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Testimony on Medicare Coverage of Investigational Medical Devices by Thomas Ault
Director, Bureau of Policy Development
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Committee on Government Affairs, Permanent Subcommittee on Investigations
February 14, 1996

I am pleased to be here today to discuss the issue of Medicare coverage of investigational medical devices and services associated with those devices. As you know, there has been considerable interest in this topic in the last year. I would like to begin by explaining Medicare's coverage policy as it existed prior to November 1, 1995.


The law specifically provides that Medicare shall make payment only for items and services that are reasonable and necessary for the treatment of illness or injury. Historically, the interpretation of the terms "reasonable and necessary" by HCFA has required that services must be safe and effective and not experimental. In the case of devices, Medicare has looked to the Food and Drug Administration (FDA) since the 1970s when Congress charged it with responsibility for assuring the safety and effectiveness of devices. Devices approved by the FDA were considered safe and effective and not experimental by Medicare. On the other hand, the fact that a device was being used in clinical trials pursuant to an investigational device exemption (IDE) from the FDA was seen by Medicare as an indication that the device was experimental, and these devices were not covered under the Medicare program until receiving final PreMarket Approval or clearance under section 510(k) of the Federal Food, Drug and Cosmetic Act. This policy was not established so Medicare could avoid paying claims, but to protect beneficiaries from services that had not been found to be safe and effective.

Medicare's policy of not covering investigational and experimental devices is longstanding and, in fact, stems from the inception of the program. A letter to the fiscal intermediaries in January of 1977 clearly explained the policy. It stated the following: "Since the beginning of the Medicare program the Bureau of Health Insurance has tried to emphasize to physicians and beneficiaries that our decision to deny payment for a particular medical item or service because it is considered experimental or investigational is not a judgement that a physician's choice of treatment is inappropriate or that a patient does not need treatment. These decisions are, first, required of us by the law (section 1862(a)(1) of the Social Security Act ) and are based on qualified medical advice that the items and services have not been generally accepted by the professional medical community as effective and proven treatments........."

Medicare's program instructions on medical devices, which were governing until November 1, 1995, were added to the Medicare Hospital Manual, the Carrier Manual, and the Intermediary Manual in 1986. These instructions stated clearly that "medical devices which have not been approved for marketing by the FDA are considered investigational by Medicare and are not reasonable and necessary". The instructions went on to explain that payment would not be made either for the devices or the procedures and services performed using the devices. Additional instructions in these manuals dealing more generally with all noncovered services also state that any services related to a noncovered service are excluded from coverage.

I would like to emphasize that HCFA was clear from the start about its policy regarding both coverage of investigational devices as well as any related services. To provide an example of how the policy was designed to work -- if a hospital admission was solely for the purpose of implanting an investigational device, no payment would be made for the hospital stay. On the other hand, if a patient was admitted for chest pain, but it was decided during the visit to implant an investigational device, Medicare would pay for a medical admission recognizing the chest pain, but Medicare would not pay the much higher rate applicable to a surgical stay. No payment would be made for services associated with the surgical procedure to implant the investigational device.

This payment policy was designed to protect beneficiaries against the use of devices that the FDA had not found to be safe and effective and devices that had not yet been generally accepted by the medical community. Not all devices that are available on a limited basis subject to an IDE in a clinical trial are ultimately approved. Problems are sometimes discovered in the course of the clinical trial, and some devices fail ever to receive final FDA approval.


As you are aware, however, HCFA carefully reevaluated its coverage policy for investigational devices last year. We considered the rapid rate of technological change and improvements made to medical devices that exists today and examined with the FDA the plausibility of creating a mechanism to distinguish among different types of devices with IDEs. As a result, HCFA issued a final rule on September 19, 1995 that would allow for expanded Medicare coverage of investigational devices. This rule was effective for services performed on or after November 1, 1995.

HCFA and the FDA entered into an interagency agreement to establish a process for placing devices with IDEs into one of two categories based on level of risk. The first category (Category A) is for novel, first-of-a-kind devices for which "absolute risk" of the device type has not been established. The second category (Category B) is for devices for which the underlying questions of safety and effectiveness have been resolved for that type of device. These devices are often newer generations of already proven technologies or replications of existing devices by other manufacturers. Under the new policy, Medicare may now cover items and services associated with the use of a Category B device within the context of the FDA approved clinical trial, as long as the device meets other Medicare coverage criteria.

Given the fact that a mechanism could be created to distinguish between level of risk, HCFA determined that some, but not all, devices could be covered without compromising patient safety and should be made available to Medicare beneficiaries who wanted to participate in clinical trials.

I would like to emphasize that this change is a new policy. It is not retroactive and has no bearing on past billing practices. We continue to believe that the prior policy, which was designed to protect beneficiaries against devices that the FDA had not found to be safe and effective, was the best approach available at the time.


I would now like to address the issue of inappropriate payments made to hospitals for investigational devices furnished prior to last year's final rule. Please note that there is ongoing litigation between the Department and 25 hospitals related to the hospitals' claim that the Secretary failed to comply with the requirements of the Administrative Procedures Act in issuing policy in this area. I cannot comment on issues related to this litigation.

Assertions from Hospitals Related to Policy

As you know, the Office of Inspector General (OIG) has uncovered cases where erroneous payments were made for items and services related to the implantation of investigational devices. In response to the OIG investigation, hospitals have made various statements about our policy and the cause of the overpayments. Some hospitals have stated that HCFA's policy was unclear, and others have stated that they did not know about it. As I stated before, however, the policy was plainly contained in Medicare's manual instructions, including the Hospital Provider Manual. That manual explains and interprets the statute and the rules on coverage, payment, and billing that govern operation of the program, and hospitals know that these rules are binding.

If hospitals felt that the policy was unclear, we believe they should have made attempts to discuss it with HCFA. On any issue of uncertainty, providers are encouraged to seek clarification from us. Conversely, if the policy is clear but providers disagree with it, the proper course of action is the same -- to contact HCFA. We are always willing to investigate and reevaluate a policy issue brought to our attention by concerned parties.

Payment Integrity

The Medicare system is highly complex and deals with a large volume of individual claims. In FY 1995, the fiscal intermediaries processed 133.3 million bills. HCFA tries to ensure that its policies are being implemented correctly through focused payment safeguards efforts, such as prepayment review, postpayment review, and audits. And, as I will address in a few minutes, we support other payment integrity ideas that would require legislation.

We are disturbed that improper payments were unknowingly made by Medicare for investigational devices and that these improper payments went undetected for so long. However, we are also disturbed that providers continued to bill us despite the fact that it was clearly contrary to our written policy. Avoiding improper payments in the Medicare program depends heavily on the integrity of providers to bill us responsibly and honestly. The situation Medicare faces is similar to that of the Internal Revenue Service in administering the tax system. We expect providers to adhere to the rules stipulated in the manuals and to contact us if they do not understand them or if they are unsure of their responsibilities.

Finally, I want to make clear that hospitals were not confronted with the dilemma of having to bill illegally in order to receive payment for implanting devices. We believe that in almost every instance in which an investigational device was provided, hospitals instead could have furnished an approved device, legally billed Medicare for it, and received payment. The choice they made, however, was to bill improperly for devices that were part of a clinical trial and therefore not covered.

Overpayment Recovery

If Medicare paid claims that were billed inappropriately--in this case for medical devices that had not been approved by the FDA--those payments constitute overpayments that are subject to recovery by HCFA. We are already at work identifying overpayments, and we expect to seek recoveries in accordance with the Debt Collection Act and the Medicare Act. This effort will help to ensure the integrity of the program.

I would like to point out, however, that we may be limited in our overpayment recovery efforts by the level of resources available. Current funding to pursue payment safeguards activities is inadequate because the continuing resolution provides resources at last year's level despite the continuing increase in the volume of Medicare claims. There appears to be growing support in Congress for the need to invest in payment safeguards, and we hope that funds will be appropriated at a level commensurate with the importance of this activity and its anticipated payoff.


I would like to close by commenting on various legislative proposals to strengthen our payment safeguards efforts, including overpayment recovery.

While Medicare's payment integrity activities are improving, they need further improvement, and we look forward to working together on this subject with this Subcommittee and others in Congress. To ensure effectiveness of our payment integrity activities, they need stable and reliable funding. The President and Congress have addressed this need by including in various balanced budget plans a provision that would provide stable funding for payment integrity activities, and we urge you and your colleagues to retain such a provision in any further Medicare legislation.


I am happy to be here today to discuss this important issue. I want to stress again that we should not take lightly the fact that hospitals were consistently billing Medicare and receiving overpayments for care and services related to investigational devices. We hope that situations such as this can be avoided in the future through both our reliance on the integrity of providers and the strengthening of our payment safeguard efforts.

Thank you. I will be happy to answer any questions you may have.

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