Is the Price Really Right?

Why Medicare Methodology May Be All Wrong for Cushion Allowables

At times, it seems that coding and coverage are overrated. To most people, it would seem reasonable to expect that if a product has a HCPCS code and a coverage policy indicating when it is covered, that product should be available to those Medicare beneficiaries who qualify. But the reality is that three legs — coding, coverage and pricing — support access.

For very valid reasons, the Centers for Medicare and Medicaid Services (CMS) have separate departments that are responsible for coding, coverage and pricing. The denial of access to medically necessary technology results when one or more of the three legs is not adequate.

Coding and coverage are frequently the topics of seminars and print material. These processes are increasingly transparent, and opportunities for public and written comment are available. In addition, it is worth noting that CMS recently announced significant positive changes in the processes it uses to update the HCPCS code sets. However, consider this: Even in the absence of a specific HCPCS code, a supplier can use a miscellaneous or otherwise not-classified code to submit a claim. It is not efficient, but at least the claim can be processed. Additionally, as long as there is no coverage policy that states "non-covered," at least some beneficiaries will have access to a product. However, if the fee schedule results in a level of reimbursement that suppliers cannot accept, then the guaranteed result will be lack of access to that product. In this scenario, pricing is king.

Pricing, or the methodology used to develop the fee schedule, is the least understood of the three key processes. It is important to highlight one other important factor: While CMS has the responsibility for developing the fee schedules for Medicare Part B payment, the published Medicare fee schedule is what many, if not most, payers use as a basis for their reimbursement.

Unlike the processes associated with coding and coverage, fee schedule development includes little interaction and no opportunity for comment. In fact, CMS typically hears about a problem with the fee schedule only when access to technology is at risk. Moreover, addressing pricing issues is not a simple process.

To better understand the process, as well as the inherent flaws in the process, we will offer an in-depth look at:

  • The calculation or methodology used to develop the fee schedules.
  • False assumptions and other issues that cause the applied calculations to result in inherently unreasonable pricing.

How Are Fee Schedules Developed?
Section 1834 of the Social Security Act requires that payment for DME be made on the basis of fee schedules. Many items in the original fee schedules were based on the average reasonable submitted charges for the item during the period 1986-1987. However, for those items where supplier charges were not available, CMS developed "gap-filling" methodology. Gap-filling is designed to approximate historic reasonable charge. As more time passes since 1987, the less likely it is for historic data for that period to be available. Today, gap-filling methodology is used almost exclusively. The steps included in this method are as follows:

  1. If 1986-to 1987 retail price lists are not available, gap-filling first applies a deflation factor to the submitted retail price for each product assigned to a specific code. The actual deflation rate is based on the year of the retail price list that was submitted (see figure 1, Deflation Factors).
  2. Next, the median (middle) price of the deflated retails is identified. The median price is then increased to the current date using annually approved "Update Factors" based on CPI increases and any legislative mandates (see figure 1, Update Factors). This amount becomes the basis for the allowable.
  3. The next step adds any applicable DME state sales tax. The median price within this array is once again identified.
  4. The allowable ceiling is the updated median price, and the floor is 85% of that.

Clearly, this can be a bit confusing. So let's apply gap-filling to an example.

Example assumptions:

  • A new code — "Kxxxx" — has been established.
  • Nine products have been assigned to the code through the Statistical Analysis Durable Medical Equipment Regional Carrier's (SADMERC) code verification process.
  • Figure 2, Column 2, illustrates the retail price information that the Durable Medical Equipment Regional Carriers' (DMERC's) pricing coordinators and CMS have on each product.

Now, let's calculate the basis for the allowable:

  1. The retail prices are deflated based on the year of the retail price (Figure 2, Column 2 x Column 4 = Column 5).
  2. The "median" deflated retail price is identified. In this case, that is $99.36. This would now be multiplied by the update factor for each year from 1991 to the present (Figure 3).

So, $129.11 would be the basis for code Kxxxx's allowable, even though retail prices for such items appear to have exceeded that since approximately 1996. State update factors would still have to be calculated to identify the floor and the ceiling for the allowable, and the unique allowable for each state.

What Are the Issues Associated with This Method?
Gap-filling has numerous issues, including:

  • The deflation rate is based strictly on the effective date of the submitted retail pricelist. For example, suppose a company has a retail price for a product of $100. That price has been in effect since January of 1999, but the company produces a new pricelist each year. If the company submits its 2004 pricelist, its retail price would be deflated to $58.20. If the company submits its 1999 pricelist, its retail price would be deflated to $66.50.
  • Gap-filling assumes that there will be consistent, routine price increases during the period between 1991 and 2004, and attempts to even them out (thus the variation in the deflation rates based on the price list year). But due to increased reimbursement pressures (including price freezes) and increases in competition, it is not accurate to assume price increases have automatically occurred. In a flat market sector, including a new product in the allowable calculation can have a dramatic negative impact. Most often, a new product entering the market will have pricing that reflects current competitive pricing. Unfortunately, since the new product's retail price has no history, it will be deflated considerably and is likely to have a negative impact on the median price. The perfect illustration is the recent calculation of allowables for the new HCPCS codes for wheelchair seating.
  • Gap-filling has a deflation amount for each year between 2004 and 1991. However, due to various legislative mandates, CPI increases applied to DME were blocked and as a result, the allowables were frozen. CPI freezes occurred in 1998, 1999, 2000 and 2004. In addition, the Medicare Modernization Act (MMA) calls for a freeze in CPI increases for DME through 2008. Therefore, no update factors are applied for those years in the gap-filling process, even though deflation rates were applied for each of those years (see figure 3, above).
  • The gap-filling methodology gives each product equal weight in determining the deflated median price, regardless of actual market demand. Even though one product may represent 30 percent of market demand, while another has no demand at all, each product is given equal weight in calculating the median. Therefore, theoretically it is possible that a product that has never been reimbursed by Medicare Part B, and that has no clinician support, could become the basis for the allowable.
  • If gap-filling is applied to a code that is underdefined or too broad, the results are likely to be even more problematic. Again, wheelchair seating codes are a great example. In developing the interim allowables for the new wheelchair seating policy, code K0652 included products that had retail prices from less than $60 to more $500. The resulting allowable was $288.23, far too much for some of the products in this code, yet not nearly enough for others.

Any one of these issues can result in significant variations to the final allowable. In combination, the results can be disastrous. Nowhere was this more apparent than in the initial interim allowables published for the wheelchair seating policy in October 2004. In this case, pricing history, market stability, broadly defined codes and the lack of update factors all came together to result in allowables that were as much as 25 percent below the amount reimbursed for many of the same products under previous codes. While CMS demonstrated heroic recovery in its response to the problems associated with the fee schedule, expecting CMS to correct every fee schedule that has a negative outcome is not realistic.

Clearly, CMS' ability to consistently develop inherently reasonable fee schedules is significantly impaired when using gap-filling methodology. The intent to have pricing that is fair and appropriate for all technology is sound. However, due to economic and market changes that have occurred in the DME industry since the gap-filling methodology was developed, this formula no longer ensures inherently reasonable pricing will result. As such, Medicare Part B is not necessarily providing equitable compensation to providers (it may be too much or too little), and beneficiaries may be denied access to the very products they need. To support access to medically necessary technology, to promote ongoing advancements in technology and to reduce abuse, CMS needs to revise the methodology used to develop fee schedules for DME.


This article originally appeared in the January 2005 issue of Mobility Management.

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