Reductions in reimbursement amounts may never seem “reasonable” to the supplier community, but they are a fact of life. Home health care companies experience the squeeze on reimbursement amounts in the non-Medicare part of their business constantly. Managed care companies and other contract payors routinely pit suppliers against each other in bidding wars and creative pricing strategies. Medicaid plans across the country seek ways to obtain reimbursement reductions through either competitive bidding or other negotiations with the supplier community.

Medicare, on the other hand, has a series of rules and procedures that must be followed to obtain reductions on home health care products. Thus, their reductions often take longer to go into effect.

Inherent reasonableness (IR) is a Medicare pricing mechanism that has been around for many, many years. The idea was to give the Durable Medical Equipment Regional Carriers (DMERCs) the ability to react to pricing fluctuations in their local areas.

In theory, IR would allow a DMERC to increase or decrease a price for a given item or a category of items. In reality, IR was used only to reduce prices and often the reductions were based on the opinion, rather than supportable data, of the DMERC or the Health Care Financing Administration (now the Centers for Medicare & Medicaid Services or CMS).

Consequently the home health care industry has been concerned about IR reimbursement reductions for as long as IR has existed. After long negotiations, CMS now has published a process for it and the DMERCs to use when invoking IR.

The Bottom Line
If you are the manager or owner involved in the day-to-day operations of a home health care business, you may be less interested in the technical writings in this new process and more interested in the bottom line implications to your business. These are:

1) The recently published rules do not single out a product or a category of products that CMS or the DMERCs will focus on first. However, unless you have been living under a rock, you have probably read or heard the public opinion of the DMERCs, CMS, the Office of Inspector General, and even the General Accounting Office on the unreasonableness of the reimbursement amounts for respiratory therapy medications and oxygen.

2) Based on the process for using IR as described in the new rule, experts estimate the lead time for gathering all the pricing data needed to invoke a reduction is 4 to 6 months. This means that a DMERC would have to engage in a deliberate process of gathering valid and reliable pricing data, develop a proposed price reduction, evaluate the impact of that reduction if it were to be implemented, and then publish all of this to the supplier community and seek comment. However, there is no requirement for CMS or a DMERC to change their initial notice and reduction amount based on supplier comment.

3) Once the supplier community is notified of CMS’s or the DMERCs’ intention and rationale for reducing price(s) under IR, the suppliers will have 60 days to prepare for the new price level(s).

4) This new rule affects pricing issues only. It does not preclude changes that could be made in medical policy or documentation requirements, which could occur at the same time a product is targeted for a price reduction.

No one knows how much research CMS or the DMERCs have completed with respect to prices for certain items. The home health care community has anticipated this new rule for quite some time, so it is possible that CMS or a DMERC may be able to reduce the lead time described above because they have already gathered most of the data needed to move forward.

Since the collective “crystal ball” of this industry is a bit clouded on when IR will raise its head, the best advice to the supplier community is to run a tight ship now and be ready.

Preparing for IR Reductions
Medicare Part B providers now must be keenly aware of the potential threat these new IR procedures bring. This is especially true for suppliers of products that may be targets for IR reductions, such as respiratory drugs and oxygen.

Furthermore, those suppliers who have contracts with non-Medicare payors that use published Medicare allowables to guide their own reimbursement amounts will likely see pricing changes in their non-Medicare business as well.

The environment is fertile for Medicare to invoke IR reductions and home health care companies should prepare now for the impact. Here are a few suggestions:

1) Stay on top of the published bulletins issued by their DMERCs. The most likely vehicle for notifying the supplier community of an IR pricing change is in the DMERC newsletters and/or through the DMERCs’ Web sites.

Once the IR notices are published, you may be looking at a 60-day window before prices change. In order to take full advantage of this notice, suppliers of the affected product line will need every one of those 60 days to prepare.

2) The notice will most likely state that the pricing change will be based on dates of service rather than the date a claim is received at the DMERC. But read your notices carefully to confirm this.

3) If you do not already have a dedicated person responsible for maintaining your billing system’s databases (which includes all the price tables), assign someone now. If these pricing changes go into effect and your system has not been updated to reflect the new pricing, your accounts receivable may be recorded at a higher rate and falsely inflate your days sales outstanding.

4) Do a complete analysis of your revenue cycle—from the time an order is received to the time payment is posted—to determine if there are improvements that can be made. Implementing strategies to gain greater operational efficiency will enhance your ability to endure reimbursement reductions.

5) Create a model to evaluate the financial impact of a 15% reduction on your highest volume product billed to Medicare. Then use the outcomes from this modeling to determine if this will change the way you do business with Medicare, with patients, and within the affected product line.

It is not a matter of if we will see IR used to change prices; rather it is a matter of when we will see these changes. There is no time better than the present to prepare!

Lisa Thomas-Payne is the founder of Medical Reimbursement Systems Inc, Albuquerque, NM. Contact her online at www.lisathomaspayne.com.   For more information on IR, see “Legal Counsel” starting on page 72.