When pitching to potential life sciences technology investors, entrepreneurs know that they need to demonstrate a clear path to reimbursement. Angels, VCs and strategic partners don’t want to commit resources to develop something that won’t get adequately paid for in a reasonable timeframe. That makes perfectly good sense. Indeed, I’d argue that the need to assess a technology’s likely reimbursement status begins even earlier than the investment pitch. Very early reimbursement analysis can help distinguish a challenging technical development project with no commercial potential from a possible future profit-generating product months or years before an inventor is ready to approach private investors.
Despite widespread agreement that understanding reimbursement is essential to an informed investment decision, the quality of the reimbursement analyses in most early-stage business plans is poor. It’s easy to understand why. None of the parties directly involved in a potential investment has a primary interest and/or special expertise in the complexities of healthcare reimbursement. All of them approach reimbursement analysis as a necessary evil communicated in an arcane foreign language. They therefore search out and fix upon ways to cut through the clutter and reduce the question to some simple essence. The reduction of choice in recent years, the single question most often taken to demonstrate reimbursement status, is this: “Do you have a reimbursement code?” Wrong question!
It is true that a health care technology or procedure needs to be described for billing and payment purposes by a code, or by multiple codes. If there is a code already in place that clearly identifies a company’s product, technology or procedure and provides satisfactory payment — i.e., if you are developing what is essentially a copy-cat product, or an incremental improvement within an existing class of products, and you are not adding cost — reimbursement shouldn’t be a problem. If you are subtracting cost, fitting into an established code priced to reflect more expensive competition will be a terrific advantage. So the availability of a code can be a very good thing. Of course, the more innovative the technology, the less likely it is that there will be a good fit into an existing code. Focusing on coding as the principal component of the reimbursement analysis for a technology under development disadvantages the most innovative new technologies — unnecessarily so.
For technologies that provide incremental benefits at added cost as compared to predecessors in their class, fitting into an existing code can be an impediment to commercial success. The existing code may set payment too low to allow substantial adoption rates. The operative question becomes, “Is your technology sufficiently distinct from predecessors as to warrant a new code that can be priced to satisfactorily reflect cost?”
An interesting example from this class is the ThinPrep test from Hologic Inc.. Easier to read and therefore superior to standard PAP tests, ThinPrep was also more expensive to perform. Despite very strong support from clinicians, laboratories were reluctant to invest in the infrastructure to provide a money-losing test. It was only after several years of intensive advocacy and lobbying that differential coding and payment were implemented, at which point market acceptance accelerated and ThinPrep became the market leader in cervical cancer screening. For this technology, escaping from the pre-existing code was the key to success.
Fitting into an existing code also doesn’t guarantee that insurers will pay for a technology or product. There are places in the coding systems where the detail of codes lag behind the evolution of technologies and a single code encompasses a variety of distinct technologies. Insurers use codes to process claims and pay bills, but they develop coverage policies for specific procedures, not for codes, and they have administrative tools they can use to distinguish between covered and non-covered cases within the same code.
Spinal fusion procedures provide an interesting case study of this problem. Codes for spinal fusion distinguish between anterior and posterior approaches — distinct surgical techniques. But there are newer and less invasive techniques, made possible by specific technologies, which have been squeezed into those codes. One prominent example is NuVasive Inc.‘s XLIF (eXtreme Lateral Interbody Fusion) procedure. For marketing purposes, NuVasive emphasizes how unique and distinct XLIF is from traditional fusions; for reimbursement purposes, it insists (with support from a least one professional society) that XLIF involves an anterior approach and should be coded as such.
In response to a recent series of adverse XLIF coverage decisions by major private insurers, and consequent concern in the investment community about the company’s prospects, NuVasive has argued that there will be no impact on procedure volumes because XLIF is coded and has typically been paid as an anterior procedure. Investors aren’t buying the response. They’ve read the policy analyses; they know that insurers can implement pre-authorization for spinal fusion procedures or — more frighteningly — post-payment audit of spinal fusion claims. And they know that hospitals and doctors will not be willing to risk false claims charges once such mechanisms are in place; they are waiting for the enforcement shoe to drop. Fitting into a code guarantees NuVasive nothing in the face of targeted coverage policies.
Finally, the absence of a clear fit into a billing code is far from a death sentence for a new technology. All of the billing systems used by healthcare providers (the CPT system for physician and hospital outpatient procedures, the ICD-9 system for hospital inpatient procedures and the HCPCS level II system for everything not coded in CPT or ICD-9) have “unspecified procedure” codes to allow submission of bills for services that don’t fit into established service-specific codes. Use of these catch-all codes comes at a cost: Payments cannot be processed electronically; claims are referred for “development” (requests for documentation and justification) by insurers; payment is delayed; and the technology developer needs to provide considerable reimbursement support to customers. But the cost, with careful planning, is time-limited and there are clearly defined procedures in place for creating new codes and thereby enabling routine electronic processing of claims. Having a plan, and knowing the costs and requirements for getting to the desired end, is far more important than simply having a code.
If “do you have a code?” is the wrong question, is there a right one — a single question that can separate the life science reimbursement gold from the technological base metals that insurers won’t likely pay for? Sure there is, and I’ll tell you what it is in my next post.
Edward Berger is a senior healthcare executive with more than 25 years of experience in medical device reimbursement analysis, planning and advocacy. He’s the founder of Larchmont Strategic Advisors and the vice president of the Medical Development Group. Check him out at Larchmont Strategic Advisors.