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Orthopedic and Dental Industry News Complete Archive »

Medical Device Space Breathes Sigh of Relief as CMS Issues Inpatient Reimbursement Revisions BY TODD BARTELS, AUGUST 3, 2006

As we have previously discussed in several posts, since April the Center for Medicare and Medicaid Services (CMS) has planned to release new Inpatient Prospective Payment System (IPPS) regulations for FY 2007. Late Tuesday CMS issued this much-anticipated IPPS rule, which will shift the mechanism by which CMS calculates inpatient hospital procedure reimbursements from a charge-based to a cost-based system. The new IPPS rule also will modify many diagnosis related groups (DRGs) to more correctly reflect severity of illness.

Concerned over the accuracy of payments related to the DRGs, as well as the escalation of up-coding and specialty hospitals, the Medicare Payment Advisory Commission (MedPac) last year called for a major transformation in the way CMS determined inpatient procedure payments, which since 1984 had focused on hospital charges rather than costs. CMS' preliminary April regulation reflected these concerns by providing for significant reimbursement reductions for certain DRG procedures, including heavy reductions for many cardiological procedures as well as more minor reductions for some orthopedic procedures. The preliminary April regulations sent shocks through the medical device space, as many feared that the reimbursement reductions would have negative impacts on industry earnings.

Fortunately for medical device makers and investors, the regulations issued Tuesday provided for reimbursement reductions that are far less severe than had been expected. Cardio procedures will not face reductions as significant as anticipated, and some orthopedic procedures will even see reimbursement increases. The most sizeable reductions in the new rule are to stents, reimbursements for which had been slated to be reduced by as much as 34%, but under the final rule will only face reductions of between 10% and 15%. Similarly, cardio-defibrillators faced 22% reimbursement reductions in the April proposal, whereas now they will be reduced a minor 2% to 3%.

On the orthopedic side, payments for joint-replacement procedures will increase by 4% to 5%, which is a significant rise over the flat change in the April regulations. Spinal fusion DRG reimbursements will increase by 8% to 10%, up considerably from a 5% to 10% proposed reduction, while spine reimbursement rates overall rose almost 6%. Players in both the cardio and orthopedic device sectors - including the cardio companies Boston Scientific, Medtronic, and St. Jude Medical and the orthopedic companies Zimmer, Stryker, and Biomet - were much relieved by the new IPPS rules, and many medical device stocks traded higher on Wednesday following the CMS announcement.

We applaud the new IPPS regulations. Compared to the preliminary April regulations, this rule far more accurately reflects the actual costs of the constantly evolving medical devices used in these procedures. We believe that the softened reimbursement reductions and the reimbursement increases of the IPPS rule will further spur growth in the medical device sector as well as increase valuations of medical device companies in FY 2007. However, as the cost-based weights will be phased in over the next three years (beginning Oct. 1, 2006), and as CMS continues to adjust the DRGs according to severity of illness, we suggest that parties interested in the medical device arena should continue to closely monitor the IPPS regulations set out by CMS, as future regulations will continue to have exceptionally strong influence on the industry.

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