Medical Device Daily Associate

The Centers for Medicare and Medicaid Services (CMS) has proposed steep cuts in Medicare reimbursement that, if implemented, could have significant implications for the medical device industry, most notably via substantial reductions in payments for heart products such as pacemakers, defibrillators and stents.

By comparison, proposed changes for orthopedic products, such as replacement hips and knees, were relatively moderate.

The proposed reductions have been issued in a weighty 1,192 page report proposing significant revisions to how hospitals are reimbursed for inpatient services. The agency said the changes, which it noted include the first significant revision of the inpatient prospective payment system (IPPS) since its implementation in 1983, are geared at paring down costs and revamping the system for classifying patient cases.

When fully implemented – scheduled for FY08 and potentially earlier – CMS said the revised IPPS would improve the accuracy of payment rates for inpatient stays by basing the weights assigned to diagnosis related groups (DRGs) on hospital costs rather than charges, and adjusting the DRGs for treating the sickest patients.

Glenn Novarro, Bank of America (New York) analyst, in a research note termed the initial version of the new payment rules “far worse than expected“ and said they would mean dramatic cutbacks to reimbursement of both coronary stent and cardiac rhythm management procedures.

Payment for stents appeared to fare the worst, with cuts in the 20% to 30% range. Not far behind, reimbursement for implantable cardioverter defibrillators (ICDs) would drop more than 20% under the new guidelines.

The orthopedics sector generally remained flat, but in that group spinal fusion took an average 6.9% hit and primary joint replacement would be reduced by .6%.

“The ICD and stent companies will feel the brunt [of CMS changes] while orthopedic companies could benefit as the relative profitability of those procedures is largely unchanged,“ said Thomas Gunderson, analyst for Piper Jaffray (Minneapolis), in a research report. “We expect to see significant revisions in the final rule, but the headwinds in cardio just got worse and the sailing in ortho is getting easier.“

CMS noted that the proposed changes, which reflect reccomendations from the Medciare Payment Advisory Commission (MedPAC), are aimed at closing loopholes used by specialty hospitals – such as cardiac, orthopedic and surgical centers – that it said allows them to “cherry-pick“ more profitable cases.

The reforms will significantly affect payments to specialty hospitals – hospitals that typically are owned, in whole or in significant part, by physicians who serve as referral sources. The growth in specialty hospitals has been slowed temporarily by statute or regulation since the Medicare Modernization Act was signed in December 2003.

Under the proposed rules, by 2008 cardiovascular speciality hospitals will experience an 11.7% decline in payments; orthopedic centers, a 9.4% reduction; and surgical hospitals, a 7.2% decline, according to CMS.

To achieve its aims, the agency said it is considering a two-step process of transformation. The first step, set out in the proposed rule, would assign weights to DRGs based on hospital costs, rather than hospital charges. This would theoretically eliminate biases in the current DRG system arising from the differential markup that hospitals assign for ancillary services among the DRGs. The new DRG weights would go into effect Oct. 1, 2006.

A second step, thus far scheduled for FY08, would replace the current 526 DRGs with either the proposed 861 consolidated severity-adjusted DRGs or an alternative 70 adjusted DRG system developed in response to the public comments CMS is sure to receive on this issue, many most likely from special interest groups affiliated with the hospital and device industries. CMS said it is also considering ways of improving recognition of severity in the current DRG system by FY 2007.

When the two steps are fully implemented, hospitals can expect more accurate payment for their services, according to CMS.

“The hospital payment reforms we are proposing today will mean payments for hospital inpatient services will more accurately reflect the costs of providing the services,“ said CMS Administrator Mark McClellan, MD, PhD. “We are taking important steps to make payments fairer to hospitals and to assure beneficiary access to services in the most appropriate setting.“

The public comment process, running through June 12, offers hope to both the hospital and device industry that the cuts may not be as severe as planned, and McClellan's comments appeared to indicate that he would take their concerns under consideration.

“This proposed rule will be shaped by the public comment process,“ said McClellan, adding, “We look forward to comprehensive feedback from hospitals, suppliers and other stakeholders that will help to refine and improve the final version of the rule.“

While McClellan did offer some comfort, it still did not allay the fears of medical technology advocacy groups such as the Advanced Medical Technology Association (AdvaMed; Washington), which warned that the proposed changes in the Medicare hospital inpatient rule could have a disproportionately negative effect on patients receiving advanced medical treatments.

AdvaMed particularly expressed great concern about Medicare's proposal to base future payments on historical costs because it said that the data that would be used to calculate rates does not accurately reflect the procedures and services available today and would penalize the hospitals that use newer, more advanced technologies.

“Newer medical technologies are allowing patients to recover faster and often reduce overall medical and social costs,“ said Ann-Marie Lynch, executive vice president for payment and healthcare delivery at AdvaMed. “The significant changes proposed will need to be carefully studied to avoid unintended consequences that will prevent patients from receiving the most effective treatments.“

AdvaMed said it supports a “measured approach“ to refining inpatient hospital payments.

Despite AdvaMed's concerns, CMS said it is committed to ensuring that Medicare beneficiaries have rapid access to new technologies by providing for temporary add-on payments for appropriate technologies.