. . 

I 

MEDICARE CARRIER ASSESSMENT 

OF NEW TECHNOLOGIES 

OF INSPECTOR GENERAL 

OFFICE OF EVALUATION AND INSPECTIONS 

APRIL 1990 
MEDICARE CARRIER ASSESSMENT 

OF NEW TECHNOLOGIES 

Richard I? Kusserow 

INSPECTORGENERAL 

OEI-01-88-00010 APRIL 1990 
EXECUTIVE SUMMARY 

PURPOSE AND OBJECTIVES 

This inspection report reviews technology assessmentactivities by the Medicare carriers. We 

examined how the carriers identify new technologies, and how they make decisions about 

coverage and pricing for new devices, diagnostic tests,procedures, and treatment modalities. 

Also, we addressedhow the carriers perceive their overall performance in carrying out 

technology assessmentactivities. 

BACKGROUND 

Total Medicare expenditures increased at an averageannual rate of 12 percent over the years 

1976 to 1988, but Medicare Part B expenditures increased at an annual rate of 18 percent over 

the same years. In dollar terms, the Part B payments made by Medicare carriers increased an 

averageof $1.8 billion a year, to $26.1 billion in 1988. Studies conducted by the Health Care 

Financing Administration (HCFA) and the Office of Technology Assessmentindicate that new 

health care technologies account for a substantial portion of the annual increase. 

In their role asprocessorsof approximately 400 million claims annually for health care items 

and services, the Medicare carriers are usually the program’s first point of contact with 

technologies new to the medical marketplace. 

The carriers are called upon to identify and to make coverage and pricing decisions about 

almost all new health care technologies. Ordinarily the carriers decisions are final; HCFA 

catries out national assessmentson only 20 or 30 new technologies a year. 

METHODOLOGY 

We basedthis inspection on: 

. structured interviews with representativesof all the Medicare carriers that were 

responsible for processing Part B claims during the summer of 1988; 

. written information provided by the carriers concerning their experiences in assessing 

five particular new technologies; 

. discussions with outside observers,including representativesof manufacturers, 

insurance organizations, and national organizations active in assessinghealth care 

technology; and 

. ‘the HCFA’s Medicare Part B payment data records, from which we derived payment 

amounts for particular codes provided by the carriers. 

i 
MAJOR FINDINGS 

Our findings on carrier assessmentof new technologies reflect three major themes: 

(1) limited information about emerging technologies, (2) inconsistent coverage and pricing 

decisions, and (3) economies not realized. We reflect these themes in our findings: 

The HCFA has moved to improve carrier coverage and pricing. However, carriers 

desire additional and more timely information on coverage and pricing matters. 

Carriers are inconsistent in coverage and pricing decisions involving new technologies. 

Some of the variations are unwarranted (particularly in pricing). 

Carriers have rw system for ensuring that payments for new technologies decrease in 

response co decreasing costs for delivering an item or service. 

We organized our individual findings according to the Medicare carriers’ process for 

assessmentof new technologies: (1) identifying the new technology as such, (2) deciding 

whether or not to include it as a Medicaxe covered item or service, and (3) deciding on the 

reimbursement amount, or price, to allow for it. 

Overall Performance 

. The carriers’ self-rankings indicate substantial room for improvement in the way they 

assessnew technologies. In only one of four categories do a majority rate the carrier 

performance as good. 

Identification 

. More than one-third of all carriers have experienced major problems with the 

identification of new technologies. Included among them are 6 of the 11 largest carriers. 

Coverage 

. Most carriers use professional acceptanceas a major criterion when making coverage 

decisions about new technologies. Less than 10 percent of the carriers cite cost 

effectiveness as a major criterion. 

. Respondentsat one-third of the carriers say that the carriers, as a group, are at most 

minimally consistent in making coverage decisions about new technologies. 

. When they make coverage decisions about new technologies, most carriers get input 

from such operationally related sourcesasHCFA, other carriers, or their own private 

businesssegments. 

ii 
. However, the carriers strongly support the concept of a national clearinghouse that 

would shareinformation about coverage issuesamong carriers. 

Pricing 

. Most carriers use more than one method to setreimbursement amounts for new 

technologies. The method used by the most carriers is that of comparison to similar 

codes. 

. Reimbursement amounts allowed for new technologies vary significantly from one 

carrier to another. The variation is much greaterthan that accounted for by differences 

in per capita personal income acrossthe country. 

. Although about half the respondentsthink that the cost of providing a new technology 

tends to decreaseduring the 2 or 3 years following its introduction, none identify any 

special initiatives to avoid overpayments by Medicare in such instances. 

RECOMMENDATIONS 

The HCFA should continue to improve its own capability and that of the carriers to identify 

.emerging technologies and to make more informed, explicit, and consistent coverage and 

pricing decisions concerning new technologies. 

Toward this end HCFA should: 

(1) continue to improve communication among the carriers through increased use of 

national and regional technical advisory groups, 

ca continue to improve carrier accessto comparative Medicare payment information about 

new technologies, 

(3) review the performance of carriers in identifying, covering, and pricing specific new 

technologies, and 

(4) cooperate with the Public Health Service in proactively and routinely compiling and 

rapidly disseminating information on new health care technologies through 

clearinghouses or other appropriate means. 

The HCFA should seek legislative authority to broaden the basesupon which it can establish reimbursement amounts for new and emerging technologies other than physician services. This authority should be available to HCFA both at the time of the initial coverage 

decision and as the technology matures. 

. . . 111 
The legislation should supplement current authorities by allowing HCFA to: 

(1) limit initial payments basedon a consideration of the cost of developing and delivering 

the technology, 

(2) subsequently reduce the allowable chargesfor new technologies as they mature in order 

to take advantageof reduced costs, and 

(3) establish regional or national reimbursement limits basedon simple and easily verifiable 

criteria such as the mere existence of substantial variation in reimbursement rates. 

COMMENTS AND OIG RESPONSE 

In its written comments and at subsequentmeetings, the HCFA recognized that problems exist 

with the carrier assessmentof new technologies and noted that it has taken numerous recent 

initiatives to’mprove technology assessment. Some of the actions we recommended are 

included among the HCFA initiatives. The fiCFA was concerned that our findings, at least in 

part, may no longer be valid becauseof its recent efforts. It asked the OIG to conduct an 

additional study aimed at assessingthe effectiveness of its recent initiatives. 

We agree that HCFA has moved to resolve the problems addressedin this study. For this 

reason we have removed from this report a statement, contained in the draft report, that the 

current procedures for carrier coverage and pricing of new technologies constitute a material 

internal control weakness within the meaning of the Federal Manager’s Financial Integrity 

Act. We have agreed to work with HCFA in evaluating the effectiveness of its efforts to 

improve carrier assessmentof new technology. 

The HCFA agreed that additional legislative authority would help it improve coverage and * 

pricing decisions for nonphysician services. The HCFA believes that physician payment 

reforms recently enacted in the Omnibus Budget Reconciliation Act of 1989 (OBRA-89) will 

provide an appropriate framework and sufficient authority to improve coverage and pricing 

decisions relating to physician payments. 

We agreeand we have modified our legislative recommendations to focus exclusively on 

nonphysician services. But we are concerned about the practical aspectsof the new physician 

payment reform provisions. In order to develop fee schedulesfor new and emerging treatment 

modalities, HCFA must identify them We believe that the ability to identify emerging new 

technologies is the area of greatest weakness in the current system. We are hopeful that 

HCFA’s recent initiatives will be effective in addressing this weakness. We will know more 

when our future evaluations, mentioned above, are completed. 

We also remain concerned that the many Part B payments for nonphysician services, such as 

durable medical equipment, prosthetics, and physiological testing, are not covered by the 

payment reforms of OBRA-89 . We believe our legislative proposals arc particularly 

important for these nonphysician services. 

iv 
The HCFA disagreed with our recommendation for disseminating coverage and pricing 

information among carriers through a clearinghouse becauseit would not be cost effective, 

and becausecarriers do not use current clearinghouses. We continue to support this 

recommendation. In our survey, the carriers themselvesasked for this kind of assistance. We 

believe the current clearinghouses are too passive and often impracticably slow becausethey 

rely upon specific requestsfrom the carriers. What we have in mind is a more proactive and 

orderly dissemination of information. We think that a more proactive clearinghouse would be 

an effective way to do this, but we would support any other technique provided it is 

aggressiveand systematic. We have modified the wording of the recommendation to make 

our intent more clear. 

The Public Health Service and the Office of the Assistant Secretary for Planning and 

Evaluation both recognized the need to improve carrier coverage and pricing decisions. They 

both supported the idea of a clearinghouse to sharecoverage and pricing information. 

The Health Insurance Association of America and the Health Industry Manufacttirs 

Association also commented on our draft report. They agreed with most of our findings and 

recommendations. 

The text of all comments and our detailed responsesto them are in appendix D. 

V 
. 

TABLE OF CONTENTS 

EXECUTIVE SUMMARY 

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

Carrier Identification Of New Technologies . . . . . . . . . . . . . . . . . . . . . .6 

Carrier Coverage Of New Technologies. . . . . . . . . . . . . . . . . . . . . . . . .8 

Carrier Pricing Of New Technologies. . . . . . . . . . . . . . . . . . . ..c.... 16 

Overall Carrier Performance In-Assessment Of New 

Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 

RECOMMENDATlONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 

Comments And OIG Response . . . . . . . . . . . . . . . . . . . . . . . . . ..i... 26 

APPENDIX A 

- Methodological Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-l 

APPENDIX B . 

Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-l 

APPENDIX C 

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c-1 

APPENDIX D . 

Comments On The Draft Report And OIG Responses . . . . . . . . . . . D-1 

APPENDIX E 

Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-l 
INTRODUCTION. 

BACKGROUND 

Basis in the Law 

Medicare is a health insurance program for the aged an! disabled. Since enactment in 1965 it 

has provided coverage for broad categories of benefits. Among thesebenefits are (1) 

services by physicians, and (2) supplies such as equipment and diagnostic testsordered by 

physicians. All of thesearc covered under supplementary medical insurance (Part B of 

Medicare). Hospital insurance (Part A) covers servicesprovided by hospitals, skilled nursing 

facilities, and home health agencies. 

Generally, Part B of Medicare covers aIl services ordinarily furnished by physicians licensed 

to practice medicine and those items or servicesfurnished by nonphysician suppliers under a 

physician’s supervision or in responseto a physician’s request. But coverageis not unlimited. 

The law provides a general exclusion that applies to every claim for benefits: 

“...no payment may be made for any expenses which... are not reasonable and 

necessary for the diagnosis or treatment o illness or injury or to improve the 

function of a malformed body member....” 4 

Administration by Carriers 

The law assignsto the Secretary of Health and Human Services(HHS) overall responsibility 

for administering Medicare. Within HHS, the Health Care Financing .Administration (HCFA) 

has primary responsibility for Medicare operations. The law authorizes the Secn%ary3toenter. 

into contracts with carriers for performance of payment and other program functions. -Under 

Part B, thesecarriers are private insurance organizations that contract with the Secretary to 

make coverage determinations, set reimbursement amounts, and disburse payments in a local 

service area, most often a State. 

One of the essential functions that carriers perform is the making of coveragedecisions in 

responseto claims for benefits. Carriers do not rely on an all-inclusive list of Medicare 

covered items and services. In principle, each of the estimated 500 million Medicare Part B 

claims filed annually is the subject of a coverage determination by a carrier. In practice, few 

individual claims present serious coverage issues. Small numbers each year include new or 

unusual devices, tests, procedures, or treatment modalities which the carriers must assess,and 

for which they must make coverage and pricing decisions. 

Carriers are bound by policy guidance that HCFA hasissuedon a specific new technology. 

When such guidance is not offered, each carrier is authorized to make decisions about what is 

reasonable and necessaryand to apply these decisions in making coveragedeterminations for 

individual claims.4 
Becausethey receive and adjudicate claims, carriers perform the bulk of assessmenton new 

technologies. A small number of items and services(usually 20 to 30 a year) become the 

subjects of a nationally centralized technology assessmentprocess,either becausethey present 

broad national policy issuesor becauseit has become apparent that different carriers have 

made inconsistent coverage decisions. Carriers refer these issuesto HCFA, which coordinates 

the centralized assessmentand advisesthe carriers of the result. 

Trends in Medicare 

Total Medicare expenditures increased at an averageannual rate of 12 percent over the years 

1976 to 1988, but Medicare Part B expenditures increased at an annual rate of 18 percent over 

the same years (figure 1). In dollar terms, the Part B payments made by Medicare carriers 

increased an averageof $1.8 billion a year, to $26.1 billion in 1988. Studies conducted by 

HCFA and the Offke of Technology Assessmentindicate that new health care technologies 

account for a substantial portion of the annual increase. 

FIGURE 1 

MEDICARE PAYMENTB,TOTAL AND PART B 

1976 - 1988 

B%LlON@ 

$100 

1876 1878 1080 1082 1084. 1888 1088 

YEAR 

- TOTAL * PART B 

SOURCE: HEALTH CARE FINANCING 

ADMINISTfUTION. OFFICE OF 

THE ACTUARY 

The increasinFmmber of enrollees contributes about 13 percent of the increase for Part B 

expenditures. Inflation, the largest factor, contributes about 50 percent of the increase, and 

increasing use of servicescontributes the remaining 37 percent. The latter two factors reflect 

2 
. 

the effects of technological innovation, Both include the costs of developing and introducing 

new items and servicesand demand for new services.’ 

PURPOSE AND OBJECTIVES 

This study reviews technology assessmentactivities by the Medicate carriers. It examines 

how the carriers identify new technologies and how they make decisions about coverageand 

pricing for new devices, diagnostic tests,procedures, and treatment modalities. It also 

addresseshow the carriers perceive their overall performance in carrying out thesefunctions. 

METHODOLOGY 

We interviewed each of the 45 carriers about the processthey use to assessnew technologies 

and their evaluation of the assessmentactivity. We spoke with medical directors of all 29 

carriers who had them. In the caseof 16 carriers that did not have medical directors, we 

interviewed responsible smff personswho were knowledgeable about Medicare operations. 

Our detailed, structured interviews followedimroductory letters and preliinary 

conversations to identify the respondentsat each carrier. We interviewed chief medical 

officers and those who overseedecisions about new technologies; as such thesepersonsam 

likely to be highly knowledgeable about carrier assessmentactivity. 

Since all carriers participate in technology assessment,we chose to interview all of them. In 

analyzing their responses,we grouped the carriers by size, censusregion, type (Blue Shield 

plan or commercial carrier), and presenceof a medical director. 

In addition, we interviewed 12 observersoutside the carriers for independent perspectiveson 

how well the carriers ate doing in assessingnew technologies and for recommendations on 

any improvements that might be made (appendix A). 

For a snapshot view of actual experiences,we asked the carriers about decisions they have 

made concerning a selection of new technologies. Through the introductory letters we asked 

what procedure codes they used for 12 technologies during the years 1985 through 1987. For 

5 of these technologies we also asked for the carriers’ experience with the key elements in the 

assessment: identification, coverage, and pricing (appendix B). 

We reviewed HCFA’s Part B payment records for these samefive technologies in order to 

determine the number of servicesreported by each carrier in the years 1985-1987 and the 

actual expenditures reported Brief descriptions of the technologies can be found in appendix 

C. 

OTHER STUDIES AND ACTIONS 

In 1984 the Office of Technology Assessmentexplored;he dual relationship between 

Medicare and technology and identified policy options. In 1985 the consulting firm of 

Lewin and Associates, under a contract with the Assistant Secretary for Planning and 

3 
I ! . -, 

Evaluation, examined the Medicare coverageprocessfor new technologies and recommended 

changesin five specific areasof policy-making.’ And HCFA itself styd$s technology 

assessmentin its role as the source of policy guidance for the carriers. 

During 1987, in compliance with the terms of an agreement to settle a beneficiary’s lawsuit, 

HCFA published in the Federal Register a notice and request for comments about procedures 

for medical services coverage decisions.” Many of thesecomments reflected opinions that 

Medicare is not consistent, particularly in coverage decisions. 

In January of 1989, following analysis of the comments, HCFA published a proposed rule on 

criteria and proc@res for making medical servicescoverage decisions that relate to health 

care technology. The proposed rule addressescriteria and procedures for HCFA decisions as 

to whether and under what circumstances specific health care technologies could be 

considered reasonable and necessaryand therefore covered under Medicare. The rule would 

provide for more opennessand streamlining of the decision making process through increased 

public participation and expedited review of new breakthrough technologies. -

A second lawsuit,13 recently certified as a class action in U.S. District Court in Massachusetts, 

seeksin effect an individual technology assessmentby the carriers for each claim. If 

successful, no claim could be denied on the basis of a centralized decision that an item or 

service is not reasonable or necessarywithin the meaning of Medicare law. 

Along with the regulatory process,HCFA has moved with a number of administrative actions 

aimed at improving the assessment.ofnew technologies, including that done by the carriers. 

Among these actions are the following: 

. All carriers are required to submit a copy of all medical coverage policy. This policy 

will be reviewed to identify carriers with widely variant policy. 

. Ail carriers are required to have licensed physicians as medical directors. 

. Medical directors conferences are to be held at least annually (in fact have been 

semiannual) and are to devote attention to technology’assessment. 

. The Coverage and Payment Technical Advisory Group and the HCFA Physicians’ Panel 

both discuss emerging technology and coverage issues. 

. The HCFA is evaluating the reasonablenessof price levels for real time cardiac 

monitoring, 

In May 1988, the National Advisory Cout$l on Health Care Technology Assessment issued a 

report on the Medicare coverage process. The report is organized in chronological order of 

the stepsin the coverage and assessmentprocessthat applies to those technologies chosen for 

4 
national assessment. It is exemplified by the progressof nine selected technologies. The 

Council made 23 recommendations for improving the timeliness, openness,and quality of this 

assessmentprocess. National technology assessmentsare, of course, binding on carriers when 

incorporated into HCFA instructions. Moreover, the national process provides a model for 

portions of the carriers’ own assessmentactivities. 

5 
FINDINGS 

Our fmdings on carrier assessmentof new technologies reflect three major themes: (1) limited 

information about emerging technologies, (2) inconsistent coverage and pricing decisions, 

and (3) economies not realized. We reflect these themes in our findings: 

The HCFA has moved to improve carrier coverage and pricing. However, 

carriers desire additional and more timely information on coverage and pricing 

matters. 

Carriers are inconsistent in coverage and pricing decisions involving new 

technologies. Some of the variations are unwarranted (particularly in pricing). 

Carriers have no system for ensuring that payments for new technologies 

decrease in response to decreasing costs for delivering an item or service. _ 

We organized our individual findings according to the Medicare carriers’ processfor 

assessmentof new technologies: (1) identifying the new technology as such, (2) deciding 

whether or not to include it as a Medicare covered item or service, and (3) deciding on the 

reimbursement amount, or price, to allow for it. 

CARRIER IDENTIFICATION OF NEW TECHNOLOGIES 

Caniers rely primarily upon claims submissions and physician inquiries to identify new 

technologies. 

For the identification of new technologies, carriers for the most part react to inputs from 

agents outside of Medicare. Few caxriersactively seek to identify new technologies, and they 

usually react to external sources. 

According to 80 percent of the carriers, the claims processing department is the primary site 

for identification of a new technology. Significant characteristics that trigger identification 

and review include claims submitted without a procedure code, or claims for items or services 

the carrier has not seenbefore or that have no established pricing. One carrier representative 

stated: “The claim cannot be categorized or explained and we don’t know how to processit.” 

Thus, identification takes plpce by exception- if the claim cannot be paid, it is passedon for 

further review. 

Fewer than 20 percent of the carriers have written guidelines to addressidentification of new 

technologies. Those who do include the guidelines in their claims processing manuals. 

Ordinarily, a new technology is identified not by its meeting a defined criterion, but by its 

failing to fit payment instructions. 

6 
At the larger carriers particularly, departments other than claims processing, often professional 

relations or utilization review, identify new technologies. These departments are contacted by 

external sourcessuch as physicians, manufacturers, national associations, and beneficiaries. 

Physicians account for the substantial majority of thesecontacts. They approach the carriers 

by telephone or letter or talk with carrier medical staff and advisersat professional meetings. 

Some physicians call a carrier before submitting a claim to learn if Medicare will cover an 

item or service. Others question the reimbursement amount received on a new technology 

about which the carrier was unaware. 

Besidesinput from physicians, about one-third of the carriers identify manufacturers as a 

sourcefor identification of new technologies. Larger carriers tend to rely on larger numbers 

of sourcesto identify new technologies. Of the 11 largest carriers, 10 draw on 3 or more 

sources,but only 13 of the 34 smaller carriers rely on asmany. 

More than one-third of all can+rs have experienced major problems with the identification 

of new technologies. Included among them are 6 of the II largest carriers. -

Providers sometimes cause significant problems for carriers by giving inadequate descriptions 

of new technologies on claims submitted for payment. If a claim carries a procedure code that 

does not accurately describe a new technology, this &lays or defeats carrier identification. 

Intentionally or not, providers can thus exploit a vulnerability in the carrier identification 

process. Ten carriers report that a new technology billed under an established procedure code 

would not be recognized as new but would be paid as submitted. A carrier’s failure to 

recognize a new technology can lead to severalproblems for beneficiaries, physicians, the 

health care industry, and program administrators. Any Medicare overpayments are subject to 

recovery. These overpayments, if not corrected promptly, createan erroneous impression 

throughout the community that Medicare now pays for the new technology. This opens the 

way to still more incorrect bills and additional improper payments. A carrier that does not . 

recognize a new technology is prevented from informing providers at an early stage about 

Medicare’s assessmentof the technology. The carrier’s claims processing department receives 

little or no guidance about the new technology, and the errors compound with each new claim 

submitted. 

Sometimes, manufacturers also create problems for the caniers by providing data that are not 

relevant, objective, or complete. Many medical directors feel that promotional material is of 

questionable value to their assessmenttask simply becauseit is used as a marketing tool. One 

representativeof a large carrier went on to say: “Technologies are presented initially by 

manufacturers who send their own literature and reference material. We have to follow up 

with our own literature searchand often refute what is claimed by the manufacturer.*’ Some 

carriers have developed referral procedures that attempt to place constraints on submission of 

promotional material in connection with assessmentof new technologies. 

7 
Six@ percent of carriers report that HCFA provides them with information on the 

identifxation of new technologies no more than occasionally. 

The HCFA provides policy guidance to the carriers on allaspects of assessmentfor new 

technologies. All carriers receive the Coverage IssuesManual with information about national 

coverage decisions. However, a majority of the carriers say that they receive information 

about other new technologies, that have not been subjects of a national decision, no more than 

occasionally. Only one-third of the carriers repott receiving information often or very often, 

and one-fourth say they receive it rarely or never. 

Most carriers describe the information that HCFA supplies as guidelines (including manuals) 

and alerts to new technologies that have been identified elsewhere. The HCFA usually 

transfers information to the carriers formally, in manual instructions or written guidelines. 

These are the items carriers find most useful. Somecarriers, however, say that they would 

like HCFA to provide more timely and specific information on the experience of other carriers 

with new technologies, and on when such technologies ceaseto be investigational or become 

obsolete. 

CARRIER COVERAGE OF NEW TECHNOLOGIES 

Most ca+ers use professional acceptance as a major criterion when making coverage 

decisions about new technologies. Less than IO percent of the carriers cite cost 

eflectiveness as a major criterion. 

In making coverage decisions, carriers use a small and consistent set of criteria, which include 

professional acceptance,patient benefit, safety and effectiveness (fiw 2). These same 

criteria were identified in other studies of coveragedecision making. Guidelines issued by 

the Blue Cross and Blue Shield Association,16 comments submitted in response to HCFA’s . 

noticep and responsesof the outside observerswe interviewed taken together reflect a 

consensusabout criteria for coverage. 

Acceptance by the profession, which is identified by most medical directors as a major 

criterion, commonly has four characteristics. A new technology is generally accepted if: 

. research and investigation are complete, 

. value for diagnosis or treatment is demonstrated, 

. it is in general use for patient care, and 

. it does not involve drugs or devices not cleared by government regulators. 

8 
CRITERIA USED 

IN MAKING 

PROF. ACCEPTANCE 

PATIENT BENEFIT 

SAFETY 

EFFECTIVENESS 

APPROPRIATE SETTINQ 

OOST EF FEOTIVENESS 

COST 

FIGURE 2 

BY MEDICARE CARRIERS 

COVERAGE DECISIONS 

20 - 40 80 80 ioo 

SOURCE: AU MEDICARE CARRIERS PEROENT OF WRIER8 

AS REPOFiTED TO OFFICE OF 

INSPECTOR GENERAL, HHS. 1988 

Since each of the carriers interprets the meaning of demonstrated value and general use within 

its service area, coverage decisions can and do vary, reflecting differences in local practice 

patterns. These variations are of concern to some carrier representativeswho feel that health 

care has become “a much more uniform processnationally than it was in 1965 when Medicare 

was &acted.” One of the medical directors observes,“the idea of local practice patterns that 

was accurate20 or 30 years ago no longer applies today.” The carriers arelooking for more 

coordination-some even say uniformity-in coverage decisions. 

The economic criteria, cost and cost effectiveness, are at the low end of the responsescale in 

figure 2. Most canier representatives view them as criteria for pricing only. They take the 

cost or cost effectiveness of a new technology into account only to limit payment to that for an 

older item or service that provides the same patient outcome!. Among the remaining carriers 

that do not use the economic criteria, several dismiss them asirrelevant to health care 

decisions. 

Five of the 12 outside observers we interviewed, including 3 of 4 manufacturer representatives 

giving their own opinions, feel that cost effectiveq?ss should be considered as a major 

criterion in making Medicare coverage decisions. One representativefeels that carriers do 

use cost effectiveness but do not admit to doing so. This observer feels that the practice 

impairs the credibility of Medicare and suggeststhat HCFA publish a listing of coverage 

criteria that mandatesconsideration of cost effectiveness. On the other hand, six national 

organizations; including the Health Industry Manufacturers Astociation, expressconcern with 

useof cost effectiveness as a coverage criterion for Medicare. 

9 
. 

One manufacturer proposes that the burden of demonstrating relative effkacy should be 

assumedby the proponent of a new technology as an integral and routine part of researchand 

development. According to this observer, a new technology should be shown to be 

economically responsible in order to earn Medicare coverage. All four of the manufacturer 

representativeswhom we interviewed accept that burden of proof as part of their development 

costs. 

When they make coverage decisions about new technologies, most carriers get input from 

such operationally related sources as HCFA, other carriers, or their own private business 

segments. 

Carriers seek background and evaluation information from external sourcesto add to the 

knowledge of medical practice and scientific literature that their medical advisers bring to the 

assessmenttask For this they turn to familiar organizations, primarily HCFA (figure 3). For 

instance, in our case study of tissue plasminogen activator, we found that 18 carriers (out of 27 

that reported decisions) d&w input f&m HCFA, and 16 from other carriers (seeappendix B). 

Likewise, in the study by the OtZice of Technology Assessment,HCFA and othIy insurance 

companies are the two sourcesnamed most frequently by medical consultants. 

FIGURE 3 

EXTERNAL SOURCES USED 

IN MAKING COVERAGE 

HWA 

OTHER CARRIERS 

PRIVATE BUS. 

TECH ADVISORY GROUP 

INSURANCE ASSOOS. 

MANUFACTURERS 

MEDICAL SOOlETlES 

SPEOIALTY SOOIETIES 

BENEFlOlARlES 

BY CARRIERS 

DECISIONS 

. ;1 2; 4; eb 80 100 

SOURCE: AU MEDICARE CARRIERS PEROENT OF OARRIERI 

AS REPORTED TO OFFICE OF 

INSPECTOR GENERAL, HHS. 1988 

The HCFA supports a number of Technical Advisory Groups (TAGS) consisting of contractor 

(carrier or intermediary) representatives and HCFA staff who meet to discuss and share 

information on common concerns. Although one carrier TAG centers its attention on 

coverage and payment issues, little more than one-fourth of the carriers identify it as an 

external source for information. Those who do so tend to be among the 10 or 12 carriers with 

10 
active representation in the group. All the carriers are aware of the existence of this TAG and 

receive minutes or reports of meetings. However, the extent to which each carrier usesthe 

TAG discussions seemsto vary directly with the extent of participation by its staff. 

We learned of the Medical IssuesTechnical Advisory Group (MITAG) that includes the 

medical directors of all five carriers in HCFA’s New York region. The MITAG meets twice a 

year, with the HCFA regional office providing administrative and organizational support. 

Carrier medical directors and their staffs set the agenda, make presentations, and lead the 

discussions. All the carriers in the region agree with HCFA that the M.lTAG facilitates 

exchange of important information, provides a forum for useful discussion of new 

technologies, and promotes consistency in carrier decisions. All consider active involvement 

by the medical directors critical to the group’s effectiveness. 

Carriers get less input from sourcesless closely associatedwith their own organizations and 

those less closely associatedwith Medicare administration. Notable for their absenceas 

sourcesof input for coverage decision making are the Professional Review Organizations, 

State and Federal Government agencies,and suppliers of health care equipment. Fewer than 

10 percent of the carriers draw upon local or State medical associations. None report any 

input from beneficiaries or beneficiary interest groups. 

About half the can-iersfind the support they get from HCFA at least moderately helpful in 

making coverage decisions about new technologies. An additional 40 percent view HCFA 

supporl as minimally or not helpfur 

FIGURE 4 . HOW CARRIERS RECIEVE HCFA SUPPORT 

FOR MAKING COVERAGE DECISIONS 

YODLRATEW HELCf 

10s 

NO EXCENILNCE 

YINIYALLY HELPFUL 

IDS NOT HELPFUL 

SOURCE: AU MEDICARE CARRIERS 

AS REPORTED TO OFFICE OF 

INSPECTOR GENERAL, HHS. 1968 

11 
About half the carriers react positively to the help they get from HCFA in making coverage 

decisions, and many of these find the support very helpful (figure 4). Carriers find HCFA 

support helpful when it provides definite answers to specific questions. Included among the 

HCFA support that carriers find helpful are policy guidelines in the Medicare Carriers Manual 

and the Coverage Issues Manual. Several carriers single out the transmittal on magnetic 

resonanceimaging as an illustration of how it should be done.20 This transmittal, they say, 

includes definitive criteria and guidelines that are well researched,well documented, and well 

presented. Carriers also find helpful HCFA’s sharing of experiencesthat other carriers have 

had with specific technologies. They appreciate the opportunity to shareresponsesby HCFA 

central and regional offices to specific requests. 

Among those carriers who say that HCFA is not helpful, the theme of timeliness dominates; 

information comes to them slowly. Some carriers mentioned, too, that information from 

HCFA is overly open to interpretation. The guidelinesare not as specific as they could be. 

Each carrier is left to make its own coverage decisions, opening up the potential for 

inconsistency. The carriers want HCFA to provide more background, a better rationale for 

decisions, and prompter exchange of information among carriers. 

A number of carriers ask that HCFA provide them with a senseof reasonablepricing ranges 

for new technologies, possibly by passing along reimbursement rates set by other carriers. 

They bring up this point while addressing coverage questions. Many carriers seepricing, or at 

least the setting of relative values, as an integral part of the coveragedecision process. Their 

perception is not unique to their role as carriers. A number of medical directors routinely 

include pricing recommendations along with their coveragedecisions for Medicare and for 

private businesssegments. 

At most carriers, physicians have the key role in making coverage decisions about new 

technologies. About one-fourth of the carriers, howevet, involve nonphysicians extensively. 

in this process. . 

Although each carrier approachesthe,assessmentof new technologies in its own way, the 

nature of the task leads to some common features among the different approaches. At each 

carrier one person has the key role in technology assessment.That person assemblesand 

evaluatesdata and opinions and prepares the carrier decision (which may still need to be 

ratified by responsible authority in the carrier organization). The medical director has this key 

role at the 29 carriers that employ such a person. Other carriers involve nonphysicians 

extensively in the assessmentprocess. Nurses were the coveragedecision makers, for 

example, at 6 carriers out of 32 that covered the infusade pump, one of our casestudies 

described in appendix B. 

All 11 of the larger ca&iers have medical directors. All of them take the key role in 

technology assessmentat their carriers, and nine of them work with medical advisory 

committees on such matters. These committees can be structured or informal, continuing or 

task oriented, internal or inclusive of physicians from outside the carrier. Many of the carriers 

that use committees think that the most objective committees involve more than one type of 

12 
medical specialist on every issue. They seeconsultant bias as an important vulnerability in 

technology assessmentand seekinput from other specialists as a check. Some carriers extend 

the concepts of opennessand balance further by including the participation of other health 

care professionals. A few carriers allow for public input to the advisory committees. 

At 12 carriers, the medical directors report that in assessingnew technologies they work 

essentially alone. They frequently seekinformation from colleagues, researchcenters, 

specialty groups, and other medical directors, but the core evaluation is theirs alone. In 

supporting this approach, some note that an individual is better able to make a prompt 

decision than is a committee. 

Only 8 of the 17 smallest carriers have medical directors. Most carriers without medical 

directors draw upon consultant physicians and precedents,but they have no internal process 

for assessmentat the physician level. Smaller carriers often look to larger neighbors for 

advice in the form of precedents.A catrier with one or more centers of medical researchin its 

service area is likely to receive some of the first claims for new technologies. Butknowledge 

now spreadsso quickly that small carriers seeclaims for some new technologies at almost the 

same time as their larger counterparts. 

Nonphysicians who are involved extensively in the processfor coverage decision making: 

. rarely have operating guides, 

. have few explicit limits to discretion, and 

. usually are subject to internal quality review of their work in assessingnew technologies. 

Beginning in 1989 all carriers are required to have medical directors. Still, there may be a 

continuing role for experienced nonphysicians in support of the medical directors, and that 

role could be extensive in some situations. 

Respondents at one-third of the carriers say that the carriers, as a group, are at most 

minimally consistent in making coverage &&ions about new technologies. 

The carriers split into three nearly equal groups in their opinions about consistency (figure 5). 

Many of the carrier representativeswho say that coveragedecisions are not consistent 

attribute this situation to a widespread lack of communication among the carriers. 

Representatives at other carriers say that more prompt, more effective, and mom frequent 

communication between HCFA and the carriers would operate to increase consistency. Many 

of the respondents feel that regional medical meetings and a central coverage clearinghouse 

could open new possibilities for communication. 
FIGURE 5 

HOW CARRIERS VIEW THECONSISTENCY OF 

THEIR GROUP IN MAKINNG COVERAGE DECISIONS 

MODERATELY CONIllf 

888 INIYALLY CONIIOT. 

818 

VERY CONll8T. 

rs 

I SOURCE: ALL MEDICARE CARRIERS NO OCINION 

AS REPORTED TO OFFICE OF ass 

INSPECTOR GENERAL, HHS. 1988 

Almost all of the respondentswho expressz& opinion regard consistency of carrier actions as 

a desirable attribute. Although some of them attribute inconsistency to differences in local 

patterns of medical practice, most say that new medical knowledge diffuses quickly through 

the health care delivery system today, much more quickly than was true at the birth of 

Medicare a quarter century ago. Few agree with the medical director who seesvirtue in 

inconsistency, saying: “Lack of variability may not be an asset. What is to prevent all of us 

from going off in the wrong direction together?” 

Those who say that the carriers are at least moderately consistent feel that by “asking around” 

they can get “a fair exchangeof information.” In their view any reported examples of 

inconsistency representexceptions that have slipped through the system. These carriers cite 

their experiences with physicians who have moved from one carrier’s service areato another.’ 

Such physicians sometimes have reported to the new carrier broader coverage and higher 

payments by the previous carrier. When the new carrier called to check the report, it was not 

corlfirmed. 

Some medical directors believe that inconsistency gives the entire Medicare program a bad 

name, “especially when durable medical equipment is covered by one carrier and not another. 

It is difficult to make providers and beneficiaries seehow Medicare can be a national program 

but not be consistent on what is covered.” Experience with transtracheal oxygen in one of our 

case studies illustrates the point During 1985,18 carriers used 8 procedure codes in 

processing claims for tube insertion and gas supplies; in 1987,25 carriers paid for the 

procedure and supplies under 10 codes (seeappendix B). 

14 

I 
The cam’ers strongly support the concept of a national clearinghouse that would share 

information about coverage issues among carriers. 

The coverage clearinghouse may be an idea whose time has come.21All but six of the carriers 

(87 percent) regard it as a good idea (figure 6). Many carriers are extremely positive about the 

notion, calling it “an absolute necessity,” or “a long overdue development.” Those few 

carriers who do not consider the clearinghouse to be a good idea are troubled by its possible 

costs. It would entail creation of a new bureaucracy,they say,which would only add to the 

demands on their time and resources. 

FIGURE 6 

DO CARRIERS CONSIDER THE COVERAGE 

CLEARINGHOUSE A GOOD IDEA 

DON’T KNOW 

7% 

0 

lb 

SOURCE: ALl MEDtCARE CARRIERS 

AS REPORTED TO OFFICE OF 

INSPECTOR GENERAL. HHS. 1988 

Those carriers who favor a clearinghouse cite the benefits of drawing on research already 

completed, thus eliminating needlessduplication. They also believe that a clearinghouse 

would speedup the flow of information, a significant point in light of the carriers’ desire for a 

faster flow of information from HCFA. An effective clearinghouse provides information 

promptly. Smaller carriers, with fewer resourcesfor doing research,anticipate that a 

clearinghouse would furnish more complete information than they could obtain on their own. 

And finally, becauseparticipation I?; noncarriers could open accessto a larger baseof 

information, two-thirds of the carriers would welcome outsiders as contributors and as users. 

Some important efforts now taking place are aimed at providing centralized information 

resourcesfor health care technology assessment. Included among them are: 

. American Medical Association, Diagnostic and Therapeutic Technology Assessment 

Project (DA’ITA). Uses consultants selectedfrom a panel of more than 1000 physicians 

and publishes assessmentsin the association’s Journal. 

15 
Blue Cross and Blue Shield Association, Technology Evaluation and Coverage Project 

(TEC). Provides technical assistanceto member plans for their consideration along with 

other factors in making coveragedecisions. 

Health Insurance Association of America, Medical Practice Assessment Center (PAC). 

Began in 1987 with a report on underevaluated health care technologies. Included 

information on obsolete technologies, and commissioned a study on quality assessment. 

National Academy of Science, Institute of Medicine (IOM), Council on Health Care 

Technology. Developing an information clearinghouse on technology and technology 

assessmentas mandated by Congressin 1984. Published an initial directory in 1988. 

National Center for Health Services Researchand Health Care Technology Assessment 

through its Office of Health Technology Assessment(OHTA). Evaluates the safety and 

effectiveness of new technologies and synthesizesthe results in an Assessment Report 

that is disseminated widely. This Office was reorganized under the recently enacted 

Omnibus Budget Reconciliation Act of 1989 (OBRA-89). 

Few carriers draw on theseresourcesnow. One-fourth of the 27 Blue Shield plan carriers 

include TEC as an external source from which they get information for making coverage 

decisions. Just three carrier representatives,all of them medical directors, name DAmA as a 

source, and only one mentions IOM 

CARRIER PRICING OF NEW TECHNbLOGlES 

Mosi carriers use more than one method to set reimbursement amounts for new 

technologies. The method used by the most carriers is that of comparison to similar codes.. 

Carriers set the reimbursement amounts for items and servicescovered under Part B of 

Medicare, including new technologies, by using a methodology called reasonablecharge 

determination.22 Ordinarily this methodology means that carriers collect histories of billed 

chargesfor each item or service. They allow as a reasonablereimbursement amount the 

lowest of (a) the billing provider’s customary charge, (b) the prevailing charge for similar 

items or services in the locality, or (c) the actual charge. Sometimes it has proved difficult to 

collect charge histories for truly innovative technologies. 

Moreover, the law places restrictions on the reimbursement amount allowed, additional to 

those derived for billed charge histories. Among these limitations have been freezes in 

physician fees, adjustments for inherent reasonableness,restrictions on overpriced procedures, 

special limits for cataract glassesand lenses,and controls on services by physician assistants 

and nurse anesthetists. 

More recently, as part of OBRA-89, Congressamended the law to provide for payment of 

physician services according to a resource basedrelative value scale (RBRVS). The new 

16 
provisions addressphysician servicesonly. They do notprovide relative values for 

nonphysician services, nor do they extend to health care items covered by Medicare. And 

OBRA-89 does not addressthe potential for expansion of HCFA or carrier authority to 

broaden the basesupon which they can make reasonablecharge determinations for the new 

and emerging technologies not covered by RBRVS. 

The Medicare CaxriersManual gives policy guidance about the methods carriers should !:e to 

set the reimbursement amounts for a new technology that does not have a billing history. 

The carriers consider an averageof three methods when they are pricing a new technology. 

The most common methods seek to establish some relationship with prior experience (figure 

7). Almost three-fourths of the carriers compare a new technology with similar codes. Often 

this comparison can be made by the carrier’s own staff of reasonablecharge specialists, using 

internal data. About one-half of the carriers seekprecedentsfrom providers or other carriers, 

and one-fifth from their own private businesssegments. All three of thesecommon pricing 

methods involve contacts outside the Medicare carrier. 

METHODS 

FOR 

SIMILAR CODES 

SURVEY PROVlDERS 

SURVEY CARRIERS 

RELATIVE VALUE 

PRIVATE BUSINESS 

0AP FILLINQ 

INHERENT REASON. 

SWRCE: ALL MEDICARE CARRIERS 

AS REPORTED TO OFFlCE OF 0 

INSPECTOR GENERAL, HHS, 1988 

FIGURE 7 

USED BY MEDICARE CARRIERS 

PRICING NEW TECHNOLOGIES 

20 40 30 SO 100 

PERCENTOFaRRIER8 

17 
consultant bias. They would welcome a national fee scheduleor a set of relative values 

provided by HCFA. 

Although only 1 carrier reported a policy of simply paying submitted chargesfor a new 

technology, 13 set the reimbursement amount for plethysmography in this way (seeappendix 

B). Some of these 13 pay submitted chargesuntil they have accumulated sufficient charge 

data (through as few as four claims) to perform a reasonablecharge analysis. 

Few carriers report that they use inherent reasonablenessto setprices for new technologies. 

Only two respondents in our carrier interviews include it as one of their pricing methods. In 

our casestudies an averageof four carriers report that they used inherent reasonablenessin 

setting the price for each of the five new technologies. The maximum is eight carriers for the 

infusade pump. 

Almost half of the carriers spoke of opportunities for making more clear the Medicare Carriers 

Manual instructions on calculation of reasonablecharges. The instructions for new 

technologies, in particular those which haveno prior charge history, could be made simpler. 

One respondent found that the instructions “have become so complicated as to be almost 

unbelievable.” Another offered the opinion that ‘A Philadelphia lawyer could not figure it 

out.” And a third respondent suggestedthat the whole process“reduces to a nonscientific wild 

guess. Usually, the price is on the high side. Almost always, it goes up.” 

Theserespondents and their counterparts at other carriers repeatedly ask for a framework that 

would allow them to know that their pricing decisions ate not inconsistent with those of other 

carriers or the national Medicare program. They arc looking for a better way to make 

comparisons with other carriers, non-Medicare payers, providers and suppliers, and most 

importantly HCFA’s own pricing information. 

Reimbursement amounts allowedfor new technologies vary significantly from one carrier * 

to another, The va&tion is much greater than that accountedfor by differences in per 

capita personal income across the country. 

Not surprisingly, in view of the variety of methods that carriers are aIlowed to use to set 

reimbursement amounts, the averageamount allowed for the same new technology can differ 

by several hundred dollars from one carrier to another. The 1987 data for one of our case 

study technologies, real time cardiac monitoring, illustrates this discrepancy (figure 8). It 

shows that the average amount allowed for this service varies widely, from a low of $49.17 at 

one carrier to a high of $25 1.10 at another. 

The two carriers which allowed (and presumably paid) the highest total amounts for real time 

cardiac monitoring during’1987 together accountedfor 81 percent of the national total allowed 

and 65 percent of the national total number of services. The averageamount allowed per 

service by these 2 carriers, $233.62, was 75 percent higher than the national averageof 

$132.26. Yet the carrier which allowed the third highest total amount on averageallowed 

18 
$82.67 per service, 62 percent of the national average. Higher volumes by themselvesdo not 

account for the variations in averageamounts allowed by the carriers. ’ 

FIGURE 8 

AVERAGE AMOUNTS ALLOWED BY CARRIERS 

FOR REAL TlME CARDIAC MONITORING, 1987 

AVERAGE AMOUNT ALLOWED 

8160 

SOURCE: HCFA. BUREAU OF DATA CARRIERS 

MANAGEMENT AND STATl!YlCS. PART B 

MEDICARE ANNUAL DATA SYSTEM 

Neither is there a ready connection between average amounts allowed and economic 

circumstances in different parts of the country. The second and fourth lowest average 

amounts allowed for real time cardiac monitoring servicesduring 1987 occmred in large 

industrial Statesof the Northeast. These Statesare above the national averagein per capita 

personal income.% The fourth highest averageamount allowed occurred in a rural southern -

State ranked 42 for personal income. It might seem that higher incomes would support, or 

even call for, higher averageamounts allowed. This is not the case. 

Significant variation in reimbursement amounts for new technologies seemsto be the rule 

more than the exception. The samepattern appearedfor real time cardiac monitoring services 

in 1985 and 1986. A similar pattern occurred each year for the other new technologies 

included in our casestudies (table B-3 in appendix B). 

We want to emphasize again that the data which show the price variations are the product of 

reporting by the carriers. The procedure codes for which we accumulated amounts allowed 

fi-om HCPA’s Part B Medicare Annual Data System (BMAD) are those codesreported to us 

directly by the carriers, as described in the methodological notes of appendix A. We can make 

no judgement about the possibility for additional payments made under different codes. 

We also emphasize that BMAD is a relatively new data baseand some data may not have been 

reported accurately. For example, two of the largest carriers, together accounting for more 

‘\ 

19 
than half of the national total amount allowed for real time cardiac monitoring during 1985 

and 1986, show no amounts allowed during 1987. Another carrier, third highest in total 

amount allowed and highest in averageamount allowed for real time cardiac monitoring 

during 1985, shows no such data for 1986. 

Despite possible limitations on completeness of the data, the variation illustrated in figure 8 is 

real. Variation occurs for each casestudy and each year. And the variation reflects something 

more than differing economic circumstances acrossthe country. In fact, for our casestudies, 

the averageamounts allowed typically vary by a factor of five. This wellftceeds the factors 

of 1 or 2pd in ranges of compiled data on per capita personal income or cost of living 

indexes in different locations. Even the ranges for reported physicians’ fees vary by less 

than a factor of 2 between censusregions.26 

The carrier representativeswith whom we spoke (for the most part medical directors) note that 

new technologies often come into use through the efforts of one or two innovative 

manufacturers operating nationwide. These observersnote that this can be true even if the 

actual delivery of the technology to a patient is completed by one of a large number of 

physicians operating in accord with local practice. They seemuch lessreasonfor such a 

nationally standardtechnology to vary in price than there is for an item produced locally, or 

for a traditional medical service such as a physician office visit. 

These carrier representatives,as well as the representativesof four manufacturers whom we 

interviewed, seemedical practice becoming more uniform nationally. They offer little basis 

for variation in the cost of delivering a new technology beyond what is neededto account for 

local costs of labor, rent and goods, asreflected in overall cost of living indexes. 

Although about half the respondents think that the cost of providing a new technology 

tends to &crease during the 2 or 3 years following its introduction, none identify any . 

special initiatives to avoid overpayments by Medicare in such instances. 

Those canier respondentswho feel that the cost of providing a new technology decreaseswith 

increasing utihzation (figure 9) attribute this to differing factors associatedwith the 

particular technology. For newly developed surgical procedures the respondentssay that 

demands on time and skill tend to decreasewith experience gained in practice. They seethis 

as the chief reason that the cost of providing a new surgical procedure decreases.Moreover, 

they note that the surgical support team and any hospital or other facility support resoulces 

tend to become more efficient over time. This also contributes to decreasingthe cost of 

providing the service. 

For manufactured items such as medical devices, the respondents seeeconomies of repeated 

production as the chief contributor to decreasesin the cost of providing a new technology. 

Likewise, they seethe promotion and distribution organizations for the item asoperating more 

efficiently after a few years of experience have been gained and the high cost of product 

introduction has been absorbed. 

3n 
1 FIGURE 9 

DO NEW TECHNOLOGY COSTS TEND TO DECREASE 

WITH USE AND ARE THERE MEDICARE SAVINGS? 

NO *Es 

47s 

DEOREASE? WINDS? 

SOURCE: ALL MEDICARE CARRIERS 

AS REPORTED TO OFFICE OF 

INSPECTOR GENERAL. HHS. 1988 

If the cost of delivering a new product decreases,and respondentsat half the carriers think it 

does, it might appear reasonable for carriers to reflect this lower cost in lower Medicare 

reimbursement amounts. Yet, none of the respondentsidentifies any special initiatives by the 

carriers to capture savings for Medicare when the cost of providing a new technology 

decreases. The carriers are aware of only two major instanceswhere Medicare allowances 

decreasedto recognize economies of scale associatedwith new technology: cataract 

extraction and coronary artery bypass grafts.27 

Carriers&o along with the marketplace becauseof the Medicare law’s definition of reasonable 

charges. The carriers seethis marketplace as one in which fancy new procedures tend to 

command the highest prices, pulling up all payment levels along with them They see 

Medicare’s reasonable charge structure, basedon billed charge histories, furnishing an 

incentive for continuing inflation. Few carriers, as already noted, report using inherent 

reasonablenessas a basis for pricing decisions. The data needed to relate Medicare prices to 

the cost of providing an item or service are trade protected and not often made available to the 

carriers. Some carriers maintain simply that chargesare their only concern, and that the cost 

of providing a new technology has no role to play in Medicare pricing. 

“The medical marketplace can be perverse,” notes the medical director at a large carrier. “If a 

new technology is successful, many providers acquire the capability to use it. Because the 

fu<eddemand is spread over a larger number of providers, the number of servicesavailable to 

each decreases. One consequenceis an increasein prices in the attempt to maintain revenues 

in the face of decreasing volume. This is not how the marketplace ought to work.” 

21 
Many carriers areioolcing to HCFA for guidance on the reasonablerange within which their 

price for a new technology should fall. They want to know that their prices are not out of line 

with other regions of the country. 

OVERALL CARRIER PERFORMANCE IN ASSESSMENT OF NEW 

TECHNOLOGIES 

The carriers’ self-rankings indicate that there is substantial room for improvement in the 

way they assessnew technologies. In only I of 4 categories do a majority rate the canier 

performance as good 

In appraising their own performance in handling new technologies, the carriers indicate that 

there is much room for improvement. This, they suggest,is particularly true with respect to 

their objectiviry in making decisions; openness to public input tqtdaruztion to benefXaries 

and providers about coverage and pricing decisions; and timeliness in making such decisions 

(figure 10). The carriers’ perceptions of their limitations inhese areasare in accord with 

concerns raised in prior studies of technology assessment and in public comments that 

HCFA received in responseto its April 29,1987 notice on Medicare coverage criterk4 

FIGURE 10 

CARRIER SELF RANKINGS OF PERFORMANCE 

IN ASSESSING NEW TECHNOLOGIES 

. OBJECTIVITY 

OPENNESS 

EXPLANATION 

TIMELINESS 

SOURCE: AU MEDICARE 

CARRIERS AS REPORTED TO OFFICE OF INSPECTOR o 10 20 30 40 60 60 70 

GENERAL, HHS. 1988 

Among the four aspectsof performance that we identified, it is only with respect to the 

carriers’ use of objective criteria in making coverage and pricing decisions that a majority rate 

the carrier performance as good (figure 10). But even hem, it is apparent that there is 

considerable room for improvement About one-fifth of the carriers rate their performance in 

terms of objectivity as no better than fair. 

22 
. 

SimiIarly, in appraising the effect of their technology assessmentactivity on innovation by 

providers and on beneficiary accessto new technologies, the carriers indicate that there is 

room for improvement. About 40 percent of the carriers rated their effect on innovation as 

good. Only 25 percent rated their effect on beneficiary accessas good. In this context it is 

pertinent to note that HCFA’s annual carrier performance evaluation program (CPEP) reviews 

do not include a set of elements specifically addressingtechnology assessmentactivity. About 

one-half of the carriers report that HCFA evaluates this activity either implicitly in other CPEP 

elements or separately through ongoing monitoring. About one-fourth of the carriers indicate 

that there is no HCFA evaluation of their technology assessmentactivity, and about one-fourth 

say they do not know if such evaluation takes place. 

23 
. 

2. RECOMMENDATIONS 

Based upon the findings above, the time hascome for new national initiatives that foster 

consistency in the administration of the Medicare program and in the identification, coverage, 

and pricing of new technologies. In this context we make the following recommendations: 

The HCFA should continue to improve its own capability and that of the 

caniers to identify, emerging technologies and to make more informed, explicit, 

and consistent coverage and pricing decisions concerning new technologies. 

Toward this end HCFA should: 

1. Continue to improve communication among the carriers through increased use of national and regional technical advisory groups. 

At national and regional levels, HCFA should facilitate more frequent meetings ai which 

carrier officials and HCFA officials discussnew technologies and how to respond to them. 

Becauseof the information sharedin such meetings, they can be quite effective in promoting 

greater consistency in coverage and pricing decisions. The Medical IssuesTechnical Advisory 

Group in Region II, which for some time has servedas a forum for discussion among HCFA 

officials and carrier medical directors, appearsto be a good example of the kind of 

collaborative effort that should be replicated 

2. Continue to improve carrier accessto comparative Medicare payment information about 

new technologies. 

Recently, HCFA has given carriers accessto the carrier payment amounts that are stored in its 

files, such as in the Medicare Part B Annual Data Set (BMAD). The HCFA should explore the 

best ways of making such data available. Given the vast amount of data involved, it would 

probably bk preferable to disseminate the information selectively, perhaps through a query 

facility or as summaries, rather than through massdistribution to all carriers. Selective 

distribution would allow each carrier to give a more intensive review to the pricing decisions 

most relevant to its own experience. 

When carriers have the capacity to compare their payment amounts for particular new 

technologies with one another, those with unusually high or low amounts would quite likely 

reexamine the basesfor their payment determinations. Over time, the likely effect would be 

greater consistency in payment levels. 

3. Review the performance of carriers in identifying, covering, and pricing specific new 

technologies. 

The HCFA should carry out such a review through regional office monitoring visits and 

through the annual Contractor Performance Evaluation Program. The HCFA should make 

24 
clear to the carriers that identification, coverage, and pricing of new technologies are essential 

parts of their role and that each will be considered in evaluating their overall performance. 

4. Cooperate with the Public Health Service in proactively and routinely compiling and 

rapidly disseminating information on new health care technologies through clearinghousesor other appropriate means. 

Any such clearinghouse should be established with input from the carriers and in a way that 

maximizes carrier accessto information bearing on their identification, coverage, and pricing 

of new technologies. It should have clear operating parametersthat assureaccurate 

acquisition and rapid dissemination of data. 

To broaden the information baseand reduce unnecessaryduplication, HCFA and PHS should 

also pursue thepossibility of sharing the benefits and costs of the clearinghouse with other 

interested parties, such as the American Medical Association, Blue Cross and Blue Shield 

Association, Health Insurance Association of America, or the Institute of Medicine. 

The HCFA should seek legislaa’ve authority to broaden the bases upon which it 

can establish reimbursement amounts for new and emerging technologies other 

than physician services. This authority should be available to HCFA both at 

the time of the initial coverage decision and as the technology matures. 

. The legislation should supplement current authorities by allowing HCPA to: 

(1) limit initial payments basedon a consideration of the cost of developing and delivering 

the technology, 

(2) subsequently reduce the allowable chargesfor new technologies as they mature in order 

to take advantage of reduced costs,and 

(3) establish regional or national reimbursement limits basedon simple and easily verifiable 

criteria such as the mere existence of substantial variation in reimbursement rates. 

25 
> COMMENTS AND OIG RESPONSE 

In its written comments and at subsequentmeetings, the HCFA recognized that problems exist 

with the carrier assessmentof new technologies and noted that it has taken numerous recent 

initiatives to improve technology assessment. Some of the actions we recommended are 

included among the HCFA initiatives. The HCFA was concerned that our findings, at least in 

part, may no longer be valid becauseof its recent efforts. It asked the OIG to conduct an 

additional study aimed at assessingthe effectiveness of its recent initiatives. 

We agree that HCPA has moved to resolve the problems addressedin this study. For this 

reason we have removed from this report a statement, contained in the draft report, that the 

current procedures for carrier coverage and pricing of new technologies constitute a material 

internal control weakness within the meaning of the Federal Manager’s Financial Integrity 

Act. We have agreed to work with HCFA in evaluating the effectiveness of its efforts to 

improve carrier assessmentof new technology. 

The HCFA agreed that additional legislative~authority would help it improve coverage and 

pricing decisions for nonphysician services. The HCFA believes that physician payment 

reforms recently enacted in the Omnibus Budget Reconciliation Act of 1989 (OBRA-89) will 

provide an appropriate framework and sufficient authority to improve coverage and pricing 

decisions relating to physician payments. 

We agree and we have modified our legislative recommendations to focus exclusively on 

nonphysician services. But we ate concerned about the practical aspectsof the new physician 

payment reform provisions. In order to develop fee schedulesfor new and emerging treatment 

modalities, HCFA must identify them We believe that the ability to identify emerging new 

technologies is the area’of greatest weakness in the current system We are hopeful that 

HCFA’s recent initiatives will be effective in addressingthis weakness. We will know more . when our future evaluations, mentioned above, are completed. 

We also remain concerned that the many Part B payments for nonphysician services, such as 

durable medical equipment, prosthetics, and physiological testing, are not covered by the 

payment reforms of OBRA-89 . We believe our legislative proposals are particularly 

important for thesenonphysician services. 

The HCFA disagreed with our recommendation for disseminating coverage and pricing 

information among carriers through a clearinghouse becauseit would not be cost effective, 

and becausecarriers do not use current clearinghouses. We continue to support this 

recommendation. In our survey, the carriers themselvesasked for this kind of assistance. We 

believe the current clearinghouses are too passive and often impracticably slow becausethey 

rely upon specific requests from the caniers. What we have in mind is a more proactive and 

orderly dissemination of information. We think that a more proactive clearinghouse would be 

an effective way to do this, but we would support any other technique provided it is 

26 
aggressiveand systematic. We have modified the wording of the recommendation to make 

our intent more clear. 

The Public Health Service and the Office of the Assistant Secretary for Planning and 

Evaluation both recognized the need to improve carrier coverage and pricing decisions. They 

both supported the idea of a clearinghouse to sharecoverageand pricing information. 

The Health Insurance Association of America and the Health Industry Manufacturers 

Association also commented on our draft report. They agreed with most of our findings and 

recomme,ndations. 

The text of all comments and our detailed responsesto them are in appendix D. 

27 
METHODOLOGICAL NOTES 

CARRIERS 

_ We held discussions with representativesof the 45 geographic carriers that processed 

Medicare Part B claims during the summer of 1988, when our data gathering was completed. 

In those instanceswhen a single Blue Shield plan held contracts for more than one area (as 

Arkansas Blue Shield servedArkansas and Louisiana), we aggregatedtheir activities in all the 

areasand regarded them as one carrier with one medical director. For the commercial 

insurance organizations that held more than one contract, we regarded each field office (which 

may serve more than one State) as a separatecarrier. We did not interview the Railroad 

Retirement Board, whose function is primarily oversight, although it is often termed a carrier. 

We treated the carrier responsesto our questions asdependent variables and an,al$ed them 

against four independent variables: size, reGon, carrier type, and presenceof a medical 

director. We used the commercial software programs dBASE III Plus andLotus l-2-3 to 

accumulate and sort responses. For analyseswe used the Stat-Packetssoftware package of 

statistical analysis programs on a microcomputer. Using this software, we developed 

correlations and broke responsedata down into separatecategories for each independent 

variable. 

Size 

We ranked the carriers according to the aggregated total of Part B disbursementseach made in 

1986 as given in HCFA records. Using variance techniques, we identified four clusters of 

carriers differentiated on the basis of payments: 

Total 

Cluster Number of Carriers Disbursements* 

1 (SmalIest) I7 $1.75 billion 

2 17 $5.29 billion 

3 8 $7.11 billion 

4 (Largest) 3 $4.49 billion 

*This total of disbursements differs from the Part B payments in figure 1 becausethey draw 

on two different data sources. This total may not be complete; figure 1 is accuratefor the 

amounts paid out. The ranking of the carriers by size should not be affected by the difference. 

A-l 
Region 

We used the categorization developed by the U.S. Department of Commerce, Bureau of the 

Census. The four geographic regions of the country were the Northeast, Midwest, South, and 

West. 

Type of Carrier 

Of the 45 total carriers asdefined above, 27 were Blue Shield plans and 18 were commercial 

insurance organizations. 

Medical Director 

In preliminary discussions, we identified the medical directors at 29 carriers. The remaining 

carriers either had no medical director or had none with responsibility for the Medicare 

segmentof their business. During the course of this study we learned that HCFA has advised 

the carriers that each would be required to have a medical director for Medicare beginning in 

1989. 

OUTSIDE OBSERVERS 

We held discussions with representativesof organizations external to the carriers, each of 

them related to and concerned with carrier technology assessmentactivities. These included: 

. four manufacturers of new technologies that were included in our casestudies (see 

_appendix B), 

. five insurance organizations (including four medical directors not now active in 

Medicare work), and 

. three national organizations active in health care technology assessment. . 

A-2 
APPENDIX B 

CASE STUDIES 

Following telephone discussions with medical directors at 21 carriers (separatefrom the study 

interviews described in appendix A), and with physician consultants at Part A intermediaries, 

Professional Review Organizations, or in private practice, we developed a list of 50 

technologies that were characterized asrecent subjects of technology assessment.We reduced 

the list to 12 that included a balance among new devices, diagnostic tests, and surgical 

procedures. In making this reduction we included some highly innovative technologies along 

with some incremental improvements. 

In an introductory letter, we asked the carriers to give us the procedure codes they had used 

for eachof the 12 technologies during 1985-87. (Our request asked for 13 technologies, but 

the wording for one of thesewas ambiguous. We have excluded it from the analy_sis.)All 

carriers should use the sameHCFA Common Procedure Coding System (HCPCS). Table 

B-la summarizes the responses. Some, but not all and in no instance all 45, of the carriers 

reported definite codes they used in processing claims for the 12 technologies. Absence of a 

code could mean that the carrier had (a) not yet received a claim for the given technology, or 

(b) not yet assignedit a distinct code, or (c) had made an affirmative decision against coverage 

for the technology. 

Tables B-lb and B-lc in this appendix summarize the carrier responseson numbers of codes 

used. The number of codes for each technology indicates how closely the carriers adhere to 

HCPCS. Subject to HCFA concurrence, carriers have within HCPCS the option to assign a 

local code to an item or service in order to facilitate payment and utilization reviews. Carriers 

may want to use local codes for new technologies until billing and use patterns have been 

established. 

. 

Following a review of the procedure codesreported by the carriers, we obtained from HCFA 

the amounts paid during 1986 for &most common codes. We selectedfor detailed case. 

studies five of the technologies that showed substantial volume of Medicare claims activity. 

To the extent possible with such a small group we balanced.our selection to include devices, 

tests,and techniques. We asked the carriers to identify: 

. the source that brought the new technology to the carrier’s attention, 

. the department that identified the new technology, 

. who made the coverage decision, 

. the criteria used in making the coverage decision, 

B-l 
. the external sourcesdrawn upon in making the coverage decision, 

. the methods used for setting a reasonablecharge, 

. whether the reasonablecharge had been changed, and 

. the methods used in setting the new reasonablecharge. 

Tables B-2a through B-2e in this appendix summarize the carrier responsesto questions about 

the coverage decision making process. The responsesin most categories total lessthan 45 

becausewe directed questions on any given technology only to those carriers who had 

identified a procedure code in responseto our introductory letter (except tissue plasminogen 

activator, the subject of a national coverage decision in early 1988). Not all carriers answered 

all questions that were directed to them, and some gave multiple answers,so the response 

totals are not necessarily the samefor different questions about any one technology. 

Table B-3 in this appendix lists averages,ranges, and standard deviations of the amounts 

allowed by the carriers for each of three new technologies included in our casestudies.We 

excluded tissue plasminogen activator from this listing becauseso few carriers reported 

payments during the years 1985-1987. We excluded infusade pumps becausesome of the 

available pricing data referred to surgical implantation of the device and some referred to 

supplies used with the pump. 

B-2 
TABLE B-la 

NUMBER OF CARRIERS REPOR77NG CODES FOR EACH TECHNOLOGY 

TECHNOLOGY 

Magnetic ResonanceImaging for 

Diagnosis of Stroke 

Extracorporeal Shock Wave 

Lithotrips y 

CochleaeDevice Implantation 

Intracardiac Electrophysiological 

Testing: Induction of Artythmia 

by Electrical Pacing 

Real Tiie Cardiac Monitoring 

PllnctLml Plug Procedure: 

Laser Canaliculoplasty 

Plethysmography: Noninvasive 

vascular Diagnostic Testing of 

the Lower Extremity . 

Infusade Pumps: Implantation and 

Supplies 

Transtracheal Oxygen: Tube Insertion 

and Gas Supply 

Laser Surgery: Trabeculoplasty 

Decompression of Median Nerve at 

Carpal Tunnel: Arthroscopic or 

Laser Procedure 

Tissue Plasminogen Activator 

1985-1987 

1985 

27 

7 

6 

36 

23 

27 

41 

36 

18 

40 

29 

14 

1986 1987 

38 41 

41 44 

38 41 

38 - 40 

29 43 

31 35 

43 44 

38 43 . 

19 25 

42 44 

30 33 

17 19 

SOURCE: Medicare Carriers as Reported to O#ice of Inspector General. HHS, 1988 

B-3 
TABLE B-lb 

NUMBER OF HCPCS PROCEDURE CODES 

19851987 

TECHNOLOGY 

Magnetic ResonanceImaging for 

Diagnosis of Stroke 

Extracorpore~ Shock Wave 

Lithotripsy 

Cochlear Device Implantation 

Intracardiac Electrophysiological 

Testing: Induction of Anythmia -

by Electrical Pacing 

Real Time Cardiac Monitoring * 

Punctum Plug Procedure: Laser 

Canaliculoplasty 

Plethysmography: Noninvasive 

Vascular Diagnostic Testing of 

he Lower Extremity 

Infusade Pumps: Implantation and 

Supplies 

Transtracheal Oxygen: Tube 

Insertion and Gas Supply 

Laser Surgery: Trabeculoplasty 

Decompression of Median Nerve at 

Carpal Tunnel: Arthroscopic or 

Laser Procedure 

Tissue Plasminogen Activator 

USED FOR EACH TECHNOLOGY 

1985 1986 1987 

2 2 2 

12 4 4 

3 1 2 

8 8 - 10 

16 14 18 

5 6 9 

4 3 3 

25 25 27 -

8 8 10 * 

4 3 3 

3 3 4 

8 9 12 

SOURCE: Medicare Carriers as Reporred IO Ofice Of Inspector General, HHS, 1988 

B-4 
TABLE B-lc 

NUMBER OF LOCAL PROCEDURE CODES USED FOR EACH TECHNOLOGY 

19851987 

TECHNOLOGY 1985 1986 1987 

Magnetic ResonanceImaging for 

Diagnosis of Stroke 

Extracorporeal Shock Wave 

Lithotrips y 

Cochlear Device Implantation 

Intmcardiac Electrophysiological 

Testing: Induction of Atrythmia 

by Electrical Pacing 

Real Time Cardiac Monitoring 

Punctum Plug Procedure: Laser 

Canaliculoplasty 

Plethysmography: Noninvasive 

Vascular Diagnostic Testing of 

the Lower Extremity 

Infusade Pumps: Implantation and 

Supplies 

Transtracheal Oxygen: Tube 

Insertion and Gas Supply 

Laser Surgery: Trabeculoplasty 

Decompression of Median Nerve at 

Carpal Tunnel: Arthroscopic or 

Laser Procedure 

Tissue Plasminogen Activator 

0 0 0 

9 4 3 

0 0 1 

3 5 . 4 

2 1 0 

1 2 3 

0 0 0 

6 7 8 

1 

2 

1 

0 

SOURCE: Medicare Carriers as Reported To Office of lnspecror General. HHS, 1988 

B-5 
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. TABLE B-3 

AVERAGE AMOUNTS ALLOWED 

NATIONAL AVERAGESAND 

TECIiNOLOGY 

I 

YEARS NATIONAL 

AVERAGE 

REAL TIME CARDIAC MONITORING: 

1985 $94.40 

1986 $105.20 

1987 $125.71 

PUNCTUM PLUG PROCEDURE: 

1985 I $173.91 

1986 $189.74 

1987 $179.02 

PLETHYSMOGRAPY, VASCULAR: 

1985 $55.35 

1986 $64.43 

1987 $62.7 1 

FOR NEW TECHNOLOGIES . RANGES, 19851987 

AVERAGE AMOUNT ALLOWED 

RANGE 

LOW - HIGH 

$21.20-$ 178.71 

$23.82-$239.50 

$49.17~$251.10 

$3X25-$774.36 

$3X38-$566.07 

$34.34-$926.76 

$18X-$ 117.26 

$12.13-$ 151.86 

$14.92-$ 129.66 

STANDARD 

DEVIATION 

$42.45 

$52.5 1 

$56.95 

. $193.75 

$168.68 

$176.16 

$24.50 

$32.57 

$30.85 
. 

APPENDIX C 

GLOSSARY 

The cochiear implant is an electronic device that captures sound and converts it to an 

electrical signal. It improves hearing by stimulating the auditory nerve. 

Decompression of the median nerve at the carpal tunnel is a procedure to releasetight bands 

of tissue that may develop and presson the nerve where it passesunder the arch formed by the 

bones of the wrist 

Extracorporeal shock wave lithotripsy (ESWL) provides for the pulverization of kidney or 

gall stonesby focused ultrasonic shock waves. It offers an alternative to invasive surgery or 

to drug maintenance therapies. 

Infusade pumps are devices that dispensemedication slowly and continuously into a blood 

vessel over extended periods of time. Implanted in the body and reftlled by injection, they 

allow the patient to remain ambulatory and to control levels of medication. 

Intracardiac electrophysiological testing is an invasive diagnostic tool that stimulates the 

heart beating with an electrode introduced into a heart chamber. Electrical signals am 

imposed out of phase with established rhythms to study the speed and quality of recovery to 

the heart’s normal beats. 

Magnetic resonance imaging (MRI) is a method of showing the size and shapeof body 

cavities and tissues. It is capable of demonstrating a wide variety of soft tissue lesions, and it. 

avoids use of potentially harmful radiation or injected contrast media. 

PIethysmography is measurement of changes in the size of a part of the body in responseto 

the circulation of blood. It is often used to assessblood flow in the veins of the legs. . 

The punctum plug procedure places stoppers at the openings into the drainage tubes through 

which tear fluid runs out of the eye. It is used to retain fluid in patients who experience “dry 

eye.” 

Real time cardiac monitoring records out-of-the-ordinary episodes of heart activity when the 

patient is in an ambulatory setting and about the normal tasks of ordinary life. 

Tissue plasminogen activator (‘PA) is a naturally occurring enzymatic protein that 

promotes breakup of blood clots. It is available as a genetically engineered drug for use in 

treating heart attack patients. 

C-l 
l’kabeculoplasty, whether or not performed with a laser “knife”, is a procedure to open the 

pores through which fluid drains from the front part of the eye. It allows increasedflow of 

fluid (aqueoushumor) out of the eye, helping to relieve built-up pressurein casesof glaucoma. 

Transtracheal oxygen is delivered through an opening in the neck, instead of through the 

nose. The method can be more effective in getting oxygen to a patent’s tissues,and it can 

consume less oxygen in achieving the sameeffect. 

c-2 
APPENDIX D , 

COMMENTS ON THE DRAfl REPORTAND O/G RESPONSES 

In this appendix we provide the verbatim comments on the draft report by the Health Care 

Financing Administration (HCFA), the Public Health Service (PHS), the Assistant Secretary 

for Planning and Evaluation (ASPE), the Health Industry Manufacturers Association (HIMA), 

and the Health Insurance Association tif America @BAA). In each case,after presenting the 

comments, we offer our response to the comments. 

With respect to HCFA, the operating agency to which each of our recommendations is 

directed, it is important to note that subsequentto receipt of its written comments we held 

meetings with HCFA to discuss the agency’s concerns about the report’s findings and 

recommendations. At these meetings HeA officials discussedproblems which exist with 

carrier assessmentof new technologies, and indicated that the agency has taken recent 

initiatives to improve technology assessmenf 

Some of the actions we recommended are included among the HCFA initiatives. The HCFA 

was concerned that our findings, at least in part, may no longer be valid becauseof its recent 

efforts. It asked the OIG to conduct an additional study aimed at assessingthe effectiveness 

of its recent initiatives. 

We agree that HCFA has moved to resolve the problems addressedin this study. For this 

reason we have removed from this report a statement, contained in the draft report, that the 

current procedures for carrier coverage and pricing of new technologies constitute a material 

inter&l control weakness within the meaning of the Federal Manager’s Financial Integrity 

Act. We have agreed to work with HCFA in evaluating the effectiveness of its efforts to 

improve carrier assessmentof new technology. 

The HCFA agreed that additional legislative authority would help it improve coverage and 

pricing decisions for nonphysician services. The HCFA believes that physician payment 

reforms recently enacted in the Omnibus Budget Reconciliation Act of 1989 (OBRA-89) will * 

provide an appropriate framework and sufficient authority to improve coverage and pricing 

decisions relating to physician payments. 

We agree and we have modified our legislative recommendations to focus exclusively on 

nonphysician services. But we are concerned about the practical aspectsof the new physician 

payment reform provisions. In order to develop fee schedulesfor new and emerging treatment 

modalities, HCFA must identify them. We believe that the ability to identify emerging new 

technologies is the area of greatest weakness in the current system. We are hopeful that 

HCFA’s recent initiatives will be effective in addressing this weakness. We will know more 

when our future evaluations, mentioned above, are completed. 

! 

D.- 1 
We also remain concerned that the many Part B payments for nonphysician services,such as 

durable medical equipment, prosthetics, and physiological testing, are not covered by the 

payment reforms of OBRA-89 . We believe our legislative proposals are particularly 

important for thesenonphysician services. 

The HCFA disagreed with our recommendation for disseminating coverage and pricing 

information among carriers through a clearinghouse becauseit would not be cost effective, 

and becausecarriers do not usecurrent clearinghouses. We continue to support this 

recommendation. In our survey, the carriers themselves asked for this kind of assistance. We 

believe the current clearinghousesare too passive and often impracticably slow becausethey 

rely upon specific requestsfrom the carriers. What we have in mind is a more proactive and 

orderly dissemination of information. We think that a more proactive clearinghouse would be 

an effective way to do this, but we would support any other technique provided it is 

aggressiveand systematic. We have modified the wording of the recommendation to make 

our intent more clear. 

Following are the written comments we received on the draft report and our responsesto them. 

HEALTH CARE FINANCING ADMINISTRATION (HCFA) COMMENTS 

We have reviewed the above draft report. OIG statesthat its findings demonstrate “the lack of 

an effective system to identify, track, and diffuse information about new technologies and to 

decreaseMedicare payments to capture economies of scale when theseflow from new 

technologies.” According to the report, this alleged deficiency constitutes a material internal 

control weaknesswithin the meaning of the Federal Managers’ Financial Integrity Act and the 

Office of Management and Budget Circular A-123. 

We do not agree with this conclusion. We believe that the report does not offer sufficient . 

evidence to support its major findings. Also, the report does not reflect the statutory context 

within which carrier assessmentof new technology is made. Finally, the report does not 

addressthe recent significant changes.already affecting the technology assessmentprocess, 

even though thesewere discussedwith OIG stafTat an exit conference on August 2. 

More detailed comments on the report’s findings and recommendations are attached. Thank 

you for the opportunity to review and comment on this draft report. 

OIG statesin the report, “the conditions identified in our findings collectively show a material 

internal control weakness....” The report has three major findings upon which this allegation 

of a material weaknessis based Our comments on these findings follow: 

Finding 1 - Unwarranted Variation 

Extensive and apparently unnecessaryvariation exists among the carriers in 

coverage and pricing decisions involving new technologies. 

D-2 
Response 

The mere existence of variation in coverage and pricing decisions does not necessarily 

indicate a problem. The Medicare program was designed from the outset, in both statute and 

regulations, to reflect local practice and pricing conditions. Furthermore, basedon the data 

presentedin this report, it is difficult to reach any conclusion regarding the degreeof variation 

(unwarranted or not) that exists among the carriers in covering or pricing new technologies. 

Thus, the extent of the alleged problem cannot be addressed. 

. Coverage of New Technologies 

In terms of coverage decisions, the report does not give an example of any 

unwarranted variation, nor does it offer any evidence as to the scope of the 

variations between carriers. The report finds instead that, in responseto a survey 

question, “respondents at one-third of the carriers say that the carriers, as a group 

are at most minimally - consistent in making coverage decisions about new 

technologies” (Page 12). The report d&s add that an equal number of cafriers 

statedthere was at least moderate consistency, and another equally sized group 

had “no opinion.” The ambiguity of this responsecalls into question the 

effectiveness of the survey, but, more fundamentally, we would question the use 

of a survey as a substitute for an analysis of actual coveragedata. 

The only “hard” data on carrier coverage of new technology are presentedin table 

II-A-l. This table purports to show the number of carriers covering each of 12 

_selectedtechnologies from 19851987. The figures presentedfor 1987 in this 

table appear to indicate that the carriers are relatively consistent in their coverage 

decisions. 

Moreover, in the narrative which precedes this table, OIG describes its 

methodology for obtaining the coverage data, i.e., the carriers were asked to give 

the procedure codes used for each of the 12 technologies. From this information, 

OIG apparently inferred which carriers covered what technologies. However, 

coveragedecisions cannot necessarily be inferred from the presenceor absenceof 

a code. A catrier can decide not to cover an item for which a code already exists, 

or may cover an item or service for which no code exists by using one of several 

“not other&ise specified” codes available. OIG may have gathered data on 

carrier coding, but it is not possible to know for sure what thesedata say about 

carrier coveragedecisions. 

. Pricing of New Technologies 

The report does not identify any overall financial effect so that the significance of 

the problem can be evaluated. The only comparative figures arc found in table 

II-C. This table hasdata for only three technologies, each of which shows a wide 

D-3 
range of carrier payment levels. However, OIG does not disclose the array of 

payments. This makes it impossible to tell if the variation is causedby one or 

two aberrant carriers, with most of the payment levels clustered near the average, 

or whether the randomnessis broad based Without this information, it is not 

possible to evaluate the significance of the range. 

There are even more fundamental methodological problems with the data as 

presented. It would appear that OIG did not ask the carriers what their prevailing 

rates were for the technologies in question. Rather, according to the explanation 

given on page 17, they took the various procedure codesreported to OIG for the 

three technologies, then usedHCFA’s Part B Medicare Annual Data System 

(BMAD) to determine the allowed payments for thesecodes. However, 

according to table II-A-2, there were several codesreported for each technology 

(18 for real time cardiac monitoring, 9 for punctum plug procedure, and 3 for 

plethysmography), and thesedifferent codes may not representprecisely the same 

service. There are different procedures that can group under each technology and 

different ScTvicesthat could be included in thesecodes (e.g.; technical component 

vs. physician services). It appearsthat OIG lumped the data from all the codes 

together. Thus, it is not possible to determine bow much the variation in allowed 

amounts reflects an inadvertent comparison of different items, or how much is 

actually due to variations in carrier pricing decisions. 

OIG Finding 2 - Economies Not Realized 

. Carriers have no system for ensuring that payments for new technologies 

decreasein responseto decreasing costs for delivering an item or service. 

Response 

As OIG makes no attempt to define the financial effect of this finding, the significance of the 

problem is not clear. The evidence that economies have not been realized relies, fust, 

on the opinion of “respondents at half the carriers” that the cost of delivering a new product 

decreases(Page 19), and second on the fact that the actual pricing of the sample technologies 

did not decrease. There are no concrete and factual data presentedto show that the actual 

costs of thesetechnologies did in fact decreaseover the time period studied. 

The report criticizes the carriers for not taking special initiatives to “capture savings for 

Medicare when the cost of providing a new technology decreases”(Page 19). OIG does not 

take into consideration the considerable statutory constraints that a carrier faces in taking such 

an initiative. Medicare law statesthat the criteria for detetmining a reasonablecharge for a 

physician service are the customary chargesfor similar servicesmade by the person furnishing 

the service, and the prevailing chargesin the locality for similar services. Thus, it does not 

generally follow that the pricing of the sampled procedures would decline, as annual pride 

adjustments are necessarily basedon submitted charges. 

D-4 
OIG also makes frequent reference to the fact that few carriers apply inherent,reasonableness 

to lower the pricing of technologies. The OIG ignores the statutory realities. Since 1985, 

Congress has acted to restrain the useof inherent reasonablenessas a pricing criterion. 

Carriers are no longer free to apply inherent reasonablenessto physician services, which 

would constitute the bulk of chargesfor new technologies. If HCFA wishes to apply factors 

other than reasonable chargesin determining whether a charge is inherently reasonable,we 

must fmt publish a notice in the Federal Register to that effect. 

Finding 3 - Little Guidance to Carriers 

While HCFA has made strides in specifying overall proceduresfor coverage 

decisions, it gives little practical guidance to carriers on coverageand pricing 

matters. 

Response 

Medicare law authorizes the Secretary to enter into contracts with carriers for performance of 

payment and coverage functions. This basic approach of Medicate operations appearsto be 

disregarded by OIG when discussing the relationship between HCFA and the carriers. The 

case studies in the repat indicate that the carriers often seek and receive advice from HCFA. 

The report also statesthat HCFA will make a national coverage decision binding on the 

carriers, when “it has become apparent that different carriers have made inconsistent coverage 

decisions” (Page 2). OIG has not produced evidence that HCFA has failed to fulfill the 

objectives of the law in this regardThe report also fails to take fully into account the following initiatives taken by HCFA to 

update the coverage processand to improve and.increasecommunication between HCFA and 

the carriers. 

. On January 30,1989, HCFA published a proposed rule in the Federal Register which 

describes the coverage processin detail and which makes explicit the criteria that are to 

be applied when making coverage decisions. This important initiative, which for the 

first time would include cost-effectiveness asa covemge criteria, was essentially 

relegated to a footnote in this report 

. HCFA is requiring that carriers must submit a copy of all medical coverage policy by 

September 30, 1989. This policy will be reviewed to identify carriers with widely 

variant policy. 

. Effective October 1,1988, carriers were required to have licensed physicians as medical 

directors. 

* HCFA is committed to holding an annual Medical Directors’ Conference, though in 

practice, these conferences have been held on a semiannual basis since December 1988. 

D-5 
During the May 1989 conference, a half day was devoted to the subject of new 

technology assessment. 

. HCFA’s Coverage and Payment Technical Advisory Group, which includes selected 

carrier physicians, and the HCFA Physicians’ Panel both discuss emerging technology 

and coverage issues. 

. In recent years, there has been significant pricing guidance given to carriers on new 

technologies. The instructions on magnetic resonanceimaging and the technical 

component of cardiac catheterization are two examples. We are in the processof 

carrying out an evaluation of the reasonablenessof price levels for real time cardiac 

monitoring. When this is fmished, the results will be communicated to the carriers. 

Comments on Specific Recommendations 

Recommendation I 

HCFA and the Public Health Service (PI%) should cooperatein establishing a clearinghouse 

devoted to the compilation and dissemination of information on new health care technologies. 

The clearinghouse could be established either within the Department or through contract with 

a private entity. 

Response 

We do not concur with this recommendation. The report does not demonstrate that this would 

be a cost-effective alternative to the recent initiatives we have described above. In addition, 

this recommendation appearsinconsistent with OIG’s own findings, since the report itself . 

suggeststhat carriers do not use information already available from existing clearinghouses. 

In this regard, the report does not mention the clearinghouse function of the National Center 

of Health Services Researchand Health Care Technology Assessmentwithin the PHS. 

Recommendation 2 

HCFA should foster greater consistency among the carriers in their coverage and pricing 

decisions concerning new technologies by: , 

. Improving communications among the carriers by fostering increased use of national 

and regional technical advisory groups. 

. Providing the carriers with selective accessto comparative Medicare payment 

information about new technologies. 

D-6 
. Reviewing on a regular schedule the performance of carriers in identifying, covering 

and pricing specific new technologies. 

Response 

We agree that we should constantly foster improvements in our carrier decisionmaking 

processwith regard to new technologies. It is becauseof this commitment that we have 

undertaken many of the initiatives listed above. Given the extent of theseinitiatives, we do 

not believe that the specific actions included in the OIG recommendation are necessaryat this 

time. 

Recommendiztion 3 

HCFA should seek legislative authority to broaden the basesupon which it can establish the 

reasonablecharge for a new technology, both at the time of initial coverage and after the 

technologyhas assimilated into the marketplace. 

Response 

We do not concur with this recommendation. This recommendation is largely a proposal that 

HCFA be given increased authority to apply inherent reasonableness. However, Congress has 

only recently stated its position, by acting to restrict further the Secretary’s authority. It is 

clear that Congress has no interest in easing the administrative burden that Congressitself 

imposed on applying inherent reasonableness. 

Also,.under pending legislation, the physician payment system will change radically. With a 

national fee schedule using a resource cost-basedrelative value system, carrier discretion to 

price physician services will be virtually eliminated. Therefore, there would be little current -

interest in Congress in making procedural adjustments in the reasonable charge system. 

OIG RESPONSE TO HCFA WRIT)-EN COMMENTS 

We believe that the report does offer sufficient evidence to demonstrate the lack of effective 

systemsto identify, track, and diffuse information about new technologies and the inability of 

the system to decreaseMedicare payments to reflect economies that flow from new 

technologies. 

Becausethe systems do not exist, the information desired by HCFA is practically impossible 

to obtain. We therefore collected information using discussion guides and mail surveys of the 

very carriers who would operate any effective system We also obtained new data about a few 

specific technologies to illustrate the points we raised. We believe that the carriers’ 

experiences and observations collected in the report, along with the casestudies, support the 

findings and recommendations. 

D-7 
We agreewith HCFA that the report should reflect the statutory context within which carrier 

assessmentof new technology is made. We did not mean to imply that HCFA was rem& in 

failing to use its statutory authority. On the contrary, we believe that HCFA has been thwarted 

in its efforts by ambiguous statutesand complex procedural requirements. In the final report 

we havemade the context more explicit. Also in the final report, we have recognized more 

completely HCFA’s recent initiatives to update the coverageprocessand improve 

communication. These are significant steps. Our report recommends additional beneficial 

stepsderived from the carriers own experiencesand perceptions. 

Finding 1 - Unwarranted Variation: 

The HCFA statesthat variation in coverage and pricing decisions does not necessarily indicate 

a problem; variation was designed into the program from its outset in 1965. But the OIG 

report speaksof unwarranted variation. Neither OIG nor the respondentsto the survey finds 

any basisfor the extent of variation perceived by the takers. Although the extent of variation 

contemplated by the architects of Medicare is not defined for coverage and pricingactivities, 

there are some guides available that allow us-to place the variation in context: 

. We found average amounts allowed for new technologies varying by factors of five 

among ctiers. In contrast, economic indices such aspersonal income or cost price 

indices rarely vary by a factor as much as two between States. 

. Carrier medical directors perceive the variation in coverageamong carriers as well in 

excessof the variation on medical practice among States. They observe that medical 

practice today in 1989 is much more uniform nationally than it was at the outset of 

-Medicare in 1965. 

. Small and remote carriers report that they seenew technologies soon after general -

professional acceptance. Any advantage for the major medical centers operatesduring 

the investigative phaseof the technology. 

. Manufacturers of new technologies operate in a nationwide market. Only rarely do 

manufacturers make new technologies available in limited areasof the country. 

The HCFA statesthat the survey question on consistency is a questionable substitute for 

analysis ot actual coverage data. As previously mentioned, we believe that the carriers’ 

perceptions and the casestudies provide ample basisfor a finding that coverage and pricing 

decisions are inconsistent. However, we modified our finding to indicate that some, but not 

all, of the variations arc unwarranted. We are particularly concernedabout variations in 

pricing. 

The HCFA correctly statesthat the data in table n-A-1 (now table B-la) of the draft report 

refer to codes used, not to coverage decisions. We haverevised the table and the discussion in 

D-8 
the text to correct this en-or. But we should emphasize that the conclusion is not changed. 

The sameitem or service is treated differently by different carriers. 

We found no evidence that carriers make decisions not to cover, they just do not make the 

decision to cover. If the data in table B-la are taken at face value, they show extensive 

variation in what is supposedto be a uniform national coding scheme,and raise a question as 

to how well the HCPCS applies to new technologies. If, however, the implication drawn by 

the OIG is correct, and the absenceof a code indicates absenceof coverage for a new 

technology, that raises a question as to how equal is the accessdifferent Medicare 

beneficiaries have to what is supposedto be a nationally distributed new technology. 

The HCFA statesthat the draft report does not disclose arrays of allowed amounts in table II-C 

(now table B-3) and does not identify any overall financial effect. We agree that the 

dispersion in allowed amounts should be shown more completely than through the sample in 

figure 8. Accordingly, we have added standard deviations to table B-3. These clearly show 

that the variations are subs&n&I. Since our choice of technologies and thereforethe data on 

averageallowed amount are illustrative, we should not and do not project financial effects. 

We found that variation exists, and it exists for some critical new technologies. We did not 

attempt to audit all new technologies: 

The HCFA statesthat there are fundamental methodological problems with the use of HCPA’s 

Part B Medicare Annual Data System (BMAD) and with lumping together the data for 

different codes. We used BMAD becausethat gives the best available measureof what was 

actually paid. Prevailing charges would give what should have been paid under ideal 

conditions. 

Similarly, the use of diffe.Ent codes by different carriers would have made any comparison by 

individual code meaningless. We asked each carrier the samequestions, in the samewords, -

and we used BMAD to translate their responsesinto allowed amounts. Our averagesdo 

average everything the carriers include under each new technology. We recognize that there 

are different levels within each technology but we choose to report each as a group. 

Finding 2 - Economies Not Realized: 

The HCFA statesthat no concrete and factual data are presented to show that the actual costs 

decreasedand that the financial effect is not defined. However, since neither HCFA nor the 

carriers routinely identify new technologies or keep track of payment trends as these 

technologies mature, such data is practically nonexistent. Nevertheless, we gathered the 

carriers’ own perceptions about cost trends for new technologies. We reported on the apparent 

contradiction between the Iarge number of respondentswho believe that costs decreaseand 

the absenceof any affirmative effort to reflect theseperceived cost decreadesin Medicare 

reimbursement amounts. 

The HCFA statesthat the report does not take into account the criteria for determining a 

reasonablecharge and the statutory constraints on HCFA and the carriers in use of inherent 

D-9 
: 

reasonableness. We agree, and we have modified the background section of the final report 

accordingly. Becauseof these factors we recommended, and continue to recommend, 

legislative action. 

Finding 3 - Little Guidance to Carriers: 

The HCFA statesthat the evidence in the report does not show HCFA to have failed to fulfill 

ihe objectives of the law in relation to carriers as Medicare contractors. The purposeof this 

study is to identify ways for HCFA and the carriers to better achieve their objectives, changing 

the structure only when a change is needed We found that the carriers collectively believe 

that they, and HCFA, can do better at assessmentof new technologies. Our recommendations 

addressthe carriers’ need in this axea. 

The HCFA statesthat the report does not take fully into account HCFA’s initiatives to update 

the coverageprocessand to improve communication between HCFA and the carriers. We 

agree, and we have taken more complete note of these in the final repon -

Recommend&ion I - Clearinghouse: 

The HCFA rejects our recommendation for a clearinghouse stating that it is not shown 

cost-effective, that carriers don’t use existing clearinghouses, and that the clearinghouse 

function of the National Center of Health Services Researchand Health Care Technology 

Assessment(NCHSR/HaA) is nqt mentioned. 

We continue to support our recommendation. The carriers themselveswant something 

existing clearinghouses do not offer, prompt accessto coveragebackground and also pricing 

information. The HCFA initiatives don’t give the carriers this kind of information. The 

means to provide such information promptly to the caniers can and should be developed more 

strongly. What we are advocating is a more active strategy for disseminating information to 

take the place of one that relies on the carriers to request information. We think that a 

clearinghouse can be an effective way to do this, but we would support any other technique 

provided it is aggressiveand systematic. We have modified the wording of our 

recommendation to clarify our intent. 

Limitations of the existing clearinghouses make it all the more important for HCFA to 

exercise leadership in prompt sharing of information that is useful to the carriers in assessing 

new technologies. If, as the carriers believe, information sharing will eliminate unnecessary 

duplication of effort, then carrier use of the clearinghouse would be cost beneficial. The role 

of the NCHSR/HCTA clearinghouse function will have to be reconsidered now that OBRA-89 

hasreplaced NCHSR/HCTA with .theAgency for Health Care Policy and Research. 

Recommendation 2 - Foster Consistency: 

The HCFA agreesthat they should constantly foster improvements in the carrier decision 

making processesfor new technologies. We have statedabove that the HCFA initiatives are a 

D- 10 
valuable beginning. Regional meetings and Technical Advisory Groups similar to the the New 

York Region’s Medical IssuesTechnical Advisory Group (MITAG) model hold promise as 

effective ways to foster active and ongoing communication among carriers, with HCFA in its 

proper oversight role. We also recommend that HCFA continue to find ways to give caniers 

selective accessto pricing information. The recent initiative of supplying BMAD data is a 

good start. This is the very data we used for our casestudies. But, as HCFA has remarked, it 

has its limitations, especially given the discretionary nature of coding of some services. 

Further, we recommend that HCFA, in reviewing the carriers’ performance, give special 

attention to new technology. The respondentsto our survey (medical directors) either had no 

knowledge of the Conttactor Performance Evaluation Program (CPEP) process or little 

understanding of its function. They reported that it did not relate at all to their technology 

assessmentactivities. 

Recommendation 3 - Seek Broad& Basesfor Pricing in the Law: 

The HCFA rejects our recommendation, stating that it amounts to expansion of inlZrent 

reasonablenessauthority, which it goes on tostate the Congress wants to restrict. Also, 

HCFA statesthat the recently enactedresource basedrelative value system for physician 

payment will soon make this issue moot. 

We agreeand we have modified our legislative recommendations to focus exclusively on 

nonphysician services. But we are concerned about the practical aspectsof the new 

provisions. In order to develop fee schedulesfor new and emerging treatment modalities, 

HCFA must identify them We believe that the ability to identify emerging new technologies 

is the areaof greatest weaknessin the current system We are hopeful that HCFA’s recent 

initiatives will be effective in addressingthis weakness. We will know more when our future 

evaluations, mentioned above, are completed. 

We also remain concerned that the many Part B payments for nonphysician services, such as 

durable medical equipment, prosthetics, and physiological testing, ate not covered by the 

payment reforms of OBRA-89. We believe our legislative proposals are particularly 

important for these nonphysician services. 

PUBLIC HEALTH SERVICE (PHS) COMMENTS 

General Comments 

Through the Office of Health Technology Assessment(OI-ITA), PHS is involved in the Health 

Care Financing Administration (HCFA) processfor making national coverage decisions for 

health care technologies. However, this relationship on the part of OHTA does not directly 

involve the activities of the Medicare carriers, particularly where pricing matters are 

concerned. 

A review and analysis of table II-A- 1, “Number of Carriers Covering Each Technology 

1985-1987,” in the OIG report indicates the usefulnessand necessity for technology activities. 

D- 11 
While a clearinghouse is necessaryfor compiling and disseminating information, completed 

assessmentreports by PHS and subsequentMedicare Coverage Instructions make carrier 

coverage decisions easier and more consistent. For technologies assessmentby OHTA such as 

Trabeculoplasty, Cochlear Device Implantation and Extracorporeal Shock Wave Lithotripsy 

most carriers were consistent in their coverage decisions. Also evident is the fact that even 

where a National Coverage Decision has been made by HCFA such as in the caseof Pacing, 

not all carriers are aware or consistent with the HCFA Position for that technology or 

procedure. 

The following are our comments on the OIG recommendations. 

OIG Recommendation 

The Health Care Financing Administration and the Public Health Service (PHS) should 

cooperate in establishing a clearinghouse devoted to the compilation and dissemination of 

information on new health care technologies. ‘Ihe clearinghouse could be establishedeither 

within the Department or through a contracf with a private entity. 

PHS Comment 

We concur in general with this recommendation. The OIG report makes reference to the 

PHS-supported Institute of Medicine (IOM), Council on Health Care Technology 

clearinghouse function which is already operational The report notes, however, that few 

carxiersdraw on this resoume aswell as other efforts providing technology information. The 

availability and Iocation of a clearinghouse devoted to the compilation and dissemination of 

information on new health care technologies may not be asmuch the issue as the needto get 

Medicare carriers to utilize the existing resources. Furthermore, the reliance of Medicare 

carriers on a national clearinghouse for their technical information will certainly addressthe -

concern raised in the OIG report for greater consistency among carriers in their coverage 

decisions. * 

Regardlessof the organizational location of the clearinghouse, the Department or‘IOM, 

adequatefunding for such an endeavor is paramount for a successfulprogram. 

Reorganization legislation being considered for the National Center for Health Services 

Researchand Health Care Technology Assessment(NCHSR) may place the IOM 

clearinghouse function within the National Library of Medicine. PHS is in full agreement 

with the OIG report that there is a need for a national clearinghouse; however, the support for 

the clearinghouse functions already operational may be preferable to seeking the 

establishment of a clearinghouse within the Department. Should the Department be 

encouraged to established a clearinghouse then consideration and funding for the operation 

could be given to the Division of ResearchDissemination and External Liaison (Division) 

within NCHSR. The Division is responsible for disseminating the assessmentsof OHTA and 

has a mailing list of approximately 25,000 people and organizations. 

D- 12 
OIG Recommendation 

The Health Care Financing Administration should foster greaterconsistency among the 

carriers in their coverage and pricing decisions concerning new technologies. 

PHS Comment 

Even though this recommendation is directed to HCFA, PHS concurs in general with it. PHS 

is aware of the inconsistency in contractor coveragedecisions as well as HCFA proposals to 

addressthis issue. The stepsoutlined by HCFA in the Federal Register, January 30, 1989, (54 

FR 4302) regarding “The Medicare Program: Criteria and Proceduresfor Making Medical 

Services Coverage Decisions that Relate to Health CareTahnology” seem appropriate and 

adequatefor obtaining g-resterconsistency in the coveragedecisions of Medicare Carriers. 

OIG RESPONSE TO PHS COMMENTS 

We welcome PHS support for a clearinghouse and we agreethat there is a need to get 

Medicare carriers to utilize existing resourcesmore effectively. We encourageHCFA and 

PHS to atrange a meeting of’all interested parties to discussoperating alternatives, including 

use and organizational location of the IOM clearinghouse function. We agreewith the PHS 

statement that, regardless of the organizational location of a clearinghouse, adequatefunding 

is paramount for a successful program. 

We note that PHS is aware of the inconsistency in contractor coveragedecisions as well as 

HCFAproposals to addressthis issue. The proposed rule on coveragedecision making is an 

important first step, but this alone is not enough. The carriers are looking for more effective 

guidance from HCFA, better.communications among themselves,and quicker more extensive 

sharing of national Medicare data with the carriers by HCFA. The MITAG discussions 

provide an attractive model for improving communications. 

ASSISTANT SECRETARY FOR PLANNING AND EVALUATION (ASPE) 

COMMENTS 

We have been concerned about HCFA’s coverage determination processfor some time and 

welcome and support your recommendations to improve coveragedecision making. 

OIG Recommendation 

Establish a joint HCFA/PHS clearinghouse on new technologies. 

ASPE Comment 

We support a joint clearinghouse, but would prefer it to be maintained within the Department, 

rather than contracted out to a private entity. We believe that an in-house clearinghouse would 

offer significant advantages in terms of cooperation and rapid dissemination of information. 

? 

D-13‘: 
In addition, we suggest that substantive linkage among the Effectiveness Initiative, technology 

assessmentactivities of NCHSR, and the recommended HCPA/PHS clearinghouse could have 

synergistic effects on all three. 

Since carriers do not utilize existing national technology sources,it is imperative that the 

clearinghouse take the initiative to communicate with the carriers and foster communication 

among carriers. 

OIG Recommendation 

HCPA should seek legislation to increaseits authority to make reasonable charge 

determinations for new technologies both at the time of initial coverage and after the 

technology has been assimilated into the marketplace. 

ASPE Comment -

With the Congresslikely to implement an RBRVS sometime in the near future, it becomes 

even more important that HCFA acquire and exercise authority to setreasonable charges (and 

presumably soon, relative values) for new technologies and other newly covered items and 

services as well as the authority to revise such chargesand relative values as circumstances 

WXElllt. 

Thank you for sharing your report with this office. 

OIG RESPONSE TO ASPE COMMENTS 

We welcome ASPE support for a clearinghouse which takes the initiative to communicate 

with carriers and foster communication among carriers. We encourage HCFA and PHS to * 

arrange a meeting of all interested parties to discuss operating alternatives, including whether 

an in-house clearinghouse would offer significant advantagesin terms of cooperation and 

rapid dissemination of information. 

We agree with ASPE that HCPA needsto acquire and exercise authority to set reasonable 

charges,and also the authority to revise charges. 

HEALTH INDUSTRY MANUFACTURERS ASSOCIATION (HIMA) COMMENTS 

Thank you for your August 16 letter transmitting a copy of your “Medicare Carrier 

Assessmentof New Technologies” August draft report (Draft Report). Medicare assessment 

of medical technologies, at both the national and local levels, has a significant impact on our 

members-manufacturers of medical devices, diagnostics and health cam information 

systems. Since 1986, HIMA has been quite involved with the Medicare coverage and 

payment process. We appreciated your contacts with our organization during the research 

stagesof this Report and we welcome the opportunity to comment on the Draft Report. 

D- 14 
Your study is particulady important in view of the unique challenges which technology 

innovation presents. Continual researchon medical devices and diagnostics makes innovation 

both rapid and incremental. The assessmentprocessis often time consuming and results in a 

snapshotof medical practice. Carriers face the difficult task of keeping their policies 

up-to-date with current medical knowledge. 

The fohowing comments addressissuesin your report in the sequencethey appear in the Draft 

Report. 

A. HIMA COMMENTS ON IG FINDINGS 

1. Technological innovation has not been the major cause of Medicare Part B payment increases. Rather, new devices have allowed many servicesto be performed in a more 

cost-efficient location-the outpatient setting-contributing to Congressional and Administration goals under the prospective payment system -. 

The Draft Report statesthat HCFA and OTA studies show that new health cam 

technologies account for a substantial portion of the annual increasein Part B 

payments (page 2). The data in the report attributed 50% of this increase to 

inflation and 37% to increases-inutilization. 

A clear objective of Congressand the Administration in implementing the 

prospective payment system and the professional review organization program 

was to encourage a shift of medical servicesfrom more costly inpatient settings to 

the outpatient arena. ‘Es would save costs on inpatient care, but it would also 

trigger increased utilization of outpatient services. 

Technology has helped to shift services and costs to less expensive outpatient 

settings. 

Additionally, studies by ProPAC confirm that technology has played a minimal 

role in hospital inpatient cost increases. 

Overall, the results suggestthat new technology and technological advances account for only a small part of the annual increase in total Medicare expenditures for hospital operating costs. (Medicare Prospective 

Payment and the American Health Care System, Report to the Congress, 

Prospective Payment Assessment Commission, June 1988, page 22.) 

A complete examination of the role of technology in terms of Medicare Parts A and B 

payments reveals that technology contributes only modestly to overall increases. 

2. The section dealing with other studies and actions should include a description of the 

September 14, 1985 report and recommendations of the Congressionally mandated National Advisory Council on Health Care Technology Assessment. 

D- 15 
3. improved communications between manufacturers and carriers can make technology assessment more eficient. 

The Draft Report statesthat: “Manufacturers also createproblems for the carriers 

by providing data that are not relevant, objective, or complete.” (Page 6.) 

Manufacturers can provide better prepared materials for carriers if they know 

precisely what information carriers need in order to make reasonablecoverage 

decisions. The information requirements are rarely spelled out by carriers. Even 

coveragerequirements used at Medicare’s national level have only been issued in 

proposed form asrecently as January 30.1989. (Seeproposed rule in Federal 

Register.) Carriers in some casesare quite reluctant to take the time to discuss 

their evaluations with manufacturers. HIMA has someevidence of carriers 

refusing to respond to manufacturers’ inquiries. Improving the communication 

between carriers and manufacturers would facilitate proper assessments. 

HIMA has for three years been conducting seminarsto educateits membersabout 

Medicare concerns. We have featured-representativesfrom carriers and would 

like to continue and even expand theseprograms. (These conferenceshave also 

included representatives from the Inspector General Division of the DHHS Offke 

of General Counsel.) 

4. HIMA and its members have consistently identified the problems with cost-effectiveness 

as a coverage criteria. 

The Draft Report (pages 8-9) implies an endorsementby manufacturers of 

cost-effectiveness as a coverage criterion. HIMA has underscoredthe legal, 

a methodological, and policy problems associatedwith using cost-effectiveness as a 

Medicare criterion. Some clarificationof this section should be made. 

B. HIMA COMMENTS ON IG RECOMMENDATIONS 

1. A clearinghouse to compile and disseminate information on health care technologies 

could be an asset to carrier decision-making provided the information was regularly 

kept up to date and that the sources of data into the clearinghouse included information 

from a wide range of reliable sources, including manufacNers of medical technology. 

HJMA would like to sound a note of caution that such a clearinghouse should not 

unduly complicate the coverage decision-making process. Creating a new entity 

might only add delay in decisions without improving the quality of decisions. 

Thus, it would be crucial, if such a clearinghouse was to be considered, that clear 

operating parameters be established that assurerapid and accurateacquisition and 

dissemination of data. 

2. Greater consistency, to the extent it is needed, can be promoted by finalizing the Medicare coverage regulation. 

D- 16 
The IG report recommends that HCFA should foster greater consistency among 

carrieIs in coverage and pricing decisions. HCFA has made a substantial step in 

this direction already with the publication of a proposed rule on January 30,1989, 

dealing with Medicare coveragecriteria. The criteria would apply for both 

national and local decision-making. Setting out the rules for coverage is the best 

first step in making decisions more consistent. 

The Medicare program was designed to operate in a decentralized fashion. The 

system of carriers and fiscal intermediaries was set up to taiceadvantageof the 

expertise held by operating insurance companies. The Draft Report proposes,in 

some respects,to reversethis principle. The carriers would benefit from a 

binding national mechanism that imposes decisions on them becauseit would 

relieve them from the burden of making the decisions themselves. They could in 

fact shift this responsibility to the federal government. 

Some improvements in carrier consistency should be expected, but not thefederalization of technology assessment. The question of variation in practice 

patterns is a complex one. There are legitimate divergences in medical care when 

comparing research-intensive, teaching institutions to small rural hospitals. 

carriers should continue to have the responsibility, discretion, and flexibility to 

apply coverage rules to their own unique situations. This can assurethat 

decisions anzmade with the patient’s needs in mind, not just the need for national 

uniformity. 

The finalization of HCFA’s coveragerule, transmission of the rule to caniers, 

_ education of the carriers, and requiring compliance with the rule through HCFA’s 

annual carrier performance evaluation program (CPEP) would improve 

performance without creating a new layer of bureaucracy. 

3. Sufficient legislative author@ clearly exists for Part B payment controk. 

The IG report suggestslegislative changes to allow HCFA to establish reasonable 

charges for a new technology, at the time of initial coyerage and after the 

technology has been disseminated into the marketplace. HCFA currently has 

wide-ranging authority to establish payment amounts and to change those 

amounts. The legislation allowing the use of inherent reasonablenessfor 

physician services and for other Part B items, the implementing regulations, and 

the carrier instructions are quite detailed. They afford caniers a high degreeof 

guidance in payment analysis. This is not to say that Part B payment mechanisms 

are not complex and could benefit from clarification. However, no further 

legislative changesshould be contemplated until recent initiatives have been fully 

understood by the carriers and providers. 

The Draft Report assumesthat costs will inevitably drop as familiarity with a new 

technology increases. This assumption needsto be fully explored to seeif in fact 

D- 17 
“economics of scale or knowledge” occur in the medical marketplace. The 

concept appearsto be driven by anecdotesand two procedures,cataract extraction 

and coronary artery bypass grafts, which may not representthe actual dynamics 

of technology-specific, system-wide efficiencies. 

C. CONCLUSION 

The role of carrier coverage decision-making has been and will continue to be an 

important part of the Medicare program. The Draft Report identifies some areas 

where improvement is needed. HIMA supports, as noted above, certain reforms 

that will contribute to better and more efficient decisions. We are concerned that 

certain recommendations made in the Draft Report would not improve the 

process. 

We very much appreciate the opportunity to review the Draft Report and share 

our comments with you. -. 

OIG RESPONSE TO HIMA COMMENTS 

We agreethat certain reforms will contribute to better and more efficient decisions and we 

welcome the support of HIMA in those areaswhere improvement is needed. We continue to 

believe that the recommendations made in the draft report would improve the process. 

In responseto specific concerns expressedby HIMA: 

Al. The report statesthat technology innovation accountsfor a substantial portion of the an­

-nual increasein Part B payments, and cites studies by HCFA and OTA in support. We 

are not aware of more recent studies that estimate this portion more precisely. We did -

not state,or imply, that technological innovation is the major cause of the annual increz~~ Indeed, we did state that inflation is the largest factor. 

A2. We have added a reference to the report of the National Advisory Council on Health 

Care Technology Assessmentto the section dealing with other studies and actions. 

A3. We recognize the initiative of HIMA in conducting seminars to educate its members 

about Medicare concerns. But we also recognize that manufacturers ordinarily take the 

initiative in approaching carriers about new technologies. Although we agree with 

HIMA that improved communications can make technology assessmentmore efficient, 

we remain concerned that HCFA and the carriers need to take a more affmative attitude in relating to manufacturers. 

A4. The four manufacturer’s representativeswhom we interviewed gave their own opinions 

about cost effectiveness as a major criterion in making Medicare coverage decisions. It 

should not be inferred that they are representative of the group of all manufacturers. We 

D- 18 
Bl. 

B2. 

B3. 

have mod&d the text to emphasize that theseare individual opinions, and we have 

noted HIMA stated concerns with cost effectiveness as a criterion. 

We agree with HIMA’s concern that any clearinghouse provide information promptly in 

order to expedite coverage and pricing decision making, and we have noted the importance of time in the final report. 

We agree with HJMA that implementation of HCPA’s proposed rule on coverage decision making is an important first step, but this alone is not enough. The carriers are asking for more effective guidance from HCFA, better communications among themselves, 

and quicker more extensive sharing of nationai Medicare data with the carriers by 

HCPA. The MITAG discussionsprovide an attractive model for improving communications. 

We continue to believe that the statutory authorities HCPA now has for deciding the 

amounts Medicare pays for a new technology are so detailed and complex as to be effectively unusable. The small number of-carriers reporting use of inherent reasonableness 

illustrates this situation. We believe there is a need for a clearly stated statutory authority for HCFA to set national prices or price limits in those exceptional situations where 

HCFA believes this action warranted. 

This authority should allow HCFA to go beyond charge histories (for example, to 

consider product development costs) in order to set a reimbursement amount that 

is fair to the provider of service,encouragesbeneficiary accessto the benefits of 

new technology, and supports innovation by the manufacturer or other innovator. 

_We should emphasize that we foresee this processoccurring about as frequently 

as do national coverage decisions now, approximately 20 time a year. Carriers 

would continue to make almost all Part B coverage and pricing decisions. 

HEALTH INSURANCE ASSOCIATION OF AMERICA (HIAA) COMMENTS 

Thank you for sharing with us the draft report entitled, “Medicare Carrier Assessment of New 

Technologies,” which provides an overview of major issuesand challenges facing the 

Medicare Part B carriers in assessingnew health care technologies. We have had an 

opportunity to review this draft report and we have the following comments: 

1) We would support the establishment of a clearinghouse on emerging and new technologies in order to accessinformation bearing on the identification, coverage and pricing of 

such technologies. 

The HIAA has been discussing the desirability and feasibility of establishing such 

a clearinghouse for its members, and we would be very willing to meet with 

representatives from HCFA and PHS in order to discuss a collaborative effort. 

D- 19 
2) We support the recommendation regarding HCFA’s need to foster greater consistency 

among carriers in their coverage and pricing decisions concerning new technologies and 

to go a step further, we would recommend that such information should be shared with 

private sector third party payers. 

3) We support the recommendation that HCFA should seek legislative authority to broaden 

the basis upon which it can establish the reasonablecharge for a new technology, both 

at the time of initial coverage and after the technology has been assimilated into the market place. There are severalcoverage/payment level issuesthat commercial insurers 

must deal with on a daily basis, and if such information could be sharedwith private sector payers, it would also create greater consistency. 

On page 15 of the report, it statesthat, “HIAA has established a Pm&e AssessmentCenter 

which began in 1987, with preliminary studies in small areaanalysis and reviews of obsolete 

technologies.” The formal name of the HIA4 technology assessmentactivity is called the 

Medical Practice AssessmentUnit, which has initially developed a report on underevaluated 

health care technologies, which includes information on obsolete technologies and 

commissioned a study on quality assessment.Further, the unit plans to convene rotating 

panels of experts by clinical area,in order to identify emerging and new health care 

technologies, as well as technologies that may be becoming obsolete. 

In addition to this activity, the association plans to hold a seriesof conferences dealing with 

coveragepayment level issues,such as identifying setsof criteria by delivery setting, e.g., 

hospital inpatient care, ambulatory cam, preventive services,etc. As mentioned, we are 

considering the establishment of a clearinghouse in order to assistour companies in 

identifying emerging and new technologies. 

The unit does not plan to conduct any small area analysis studies at this time, and your final 

report should reflect that. 

I believe the recommendations offered in the report would dramatically improve the 

operational aspectsof Medicare carrier identification and assessmentof new technologies, and 

we would be pleased to work with the Inspector General’s office to improve the Medicare 

coverage decision-making process. 

OIG RESPONSE TO HIAA COMMENTS 

We welcome HIAA support for our three recommendations, and we encourage HCFA and 

PHS to arrange a meeting of all interested parties to discusscollaborative efforts with regard 

to a clearinghouse. 

We misunderstood some of the information about the Medical Practice AssessmentUnit that 

was provided by HIAA during our interviews. We have changed the final report to recognize 

the activity of the unit as stated by HIAA. 

D - 20 
APPENDIX E 

ENDNOTES 

1. Health Insurance for the Aged and Disabled, Title XVIII of the Social Security Act, 42 

USC. 1395 et seq. 

2. Section 1862(a)(l)(A) of the Social Security Act, 42 USC. 1395y(a)( l)(A). 

3. Section 1842(a) of the Social Security Act, 42 U.S.C. 1395(u)(a). 

4. U.S. Department of Health and Human Services,Health Care Financing Administration, 

Medicare Program; Procedures for Medical Services Coverage Decisions; Request for 

Comments, Notice, 52 Federal Register 15560, April 29.1987. 

5. U.S. Department of Health and Human Services,Health Care Financing Administration, 

Health Care Financing Notes, September 1986. 

6. U.S. Congress, Office of Technology Assessment(OTA), Medical Technology and 

Costs of the Medicare Program, Report OTA-H-227, July 1984, pp. 43ff. 

7. Notes 4 and 5. From 1980 to 1985, the Consumer Price Index for all urban consumers 

for all items rose from 246.8 to 322.2 (31 percent), and that for medical care rose from 

265.9 to 403.1 (52 percent). Data from U.S. Department of Labor, Bureau of Labor 

statistics. 

8. Note 6. The OTA explored the dual relationship between Medicare and health care 

technology. Medicare policies affect the adoption of technologies, and patterns and use’ 

of technologies affect Medicare costs. The OTA listed 18 major options, among them 

an option to mandate that Medicare coveragedecisions include cost considerations 

when appropriate and an option to move to fee schedulesfor physician payments under 

Medicare. 

9. Lewin and Associates, A Forward Plan for Medicare Coverage and Technology 

Assessment, Washington, DC., 1985. Among the changesrecommended by Lewin are 

clarifying and opening up to the public the coveragedecision making process and more 

narrow coverage decisions by HCFA. 

10. U.S. Department of Health and Human Services,Growth in the Volume and Intensity of 

Physician Services, Washington, DC., 1989. This report is in response to Section 

4056(c)(2) of Public Law 100-203, The Omnibus Budget Reconciliation Act of 1987. 

11. Jamesonv. Bowen, CA. No. CV-F-83-547~REC (E-D. Cal). 

E-l 
.. 

12. Federal Register, January 31,1989, Volume 54, Page4302. 

13. Griffiths et al. v. Bowen, U.S. District Court, D. Mass., C.A. 86-2556-Y. 

14. U.S. Department of Health and Human Services,Office of the Assistant Secretary for 

Health, National Advisory Council on Health Care Technology Assessment,The 

Medicare Coverage Process, Washington, D.C., 1988. 

15. Blue Cross and Blue Shield of Massachusetts,Guidelines for Proper Submission of New 

ServicelProduct Information to Third Party Payers, Boston, MA, no date. 

16. Blue Cross and Blue Shield Association, Coverage of New or Unusual Devices, 

Services and Procedures in the Absenceof Written Medicare Guidelines, Administrative 

Bulletin 1816, Chicago, IL, November 7,1985. 

17. Similar comments about the role of cost effectivenesswere made in the comments 

received by the HCFA, note 4, and in the study by Lewin and Associates, note 9. 

18. Joint letter to the Secretary of the U.S. Department of Health and Human Services, 

dated Match 30,1989. 

19. See the OTA report on Medical Technology and Costs of the Medicare Program, note 6, 

appendix E, table E-4. 

20. U.S. Department of Health and Human Strvices, Health Care Financing Administration, 

Coverage Issues Manual, HCFA Publication 6, Section 50-13, November 1985. 

21. The idea of a clearinghouse to shareinformation among carriers, particularly on . 

coverageissues, has been put forward before. Seethe discussion in appendix E of note 

6 for further comments by carriers. 

22. Section 1842(b) of the Social Security Act, 42 U.S.C. 1395(b). 

23. U.S. Department of Health and Human Services,Heahh Cam Financing Administration, 

Medicare Carriers Manual, HCFA Publication 14, Part 3, Section 5000 ff, especially 

Section 5246, March 1987. 

24. United StatesDepartment of Labor, Bureau of Economic Analysis, Survey of Current 

Business, 68 (4) 75, April 1988. 

25. American Chamber of Commerce ResearchersAssociation, Inter-City Cost of Living 

Index, Fourth Quarter, 1987, Indianapolis, Indiana, 1988. 

26. Kirchner, Merian, Medical Economics, October 3, 1988,page 126ff. . 

E-2