While Congress focuses on high-stakes health care reform issues that will likely affect every health system stakeholder over the next few years, and may radically change the reimbursement environment and market potential of emerging device and diagnostic technologies, business as usual goes on — for better or for worse — for individual companies.
One of the companies experiencing “for worse” is CardioNet (NASDAQ:BEAT), the once high-flying Pennsylvania-based cardiac monitoring company touted by many as the best pure play in wireless patient monitoring and diagnostics.
CardioNet shares have plummeted in the last 2½ months. For those seeking an explanation, the answer seems simple and comes in one word — reimbursement. The company would express it more vigorously — arbitrary and unwarranted reimbursement reductions. But, as is often the case, the story is somewhat more complicated. CardioNet provides a magnificent example of why it is essential that basic business strategy decisions be informed by clear-headed analysis of reimbursement issues.
CardioNet provides mobile cardiac outpatient telemetry using an internally developed proprietary technology platform. MCOT allows continuous cardiac monitoring for up to 30 days, with the capability for real-time review and querying from a monitoring center. The technology allows for the identification of heart rhythm irregularities that elude the commonly used shorter-term monitoring technologies (e.g., holter monitoring) and many insurers, including Medicare, cover MCOT for defined subsets of patients who experience serious but unpredictable arrhythmias not adequately diagnosed by other techniques.
MCOT was approved for commercial use in 2002, and CardioNet set up its testing center that same year. As a Pennsylvania-based facility, the center did all of its Medicare billing to Highmark Medicare Services, the regional Medicare Part B carrier. The test was provided under a temporary Category III CPT code through the end of 2008.
In October of that year, however, CardioNet announced approval of permanent codes for MCOT — CPT 93228 for the professional component and CPT 93229 for the technical component — effective January, 2009, and a carrier-determined reimbursement rate for the TC of $1,123.07. The TC is the revenue CardioNet realizes for every test performed.
CardioNet went public earlier in 2008. Analysts following the company were and are extremely sensitive to reimbursement issues; this is typical for single-product companies where one reimbursement decision can be make-or-break. On April 28, the company issued a press release to refute analysts’ speculation about an imminent Highmark payment reduction for the MCOT TC. On May 18, a further press release solidified the situation, announcing formal Highmark posting of the $1,123.07 rate originally announced in October of the previous year. Things were looking good on the reimbursement front.
But there’s been nothing but bad news since. On June 30, a Cardionet press release announced a downward revision of guidance for 2009 based on lower than expected commercial reimbursement rates. On July 12 CardioNet announced a revised Highmark TC payment rate effective September 1 — a more than 30 percent reduction, to $754. Finally, on the following day, the company announced termination of its agreement to make what had been positioned as a key strategic acquisition to strengthen its position in the wireless telemetry field. It’s difficult to dismiss the reimbursement catastrophe as the underlying cause for this setback.
I have no inside information about the considerations that drove CardioNet’s strategic choices or about how it conducted its reimbursement advocacy. I can’t, therefore, objectively critique those choices or that advocacy effort.
What I do know is that CardioNet’s business strategy decisions, whether they were dictated by compelling business rationales, increased its reimbursement jeopardy. I’ll address three such decisions: An operational choice; a business model choice; and a fundamental business organization choice. All three choices — which may nonetheless have been “right” or “necessary” when made — increased exposure to reimbursement risk. Each played a part in enabling this month’s meltdown.
First, by maintaining all of its operations in a single location, CardioNet put its entire Medicare business into the hands of a single local Medicare contractor. It might have set up regional testing centers, thereby dividing its business among different local contractors — spreading exposure to the vagaries of any one locally established payment rate. There is a trade-off at work: A single carrier increases jeopardy by putting all of the eggs in a single basket; multiple carriers spread the risk, but require commensurately broadened advocacy communications and reimbursement support. CardioNet opted for operational consolidation (which may also have carried substantial operating cost advantages), valuing business simplification over reimbursement risk mitigation. And it operated in that mode from 2002; as business grew in subsequent years, the opportunity to decentralize was always present. The company seems to have believed — erroneously, it turns out — that it had a good line on the single carrier’s thinking about a reimbursement rate.
Under the decentralized operational scenario, Medicare would have had an incentive to set reimbursement at a single nationally-determined level; it would have done so to eliminate regional disparities that could not be supported by differential costs. But a single explicitly national rate is greatly preferable to an effectively national rate set by a single regional carrier. At the national level, there are procedural rules, formal opportunities for comment on proposals and public notification of the basis upon which a decision is made. Local carriers are not bound by any of these requirements, nor do they have the expertise of Medicare’s central payment policy staff; their decisions are inherently less predictable.
Second, CardioNet chose to do business as a physiological testing laboratory rather than selling its technology to independent laboratories. Had it done the latter, the company would have been free to sell the technology at a price of its own choosing. This would transfer primary reimbursement risk to CardioNet’s customers, but it would also provide those customers with unequivocal documentation of an important cost element required for the test — the technology cost. Under the scenario CardioNet chose, the cost of the technology is a “related party” cost of testing — to the extent Medicare acquires real cost data, it will not allow a markup on cost of manufacture. I suspect that CardioNet made the choice it did in order to capture a larger share of the total TC revenue stream — not an unreasonable goal. But again, there was a tradeoff: Control of the total revenue stream increased direct exposure to reimbursement risk. And again there was a more conservative choice available: Sell the technology to testing facilities until reimbursement was clearly established, then expand into the testing business once reimbursement risk was minimized.
That conservative strategy may not have been aggressive enough for the investment community. And therein lies the third risk-increasing strategic decision. CardioNet made the decision to go public before solidifying its business position and before removing reimbursement risk from the equation. Perhaps an IPO was the only way to raise enough money to build the business. An IPO was certainly the way for early investors to cash out and take profits and for management to realize substantial capital gains. But IPOs increase all sorts of exposure, create enormous pressure to accept risk in order to grow quickly and expose companies to extraordinary volatility when best-case scenarios are not realized.
Perhaps most crucially in this case, financial disclosure requirements for public companies give insurers a clear view of the company’s profitability. For CardioNet, for which MCOT is dominant, financial reports revealed the profitability of a test for which reimbursement was not yet stably established. Medicare staff access those reports and read them. They don’t reveal much about the break-even payment level for a single product of a multi-product company; they reveal everything about the relationship between cost and payment for a single-product company. For CardioNet, because it’s a public company, there’s no place to hide the MCOT profits.