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Medicare seeks to level the playing field for reimbursement
The orthopedic and spine sectors will fare OK, but other specialties may not do as well.
The Centers for Medicare and Medicaid Services took a radically different approach this year in putting together its reimbursement rate proposal for fiscal 2007, reworking its payment levels from the top down.
However, when the dust settled, the proposed rates were not much different from prior years and were considerably better than expected, at least in the areas of joint implants and spine. Nevertheless, we don’t think a sigh of relief will be in order for surgeons until the final decisions are posted in August.
Medicare officials acknowledge that the proposed changes are a “first stab” at reimbursement revision. As in the past, they sent the proposed changes for review and commentary to industry and health care professionals, and may amend the proposals based on suggestions.
The review period ended June 12, and given the radical changes, this commentary period looked more active than usual. A final decision is due from the agency in early August. Changes are slated to take effect Oct. 1.
An end to cherry picking
The reason for the shakeup: One of CMS’s core objectives is to adjust its reimbursement levels across all procedures so that payments more accurately match the costs of delivering medical care. It is believed that current rules in favor of surgical treatment over nonsurgical treatment.
As part of this, the agency wants to restrict “cherry picking” of profitable diagnosis-related group (DRG) cases by specialty hospitals. Accordingly, the Medicare Payment Advisory Commission (MedPAC) has recommended moving to a DRG system that better reflects the actual costs of delivering care and takes into account case severity.
No easy change
CMS is considering transformation of a two-step process:
(1) Assign weights to DRGs based on costs, rather than charges. By focusing on costs set by manufacturers rather than charges set by hospitals, CMS aims to bypass the random markups that hospitals assign for ancillary services among the DRGs. The key issue here: ensuring the correct calculation of costs.
We suspect that this will be a source of disagreement during the commentary period, because while orthopedic devices were largely spared in the initial proposal, cardiovascular devices were not. As such, the medical device industry is arguing that the proposed restructuring of the DRG system is flawed. The medical device industry, teaching hospitals and some medical associations are taking this fight to Capitol Hill.
(2) Replace the current list of 526 DRGs with a more extensive system that would take into account the severity of patients’ conditions (scheduled for F2008).
Source: CMS |
Medicare officials acknowledge that almost anything is possible between now and the final decision in August. Moving to a cost-based system could be delayed. The government could implement changes in DRGs for case severity this year or next. Any number of possibilities might occur. In the end, we think that implementation of such dramatic changes in the DRG structure are likely to occur later rather than sooner.
The table summarizes this year’s reimbursement proposals for orthopedic, spine and several cardiovascular devices, compared with reimbursement shifts in recent years. Contrast the proposed spine and orthopedic rates with those of cardiovascular procedures, and which were generally as drastic as had been feared, which calls for a 13% decline in reimbursement for pacemakers, a 23% decline for implantable cardioverter defibrillators (ICDs) and a 32% decline for stents. We think that, ultimately, the proposed cuts for cardiovascular devices will be scaled back. They have little likelihood of implementation, as presented.
The stock market’s initial reaction to the proposed rates for spine was positive, considering the expectations officials had before the proposal and the magnitude of the cuts in other areas. As they stand today, the proposed rates should have little impact on growth in the spine market, in our view. That said, however, we’re mindful of potential revisions to these rates in the final ruling, either positive or negative.
Hips and knees: proposed rates up 1.4%. We think the proposed rate increases could bode well for surgeons, hospitals and manufacturers if implemented. Specifically, CMS has proposed a decrease of 0.6% for major joint replacement (DRG 544, 72% of procedures), a 0.1% increase for hip and knee revisions (DRG 545, 7% of procedures), and an 8.9% increase for partial hips (DRG 210, 21% of procedures).
Spine: proposed rates down 6.0%. In spine, the proposed rates, when viewed on a weighted-average basis, were down a modest 6% year-over-year. This figure comprises 5% to 6% declines in noncervical fusion (DRG 496, 497, 498), and 5% to 10% cuts in cervical fusion (DRG 519, 520) and combined posterior and anterior fusion (DRG 496)
Glenn Reicin and Matt Miksic are equity analysts covering the medical device industry at Morgan Stanley in New York.
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