Inherent Reasonableness

Background
The Balanced Budget Act of 1997 expanded HCFA authority to adjust payment levels that it considered "inherently unreasonable," either because it found them "grossly excessive" or "grossly deficient." The law specified that payment for a service could not be changed by more than 15 percent in any year, unless the agency determined that certain criteria were met and unless it solicited public input.

In 1998, HCFA's Durable Medical Equipment Regional Carriers, or DMERCs (these are four private insurers who handle claims processing for Medicare), invoked inherent reasonableness authority in proposing a reduction in the reimbursement levels for a number of products including test strips used in home blood glucose monitors. This proposal illustrates flaws that exist in key elements of HCFA's inherent reasonableness authority, as well as in how the agency and its contractors are invoking this authority. The survey of blood glucose test strips that HCFA and the DMERCs used as the basis of the proposed reduction failed to use representative samples, contained statistical flaws, and was weighted improperly. If the DMERC test strip survey data were more accurately weighted to reflect population and sales, the sample prices would be about 9 percent higher than those reported by the DMERCs. Further, if the DMERCs had followed the inherent reasonableness regulation in evaluating their own survey data, they would have been required to increase prices for test strips significantly in 21 states. The DMERCs only proposed downward adjustments.

The DMERCs also failed to follow HCFA's own regulatory procedures- by proposing a de facto national payment limit through the DMERCs to avoid their own more rigorous process required for national decisions, and failing to permit the required public comment and due process procedures.

In the case of test strips, the DMERCs proposed the reduction even though Congress had already cut Medicare payments for such test strips by 10 percent and had frozen reimbursement for all diabetes supplies for five years.

In a related diabetes supply issue¾lancets¾the agency proposed a 20 percent reduction for lancets in 1998. In an attempt to avoid more rigorous agency procedures required for payment adjustments over 15 percent, the agency proposed reducing the payment for lancets by 15 percent in the first year and 5 percent in the second year.

On August 13, 1999, HCFA published a notice in the Federal Register proposing to reduce payment levels for six items of medical equipment. In the Notice, HCFA proposed that the fee schedule amounts for the six items be reduced incrementally by a factor of 15 percent or less per year until they are equal to the special payment limits applicable to each item.

• The cuts proposed totaled as much as 50 percent for some items. In proposing these cuts, HCFA did not follow procedures specified in the Balanced Budget Act of 1997 for making cuts in excess of 15 percent. Instead, the cuts were spread over several years in an attempt not to trigger the procedural requirements specified.
• In finding the payment levels for the six items to be "grossly excessive" and in need of correction under its "inherent reasonableness" authority, HCFA did not conduct a survey of representative prices and did not make use of available marketplace information. Rather than performing an appropriately designed market survey that could yield a representative sample, HCFA instead elected only to compare Medicare rates with VA rates.

HIMA Position and Recommendations
HIMA recommends that Congress spell out common-sense due process rules regarding HCFA's ability to invoke "inherent reasonableness" price adjustments for items on Medicare fee schedules.

To ensure fairness and due process and to ensure that patients can continue to count on appropriate access to Part B services, HIMA recommends that HCFA's inherent reasonableness authority and process be clarified to:

• Preclude HCFA or its carriers from proposing an inherent reasonableness adjustment after a statutory payment change-unless it is shown that the statutorily set payment level has become grossly deficient or excessive since enactment.
• Require national-level due process procedures to apply when two or more local carriers make a concurrent determination that a reduction is necessary.
• Require HCFA to use national-level due process procedures if payment levels are proposed to be changed by more than 15 percent in any period less than five years-not just over one year, as provided under current law.

April 2000