The document discusses the costs and benefits of adopting new medical technologies for hospitals. While innovations improve patient outcomes, they often involve substantial costs for hospitals. Medicare has some payment mechanisms to help cover the costs of new technologies, but few qualify. Widespread use of electronic health records could save billions overall, but many hospitals face financial barriers to implementation given high initial costs. Growth in hospitals' Medicare costs has exceeded payment updates in recent years, exacerbating challenges to funding new technologies.

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

2. 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

3. … though many new technologies are costly for hospitals. 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 Variable cost per case for disposables (e.g., surgical instruments) depending on type of procedure $100,000 to $500,000 Basic minimally-invasive surgery suite $50 to $400 per case for disposables $100,000 to $175,000 Image-guided surgery system for ENT procedures Variable, but substantial, for constructing MRI-safe operating room space Variable Extras $1.5 million to $5.3 million Intraoperative MRI for neurosurgery $20,000 to $35,000 Implantable cardioverter defibrillator (ICD) Base Equipment Cost Item

4. 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 New expenditures Budget neutral Budget neutral New expenditures Payment financing Midpoint of the payment range for the new technology APC group 106% of average sales price (ASP) 100% of reported costs minus device costs already built into the base payment rate 50% of the additional costs, capped at 50% of the estimated cost of the new technology Payment Cost of providing the service Cost of the new technology Cost of the new technology Additional costs of treating a case using the new technology Basis for payment Newness Newness and cost Clinical benefit, newness and cost Clinical benefit, newness and cost Criteria for payment Represent a new service Are an input to an existing service Are an input to an existing service Represent a new procedure or are an input to an existing DRG Eligible new technologies Drugs and Biologicals Medical Devices Outpatient New Technology APCs Outpatient Pass-through Payments Inpatient Add-on Payments

5. … 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 No. of Add-on Payment Applications

6. 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 Source Recipient Total Savings, $41.8 Billion Inpatient savings Outpatient savings

7. … 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

8. 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

9. … 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

10. 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

11. … 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

12. 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 5.335 4.228 1.300 0.458 2.558 0.565 0.394 1.905 2.004 0.183 1.932 2.096 1.180 1.664 5.855 1.589 0.376 0.206 0.669 5.510 11.822 48.171 Weight All Other Services All Other Products Prof. Liability Insurance Utilities Professional Fees Compensation Expense Category CPI - All Items (Urban) All Other: Non-labor Intensive ECI - Service Occupations (Private) All Other: Labor Intensive CPI - Postage Postage CPI - Telephone Services Telephone PPI - Finished Goods Less Food and Energy Miscellaneous Products PPI - Machinery & Equipment Machinery & Equipment PPI - Apparel Apparel PPI - Convert. Paper & Paperboard Paper Products PPI - Rubber & Plastic Prod. Rubber & Plastics PPI - Photo Supplies Photo Supplies PPI - Medical Instruments & Equipment Medical Instruments PPI - Industrial Chemicals Chemicals CPI - Food Away From Home Food-Away From Home PPI - Processed Foods Food-Direct Purchase PPI - Prescription Drugs Drugs CMS - Prof. Liability Premiums Malpractice CPI - Water & Sewage Water & Sewerage PPI - Commercial Natural Gas Fuel, Oil, Coal, etc PPI - Commercial Electric Power Electricity ECI- Compensation Prof. & Tech. (Private) Professional Fees ECI- Hospital Workers (Civilian) Benefits ECI- Hospital Workers (Civilian) Wages Price/Wage Variable

13. 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