Negotiating payment for new technology purchases - Managed Care

Healthcare Financial Management, Dec, 2002 by Raymond J. Kaden, Joanne H. Vaul, Pamela A. Palazola

The healthcare industry has always been faced with the issues of implementing and obtaining payment for services provided using new technology When the cost or the impact of the new technology is minor, hospitals often can adjust their capital-planning or operating-budget processes to compensate. However, when the new technology has a transformative effect on the delivery of medical services, particularly in a major clinical area, it is imperative to obtain appropriate payment from managed care payers for the technology.

To prepare for negotiations with managed care payers regarding payment for new technology, healthcare financial managers should perform a detailed baseline analysis of the affected service and an assessment of the clinical and financial implications of the new technology on utilization, volume changes, and operating costs.

These steps should be performed before beginning the organization's operating-budget preparation process, so that the financial and clinical impact of the new technology for the organization can be documented in preparation for managed care contract negotiations. Healthcare financial managers who clearly understand the clinical and economic benefits of the new technology will be better equipped to negotiate for improved and timely payment for the new technology from managed care payers.

Baseline Service Analysis

The baseline service analysis should document the operations of the service without the new technology including sufficient detail to give a complete and accurate picture of the baseline operating performance of the service. The analysis should explore staffing levels, salary costs, other operating costs, equipment, inpatient and outpatient volumes, departmental capacity, and marginal costs per procedure. Management and key medical staff of the affected department should be asked to provide information regarding the expected time of the implementation of the new technology potential volume changes resulting from the use of the new technology potential shifts in treatment patterns, impact on staffing levels, preliminary cost assumptions, and most importantly, clinical and economic benefits patients and payers would derive from the use of the new technology.

Exhibit 1 shows case-mix data and some of the financial information needed for a baseline service analysis for the cardiac services unit of a fictitious cardiac hospital. The hospital plans to begin offering services using a new drug-eluting stent (DES). (In reality, approval of the DES by the Food and Drug Administration [FDA] is anticipated in 2003.) The new DES technology is most likely to affect two major types of the hospital's procedures: coronary artery bypass graft (CABG) and percutaneous transluminal coronary angioplasty (PTCA).

Currently, 20 to 30 percent of patients nationwide who receive a coronary stent experience restenosis that recluires a repeat procedure. Results of the DES clinical trials indicate that there has been a 90 to 100 percent reduction in the rate of restenosis with the use of the DES. In addition to reducing the need to repeat a procedure, a number of patients who would have needed CABG (eg, patients with diabetes) can be treated instead with the less invasive and less costly DES procedure. Consequently, the baseline services analysis focused on the affected DRGs for CABG (DRGs 106, 107, and 109) and PTCA (DRGs 516, 517, and 518).

Because third-parry payers pay at different levels, it is necessary to extract case-mix data for the affected DRGs by payer, although grouping of homogeneous payers is certainly acceptable. In Exhibit 1, Medicare cases are isolated because they are the most voluminous in this service; all managed care, HMO, and other commercial insurers are grouped into an insured category; and Medicaid, self-pay, and charity care are combined into an "other" category. Exhibit 1 also shows the fictitious hospital's average payment per case by payer category, the marginal cost performance assumptions, and the marginal cost factors grouped by departments and broken down by cost element (direct patient care, salary, and nonsalary).

The actual average cost for the applicable DRGs then is broken down by department for each payer class. The marginal costs also are broken down by DRG; these costs are calculated using the marginal cost factors and assumptions from Exhibit 1. The costs used in the analysis should include indirect and overhead costs, because payment rates by payers include all costs.

The completed baseline service analysis indicates that the hospital is generating reasonable operating profits on CABG and PTCA procedures. An examination of profits by payer shows that net operating gains from Medicare and insured payers are covering operating losses incurred on other payers in this service. These operating results show that the hospital's cardiac services are generating a reasonable profit margin and, in fact, may be subsidizing other services that have operating losses. It is apparent that implementation of the new technology could have a short-term, negative financial impact not only on the cardiac services department, but also on other services that indirectly depend on its revenue.