CMS Made Exception to DRG Bundling: N95 Mask Costs

 Rather late in the COVID experience, in November 2022 CMS passed a new regulation partly unbundling payments in OPPS and IPPS for N95 respiratory masks if manufactured domestically.  

CMS pays the DIFFERENCE between foreign and domestic masks, and in a cost neutral way (with a haircut of a few million dollars to the rest of the OPPS and IPPS payments.)  

It's a testimony to how hard and complex unbundling from a DRG is.

Basic DRG bundling comes from SSA 1886(d) (I'm told; it's very dense text).

CFR for DRG bundling includes 42 CFR 412.1 and 412.20.

Here we read that "all coverage inpatient services...are paid under the prospective payment system."  That's conclusive.  But 412.1 contains a few exceptions, like organ acquisition costs and hematopoeitic stem cell acquisition costs.

And suddenly, at 412.1(a)(1)(iv) there's a new carveout for domestic N95 masks.  It turns out, this dates from only November 2022 (87 FR esp. 72037-72045).   This modifies both OPPS and IPPS regulations and about 24 pages of the rule deal with this.

Below, a ChatGPT3.5 summary of the November 2022 rulemaking for N95 masks:

GPT:

Here's a detailed summary of the Centers for Medicare & Medicaid Services' (CMS) proposal to adjust payments for domestic NIOSH-approved surgical N95 respirators, encapsulating the objectives, arguments, and methods outlined in the provided text.

Objectives:

The main goal of CMS's payment adjustments is to support and encourage domestic production of NIOSH-approved surgical N95 respirators, recognizing the vital role these masks play in safeguarding healthcare professionals and patients alike. This policy aims to account for the higher costs of domestically produced respirators, stimulating demand and ultimately strengthening the U.S. public health and medical supply chain.

Arguments:

Several arguments and concerns were raised in the comments. There were concerns about limiting the payment only to Medicare's share, potentially failing to adequately boost demand for domestic products. Equity issues were raised about potentially disadvantaging hospitals with higher Medicaid or low Medicare utilization. MedPAC expressed concerns about the proposal's hospital-by-hospital approach, fearing it could encourage inflation of reported costs. Another commenter expressed concern that a national unit cost differential might result in underpayments for some hospitals.

Methods:

The proposed payment adjustments were divided into several steps:

Step 1-3: Calculation of the unit cost differential between domestic and non-domestic NIOSH-approved surgical N95 respirators. This involved accounting for hospitals' purchasing patterns, agreements with suppliers, discounts, etc.

Step 4: Determination of the IPPS and OPPS percent shares of the total cost differential. This was proposed to be done by dividing total Medicare Part A inpatient costs and Part B outpatient costs by the total costs for all inpatient and outpatient services. The aim was to arrive at an equitable distribution of costs.

Step 5: Calculation of the IPPS and OPPS payment adjustments for domestic NIOSH-approved surgical N95 respirators. This involved multiplying the cost share by the total cost differential, and then reconciling against interim lump-sum payments.

Budget Neutrality Estimation for OPPS: To maintain budget neutrality, CMS proposed a calculation of estimated total spending related to the policy. This involved estimating the total number of N95 respirators used, the average unit cost difference, and the percentage of domestic masks used. The spending estimate was then used to adjust the OPPS conversion factor.

Regulation Amendments: The text also outlined the proposed regulation changes to codify the payment adjustments.

Final Outcome:

The CMS finalized the proposal without modification, responding to various comments and expressing a willingness to possibly revise the approach in the future as more data becomes available. This approach aims to balance the financial considerations of healthcare providers, fairness across different facilities, and the broader policy goal of enhancing domestic production capacities for essential medical equipment.

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Medpac disagreed.

https://www.medpac.gov/document/medpac-comment-on-cmss-proposed-rule-on-the-payment-systems-for-hospital-outpatient-departments-and-ambulatory-surgical-centers-for-2023/