Negotiating payment for new technology purchases - Managed Care

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

Clinical and Financial Implications

Using the baseline service analysis, the projected impact of the new technology on the service operations should be calculated. The projections should be performed for at least a three-year period, because the full impact of some forms of new technology may not occur in the first year due to factors such as availability of the new technology, time needed for physician training, time needed for adoption of clinical utilization criteria, and willingness of third-party payers to pay for services using the new technology.

Certain assumptions are made when projecting the three-year operational impact of the new technology. For example, in the case of the fictitious cardiac hospital, it is projected that 10 percent of the CABG cases will migrate to PTCA with DES in each of the first three years after adoption of DES. These assumptions are important in the financial model, so they should be generated with assistance from appropriate clinical staff--in this case, the cardiac catheterization laboratory director and the medical chief of interventional cardiology. Clinical trial results and other published information, including analyses prepared by independent investment analysts, also can be used to illuminate the likely operational impact of the new technology. Should there be conflicts regarding clinical assumptions, the preparation of several projections using different sets of assumptions can help the organization frame the degree of financial magnitude to be expected from the new technology.

Assumptions regarding the amount and timing of third-party payment increases for the new technology are paramount in the projections. Therefore, every effort must be made to obtain coverage pronouncements from Federal and private payers as soon as possible after FDA approval of the new technology is given. Historically, the Centers for Medicare and Medicaid Services (CMS) has assigned a code from the International Classification of Diseases, Revision 9 (ICD-9) to new technology following FDA approval. The ICD-9 code enables CMS to track charges and other clinical data relating to the new technology over time, usually up to one year. If CMS revises Medicare payment rates to reflect the higher cost of the new technology, those increases usually cannot be counted on for at least a year following introduction of the technology into the marketplace. (a) State Medicaid programs traditionally have followed Medicare's lead, so Medicaid payments also are likely to lag behind implementation of the new technology by at least a year.

Managed care payers may present a challenge. Although they may have a reputation for delaying payment increases for new technology, some managed care payers actually have led the way in paying for new technology, even to the point of permitting carve-outs from payment rates for significant new technology that has demonstrated cost savings. Therefore, it is important to begin the process of providing information about the new technology to managed care payers as soon as it becomes clear that the hospital is committed to using the new technology, that the new technology will have a significant financial impact, and that the technology is likely to receive FDA approval in the near future. Managed care payers likely will mirror Medicare's payment track record for a specific new technology Hospitals should prepare their projections based on their contract terms and experience with their managed care payers.