Articles & White Papers

Developing Integrated Product Approval and Reimbursement Strategies in the Absence of Clear Rules

February 27, 2001

Michael M. Gaba- Washington

The often-frustrating, still-evolving policies at HCFA make it all the more important for device manufacturers to put together a well-thought-out plan to gain coverage for their products.

SINCE THE DAWN of the Industrial Age, attorneys have recognized that technological innovations drive the development of the law, and that therefore the law invariably lags behind technology. This temporal gap is due in large measure to the fact that the law, by its very nature, is deliberative, reactive, and looks to the past as a way of handling the future. Technology, driven by the entrepreneurial spirit, is time sensitive, anticipates trends, and looks beyond the proven remedy for solutions.

This state of affairs is no doubt readily apparent to the medical device industry. With technological innovations making new or next-generation devices possible every two years or so, medical device manufacturers are acutely aware that the law–as embodied in the United States FDA and the Health Care Financing Administration (HCFA)–cannot keep pace with innovative new technologies. Thus, the challenge for medical device manufacturers is to develop coordinated FDA clearance and HCFA reimbursement strategies to close this gap and bring quality products to the healthcare market in a prompt and efficient manner.

Historically, device manufacturers could afford to focus their energy on obtaining FDA clearances as their pathway to the market. Of even greater concern to device manufacturers, however, should be the process by which HCFA makes its reimbursement decisions. As the single largest payer for healthcare services and supplies through the Medicare program, HCFA has significant influence over payment trends in both the public and private sectors. As the battle for the ever-shrinking healthcare dollar continues to intensify, HCFA's impact on device manufacturers becomes more severe.

HCFA and FDA have different mandates to evaluate medical devices and apply different standards during their respective reviews. Whereas FDA's responsibility is to determine whether a medical device is "safe and effective for its intended use,"¹ HCFA's job is to judge whether the device is "medically necessary" for reimbursement purposes.² Although FDA clearance is required for a HCFA determination, it does not ensure a favorable reimbursement decision.

AN OBSCURE PROCESS

HCFA's reimbursement process can be a difficult one for a manufacturer to navigate. It consists of two essential steps: coverage and payment. It is important to note that although coverage is a prerequisite to payment, these two steps are separate and distinct. The coverage decision focuses on the threshold issue of whether HCFA will pay for the device or the procedure in which it is used. Once HCFA makes a favorable coverage decision, the payment decision, which is code driven, focuses on how much HCFA will pay when the device is used in a medically necessary context. This two-step reimbursement process is complicated by the fact that HCFA has never detailed in writing the standards by which it judges "medical necessity"–despite a 1987 court order and recent pressure from Congress to do so.³

This is not to suggest, however, that HCFA has not tried to clarify its workings. In 1989, it published a proposed rule that, for the first time, outlined cost-effectiveness as a key component of the coverage process.⁴ The reaction from the healthcare community, particularly from industry, was so vehement in its opposition to cost-effectiveness that HCFA withdrew the proposed rule, which was never published for comment again.

HCFA's failure to promulgate a binding rule in any form should not be construed to mean that it is not using cost-effectiveness as a key criterion in making coverage decisions. In fact, many throughout industry would argue that HCFA's failure to publish a proposed rule is purposeful: that the agency not only wants to avoid the type of controversy it engendered in the late 1980s, but also desires to hold on to the freedom and flexibility it has created for itself by not delineating the standards by which it makes decisions.

Thanks to consistent pressure from industry and other stakeholders, HCFA's lack of identifiable standards has not escaped the attention of Congress. Feeling the increased scrutiny from Capitol Hill, HCFA published a nonbinding general notice this spring that outlines the process it intends to use to make national coverage decisions.⁵ This notice is to be followed later this summer by a document outlining generic coverage criteria. HCFA then intends to publish sector-specific criteria.

HCFA is promoting its process document as a means of streamlining its decision making and increasing the opportunities for public participation. It is important to note, however, that stakeholders are divided over the value of this notice. HCFA's supporters believe that the process document is a first step towards a new and improved HCFA in that the agency is providing industry with a basic road map for its decision-making process, promising to provide its rationale for coverage decisions, offering specific advice on getting a noncoverage decision reversed, and acknowledging that coverage is only the first step and needs to be integrated with coding and payment.

Those who are less enthusiastic about the notice point out that it is not binding on the agency, meaning that HCFA can change its process at any time. More specifically, concern has been expressed that, as outlined in the final notice, the cumulative time frame for a coverage decision could take more than three years to complete–longer than the typical life cycle for many medical devices. The notice also places several impractical deadlines on industry to submit evidence supporting a technology for coverage, and does not commit the agency to any early collaborative agreement process with industry. Finally, if stakeholders do not like a particular coverage decision, the notice does not provide for an appeals process.

These issues have not gone unnoticed on Capitol Hill. On June 24, 1999, Congressman Jim Ramstad (R-MN) introduced H.R. 2338, the Medicare Coverage Information Decision Act of 1999. This bill would require HCFA officials to meet with device companies early in the decision-making process to clarify the level of evidence the agency would need before making a specific Medicare coverage decision. Later that same day, Ways and Means health subcommittee chairman Bill Thomas (R-CA) introduced H.R. 2356, the Medicare Patient Appeals Acts of 1999. Thomas's bill would create a time-sensitive appeals process outside HCFA, but within HHS. These bills reflect modestly on the growing tension between HCFA and Congress over the agency's coverage process. As HCFA proceeds to outline its criteria, including cost-effectiveness, the interplay between Congress and the agency should produce some interesting drama for the medical device industry.

REIMBURSEMENT RATIONALE

How have we arrived at an anticipated final rule? For more than two years, HCFA officials have been asked by Congress and the media how they go about making coverage decisions. During a December 27, 1996, ABC News Nightline broadcast then-HCFA-administrator Bruce Vladeck maintained that the agency's coverage decisions are not financially driven. Specifically, he stated that money is "truly not an issue for us. We are obligated by law to pay for all services that are necessary and appropriate for Medicare beneficiaries."⁶

In April 1997–a mere four months after his Nightline appearance–Vladeck presented to Congress a preliminary version of a congressionally mandated report which included cost-effectiveness as an essential criteria in the coverage process. The final report, entitled "Lung Volume Reduction Surgery and Medicare Coverage Policy: Implications of Recently Published Evidence," makes clear that cost is a central element in HCFA's coverage and payment analysis.⁷ Explaining its intent to sponsor prospective randomized clinical trials to evaluate new technologies or procedures in which these technologies are used, HCFA juxtaposes the technology or procedure under review to "comparable alternatives." More specifically, the report identifies comparability to alternative services as one of three coverage criteria–the other two being "demonstrated effectiveness" and "appropriateness." Elaborating on the concept of comparability, the report states:

Comparability applies when the evidence is sufficient to allow comparison of the relevant costs and effectiveness of two or more technologies that are closely related in terms of being used for the same diagnostic or therapeutic purpose. Services that meet the demonstrated effectiveness and appropriateness criteria will be covered under conditions dictated by the evidence. Comparability is an additional criterion which allows for refining coverage/payment decision in cases where services are found to be more costly, but no more effective than the closely related alternatives. When such a finding is made, the service may be covered and paid at the rate of the lower cost alternative, or limited to specific patients or conditions for which it has been found more effective than the alternative services. The objective of this criterion is to assure value for the Medicare program and its beneficiaries.⁸ (italics added)

At a September 1998 public "town hall" meeting on its coverage process, HCFA's chief medical officer, Jeffrey Kang, MD, confirmed that the Medicare program can no longer pay for every new technology, treatment, or surgical procedure that may work.⁹ In fact, on several subsequent occasions, Kang has stated publicly that the great difficulty in making coverage decisions will arise when the new, significantly more expensive technology is marginally more effective than what is currently in use.

What will HCFA do when a new device
is both more expensive and more effective?

While it is clear that HCFA has embraced cost-effectiveness as a critical element of its reimbursement analysis, it is less clear how the agency will make coverage and payment decisions. For instance, by what process will HCFA identify comparable alternatives? In the report to Congress in which this concept is aired, the coverage decision HCFA is wrestling with is that of lung volume reduction surgery (LVRS). Following the issuance of a January 1, 1996, national noncoverage decision on LVRS, HCFA joined forces with the National Institutes of Health for the first time to initiate a randomized clinical trial to evaluate the procedure. The national emphysema treatment trial, commonly known as the NETT, is randomizing emphysema patients between LVRS and pulmonary rehabilitation. The latter option has been selected as the "comparable alternative."

Who determines if a new technology or procedure is considered a breakthrough (such that there is no basis for comparison) or if indeed there is a comparable alternative? And how is that decision made? While HCFA continues to struggling with these issues, comparability decisions are being made. In the example cited above, there is an essential difficulty with selecting pulmonary rehabilitation as the comparable alternative. Pulmonary rehabilitation is a prerequisite for LVRS. That is, a physician must make the medical judgment that an emphysema patient's health is likely to improve further with LVRS after that individual has undergone pulmonary rehabilitation to the fullest extent possible. It is questionable, therefore, whether pulmonary rehabilitation is truly an alternative to the surgery.

Unfortunately, this view is being reinforced by the patients seeking to improve the quality of their lives. The NETT is currently suffering from abysmal patient recruitment due in large part to the fact that qualified patients–who by definition have between two and five years to live–have already experienced several months of pulmonary rehabilitation and do not want to be forever randomized to a treatment option they know has limited usefulness.¹⁰ The implications of such a time delay are enormous, not only for the patients, but for industry. By the time HCFA acknowledges it has enough data to support a favorable coverage decision for a new technology or procedure, obsolescence will have set in.

If the medical device under review is less expensive than its comparable alternative and produces better results, HCFA will cover and pay for the new device. And, if the device is more expensive and less effective, then HCFA will not cover it. The real difficulty in this exercise, however, is defining the cost of the device and measuring its effectiveness to treat a particular illness or injury. Will HCFA take a micro or macro view when it evaluates costs? That is, will HCFA take into account future costs avoided by virtue of the adoption of a new treatment or device? Furthermore, what will HCFA do when a new device is both more expensive and more effective?

TAKING HCFA INTO ACCOUNT

While these questions raised by HCFA's new coverage policy remain unanswered, the medical device industry will need to anticipate them if it is to succeed in the marketplace. Although a device is not the subject of the NETT discussed above, a device developed in the early 1990s was largely responsible for improving LVRS outcomes. Industry certainly understands the significant disincentive to developing new devices and technologies if such innovations are to be subjected–either directly or indirectly–to multiyear HCFA-sponsored clinical trials aimed at proving a product is "medically necessary" by being cost-effective after FDA has already determined the device to be "safe and effective." Far from being an anomaly, the emphysema example has far-reaching implications: during his April 1997 testimony, Vladeck stated that HCFA intended to treat the LVRS/NETT scenario as the model for all of HCFA's coverage decisions. He did not rule out the possibility of revisiting technologies and procedures presently covered but not yet subjected to prospective randomization.¹¹

For better or worse, this is the environment within which medical device manufacturers must currently learn to function. When a manufacturer develops its FDA product approval/clearance strategy, it must take into account HCFA's perspective regarding any existing comparable alternatives; whether such alternatives are covered; whether they are covered with restrictions (e.g., limited to certain medical centers and certain physicians); and the level at which they are reimbursed. By way of example, if a manufacturer intends to market a new piece of durable medical equipment through the 510(k) process, it must consider how HCFA treats the predicate device, recognizing that the agency is not likely to pay more for a new device that is only as effective as the predicate. It will be up to the manufacturer to develop innovative studies that can generate statistically significant data (not just anecdotal vignettes) proving to HCFA's satisfaction that a new or modified device should be reimbursed at a higher level than its predicate. Manufacturers must always be wary of "inventing the golden egg beater"–that is, a device whose manufacturing costs exceed its level of reimbursement.

Procedurally, the reimbursement level will be dictated by the codes developed and assigned by HCFA. It is prudent for device manufacturers to have a strong understanding of CPT or HCPCS codes, as well as ICD-9 codes. If codes do not exist for new technologies or procedures, it is important that manufacturers communicate with local medical directors to demonstrate the need for new codes. When it comes to reimbursement, manufacturers must also take into account the fact that HCFA is moving toward a prospective payment system, or bundled payments, in all settings. For instance, in July 1998, HCFA's interim final rule establishing a prospective payment system for skilled nursing facilities became effective.¹² The agency is currently developing a similar rule for hospital outpatient services that is expected to be finalized within the year. Considering this trend, the major burden will be on the manufacturers to develop technologies that make financial sense in relation to HCFA's emerging coverage and payment processes.

CONCLUSION

As problematic as the Medicare coverage process can be, manufacturers can turn it to their advantage through careful planning at the local and regional level. Moving too rapidly to obtain a national decision may result in noncoverage. Absent a pattern of uniform coverage at the regional level, a negative outcome at the national level is likely. Once a national noncoverage decision is in place, a company is likely to find itself in a NETT-like situation–one which is extremely difficult to change even as technology continues to evolve.

For device manufacturers, having a HCFA reimbursement strategy is as important as having an FDA product clearance strategy. The two should be considered as parts of an integrated strategy and both should be developed early on in the process, as early as the design of the device itself. When planning clinical trials to demonstrate safety and effectiveness to FDA, companies should consider methodologies that will also answer HCFA's concerns regarding medical necessity, particularly cost-effectiveness. Because FDA clearance does not guarantee HCFA coverage–and HCFA coverage does not guarantee Medicare payment–medical device manufacturers of innovative technologies will be challenged to focus their entrepreneurial energy on developing comprehensive clearance and reimbursement strategies to cope with a system that remains a step or two behind.

REFERENCES

1. 21 U.S.C. 301 et seq. return to article

2. 42 U.S.C. 1395y(a)(1)(A). return to article

3. Jameson v. Bowen, No. CV-F-83-547 REC, 1987 WL 108970, at *1 (E.D. Cal. February 20, 1987). return to article

4. "Medicare Program: Criteria and Procedure for Making Coverage Decisions for Medical Services That Relate to Health Care Technology," 54 Federal Register: 4302, 4308 (1989). return to article

5. "Medicare Program Procedures for Making National Coverage Decisions," 64 Federal Register: 22619 (1999). return to article

6. Nightline: High-Priced Miracles (ABC television broadcast, December 27, 1996). return to article

7. See Hearing on Issues Relating to Medicare's Coverage, ^105th Cong., ^1st Sess. 18 (1997) (statement of the Honorable Bruce C. Vladeck, PhD). See also Donna E. Shalala, HHS, "Lung Volume Reduction Surgery and Medicare Coverage Policy: Implications of Recently Published Evidence," (report to Congress, 1998). return to article

8. Donna E. Shalala, HHS, "Lung Volume Reduction Surgery and Medicare Coverage Policy: Implications of Recently Published Evidence," (report to Congress, 1998), 7. return to article

9. "How Coverage Review Is Conducted," HCFA town hall meeting (September 25, 1998). return to article

10. While there are several important issues to explore surrounding HCFA's noncoverage of LVRS, they are not the subject of this article. Suffice it to say that at the current recruitment pace, the NETT would take between 9 and 12 years to complete. return to article

11. See Hearing on Issues Relating to Medicare's Coverage, ^105th Cong., ^1st Sess. 30 (1997) (statement of the Honorable Bruce C. Vladeck, PhD). return to article