On October 31, 2014, the Centers for Medicare & Medicaid Services (CMS) released its annual final rule (Final Rule) setting the payment rates and coverage policies for items and services reimbursed under the Outpatient Prospective Payment System in Calendar Year (CY) 2015.  Within the Final Rule, CMS confirmed several important changes for skin substitutes, including how established products are placed into appropriate reimbursement groups and how new products may be paid when first entering the market.  Manufacturers, providers and other interested stakeholders should take note of these changes and the significant implications they may have for coverage and reimbursement of these products.  The Final Rule was published in the Federal Register on November 10, 2014.

Setting the High-Cost/Low-Cost Threshold

In the CY 2014 Final Rule, CMS finalized a proposal to unconditionally package skin substitutes as part of a broader policy to package all drugs and biologicals that function as supplies when used in a surgical procedure.  In implementing the packaging policy, CMS created separate high-cost and low-cost groups for skin substitutes so as to maintain resource homogeneity within the Ambulatory Payment Classifications, the groups by which CMS organizes procedures for purposes of setting reimbursement.  To accomplish this, CMS compared the Average Sales Price (ASP) plus 6 percent payment (as of July 2013) for each product to the weighted average payment per unit for all skin substitutes, and assigned each skin substitute to the high-cost or low-cost group based on this analysis.  The threshold for 2014 is $32 per cm2.

In the CY 2015 Proposed Rule published earlier this year, CMS articulated several stakeholder concerns regarding the use of ASP data in assigning products to certain groups, including:

• Using the ASP may disadvantage those products that are sold in large sizes

• Using a weighted average ASP to establish the high-cost/low-cost threshold, combined with the existing drug pass-through policy, will lead to unstable high-cost/low-cost skin substitute categories in the future

In response to these concerns, CMS proposed to use the weighted average mean unit cost (MUC) instead of ASP data to establish the threshold for the high-cost and low-cost groups.  MUC data are based on costs from outpatient claims data rather than sales data.  Based on its analysis, CMS proposed to set the threshold for CY 2015 at $27 per cm2.  New skin substitutes without pricing information would be assigned to the low-cost category, and those skin substitutes with pass-through status would be placed in the high-cost category (with an offset applied).

In the CY 2015 Final Rule, CMS finalized its proposal to use the MUC methodology to set the threshold for packaging of skin substitutes, stating that this methodology “will better promote stability.”  CMS finalized the threshold for CY 2015 at $25 per cm2, explaining that the $2 decrease was the result of updated final rule claims data.  If there are no claims data to calculate the MUC, CMS will assign skin substitutes to the high-cost or low-cost group based on the ASP plus 6 percent data.  If ASP data are not available, CMS will use Wholesale Acquisition Cost plus 6 percent or 95 percent of the Average Wholesale Price.

Some stakeholders raised concerns with the MUC methodology, arguing that ASP data are more accurate because they represent actual sales data reported by the manufacturer.  CMS disagreed, however, explaining that ASP data blend sales prices to hospital and non-hospital entities.  Reiterating comments made in 2013, some commenters voiced concerns regarding the breadth of products CMS included in the skin substitute packaging policies, including Class III medical devices, Class II medical devices, biologicals approved under Section 351 of the Public Health Service Act and tissue-based products approved under Section 361 of the Public Health Service Act.  In response to these comments, CMS reiterated its position that the Food and Drug Administration’s (FDA’s) treatment of skin substitutes does not affect how they are categorized under the Medicare packaging policy. 

Pass-through Evaluation Process for Skin Substitutes

Separately, CMS also proposed to transition skin substitutes from the drugs and biologicals pass-through evaluation process to the separate and distinct pass-through procedures in place for medical devices.  Pass-through payments are designed to provide additional reimbursement for certain new drugs, biologicals and devices for a period of two to three years.  Although recognizing that skin substitutes have attributes of both biologicals and devices, CMS took the position that these products are “best characterized as surgical supplies or devices” as a result of their required surgical application and their similarity to other surgical supplies.  In fact, CMS drew a direct comparison between skin substitutes and implantable biologicals that are surgically inserted or implanted, the latter of which CMS began to package in CY 2009 and to evaluate under the medical device pass-through process in CY 2010.

CMS acknowledges that several commenters opposed this transition, but it ultimately finalized its proposal for all applications for pass-through payment status that would begin on or after April 1, 2015.  As a result, any new skin substitute must now demonstrate “a substantial clinical improvement over current wound treatments” in order to receive pass-through payment.  For instance, “If a new skin substitute demonstrated improved wound healing compared to existing wound treatments, it could potentially qualify … assuming that the skin substitute is not described by an expired pass-through payment device category.”  The latter part of this criterion will be driven largely by how narrowly or broadly CMS defines the payment device category for skin substitutes.  Notwithstanding the foregoing concern, CMS explains that only 30 percent of skin substitutes have qualified for, currently have or will have pass-through payments, which it interprets as evidence that these payments may not be necessary for successful commercialization of these products.

In responding to the Proposed Rule, commenters generally questioned CMS’s authority to evaluate products approved by the FDA under biologics license applications as medical devices.  In response, CMS stated that it is appropriate to treat skin substitutes as devices because these products can meet the definition of a supply or device or a biological, and the FDA’s categorization of a product should not influence which pass-through evaluation process is used. 

In an interesting reference to future skin substitutes that may come onto the market, CMS pointed out that there may be instances in which certain products might have a wound healing indication, but may not necessarily meet the definition of “skin substitutes and similar products that aid wound healing.”  Any such product would potentially fall outside the current packaging policy for skin substitutes, and, moreover, might not be subject to the medical device pass-through evaluation process finalized in the Final Rule.  This comment creates some uncertainty as to how rigidly the device pass-through process for skin substitutes and similar products will be applied, and may allow for an opportunity for some products to apply for drug pass-through status in the future.