Billing Codes Impede Medical Innovation, Study Finds

Billing codes used by health care providers to get reimbursed by Medicare and other third-party payers are an obstacle to more innovative, effective, and lower-cost medical procedures, a new study finds.

The study, “The Economics of Medical Procedure Innovation,” examined the role issuance or refusal to issue permanent medical billing codes for innovative medical procedures plays in the development of new medical procedures and in determining Medicare utilization of those procedures.

Medicare utilization of new procedures increased ninefold when they were assigned a reimbursable, permanent billing code, as opposed to temporary, provisional codes, which are not reimbursed, study authors David Dranove of Northwestern University’s Kellogg School of Management, Craig Garthwaite of Northwestern University and the National Bureau of Economic Research (NBER), Christopher Heard of Northwestern University, and Bingxiao Wu of Rutgers University found.

The study found only 29 percent of provisional code assignments are promoted to permanent code status within the required five-year provisional period, further decreasing interest in utilizing new procedures when they are not reimbursable and are unlikely to become so. When few people experiment, it is difficult to find out whether a procedure is successful or not, the study notes.

The study was released by the National Bureau of Economic Research in October.

Decoding Billing Codes

Each year, health insurers, including Medicare, process billions of claims for payment. To simplify the process and to report medical services in a way that can be understood by all, providers and insurers use the Current Procedural Terminology (CPT) system developed by the American Medical Association (AMA).

A panel of 17 people, 11 of whom are nominated by national medical specialty societies, is responsible for maintaining the code set, according to the AMA.

Every CPT is assigned to one of three categories: Category I for distinct medical procedures or services, Category II for supplemental data tracking, and Category III which is temporary for new and emerging technologies.

Understanding Incentives

After setting out to understand the economic incentives for developing innovative medical procedures, the authors of the study found two main obstacles: “the administrative hurdle of securing permanent, reimbursable billing codes” and the lack of intellectual property rights after going to the trouble and expense of creating a new procedure.

“We indicate that the ad hoc process for securing billing codes for procedure innovations creates uncertainty about both the development process and the allocation and enforceability of property rights,” the authors write.

This stands in “stark contrast” with innovation for pharmaceutical products or devices where these conditions don’t exist, the authors note.

Over the past ten years, the AMA has approved an average of fewer than 14 procedures for CPT III status, and only about 4.3 per year for CPT I promotion, the study found. In contrast, the U.S. Food and Drug Administration has approved an average of 44 new chemical entities and therapeutic biological products each year during the most recent five years.

Protecting Property Rights

The study pointed to the extreme difficulty in protecting intellectual property (IP) for new medical procedures as compared with IP protection for drugs and medical devices.

The AMA House of Delegates has historically opposed such protection, voting in 1994 to condemn patenting of medical procedures In 1998, the AMA Council on Ethical and Judicial Affairs called for “the open exchange of information without the expectation of financial reward for advancing medical science,” the study notes.

The AMA still subscribes to this view and has pushed for legislation banning procedure patents. It is unclear whether courts will uphold procedure patents independent of the patent for an associated medical device, the study notes. That is why procedure patents are rarely enforced, the study states.

As a result, it is vastly more difficult to recover research and development dollars for innovative medical procedures than for new medical devices or pharmaceuticals, thereby creating a disincentive for such investment. This is especially true for radically innovative procedures and cost-lowering procedures, the study states.

The development time for new procedures, an average of about ten years from initial research to obtaining medical codes is approximately equivalent to that for the development of medical devices and significantly longer than for the approval of pharmaceuticals, while generally lacking the IP protection of either.

Stifling Innovation

Billing codes exist solely to make claims easier for Medicare to process, says John C. Goodman, president of The Goodman Institute and co-publisher of Health Care News.

“Every doctor, every clinic, and every hospital should be encouraged to propose a different way of being paid, and Medicare should agree to it as long as there are good reasons to believe the change will lower costs and increase quality,” said Goodman.

“Billing codes are the enemy of innovations that reduce cost and improve the quality of care,” said Goodman. “The reason: No matter how good the innovation, bureaucratic obstacles delay its use. If someone invented a magic wand that cured cancer with a single swipe, no one would be paid for using it until there was a billing code, and that might take years.”