BBI Contributing Writer

Once again, medical technology companies are caught in the crosshairs of federal policy-making. The latest missive in the campaign to clarify Medicare coverage and reimbursement decisions was dispatched in May of this year, when the Health Care Financing Administration (HCFA; Bethesda, Maryland) issued a notice in the Federal Register outlining its proposed criteria for national (and local) coverage decisions. To the industry's astonishment, HCFA proposed to include determination of a technology or service's "added value" to the Medicare population, as well as its "medical benefit" for this population. And for the first time, HCFA is laying the ground rules for how local coverage decisions will be made.

Until now, HCFA's decision-making on new medical technologies and procedures has focused on whether new services fit into one of Medicare's broad benefit categories and whether the new procedure is "reasonable and necessary for the diagnosis and treatment of illness or injury, or to improve the functioning of a malformed body member." National coverage decisions by HCFA grant, limit or exclude Medicare coverage for a specific medical service, procedure, device or drug. If HCFA does not issue a national decision, coverage decisions are left to the local insurance carriers who function as Medicare intermediaries throughout the country, processing claims and handling administrative tasks. The only stipulation on local intermediaries' coverage decision-making is that their coverage policies cannot contradict a national HCFA decision and are not binding on other intermediaries outside their immediate jurisdiction.

In response to pressure from legislators and manufacturers concerned about the lack of information and outside input into HCFA's coverage decisions, in the spring of 1999 the agency issued a notice detailing the specific procedures it uses for making national coverage decisions. The notice included information about how the public can request coverage decisions, the roles of HCFA staff, advisory committees and technology assessments and how it will inform the public about the status of coverage decisions. The latest notice, however, goes beyond issues of decision-making process and outlined new criteria for coverage decisions.

Specifically, HCFA is proposing to use the following sequential steps in making its determinations:

Step 1. Medical Benefit.

Is there sufficient evidence that demonstrates that the item or service is medically beneficial for a defined population? If no, the item or service is not covered under Medicare. If yes, proceed to Step 2.

Step 2. Added Value.

For the defined population, is there a medically beneficial alternative item or service that is the same clinical modality and is currently covered by Medicare? If no, then item or service is covered under Medicare for the defined population. If yes, proceed to Step 3.

Step 3. Added Value.

Is the item or service substantially more or substantially less beneficial than the Medicare-covered alternative? If the item or service is substantially more beneficial (i.e. a breakthrough), it is covered under Medicare for the defined population. If the item or service is substantially less beneficial, it is not covered under Medicare for the defined population. If the item is neither substantially more nor less beneficial (that is, it is equivalent in benefit), proceed to Step 4.

Step 4. Added Value.

Will the item or service result in equivalent or lower total costs for the Medicare population than the Medicare-covered alternative? If yes, the item or service is covered under Medicare for the defined population. If no, the item or service is not covered under Medicare.

Comparisons of the medical benefit of two or more items or services would involve the same patient population, the same clinical circumstances, and the same clinical modality.

Implications for manufacturers

What does all this mean to manufacturers? The implications are huge. For the first time, HCFA is clearly emphasizing the importance of cost impact on coverage decisions. Historically, HCFA has separated the issue of cost from the issue of coverage by maintaining two distinct functional areas within the agency itself to handle these responsibilities; one internal group makes decisions regarding coverage and another makes decisions regarding reimbursement. By adding the cost factor to coverage decisions, HCFA is sending a message to the industry that cost-effectiveness has become an additional burden of proof for a favorable decision. On a practical level, this means that manufacturers will be expected to provide evidence of a technology's cost-effectiveness as a normal part of the coverage application. But the required form that this new information would be required to take – especially the requirement for comparative cost information – isn't clear.

In fact, HCFA's stated intention to examine the direct medical cost impact of new services and technologies stands in direct contrast to other federal agencies' ideas with respect to the appropriate type of cost information in health services analysis. The Public Health Service's Panel on Cost-Effectiveness in Health and Medicine presided over a series of meetings four years ago to try to achieve consensus about the recommended analytical technique for health care cost studies. The non-binding conclusion of the panel was that the "gold standard" of health economic studies should be a study design known as cost-effectiveness studies.

Costs vs. quality

The cost-effectiveness studies sanctioned by the PHS panel examine the relationship between the cost of a service or technology in relation to improvements in a patient's quality of life (QALY). As a unit of outcome measurement, QALY combines patient gains from both prolongation and quality of life measurements while taking into account how patients value different outcomes. The recommended cost-effectiveness calculation is a ratio of costs to QALY. The question being answered by this ratio is: For every $1 spent on the service or technology, what is the associated improvement in QALY?

The chief advantage of the cost/QALY ratio is that it allows for legitimate side-by-side comparisons of competing services or procedures as long as the methodologies used in the calculations were similar. So the costs/QALY ratio of a new technology can be directly compared with that of an older technology. The difference between the two ratios is a meaningful conclusion and can be reasonable used to make policy decisions. The ability to make side-by-side comparisons is not always possible with other forms of study designs, typically because the outcomes being measured are different. For example, one study might use improvements in patient perception of pain as its quality measurement while another might use reductions in medical complications associated with pain-treatment. The chief disadvantage of the cost/QALY ratio is that quality of life-related outcomes are only partly related to the chief concerns of acute-care medicine, which tends to focus on clinical improvements specific to the site of care.

Value studies

The difference in perspective between policy-makers and purchasers was made abundantly clear in recent presentations to hospitals by the Advisory Board Co. (Washington), the venerable consulting and research firm to the hospital industry. In meetings with hospital chief financial officers throughout the country, Advisory Board personnel counseled hospitals to better "manage innovation." Hospitals were chided for their reluctance to look to new technology for efficiency improvements made possible in part by improving the quality of care for patients and in part by producing improvements in hospital operating practices. The Advisory Board recommended that hospitals begin to look proactively at the "value" of new technologies, both medical and information, in order to make informed decisions about which technologies should be promoted within their institutions. Explicit in this notion of value is the principle that costs and benefits should be measured in terms that are economically meaningful to hospitals themselves.

For example, a hospital may want to know how a new procedure impacts hospital admissions and length of stay; impacts the intensity of services provided in-hospital; impacts medical complications; and impacts clinical outcomes for hospitalized patients. Further, a hospital wants to understand the relationship between the cost of a new service or item to these outcome measures. The fact that the procedure improves the patient's functioning at home or improves the patient's ability to perform activities of daily living, or improves the patient's perception of health is only of marginal interest to a hospital because these important facts are not used to either fund the hospital or rank the hospital in terms of JCAHO accreditation or its profiling by managed care companies.

Indeed, HCFA's proposed rules underscore the inconsistency between the policymaker's view of economic outcomes and the purchaser's view. Although HCFA does mention the possible use of QALY as an indicator of a technology's "medical benefit," if new technologies represent essentially equal benefit to existing technologies, then HCFA wants to know whether the new technology will lower costs. Despite being a federal agency, HCFA is no different than any other purchaser seeking to understand what return it's getting for its purchasing power.

The impact of the proposed HCFA rules is unlikely to stop at Medicare coverage decisions. Many commercial insurance carriers use Medicare look-alike policies in their coverage and reimbursement policies; e.g. Relative Value Units (RVUs) and Diagnosis Related Groupings (DRGs) to reimburse physicians and hospitals. Whatever new policy is eventually enacted by HCFA, the commercial insurance industry is like to adopt as well.

So technology manufacturers are left wondering just what to do. In order to publish economic studies in peer-reviewed journals, the study design needs to comply with the recommendations of the Panel on Cost-effectiveness in Health and Medicine, meaning it should use QALY as the outcomes measure. Based on HCFA's comments in its mid-May proposed rules, it may ultimately require QALY measurements as proof of "medical benefit." Conversely, in order to appeal to the actual purchaser (including HCFA, the commercial carriers and hospitals), economic information should concentrate on value analyses for the site of care or the patient population likely to receive the technology.

For the meantime, it looks like technology companies will be expected to do both. Once again, until the policy-makers and the purchasers can agree, it looks like medical technology companies will pay the price.

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