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Billing Codes Impede Medical Innovation

Billing codes used by health care providers to get reimbursed by Medicare and other third-party payers have become a bulwark against more innovative, effective and less expensive medical procedures, a new economic study finds.

The study, released by the National Bureau of Economic Research in October, and entitled “The Economics of Medical Procedure Innovation,” looked into the role that issuance or non-issuance of permanent medical billing codes for innovative medical procedures played in the economics of the development of new medical procedures and in determining Medicare utilization of those procedures.

Authors David Dranove of Northwestern University – Kellogg School of Management, Craig Garthwaite of Northwestern University – National Bureau of Economic Research (NBER), Christopher Heard of Northwestern University and Bingxiao Wu of Rutgers University found that Medicare utilization of new procedures increased fully nine-fold when assigned a reimbursable, permanent billing code, as opposed to non-permanent provisional codes, which are not reimbursed.

The study also noted a scant 29 percent of provisional code assignments are promoted to permanent code status within the required five-year provisional period, suggesting little interest in utilizing new procedures when they are not reimbursable. When few people experiment, it’s difficult to see if a procedure is successful or not.

Billing Codes, Decoded

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).

The AMA owns the Current Procedural Terminology code set, and receives royalties amounting to  $148 million a year, according to Paddockpost.com, 47 percent of the AMA’s reported total revenue.

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

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

The authors set out to understand the economic incentives in developing innovative medical procedures and determined two obstacles: “the administrative hurdle of securing permanent, reimbursable billing codes,” and the lack of intellectual property rights after going to the trouble 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,” write the authors.

The authors note this stands in “stark contrast” with innovation for pharmaceutical products or devices where these conditions don’t exist. According to the study, 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. In contrast, the FDA has approved an average of 44 new chemical entities and therapeutic biological products each year during the most recent five years.

Protecting Intellectual Property

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.

It noted the AMA House of Delegates has historically opposed such protection, voting in 1994 to condemn patenting of medical procedures, while in 1998 the AMA Council on Ethical and Judicial Affairs appealed to “the open exchange of information without the expectation of financial reward for advancing medical science.

The AMA still subscribes to this view and has pushed for legislation banning procedure patents. The study further notes that it is unclear whether courts will uphold procedure patents independent of the patent for an associated medical device and that for this reason procedure patents are rarely enforced.

The result is that it becomes 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, and that this is especially true for radically innovative procedures and cost-lowering procedures. The development time for new procedures, which at an average of about ten years from initial research to obtaining medical codes, is approximately equivalent to that for development of medical devices and significantly longer than that for the approval of pharmaceuticals, while generally lacking the IP protection of either.

Billing Codes Stifle Innovation

Billing codes exist to run Medicare, nothing more says John C. Goodman, the 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. The reason: No matter how good the innovation, bureaucratic obstacles delay its use,” said Goodman. “If someone invested 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.”

Kevin Stone (kevin.s.stone@gmail.com) writes from Arlington, Texas.


Internet info:

David Dranove, Craig Garthwaite, Christopher Heard, Bingziao Wu, “The Economics of Medical Procedure Innovation,” National Bureau of Economic Research, October 2021:  https://www.nber.org/papers/w29438

Kevin Stone
Kevin Stone writes from Dallas, Texas.


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