The Medicare Maze

Scott Campbell

Yiscah Bracha

Medicare’s reimbursement system has implications for… Medical device manufacturers Hospitals and physicians Health and welfare of the entire U.S.

population

Our Agenda:

Illuminate Medicare’s reimbursement system Show, in theory, how reimbursement system

affects medical device industry Give example of a device manufacturer

attempting to use the system to earn market share and thrive

Identify perversities in the existing system Offer recommendations for change

Our focal point:

In which part of the maze will we focus our gaze?

Type of Decision

Coverage

(will CMS pay for it?)

Reimbursement

(How much

will CMS pay?)

Where decision is made

“Local” FFS/MC FFS/MC

National FFS/MC FFS/MC

Medicare reimbursement policy:Concept…

Location of curve depends on:

Condition treated Back pain Pneumonia Heart attack Heart failure Cancer … more

Treatment site Hospital Outpatient ambulatory Doc office Skilled nursing facility Laboratory Home

Curve location may also be set by:

Type of treatment (e.g. procedure used) Medical Surgical

Line shift depends on:

Patient condition Co-morbidities Complications Outlier adjustment

Treating facility Teaching hospital Safety net (e.g. serves

many uninsured)

Prevailing wage rate Urban + Rural -

Source of “estimated cost”

Total costs: historical records submitted by multiple providers

Component costs (if used):Obtain average across providers for ratios of

componentsUse average ratios to allocate costs to

components

New reason to “shift the line”:

Add-on Payment for new services and technologies Introduced through ’03 Medicare Modernization Act Provides additional payment for new medical services

and technologies that qualify Intended to “fill the gap” – provide addl payment until

reimbursement rate adjusted upwards

www.cms.hhs.gov/acuteeinpatientpps/downloads/1428f_i.pdf

Is this a free market system?

In competitive market systems:Goods/services compete on basis of price &

quality ORVendors submit competitive bids to win

contracts

In the Medicare system…

Vendors incur costs; ‘appropriate payment’ means CMS reimburses on basis of incurred cost

CMS tries to anticipate by setting payment rates in advance.

“Medicare is a big, dumb price-fixer”

Mechanisms for issuing payment:

Fixed prices attached to CODES. Coding mechanism starts with:

Treatment site. Within site, then code for: Condition and/or procedure. Within that: Make any shifts in the line

Result: For given site, handling a given condition and/or procedure, adjusted as previously shown, CMS assigns a code with attached reimbursement rate

Sites that all have own codes:

Hospital inpatient (DRG) Hospital outpatient (APC) Physician service (CPT) Skilled nursing facility (per diem rate

based on RUG)

Hospital inpatient coding system:

Distribution of Financial Risk

Source Incurred by Assumed by

Ptt condition Patient Hospital & CMS

Treatment choice

Physician Hospital & CMS

Complications & discharge stat

Physician & hospital

CMS

Hospital outpatient coding system:

Distribution of Financial Risk

Source Incurred by Assumed by

Ptt condition PatientHospital, patient

& CMS

Treatment choice

PhysicianHospital, patient

& CMS

Physician service coding system:

Distribution of Financial Risk

Source Incurred by Assumed by

Ptt condition Patient CMS

Type of treatment

Physician & Patient

Physician & CMS

How much treatment

Physician & patient

CMS

Nursing home coding system:

Distribution of Financial Risk

Source Incurred by Assumed by

Ptt condition Patient CMS & SNF

Type of treatment

Physician SNF

How much treatment

Physician SNF

Perspectives:

Medical device industry:

Medicare should pay for whatever we produce and it should pay us our production costs.

Quote from Advamed: “Next-generation technologies are often paid at the same level as the older technology. Breakthrough technologies must undergo a time-consuming process in order to obtain appropriate coding and payment.”

Public policy*:

What does ‘appropriate’ mean? If the device produces greater benefit at same

cost, or produces same benefit at lower cost, the device will gain market share. No need to adjust anything.

If the device produces greater benefit at increased cost, we must determine whether the addl benefit is worth the addl cost.

* The “pure” view, before political wrangling gets in the way.

Patients/beneficiaries:

I want the best that’s out there, at no risk, even if I don’t know how to judge what “best” means.

Somebody else should pay for it.

Physicians:

I want the authority and autonomy to prescribe or perform any procedure I think is appropriate.

It’s unseemly for a doctor to consider money when life is at stake.

Because I wield the power of life and death, I should be paid an enormous amount of money and nobody should ever question me.

I should not have to face any risk.

Hospitals:

Sheesh. Now what?

How system plays in the field:

Medical device manufacturers negotiate with CMS for: Treatment codes that place their products

in classes with more expensive competitors

Treatment codes that bring add-on payments

Codes that specifically require use of their product (unbundles payments to providers)

Mfc’s attempt to persuade CMS:

Demonstrate that using device is more costly than existing practice

Once in use, monitor (high) costs of using device to build case to CMS to recode it to a more costly class

Show that by using (new) device, service will be more costly, thus justifying an add-on payment

Medical device manufacturers also negotiate with providers to: Use their products rather than products of

competitors Ways to persuade providers:

Demonstrate that product saves them $$Negotiate over price

Perversities:

Device manufacturers must simultaneously persuade:Providers that device saves them moneyCMS that device should be recoded to a more

expensive class because it costs so much money to use.

Example: CHF Solutions, Inc.

Manufactures a sophisticated, yet easy to use, mechanical pump/filter system to remove excess fluid from patients with fluid overload

FDA market cleared; marked for use in inpatient hospital and out-patient clinic

Currently marketed in US with a direct sales force

Aquadex FlexFlow Console

• Simple operator interface - two user settings

• rate of withdrawal, 10 to 40ml/minute, in 5ml increments

• the desired rate of fluid removal, 10 to 500ml/hour in 10ml increments

• Treatment is tailored to the individual patient by prescribing a specific rate of fluid removal

• Peripheral venous access and a transportable console (with battery) allows the patient to move about during treatment

Congestion and Fluid Overload: Heart Failure

CHF DRG most prevalent in U.S (1,000,000 yearly hospitalizations)

Re-admission rate of 21% within 30 days (cms.gov)

550,000 new diagnoses each year

Sales force:

Attempts to demonstrate to hospitals that using device will save them $$ b.cReimbursement rate for CHF DRG assumes

certain length of stayUsing device may reduce:

Length of stay Costly admissions

Hospital collects same reimbursement, but incurs fewer costs

Reimbursement: Add-on payment

Attempt to demonstrate to CMS that device should qualify for new add-on payment because:Device meets ‘newness’ criterion Using charge data for 51 patients, device

meets the ‘high cost’ criterionBetter for patients - Dr. testimonials, small

outcome data

Result of request for add-on:

Claim denied. Reason: Insufficient evidence of clinical improvement

CHF Solutions conducts:UNLOAD Trial

Compares UF device to aggressive use of diuretics in 200 patients at multiple sites

Clinical endpoints:Salt and water removal in the first 48 hoursSafety endpoints (including renal function)Readmissions for CHF: Frequency, absolute

number, hospitalized days Visits to ED and clinic

UNLOAD Results (1) At 48 hours into treatment the

ultrafiltration group demonstrated:38% greater weight loss over standard care28% greater net fluid loss over standard

care

UNLOAD Results (2)

At 90 days following hospital discharge for HF episode, compared to Standard Care, the Ultra-Filtration group showed: 43% reduction in re-hospitalization for heart failure 50% reduction in total number of re-hospitalizations 52% reduction in ED and clinic visits 63% reduction in days re-hospitalized

UNLOAD Results (3)

The benefits in weight loss and reductions of re-hospitalizations were seen all sub-groups analyzed

Effect of trial results on company’s bid to get add-on payment: By the time the trial was complete, time had

expired for add-on payment eligibility Next step:

Re-approach CMS to request special CPT code … docs more likely to prescribe device if they can bill for prescription under separate CPT

Approach hospitals with UNLOAD results to demonstrate cost savings

This example shows (1)

Fixed payment for HF DRG encourages hospitals to find cost-effective ways to treat HF:Gives a company like CHF Solutions, Inc.

leverage with hospital buyersEncourages healthy competition to produce

cost-effective treatment

This example shows (2):

Existence of add-on payment encourages company like CHF Solutions to invest resources in obtaining add-on.

To obtain add-on, company must demonstrate to CMS that product is:NewMore effective than existing practiceMore costly than existing practice

To qualify for add-on payment:

Manufacturer must demonstrate all of above within a small window of time

Small manufacturers seldom have such resources. Large manufacturers do, can move new products in the pipeline to head of the line

Both large & small manufacturers given incentives to show how much more costly their product is compared to standard care

This example shows (3):

Physicians more likely to use product if they can bill separately for its use

Encourages manufacturer to invest resources in securing unique CPT code

Policy conclusions (1)

Prospective payment & bundled payment systems push financial risk from CMS to providers. They encourage:Docs & hospitals to adopt cost-effective

strategiesCompetition among device manufacturers on

basis of price AND effectiveness at level of hospital

Policy conclusions (2)

When CMS abandons PPS and unbundles payments, it encourages: Docs & hospitals to lobby CMS to unbundle more Device manufacturers to lobby CMS for special codes

Manufacturer’s resources diverted away from competition on the basis of low price for effectiveness, towards lobbying CMS for special treatment, on the basis of high price

Policy recommendation (1)

CMS: Hold fast!Add-on payment law an example of not

holding fast. Public health policy view: Repeal the law Manufacturers’ view: Retain the law – “It fills a

necessary gap”

What else does this example show? Reimbursement system seems

bewildering b.c of many different codes, inconsistency in payment structure from one coding system to the next

To secure competitive advantage, manufacturers must invest resources in learning how to navigate the coding system

Policy recommendation (2)

CMS should drastically simplify its coding system:Procedure codes used only for information,

not to set payment rates Payment based strictly on diagnosis, adjusted

by patient condition (case-mix).Use same set of diagnostic codes across

delivery sites and for all practitioners (ICD-10)

Policy recommendation (3):

Congress should set budget limits for MedicareAbsence of limits encourages social spending

in this sector, without having to consider opportunity costs of same social resources spent elsewhere

Inequitable: Medical spending for the 65+ population the only such medical spending in the U.S. NOT subjected to budget constraints

Recommendation 4a- OR -

Recommendation 4b

Recommendation (4a):

CMS should base all coverage decisions on demonstrated cost-effectiveness:Use coverage-with-evidence-development for

ALL goods & services, not just new onesWithhold coverage from dominated goods &

servicesWithdraw coverage if, over time, good/service

becomes dominated by others

Recommendation (4b) CMS should set case-mix adjusted

reimbursement rates for each diagnosis code, based on politically-determined societal willingness-to-pay: Any entity with demonstrated capacity to treat

diagnosis is eligible for payment; Monitor & publicize patient outcomes from different

providers; encourage patients to use publicized reports to choose providers

Withdraw eligibility if necessary

Consequences to device industry:

Device manufacturers forced to demonstrate both cost savings AND effectiveness.

Difference between recommendations 4a and 4b is the entity to whom demonstration must be made:Option 4a: Demonstrate to CMSOption 4b: Demonstrate to docs & hospitals

Stakeholder analysis: