Cardiac device makers would be hard hit if payment cuts set forth in CMS' April 12 Inpatient Prospective Payment System (IPPS) proposed rule are implemented.

Following the thrust of recent recommendations from the Medicare Payment Advisory Commission, CMS is proposing that the diagnosis related group (DRG) payment system be revamped to be based on estimated procedure costs rather than on hospital charges.

CMS calls the fiscal year 2007 proposed rule "the first significant revision" of the IPPS since it was implemented in 1983.

The agency notes that the current charge-based system is biased toward surgical DRGs, which often include ancillary charges such as operating room and radiology charges. In particular, "the markup amounts for cardiology services are higher than average," the agency notes.

"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," CMS Administrator Mark McClellan said.

This redistribution could reduce payments for implanted devices in particular. According to CMS, the proposed shift to cost-based payments would mean hospitals that perform more surgical procedures will probably see decreases in payments, while those with a heavy concentration of medical DRGs could see increases.

If implemented, the change would, for example, cut payments for drug-eluting stents when accompanied by a major cardiovascular condition by 24%, to $11,319.51, from the current rate of $14,795.34, according to the Stanford Washington Research Group, a Washington, D.C.-based health policy research firm. Without a major cardiovascular condition, payment for the procedure would drop 33%, from $11,390.31 to $7,590.75.

DRG payments for implantable cardioverter defibrillator procedures would drop between 22% and 24%, and payments for pacemaker implantations would fall about 13% under the proposal.

CMS projects that payments would decrease by more than 5% for 134 providers, while 1,003 providers could see increases of the same magnitude after the 2007 switch to a cost-based system. But device industry representatives are not happy with the CMS proposal.

Device Industry Fears Unintended Consequences

"We're ready to work with CMS, the administration and Congress to identify alternatives that will improve the accuracy of payments but preserve access to these innovative healthcare services," Ann-Marie Lynch, AdvaMed executive VP-payment & healthcare delivery, said the day after the proposal came out.

The device trade association had noted in a Feb. 20 letter to Center for Medicare Management Director Herb Kuhn that "the use of cost-based weights inherently leads to the use of older data, as compared to the use of charge-based weights."

Such a system could short-change the most innovative technologies, which also tend to be the most expensive. This might limit access to those products, which in spite of their relatively high up-front costs have the potential to produce healthcare savings over the long term, AdvaMed says (¹ Also see "Could Physician-Owned Specialty Hospitals Lose Stark Exemption?" - Medtech Insight, 13 March, 2006., p. 6).

The idea to shift to a cost-based system stems from recommendations made by MedPAC in its 2005 report on physician-owned specialty hospitals. According to MedPAC, doctors with investments in specialty hospitals often seek to maximize profits by self-referring the least sick, and thus least costly, patients needing procedures in the highest paying DRGs.

Cardiac specialty hospitals are under the most scrutiny for skewing practice patterns in this way, though orthopedic specialty hospitals also have attracted attention. Orthopedic procedure payments would get some cuts under the proposed system, but they would not be as dramatic as the cardiac reductions.

The Association of American Medical Colleges, the American Hospital Association and the Federation of American Hospitals state in an April 6 letter to McClellan that "MedPAC's package of recommendations is too far-reaching" and may "create unintended consequences for all hospitals."

Boston Scientific's Parashar Patel, VP-reimbursement & outcomes planning, likewise has encouraged CMS to limit IPPS revisions to the most problematic areas. "Let's not choose a cannonball basically to solve a very narrow problem. Take some rifle shots," Patel said at the Medical Device Regulatory and Compliance Congress in Cambridge, Mass., March 30. "If it concerns specialty hospitals, then let's figure out a few narrow proposals to address those."

Though stakeholders knew that sweeping changes might appear in the IPPS proposed rule, they were not prepared for CMS' use of a different methodology to switch to cost-based payments than that suggested by MedPAC.

MedPAC recommended using hospital-specific data to re-weight DRG payments based on estimated cost. But CMS notes that "MedPAC's methodology...is administratively burdensome, not only to develop, but also to maintain."

CMS suggests a "more administratively feasible" approach using national averages as opposed to hospital-specific data. But some device industry stake-holders are concerned that the "shortcut" removes the payments even further from the actual costs of procedures, distorting and complicating the calculations.

Stage Two: Adjust DRGs For Severity

Altogether, changes put forth in the proposed rule would redistribute more than $100 mil. in operating and capital payments across different types of inpatient cases in FY 2007, according to CMS.

The proposal also includes a second stage of reforms that would follow in FY 2008. In line with another MedPAC recommendation, CMS would revise the DRG system to account for differences in severity of illness within current DRGs as another strategy to discourage costly specialty hospital practices.

In last year's IPPS final rule (FY 2006), CMS reconfigured nine cardiac DRGs commonly billed by specialty hospitals to account for different severities of illness within payment categories (² Also see "CMS Reconfigures Cardiac DRGs To Reflect Case Severity – IPPS Final Rule" - Medtech Insight, 8 August, 2005., p. 3).

The agency notes in this year's proposal that based on "significantly improved" recognition of appropriate payment differences, it is considering a similar approach to revising certain other DRGs in 2007 before making the all-encompassing changes in 2008.

Although it reserves the option to fully implement severity-based DRGs in 2007, CMS recognizes that such a schedule might not give hospitals enough time to plan for such a substantial system change.

Comments on the proposed rule are due June 12.

- Chloe Taft

CMS Proposal To Revamp Inpatient System Hits Cardiac Payments Hard

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