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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.

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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-

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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-

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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

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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 payersnot 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.

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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-

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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

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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,

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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

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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-

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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-

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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.

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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 forand . thus promoting worthless treatments. This concern is increasingly joined by an economic imperative to spend

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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

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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. REFERENCES Altman, S. H., and R. Blendon feds.). 1979. Medi- cal Technologies: The Culprit Behind Health Care Costs? Proceedings of the 1977 Sun Valley Forum on National Health. Washington, D.C.: U.S. Govern- ment Printing Office. Banta, H. D., G. Ruby, and A. K. Burns. 1984. Using Coverage to Contain Medical Costs. Proceed- ings of the Conference on the Future of Medicare. U.S. House of Representatives, February 1, 1984. Washington, D.C.: U.S. Government Printing Of- fice. Biles, B., C. J. Schramm, and J. G. Atkinson. 1980. Hospital cost inflation under state rate-setting programs. N. Engl. J. Med. 303:664-668. Boerma, H. 1982. Organization Impact of Diag- nostic Related Group Reimbursement in New Jersey. Trenton: Hospital Research and Educational Trust of New Jersey. ASSESSING MEDICAL TECHNOLOGY Bunker, J. P., J. Fowles, and J. Schaffarzick. 1982a. Evaluation of medical-technology strategies: effects of coverage and reimbursement (first of two parts). N. Engl. J. Med. 306:620-624. Bunker, J. P., J. Fowles, and R. Schaffarzick. 1982b. Evaluation of medical-technology strategies: proposal for an institute for health care evaluation (second of two parts). N. Engl. J. Med. 306:687-692. Chalmers, T. C. 1982. A potpourri of RCT topics. Controlled Clinical Trials 3:285-298. Davis, C. K. 1985. The impact of prospective pay- ment on clinical research. J. Am. Med. Assoc. 253:68~687. Dickson, P. S. 1982. The DRG Appeals Process. New Jersey Hospital Rate Setting Commission. May. Memorandum. Finkelstein, S. N., K. A. Issacson, and A. Frishkopf. 1984. The process of evaluating medical technologies for third-party coverage. J. Health Care Technol. 1:89-102. Finley, J. E. 1983. Diagnosis Related Groups (DRGs) in Hospital Payment: The New Jersey Experi- ence. U.S. Congress, Office of Technology Assess- ment. Washington, D.C.: U.S. Government Printing Office. Gibson, R. M., K. R. Levit, H. Lanzenby, and D. R. Waldo. 1984. National health care expenditures 1983. Health Care Financing Review 6:1-29. Harvard Center for the Analysis of Health Prac- tice. 1981. Impact on Health Costs of NCHCT Rec- ommendations for Nonreimbursement for Medical Procedures. Report produced under grant number HS 03314. Cambridge, Mass. Institute of Medicine. 1977. Computed Tomo- graphic Scanning. Washington, D. C.: National Academy of Sciences. Institute of Medicine. 1983. Medical Technology Assessment: A Plan for a Public/Private Sector Con- sortium. Washington, D. C.: National Academy Press. Joskow, P. L. 1981. Controlling Hospital Costs: The Role of Government Regulation. Cambridge, Mass.: MIT Press. Kahn, C. R. 1984. A proposed new role for the in- surance industry in biomedical research funding. Sounding Board. N. Engl. J. Med. January 26, 1984. Maryland Health Services Cost Review Commis- sion, Interview, 1983. Office of Technology Assessment. 1983. Diagnosis Related Groups (DRGs) and the Medicare Program: Implications for Medical Technology. Superintendent of Documents. Washington, D.C.: U.S. Government Printing Office. Reinhardt, U. E. 1985. Health care for America's poor. Princeton Alumni Weekly 27(February):23-29. Relman, A. S. 1980. Assessment of Medical Prac- tices: A Simple Proposal. N. Engl. J. Med. 303:153- 154.

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RIOT ~~ ~~y 4~T Borate Arm H~ph~' Contortion. 198~ ~ for HospitaL. Annual Report of the Rochester Area Hospital' Co~oraUon, Roch~, N.Y Rochester Area Hospitals' Corporation. 1982. ~id- ~ream Assessment of HEP. Rochester, N.Y. Smite, H. L., and B. E. Wagon. 1985. ORCs and 2Z7 the future of surgical practice. A. Engl. J. Wed. 311: 1612-1015. Yarbro, J. W., and L. E. ~ortenson. 1985. The need for diagnosb-related Coup 471. J. Am. Wed. As- soc. 253: 684-68S.