Adopting Hit Chart Pack2006

Research and analysis by Avalere Health

Adopting Technological Innovation in Hospitals: Who Pays and Who Benefits?

Research and analysis by Avalere Health

Advances in medicine, while costly, have substantially improved health outcomes and quality of care…

Source: Luce, B.R., et al. (2006). The Return on Investment in Health Care: From 1980 to 2000. Value in Health, 9(3), 146-156.

Chart 1: Return per Incremental Dollar Spent on Health Care

$1.10$1.55$1.49

$4.80

Heart attack Type 2 diabetes Stroke Breast cancer

Research and analysis by Avalere Health

…though many new technologies are costly for hospitals.

Item Base Equipment Cost Extras

Implantable cardioverter defibrillator (ICD)

$20,000 to $35,000 Variable

Basic minimally-invasive surgery suite

$100,000 to $500,000 Variable cost per case for disposables (e.g., surgical instruments) depending on type of procedure

Image-guided surgery system for ENT procedures

$100,000 to $175,000 $50 to $400 per case for disposables

Intraoperative MRI for neurosurgery

$1.5 million to $5.3 million Variable, but substantial, for constructing MRI-safe operating room space

Sources: Sg2 cited in: Gardner, E. (2006). Making the Cut. Modern Healthcare, 36(7), 50-56. Meier, B. (2005, August 2). As Their Use Soars, Heart Implants Raise Questions. New York Times, www.nytimes.com.

Chart 2: Sample Costs of Adopting Innovative Technology

Research and analysis by Avalere Health

Medicare has dedicated payment mechanisms for new technology…

Source: MedPAC. (March 2003). Payment for New Technologies in Medicare’s Prospective Payment Systems. Report to the Congress: Medicare Payment Policy. Washington, D.C.

Chart 3: Hospital Inpatient and Outpatient New Clinical Technology Payment Mechanisms

Inpatient Add-on Payments

Outpatient Pass-through Payments

Outpatient New Technology APCsMedical Devices Drugs and Biologicals

Eligible new technologies

Represent a new procedure or are an input to an existing DRG

Are an input to an existing service

Are an input to an existingservice

Represent a new service

Criteria for payment Clinical benefit, newness and cost

Clinical benefit, newness and cost

Newness and cost Newness

Basis for payment Additional costs of treating a case using the new technology

Cost of the new technology

Cost of the new technology

Cost of providing the service

Payment 50% of the additional costs, capped at 50% of the estimated cost of the new technology

100% of reported costs minus device costs already built into the base payment rate

106% of average sales price (ASP)

Midpoint of the payment range for the new technology APC group

Payment financing New expenditures Budget neutral Budget neutral New expenditures

Research and analysis by Avalere Health

…though few new clinical technologies actually have been approved for inpatient add-on payments.

* Excludes revision of one 2004 approval.** Excludes one application which was withdrawn prior to CMS decision.

Source: Avalere Health analysis of Hospital Inpatient Prospective Payment System Final Rules.

Chart 4: New Clinical Technology Add-on Payment Decisions, 2003 to Present

1

2 2

1

3

1

8

6

11

2003 2004 2005* 2006 2007**

Approved Denied

No

. o

f A

dd

-on

Pa

yme

nt

Ap

plic

atio

ns

Research and analysis by Avalere Health

Medical Records, $1.3

Lab tests, $1.6

Drugs, $2.0

Nursing time, $7.1

Length of stay, $19.3

Drugs, $6.2

Radiology, $1.7Lab tests, $1.1

Transcriptions, $0.9Chart pulls, $0.8

Private Payers, $15.8

Medicare, $11.7

Medicaid (federal), $6.1

State and local, $4.2Out-of-pocket spending, $2.0Other, $2.0

Widespread use of EHR systems can realize significant savings for the system as a whole…

* The authors’ analysis focuses on electronic medical record systems (EMR-S), defined to include EMR, clinical decision support, a central data repository, and computerized physician order entry (CPOE).

Source: Girosi, F., Meili, R., and Scoville, R. (2005). Extrapolating Evidence of Health Information Technology Savings and Costs. Santa Monica, CA: RAND Corporation.

Chart 5: Estimated Average Annual Savings from Widespread Use of EMR-S* by Source and Recipient of Savings, in Billions

Inpatient savings

Outpatient savings

Source Recipient

Total Savings, $41.8 Billion

Research and analysis by Avalere Health

…though many hospitals will need help getting to full health IT implementation.

Note: Based on 903 community hospitals with complete information.

Source: American Hospital Association. (2005). Forward Momentum: Hospital Use of Information Technology. Washington, D.C.

Chart 6: Distribution of Hospitals by Level of Health IT Use

High10%

Getting started36%

Low27%

Moderate27%

Research and analysis by Avalere Health

Hospitals with high Medicare case loads are less likely to adopt health IT…

Source: Fonkych, K., and Taylor, R. (2005). The State and Pattern of Health Information Technology Adoption. Santa Monica: RAND Corporation.

Chart 7: Health IT Adoption in Hospitals by Share of Medicare Patients

12%

19%

27%

35%

24%

41%

Share of Medicaredischarges is more than

50%

Share of Medicaredischarges is less than

50%

Radiology PACSBasic EMRCPOE

Research and analysis by Avalere Health

…as are smaller hospitals.

Source: American Hospital Association. (2005). Forward Momentum: Hospital Use of Information Technology. Washington, D.C.

Chart 8: Level of IT Use by Hospital Size

48%

23%11% 7%

19%

27%

34%

31%

19%

10%18%

31%

45%

61%

6% 7% 12% 13% 13%

66%

<50 beds 50-99 beds 100-299 beds 300-499 beds 500+ beds

HighModerateLowGetting started

Research and analysis by Avalere Health

Growth in hospitals’ Medicare costs has exceeded Medicare’s update in recent years…

Source: MedPAC. (June 2006). Acute Inpatient Services. A Data Book: Healthcare Spending and the Medicare Program. Washington, D.C.

Chart 9: Cumulative Percent Change in Medicare Acute Inpatient PPS Costs per Case and Operating Update, 1994-2004

21.3

17.4

14.010.9

7.36.15.6 5.6

2.03.5

31.8

24.3

17.0

2.9

8.0

0.4-2.1-3.2-2.6

-1.4

0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Update Medicare costs per discharge

Research and analysis by Avalere Health

…intensifying financial barriers to hospital adoption of health IT.

Source: American Hospital Association. (2005). Forward Momentum: Hospital Use of Information Technology. Washington, D.C.

Chart 10: Percent of Hospitals Indicating Initial Costs of Health IT Are a Barrier

43%

51%

53%

62%

73%

49%

43%

41%

33%

23%

94%

94%

95%

96%

92%500+ beds

300-499 beds

100-299 beds

50-99 beds

<50 beds

Significant barrier Somewhat of a barrier

Research and analysis by Avalere Health

Clinical and information technology do not have a dedicated category in the hospital market basket.

Source: CMS. Quarterly Index Levels in the CMS Prospective Payment System (IPPS) Hospital 2002 Input Price Index using Global Insight Inc. Forecast Assumptions by Expense Category: 1990-2016. http://www.cms.hhs.gov .

Chart 11: Cost Categories, Weights and Price Proxies for the Hospital Market Basket

Expense Category Weight Price/Wage VariableCompensation Wages 48.171 ECI- Hospital Workers (Civilian)

Benefits 11.822 ECI- Hospital Workers (Civilian)

Professional Fees Professional Fees 5.510 ECI- Compensation Prof. & Tech. (Private) Utilities Electricity 0.669 PPI - Commercial Electric Power

Fuel, Oil, Coal, etc 0.206 PPI - Commercial Natural Gas

Water & Sewerage 0.376 CPI - Water & Sewage

Prof. Liability Insurance Malpractice 1.589 CMS - Prof. Liability Premiums All Other Products Drugs 5.855 PPI - Prescription Drugs

Food-Direct Purchase 1.664 PPI - Processed Foods

Food-Away From Home 1.180 CPI - Food Away From Home

Chemicals 2.096 PPI - Industrial Chemicals

Medical Instruments 1.932 PPI - Medical Instruments & Equipment

Photo Supplies 0.183 PPI - Photo Supplies

Rubber & Plastics 2.004 PPI - Rubber & Plastic Prod.

Paper Products 1.905 PPI - Convert. Paper & Paperboard

Apparel 0.394 PPI - Apparel

Machinery & Equipment 0.565 PPI - Machinery & Equipment

Miscellaneous Products 2.558 PPI - Finished Goods Less Food and Energy

All Other Services Telephone 0.458 CPI - Telephone Services Postage 1.300 CPI - Postage

All Other: Labor Intensive 4.228 ECI - Service Occupations (Private)

All Other: Non-labor Intensive 5.335 CPI - All Items (Urban)

Research and analysis by Avalere Health

Market basket projection error has led to payment updates that fall short of actual market basket increases.

Source: AHA analysis of Federal Registers volumes 67-69, CMS market basket data and Global Insights, Inc., projections.

Chart 12: Medicare Market Basket Projected vs. Actual, 1998-2005

-0.2% -0.3%

-3.8%

-1.1%

-1.9%-1.6%

-2.1%-2.7%

2.4%2.9%

3.4% 3.5% 3.4% 3.3%2.5%

3.6%3.9% 3.8%

4.1%

2.7%

3.3%2.9%

3.0%

4.1%1998 1999 2000 2001 2002 2003 2004 2005

Cumulative Projection Difference Market Basket Projection for IPPS Rates Actual Market Basket