Medicare’s new technology add-on payments

I did not know this was a thing:

In 2001 CMS created the new technology add-on payment program for new technologies that represent a “substantial clinical improvement” and are inadequately paid under the [standard diagnosis related group (DRG) payment] system. New technology add-on payments supplement hospital DRG reimbursement with temporary payments for high-cost technologies.

That’s from John Hernandez, Susanne Machacz, and James Robinson in the most recent Health Affairs. This actually makes some sense:

[C]linically beneficial innovations involve higher costs but produce clinical benefits that accrue over months or years. Many policy analysts have highlighted the need for adjustments to the [payment system] to remove financial disincentives to adopting innovations that increase costs.

I know it’s a bit weird to favor cost-increasing technologies these days. But it shouldn’t be if the benefits are worth it (a big and important “if”). Moreover, this is not just a U.S. thing:

Many other countries, including Germany, France, and Japan, have adopted new technology payment adjustments for their hospital payment systems.

The authors summarize those, contrasting them to Medicare’s. I’m not getting into that here. Suffice it to say, the idea of paying more to hospitals was not taken lightly by Congress or the Center for Medicare & Medicaid Services (CMS).

Congress and CMS struggled to balance the goals of innovation and efficiency when they pioneered Medicare’s technology payment mechanisms. They adopted criteria to limit the number of eligible technologies, the payment level at which they are reimbursed, and the duration of the supplemental payments. […] CMS was more concerned about overadoption than underadoption of expensive new technology.

In part for that reason, reimbursement is set below cost:*

Payments are set at the lesser of 50 percent of the estimated difference between the hospital’s estimated costs and the DRG payment amount and 50 percent of the new technology cost. This means that hospitals incur financial losses when adopting cost-increasing new technologies, even with the new technology add-on payment program. […] New technology payments are limited to three years after FDA approval and commercialization of the technology. […] Hospitals experienced losses for ten of ten technologies [eligible in 2012-2013].

Use of these new technology payments has been relatively modest.

Between 2001 and 2015, CMS approved nineteen of fifty-three applications for the new technology add-on payment program (fifteen devices and four drugs or biologics were approved). […] The program has resulted in $201.7 million in Medicare payments in fiscal years 2002–13. This is less than half of the amount anticipated by Congress and only 34 percent of the amount projected by CMS.

The article concludes with some interesting points about new, value-based payments, which are not adjusted for new technology.

[T]he direct financial incentive created by emerging value-based payments is for providers to avoid or delay the adoption of cost increasing devices, diagnostics, and drugs, regardless of long-term savings or improved clinical outcomes.

That new payment methods shift incentives toward cost-saving technologies was a point made by Weisbrod in 1991. See also the prior paper on Medicare’s new technology add-on payment by Clyde et al. (2006).

I would not claim that Medicare’s new technology add-on program is a sensible way to manage health care technology. I do not know enough about it to make such a claim. What it shows, though, is that there is some (albeit perhaps meager) attempt by Medicare to manage technology with payment adjustments, with its attendant incentives and disincentives. This is interesting.

* One should always wonder if cost estimates are accurate or, possibly, inflated to game this system. I don’t have direct evidence on this, but it is not implausible.


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