The economics of Medicare payment changes

Our health care delivery system (and I use that phrase with trepidation) changes as reimbursement changes. Once the system provides a financial opportunity, entrepreneurs will overdevelop that opportunity.

Each of these opportunities create significant externalities. From my viewpoint, the birth of specialty hospitals has many undesirable consequences.

Then when Medicare changes reimbursement, those who have bet on a continuance of current payment strategies will exert political pressure to protect their financial interests.

Thanks to KevinMD for the link – Will Medicare’s cuts squeeze out medical devices?

Despite pressure from hospitals, the medical-device industry and politicians, the Medicare program appears ready to proceed with significant cuts in reimbursement for some of the most profitable and best-selling medical devices made in the Twin Cities.

Twin Cities hospitals, device manufacturers and consumers are anxiously waiting for details, due by Tuesday, of what could be Medicare’s biggest overhaul of the hospital payment system in decades.

The changes would not reduce overall payments by Medicare, which insures people 65 and older and the disabled. Instead, reimbursements would be decreased for procedures that are considered excessively profitable to providers, namely heart care, and increased for money-losers such as treatment for pneumonia and mental illness.

The problem with health care is that we are dividing a fixed sized pie. More money will not enter the system. I personally believe that CMS is fixing errors in reimbursement. Current reimbursement overpays many procedures and devices, and thus creates a negative impact on reimbursement for less sexy care (like pneumonia, cellulitis, urosepsis, COPD exacerbation).

The entrepeneurs have made much money, and the volume of their complaints is probably related to their understanding that a gravy train will no longer arrive at their location. CMS actually understands this issue clearly.

The changes expected Tuesday are likely to be ‘less Draconian’ than originally proposed, said Thomas Gunderson, a securities analyst with Piper Jaffray. ‘I think the level of cuts might be cut by 50 percent or more – so instead of a 30 percent cut on drug-coated stents, you’d see a 15 percent cut.’

The overhaul was based, in part, on recommendations from Medpac, a commission created to advise Medicare on reimbursement issues. Dave Durenberger, a former U.S. senator from Minnesota who served on the commission, said that Medicare officials ‘ignored or reinterpreted’ some of Medpac’s pricing formulas and ended up ‘scaring the hell out of everyone in the device industry.’

‘Our recommendations would have meant reductions, but fewer reductions spread over four years,’ Durenberger said.

Durenberger anticipates that while Medicare will likely soften the proposal and phase it in, it will not postpone it.

Any delay might unravel the process by allowing the medical-device industry to ‘pull out all of its congressional stops to beat the hell out of whatever they try to do,’ he said.

‘Industry and surgeons have to face up to reality: We have been overpaying for procedures – in particular, cardiac procedures,’ Durenberger said. ‘We have to do something to change it.’

Amen