The orthopedics device and provider community experienced a “Mediscare” on Friday, December 2, after news that Medicare was going to require 100% pre-authorization before paying for a range of orthopedic surgical procedures swept through Wall Street’s trading desks.
In effect, the news said, hospitals were being put on notice by Medicare that they would be performing “spec” surgeries and hoping to be paid after the payer agrees the procedure was “reasonable and necessary” and patients had received his or her treatment.
The news was limited to 11 high, Medicare-enrollee states until Recovery Audit Contractor (RAC) audits are were completed on all procedures.
NYC Stock ExchangeStill, the notion that one more layer of bureaucracy was about to be imposed on hospitals by CMS was enough to pull orthopedic, cardio and hospital stock values down by billions of dollars.
The list of the affected orthopedic DRG’s included:
458 — Spinal fusion except cervical w/spinal curve, malign, or 9+ fusions w/o CC
460 — Spinal fusion except cervical w/o MCC
470 — Major joint replacement or reattachment of lower extremity w/o MCC
490 — Back and neck procedures except spinal fusion w/CC/MCC or disc device/neurostimulator
The list also included a number of cardio DRGs.
Orthopedic, cardio device manufacturers and hospital stocks dropped like a rock, falling anywhere from 4% to 10% by the end of December 2.
Hospital manager Tenet Healthcare Corporation tumbled more than 10%, while Boston Scientific Corporation, Medtronic, Inc. and St Jude Medical, Inc., which make heart and spine devices, all fell between 6 and 7%. Zimmer Holdings, Inc., Stryker Corporation and other ortho stocks had similar declines.
Monday Morning Recovery
By Monday, December 5, however, the news didn’t look as dire as analysts began parsing through CMS’s (Centers for Medicare and Medicaid Services) pronouncements and it became clear that only Florida was instituting a 100% pre-payment audit now for the procedures. Buyers returned and hospital and device stocks began to recover Friday’s lost ground.
Larry Biegelsen, Wells Fargo’s Senior Analyst, put out a statement on December 5 saying that the firm had learned that only Florida had officially announced that it will perform 100% pre-payment audits on inpatient hospital stays for 15 cardiovascular and orthopedic DRGs on January 1, 2012.
Biegelsen noted that the other 10 states that are part of a CMS Recovery Audit Prepayment Review Demonstration announced in November, had not said which DRGs they will target and what percent of Medicare inpatient claims they will audit on a pre-payment basis.
According to the American College of Cardiology (ACC), whose Florida chapter’s president had originally reported on November 21 that the program was being implemented nationally, said that Medicare indicated that the percent of claims the other 10 states will audit on a pre-payment basis will be less than 100%.
Ahh, the glamorous life of a Wall Street analyst.
To Biegelsen’s credit his report and conference call with investors on December 2, was to our knowledge, the first alarm bell to a Medicare pilot project that seeks to achieve the government’s goals for cutting improper payments by 2012 through reducing overall payment errors by $50 billion, cutting the Medicare fee-for-service error rate in half, and recovering $2 billion in improper payments.
Societies and Surgeons Respond
With the Friday reaction and Monday recovery out of the way, OTW reached out to device companies and medical societies to find out how they viewed the Medicare demonstration project announced in November and First Coast Service Options, the Florida CMS contractor’s implementation of the project.
AAOS
Daniel Berry, M.D.
President of AAOSDan Berry, M.D., president of the American Academy of Orthopaedic Surgeons (AAOS) told OTW that the academy strongly supports CMS’s efforts to improve quality and reduce waste within the Medicare system. “However, ” he added, “AAOS remains wary of the incentives driving RACs and does not support onerous and duplicative programs that further add to physicians’ administrative burdens and threaten quality by compromising the valuable time they spend with their patients.”
The incentives driving RACs cited by Berry result from the auditors getting paid on a contingency basis for the funds they recover. This means that it is in the contractor’s best interest to identify improper payments, and that the process is almost sure to expand to state-run programs within the next few years. In 2007, $10.8 billion were reportedly identified as improper payments by the exclusive four contractors selected by CMS. We were unable to determine exactly how much the contractors have been paid by CMS.
ISASS
The International Society for the Advancement of Spine Surgery (ISASS) provided OTW with a statement that said spine surgeons in Florida are very concerned with this recent action and feel it will threaten patient access to medically indicated spine surgeries.
“This is doubly troubling since there is not unanimous agreement among professional medical societies, payers and their actuaries, and others on when lumbar fusions are medically appropriate or necessary; this step may make surgeons hesitate to perform surgeries that they know will improve a patient’s life, but where the indication may not fit neatly into Medicare’s increasingly more stringent guidelines for such a surgery.”
“In short, ” continued the statement, “this action takes the clinical decision-making autonomy away from the surgeon and prioritizes cost-cutting over improved outcomes. We don’t know if this is another step in what appears to be a continued assault on lumbar fusions by public and private payers, but we will be watching this closely to determine if patients are being denied life-changing surgeries.”
Jeff Fernyhough, M.D., of the Florida Back Institute in Boca Raton, told us that the recovery program is the biggest potential limitation to patient access he has seen in his 22 years of working in Florida. He told us that his office will now generate more paperwork to pile on hospitals and may require patients to sign Advanced Benefit Notices (ABN). ABNs are a promise by the patient to pay the bill for surgery if Medicare denies the claim.
Finally, Fernyhough speculated that the audit program is a way for Medicare to get free care for beneficiaries. Some patients will receive care and providers won’t be compensated, said Fernyough.
How much less compensation?
Bruce Nudell, an analyst at Credit Suisse said, in a Bloomberg story, that the procedures targeted in Florida’s program account for about $14 billion of Medicare’s spending on individual services. If the Florida program was expanded nationwide, the $14 billion would be reduced by 3% to 4%, meeting Medicare’s goal of cutting overpayments in half.
But Nudell added that, “Any broad attempt at Medicare rationing, ‘pulling the plug on grandma, ’ in an election year is likely to be suppressed by politicians, who didn’t appear involved in the decision.”
Chris Kauffman, M.D. an orthopedic surgeon at University Medical Center in Lebanon, Tennessee, went even further than Fernyhough. Kauffman, a NASS (North American Spine Society) activist told OTW that the new audit program looks like an effort to shorten a patient’s hospital stay and change the setting from inpatient hospital to outpatient settings, where physicians have more responsibility for the patient’s care.
Industry Response
We also spoke to the major orthopedic device companies looking for comment. None would comment for the record, but they all pointed to the corrections put out by analysts following “Mediscare Friday” that said the program was unlikely to have a big impact on procedure volumes and device sales.
Since Biegelsen was the first analyst to notice CMS’s proposed change, we give him the final word on the potential impact of the program on orthopedic device sales.
Assuming a 5% to 10% decline in procedures for the 15 targeted DRGs, Biegelsen expects the impact on worldwide sales on Johnson & Johnson, Medtronic, Stryker, Zimmer and Smith & Nephew to be under 1% for all companies, except for NuVasive, Inc. which could see a 2.16% impact on sales
Politics of Payment
Device manufacturers and physicians, who are heavily dependent on public reimbursement, should be very concerned about this audit program. If the audits are conducted fairly without the financial incentives cautioned about by Berry, the providers will only suffer if the procedures currently performed don’t demonstrate significant benefits to patients and don’t have a clear base of evidence agreed upon by societies. But as we have reported in previous stories (Spine Fusion Surgery Reimbursement: Science or Politics; OTW November 7, 2011), payer policies are not consistent or always based on agreed upon standards.
As usual, our orthopedic surgeons told us, the person at the payer’s end deciding what is “reasonable and necessary” is where the rubber will meet the road.
