Purchasing innovative technologies like intensity-modulated radiation therapy (IMRT) and robotic devices has been a mixed financial bag for hospitals. Although these state-of-the-art systems attract patients who might otherwise go elsewhere, both technologies are expensive, with capital acquisition costs ranging from several hundred thousand to millions of dollars. With only preexisting payment codes available when the technologies were authorized by the US Food and Drug Administration (FDA), it may have been hard for a hospital to make the economic case for their purchase.
For IMRT, codes were eventually issued to cover the cost of the additional equipment and labor that were not needed for other radiation treatments. For robotic surgery, there are no additional codes for the use of a robot, so hospitals lose thousands of dollars (on average) for each Medicare patient treated. Nonetheless, given the power of marketing campaigns, the patient demand for high-tech treatment, and support for the technology by professional societies, some hospitals have been forced to purchase at least one Da Vinci robot (or a competitor) to prevent the loss of patients and staff to facilities that have the technology.
Focused ultrasound technology for prostate ablation is attractive to facilities, especially those that employ physicians who have previously used the technology or those who helped conduct the US clinical trials. Academic medical centers have jumped at the opportunity to be the first to offer the technology. These hospitals and medical facilities seek to provide their patients with a less invasive treatment that offers disease control equivalent to standards of care but is characterized by a superior side effect profile and a much shorter ‘back-to-work’ time (i.e., days rather than the months).
However, the attractiveness of any technology to a facility is based on the payment. The Centers for Medicare and Medicaid Services (CMS) determines payment levels based on submitted claims data. Because IMRT and robotic surgery serve a larger pool of radiation therapy and surgery patients, respectively, payment levels are not sensitive to specific hospital claims data for either procedure; any discrepancies in how they are billed are diluted by the large number of generic procedures performed.
With focused ultrasound for the prostate, the issued codes were specific to the technology. Many early adopter facilities, especially private hospitals used by former offshore medical practice groups, had no experience with “first of its kind” technology when it came to proper billing practices. They did not understand the impact that their billing practices would have on the future of the technology. When later asked, administrators from these facilities wondered how they, as a small hospital in the middle of nowhere, could impact the payment levels for much larger and well-known facilities. Unfortunately, these administrators simply costed out some procedures incorrectly. When setting prices, they often did not account for or incorrectly coded the cost of rental equipment, disposables, and time and expense.
Early in its clinical use, many prostate focused ultrasound cases were performed by facilities that incorrectly costed the procedures. In the end, these facilities had an inordinately large impact on the final facility cost numbers used by CMS to set the reimbursement level for the technology. The low payment level that CMS ultimately authorized significantly decreased the attractiveness of the technology to facilities.
As I discussed in Part 4 of this blog (reimbursement), third-party payors (both private and government programs) are keen to reevaluate their payment policies to constrain rising healthcare costs. Several elements of the Affordable Care Act (ACA) limited reimbursement growth for hospitals, causing them to scrutinize medical purchases to an even greater degree by implementing more stringent standards to evaluate the benefits of new procedures and devices and adopting a more disciplined price bargaining stance. This has, and will continue to have, an impact on the adoption of new technology.
In a modern-day hospital, there are multiple people or departments involved in deciding whether to purchase a new medical device. In addition to the physicians who will be using the device, deciders include nurse managers, support staff, supply managers, the IT department, and reprocessing personnel, among others. Now manufacturers must make the case to each of these stakeholders that it is worthwhile to invest in a new technology.
Profitability and Prestige Drive Decisions
Some hospitals evaluate new technologies solely from the perspective of profitability. Hospitals may see value in a new technology if the financials make sense. They will evaluate the technology’s ability to generate new, increase existing, or preserve current revenue streams if those streams were to disappear without the new technology. Other hospitals, especially those in academic settings, often invest in technology to enhance their quality and quantity of services. These hospitals want to be the largest, most technologically advanced, and the ones that maximize physician income; they want to be at the leading edge of innovative research and clinical innovation, elevating their prestige locally and around the world. Having and displaying the latest technology can draw patients, early physician adopters, and those in the medical community who are interested in learning about advances through journal articles and grand rounds.
In days past, manufacturers only needed the support of the department head to sell a device to an interested hospital. But as hospital margins have shrunk, reimbursement levels have dropped, and technology has become more compartmentalized by department, the economics of acquiring a new technology has come to play an ever-growing role in decision making.
The Da Vinci surgical robot is a case in point. Because of its capital, service, and per-case costs, the Da Vinci system requires the hospital to use it to treat a large number of patients each year to make the purchase cost effective. For example, hospitals generally need to perform 150 to 300 procedures annually for six years, with a good portion being covered by commercial insurance, to offset the upfront and ongoing costs of acquisition and the loss incurred by each Medicare patient treated. Many new surgeons in training, particularly those in urology and gynecology, receive robotic surgical training as residents and want to work at hospitals that have the technology. Patients may also choose a hospital with a Da Vinci system based on the perception that it is a state-of-the-art facility.
As the robot became the standard for many surgeries at large academic and regional centers, and despite a lack of evidence demonstrating superiority to more traditional techniques, small hospital administrators – whose facility lacked the volume of patients required to operate a robot at breakeven – had a decision to make. They could purchase a robot to retain surgeons and patients, knowing that they most likely will lose money yearly, or they could refrain from a purchase and risk losing surgeons and patients to a regional center that has the technology. This decision was and continues to be confounded by a lack of additional reimbursement for the use of the robot.
After a facility purchases a technology, the facility’s role in determining the success of the technology for the manufacturer has not ended. The obvious “if no one uses it there will be no recurring revenue stream for the manufacturer” aspect is straight forward and easily appreciated, but the details of a hospital’s early clinical utilization can also have a profound influence on factors that weigh heavily on whether a device becomes a commercial success.
The Crucial Role of Payment Rates
It is possible that nothing determines the success of a new technology more than the payment rate CMS sets for the technology. The CMS payment rate determines whether a facility can make a profit, or at least break even, when using the technology. Payment rates also impact whether physicians will be compensated enough to at least match the amount they receive for the procedure that the new technology replaced. Without a CMS payment rate that is comparable to the cost associated with providing the procedure, it is difficult to get a hospital to purchase the technology or allow it to be used (unless it is so clearly better than the standard of care that it would be negligent if it was not offered).
CMS payment rates are determined through an arcane process based on “charges” – or the amount the patient is billed – that are submitted to CMS by hospitals performing the procedure. Rather than going into detail on how charges are determined and what CMS does with those charges, the process can be simplified by looking only at cost – what it actually costs the hospital to perform the procedure, as opposed to what it bills for the procedure. CMS uses all costs submitted by all hospitals for a given procedure and averages them together to arrive at an average cost across the US for that procedure. CMS then assigns the procedure to an Ambulatory Payment Classification (APC) that pays an amount that is close to the determined amount, but it can be above or below the calculated amount. (Learn more about this from a 2021 Foundation webinar.)
If a hospital does not correctly calculate the complete cost of a procedure – for instance, by failing to account for the cost of rental equipment, a disposable used in the procedure, or the amortized capital cost of the equipment – CMS will see the procedure costing less than the true cost and may assign it to an APC that pays an amount significantly less than the true cost. This low payment may discourage a hospital that has calculated the cost correctly from allowing the procedure to be performed, which in turn will limit the use of the technology and therefore prevent other hospitals from acquiring the technology. This point is so important it is worthy of amplification.
This point bears repeating: Because CMS payment rates are determined by a hospital’s incurred reported costs in performing a procedure, and because commercial insurance payment rates are related to CMS payment rates, it critical that each hospital using a technology costs the procedure correctly.
Although incorrect costing claims made by a hospital to CMS can be corrected (either in a forward manner or a 12-month “look back” at already filed claims), there is a two-year lag in realizing a change in the CMS payment rate; costs incurred in 2022 are assessed in 2023 for assignment of payment to take effect in 2024. This two-year delay in realizing a “living payment” for a technology may be critical in determining the future of a startup and its new technology; therefore, it is imperative that the determined cost is accurate from the start. While refiling claims is always an option, most hospitals are reluctant to do so because it may open them up for audits with potentially far-reaching impacts.
Decisions for Manufacturers
This means that manufacturers must allocate significant time with each early adopter facility to ensure the procedure is billed correctly and that the hospital understands the ramifications of billing incorrectly – not just on its own revenue stream, but on the viability of the technology. Manufacturers cannot assume that a given hospital, no matter how well known or experienced, will do this correctly for a new technology. Manufacturers should provide education and assistance to help hospitals ensure the costs submitted to CMS represent the complete and true cost of performing a procedure. Many hospitals may be reluctant, refuse, or be legally prevented from accepting this type of assistance; nonetheless, the knowledge specific to the new technology must be imparted. In this situation, manufacturers may be able to reach out to the physician user or employ an unaffiliated third party. Because claims data are averaged across all hospitals performing a procedure and case numbers for a new technology are usually low, even one hospital underreporting costs, especially if it is a high-volume user of the technology, can reduce the payment level for the entire country. Ultimately, one hospital can impact whether or not the procedure is performed nationwide.
It may seem like a win when a new technology receives a CMS payment rate, but if that rate does not cover the cost of using the technology, that win may really be a major setback. As a result, it may even be wise during the early days of technology introduction to finely “pick and choose” which institutions to sell to, encouraging facilities whose billing practices are uncertain or who are unwilling to accept billing input from the manufacturer to wait until the technology, and payment for its use, is established. The loss of sales revenue from these customers will be negligible compared with the complete loss of sales and cases that may result if there is a poor payment rate and (therefore) no cases being performed.
Hospitals also play a major role in getting the word out about a new technology. Having a world-renowned institution using, promoting, and therefore endorsing the technology will encourage other hospitals that are more “followers” than “trend setters” to acquire the technology. Many of these influential hospitals are used to and expect to receive a new product at a favorable price point in return for research, publicity, or for provididing educational activities. Start-up companies have limited ability to provide devices at huge discounts in exchange for services rendered, so it is incumbent on the manufacturer to do the homework required to identify the facilities that will provide the best bang for the buck. Each institution will argue its merits, but manufacturers should appreciate that an institution that is right for a competitor’s technology may not be right for a given start-up’s product. Compiling a list of the manufacturer’s objectives for preferential placement of its product – publicity, establishing pattern of care and usage, determining true cost, educating other physicians and facilities, publishing, producing large case numbers – and then matching a possible facility’s proven strengths against this list, will go a long way toward ensuring that those objectives will be met.
Final Thought – Working With Hospital Practices
A final point worth making is the important role a facility’s central sterile processing (CSP) department can play in the facility’s acquisition of a technology. Cleaning, disinfection, and sterilization practices and protocols are the cornerstone of infection control and patient safety. CSP is responsible for issuing and implementing policies and procedures for processing instruments correctly. As such, they often have sign-off authority for any new technology that includes components requiring procedures such as disinfection and sterilization. CSP may have the authority to require a manufacturer to submit all reprocessing methods, complete with justification for the means used to validate those methods, for review. If a new technology includes components that require reprocessing, it is imperative that the practices the manufacturer recommends are consistent with the practices employed by the facilities in which it will be placed. If a new technology requires reprocessing methods not practiced by target facilities, the manufacturer cannot assume that a given facility will change its practices to be consistent with the requirements of the manufacturer or make any kind of exception to its own policies. Rather, the facility may require the manufacturer to adapt its practices to meet the needs of the facility. Because every facility may have slightly different procedures, it is prudent for the manufacturer to poll prospective acquirers of its technology, or identify standard practices consistent across facilities that it will meet, such that decisions about the path forward for reprocessing results in an approach(s) used by the majority of its prospective customers.
Mark Carol, MD, is a senior consultant at the Focused Ultrasound Foundation.
Read the Series
- Part 1: The Complex Ecosystem of a Medical Device Startup
- Part 2: Novel Technology Development
- Part 3: Regulatory Authorization
- Part 4: Reimbursement
- Part 5: Physicians
- Part 6: Patients
- Part 7: Facilities
- Part 8: Societies and Guidelines
- Part 9: Commercialization
- Part 10: Technology Advancement
- Part 11: Publication Strategy
- Part 12: Cybersecurity
- Part 13: Financial Challenges