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OCR for page 211
Reimbursement and Technology
Assessment
Spending for health care in the United
States rose from 6 percent of the gross na-
tional product in 1965, the year Medicare
was created, to 10.8 percent in 1983, when
it reached $355.4 billion. With public
money being used for more than 40 percent
of that spending for health care (Gibson et
al., 1984), policymakers are searching for
ways to reduce health care costs while
maintaining quality care. Some analysts
blame the use of new medical technologies
and the overuse of existing technologies for
up to 50 percent of the increases in expen-
ditures for health care over recent years
(Altman and Blendon 1979; Joskow, 1981~.
In that view, one way to reduce costs
would be to reduce use of the technologies.
Such an action, however, would be justifi-
able only if we could identify the technolo-
gies that are relatively ineffective, or even
harmful, and discard them.
The primary purpose of technology as-
sessment is to improve patient outcome.
But it also is important to both private and
This chapter is based on materials drafted by Jo-
anne Finley, Donald Young, and Lawrence Morris.
211
public payers, receiving greater attention
from policymakers as its potential for cut-
ting costs of health care has become appar-
ent.
This chapter traces the applications of
medical technology assessment as they are
evolving from a context of retrospective
payment for health care to one of prospec-
tive payment. At first, when assessment
was used largely to help make informed de-
cisions about coverage of health care ser-
vices by insurers and government, its ap-
plication was only partially designed to
control health care costs. But technology
assessment now is seen as an aid to cost con-
tainment because it can help to determine
relative cost-effectiveness of diagnostic and
therapeutic procedures. The success of that
application of assessment as an adjunct of
economic policymaking will depend on
many factors, including how to cover the
costs of the assessment itself. This chapter
also examines ways in which the reim-
bursement system could further technol-
ogy assessment.
OCR for page 212
212
ASSESSMENT IN THE ERA OF
RETROSPECTIVE PAYMENTS
The apparent intention of Congress at
the time the Medicare amendments to the
Social Security Act were passed was that
the program generally should cover ser-
vices ordinarily furnished by hospitals,
skilled nursing facilities, and physicians.
The law states:
Notwithstanding any other provisions of this
title, no payment may be made under Medicare
for any expenses incurred for items or ser-
vices . . . which are not reasonable and neces-
sary for the diagnosis or treatment of illness or
injury or to improve the functioning of a mal-
formed body member. "Section 1862, Title
XVII, Social Security Act Amendments of
1965.]
The program therefore does not explicitly
include or exclude coverage for most medi-
cal devices, diagnostic and therapeutic ser-
vices, or surgical procedures. The mecha-
nisms for implementing the implied
decisions about technologies that could be
considered "reasonable and necessary"
were left to regulations without further
definition t42 CFRT 405.31(k)~. The clear-
est formal operating definition is contained
in program instructions for the intermedi-
aries contracted to process claims, pre-
pared by the Health Care Financing Ad-
ministration (HCFA), which directed that
payment could be made only for health
care procedures that were (1) generally ac-
cepted as safe and effective or were proved
to be safe and effective, (2) not experimen-
tal, (3) medically necessary, and (4) fur-
nished in accordance with accepted stan-
dards of practice in an appropriate setting.
When intermediaries processing claims
for Medicare had questions about new
technologies, they usually referred the
more complex payment decisions back to
HCFA. If medical consultation appeared
necessary, that agency presented its ques-
tions to a panel of physicians. If a decision
ASSESSING MEDICAL TECHNOLOGY
could not be reached by the panel, the
matter was referred to the Public Health
Service for further review.
In 1978, Congress created a National
Center for Health Care Technology
(NCHCT) to establish a more systematic
approach to technology assessment and
provide advice to HCFA on safety, effi-
cacy, and cost-effectiveness. Although
NCHCT recommendations were credited
with saving millions of dollars for HCFA
(Harvard Center for Analysis of Health
Practices and University of California, Los
Angeles tUCLA], School of Public Health,
1981), the NCHCT was opposed by the
health care technology industry and some
professional organizations. Appropriations
for the center were halted in 1982. Since
then the Office of Health Technology As-
sessment in the National Center for Health
Services Research has had the responsibil-
ity for preparing assessments and recom-
mendations regarding Medicare coverage
questions referred to the Public Health Ser-
vice by HCFA. Recent legislation (P.L. 98-
S51) changes the name of the National
Center for Health Services Research to the
National Center for Health Services Re-
search and Health Care Technology As-
sessment (NCHSRHCTA) and establishes a
National Advisory Council on Health Care
Technology to assist in development of cri-
teria and methods to be used by the center
in making health care technology recom-
mendations.
Most assessment decisions about paying
for use of technologies remain with the
contracting intermediaries who process
Medicare claims. They generally accept
for coverage technologies that are accepted
by the local physicians and hospitals
(Finkelstein et al., 1984~. Specific technol-
ogies for which claims are paid by interme-
cliaries vary across the country.
Increasing resistance to rising health
care costs has led some of these contractors,
whether making the decision for the fed-
OCR for page 213
REIMBURSEMENT AND TECHNOLOGY ASSESSMENT
oral government or for its plan's sub-
scriber, to organize more formal proce-
dures for assessing technologies. For exam-
ple, a Medical Policy Committee of Blue
Shield of California has been in existence
for many years and evaluates safety, effi-
cacy, cost, and cost-effectiveness of new
technologies before making claims pay-
ment decisions. Similarly, the Interspe-
cialty Medical Advisory Committee of Blue
Shield of Massachusetts determines the
general applicability of new medical tech-
nologies. The activities of the national Blue
Cross and Blue Shield Association are a
further example. This organization has en-
couraged support of the Clinical Efficacy
Assessment Project of the American Col-
lege of Physicians, discussed in Chapter 2,
and also once commissioned the Institute
of Medicine (1977) to examine the efficacy,
utilization, and costs of computed tomog-
raphy (CT) scanning.
Blue Cross and Blue Shield also estab-
lished a Medical Necessity Project, which
relies on assistance from specialty societies,
and has issued respiratory therapy guide-
lines in association with the American Col-
lege of Physicians, the American College of
Surgeons, and the American Academy of
Pediatrics. Additionally the project has de-
veloped guidelines for the coverage of 85
procedures, a policy on routine admission
test batteries, and guidelines for diagnostic
. .
Imaging.
The Blue Cross and Blue Shield Associa-
tion also maintains a full-time staff that
deals with technology issues, maintains a
body to advise local plans, and otherwise
supports member plans on these concerns.
However, each policy statement is accom-
panied by a disclaimer indicating that it is
a "guide to facilitate reasonable consis-
tency among the medical judgments ap-
nli~r] ton ~1 time
~ _
~ ~ ... without unnecessary
loss of plans' traditional sensitivity to local
practices."
These examples illustrate the ability and
213
interest of private health insurers to con-
duct technology assessment. But there are
no national or regional standards. Medi-
care claims recommended for payment or
subscribers' covered benefits vary across
the nation. HCFA expects contractors to
refer general coverage issues of national in-
terest to the central office, but referral is
not required either by statute or regula-
tion. Nor does HCFA hold contractors ac-
countable for adherence to the expecta-
tions (Banta et al., 1984~. Unfortunately,
information on a timely basis often is lack-
ing for some new procedures; for example,
total hip replacement was covered by most
large third-party payers when it was still
classified as experimental by the Food and
Drug Administration (FDA) (Bunker et
al., 1982a; Finkelstein et al., 1984~.
Despite assessment activities by HCFA
and others, spending for health care con-
tinued to rise. Some reasons that technol-
ogy assessment has not restrained costs are
legal matters (see Appendix 5-A). Societal
and political factors such as those sur-
rounding liver transplantation can impede
cost-containment efforts. Antitrust chal-
lenges arise when insurers attempt to limit
payments to certain providers. The author-
ity to apply reimbursement sanctions to
implement the findings of assessment, even
if quality is at stake, must be clearly spelled
out in the law. Unfortunately, even when
states have passed legislation to protect
against antitrust challenges payers efforts
to limit reimbursement have been legally
challenged on other grounds. Obstacles for
private insurers also lie in market forces.
Buyers of private programs want the wid-
est array of benefits for the least outlay,
and competition among various private in-
surers is fierce. Also, there are political
considerations that blunt the effects of
technology assessment; the system is an as-
sessment of the validity of public expendi-
ture, not of clinical usefulness in the spe-
cific case. Public programs have not regu-
OCR for page 214
214
lated physicians' fees or rationed costly ser-
vices such as hemodialysis. And private
coverage is available to some groups to fill
gaps in payment levels or benefit structures
that occur in public programs.
Finally, even if these disincentives were
removed, the data bases on which insurers
have to depend to make informed coverage
decisions are inadequate. Medicare cost re-
ports and claim forms, the Medicaid man-
agement information system, and private
insurance claims data have not included
detailed information on patient character-
istics, procedures used, and outcomes. In-
termediaries submit 20 percent of the
Medicare inpatient claims as samples to
HCFA, which attempts to merge patient
and financial data (the MEDPAR file).
HCFA has attempted to extract enough in-
formation about patient characteristics,
resources used, and costs to develop its
Diagnosis-Related-Group (DRG)-based
prospective payment system from this in-
complete data base. The purpose of col-
lecting these data has been to enable payers
to pay claims. It is primarily financial
data. There is a growing need by payers for
more information that could be used for
technology assessment as well as full analy-
sis of the basis for differing costs for differ-
ent kinds of patients. The routine claims-
based data are not sufficient.
THE NEED FOR ASSESSMENT IN THE
NEW ERA OF COST CONTAINMENT
Today the emphasis on cost containment
in plans is on altering reimbursement (pay-
ment methods) to induce and even reward
cost-saving behavior. Reimbursement can
vary according to whether payments are
based on costs or on charges, whether it is
made retrospectively or by the terms of a
prospectively fixed revenue budget, and
whether it is able to control cost increases
or not.
Radical change in federal reimburse-
ment policy has occurred through amend-
ASSESSING MEDICAL TECHNOLOGY
meets relating to Medicare. All of the
above variables are touched by the new
federal system, and responsibilities for
some technology assessment as it may re-
late to the goal of cost containment as well
as quality assurance for Medicare are writ-
ten into the law. Because data require-
ments are also affected, chances may im-
prove for technology assessment.
Until recently, major payers such as
Medicare and Blue Cross reimbursed hos-
pitals retrospectively on the basis of costs
incurred. Under a system of cost-based re-
imbursement, the acquisition and use by
hospitals of new technology and of all med-
ical procedures (if the coverage decisions
had already been made) could be fully cov-
ered regardless of their expense.
States were the first to experiment with
mandatory prospective payment systems
for hospital reimbursement. They estab-
lished under various statutory provisions
that reimbursement by state-regulated
payers (Blue Cross, Medicaid) would be
based on advance calculation of revenues
needed to care for those patients. Payments
would then be made on some timely basis
so that by year's end they would add up to
no more than the prospectively determined
hospital revenue. When prospective reim-
bursement systems have been analyzed,
they have been found to contain hospital
charges to payers to whom the methods ap-
plied. If those payers represented a large
enough proportion of hospital revenue
sources, there also was a spillover effect so
that hospitals' overall expenditures and ex-
penditures per adjusted admission did not
inflate as rapidly as the nation's (Biles et
al., 1980~.
On the premise that cost containment
would be most effective if all sources of
revenue were controlled, states experi-
menting with prospective payment systems
sought waivers of Medicare's Principles of
Reimbursement. These waivers enable all
payers' reimbursements, including Medi-
care for inpatients, to be calculated in the
OCR for page 215
REIMBURSEMENT AND TECHNOLOGY ASSESSMENT
same way. Maryland and New Jersey were
the first states to be granted waivers as well
as research and development funds to re-
fine their cost-containment methods. New
Jersey's system began with hospital cost
containment for Blue Cross and Medicaid
(Finley, 1983) and was expanded to all
payers including Medicare in 1978.
Cost-based, retrospective reimburse-
ment paid a per diem amount regardless of
the patient's illness. This became seen as an
incentive to increase reimbursement
amounts by keeping patients longer than
necessary. Cost-containment advocates de-
vised a different way of calculating reim-
bursement. The Diagnosis-Related Group
became the product definition for hospi-
tals. The DRGs for each of hundreds of ill-
nesses is the result of a distillation of pa-
tient discharge abstracts to find group
characteristics that were clinically sensible
and statistically clustered for cost, length
of stay, and other measures of resource
consumption (Office of Technology Assess-
ment IOTA], 1983~.
The relative success of New Jersey's ex-
periment with DRGs interested the De-
partment of Health and Human Services
and the Congress, which in August 1982
passed the Tax Equity and Fiscal Responsi-
bility Act (TEFRA; P.L. 97-248~. It was
aimed at relief for many classes of taxpay-
ers, but it also dealt with cost containment
for the Medicare program. A hospital's
costs calculated on a case by case basis
(Medicare discharges by DRGs) would be
limited to a target rate of increase, and in
no instance could a hospital's Medicare re-
imbursement exceed a mean per-case oper-
ating cost within its peer group.
In April 1983, the Social Security Re-
form Act (P.L. 98-21, Title VI) was en-
acted; Title VI moves Medicare payments
over the next 3 years toward a prospective
reimbursement system based on an average
DRG-specific price. Medicare's calculation
of average DRG prices (in 1984 there were
467 DRGs) is based on incomplete patient-
215
specific data from a 20 percent sample of
its claims (the MEDPAR file). The average
cost for a DRG, calculated from financial
elements required on Medicare cost reports
related to direct patient care, is then
weighted according to how much greater
these costs are than the average for all
Medicare discharges. The price for each
DRG is adjusted by this weight. Adjust-
ments are also made for differences in area
wage rates, and a 0.25 percent factor (ini-
tially under TEFRA it was 1 percent), now
said to be for technology, is added. Ini-
tially, only part of the hospital's Medicare
reimbursement is based on this DRG price.
The remainder, decreasing each year, will
move from the regional average to a na-
tional average.
Under a reimbursement policy of preset-
ting an institution's budget based on an av-
. . . . ..
erage price wit non a group, decisions on
the acquisition and use of new technologies
must meet economic criteria. When a hos-
pital begins to spend more money than it
collects under a prospective per-case reim-
bursement system, administrators and fi-
nance directors may begin to analyze other
technologies such as physician practice for
cost-effectiveness. Therefore, the new re-
imbursement policy would appear to en-
courage the assessment of medical technol-
ogies for their safety and costs. But the
strength of demand for technology assess-
ment will depend on many factors. Six
such factors are discussed below.
Leverage of the Reimbursement System
over Institutions
If a hospital is not heavily dependent on
Medicare revenues, the controls may not
be sufficient to motivate technology assess-
ment. "Under the new Medicare law about
32 percent of the revenues of nonfederal
short-term hospitals will be subject to
DRG payment" (OTA, 1983). Worse, as
hospitals identify the most profitable pa-
tients and services, the access of some
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216
Medicare patients may become limited.
The political consequences from the first
time Medicare patients are turned away
may force some changes. Patients without
insurance are already being transferred
among institutions (Reinhardt, 1985~.
Changes also may be demanded because of
the effect on other payers—not on Medi-
care to whom costs can be shifted. These
payers may have a large political voice.
Cost shifting may become more difficult
with the development of health mainte-
nance organizations and preferred pro-
vider organizations and negotiations be-
tween industry and providers.
Capital Acquisition
At the outset the Medicare prospective
payment system will add to the established
DRG payment rate a cost-based factor for
capital acquisition (depreciation and inter-
est payments). However, the secretary of
the Department of Health and Human Ser-
vices (DHHS) must study the methods by
which capital-related costs can be included
in the prospective payment rate. The law
stipulates a deadline of October 1, 1986,
for a legislative proposal to deal with pro-
spectively reimbursed capital costs also to
be tied to patient mix. Many technologies
that hospitals may wish to acquire can be
classified as capital, such as a new linear
accelerator or even expensive major mov-
able equipment. For some hospitals that
are not presently severely revenue con-
strained, this time gap in reimbursement
policy may briefly propel them toward
capital intensity without the desired tech-
nology assessment that should precede such
decisions.
Some states with prospective reimburse-
ment systems for all payers have built-in
limits on capital acquisition that may make
prepurchase assessment for cost-effective-
ness more necessary. New Jersey has a
method different from the federal govern-
ment's for adding a capital facilities allow-
ASSESSING MEDICAL TECHNOLOGY
ance to the DRG rate. Target occupancy
levels based on regulation and current ex-
perience, rather than currently licensed ca-
pacity, are used to figure an annual pro-
rated sum to be set aside for eventual
replacement (Finley, 1983~. Maryland at-
tempts to limit new capital acquisition to
that which is cost-effective. That state sel-
dom grants increases for technologic addi-
tions, believing that approved technology,
if cost-saving, should pay for itself within
the prospective budget (from an interview
with the Maryland Health Services Cost
Review Commission, 1983~. Both states
lack sufficient data to distinguish a truly
new way of diagnosing or treating an ill-
ness, for which a rate of increase might be
granted, from a method that merely re-
places the old.
State Certificate of Need (CoN) pro-
grams* regulate the establishment of ma-
jor new health services and institutions and
major capital expenditures for plant and
equipment by legally requiring and con-
trolling franchises or rights to add services
and invest in physical capital. Historically,
such programs have based their decisions
on an assessment of whether population
size, travel time, access, the lack of pre-
existing unused capacity, and other factors
indicate a need for an investment or ser-
vice. It was implicitly assumed that all or
nearly all proposed investments were
worthwhile in a technology assessment
sense and therefore ought to be made avail-
able.
Recently, however, the state govern-
mental leaders who run CoN programs
have recognized that if health expenditures
are to be limited to any significant degree,
it will be necessary to advance from this
all-or-nothing notion of effectiveness to a
concept of relative need, a recognition that
some investments are more desirable than
* Background materials provided by Jonathan
Brown.
OCR for page 217
REIMBURSEMENT AND TECHNOLOGY ASSESSMENT
others. The principal way in which rela-
tive need has been proposed for application
is a regional capital cap, an annual limit on
the dollar commitments for new services
and physical capital in a state or region. A
cap forces investment and service proposals
to compete for approval and requires the
review agency and its governing board to
rank the need for different proposals. Cap-
ital cap programs have been proposed or
implemented in Massachusetts, Maine,
New York, Michigan, Rhode Island, and
New Jersey. Because the health of people is
the presumed goal of most health care in-
vestments, a capital cap requires the CoN
agency to assess the cost-effectiveness of
each investment in terms of its impact on
longevity and quality of life. To achieve
these ends, new forms of concurrent infor-
mation gathering and technology assess-
ment must be combined with policies fo-
cusing on day-to-day provider decision
making (rather than simply long-range
regulation) if real increases in health sys-
tem productivity are to be achieved with
any consistency and reliability.
Stimulus for Technology Assessment in
Reimbursement Policy
A reimbursement system may or may
not incorporate incentives for cost-
efficiency. Incentives can encourage the
use of cost-saving technology, and even
contribute funds for the acquisition of new
technology and the conduct of assessment.
Private hospitals can generate funds to
create clinical data bases to evaluate medi-
cal technologies. In the 1970s a group of
Rochester, N.Y., hospitals banded together
to develop a prospective payment plan that
included Medicare, Medicaid, and Blue
Cross patients. Once hospitals reduced
their costs, they were allowed to share in
the savings. By 1981 this program gener-
ated enough funds to maintain and expand
a data base to test the cost-effectiveness of
technologic innovation, and even to award
217
$500,000 in research grants to study the ef-
ficiency of certain therapeutic practices
(Rochester Area Hospitals' Corporation,
1980, 1982~.
Another example of a reimbursement in-
centive for using information from tech-
nology assessment is offered by the New
jersey Hospital Rate-Setting Commission,
which allowed a rate increase to a hospital
that had been particularly effective in phy-
sician education, the goal of which was to
alter expensive practices which were not of
special benefit to patients. The increased
revenue was time limited and earmarked
for the development of a computer clinical
management information system. This
would then be made available to other
New Jersey hospitals. It would signal to
physicians writing patient orders what
tests and procedures were and were not in-
dicated (by DRGs) based on cost, yield,
and therapeutic impact.
In contrast, federal law does not provide
financial incentives for technology assess-
ment. OTA has analyzed the stimulus for
technology assessment of incentives built
into the new laws. "Under the temporary
provisions of TEFRA, the hospital reaps
little reward for keeping its per-case costs
low (maximum of 5 percent of its per-case
rate) but bears the full penalty of exceeding
the per-case limit. Under the new Medi-
care law, the hospital bears the full burden
of a loss and reaps the full rewards of a sur-
plus" (OTA, 1983~. One is too restrictive to
inspire technology assessment. The other
may be too liberal, because use of the sur-
plus is not restricted as to the kinds of tech-
nologies that might be acquired or to any
proof that they have been assessed for cost-
effectiveness.
DRG Price Development and
Technology Assessment
The fact that hospital payment will now
depend on the patient's illness rather than
on the patient's occupancy of a room re-
OCR for page 218
218
quires both the
i]
nstitution and the payer to
keep accurate, complete, and timely medi-
cal charts. Proper DRG assignment cannot
be made without charted detail on patient
characteristics beyond diagnosis, for exam-
ple, age and secondary diagnoses, proce-
dures performed, complications, and hos-
pital resources used or required.
These data have utility for technology
assessment. Whether the payment system
creates a greater perception of need for
technology assessment may depend in part
on how the DRG is priced and how much
an institution knows about its dollar vari-
ances from some norm or standard. The
more the institution's managers can visual-
ize the cost centers (resources) involved in
the generation of profit or financial loss,
the more they can be motivated to analyze
practices, equipment, and procedure utili-
zation. In an ideal analysis these data
should be linked to patient outcome, so
that the motivation remains related to pa-
tients' benefit as well as price. However the
DRG system provides a strong fiscal incen-
tive to slant diagnostic and procedure data
ASSESSING MEDICAL TECHNOLOGY
percutaneous transluminal coronary an-
gioplasty has been assigned to a surgical
DRG rather than a cardiac catheterization
DRG and is therefore paid at a higher rate
giving hospitals a bonus. Attention will
need to be paid to these issues by HCFA
and the Prospective Payment Assessment
Commission (ProPAC).
The derivations of prices for DRGs in all
the varying systems that use these patient
classifications are quite different, but all
depend on averages. Cost centers such as
laboratory/operating room, physical medi-
cine, intensive care unit, or radiology may
differ in their cost performance. There-
fore, the details of cost centers by which
these costs are reported is also important.
The DRG weights developed for TEFRA
and the DRG prices under the new Medi-
care law are averaged from a 20 percent
national sample of all Medicare hospital
claims. Prices must also be derived from
some given base year of hospitals grouped
by similar characteristics and existing costs
and billing data (bills have charges).
Therefore, the use of ratios of costs to
charges by DRG depends on averages
among the peer groups of institutions.
to a higher-paid DRG. Pricing methodol-
ogy can also be so restrictive as to make
technology assessment or acquisition im-
possible (Dickson, 1982~.
DRG creep (the phenomenon in which
coding is inappropriately altered to en-
hance payment) may have unintended
downstream consequences for the weights
assigned to similar DRG categories. HCFA
has established a monitoring system that
examines shifts in patterns on a hospital-
by-hospital basis. Smits and Watson (1985)
have shown that prospective payment
based on DRGs will influence surgical - · r
practice both through the methods by
which new procedures are assigned codes
and through the monitoring systems de-
signed to detect changes in DRG patterns.
Within the field of coding the central prob-
lem is how to manage change and the abil-
ity of the coding system to respond to new
events in clinical medicine. For example
A, ~ ~ ~
Higher costs of some DRGs in hospitals
that use technology inefficiently will influ-
ence the average. This could lessen the mo-
tivation for technology assessment. Con-
versely lower-cost hospitals caring for
complex DRGs may underutilize effective
technology, and the average will pull
down the appropriate price for other hos-
pitals.
The Medicare program's pricing meth-
odolow works its way rapidly from a hos-
p~tai-spec~c portion to a flat national
average and will probably encourage
technology assessment less than it will the
tendency on the part of some hospitals to
send expensive patients elsewhere. If this
leads to an orderly plan for regionalization
of care for complex and unusual cases,
with a separate DRG price system, there
might be a positive impact on quality and
OCR for page 219
REIMBURSEMENT AND TECHNOLOGY ASSESSMENT
cost containment. If regulators furnish
hospitals with sufficient data on their wide
cost variances, by DRG, from regional and
national standards, there is an opportunity
to discover the reasons, including those
which lie with technology.
Cost-Containment Information:
Feedback for Change
Standard economic thinking suggests
that purchasers will not buy a product they
feel is too costly if they can get it elsewhere
for less. But the users of hospital technolo-
gies are physicians. They have not been
trained to think about patient care in eco-
nomic terms, nor has there been any par-
ticular incentive for them to think that
way. They may even feel that cost implica-
tions have no place in doing what they
think is best for their patients. Therefore,
effective cost containment is most apt to
occur when it is structured so as to have an
impact on physician practice patterns.
Doctors have desired information in the
past about what may be useful or harmful
to their patients, or what may expose the
physician to liability. However physicians
need the information in clinical terms rele-
vant to their way of managing patients.
Practice patterns are more likely to change
if the use of the information by physicians'
peers teaches that costlier behavior is not
necessarily beneficial to patient outcomes.
The New Jersey prospective payment
demonstration had two components to in-
fluence physician practice behavior: (1) a
hospital cost factor for specific implemen-
tation of prospective payment was allowed
as an add-on to the DRG rate; in addition
to perfecting their computer data manage-
ment and upgrading medical records capa-
bilities, hospitals could seek education
costs to help doctors understand and use
the DRG information; (2) the New Jersey
DRG system generated management re-
ports to hospitals (including the medical
director), showing cost performance by
219
DRGs and by all ancillary cost centers
compared with that of all other hospitals
(the standard).
Using these annual management reports
New Jersey hospitals have developed their
own computer programs to itemize high-
ranking, negative-variance DRGs (these
produce dollar disincentives because some
aspects of practice have made these DRGs
more costly than the standard) into a per-
formance track for each doctor admitting
certain kinds of patients. The hospitals can
now identify physicians in a total doctor
cluster who are dealing with patients in a
more costly way compared with that of
their own peers, and can identify which
technology cost centers (laboratory, oper-
ating room, intensive care unit, physical
medicine, radiology, etc.) account for this.
An evaluation study of the impact of
New Jersey's DRG system on hospital be-
havior found medical staffs much more in-
volved in the organization of the hospitals.
"The character and flow of information
has changed. The quantity and type of in-
formation that is collected has expanded
allowing for the development of more so-
phisticated management information deci-
sions" (Boerma, 1982~.
Medicare does not propose to feed back
such information to hospitals as they enter
the prospective payment system. The ini-
tial average DRG rates and the weights by
urban/rural peers and regions have been
published. Presumably a hospital using its
own Medicare cost reports could analyze in
what DRGs it has been paid less than un-
der cost-based reimbursement. But they
will not have management reports com-
paring them, cost center by cost center, to
peer hospital or a regional standard unless
they themselves develop such a compara-
tive information system. Without such
comparisons, data useful for making in-
formed technology acquisition decisions
and for influencing ineffective and costly
physician patterns may be lost. Instead,
hospitals may emphasize profitable lines,
OCR for page 220
220
regardless of the needs of the community or
the most effective ways to render care.
Mechanisms to Promote Appropriate
Use of Technology
When a new technology becomes widely
used, research and development costs will
have been repaid, and volumes of services
to which it is applied will increase. If there
is a system in place for assessment, these
forces should dictate a lower price for a
technology. If a technology has a cost-
beneficial effect on patient care, such as re-
ducing the number of hospital days or pre-
venting certain complications, that too
should decrease the hospital price. But spo-
radic technology assessment applied to
new equipment and procedures has not yet
brought a reassessment and price decrease
once widespread diffusion has occurred.
The primary objective of a DRG price
adjustment process is to maintain equality
across DRGs in the ratios of price to the
cost of efficient care. This objective implies
that as new cost-saving technology be-
comes available for use in certain DRGs,
the relative price of these DRGs should be
adjusted downward to reflect the new effi-
ciencies. Alternatively, the development of
new cost-raising technologies that improve
patient outcomes enough to justify their
use should be met with increases in the
prices of relevant DRGs (OTA, 1983~. In
order to make price adjustments, an ample
supply of data will be required.
In the 1983 Social Security Reform Act,
Congress provided for an independent Pro-
spective Payment Assessment Commission
and charged it with tasks including the fol-
lowing: (1) to identify medically appropri-
ate patterns of health resources use and to
collect and assess information on medical
and surgical services and procedures (in-
cluding regional variations) "giving special
attention to treatment patterns for condi-
tions which appear to involve excessively
costly or inappropriate services not adding
ASSESSING MEDICAL TECHNOLOGY
to the quality of care"; (2) to assess the
safety, efficacy, and cost-effectiveness of
new and existing medical and surgical pro-
cedures; (3) to collect and assess the neces-
sary factual data; (4) to attend to the ap-
propriate updating of existing DRGs, or
relative weighting factors so that "such
groups reflect appropriate differences in
resource consumption in delivering safe,
efficacious, and cost-effective care."
Based on the commission's recommenda-
tions, the DHHS secretary must adjust the
DRG prices and weights by fiscal year
1986 and at least every 4 years thereafter.
The commission is largely constrained
by its limited funding (not by legislation)
to the use of existing information, pub-
lished and unpublished. This underscores
the need for an organized, coherent, meth-
odologically sound national system for
technology assessment and for review of
the adequacy of data which already exist.
However, Congress also permitted the
commission to award grants and contracts
for "original research and experimenta-
tion, including clinical research, where ex-
isting information is inadequate ..."
tP. L. 98-21, (5) (E) (ii)].
'`Reimbursement for the technology as-
sessment indicated is authorized and the
source specified: 85 percent from the Fed-
eral Hospital Insurance Trust Fund, and
15 percent from the Federal Supplemen-
tary Medical Insurance Trust Fund" [P.L.
98-21, section 601, (6~(A-1~.
The first appropriation for this commis-
sion was only $1.5 million, and the staff
has been limited to no more than 25 per-
sons. Thus, while cost containment and
technology assessment are now explicitly
linked, the commission must still depend
largely on existing assessments, which may
be inadequate, and the group will not have
sufficient funds to assess a wide variety of
high-cost technologies.
The law^also provides for a continuation
of peer review activities. The determina-
tion for Medicare, and sometimes for
OCR for page 221
REIMBURSEMENT AND TECHNOLOGY ASSESSMENT
Medicaid, of appropriate lengths of stay
and the medical necessity for admission
and for certain tests and procedures were
the primary roles in the past of Professional
Standards Review Organizations (PSROs).
The Social Security Act Amendments re-
created some of this process. Hospitals are
required to contract with Peer Review Or-
ganizations (PROs) in order to retain eligi-
bility for Medicare reimbursement. HCFA
has drafted new scope of work require-
ments for PROs that have less of a focus on
days of stay and will require that PROs
have access to systems for medical technol-
ogy assessment. Under the law, PROs must
review the validity of diagnostic informa-
tion provided by hospitals, because this is
the basis on which proper patient assign-
ment is made to a DRG.
PROs also are expected to watch over
quality, for example, to develop methods
to monitor unnecessary surgery and inva-
sive procedures that may cause complica-
tions. All such questions of medical neces-
sity and quality assurance call for methods
of technology assessment, but because
comprehensive discharge data are not re-
quired of providers PROs are left free to
continue to use criteria based on typical
patterns of practice in the geographic area.
Norms of care vary greatly across the coun-
try. Often, these norms are averaged from
reporting systems based on what doctors
do, which may be based on good judgment
and good physician education, but have
not been assessed for efficacy, consistent
patient benefit, or sometimes even for
safety.
A serendipitous aspect of the Medicare
prospective payment system may be the
DRG data base itself. In New Jersey, the
central agency has put into its computers a
complete patient abstract based on Uni-
form Hospital Discharge Data Systems
(UHDDS) and proposes to augment this
with coded information needed to assess
quality for every hospital discharge in the
state since 1976. Linked with cost center
221
data, this information has enabled a retro-
spective comparison of the outcomes and
costs for patients in the same DRGs treated
with different technologies.
Technology assessment does hold prom-
ise for containing costs while ensuring
quality care for patients. Although the cur-
rent federal reimbursement law poten-
tially encourages the appropriate use of
technology and could foster the accumula-
tion of a useful data base, it can be im-
proved further for technology assessment.
For example, nothing in the law encour-
ages technology assessment before wide
diffusion of a technology. A technology
factor has been added to the DRG price,
but it has not been structured as a special
opportunity for assessment. In addition,
the incentives for technology assessment
will have to be extended to cover other
payment mechanisms.
PAYING FOR TECHNOLOGY
ASSESSMENT
The growing portion of health care costs
attributed to technologic interventions
points to the need for assessment as a part
of the national effort to contain these costs.
Assessing technologies before and after in-
troducing them into the health care system
could result in better medical care and
could decrease health care costs. It would
provide physicians, third-party payers,
and the public with an improved basis for
decisions about the best uses of technolo-
gies and would facilitate appropriate utili-
zation. Some interest in assessing technolo-
gies already in use also appears to have
been revived in provisions of the amend-
ments to the Social Security Act establish-
ing the Medicare Prospective Payment Sys-
tem. A question remains as to who will pay
for technology assessment.
Yarbro and Mortenson (1985) believe
that under the DRG system institutions
will be reluctant to carry out clinical trials
because of cost considerations. They sug-
OCR for page 222
222
gest a new DRG category to handle this.
Davis (1985) believes this solution is un-
workable and that the funding for trials
must come from other sources.
As Appendix 5-A explains in detail and
in more technical language, third-party
payers would like to restrict their payments
to claims for technologies that are clearly
necessary and effective for the medical
care of the patient. Therefore, they have a
considerable stake in the availability of
more research and research of high quality
done by disinterested parties in technology
assessment. This constraint is not merely
self-serving; it makes the health care dollar
more effective by applying resources where
they are needed and where they work.
Two main impediments to effective use of
these ideas come from the courts. First, the
third-party payers may find themselves ac-
cused of antitrust violations, for example,
because similarity of exclusions by the sev-
eral payers seems to be grounds for com-
plaints of restraint of trade. Second, the in-
sured may sue because of problems about
the availability of coverage and disagree-
ment about the provisions of the contract.
Sometimes these claims about inappro-
priate lack of coverage can lead to large
damages. Thus, it may turn out that the
courts will not always accept good evi-
dence about the ineffectiveness of certain
technologies. And therefore third-party
payers may not always be able to take
proper advantage of improved knowledge
about technologies. The legal problems
that pose such serious impediments to us-
ing information from technology assess-
ment fall outside the committee's expertise
and therefore are not fully addressed in this
book. Nevertheless, it is believed that
much more work needs to be done to re-
solve these issues.
Many authors and conferees have ad-
dressed the question of reimbursement for
technology assessment. Chalmers proposed
that the federal government and the pri-
vate sector "set up an evaluating body to
ASSESSING MEDICAL TECHNOLOGY
organize and fund clinical trials." It is pro-
posed they start with the most expensive
procedures and decide which are worth
paying for, traditional or not (Chalmers,
1982~. Implicit in this recommendation is
that all major public and private payers
will reimburse for the costs of the trials and
the care of the patients when the activities
are part of a planned and approved clinical
trial. However, conferees noted that there
are antitrust impediments to such a recom-
mendation.
A workshop on the role of third-party
pavers in clinical trials, sponsored by the
Arthritis Foundation and the National
Multiple Sclerosis Society (1983), recom-
mended that HCFA undertake some fund-
ing of clinical trials of new and experimen-
tal procedures and that Congress make
clear this authority and its underwriting by
the Medicare trust funds. In addition, said
the conferees, private insurers should reim-
burse the medical and treatment costs for
patients participating in approved clinical
trials in designated settings. This confer-
ence group also recommended a larger role
in clinical trials for the National Institutes
of Health (NIH) but only if additional
funds for it were appropriated by Con-
gress. NIH was also viewed as the entity
into which private foundations, pharma-
ceutical firms, manufacturers, employers-
payers, and third-party payers should
channel funds.
Bunker et al. (1982a, b) analyzed the ef-
fects of coverage and reimbursement on
biomedical innovation as well as the inade-
quacies and inconsistencies of funding new
technologies and their evaluation. They
recommend "a major shift in coverage pol-
icy" so that identified new therapies could
be "selected for coverage contingent on the
collection of appropriate evaluation data."
The new money required for the process,
they believed, should come from a joint
fund established by all insurers. Further-
more, the establishment of an Institute of
Health Care Evaluation (IHCE) is sug-
OCR for page 223
REIMBURSEMENT AND TECHNOLOGY ASSESSMENT
gested. It would be supported by a volun-
tary per capita levy on all insurers plus
HCFA grants and contracts for the re-
search (Bunker et al., 1982a, b).
Relman (1980) once estimated that pri-
vate and public third-party payers could
contribute $100 million to $200 million to
such a joint fund if each were assessed 0.2
percent of their total health care expendi-
tures. There have been others who have
suggested that even the life insurance in-
dustry should contribute to biomedical in-
vestigation, based on the speculation that
the increased longevity that might result
would be of direct benefit to these insurers.
A 1 percent investment by the life insur-
ance industry is estimated to provide $1
billion annually for medical research
(Kahn, 1984~.
An Institute of Medicine (IOM) commit-
tee issued a report, "Medical Technology
Assessment: A Plan for a Public/Private
Sector Consortium," in November 1983. It
proposed that Congress appropriate start-
up funds for such an entity, with an en-
dowment to be raised thereafter by pooling
the funds of interested parties payers,
professional associations, foundations, etc.
Users' fees from those who would purchase
the published results of assessments were
hoped to bring in additional funds. Both
Bunker and the IOM committee give ex-
amples of similar research consortia initi-
ated with federal appropriations.
This chapter has emphasized the uses of
technology assessment as a part of chang-
ing reimbursement policy. Reimbursement
offered, or withheld, is a prime tool for the
enforcement of socially necessary deci-
sions. The consortia recommended by re-
cent study groups and authors are advisory
with no policymaking or regulating roles.
Contracting fiscal intermediaries for Medi-
care recommend various coverage deci-
sions, but HCFA may or may not follow
them, nor are they codified into a uniform
approach. The important Medicare Pro-
spective Payment Assessment Commission
223
is advisory to HCFA, but the law is not
clear on any mandates to the Executive
Branch for implementation of the findings
of the commission, although the require-
ment that HCFA proposes amendments to
the law by certain dates does appear as
part of the intent of Congress. OTA does
not make recommendations in its studies of
various technologies, although its influ-
ence is obvious in the first decisions Medi-
care has ever made to restrict coverage for
certain technologies to their use in a spe-
cific setting and by professionals with spe-
cific skills.
If the need for medical technology as-
sessment couples so fully with the need for
rational cost containment, a major policy
issue is posed for lawmakers: Should reim-
bursement regulation be used to enforce
scientific decisions about the safety, effi-
cacy, and cost-effectiveness of technolo-
gies? The answer is not yet clear in law or
. .
in appropriation.
Chapter 2 discusses the scope of medical
technology assessment in the United States
and compares it with the cost of health
care. There, it is estimated that in 1984
$384 billion was spent on health care while
less than $1.3 billion was spent on medical
technology assessment; a large portion of
this was (roughly $800 million) spent by
private industry.
It is strongly believed that additional
support for medical technology assessment
is needed and that it should come from the
health care dollar. There are a number of
ways this might be realized, whether by a
per hospital bed assessment, provider con-
tributions, third-party payer grants, or
other mechanisms. Perhaps there is no sin-
gle approach that will suffice; careful
study will be needed by a specifically
charged group to develop a specific plan.
Technology assessment has the potential
both to improve health care and to control
costs. For this reason, a portion of the
health care dollar should be allocated to its
promulgation.
OCR for page 224
224
CONCLUSIONS AND
RECOMMENDATIONS
Coverage and reimbursement policies
can foster technology assessment. As seen
in this chapter, technology assessment has
limited use for containing costs in a system
of making coverage decisions based on
usual and accepted medical practice. If a
technology could clearly be ruled obsolete,
coverage could be denied. Similarly if a
technology was experimental, coverage
could be denied. Unfortunately while the
FDA does have criteria for determining if a
drug or device is experimental, there are no
firm criteria for assigning a technology to
the experimental or obsolete categories for
Medicare. Market forces to sell insurance
policies and provide the best coverage to
clients make decisions about coverage of
technologies on the basis of assessment dif-
ficult (even if information on which to base
these decisions was available, which it of-
ten is not). The primary value of technol-
ogy assessment in the reimbursement-
based system is for determining safety and
efficacy (Finkelstein et al., 1984~.
Under a prospective payment system
based on cost per case, such as DRGs, more
powerful incentives appear to be present
for technology assessment for cost-effec-
tiveness, but much more can be achieved.
If physicians and hospitals can find more
cost-effective ways for treating patients,
larger profits can be gained from rendering
health care, patients will get better care,
and costs can be contained. Unfortunately,
the information base for making such deci-
sions does not exist nor is the system well
structured to achieve more information.
In order to develop a coordinated system
for technology assessment and to achieve
cost savings through technology assess-
ment, the assessment process and the reim-
bursement system must become more con-
gruent. Some recommendations (in italics)
affecting the reimbursement system fol-
low.
ASSESSING MEDICAL TECHNOLOGY
· Decisions about payment for medical
care should be based on more than safety,
efficacy, and research status of the care. A
beginning in expanding the criteria exists
in the new prospective payment system,
which encourages cost-effectiveness of
care.
· Data collected for claims purposes
should be made more usefulfor technology
assessment. Again, the advent of prospec-
tive payment, which includes diagnosis
and characteristics of care in the informa-
tion needed for claims, seems likely to con-
tribute to technology assessment.
· Payment for medical technology as-
sessment should be made through the sys-
tem that pays for medical care. The pro-
spective payment system already includes a
set-aside for technology, which could be
earmarked for assessment. Another possi-
bility is to pay for use of experimental tech-
nology if it collects data on safety, efficacy,
and cost-effectiveness. Still another way is
to set aside for assessment a percentage of
the health care dollar, as handled by third-
party payers or providers, both public and
private.
APPENDIX 5-A: LEGAL
CONSIDERATIONS IN PRIVATE
HEALTH INSURER'S IDENTIFICATION
AND EXCLUSION OF UNNECESSARY,
INCOMPETENT, AND UNPROVED
SERVICES
Proliferation of new medical and surgi-
cal procedures, devices, drugs, health care
personnel, and facilities, and the related
escalation in costs of care, have prompted
public and private benefit programs to ex-
amine and reform their roles in the alloca-
tion of resources to health care. Long-
standing public policy concern for
protecting the ill from exploitation mili-
tates against providing health benefits
for—and . thus promoting worthless
treatments. This concern is increasingly
joined by an economic imperative to spend
OCR for page 225
REIMBURSEMENT AND TECHNOLOGY ASSESSMENT
limited health benefit funds only for care
that discernibly benefits health.
In consequence, it is becoming common-
place for coverage to expressly exclude ser-
vices that are medically unnecessary or in-
appropriate to diagnose or treat the
patient's condition. Meaningful imple-
mentation of such an underwriting deci-
sion obviously depends heavily on the in-
surer's ability to identify and apply
reasonable standards to distinguish effec-
tive care from that which is of uncertain or
no value.
Given the very high cost of much care
and the prevalence of health benefits in
one or another form, these insurer efforts
toward more-efficient application of bene-
fit funds can significantly affect both their
beneficiaries' access to desired care and the
marketplace success of various providers
and producers of health technologies. It is
thus not surprising that such efforts by
public and private benefit plans frequently
result in legal challenges by affected bene-
ficiaries, providers, or both. These chal-
lenges to private insurers have been of two
principal types: (1) provider antitrust
claims that insurer actions related to judg-
ments about necessary and appropriate
care unlawfully restrain trade in a product
market in which they compete, and (2)
program beneficiary contract and tort
claims contesting both the threshold en-
forceability of benefit exclusions pertain-
ing to unnecessary or unproved services
and the reasonableness of the specific in-
surer determinations made in applying
such exclusions to them.
Antitrust and insurance case law devel-
opment during the past decade has signifi-
cantly increased the private insurer's risk of
both types of litigation and liability. Dur-
ing that period, a succession of court deci-
sions has radically narrowed the exemp-
tions that once shielded health care and
insurance activities from antitrust law ap-
plication. As a result, both the incidence
and cost of health benefit antitrust litiga-
. . . .
225
tion have multiplied. At the same time, in-
surers increasingly are exposed to benefi-
ciary claims for compensatory and puni-
tive damages for alleged misrepresentation
of benefits, breach of contracts, bad faith,
and similar evils. The plaintiff's health and
financial circumstances often are dire and
damage awards may be extremely large.
These contemporaneous developments
In antitrust and insurance laws are rele-
vant to private insurers' attempts to iden-
tify and avoid paying for unnecessary, in-
competent, or unproved uses of health care
"technology" because they tend to produce
conflicting incentives for the insurer. On
the one hand, recent insurance benefits lit-
igation underscores the need for benefit
contracts to provide clear and complete
notice of all coverage limitations and ex-
clusions as a condition of their enforceabil-
ity. Similarly, the standards and proce-
dures followed by the insurer in adjudicat-
ing individual claims for benefits must be
reasonable and fairly accord the insured's
interest at least as much consideration as
the insurer gives to its own.
The insurer is thus propelled to search
for increasingly precise and understand-
able descriptors for contract exclusions
pertaining to unnecessary and unproved
care and for defensible criteria for their ap-
plication to specific cases. The search nec-
essarily leads to the research findings and
expert opinions of the scientific and medi-
cal communities and to the new drug and
device evaluations of the FDA.
A countervailing pressure arises from the
new phenomenon of provider antitrust
suits against insurers and other providers in
which it is alleged that insurance contract
exclusions and denials of benefits for un-
necessary or unproved services are the
result of and means of effectuating agree-
ments among competing providers to un-
reasonably restrain trade in a particular
health service. Such cases are currently
pending with regard to psychiatric care,
chiropractic, treatment for arthritis with
OCR for page 226
226
dimethyl sulfoxide (DMSO), bilateral ca-
rotid body resection for asthma and other
respiratory disorders, radial keratotomy,
Burton's immune augmentation therapy,
and allergy treatment, among others. In
addition, 2 years ago the U.S. Supreme
Court held that an insured had antitrust
standing to sue her insurer for treble dam-
ages that resulted from contract limitations
on coverage of psychologists' services. Thus
the contract beneficiary is now also a po-
tential antitrust plaintiff.
In seeking reasonable standards of safe
and effective use of the mushrooming ar-
ray of health technology, the insurer (and
medical consultants) must also be wary
that their actions may later be construed as
elements of a concerted refusal to deal by
an aggrieved provider or patient. The in-
surer's development of reasonable benefit
standards that courts will honor, and its
avoidance of antitrust risk in the process,
could be greatly enhanced by access to
more and better-quality health technology
assessment. Increased information from re-
liable evaluations performed by disinter-
ested parties is needed to support benefit
plan efforts toward more-efficient resource
use.
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Representative terms from entire chapter:
medical technology
