Medicare Raises Ortho Reimbursement by 4.4% in 2013

In spite of Medicare’s trustees reporting in April that the hospital trust fund will be insolvent in about 12 years, the Centers for Medicare and Medicaid Services (CMS) announced on August 1 that it will increase what the agency will pay hospitals for orthopedic related surgeries in 2013 by, on average, a whoppin’ 4.4%. 

The update applies to approximately 3, 400 acute-care hospitals. More on the reimbursement rates for specific orthopedic and spinal procedures below.

Overall Medicare Payments Up 2.8%

Overall, CMS will increase IPPS (Inpatient Prospective Payment System) operating payment rates by 2.8%. Last year, CMS only raised the rates by 1.8%. This reflects an increase of 2.6% for the hospital market basket adjusted by a multi-factor productivity adjustment of -0.7 percentage point and an additional -0.1 percentage point in accordance with the Affordable Care Act; this is, according to the agency, increased by 1.0% for documentation and coding adjustments.

DRGs, SGR and Sequestration

Payments to surgeons for specific procedures are based on Medicare’s payments to hospitals as well as direct payments for physicians’ services on behalf of the patient by Medicare. This year, this complicated mix of payments takes place in a political environment governed by Medicare Severity Diagnosis Related Groups (MS-DRGs), the sustainable growth rate (SGR) and sequestration.

Each year CMS updates its pay schedule for MS-DRGs for inpatient stays in acute care hospitals under the IPPS. CMS gets a bucket of money from Congress and then begins an allocation process that weighs the “value” of one type of procedure against another. As more procedures and technologies are approved for coverage by CMS, the more the agency must spread a finite amount of money over more hospitals, care providers and patients. 

Until 2008, discharges were classified into one of 538 CMS diagnosis-related groups (DRGs). In 2008, CMS replaced the 538 DRGs with 745 MS-DRGs that provide higher payments for more severely ill or injured patients and lower payments for all other cases. Since 2008, CMS has modified these MS-DRGs bringing the current total number of MS-DRGs to 751.

Physician reimbursements are based on the SGR. Without Congressional intervention, the SGR required Medicare to cut payments to physicians by more than 27% in January. The large cut is required because Congress has continually overridden smaller cuts over the years. To keep the SGR on schedule, the Congressional overrides must be made up in January.

No serious public policy observer believes that the government will cut physician reimbursements by 27% in January and a new Congress will, once again, override the mandated cuts.

On top of this looms the specter of “sequestration.”

You might recall that after the midterm elections in 2010, a new class of legislators demanded that the U.S. Government not raise its debt ceiling. By refusing to approve a higher debt limit, the federal government’s creditors were facing the unthinkable— a U.S. Government debt default. In order to reach a compromise between Republicans in the House, Democrats in the Senate and the White House, the people’s representatives agreed that unless a “Supercommittee” came up with about $1 trillion in cuts, there would be, among others things, a 2% cut to Medicare in January 2013.

Medicare Insolvency

Medicare’s trust fund’s expenditures have exceeded its income each year since 2008. Despite projections that over the next 10 years the fund’s expenditures will grow by an annual average of 5.3% and its income by an average 6%, the fund is expected to have enough revenue by 2024 to pay only 87% of projected costs for that year.

So given these mandated draconian cuts (which no one believes will happen) and the looming insolvency of the Medicare Trust Fund, the 4.4% increase in payments for orthopedic and spinal procedures looks remarkably generous.

Market Impact

Mizuho Securities analyst Mike Matson says the increase in rates is a small positive. In his view the increase is unlikely to have a huge impact on pricing dynamics. ”Medicare reimbursement has risen by several percent per year for the past few years but pricing pressure has worsened despite these increases. “

“Reimbursement levels are just one out of a number of factors that affect prices, and we do not view the final 2013 reimbursement increases as significant enough to change the pricing trends that are being driven by weaker product cycles, an increase in the number of physicians working for hospitals and hospital cost-cutting in anticipation of healthcare reform and sequestration.”

Spine Up 4%

During the government’s fiscal year 2013, which begins October 1, spinal fusion payments will be up about 4% over 2012, with vertebral augmentation pay up by nearly 5%.

Source: Mike Matson, Mizuho Securities USA Inc.

Wells Fargo analyst Larry Biegelsen says companies with the most exposure to spine fusion include: NuVasive, Inc. (93% of revenue), Orthofix International NV (26%), Medtronic, Inc. (20%), Stryker Corporation (8%) and Zimmer Holdings, Inc. (5%). Medtronic, Smith & Nephew plc and Stryker all sell vertebroplasty kits.

Large Joints

Large joint payments will be up by about 4%, and trauma rates will be up by 3-4%. The final rates reflect about 0.5% to 1% increases over the proposed rates announced last spring by the agency.

Source: Mike Matson, Mizuho Securities USA Inc.

Biegelsen said of the companies with the most exposure in hips and knees include: Zimmer (72% of revenues), Smith & Nephew (39%), Stryker (31%) and Depuy Synthes Companies (4%).

Rate Timeline

Key orthopedic DRGs have risen slowly since 2008.

Source: Mike Matson, Mizuho Securities USA Inc.

Quality Reporting

In addition to a rate update, CMS also addresses policy issues.

Payment rates for inpatient stays in general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program will be increased by 2.8%. Those that do not successfully participate in the IQR Program will only receive an increase of 0.8% (i.e., a 2.0 percentage point reduction).

No New Ortho Technology Add-Ons

To remove barriers to access for costly new technologies that are not yet fully reflected in the current MS-DRG payment rates, the Medicare law provides for temporary add-on payments for inpatient stays that involve the use of certain approved new technologies. CMS is approving new technology add-on payments for three applications, glucarpidase (Voraxaze), fidaxomicin (DIFICIDTM), and the Zenith Fenestrated Abdominal Aortic Aneurysm (AAA) Endovascular Graft.

Primary Care versus Specialties

A CMS fact sheet accompanying the IPPS update stated that the agency anticipates that payments to many non-primary care specialties will likely decrease under the proposed rule. As a corollary, primary care physicians would likely find that their payments would increase under the proposed rule.

The fact sheet also noted the agency estimates that payments to family care physicians would likely rise 7% and other primary care physicians would also experience a payment increase—although at a smaller 3-5% rate.

X-Ray Services

The new IPPS payment rule expands the list of professionals that can order Medicare-covered portable X-ray services. The rule revises the conditions of coverage in order to allow non-physician practitioners and limited-license physicians to order portable X-ray services, consistent with state licensure rules.

Providers may not know how Congress will fix mandated cuts in January, but for now they know what they will be paid by Medicare.