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September 4, 2020

CMS Proposes Significant Changes in Medicare's Coverage Process for Devices, Pharmaceuticals and Diagnostics



On September 1, 2020, the Centers for Medicare & Medicaid Services (CMS) published a proposed rule aimed at doing two things: (1) speeding Medicare coverage of certain innovative devices and (2) codifying a definition of what makes an item or service medically "reasonable and necessary" under the Social Security Act 1861(a)(1)(A).1 The rule, if finalized, would create a new pathway to coverage, called Medicare Coverage of Innovative Technology (MCIT), which would provide nationwide coverage for technologies designated as "breakthrough" by the Food and Drug Administration (FDA) immediately following FDA's marketing authorization. It also would codify in regulations a definition of "reasonable and necessary" items and services based on a definition currently used by Medicare Administrative Contractors (MACs), with an additional element that potentially would include coverage determinations by commercial insurers as a factor in making Medicare coverage determinations.

If adopted, these proposals would arguably lead to the most wide-ranging changes in Medicare's coverage standards and procedures in decades. Achieving Medicare coverage is a lengthy process for some new devices, and the MCIT pathway would allow a small number of breakthrough devices to avoid coverage delays that recent data suggests can go on for many months. The proposal to codify the definition of "reasonable and necessary" is intended to apply to all items and services—not just breakthrough devices, though many details remain open to further consideration. In particular, using commercial insurance coverage to determine Medicare coverage, appears to be intended as a way to expand coverage, but also may introduce a "wild card" in the coverage process. The details of how this concept would be implemented remain to be specified.

In the proposed rule, CMS repeatedly asks for public comment on various aspects of the proposals. Manufacturers of devices, diagnostic tests, and drug as well as Medicare enrolled providers and suppliers may want to submit comments through the formal comment process. The window for public comments closes at 5:00 PM on November 2, 2020. 

New Pathway to Coverage—Medicare Coverage for Innovative Technology

CMS proposes a new Medicare coverage pathway—the Medicare Coverage for Innovative Technology (MCIT) pathway—that would provide immediate national coverage for devices designated by the FDA as breakthrough devices and that are within a Medicare benefit category beginning on the date of FDA market authorization and continuing for up to four years.

What products would be covered? Under this proposal, breakthrough devices would automatically be considered "reasonable and necessary" under section1862(a)(1)(A) of the Social Security Act, which is the general rule for Medicare coverage for items and services for diagnosis or treatment of a disease—that is, those not preventive in nature. MCIT coverage would apply to a device's on-label indications only. Off-label uses are proposed to be non-covered.

In the preamble discussion, CMS indicates that its proposal does not include coverage for diagnostic tests that have breakthrough status. However, the language proposed to amend the Code of Federal Regulations does not include such a limitation. This discrepancy will need to be addressed.

CMS proposes that the MCIT pathway would be voluntary (that is, manufacturers would affirmatively opt-in), and coverage would be initiated when a manufacturer notifies CMS of its intention to utilize the MCIT pathway.

Timing of eligibility: To be eligible for MCIT coverage, a breakthrough device would be required to receive FDA market authorization no earlier than two years prior to the effective date of the MCIT rule. Coverage would begin at the later of the date of FDA market authorization or the effective date of the rule and would expire four years after FDA market authorization. In other words, some breakthrough devices approved by the FDA before the effective date of the rule would be eligible for coverage, but coverage for those devices would be effective for less than four years.

Exit from the pathway: At the end of a device's four-year MCIT eligibility, coverage of the breakthrough device would be subject to one of Medicare's standard coverage pathways: (1) a National Coverage Determination (NCD) providing affirmative coverage (which may include limits based on facility or patient); (2) a NCD resulting in non-coverage; or (3) deferral to Medicare Administrative Contractor (MAC) discretion, operating through by claim-by-claim adjudication or Local Coverage Determinations (LCDs). After a device's MCIT pathway eligibility ends, CMS would determine which of these coverage pathways the device will fall into depending on the clinical evidence base available at the time. (CMS has set the four-year window to accommodate completion of post-market studies.) However, CMS would not obligate manufacturers of breakthrough devices to conduct clinical studies under the MCIT pathway. The MCIT pathway differs from CMS' pathway for Coverage with Evidence Development in this respect.

CMS encourages early manufacturer engagement, both before and after FDA market authorization, for manufacturers to receive feedback from CMS on potential clinical study designs and clinical endpoints that may produce the evidence needed for a definitive coverage determination after MCIT. CMS also advises manufacturers to consider applying for a NCD well ahead of the four-year expiry date to avoid possible lapses in coverage.

This proposal raises a number of questions which may be worthy of comment. A few of these are mentioned below:

  • Would this proposal defer CMS' responsibility to determine whether an item is reasonable and necessary to FDA's judgment as to whether something is a breakthrough device? Should CMS explain in more detail why it is deferring to an FDA decision that is not to medical necessity? Are stakeholders confident that FDA is consistently and fairly making judgments as to whether a device is a breakthrough device? What happens if a device loses its breakthrough status?
  • Should the proposed MCIT pathway include non-breakthrough devices? All PMA devices, including non-breakthrough devices, have FDA marketing approval and, in many cases, the clinical trials supporting non-breakthrough devices are more robust because they include more patients, have longer follow up, etc.
  • CMS makes no mention of coding and reimbursement for these devices or how CMS intends to coordinate that process with day-one coverage after FDA market authorization. Should CMS provide more details as to the notification process and the required timing to coordinate coverage, coding and payment so everything is effective on day one?
  • Should diagnostic tests be eligible for the MCIT pathway?
  • Should drugs and biologics be eligible for this pathway? If so, which ones?
  • Is the four-year coverage period appropriate? CMS explicitly asks for comment both on whether four years is sufficient and whether it should limit coverage to one year.
  • Should CMs provide more detail on how it intends to interact with manufacturers during the four-year MCIT period so that manufactures can obtain a clear understanding of what CMS expects in terms of additional clinical data to support continued coverage?
  • If there is no NCD in effect when the MCIT pathway eligibility, will the device still be covered at the local level? Should CMS be more explicit as to what actions it or the MACs might take with respect to coverage after the MCIT pathway eligibility expires?
  • Does this proposal affect Medicare coverage of breakthrough devices that are used during an otherwise non-covered inpatient stay (e.g., due to medical necessity)?
  • Dos CMS need to explain the relationship between the MCIT pathway and the NCD process? For example, why would a breakthrough device be deemed medically necessary under MCIT but then have to go through the NCD pathway after four years?
  • What implications does the MCIT pathway have for coverage by and payment to Medicare Advantage plans?

Changes to "Reasonable and Necessary" Determinations

The Medicare statute generally prohibits coverage of items and services that "are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member."2 In making NCDs, CMS determines whether an item or service is reasonable and necessary, including for what indications and for what patient populations, and under what circumstances.

In this rule, CMS proposes to codify in regulations a definition of "reasonable and necessary" that is based on guidance CMS has previously provided to the MACs for them to apply in developing local coverage determinations (LCDs).3 Specifically, CMS proposes to define "reasonable and necessary" at 42 CFR § 405.201(b) to mean that the item or service is considered:

(1) Safe and effective;

(2) Except as set forth in §411.15(o)) of this chapter, not experimental or investigational; and

(3) Appropriate for Medicare patients, including the duration and frequency that is

considered appropriate for the item or service, in terms of whether it—

(i) Meets all of the following criteria:

(A) Furnished in accordance with accepted standards of medical practice for the diagnosis or treatment of the patient's condition or to improve the function of a malformed body member;

(B) Furnished in a setting appropriate to the patient's medical needs and condition;

(C) Ordered and furnished by qualified personnel;

(D) One that meets, but does not exceed, the patient's medical need; and

(E) At least as beneficial as an existing and available medically appropriate alternative; or

(ii) Is covered by commercial insurers, unless evidence supports that differences between Medicare beneficiaries and commercially insured individuals are clinically relevant.4

The language in factors (1) through (3)(i) mirror the current instructions to the MACs, but this language has not yet been explicitly incorporated into the NCD process. In fact, it appears these criteria may differ from the criteria CMS currently uses for NCDs. For example, in many recent national coverage analyses (the process CMS uses to establish an NCD) CMS posed one or two very specific questions, the answer to which form the basis of the NCD. These questions are usually a variation on "Does "item or service" improve net health outcomes of Medicare beneficiaries?" Also of significance, the addition of factor (3)(ii) would provide a new and alternative opportunity for coverage based on coverage by commercial insurers, a factor that has not been applied to either national or local Medicare coverage determinations in the past. CMS emphasizes that factors (1) and (2) would apply in all cases.

The proposal raises numerous questions. Most fundamental, it is not clear how broadly this definition would apply. Certain CMS statements in the summary section of the rule preamble and in related press materials suggest that CMS intends for the definition to apply to all items and services eligible for coverage under Medicare Parts A and B, not just devices.5 At a technical level, however, the section of regulations that CMS is proposing to amend in order to codify this definition, Chapter 42, Part 405, Subpart B, specifically applies to devices that qualify for investigational device exemptions (IDEs). Based on this placement, it appears the definition of reasonable and necessary would apply only to IDE devices.

CMS' discussion related to the role of commercial insurance coverage as a factor in Medicare coverage determinations leaves unspecified many elements of how this factor would be employed. The effects and implications of this proposal for existing coverage policies (local and national) and future policies are hard to predict.

What specific items and services might qualify for coverage under the commercial payer provision also is not clear. CMS states that the commercial market analysis "would be initiated if an item/service fails to fulfill the existing factor (3) criteria defining appropriate for Medicare patients but fulfills (1) safe and effective and (2) not experimental or investigational."6 (emphasis added) CMS' statement suggests that the commercial coverage alternative would apply only to items and services that could not otherwise meet the standard for Medicare coverage. However, at the same time, CMS indicates that it might apply the commercial coverage factor to items and services that currently are covered by Medicare and solicits comments on whether it should grandfather existing coverage policies.7

CMS proposes that an item or service could not be covered based on coverage in the commercial insurance market if evidence supports that differences between Medicare beneficiaries and commercially insured individuals are "clinically relevant." CMS does not define the term "clinically relevant" or provide any discussion of how it would determine that such differences exist. When the evidence supports differences in the Medicare and commercial populations, CMS would rely on the existing factor (3) criteria in determining coverage.

CMS suggests that coverage by a commercial plan would not just allow Medicare to consider the item or service reasonable and necessary but the commercial coverage would become Medicare's coverage policy.8 CMS solicits comment on the best way to determine which commercial plan(s) it should rely on for Medicare coverage and whether the commercial plan offerings considered should be limited in any way, such as by number of enrollees or even using a singular reference plan. CMS asks whether other parameters should apply, such as whether an item or service is covered by a majority or plurality of plan offerings or of covered lives. CMS does not explain how it would conduct the analysis of commercial coverage and asks for comment on the data sources it should use. CMS proposes to adopt the least restrictive coverage policy amongst the offerings examined but solicits comment on whether it should instead apply the most restrictive policy to address concerns about the potential for unreasonable or unnecessary utilization. CMS proposes to exclude Medicaid and Medicare managed care plans and other government administered healthcare coverage programs from the commercial plans CMS would consider.

In addition to applying review of commercial coverage policies in the context of NCDs, CMS also sets forth a proposal for MACs to review commercial coverage policies to inform both the development of LCDs and claim-by-claim coverage decisions.

Previous attempts by CMS to put Medicare coverage criteria, and definitions of reasonable and necessary in particular, into its regulations have had a troubled history. After proposals in 1980 and 1989 to include cost effectiveness in the criteria were scuttled by industry opposition, CMS issued a Notice of Intent for rulemaking in 2000, suggesting that technologies must demonstrate "medical benefit" as well as "added value to the Medicare population."9 In 2003, CMS announced it did not intend to pursue rulemaking based on this notice because of "substantial competing interests."10

Perhaps reflecting this history, CMS concludes its discussion of this proposal with a sweeping comment solicitation:

We solicit comment on this proposed definition of reasonable and necessary, and alternatives outlined above, as well as other mechanisms or definitions we could establish for the term "reasonable and necessary", and the merits and drawbacks associated with each, including the potential impact on Medicare program expenses or complexity. We may finalize any variation or outgrowth of the policies described in this proposal, or some combination of these options in lieu of or in conjunction with our proposed definition.11

Following are other potential areas for comment:

  • Should CMS be more specific in how it would apply the new reasonable and necessary criteria such as giving examples as to how they would be applied to specific items and services?
  • Should CMS provide more detail on how these proposed criteria might result in different coverage decisions than have been made using the current criteria?
  • Aside from coverage of drugs and devices, these criteria may apply to all medical services such as diagnostic tests, surgical procedures, and office visits. Should CMS provide additional detail as to how these criteria will be applied to those services?
  • The criteria in (3)(i) are not very specific. Should CMS provide more detail on how it will apply the "appropriate setting," "meets, but does not exceed the patient's need," and the "at least as beneficial as" criteria? For example, will Medicare make place-of-service specific coverage decisions, cover only the minimal amount of care a patient needs, and/or require head-to-head comparative clinical trials for coverage of items and services as it implements these three criteria?
  • If no commercial plans explicitly cover an item or service or if some plans explicitly non-cover an item or service, will CMS also non-cover that item or service? What if some commercial plans cover and others non-cover?
  • How will CMS take into account the heterogeneity of the commercial insurance market, considering that plans very greatly in structure and degree of risk they absorb depending on how they are paid by employers or enrollees?
  • If finalized, will these new criteria affect how commercial insurers make their coverage decisions?


CMS presents no estimate or other information relating to the Medicare cost impact of the changes relating to the reasonable and necessary standards. CMS notes that "nuances of the definition would affect the magnitude of the impact" and requests "comment that would facilitate quantification of effects and comparison of alternatives at the final rule stage."12

CMS concludes that it cannot develop a point estimate of the impact of the MCIT, in part because how the new technologies would otherwise come to market and be paid is unknown.13 Instead, CMS presents three hypothetical scenarios that differ in assumed increases in Medicare costs (based on payments and utilization observed under the New Technology Add-on Payment provision under the Inpatient Prospective Payment System). For each scenario, CMS assumes that the MCIT pathway would draw two candidates in the first year, three in the second, four in the fourth and five in the fifth. By FY 2024, the range of cost estimates is from $0 to just over $2 billion for a single year.14

Opportunity to Comment

CMS will accept comments from stakeholders and the public until November 2, 2020. Some specific areas are suggested in the paragraphs above, but CMS asks for comments in many other areas dotted through the proposed rule, and interested parties are free to comment on any aspects within the scope of the proposals. Please contact your Arnold & Porter attorneys if you would like to discuss how we might be of help.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. "Medicare Program: Medicare Coverage of Innovative Technology (MCIT) and Definition of 'Reasonable and Necessary,'" 85 Fed Reg 54327.

  2. Social Security Act (SSA) 1862(a)(1)(A). The statute specifies certain exceptions to this provision and also provides a pathway for coverage of preventive services.

  3. Medicare Program Integrity Manual (100-08), Chapter 13, section 13.5.4.

  4. 85 FR 54331.

  5. "In this proposed rule, we are proposing to codify a definition of "reasonable and necessary" for items and services that may be covered under Part A and Part B of the Medicare program. This proposed definition would apply to all Medicare items and services, not just those covered through the MCIT pathway." CMS Fact Sheet. Proposed Medicare Coverage of Innovative Technology (CMS-3372-P), August 31, 2020.

  6. 85 Fed. Reg. 54332.

  7. Ibid.

  8. "As greater access to innovative treatments provides beneficiaries with more opportunity to improve health and drive decisions, we would, when coverage is afforded on the basis of commercial coverage, adopt the least restrictive coverage policy for the item or service amongst the offerings we examine." 85 Fed. Reg. 54332.

  9. "Medicare Program; Criteria for Making Coverage Decisions," Notice of intent to publish a proposed rule. 65 FR 31124 (May 16, 2000).

  10. "Medicare Program; Revised Process for Making Medicare National Coverage Determinations," Notice. 68 FR 55634 (September 26, 2003).

  11. 85 Fed. Reg. 54333

  12. 85 FR 54336.

  13. Id.

  14. 85 FR 54337.