Manufacturers will be allowed to appeal to a CMS advisory panel for reconsideration of whether a new technology qualifies as a "substantial improvement" in the diagnosis and treatment of Medicare beneficiaries, according to the agency's inpatient prospective payment system (PPS) final rule.

Published Sept. 7 in the Federal Register, the rule establishes a federal panel, comprised of CMS clinical staff and supplemented with coding and claims processing experts, that will advise the agency on changes to the diagnosis-related group (DRG) system.

The panel will accept applications from manufacturers on a rolling basis, the rule notes. Initial data submissions are due by early October of each year, with complete data sets accompanying the proposed changes to be filed by mid-December.

This timeframe would allow CMS to publish decisions made by the panel in the annual proposed rule announcing updates to the inpatient PPS, the agency notes.

According to the final rule, "several commenters" objected to creation of the CMS panel when the plan originally surfaced in the May 4 proposed rule.

"One commenter referred to the panel as an unnecessary layer of bureaucracy that should be eliminated," the final rule states. "The commenter believed the panel would be unnecessary and that CMS should automatically deem drugs and biologicals approved by FDA through its 'fast-track' processes as new technology."

"The panel will consider all relevant information (including FDA 'fast-track' approval) in making its determinations," the rule responds. "However, we do not envision an automatic approval process under this provision."

Regarding the commenter's suggestion that the panel would be redundant, CMS replies: "Because there is not another body currently making such determinations, it is necessary to establish the panel."

The substantial improvement clause is one of three criteria determining whether a new technology qualifies for additional payment under the inpatient prospective payment system.

The other criteria for new technology are that it receives inadequate payment under the current DRG system and that it is "new" based on the agency definition, which states that CMS must not currently have cost data available on the procedure.

Following receipt of a number of comments on the proposed rule criticizing the substantial improvement requirement, CMS attempted to elucidate the term and how it would be applied in the final rule.

Requestors for special payment for a new technology must meet one or more of three criteria. The technology must offer a treatment option for a patient population for which currently available treatments are inappropriate; allow for an diagnosis of a condition that is currently undetectable or offers an earlier diagnosis than current technology; or significantly improve clinical outcomes compared to currently available treatment.

Improved clinical outcomes may include reduced mortality rate, reduced device-related complications and reduced recovery time.

Device manufacturers had taken issue with the proposed standard of "substantially improves." AdvaMed suggested CMS replace the proposed standard with "substantially different" (¹ Also see "Industry Groups Praise Intravascular DRG Assignment, Question CMS Methods" - Medtech Insight, 9 July, 2001.). Several comments to the proposed rule noted "the [Medicare] statute does not require such a stringent test and that the term is too subjective and cumbersome to administer properly," CMS reports.

For example, the Medicare Payment Advisory Commission, although it agreed with the three criteria, remarked that it would be difficult to "operationalize" substantial improvement.

Nevertheless, CMS has resolved to adopt the substantial improvement standard for new technology, defending the decision by emphasizing that "various new technologies introduced over the years have been demonstrated to have been less effective than initially thought, or in some cases potentially harmful." Therefore, "it is in the best interests of...beneficiaries to proceed very carefully with respect to the incentives created to quickly adopt new technology."

Separately, AdvaMed and the Medical Device Manufacturers Association had objected to use of the threshold of one standard deviation above the mean charges of other cases within a DRG for determining which devices are inadequately reimbursed. AdvaMed said that virtually no new technology in recent years would qualify for additional payment under that threshold.

CMS rejected AdvaMed's proposal to create a threshold based on the lower of 120% of the base DRG payment amount or $2,500 in increased costs, noting that "a set minimum dollar threshold, such as $2,500...would represent a relatively small percentage of the costs of the case" for many DRGs.

Instead, the agency adopted the suggestion of one commenter that the threshold "be set based on the distribution of the charges using a logarithmic transformation of the arithmetic charge values" to reduce the influence of outlier cases on mean and standard deviation values.

Using the logarithmic system, the average standard deviation as a percentage of mean charges for the DRG was 50%, compared with 75% under the proposed methodology. Additionally, the amount by which a new technology has to exceed the DRG charges declined from $11,794, in the proposed rule, to $7,799.

Therefore, the rule concludes that a new technology must result in average charges above the DRG mean charges plus one standard deviation of charges based on the logarithmic distribution, in order to receive additional payment.

CMS also acknowledges concerns that the rule would compare costs of cases involving new technology with the average charges for all cases in the DRG, a factor that would further hinder new technology, since hospital charges are greater than costs. "We agree that it would be inappropriate to require to require new technologies to exhibit costs in excess of one standard deviation of average charges," CMS states. The final rule revises proposed language to refer to charges of cases involving new technology instead of costs.

CMS retains the provision of the proposed rule limiting payment of new technologies to 50% of the amount by which the cost of the case exceeds the DRG payment.

The agency notes that "if projected payments for the technology exceed the target amount in a given year, the marginal payment factor will be reduced prospectively from 50% as necessary to meet the target."

AdvaMed maintains that the 50% cap is inconsistent with the law and that "the transitional payments are required to adequately recognize the costs of new medical services and technologies." The target for the new technology payments will be set at 1% of total operating payments in a given year.

According to House Ways & Means Committee/Health Subcommittee Chair Nancy Johnson (R-Conn.), the qualifications for additional payment for new technologies in the rule do not correspond with Congressional intent. In an Aug. 14 letter to CMS Administrator Tom Scully, Johnson advises that "a flat add-on or separate DRG would ensure that those who provide the service are protected."

"This system would better match the intent of Congress than the outlier-like proposal," Johnson asserts. It is not clear whether the new logarithmic calculation for the threshold would mitigate those concerns.

In its comments on the proposed rule, AdvaMed maintained that the threshold would keep "critical life-savings new technologies...such as coronary stents, cardiac resynchronized therapy, drug-eluting stents and carotid and neurovascular stent procedures" from receiving additional payment.

Apart from adding the logarithmic method to calculate the standard deviation, however, CMS emphasizes that the standard deviation-based threshold itself is appropriate. "It is important to establish thresholds that recognize the variability in costs per case within DRGs and maintain the fundamental financial incentives of the prospective payment system as much as possible."

In addition to addressing payment for new technologies, the rule also addresses limitations of the 22-year old ICD-9-CM diagnosis and procedure coding system, which is currently running out of codes. The agency's long-term goal is to implement ICD-10-PCS and ICD-10-CM as replacement systems for ICD-9-CM. The agency is also revising the timeframe for implementing new codes. CMS will reduce the minimum time for introducing new codes to six months from the current 11 months by moving ICD-9-CM Coordination and Maintenance Committee meetings from May to April and adopting coding revisions approved in April by October of that year. Additionally, CMS is changing the November meeting of the committee to December. CMS also retains language making the mechanism for recognizing costs of new medical services and technologies effective Oct. 1.

"Substantial Improvement" Standard, 50% Cap Remain In Inpatient PPS Rule

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