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Medicare Coverage for New Medical Technology

The Basics of Health Care Financing Administration Policy

¹ Department of Radiology, Massachusetts General Hospital and Harvard Medical School, 55 Fruit St., Boston, MA 02114.
² Regulatory Affairs Initiative, Center for Integration of Innovative Technology and Medicine (CMIT), 100 Charles River Plaza, Boston, MA 02114.
³ Boston University School of Law, 765 Commonwealth Ave., Boston, MA 02215.

Received May 25, 2000; accepted after revision July 7, 2000.

 
Supported in part by a grant from CIMIT, a nonprofit consortium comprising Massachusetts General Hospital, Brigham and Women's Hospital, Massachusetts Institute of Technology, and Draper Laboratory.

Address correspondence to J. J. Smith.

Introduction

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
Introducing promising, innovative technologies into medical practice and achieving their maximum clinical impact require more than solid concepts, good science, and United States Food and Drug Administration (FDA) marketing approval. In an age in which high technology frequently means high cost, it is crucial that physicians and the institutions in which they practice receive appropriate reimbursement from third-party payers for new technologies. Arguably the most important of these entities is the Health Care Financing Administration (HCFA), which administers the federal Medicare program and is the largest such payer. As such, HCFA's coverage and reimbursement decisions are often followed by other government and private third-party payers. Understanding how HCFA makes its coverage decisions is critical to developing strategies that will result in the timely, appropriate reimbursement of new medical therapies, ultimately achieving improved patient care.

HCFA Background and Medicare Payment Structure

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
Part of the Department of Health and Human Services, HCFA was established in 1977 to administer the Medicare and Medicaid programs. Although Medicare was originally enacted in 1965 to address the needs of the elderly, coverage expanded in 1973 to include the severely disabled as well as individuals with end-stage renal disease. Coverage determinations for medical products and services are subject to conditions found in the Medicare statute, HCFA regulations, policy precedent, and administrative instructions.

Medicare law establishes broad categories of covered benefits, general limitations on coverage, and specific coverage exclusions [1]. Covered benefits are the services, items, and procedures available to beneficiaries for which Medicare will pay and are separated into groupings known as parts [2]. Hospital insurance-covered services (part A) include inpatient hospital care, skilled nursing facilities, home health agency care, and hospice care. Supplemental medical insurance-covered services (part B) include physician services in hospital and nonhospital settings, clinical laboratory testing, durable medical equipment, supplies, diagnostic tests, ambulance services, vaccinations, and certain prescription drugs. These services, when performed by hospital outpatient departments, ambulatory surgical centers, and home health agencies, are also covered under part B.

To be eligible for coverage under either part A or part B, a product or service must be "reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member" [3]. The Medicare statute does not address coverage of specific medical devices, surgical procedures, or diagnostic or therapeutic services. Rather, it is HCFA, in the day-to-day administration of the Medicare program, that determines the specific products and services covered.

Hospital Reimbursement Under Part A

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
As initially administered, reimbursement to part A institutions was on a fee-for-service basis, meaning that HCFA based payments on the corresponding reimbursements made by commercial third-party payers [4]. This method, based on the institution's reported reasonable costs, proved extremely inflationary. In response, the agency began restricting cost-based payments in the 1980s and eventually replaced fee-for-service with the diagnosis-related group prospective payment system, which prospectively established reimbursement levels.

Still in use today, this prospective payment system pays hospitals a fixed amount based on each individual beneficiaries' diagnosis in the diagnosis-related group system [4]. These predetermined rates differ among diagnosis-related groups according to the level of services and resources needed for particular diagnoses and treatments. Reimbursement may be adjusted to take into account specific factors affecting particular hospitals, such as regional labor costs, extremely expensive cases, and medical education programs. The Balanced Budget Act of 1997 and its 1999 amendments also require HCFA to establish prospective payment systems for skilled nursing facilities and home health agency care [5,6,7].

Physician and Medical Services Reimbursement Under Part B

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
Medicare reimbursement of physicians' services is provided under part B of the program. Part B's history closely parallels that of part A, with reimbursement initially based on a physician's historical reasonable charges [4]. In response to considerable inflation, a resource-based relative value schedule was implemented in the 1990s [4]. Its intent was to create a fee schedule that reflected the effort and expense associated with providing specific physician services.

The resource-based relative value schedule establishes a nominal value for each type of service relative to other services [8]. Three cost components comprise the relative value schedule. A physician work component reflects the time and intensity of the service provided, whereas a practice expense component reflects costs such as office rental, equipment rentals, and salaries. Finally, a malpractice component reflects expenses for professional liability insurance. The values from these three components are adjusted according to a physician's geographic location, which allows reimbursement to reflect variation in the actual costs of practice.

Hospital outpatient services are covered under part B. Originally, HCFA either paid the charges for devices used in this setting or established a fee schedule [9]. As required by the Balanced Budget Act of 1997, this practice ended with the institution of a hospital outpatient prospective payment system in mid 2000 [10]. Conceptually similar to the diagnosis-related group system, the new system establishes predetermined prices for all outpatient procedures and services on the basis of an ambulatory payment classification value. Importantly, the cost of implantable devices, durable medical equipment, and items used in performing diagnostic radiography and laboratory tests are all reflected in the ambulatory payment classification value and are no longer billable separately [11]. Products represented in the bundled charge include pacemakers, stents, defibrillators, cardiac sensors, venous grafts, drug pumps, and neurostimulators.

Some devices covered by the outpatient prospective payment system may qualify for additional reimbursement via a transitional "pass-through" payment system [10]. This pass-through provides a period of from 2 to 3 years of payments above ambulatory payment classification group reimbursement for certain new or innovative drugs, biologics, and medical devices. To qualify, products must not have been reimbursed as outpatient services as of December 31, 1996, and their cost must be "not insignificant" in relation to ambulatory payment classification reimbursement [12]. In addition, devices must be FDA-approved for use, form an integral part of the procedure, and used only in one patient [13]. There is an exception for certain investigational products placed in category B, a process that is discussed in detail in a subsequent section of this report [10].

Diagnostic and therapeutic equipment and multiuse nonimplantable instruments are excluded from the pass-through payment system. These items are considered overhead costs of the procedure or service and are factored into ambulatory payment classification reimbursement. However, the outpatient prospective payment system contains separate "new technology ambulatory payment classification" billing codes for certain new diagnostic or therapeutic equipment or instrumentation that was not billable as an outpatient service in 1996 or that was billable but the actual costs are not adequately represented in the 1996 data used to make payment determinations. The agency intends to periodically review submissions for eligible new technology ambulatory payment classifications.

Medicare Plus Choice Organization Reimbursement Under Part C

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
Coverage for the Medicare Plus Choice program is provided under part C of Medicare. Beneficiaries who have both parts A and B coverage may choose to enroll in one of these risk-based plans to receive their care. The three primary part C plans are the following: coordinated care plans that include health maintenance organizations, provider-sponsored organizations, and preferred provider organizations; private unrestricted fee-for-service plans; and medical savings account plans. Reimbursement for all three types of plans is based on a combination of local and national capitated rates determined by the Secretary of Health and Human Services [8].

Medicare Plus Choice organizations receive fixed monthly payments from HCFA for each individual participating in the program based on an annual capitation rate and adjusted for risk factors. These include age, disability, sex, and institutional status, all factors that take into account variations in health care costs based on the health status of the individuals participating in the program [8].

Medicare Coverage Decision Process

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
The process of making Medicare coverage decisions is highly decentralized. Although HCFA is responsible for the ultimate administration of Medicare, coverage determinations are generally made by the program's local contractors, which are entities under agreement with HCFA to administer Medicare [14]. Contractors include fiscal intermediaries, which generally process part A claims, and carriers, which administer part B claims. Organizations such as private insurance companies (e.g., Blue Cross and Blue Shield) and claims-payment contractors serve as contractors [15]. Peer-review organizations are also involved in the process, reviewing the medical necessity and quality of care of services provided to Medicare beneficiaries. Apart from national coverage decisions issued by HCFA, intermediaries and carriers hold considerable discretion in making coverage decisions.

National Coverage Decision Process

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
HCFA has recently placed new emphasis on its national coverage decision process, a mechanism designed to address conflicting carrier policies, substantial controversy among experts, obsolete services, and program integrity [14]. All national coverage decisions are binding on Medicare contractors [1]. National coverage decisions are initiated either internally by HCFA, or through external formal requests, which usually come from intermediaries and contractors.

HCFA will only accept formal requests that comply with the agency's specific documentation requirements. When the agency accepts a request, a formal review process begins. HCFA must ordinarily respond to the requestor within 90 days of receipt of the completed request. Requests for coverage concerning a device or pharmaceutic will generally only be accepted after FDA approval.

HCFA may make a variety of responses to requests for national coverage decisions. The agency may elect not to take action, allowing local contractor discretion. Alternatively, if medical and scientific information on the specific issue is overwhelmingly in favor of or against coverage, the agency may issue a national noncoverage decision, a national coverage decision with limitations, or a national coverage decision without limitations within their 90-day timeframe. If the issue is complex, controversial, or broad, the agency may refer the request to experts on its Medicare Coverage Advisory Committee and possibly to an independent third-party technology assessor for further evaluation. HCFA is free to accept or reject Medicare Coverage Advisory Committee or third-party recommendations.

HCFA's intention to issue national coverage decisions is announced in decision memoranda. However, national coverage decisions are not binding on Medicare contractors until they are published in the Federal Register as program instructions or HCFA rulings. Implementation of a national coverage decision regarding medical services is not immediate and can occur only after the establishment of code determinations, payment levels, and claims processing instructions. HCFA's Center for Health Plans and Providers is responsible for all coding and billing instructions. Generally, implementation will occur within 180 days of the first day of the next full calendar quarter after the date the national coverage decision was issued.

Medicare Contractor Coverage Decision Process

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
In the absence of national coverage decisions issued by HCFA, Medicare contractors are responsible for deciding coverage issues and adjudicating claims for services within established criteria, using their own discretion. HCFA provides guidance in making coverage determinations through utilization and quality control peer-review organizations, and coverage issues manuals, which contain national coverage determinations [1]. Contractors may also use secondary sources of guidance through advisory groups, contact with regional HCFA representatives, and direct contact with the agency. In addition, Medicare contractors may publish local medical review policies that explain specific coverage determinations and provide guidance to the general public. These local medical review policies only apply locally.

Special Circumstances: Experimental Devices and Conditional Coverage

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
As discussed earlier, the Social Security Act provides that Medicare coverage is appropriate only if the proposed treatment is reasonable and necessary [4]. HCFA has authority to determine the scope of "reasonable and necessary," which it has defined in the context of devices as a product that is safe and effective, medically necessary, and not experimental [16]. The agency considers the term "experimental" to be synonymous with "investigational" [17]. Under this reasoning, distribution of a product under an investigational device exemption, an FDA-administered mechanism allowing device distribution and use for clinical testing, showed that its use was not reasonable and necessary [17]. Consequently, coverage was denied for devices that were distributed exclusively under an investigational device exemption.

In the aftermath of a series of investigations of teaching hospitals and Congressional hearings, HCFA has recognized that some investigational device exemption-covered devices are actually refinements or replications of existing technologies [17]. Under these circumstances, at least partial evidence exists to support device safety and effectiveness, with investigational device exemption-covered clinical trials required to gather additional evidence. Given this partial evidence, HCFA determined that their use could be viewed as reasonable and necessary if these products could be identified among the vast number of investigational device exemption-covered devices [16].

HCFA and FDA Interagency Agreement

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
On September 8, 1995, FDA and HCFA entered into an interagency agreement, initiating a categorization process that differentiates between novel, first-of-a-kind devices without safety and effectiveness data and newer generations of legally marketed devices [17]. Under this process, FDA assigns each investigational device exemption-designated device to one of two categories: category A, experimental or investigational, or category B, nonexperimental or noninvestigational. Category A contains innovative new devices for which absolute risk has not been established and initial questions of safety and effectiveness have not been resolved. Category B is appropriate for devices for which there is some evidence of safety or effectiveness or for those that are undergoing testing to show similarity in operation and use to a legally marketed product.

Category designation is confidential information between FDA, HCFA, and the device's sponsor, although the investigational device exemption number and device category are public information. However, a health care provider or supplier who knew or could have reasonably known that the device would not be covered will not be reimbursed. Whether the provider could have reasonably known that the device was not covered depends on whether the provider received notices from HCFA, intermediaries, carriers, or peer-review organizations. Knowledge can also be imputed from Federal Register publication of national coverage decisions or other decisions indicating noncoverage and from the provider's knowledge of what are considered acceptable standards of practice by the local medical community [18]. The knowledge requirement is typically not a problem for hospitals conducting clinical trials because they are aware of the investigational device exemption number and category designation.

Should the sponsor disagree with FDA's decision to place their device into category A, it may petition FDA for a reevaluation. Because the categorization decision is confidential, only the sponsor can make such a petition. Only after FDA has completed its reevaluation and concludes the device is properly in category A can the sponsor request review by HCFA, which limits its review to the FDA record. Given the FDA's expertise in assessing device-related scientific data, HCFA admits that it will rely heavily on FDA's recommendation [16]. However, HCFA retains the authority to make the final decision concerning Medicare device categorization.

Application of the Interagency Agreement

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
HCFA continues to view experimental and investigational devices as falling short of the reasonable and necessary threshold for reimbursement and excludes coverage for category A devices under this rationale [16]. HCFA's acceptance of a category A designation constitutes a national coverage decision and is binding on all HCFA's contractors. In addition to noncoverage of the device itself, services related to the use of a category A device are not covered. This includes care rendered in preparation for use, actual device use, and inpatient recovery and follow-up. Complications arising from a noncovered device use may be reimbursed, provided all other Medicare requirements are met.

Placement of a device into category B does not ensure Medicare coverage. Rather, HCFA uses FDA's categorization as a factor in making coverage decisions, the ultimate decision being an independent one on the part of HCFA for national coverage decisions or its contractors for local decisions [16]. HCFA reserves the right to conduct an independent assessment to determine whether it will extend coverage. In addition, the agency may restrict coverage to a limited number of patients participating in an FDA-approved clinical trial. For example, HFCA has issued noncoverage instructions on category B devices such as carotid stents.

Should HCFA or a contractor approve coverage of a category B device, the rate of reimbursement is based on, and may not exceed, that currently applied to products used for the same medical purpose [16]. For devices requiring inpatient treatment, the diagnosis-related group prospective payment system will ordinarily be applied.

Conclusion

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 
HCFA has established a Medicare coverage determination system that is largely decentralized and difficult for the casual observer to fully comprehend. Regardless of complexity, these coverage decisions have the potential to significantly affect clinical acceptance of new technologies and, with it, patient care. HCFA's methods for rendering coverage decisions continue to evolve, with actual decisions for specific products heavily dependent on the product at issue and the treatment it is intended to provide. However, physicians and device sponsors must consider coverage issues early in a product's development to avoid adverse decisions that could severely limit a device's ultimate clinical application. To this end, early consultation with the agency and its local contractors is extremely useful, both to clarify HCFA requirements and to gain an understanding of what data will be required for a positive coverage decision. By better understanding the HCFA coverage system and involving the agency and its contractors early in the development process, physicians may achieve maximum clinical impact of important, new technologies for their patients.

References

Top Introduction HCFA Background and Medicare... Hospital Reimbursement Under... Physician and Medical Services... Medicare Plus Choice... Medicare Coverage Decision... National Coverage Decision... Medicare Contractor Coverage... Special Circumstances:... HCFA and FDA Interagency... Application of the Interagency... Conclusion References

 

1. Medicare program; procedures for medical services coverage decisions, 52 Federal Register 15560-15563 (1987)
2. Health Care Financing Administration. Medicare: a brief summary. Available at http://www.hcfa.gov/medicare/ormedmed.htm. Accessed July 3, 2000
3. Social Security Act. Exclusions from coverage and Medicare as secondary payer, 42 USC § 1395 (1999)
4. Kinney ED. Medicare managed care from the beneficiary perspective. Seton Hall L Rev 1999;26:1163 -1194
5. Balanced Budget Act of 1997, Pub L No. 105-33, 111 Stat 251
6. 42 CFR § 409, 411, 413, 489 (1999)
7. Prospective payment system for home health agency care, 64 Federal Register 58134-58209 (1999)
8. Social Security Act. Payment for physician services, 42 USC § 1395 (1999)
9. Reiss JB. Commentary on payment and reimbursement issues affecting the marketing of drugs, medical devices, and biologics, with emphasis on the antikickback statute and Stark II. Food Drug Law J 1997;52:99 -108[Medline]
10. Prospective payment system for hospital outpatient services, 63 Federal Register 47552-48030 (1998)
11. Prospective payment system for hospital outpatient department services, 42 CFR § 419.2 (1999)
12. Transitional pass-through for additional costs of innovative devices, drugs, and biologics, 42 CFR §419.43 (e) (1) (C) (1999)
13. Health Care Financing Administration. Updated list of transitional pass-through items and new technology services eligible for payments under the outpatient prospective payment system effective July 1, 2000 and status indicator corrections. Baltimore: Health Care Financing Administration; May 12, 2000
14. Medicare program: procedures for making national coverage decisions, 64 Federal Register 22619-22625 (1999)
15. Health Care Financing Administration. Part A intermediaries and Part B carriers by state. Available at http://www.hcfa.gov/medicare/incardir.htm. Accessed July 3, 2000
16. Medicare program: criteria and procedures for extending coverage to certain devices and related services, 60 Federal Register 48417-48425 (1995)
17. Center for Devices and Radiological Health, Food and Drug Administration. Implementation of the FDA/HCFA interagency agreement regarding reimbursement categorization of investigational devices memorandum. Rockville, MD: Food and Drug Administration; September 15, 1995
18. Criteria for determining that a provider, practitioner, or supplier knew that services were excluded from coverage as custodial care or as not reasonable and necessary, 42 CFR § 411.406 (e) (1999)

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This Article Full Text (PDF) Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Similar articles in PubMed Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via Google Scholar Google Scholar Articles by Smith, J. J. Articles by Agraz, J. A. Search for Related Content PubMed PubMed Citation Articles by Smith, J. J. Articles by Agraz, J. A. Social Bookmarking                      What's this?