November 14, 2000
The Honorable Michael Hash Dear Mr. Hash: As you know, we share the goal of assuring that hospitals are appropriately compensated for the use of new technologies to improve care delivered to Medicare beneficiaries in all settings. With the development of the outpatient prospective payment system (PPS), which included a payment for devices, Congress was concerned that in order to encourage appropriate access to these new technologies, an additional payment, or add on, was needed for this purpose. Last year, the Congress created a mechanism to make transitional pass-through payments in the outpatient prospective payment system (PPS) for certain drugs, devices, and biologicals that was intended to accomplish this goal. However, as HCFA has begun to implement this pass-through system, certain potential shortcomings and operational difficulties have come to our attention. We are concerned that instead of achieving our mutual goal of appropriate payment for new technology, this mechanism is seriously flawed and is inconsistent with the premise underlying a prospective payment system which is intended to encourage appropriate utilization of resources for beneficiary care. The decision about what technology is most appropriate for an individual beneficiary should be made by the physician, hospital, or other health care providers and should not be influenced by the potential for a bonus payment for the use of a particular item. However, we are concerned that the pass-through system as currently designed provides incentives for providers to make decisions about the use of technology based not on the best interests of the patient, but on the financial incentive provided under the pass-through system. This is because the additional payment distorts the incentives under the outpatient PPS by biasing hospitals toward using new technology, without any consideration of the patient’s medical circumstances. Moreover, the pass-through payment structure is inherently inflationary and may drive spending in ways that raise questions about whether the spending is in the interest of the beneficiary or in the interest of financial gain for providers and manufacturers. First, the system provides for enhanced payments for new items, whether or not they are effective or efficient. It is not clear that it is always appropriate to increase payment for new technology. Most new technologies are incremental or marginal improvements over existing items and are incorporated into the PPS as they are adopted in the market place. In some cases, new technology can be a "break-through," and may have higher costs in such instances, although it is also possible that efficiencies in care that are achieved by the new technology may actually reduce costs. Second, as currently structured, the pass-through payments encourage manufacturers to raise their prices. Manufacturers of drugs and devices have an incentive to inflate prices both to qualify for pass-through status and to appeal financially to hospitals. Under the current statute, new items qualify for pass-through payments based on their cost and the date the item became available. Hospitals are reimbursed based on the average wholesale price (AWP) for drugs and charges reduced to costs for devices. In both instances, the manufacturer has an opportunity to manipulate the price to obtain higher reimbursements for the hospital and therefore make their product more attractive. This leads to a perverse incentive for hospitals to choose the most expensive rather than the most effective technology. The pass-through payments also benefit larger, high technology hospitals at the expense of smaller hospitals less likely to use the newer items. Additionally, at a time where HCFA is working to simplify program rules and requirements, the pass-through mechanism adds an additional layer of complexity to administering the PPS that is disproportionate to the level of resources provided through the pass-through payments. Recently, there has been concern about the total amount of pass-through payments under the PPS. Preliminary estimates indicate that the statutory cap on total pass-through payments will shortly be exceeded by a significant margin, eventually requiring reductions in payments. Raising the cap will only exacerbate current flaws in the system since it increases the bias toward new technology and further distorts resource decisions hospitals must make under the PPS. Moving to a category-based device list, as proposed in the Benefits Improvement and Protection Act, H.R. 5433, would not fully eliminate these problems either. In fact, we are concerned that it would lead to additional pressure on HCFA to constantly create new pass-through categories and would continue to divert administrative resources to make eligibility determinations which HCFA could better use on other programmatic needs. We are raising these concerns because we believe that the current system, without adjustment, is destined to implode. We believe this matter requires legislative attention to fix the flawed mechanism. We reject the option of simply adding more money to raise the existing cap. We would appreciate any suggestions for legislation to address this issue. Sincerely, JOHN D. DINGELL SHERROD BROWN PETE STARK
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