Ensuring adequate payment for the use of new technology

Healthcare Financial Management, Feb, 1998 by Raymond J. Kaden

At a time when new technology proliferates and major

government and third-party payers are working to reduce payments to

hospitals and physicians, the problem of obtaining appropriate and timely

reimbursement for services that involve the utilization of new medical

technology takes on added financial importance. In the past 10 years, the

industry has seen significant changes in diagnostic and therapeutic

techniques through the use of new and costly medical technologies and

therapies.

At one time, providers addressed the issue of reimbursement for utilization

of new technologies by increasing charges for such services. Medicare even

included a component in its prospective payment rates for new technology.

However, with recent and expected future cutbacks in both Federal and state

healthcare funding and continued growth in managed care contracting, proper

and timely reimbursement for new technology use is no longer assured. Often,

there is considerable lag time between the introduction of the new

technology and its recognition as a legitimate, reimbursable treatment by

payers. Moreover, reimbursement is not guaranteed even when a new technology

has proven clinical efficacy.

For some new devices or therapies, the cost of implementation is clearly

offset by the operational cost savings that are achieved. Most healthcare

providers have developed sufficient management information systems and

cost-accounting capabilities to assess the operational impact of a new

technology by calculating its incremental costs. Such analysis should be

performed to determine whether current payment for use of the new technology

is adequate or whether new rates should be negotiated.

PERFORMING A REIMBURSEMENT ANALYSIS

A preliminary analysis should focus on cases affected by the new technology.

The analysis should include the following information:

* The major payers for the procedure;

* The number of cases for each procedure, by payer;

* The average all-inclusive cost per case by payer, calculated using the

ratio-of-costs-to-charges (RCC) method applied to overall charges, or by

direct costing, if available from the provider's internal cost-accounting

system; and

* The average payment rate, by payer.

For example, the cost-effectiveness of coronary stents (small,

stainless-steel devices that are inserted into blocked arteries to prop them

open and restore blood flow) can be determined by assessing their use in

percutaneous transluminal coronary angioplasty (PTCA), commonly referred to

as balloon angioplasty. Exhibit 1 shows how the information required for a

preliminary analysis might be provided on a pro forma worksheet that

management could use to calculate the reimbursement shortfall for these

devices. Exhibit I also shows how this type of analysis can provide a clear

idea of which payers should be approached to negotiate a higher payment

rate.

If the preliminary analysis identifies a significant payment shortfall, a

database for the cases affected by the new technology should be created to

further quantify and [TABULAR DATA FOR EXHIBIT 1 OMITTED] understand the

technology's impact on operations. The database should include information

regarding costs and utilization patterns associated with the new technology.

Moreover, it should be designed not only to allow internal performance

comparisons, but also to enable providers to compare their performance with

available external benchmarks for the technology.

National, regional, and state historical databases of cases are possible

sources of such benchmarks among peer facilities for performance quality and

cost-efficiency. The calculations of peer facilities' costs required for

such comparisons, particularly at the department level, would likely be

limited to the RCC method applied to overall charges because, in most cases,

more sophisticated costing information would not be accessible.

PTCA REIMBURSEMENT ANALYSIS

Approved for use by the Food and Drug Administration in August 1994,

coronary stents are now used in nearly half of all PTCA procedures performed

nationally Although PTGA procedures using stents are more expensive than

those without stents, they are increasingly becoming the preferred procedure

among interventional cardiologists.

Initially, PTCA procedures with and without stents were grouped together for

reimbursement purposes, which prevented analysis of the reimbursement impact

of each type of procedure. Separate analysis of stent procedures was not

possible until October 1995, when HCFA assigned a unique ICD-9 procedure

code, 36.06, to PTCA performed with stents. Moreover, all PTCA procedures,

whether or not stents were used, shared the same DRG classification (DRG

112) until October 1997, when HCFA created DRG 116 for PTCA with stents.

Because the procedures were initially grouped together, and because many

managed care contracts were negotiated before PTCA with stents started to

become the preferred procedure, reimbursement for these procedures often is

based on costs for the lower-cost procedure, even for providers that

successfully negotiated separate case rates for cardiac cases before