On february 11, the implementation of the inherent reasonableness (IR) regulations gave the Centers for Medicare & Medicaid Services (CMS) a new set of powers to reduce reimbursement on home health care products.

The regulations explain the process that CMS and the DME Regional Carriers (DMERCs) will use to reduce or increase payment amounts when they believe the existing amounts are either grossly excessive or deficient. This applies to all services paid for under Medicare Part B except physician services and services paid under a prospective payment system, such as home health or outpatient hospital services. The rule therefore applies to Part B items and services, such as DME and drugs paid for under Medicare Part B.

Importantly, the regulation does not announce specific payment reductions. Instead it defines a process for CMS and the carriers to use IR to make payment adjustments. As a result, it is difficult to predict what items CMS or the DMERCs may identify for possible IR payment reductions.

CMS does reference “numerous” Office of Inspector General (OIG), General Accounting Office (GAO), and newspaper reports contending that the Medicare program overpays for medical equipment and related items. In the past, respiratory medications, enteral nutrition, home oxygen, and hospital beds have been the subjects of these OIG and GAO reports, but assuming the IR reductions will start with these products is just conjecture.

Likewise, it is difficult to predict how long it will take CMS or the DMERCs to identify proposed payment adjustments. However, based on the revised criteria and processes in this regulation, it could take 4 to 6 months to issue any proposed payment reductions.

How IR Will Work
When a DMERC proposes to establish new payment limits using the IR authority, it must inform the affected suppliers and Medicaid agencies of the proposed payment amounts and the factors it considered in proposing them. The notice must include:

• The effects on the Medicare program, including cost, savings, assignment rates, beneficiary liability, and quality of care.
• What entities would be affected (eg, classes of providers or suppliers, beneficiaries).
• How significantly these entities would be affected.
• The impact of the payment adjustment on beneficiary access to the item/service.

CMS defines the terms “grossly excessive or deficient” to be payment adjustments of 15% or more. When CMS or a carrier makes a payment adjustment of more than 15% over multiple years, it must review market prices in the years subsequent to the first reduction to ensure that further reductions continue to be appropriate. In addition, when CMS makes a national determination to make a payment adjustment of more than 15% in a given year, in addition to complying with the rules defining the use of valid and reliable data, it must also:

• Consider the potential impact on quality, access, beneficiary liability, assignment rates, and participation of suppliers.
• Consult with representatives of the supplier industry likely to be impacted by the proposed change.
• Publish in the Federal Register the proposed and final notice of a new payment limit before it can adopt the limit. The IR regulation provides that the proposed and final notice will include specific information such as an explanation of the factors and data that CMS considered, the proposed payment amount or methodology, and the potential impacts of the proposed new payment limit.

In the case of a payment reduction (or increase) of 15% or less in a given year, CMS or the carrier will notify affected suppliers of the proposed payment amounts and the factors considered in the proposed new amounts, and will ask for comments from suppliers. CMS or the carrier will evaluate comments it receives and CMS must inform the carrier in writing that it has received the carrier’s notification of the new payment limit. The carrier must inform affected suppliers and the Medicaid program(s) of any final limits it establishes. The effective date of a new final payment limit must be at least 60 days after the date that the carrier notifies affected suppliers and the Medicaid program(s).

Reliable Data Is the Key
One of the criticisms of IR reductions is that if any errors are made in the collection of the payment data used to justify the reduction, the carrier could make an improper reimbursement adjustment. And it is not just IR opponents making these claims. A July 2000 GAO report on IR expressed concern about the process the DMERCs used in 1998 to collect data and the data actually used to support the proposed IR reductions.

In response, the new IR regulation contains a list of criteria that CMS or a carrier must meet to ensure the use of “valid and reliable data” when making an IR determination. Under the new IR regulation, when CMS or a DMERC collects data to make an IR determination, the regulation requires it to:

• Develop written guidelines for data collection and analysis.
• Ensure consistency in any survey to collect and analyze pricing data.
• Develop a consistent set of survey questions for requesting retail prices.
• Ensure that sampled prices fully represent the range of prices nationally.
• Consider the geographic distribution of Medicare beneficiaries.
• Consider relative price in the various localities to ensure that an appropriate mix of areas with high, medium, and low consumer prices was included.
• Consider criteria to define populous state, less populous state, urban area, and rural area.
• Consider a consistent approach in selecting retail outlets in chosen cities.
• Consider whether the distribution of sampled prices from localities surveyed is fully representative of the distribution of the US population.
• Consider the products generally used by beneficiaries and collect prices of these products.
• When using wholesale costs, consider the costs of the services necessary to furnish a product to beneficiaries.

However, CMS still defends its position that it is appropriate to use Veterans Administration (VA) prices as a benchmark to determine payment amounts. If the VA represents a wholesale acquisition cost, it is appropriate to impute a markup to make VA price comparable to a Medicare retail transaction, CMS states.

What is the future of IR? CMS likely will rely upon the DMERCs to collect data and propose IR reductions. The bigger questions are how many items the DMERCs will target at one time, how quickly they will issue a proposed IR reduction, and how sufficient the data used as a foundation for any IR reductions will be.

Cara C. Bachenheimer, JD, is a partner at the law firm Epstein, Becker & Green in Washington, DC. Contact her at (202) 861-1825 or cbachenheimer@ebglaw.com.