guest editorial
How Costs Affect Reimbursement
Avoiding new technology is bad for reimbursement.

Reducing procedure costs below the Medicare payment amount seems like a perfectly normal way for surgical facilities to increase profitability. In fact, it does increase short-term profits. In the longer term, however, payment changes mirror cost changes. Once the Centers for Medicare and Medicaid Services (CMS) determines that a procedure's costs are measurably lower than its prospective payment amount, it then lowers the payment to be closer to the new level of cost. Conversely, when costs go up, reimbursement eventually follows.

Virtually all facilities prefer new technologies that offer important new benefits, but some feel that they can't justify the expense, reasoning that lower costs are in the facility's best interest. Everyone who treats seniors should be aware that Medicare reimbursement is a "use-it-or-lose it" proposition. Choosing the least expensive inputs in order to stay within today's payment rate can have the perverse effect of lowering future payment. If facilities then respond by making further cutbacks, then payments will be reduced again. This can iterate into a downward spiral, ending at a point where procedures are devalued and incentives to develop new technology are lost.

Determining Reimbursement

How often CMS adjusts rates to reflect new cost data depends upon whether the facility is an ASC or a hospital outpatient department (HOPD). The two settings are different today, but many experts believe that ASCs are headed for a payment system overhaul that will mirror the HOPD system. Thus, it's appropriate for ASCs to understand the HOPD system.

The rate for every HOPD procedure is recomputed annually. Whether a procedure's payment goes up or down depends primarily upon two factors: whether its median cost went up or down, and the extent to which other procedures' median costs went up or down. This second factor exists because of the statutory requirement for budget neutrality -- increases in some payments must be offset by decreases in other payments. If cataract surgery costs don't change, or increase only slightly while other procedures' costs increase more, then cataract payment falls. The payment decrease will be even more pronounced if cataract surgery costs decline while other procedures' costs increase.

For example, the 2002 HOPD payment for cataract surgery plunged 21% ($279). CMS' data showed that cataract costs had increased only slightly while costs for other procedures in cardiology, neurology, and urology increased dramatically. Because their costs increased, those specialties' surgical procedures received substantial payment increases in 2002 -- thousands of dollars in some cases -- at the expense of other procedures such as cataract surgery.

In the following year, the latest HOPD cost reports showed a cost increase for cataract surgery and cost decreases for many other procedures. The HOPD cataract payment increased by 10% in 2003.

ASCs are Next

ASCs haven't yet experienced the effects of annual cost recalculations. CMS has put ASC cost analyses on hold since the mid-1990s, when it last conducted an ASC cost survey. That survey resulted in a 1998 proposal to lower cataract payment by 7% and YAG by 35%. Those rates were never implemented because the Outpatient Ophthalmic Surgery Society (OOSS) demonstrated to Congress that the survey contained several errors. Thus, today's ASC rates are based upon a much older cost survey that the agency conducted in 1986. Payments have been adjusted upward for inflation in some years, but haven't yet undergone the annual reassessment of procedural costs as is done in the HOPD and other prospective payment settings.

Recent developments in Washington point to an increased interest in measuring ASCs' current costs and adjusting reimbursement accordingly. The Medicare Payment Advisory Commission (MedPAC), a group that advises Congress on Medicare matters, has drawn attention to the high growth rate of new ASCs, healthy ASC profits, and the ASC industry's easy access to venture capital. To MedPAC, large profit margins mean payments are probably too high. It's in this context that CMS is being asked to take ASC payment recalculations off of the back burner. In support of this direction, the U.S. office of the Inspector General (OIG) recently announced that it will conduct a comprehensive cost survey of all ASC procedure costs in 2004.

In addition, Medicare reform legislation calls for the General Accounting Office to study ASC costs relative to HOPDs' costs to determine whether it would be appropriate to eliminate ASC cost surveys and instead set ASC payments using a ratio of ASC costs to HOPD costs. The legislation doesn't dictate that cost surveys be eliminated, and it's uncertain whether an ASC/HOPD "crosswalk" approach will be adopted. If it is, then ASCs' current costs will play a critical role in the ratio. Thus, regardless of the methodology that CMS ultimately implements, ASCs will see payment changes that reflect their costs, as is currently the case in HOPDs.

Because today's payments are based on 1986 costs, this could be a good thing for procedures that have seen clinically beneficial advancements in technique and technology that came with a higher price tag. For a given procedure such as cataract surgery, whether a cost survey results in an upward or downward payment adjustment will be affected by whether the procedure's costs are higher or lower than the current national average payment rate of $989.

Adopt New Technologies

The fact that ASC payment for cataract surgery has been essentially stagnant over the past several years has obscured the more customary manner in which reimbursement rates are reset in almost every setting except ASCs. ASCs that have lowered costs to very low levels have enjoyed the added profits, but they have also unwittingly contributed to the potential for future cuts. Those that adopt new techniques and product technologies that offer significant benefits, despite their higher costs, are elevating the value of the cataract procedure and lessening the chances of reimbursement cuts.

Armed with this understanding, surgeons and facilities shouldn't reflexively let the higher cost of advanced technologies stop them from being utilized. Instead of letting the cost/reimbursement relationship cause payments to spiral downward, ophthalmologists and manufacturers should work toward a common goal of elevating the value of eye surgery. In the long run, everyone will benefit when surgeons and other decision-makers choose techniques, staff, products, and technologies that provide the best health outcomes and enable the facility to attract more patients who are in need of care.

It's CMS' responsibility to carefully watchdog the spending of taxpayers' money. It's also its responsibility to ensure that payment rates don't cause Medicare beneficiaries to be denied access to new technologies that substantially improve or save lives. It's within this latter context that payments often increase a year or two after new technologies and techniques cause procedural costs to increase.

Some specialties have demonstrated a willingness to adopt technologies that benefit patients, even when that choice isn't financially optimal in the short run. In 2001, the price of an important new neurostimulator lead was several thousand dollars higher than the Medicare payment for the procedure in which it was used. Some neurosurgeons recognized its benefits and used it anyway. Later, manufacturers secured additional HOPD payment for the leads, but that additional payment lasted only 2 years. By that time, CMS' cost data reflected the higher cost of the new technology, so the HOPD payment for the procedure increased. Even if there hadn't been the temporary extra reimbursement, the utilization of the costlier product would still have raised the procedure's payment.

Vitreoretinal surgeons' use of new technology contributed to an increase in the 2003 HOPD payment amount for certain retinal procedures. Utilization of perfluorocarbon liquid in 2001 and 2002 improved patient outcomes, added to procedural cost, and contributed to a 21% increase in HOPD reimbursement in 2003.

Perhaps due to the high volume of the procedure, purchasers of cataract products seem more likely to block a costly new technology when current reimbursement rates are inadequate, even when surgeons and nurses acknowledge the technology's advantages for patients. To support what would seem to be a reasonable goal -- lowering costs -- some facilities feel that they must replace disposables with reusables or heavily reuse single-use devices. Phacoemulsification equipment and devices that reduce complications are preferred but may be avoided because of cost. IOLs with higher YAG rates are sometimes chosen because it isn't understood how their lower costs will degrade future reimbursement. Ophthalmology has an opportunity to either adopt technologies that elevate the value of surgical procedures, or let short-term thinking devalue them until they are woefully underpaid.

Weigh Costs and Benefits

No one is suggesting that costs be disregarded when making purchasing decisions. Wasteful expenses should be curbed. Labor should be allocated efficiently. If you're paying more, it should be because you're getting more. It makes no sense to spend more for something that doesn't provide a correspondingly higher level of benefit.

There are always cheaper products somewhere, and there are reasons why they're cheaper. Consider what you believe to be the best technology, and then look at total cost rather than price tags.

• What makes your surgical technique easier and safer?
• Is the less-expensive product associated with higher complications that incur additional treatment costs?
• What will bring more patients who need care to your facility? And does the product offer outcomes as good as competing facilities' outcomes, so that word-of-mouth referrals aren't lost?
• Does the product with the higher price tag enable more procedures per day? If caseload increases, what products will enable you to handle the extra volume while minimizing your time spent handling complications and product malfunctions?

Don't focus solely on today's reimbursement rate when making cost/benefit judgments. By understanding the longer-term link between cost and reimbursement, you can make choices that are not only best for patients, but that will also support future reimbursement rates that allow for improvements in techniques and products.

Brette McClellan is Director, Health Policy Government Relations, at Alcon Laboratories, Inc. She earned both a BS in Economics and an MBA from the University of Chicago and spent 16 years in management positions in Alcon's Surgical Division. She can be reached via e-mail at brette.mcclellan@alconlabs.com.