IR 101

The Centers for Medicare and Medicaid Services Dec. 13, 2002, issued a long-awaited interim final rule concerning the application of “inherent reasonableness” to certain Medicare Part B items and services. This expedited IR authority could have an immediate and potentially devastating impact on home medical equipment providers, because the durable medical equipment regional carriers now have the ability to reduce payments for durable medical equipment, prosthetics and orthotics at a faster pace.

Effective Feb. 11, 2003, the regulations explain the process whereby CMS and Medicare carriers — including the DMERCs — will reduce or increase payment amounts when the federal government believes the existing payment amounts are either grossly excessive or grossly deficient.

CMS issued the rule as an “interim final rule,” because the agency is soliciting comments on two issues: the definitions of “grossly excessive” and “grossly deficient,” and the criteria for compiling valid and reliable data.

The IR rule applies to all services paid for under Part B except physician services and services paid under a prospective payment system, such as home health services. Therefore, the rule applies to DME; drugs covered under Medicare Part B, such as inhalation and infusion drugs; laboratory services; and ambulance services.

However, the rule does not announce specific payment reductions. Rather, it defines the process whereby CMS and the DMERCs may use IR to adjust payments. Consequently, it is difficult to predict which items CMS or the carriers may target. Likewise, it is difficult to predict how long CMS or the carriers will take to identify items and services in need of adjustments.

Nonetheless, hinting at possible reductions, the rule refers to “numerous” reports from the U.S. Office of Inspector General, the U.S. General Accounting Office and newspapers, which contend Medicare pays too much for medical equipment and other items.

Such reports have targeted respiratory medications, enteral nutrition, home oxygen and hospital beds. However, in light of the IR rule’s strict procedural requirements for collecting pricing data, it likely will take CMS or a carrier at least four to six months to issue any proposed payment reductions.

When can CMS and the carriers use IR?

Payment adjustments of more than 15 percent during a given year must be published in the Federal Register. For all other adjustments, no such announcement is necessary, according to the new IR rule.

Any of the following factors could trigger IR consideration:

• The marketplace is not competitive;
• Payment amounts do not reflect changing technology, increased facility with that technology, or changes in acquisition costs, production costs or supplier costs;
• Payment amounts for the items or services in a particular locality are grossly higher or lower than payment amounts in other comparable localities, taking into account the relative costs of furnishing the items or services in different localities;
• Payment amounts for the items or services are grossly higher or lower than acquisition or production costs for the items or services;
• There have been increases in payment amounts for items or services that cannot be explained by inflation or technology;
• The payment amounts for items or services are grossly higher or lower than the payments made for the same items or services by other purchasers in the same locality; and
• The payment amount does not reflect a new technology;

How will CMS and the carriers justify IR changes?

Responding to a July 2000 report from the GAO — a report that expressed concern about the process whereby the DMERCs in 1998 collected data to justify IR reductions — the new IR rule includes strict data-collection guidelines. Before proposing reimbursement changes, CMS and the carriers must:

• Develop written guidelines for data collection and analysis;
• Ensure consistency in any pricing survey;
• Ensure that sampled prices fully represent the range of national prices;
• Consider the geographic distribution of Medicare beneficiaries;
• Consider relative price in the various localities, to ensure an appropriate mix of areas with high, medium and low consumer prices;
• Consider criteria to define “populous state,” “less-populous state,” “urban area” and “rural area”;
• Use a consistent process for selecting retail outlets within selected cities;
• Consider whether the distribution of sampled prices from localities surveyed is fully representative of the distribution of the U.S. population;
• Consider the products generally used by beneficiaries and collect prices of these products; and
• When using wholesale costs, consider the costs of the services necessary to furnish a product to beneficiaries.

How will CMS and the carriers notify providers about IR changes?

When reducing (or increasing) a payment by 15 percent or less within a given year, CMS or the carrier will notify affected suppliers and explain the factors considered in proposing the new amounts. CMS or the carrier then will ask for comments from suppliers, and will evaluate comments it receives.

Before a carrier can establish new payment limits, the carrier must inform CMS. In turn, CMS must inform the carrier in writing that it has received the carrier’s notification. The carrier then must inform affected suppliers and the state Medicaid programs of any final limits it establishes. After this final notification, the new payment limit will take effect no sooner than 60 days later.

When CMS or a carrier makes a payment adjustment of more than 15 percent during multiple years, CMS or the carrier must review market prices for the years subsequent to the first reduction, to ensure that further reductions continue to be appropriate.

When CMS makes a national determination to adjust payments by more than 15 percent during a given year, CMS must, in addition to complying with the data-collection guidelines, do the following:

• Consider the potential impact on quality, access, beneficiary liability, assignment rates and participation of suppliers;
• Consult with representatives of the supplier industry likely to be impacted by the proposed change; and
• Publish in the Federal Register the proposed and final notice of a new payment limit before it can adopt the limit. The IR regulation provides that the proposed and final notices will include specific information such as an explanation of the factors and data that CMS considered, the proposed payment amount or methodology, and the potential impacts of the proposed new payment limit.

What else do I need to know?

CMS will periodically check the rate at which suppliers are accepting assignment for items and services, and will monitor beneficiary complaints about access. Additionally, CMS will not establish an appeals procedure for IR determinations, because the U.S. Congress did not provide for one in the statute. Instead, CMS explains, the public comment period for proposed IR adjustments will provide a mechanism for commenters to raise issues and concerns before any IR adjustments are finalized.

Defending its long-held position that it is appropriate to use Veterans Administration prices as a benchmark to determine appropriate payment amounts, CMS explains that, if the VA represents a wholesale acquisition cost, it is appropriate to mark-up the VA price to achieve a comparable Medicare retail price.

For example, in its Aug. 13, 1999, proposed notice of IR reductions for certain DME items, CMS used VA prices, plus a 67 percent mark-up, to make the VA wholesale prices comparable to Mediare retail prices.

While the new IR rule does not establish a formal process whereby suppliers may petition for a payment increase, CMS explains that “anyone has the opportunity to submit a request to CMS or a Medicare carrier for an inherent reasonableness adjustment.” Furthermore, suppliers can use the same illustrative criteria that CMS or a carrier would use to defend a proposed change.

Final Analysis

What is the prognosis for the future of IR? It is likely that CMS will rely on the DMERCs to collect data and make IR reductions.

The bigger questions are: How many items will the DMERCs target at one time? How quickly will the DMERCs issue a proposed IR reduction? and, How sufficient will the data be that the DMERCs use as a foundation for proposed IR reductions? To learn the answers, suppliers will have to wait and watch.

A specialist in health care legislation, regulations and government relations, Cara C. Bachenheimer is an attorney with the law firm of Epstein, Becker & Green in Washington. Bachenheimer previously worked at the American Association for Homecare and the Health Industry Distributors Association. You can reach her by phone at 202/861-1825 or e-mail at [email protected].