Medical Device Daily Washington Editor

WASHINGTON — The publication this week of final rules addressing the federal government's hospital in-patient prospective payment system (IPPS) may not be as final as expected.

But public outcry concerning the originally proposed payment reductions served to trim some of them back by a substantial margin, and the Centers for Medicare & Medicaid Services (CMS; Baltimore) bought itself a little breathing room to finish the job on the diagnostic-related groups (DRG) maze.

In a conference call hosted by Prudential Equity Group (New York), Edward Dougherty, senior vice president at Baker & Daniels Consulting (Washington), gave an overview of the impact that the new regulations may have on the device industry. While the tenor of the call was upbeat, it was clear that hospitals will have their hands full in rewiring their billing and diagnostic practices in parallel to the changes that CMS will undertake.

Dougherty said the final rule “represents a milestone” in CMS's refinement of the IPPS, and that the general theme is moderation of the impact that the proposed rule “would otherwise have had on reductions in payments for medical devices.”

He described the new CMS rule as part of a “broader trend in their efforts to develop prospective payment systems that better provide access” for Medicare beneficiaries while putting the brakes on ever-escalating costs.

Dougherty reminded callers that this effort commenced in March 2005 when the Medicare Payment Advisory Commission (MedPAC) concluded that the structure of the existing IPPS had encouraged some physician groups and facilities to be more selective about the patients that they treated “in an effort to receive higher payment for those,” a problem MedPAC saw in “a number of geographic markets.”

These perverse incentives, as Dougherty described them, forced CMS to dump the charge-based approach in favor of a cost-based system, along with the work of rewriting the diagnostic-related group (DRG) system to account more accurately for the severity of a patient's condition. The proposed rule called for implementation of cost-based payment Oct. 1, 2006, and implementation of the severity DRG would kick in Oct. 1, 2007.

But those deadlines have been junked.

CMS will phase in the cost calculation over three years beginning Oct. 1 in equal increments. For FY07, one-third of payments will reflect costs and two-thirds will reflect charges. Those ratios will flip-flop the following year, and costs will be the sole determinant of prospective payments beginning Oct. 1, 2008. The DRG revamp is scheduled to be completed by the beginning of FY08, but the agency has amended some portions of the DRG code for FY07.

Dougherty said that CMS sees DRG severity indices as a serious issue but will take a closer look at it “over the next couple of months.” The agency will go through the public-comment and rulemaking cycle again “to determine the specific process for developing and implementing a severity-adjusted DRG system.”

For 2007, the impact of cost-based payment “should be about a 1% increase in payment for medical DRGs (not related to surgeries) and a 1% decrease on average for the surgically-focused DRGs,” the said. Cardiac and orthopedic DRGs will not be affected as intensely as they would have under the original proposed rules, and the same can be said for diversified hospitals. However, specialty hospitals are likely to feel the bite more keenly.

Cost calculations were a difficult subject to master in the change from charge-based payments to those based on costs. Dougherty said CMS initially proposed to use 10 cost centers used by hospitals to track their operational costs. However, the final rule is based on 13 cost centers, “to make more refined and accurate the calculation of actual cost.”

Cost compression is essentially the practice of using a lower markup for high-cost devices than low-cost devices, and as a consequence, “we will see a fairly important focus on the transparency of device cost . . . which may have an impact on how manufacturers report that cost and how providers report it as well,” Dougherty said.

Another factor in the cost-compression conundrum is a “lack of consistency on the provider side” in terms of where some costs are entered,” he noted, giving the example of cardiac devices, which some entities enter in an operating room cost category. “CMS will have to unravel some of that complexity to determine what the appropriate charges” will be.

Dougherty said that while the agency works its way through the DRG-severity puzzle, it will roll out a total of 20 new DRGs which will focus on better organization of the more expensive complex cases.

“CMS's hope is that the additional DRGS will result in a temporary fix, to more accurately pay providers for these more expensive procedure types” until the severity-adjusted DRGs are put into play, he said.

The task of sorting out DRGs with a severity component in time for roll-out in FY08 is “clearly a heavy lift,” Dougherty said, and will require completion of the required analysis by the end of this calendar year so that the public-comment period can fit into early 2007.

Despite widespread skepticism on CMS's chances of making the deadline, Dougherty said, “I think there is enough political pressure to keep the ball rolling, and assuming that the contractor can meet the initial deadline, I would anticipate that there would be some continued change in 2008,” even if CMS cannot roll out the complete severity-adjusted DRG mechanism by then.

Dougherty said that the creation of a carotid-stent DRG suggests that CMS still does not want to “create a new DRG unless you have a large number of cases that simply do not fit into existing DRGs” as determined by clinical coherence (similar types of cases) and relatively similar cost and charge bases.

However, the addition of this DRG is an “acknowledgement that the complexities of the cases are something that CMS is increasingly focused on in addition to the severity.” The interim refinements to the DRG catalogue are a “mid-step between what we have in the current system and what we would anticipate in a new DRG system.”

Dougherty understated the case when he observed that the comment period was “particularly active,” and that some of the “significant players in the process” were MedPAC, Sen. Chuck Grassley (R-Iowa) and the Advanced Medical Technology Association (AdvaMed; Washington). All those commenting conceded “that some change was needed,” but were concerned about time of implementation and the need to make both changes simultaneously, he said.

“I think it's clear that MedPAC comments . . . are frequently referenced,” Dougherty said. “CMS appeared to accept the comments [offered by Congress], but also deferred some of the issues to further analysis and additional comment period.”

Stephen Ubl, president and CEO of AdvaMed, said the association supports “a more accurate inpatient payment system” and that the final rule appears to address “many of the concerns that were raised by patient, physician and hospital groups.”