BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   SB 959|
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                                 THIRD READING


          Bill No:  SB 959
          Author:   Lieu (D)
          Amended:  4/9/12
          Vote:     21

           
           SENATE LABOR & INDUSTRIAL RELATIONS COMM.  :  5-0, 5/9/12
          AYES:  Lieu, DeSaulnier, Leno, Padilla, Yee
          NO VOTE RECORDED:  Wyland, Runner


           SUBJECT  :    Workers compensation:  provider reimbursement:  

                      Implantable medical devices, hardware, and 
          instrumentation

           SOURCE  :     Author


           DIGEST  :    This bill repeals the additional, separate 
          reimbursement in excess of the Official Medical Fee 
          Schedule, for implantable medical devices, hardware, and 
          instrumentation for spinal surgeries, also known as "spinal 
          pass-through."

           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 
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          authorized by the state.

          Existing law requires the Administrative Director of the 
          Division of Workers' Compensation 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.  


          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:

           The provider's documented paid cost of the device, 
            hardware, or instrumentation. 

           The lesser of either $250 or 10 percent of the provider's 
            documented paid cost for the device, hardware, or 
            instrumentation.
           Any sales tax and shipping and handling charges actually 
            paid.

          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.  

          This bill repeals the additional, separate reimbursement in 
          excess of the OMFS, for implantable medical devices, 
          hardware, and instrumentation for spinal surgeries, also 
          known as "spinal pass-through."

           Comments
           
           Workers' Compensation System Reimbursement for Spinal 
          Procedures  .  Since 2003, the OFMS reimburses most workers' 
          compensation procedures at 120 percent of the Medicare 
          payment system rate.  Like the Medicare system, the OMFS 
          utilizes Medicare Severity Diagnosis Related Groups 
          (MS-DRG) when calculating appropriate reimbursements for a 

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          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).
          
          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 

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          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.  

           Studies on the Spinal Pass-Through in the Workers' 
          Compensation System  .  The spinal pass-through was codified 
          in SB 228 (Alarcon), Chapter 639, Statutes of 2003, in the 
          most recent wave of workers' compensation reform bills, 
          culminating in SB 899 (Poochigian), Chapter 34,Statutes of 
          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:

           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 percent higher than the cost per discharge for 
            workers' compensation patient.

           Since the workers' compensation fee schedule reimburses 
            at 120 percent of the Medicare rates, workers' 
            compensation reimbursements exceed estimated costs 
            without the pass-through.

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           Four hospitals in California showed usages rates in 
            excess of what would be expected when compared to other 
            hospitals performing workers' compensation spinal 
            surgeries.
           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.

           Prior legislation
           
          SB 228 (Alarcon), Chapter 639, Statutes of 2003, codifies 
          the current spinal pass-through reimbursement.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No   
          Local:  No

           SUPPORT  :   (Verified  5/10/12)

          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
          U.S. Healthworks
          Western Home Furnishings Association
          Western Propane Gas Association

           OPPOSITION  :    (Verified  5/10/12)

          Access MediQuip
          California Hospital Association
          Medtronic

           ARGUMENTS IN SUPPORT  :    Proponents, such as the California 
          Labor Federation and the California Coalition on Workers' 

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          Compensation, note that the OMFS already provides a 
          reimbursement 20 percent 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.

           ARGUMENTS IN OPPOSITION  :    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 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 
          MediQuip 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 MediQuip argues that 
          these services save hospitals significant amounts of money 
          through utilizing the scale of third party benefit managers 
          like Access MediQuip.  Access MediQuip also argues that, 
          due to their experience with spinal hardware, they can 
          steer payors towards safer and more cost effective spinal 

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          hardware, which provides secondary benefits to the workers' 
          compensation system.  Access MediQuip suggests that the 
          Legislature pursue alternatives to the complete elimination 
          of the spinal pass-through, which would allow companies 
          like Access MediQuip to continue to provide services to 
          hospitals but remove the "double-dipping" aspect of the 
          current reimbursement system.  
           

          PQ:do  5/10/12   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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