For the most part, annual changes in Medicare payment rates don’t directly impact medical device manufacturers. With the exception of the very small number of devices that qualify in any year for the Medicare Inpatient New Technology Add-on or Hospital Outpatient Pass-through (PDF) status, or devices used in the home and classified as “durable medical equipment,” demand for devices is influenced more by the overall financial health of hospitals and physician practices than by any particular reimbursement rate decision or trend in payment levels. Nonetheless, device makers should be very interested in whether insurers are adequately covering the financial needs of their hospital and physician customers. If hospital or physician practice P&Ls are healthy, they’ll invest in new equipment and technologies that improve quality, expand capabilities or provide favorable market positioning.
The conventional wisdom on provider financial health, strongly reinforced by provider organization public positions, is that payments from Medicare are in general too low. And there are some facts that lend support to that argument. Physician incomes are reported to be falling, fairly dramatically in some specialties, and there are reports of geographic shortages (PDF). Numerous hospitals annually report operating deficits, engage in protracted labor disputes with nurses and other unionized employees and/or implement staffing reductions. Increases in private insurer payment rates (and consequently in health insurance premiums) are attributed by both doctors and hospitals to cost-shifting required by inadequate public program payments. At the same time, many hospitals are aggressively adding new patient capacity, luxurious medical office complexes abound and provider purchases of expensive new equipment remain as healthy as overall capital markets allow.
The picture, in other words, isn’t all that clear. And since most of the public statements and arguments on the issue come from parties driven in substantial part by financial self-interest, it is hard for any independent observer to come to a satisfactory conclusion. The fact that conclusions are hard to come by, however, doesn’t negate the fact that med-tech companies have a lot at stake and that they need to incorporate an informed understanding of provider finances — an understanding based in an assessment of the adequacy of insurer payment levels — into corporate strategy and product commercialization plans. The same is true for equity investors considering commitments to the med-tech space. But where to find an objective and empirically-based assessment of payment adequacy?
MedPAC, the Medicare Payment Assessment Commission, is one source for such an assessment. MedPAC is an independent agency established in 1997 to advise Congress on issues affecting the Medicare program. The commission’s statutory mandate is broad. While its primary focus is on Medicare payment levels for services, it is also tasked with analyzing access to care and quality of care for Medicare beneficiaries, a chore that necessarily entails evaluation of the relationship between Medicare payments and the general financial well-being of providers. Directed by 17 commissioners broadly representative of various analytical disciplines, as well as healthcare system stakeholders, MedPAC maintains a full-time staff of about 30 analysts and publishes two major reports annually (a payment policy report in March and a healthcare system policy report in June) as well as an annual Data Book, provides testimony on Medicare issues to Congressional committees and prepares numerous comment letters and special studies. MedPAC has a similar reputation for non-partisan expertise as the Congressional Budget Office and the staggered three-year terms of commissioners maintains excellent continuity.
MedPAC issued its annual Report to the Congress on Medicare Payment Policy (PDF) March 1, and its methodology and findings are instructive. In assessing the adequacy of Medicare payment, MedPAC looks at multiple variables, including:
- Beneficiaries access to care, as measured by volume of services, supply of providers, and provider capacity;
- The quality of care;
- Providers’ access to capital; and
- The relationship between Medicare payments and costs (i.e. providers’ "Medicare margins".
The assumption here — quite reasonable, I think — is that if payments are sufficient to maintain an adequate supply of good quality services, as measured by both the number and the capacity of providers, the system is adequately funded. Likewise, if providers have adequate access to capital in order to fund facility and equipment investments, they must have reasonably healthy financial statements. And obviously, if operating margins are positive, payments must be adequate. MedPAC looks at both overall margins and Medicare margins, and its analyses therefore allow insight into the question of cost-shifting.
The report provides a detailed analysis of each of these measures for each category of Medicare services (e.g., hospital inpatient, hospital outpatient, physicians, ambulatory surgery centers, chronic dialysis facilities, etc.). There is sufficient variation among types of service to render any generalizations imperfect and anyone interested in a particular provider category should read the report. But with a few exceptions MedPAC finds that Medicare beneficiaries have little trouble gaining access to the healthcare services they want and need, that the supply and capacity of providers is keeping pace with demand, and that quality of services across most available measures is improving (albeit slowly) or is, at worst, constant. Furthermore, MedPAC finds that provider’s have generally had adequate access to capital — less so during the 2008 financial system crisis than is typically the case, but even then no worse than potential borrowers in any other sector of the economy. In general, Medicare payment levels are adequate to meet program goals.
One possibly problematic area highlighted by MedPAC is hospital Medicare margins, which have been negative since 2003 and are trending downward — reaching 7.2 percent in 2008. Inpatient margins were –4.7 percent that year, while hospital outpatient margins were a whopping –12.9 percent. Medicare payments to hospital are clearly lower than the cost of providing the paid-for services. All-payer operating margins, however, remained positive, although that indicator slipped to 1.6 percent in 2008. So hospitals as a class remain solvent, although apparently by virtue of higher private insurer payments making up for Medicare shortfalls. Is this the smoking gun, definitive evidence from a respected non-partisan body, that inadequate Medicare payment levels lead to cost-shifting and increased private insurance costs and premiums?
The answer, according to MedPAC, is a resounding "No." First, the commission argues, Medicare payment levels have no influence over private insurer contract pricing or fee schedules. Private insurer payment levels are based either on principles such as "prevailing community charges" or "reasonable and customary charges," in which case they are essentially historically determined, or on contract negotiations, in which case they reflect market power. Hospitals might seek higher payments from private insurers — indeed, you would expect them to seek the highest payments they can achieve — but they would do, and in the past have done, exactly the same thing irrespective of their Medicare margins.
MedPAC’s second retort to the cost-shifting claims is even more interesting. The commission’s analysis of hospital costs shows a wide range of variation; some hospitals can provide the same services as others, with equal or better quality, at markedly lower cost. And there is a clear inverse relationship between cost-efficiency and the percent of patients who are privately insured. The most cost-efficient hospitals are the ones most reliant on Medicare; the highest-cost hospitals are the least dependent upon Medicare. And the Medicare-dependent hospitals provide care of at least equivalent quality, but at lower cost.
The take-away here is the opposite of the hospitals’ "we have to cost-shift" claim. Higher private insurer payment levels, in large part the result of the market power of major hospital providers, keep hospital costs higher than they need to be by subsidizing provider inefficiencies. The hospitals that are most reliant on Medicare have had to work harder to be efficient and to get the most out of what they are paid — and they are succeeding, providing care of good and improving quality at cost levels that are well-constrained. Hospitals that enjoy strong market positions and relatively large privately insured patient populations provide care that is no better, but do so at markedly higher cost.
So which sector needs to be "fixed" — Medicare or the private market?
I’ll return to what this all means for the medical technology sector in a subsequent post — and with luck I’ll be able to provide a definitive analysis of the outcome of the healthcare reform battle in my next post.
Edward Berger is a senior healthcare executive with more than 25 years of experience in medical device reimbursement analysis, planning and advocacy. He’s the founder of Larchmont Strategic Advisors and the vice president of the Medical Development Group. Check him out at Larchmont Strategic Advisors.