In April 2007, CMS issued a proposed rule that continues the movement toward a cost-based payment system from a charge-based one, as well as implementation of a DRG system that more accurately reflects levels of patient severity. In FY 2008, which begins October 31, 2007, payments to all hospitals are expected to increase by 3.3% overall. Since this must be budget-neutral and overall spending cannot increase, payment for some DRGs will increase and others will decrease.

This is not just a conversation topic for the folks in Finance. It will be important for materials management professionals to be conversant as well. If history is any guide, device vendors may broadly characterize the reimbursement changes to physicians in a way that is misleading or even downright wrong. The materials professional has to be prepared to counter with the right information.

CMS rationale for change

By way of background, CMS’s changes came out of recommendations to Congress by the Medicare Payment Advisory Commission (MedPAC) that were primarily aimed at physician-owned specialty hospitals.

MedPAC reported that the Medicare payment system had the effect of encouraging development of specialty hospitals, because it paid more for certain DRGs and in turn made certain cases more profitable. Specialty facilities sprung up to "cherry-pick" the healthiest, most profitable orthopedic, cardiac and other patients. Full service hospitals were left with high-acuity and less profitable, or simply unprofitable, cases.

To correct for this, and discourage cherry-picking, Medicare is shifting to a cost-based payment system that also attempts to account for patient severity better than the previous DRG system did. Under the proposed Medicare Severity DRGs (MS-DRGs), the number of DRGs will increase by about 40% to offer more nuanced categorization of patient condition and clinical intensity. Higher severity of illness will merit higher reimbursement, while lower severity will be reimbursed at a lower rate.

CMS predicts that payments to cardiac specialty hospitals – where physician owners may tend to admit their healthiest and most profitable cases - will drop by 4% in FY 2008. This is in addition to rate reductions totaling about 5%, implemented over FY 2006 and 2007.

What to expect: A battle of misinformation

It remains to be seen what impact MS-DRGs will have on the outlook for further development of physician-owned specialty hospitals. What can be predicted is the cloud of misinformation that typically accompanies any change to the Medicare payment system for cases involving expensive implants.

For example, when Medicare first created a new DRG for coronary stents — breaking them out of the old angioplasty DRG — stent vendors were known to represent to cardiologists that the new DRG payment was higher, and therefore covered the hospital’s increased costs for the implant procedure.

In fact, the new DRG payment was higher. That much was true. But it did not cover the hospital’s increased cost of the implant, and many hospitals started losing money on virtually every Medicare stent case. Certainly, it did nothing to cover the skyrocketing costs when multiple stents were implanted. A partial truth became the rotten foundation for decision-making.

More recently, the marketing spin for spinal disc replacement surgery promoted the same partial truth. Reimbursement may be higher…but does it really cover the cost? Who pays for the experiment?

In these two examples (and there are many more), physicians relied upon the information they were given from a source they trusted and interact with on a regular basis: their vendor. "It’s OK to use the expensive new gizmo, because it is covered by the payer" is the message.

Only after the hardware is implanted and the patient goes home does the hospital discover the economic aftermath. In the absence of information to the contrary, well-intentioned physicians, acting on the belief that they are doing no financial harm to the hospital, may use a very expensive technology that can bankrupt a service line. With the right information, the same physician will make a different choice in most cases.

Give physicians better informational weapons

Shame on the materials manager who doesn’t arm physicians with better information than vendors do.

Materials managers have a duty to provide the financial data that helps physicians make a fully-informed choice. Materials professionals can counter misinformation with accurate data on expected reimbursement, and hospital-specific reimbursement analysis. This is not difficult information to obtain, and can be done collaboratively with Finance and the departments (OR, Cath Lab, EP Lab, etc) requesting the device or implant.