The Medtech Reimbursement Conundrum: How Did We Get Here?

By Edward Black, founder and principal, Reimbursement Strategies

In May 2008, a health plan medical director cautioned me that the “Day of Reckoning” would be coming for the medical and biotech technology industries. Now, that day is upon us.

For years, government and private payer medical directors have been silently praying for the days when medtech executives would appreciate their plight and focus on technological innovations that are effective, both clinically and economically. Not unlike the FDA, whose pendulum sways back and forth between consumer protection and technological advancement, payers have dual roles in supporting clinical advancement while managing costs. The Patient Protection and Affordable Care Act (PPACA) has not changed the rules so much as it has emboldened private insurers to force the issue on cost effectiveness.

A report by the Institute of Medicine (IOM, a division of the National Academies of Sciences, Engineering, and Medicine) calculated that 30 percent of health spending in 2009 — roughly $750 billion — was wasted on unnecessary services, excessive administrative costs, fraud, and other problems. That report had more influence on payers’ determination to change the system than the PPACA.

It was from that IOM report that the “triple aim” was created, setting the tone for payers and their behavior today. The triple aim’s goals include improving the patient experience of care (including quality and satisfaction), improving the health of populations, and reducing the per capita cost of health care. To those ends, new payment methodologies and programs have been in the works for years:

• Bundled payments
• Packaged pricing
• Episode of care payments
• Value-based reimbursement
• Payer/technology risk share arrangements
• Centers of excellence, to which they would steer their members.

Health and Human Services Secretary Sylvia Burwell said that, by 2018, half of Medicare payments will be based on programs that put providers at risk for quality, cost, or value. But, as recently as last month, the General Accounting Office reported that Medicare’s value-based purchasing program has not made meaningful improvements in care in its first three years.

Furthermore, nearly 75 percent of U.S. hospitals saw Medicare payments increase or decrease by less than half a percentage point in the fiscal year ending Sept. 30. The median penalty was $56,000 and the median bonus payment, $39,000. This state of the industry also means that mandatory participation programs, like the Comprehensive Care for Joint Replacement initiative announced in July, will increasingly replace opt-in programs that have seen only tepid provider response and modest financial impact.

These initiatives represented payers’ desperate efforts to redesign a supply side economic health care system to pay more for value. All the while, they knew that the expected collaboration among hospitals, physicians, and post-discharge care providers could result in more coordinated care processes and outcomes.

The absence of electronic health records made the lack of care coordination more understandable, but it also exposed hospitals and physicians’ lack of willingness to invest in such resources. While payers generally laud the increasing collaboration they see through the formation of integrated delivery systems, including accountable care organizations (ACOs), they fear the collective bargaining power of these emerging organizations. In many respects, they want it both ways.

Even the American Medical Association (AMA) is beginning to think about how they might have to adjust to new realities through the current procedural terminology (CPT) physician service coding system. The coding nomenclature is needed now for third-party billing and claim processing, used to uniquely describe the thousands of specific, potentially reimburseable medical, surgical, and diagnostic procedures that physicians and qualified health professional provide. Each CPT code is assigned a relative value unit (RVU), which is used as the basis for calculating physician fees and third-party payment. In the future, packaged payment programs may relegate CPTs’ primary purpose to measuring internal physician productivity-based compensation within a healthcare system — a far departure from its current primary purpose.

Successful technology companies will come to understand that chronic health conditions drive most medical coverage policy decision-making, and that payers would rather pay for patient behavior change (smoking cessation, exercise, obesity controls that mitigate the onset of diabetes, and health coaching) than pay for new therapeutic solutions to compensate for poor lifestyle decisions.

No health technology economic analysis exists that can demonstrate cost-effectiveness superior to patients making better lifestyle decisions. The best incremental cost-effectiveness ratios (ICERs) always come from disease avoidance, a phenomenon that holds true worldwide. Almost every country is struggling economically to manage an aging population of baby boomers who will live beyond the ages of their parents. The demand curve for care will continue to grow while the payment level will have to descend to maintain a reasonable level of affordability.

In defense of third-party payers, there are several things to keep in mind:

• Change in medical technology is coming faster than health plans can reasonably manage.
• Innovations that present only marginal clinical improvements will not garner the attention they might have in the past, and thousands of such tests and procedures are proposed every year.

This set of circumstances has led to health plan medical directors becoming like urban coyotes — you know they are there, but you can’t see them; they avoid human contact; but they can disrupt your life in many unknown ways. Instead of a meeting to discuss a new technology, you will almost always get the cordial response, “just send me the literature.”

Since the economic recession of 2008, health plans have had to be leaner and employ fewer people, diminishing administrators’ time and ability to remain as technologically current as before. As recently as this summer, the rising cost of health plan administration, combined with fast-inflating prescription drug costs, has moved the healthcare share of the U.S. GDP to its highest level ever, 18.2 percent. Health plans are feeling the pressure.

Nowhere is this more evident than in point-of-care diagnostics. Simple, disease-specific, office-based tests are growing increasingly popular and voluminous, but they have the potential for overutilization — a problem health plans would rather avoid than try to manage. Technological advancements are driving the industry to new payment methodologies as much as the continually increasing cost of care.

Health plans know they are not efficient in micromanaging utilization, so the bundling of services into a broader single payment thrusts the cost-management issue back onto hospitals and clinics. The technological advances that capture health plans’ attention will be those that rise above the crowd and help solve payer issues, not create new issues to manage.

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In this series, we will continually examine new developments in medtech, biotech, and pharmaceutical reimbursement within the context of the U.S. government, private payers, and global healthcare issues. We will continue to monitor and comment on the market, new payment programs from CMS, and private payer initiatives targeted toward cost efficiency and industry response to these new pressures. The programs and acronyms will change frequently, but the fundamental theme of better overall healthcare cost management will remain.

About The Author

Edward Black specializes in reimbursement strategy, payer relations, and health economics for medtech and biotech companies in the U.S. and abroad. Before founding Reimbursement Strategies, LLC in 2008, Mr. Black worked over 25 years in health and provider network management within the Blue Cross Blue Shield system and served on two national advisory boards responsible for leading consistency in medical, benefit, and payment policy. From 1994 to 2002, Mr. Black served as the executive director of three managed care business partnerships with large multispecialty clinics for which he was awarded the 1995 Outstanding Contribution to the Healthcare Industry Citation by LifeScience Alley.