The Perils of Calculating Costs for New Technology

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Original story posted on: October 31, 2018

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CAR-T therapy could list a single service with a $1.4 million charge.

I was honored to be able to speak at the annual meeting of the National Association of Healthcare Revenue Integrity in Arizona in mid-October. Since the audience was a group of hospital revenue staff, I used my session to make my case for proper status determinations in total knee arthroplasty to ensure that hospitals are collecting all the compliant revenue to which they are entitled and ensure that their claims will pass scrutiny in an audit.

At the beginning of my talk, I polled my audience and found that about 10 percent were still admitting all Medicare patients as inpatients; 20 percent were performing all services as outpatient; 50 percent were trying their best to guide the doctors to the proper status; and 20 percent were not sure what their hospital did. I also learned that only about half of the audience answered, demonstrating that online polling using a conference smartphone app is not the most effective way to conduct audience polls.

During my session I also discussed the Centers for Medicare & Medicaid (CMS) proposal to allow 12 cardiac catheterization procedures at ambulatory surgery centers (ASCs) starting in 2019. In 2016, Medicare paid out over $3 billion for cardiac catheterizations for over a million procedures. If elective cardiac catheterizations on Medicare beneficiaries are permitted to occur in ASCs, they will quickly invest in the equipment to allow these invasive procedures and solicit ownership interests by cardiologists. Once cardiologists become part-owners of the ASCs and start performing elective cardiac catheterizations, it will quickly lead to elective pacemakers and defibrillators shifting to the ASC, and of course, most of the commercial insurance patients needing any of those services will be shifted. Imagine if hospitals lost even a fraction of their cardiac volume and revenue to physician-owned ASCs; that could cause significant financial pain, so now is the time to start strategic planning.

Although I enjoy speaking at conferences, I also learn a lot by attending other sessions. There were many fascinating sessions at this conference, but the one that really opened my eyes was a presentation by Jugna Shah of Nimitt Consulting and John Settlemeyer of Atrium Health discussing new technologies. Because the Medicare inpatient admission payment structure is based on historic costs and assignment to a DRG that closely matches the costs, new technologies can create financial confusion. And as we all know, the cost of new technology, especially in the area of cancer therapy, seems to be increasing exponentially.

CMS has a formal process for interested parties to ask for designation as a new technology with costs that are not adequately covered by the appropriate DRG. If granted, an add-on payment rate is established, set to a maximum of 50 percent of the actual cost of the technology. But since that payment covers only half of the cost, it often falls upon the outlier payment system to properly compensate hospitals, with the outlier payment covering 80 percent of the excess costs past a fixed threshold set yearly by CMS.

The outlier payment is based on the total reported cost of the care provided for the inpatient admission. But when hospitals bill Medicare, they do not report costs, but instead bill the chargemaster charge for every service provided. The total cost is calculated by taking the reported charges on the claim and applying the hospital’s designated charge-to-cost ratio. I know that sounds convoluted, but that is because it is.

I had a pretty good grasp of all that, as confusing as it is, but here is the “a-ha” moment I had during the presentation. When a hospital adds a new technology to its chargemaster, even though there is a designated new technology add-on payment, they have to price that new technology on their chargemaster so that the charge-to-cost ratio gets applied properly. That means they must mark it up by the appropriate percentage. If they don’t do that, the calculated costs for the new technology will be artificially low, and not only will their add-on payment will be reduced, but their chance to get a compliant outlier payment will be lost.

One of the examples that Jugna and John presented was Chimeric Antigen Receptor (CAR) T-Cell Therapy, or CAR-T therapy. I am sure many of you have heard of CAR-T for leukemia, mainly because of the price tag; the hospital must pay the company that processes the blood at least $375,000 for each treatment, depending on the indication. CMS addressed this cost by establishing an add-on payment that cannot exceed $186,500. In order for a hospital to get the proper add-on and outlier payment, it must post the cost of this treatment on its chargemaster and on the claim at a rate adjusted for its charge-to-cost ratio, which will mean posting a price of over $1.4 million.

But not only does the proper pricing affect the reimbursement for that claim, but each year CMS collects every claim for these new technology services and looks at what hospitals charged in order to assign it to a proper DRG or establish a new DRG, if appropriate. CAR-T therapy is not common, so that means if only a few hospitals price it improperly, all hospitals performing CAR-T will literally be paying the price for many years to come by the undervaluing the costs of such admissions, which CMS will set.

And while getting the financial aspects correct is crucial, hospitals must remember the downstream effects of this pricing system. Patients who receive CAR-T therapy will receive a statement from the hospital listing a single service with a $1.4 million charge. That is sure to generate some phone calls. But now that CMS is now requiring all hospitals to post their chargemasters on the Internet for all to see, this charge is likely going to generate some inquiries by the press and patient advocacy organizations.

Hospitals did not design the pricing system, but must abide by it, and they should be prepared to explain it if questioned. In fact, as Jugna noted in the presentation, CMS seemed to prepare for such questions, noting in the Federal Register (70 FR 68654), “we believe that hospitals have the ability to set charges for items properly so that charges converted to costs can appropriately account fully for their acquisition and overhead costs.”

This conference reminded me about the fascinating and complex work that our revenue cycle and revenue integrity colleagues do every day. It is a challenge for our doctors to care for patients in today’s environment, with uncertain targets and the plethora of measurements, but it is no easier for our revenue colleagues to navigate the payment policies that seem to get more complex each year.

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Ronald Hirsch, MD, FACP, CHCQM

Ronald Hirsch, MD, FACP, CHCQM is vice president of the Regulations and Education Group at R1 Physician Advisory Services. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute-care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic. He is a member of the Advisory Board of the American College of Physician Advisors, a member of the American Case Management Association, and a Fellow of the American College of Physicians. Dr. Hirsch is a member of the RACmonitor editorial board and is regular panelist on Monitor Mondays.

The opinions expressed are those of the author and do not necessarily reflect the views, policies, or opinions of R1 RCM, Inc. or R1 Physician Advisory Services (R1 PAS).

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