain in the patient after discharge, could be grouped with the lower-cost supplies.
CMS suggests that manufacturers may need to change their pricing practices as well to help the charge compression fix succeed.
Companies sometimes sell surgical kits to hospitals comprising a high-cost primary implantable device and supplies required for its operation or implantation. Items not integral to the device may be included. As a result, CMS is seeking comments on how hospitals should split the combined total charge for the kits, which is reflected on the invoice from manufacturers, to account for the cost of the individual components.
"To the extent that device manufacturers could be encouraged to refine their invoicing practices to break out the charges and costs for the lower-cost supplies and the higher-cost primary device separately, so that hospitals need not 'guesstimate' the cost of the device, this would facilitate more accurate cost reporting," CMS writes.
The agency also is seeking comments on the use of different criteria for splitting up the medical supplies and device cost centers. One option is to distinguish between high- and low-cost items based on a cost threshold, but CMS worries that manufacturers may inflate prices to ensure their devices are included in the high-cost group.
Another option is to divide up the products based on whether the hospital markups are higher or lower than average, CMS says.
Payment Rates Look Stable For Devices
The inpatient payment rule will be finalized by Aug. 1 for implementation Oct. 1. CMS will accept comments on the proposed rule, which includes discussion of various hospital payment policies, through June 13.
AdvaMed says it is pleased that the two-year phase-in of severity-adjusted diagnosis related groups, or MS-DRGs, will be completed in FY 2009.
MS-DRGs are part of a new classification system that pays hospitals more for treating patients with complications or comorbidities than for treating less-sick patients with a similar primary diagnosis. CMS proposes very few revisions for FY 2009 to the MS-DRGs it established last year.
Lynch noted that the MS-DRGs improve patient groupings while avoiding the wide swings in payments that were apparent in earlier efforts to revise the classifications.
Also in FY 2009, CMS will complete a three-year transition from charge-based payment weights to cost-based weights.
Device industry analysts agree that the proposed payments for 2009 are relatively stable. The "uneventful" rates "reaffirm our long-standing opinion that Medicare reimbursement rates will not be a hurdle to industry growth," Morgan Stanley's Glenn Reicin says in an April 14 research note.
Proposed changes to cardiovascular payments are relatively moderate, analysts say. Bare-metal stent procedures would see payments dip an average of 2.4%, while drug-eluting stent procedure payments would go down 4.5% on average, according to calculations by Wachovia's Larry Biegelsen.
Pacemaker procedure payments on average would increase 3.5% and payments for implantable cardioverter defibrillator procedures would go up 3.9% on average.
Orthopedic procedures could see larger gains, with hip and knee replacement and revision payments up an average of 6.6%, Biegelsen says. Payments for back and neck procedures using artificial discs or interspinous spacers would increase 18.3%.
Overall, hospital payments in FY 2009 are projected to increase 3%. This includes a 0.9% across-the-board reduction to payment rates to maintain budget neutrality by offsetting changes in coding practices under the MS-DRGs that could shift the mix towards more costly patients.
The rate of the offset was set by Congress last September, and is less than what CMS had originally thought necessary (3"The Gray Sheet" Oct. 1, 2007, In Brief). CMS says it has the authority in 2010-2012 to go back and retrospectively adjust for overpayments in 2008 and 2009 if needed.
- Chloe Taft
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