BILL ANALYSIS Ó
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: May 9, 2012 2011-2012 Regular
Session
Consultant: Gideon L. Baum Fiscal:No
Urgency: No
Bill No: SB 959
Author: Lieu
As Introduced/Amended: April 9, 2012
SUBJECT
Workers' compensation: provider reimbursement: implantable
medical devices, hardware,
and instrumentation.
KEY ISSUE
Should the Legislature repeal an additional reimbursement for
implantable medical devices, hardware, and instrumentation for
spinal surgeries?
PURPOSE
To repeal the additional, separate reimbursement in excess of
the Official Medical Fee Schedule, for implantable medical
devices, hardware, and instrumentation for spinal surgeries.
ANALYSIS
Existing law establishes a workers' compensation system that
provides benefits to an employee who suffers from an injury or
illness that arises out of and in the course of employment,
irrespective of fault. This system requires all employers to
secure payment of benefits by either securing the consent of the
Department of Industrial Relations to self-insure or by securing
insurance against liability from an insurance company duly
authorized by the state.
Existing law requires the administrative director of the
Division of Workers' Compensation (DWC) to adopt and
periodically revise an Official Medical Fee Schedule (OMFS) to
establish reasonable maximum medical fees for medical services,
including physician services and medical-legal expenses. These
fees are generally in accordance with the Medicare and Medi-Cal
payment systems. (Labor Code §§ 5307.1 & 5307.6)
Existing law provides for an additional, separate reimbursement
for implantable medical devices, hardware, and instrumentation
for spinal surgeries. This separate reimbursement, also known
as the spinal pass-through is:
1) The provider's documented paid cost of the device,
hardware, or instrumentation;
2) The lesser of either $250 or 10% of the provider's
documented paid cost for the device, hardware, or
instrumentation; and
3) Any sales tax and shipping and handling charges actually
paid.
(Labor Code § 5318)
Existing law also provides that the spinal pass-through is
operative only until the Administrative Director adopts a
regulation specifying separate reimbursement, if any, for
implantable medical hardware or instrumentation for complex
spinal surgeries. (Labor Code § 5318)
This bill would repeal the above-described spinal pass-through
provisions.
COMMENTS
1. How Does the Workers' Compensation System Currently Reimburse
for Spinal Procedures?
Since 2003, the Official Medical Fee Schedule (OFMS)
reimburses most workers' compensation procedures at 120% of
the Medicare payment system rate. Like the Medicare system,
the OMFS utilizes Medicare Severity Diagnosis Related Groups
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(MS-DRG) when calculating appropriate reimbursements for a
variety of surgical procedures, including spinal surgeries.
The MS-DRG system was put in place by Medicare in 2007, and it
creates a classification system for hospital payments that can
be adjusted by the cost of the procedure, geography, and other
considerations.
The appropriate MS-DRG is selected based on diagnosis of the
patient and any relevant complications or co-morbidities (a
disease or disorder in addition to the primary disease or
disorder) the patient may have. Using spinal surgeries as an
example, MS-DRG 30 is for spinal procedures without major
complications or co-morbidities; MS-DRG 28 is for spinal
procedures with major complications and co-morbidities. As
MS-DRG is more complicated and requires additional resources,
it weighted more significantly. In both cases, for the
purposes of Medicare, the MS-DRG includes the cost of the
device. No additional reimbursement is allowed.
For example, a hypothetical MS-DRG 30 procedure (spinal
procedure without complications or major complications) in a
non-teaching generic hospital in 2012 would be reimbursed as
follows (with the workers' compensation reimbursement in
parentheses):
(Base-operating costs)(MS-DRG)= Medicare Reimbursement
(Medicare Reimbursement)(1.2)= Workers' Compensation
Reimbursement
($5,209.74)(1.6924)= $8,816.97 ($10,580.36)
However, a hypothetical MS-DRG 28 procedure (spinal procedure
with major complications) in the same hospital in 2012 would
be reimbursed as follows:
(Base-operating costs)(MS-DRG)= Medicare Reimbursement
(Medicare Reimbursement)(1.2)= Workers' Compensation
Reimbursement
($5,209.74)(5.6476)= $29,422.58 ($35,307.03)
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In short, while the specific reimbursement amount will vary
from hospital to hospital, the more labor intensive and
resource intensive procedures will be reimbursed at a higher
rate. The MS-DRG weights are adjusted annually by Medicare,
allowing for utilization and market factors to impact
reimbursements.
Additionally, the workers' compensation system has an
additional reimbursement with the spinal pass-through.
According to the California Workers' Compensation Institute,
the spinal pass-through in 2007 and 2008 added, on average,
$15,409 to each spinal procedure , though the cost of the
pass-through varies significantly between MS-DRGs (between
$6,137 and $49,304). The use of the pass-through differs from
Medicare, as the MS-DRG is calculated to capture the cost of
the device, which will be discussed below.
2. Studies on the Spinal Pass-Through in the Workers'
Compensation System:
The spinal pass-through was codified in SB 228 (Alarcon) in
2003 in the most recent wave of workers' compensation reform
bills, culminating in SB 899 (Poochigian) in 2004. Prior to
the codification of the spinal pass-through, the Commission on
Health, Safety, and Workers' Compensation (CHSWC) released a
report from RAND that raised concerns on the need for a spinal
pass-through, which at that time existed as a regulation. The
RAND study noted that the pass-through results in the "paying
for the hardware twice: once in the DRG fee schedule relative
and again in the additional payment for the hardware costs."
CHSWC commissioned a second study in 2005 to review the spinal
pass-through. This study, titled "Payment for Hardware Used
in Complex Spinal Procedures under California's Official
Medical Fee Schedule for Injured Workers" made several
important findings:
a) On average, workers' compensation patients are less
costly than Medicare patients and have a shorter length of
stay. The Medicare cost per discharge was found to be about
14% higher than the cost per discharge for workers'
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compensation patient;
b) Since the workers' compensation fee schedule reimburses
at 120% of the Medicare rates, workers' compensation
reimbursements exceed estimated costs without the
pass-through;
c) Four hospitals in California showed usages rates in
excess of what would be expected when compared to other
hospitals performing workers' compensation spinal
surgeries; and
d) The existing spinal pass-through does not incentivize
prudent purchasing and use of spinal hardware.
The findings of this study were further discussed and
supported in two RAND studies that followed in 2009. One
study, titled "Inpatient Hospital Services: An Update on
Services Provided Under California's Workers' Compensation
Program" showed an increase in utilization of spinal hardware
from 2003 to 2005, notably in DRGs that included hardware that
would qualify for the pass-through.
The second study, titled "Regulatory Actions that Could Reduce
Unnecessary Medical Expenses Under California's Workers'
Compensation Program" identified the spinal pass-through as an
area of potential savings in the workers' compensation system.
This study pegged the savings between $23 million and $60
million , depending on the policy adopted to replace the
current spinal pass-through reimbursement.
3. Need for this bill?
As was discussed above, multiple RAND studies have identified
the spinal pass-through reimbursement as an area requiring
reform in the workers' compensation system. The 2005 RAND
study mentioned several possible regulatory reforms, such as
limiting the pass-through to new technology that may be
expensive or establishing a special fee schedule for specific
hardware. In the 2009 RAND study on Regulatory Action,
additional policy options were also mentioned, including
eliminating the pass-through altogether or limiting the
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pass-through to only cover costs in excess of the workers'
compensation fee schedule.
To date, the Division of Workers' Compensation has not enacted
any of these reform proposals.
SB 959 would eliminate the statutory reference to the spinal
pass-through. By doing so, this bill would leave in place the
existing Official Medical Fee Schedule reimbursement. SB 959
would not limit the ability of the Division of Workers'
Compensation to take further regulatory action on spinal
hardware.
4. Proponent Arguments :
Proponents, such as the California Labor Federation and the
California Coalition on Workers' Compensation, note that the
Official Medical Fee Schedule already provides a reimbursement
20% above the Medicare reimbursement, which already includes
the cost of the device. Proponents argue that the RAND
studies conclusively show that the additional spinal
pass-through reimbursement in the workers' compensation system
is unnecessary and promotes destructive incentives.
Proponents cite a recent Wall Street Journal (WSJ) that
provides a detailed account of how consultants have helped
some hospitals cash in on the high reimbursements and, in the
process, intentionally inflated the cost of medical devices in
order to profit even more handsomely. Proponents argue that
the story is evidence that the RAND findings are correct and
that overreimbursement leads to bad behavior that drives bad
results for injured workers and high costs for employers.
Proponents argue that, with the RAND findings and WSJ story
taken together, and with the absence of immediate regulatory
action by the Division of Workers' Compensation, there is a
need for immediate legislative action to repeal the spinal
pass-through reimbursement.
5. Opponent Arguments :
Opponents, such as the California Hospital Association (CHA)
and Medtronic, Inc., argue that eliminating the spinal
pass-through will limit the ability of injured workers to
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receive necessary spinal surgeries. CHA argues that, prior to
the existence of the pass-through, hospitals cancelled spinal
surgeries for injured workers. CHA therefore argues that
hospitals will be unable to provide this service without the
pass-through. Medtronic also disputes the fiscal analysis
done by RAND, as it relies on Medicare data, rather than
workers' compensation data.
Access Mediquip, a third-party benefit manager of surgical
implants for hospitals, is also in opposition. Access notes
that their business model of purchasing devices and assuming
the liability for workers' compensation claims management is
dependent on at least a portion of the pass-through. Access
argues that these services save hospitals significant amounts
of money through utilizing the scale of third party benefit
managers like Access. Access also argues that, due to their
experience with spinal hardware, they can steer payors towards
safer and more cost effective spinal hardware, which provides
secondary benefits to the workers' compensation system.
Access suggests that the Legislature pursue alternatives to
the complete elimination of the spinal pass-through, which
would allow companies like Access to continue to provide
services to hospitals but remove the "double-dipping" aspect
of the current reimbursement system.
6. Prior Legislation :
SB 228 (Alarcon), Chapter 639, Statutes of 2003, codified the
current spinal pass-through reimbursement.
SUPPORT
Actief Case Management, Inc.
Aerospace Dynamics International, Inc.
American Insurance Association
Association of California Insurance Companies
California Association of Joint Powers Authority
California Coalition on Workers' Compensation
California Grocers Association
California Labor Federation, AFL-CIO
California Manufacturers & Technology Association
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California Professional Firefighters
California Restaurant Association
California Retailers Association
California Self-Insurers Association
California State Association of Counties
California Trucking Association
Costco Wholesale
County of San Bernardino
CSAC Excess Insurance Authority
EME International
Employers Group
FedEx Corporation
Gallagher Bassett Services, Inc.
Grimmway Farms
IBA West
Indio Chamber of Commerce
iUnlimited Investigative Services
Marriott International, Inc.
Morehouse Foods, Inc.
National Federation of Independent Business
Nordstrom
North Bay Schools Insurance Authority
Pacific Athletic Wear, Inc.
PPG Aerospace
Regional Council of Rural Counties
San Diego and Imperial County Schools JPA
Schools Insurance Authority
Schools Insurance Group
Seawright Custom Precast, Inc.
Sedgwick Claims Management Services, Inc.
The Boeing Company
TRISTAR Risk Management
Western Home Furnishings Association
Western Propane Gas Association
OPPOSITION
Access MediQuip
California Hospital Association
Medtronic
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