________________________________________

REIMBURSEMENT BASICS
FOR LIFE SCIENCE ENTREPRENEURS

MassChallenge
September 29, 2010

Edward E. Berger
 THE REIMBURSEMENT CHALLENGE
________________________________________

• Critically important element in

– Investor due diligence
– Commercial success
• Obstacles are over-hyped
– Path to success is well marked
– Careful analysis, planning and execution
guarantee success, if the technology is
“worthy”

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 THE GOOD NEWS
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• Medical technologies or therapeutics that

effectively address unmet clinical needs, or
that clearly improve outcomes, always get
reimbursed in the U.S. …
– Counter-examples?
• …If the case is made effectively
– Understanding payers’ wants/needs
– Effective execution of a well constructed plan
– Compelling empirical demonstration of value
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 THE FIRST CRITICAL DIMENSION:
BILLABLE SERVICE OR EXPENSE LINE
________________________________________
• Will the user (physician, hospital, patient) be
submitting a bill for your technology or
service?
– Procedural requirements apply
• Is it simply a component of a billable service
(e.g. surgical tool, office equipment,
analyzer, etc.)?
– Cost justification is crucial
• Answer(s) may be specific to site-of-service
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 THE SECOND CRITICAL DIMENSION:
WHO PAYS?
________________________________________

• Self pay
– Market sets price and demand
– No significant procedural requirements
• Private third party payer
– Highly decentralized and unpredictable
– Highly variable in eligibility, methodology and amount
• Public third party payer (Medicare/Medicaid)
– Relatively centralized and predictable
THIRD PARTY PAYMENT: THREE DISTINCT
BUT RELATED ELEMENTS
________________________________________

• Coding
– A unique and objective identification of the
service or item provided
• Coverage
– The determination of whether and under what
circumstances to pay for the service or item
• Reimbursement
– The specification of a payment methodology
and amount
CODING IS THE MOST COMPLEX OF THE
THREE – AND THE LEAST IMPORTANT
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• Multiple coding systems mandated for different

purposes
– CPT, ICD9, ICD10, HCPCS
– Each controlled by a different organization
• Overlapping but not always synched
– Each with distinct application processes,
requirements, review cycles and implementation
schedules
• But system provides options during code
acquisition / optimization process
 NEED A WELL DESIGNED AND
EXECUTED CODING STRATEGY
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• Identify and evaluate existing codes

– “fit” and “adequacy of payment”
• If new code is needed …
– Understand requirements and timelines
– Execute plan to optimize outcomes
• Utilize “unspecified procedure” code in
interim
– Does impose administrative burden on company
and customers
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 COORDINATE MD AND FACILITY
CODING (AND PAYMENT) STRATEGIES
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• Utilization affected by adequacy of payment

to both physician and facility
• Market forces operate
– Physicians allocate time to procedures /
activities with highest return on time and effort
– Hospitals likewise will allocate space, time and
capital to procedures with good returns
• Extreme disparities will lead to exclusions
by either party
COVERAGE POSES MORE DIFFICULT
CHALLENGES (1)
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• Payers do not have common standards

– CMS constrained by statute, regulations, and
prescribed policy processes
• Screenings and preventive services defined in law
• Cost excluded as a factor if any benefit beyond
existing clinical alternatives
– Private payers far less constrained
• Different insurance → different benefits
• Free to apply any lawful standard the market will
bear
 COVERAGE POSES MORE DIFFICULT
CHALLENGES (2)
________________________________________

• Clinical utility is the touchstone, but there is

no common operating definition
– “Reasonable and necessary” standard is not
the same as FDA’s “safe and effective”
• Incremental clinical benefit is key
– Reinforced by recent CER initiatives
• Cost does enter the equation
– Overtly or covertly
• More rigorous analysis for high cost technologies?
 COVERAGE DECISIONS ARE
DATA DRIVEN
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• Health technology assessment (HTA)

– Do it themselves or by external contract
– Sources include: CMS Coverage Analysis
Group, BCBSA Technology Evaluation Center;
ECRI; Hayes, Inc.; HealthTech
• Medicare and major private payers provide
online databases of coverage policies and
analyses
– Rich resource for understanding what you will
need to demonstrate
 PLAN TO MEET DATA REQIREMENTS
FOR COVERAGE
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• Evaluate what insurers will want/need to

know
• Integrate your regulatory and reimbursement
strategies
– Integrated data effort is cost and time efficient
– Clinical trial staff can monitor and control to
establish data validity
– Include cost data capture

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COORDINATE CMS / FDA PROCESSES
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• Meet with CMS as soon as you have a clear

sense of FDA requirements
– Both coverage and coding staff
– Educate about your product and plan
• Get informal feedback on agency perspective
– Shorten total decision timeframe by giving CMS
access to data submitted to FDA
– Evaluate new parallel review option
• Provide periodic progress updates to build
relationship and agency knowledge base
 PRIVATE INSURER PERSPECTIVES
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• Continuum of policies from traditional fee for

service to fully capitated managed care
– Competition within each class of policy
– Competition between types of coverage
• Diverse principal competitive drivers
– Cost control for lower premiums
– Quality and/or access superiority
– Coordination of care for quality and efficiency
• Effective, cost-efficient technologies create
competitive leverage for insurers
 COVERAGE DECISION MAY TAKE TIME
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• Coverage policy approval timeline is a

function of
– Clinical impact of the service
– Quality of the supportive data
– Support from opinion leaders
– Visibility to public
– Competitive pressure (private insurers)
• Need to advocate case by case, insurer by
insurer, until policies emerge
 COVERAGE POLICIES ARE
INCREASINGLY REFINED
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• Diagnostic tools allow identification of subgroups

likely to benefit from specific treatments
– Companion diagnostics model for drug testing trades
off between market size and success probability;
Device analogs are emerging
• High cost therapies getting placed into a
sequential hierarchy of interventions…
– … for patients who fail a trial of …

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 COVERED SERVICES GET REIMBURSED
BUT HOW MUCH?
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• Private insurers have many different ways of setting

payment levels
– Rate schedule
– Negotiated rate w/ provider
– Prevailing charge
– Inclusion in capitated rate
– Disease-management contract
• With or without carve-out
• Each method creates distinct incentives
 PROVIDERS CAN NEGOTIATE WITH
PRIVATE INSURERS
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• Need clinical and financial data to support

highest attainable payment level
– Efficacy and safety relative to therapeutic
alternatives
– Cost relative to therapeutic alternatives
– Impact on total cost of care
• Complication rates, follow-up care
• Insurers will pay to incent adoption of cost-
saving technology
 MEDICARE PAYS UNDER FIXED RULES
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• Hospital Inpatient Prospective Payment
System
– Diagnosis Related Groups (DRGs)
• Hospital Outpatient Prospective Payment
System
– Ambulatory Payment Classifications (APCs)
• Physician Fee Schedule
– Resource Based Relative Value Scale (RBRVS)
• AWP + 6% for physician-administered
drugs
 MEDICARE PAYMENT SYSTEMS
CHARACTERISTICS
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• Each system is based on averaging

payment for clinically coherent groupings
of codes
– A reasonably efficient provider, with a
representative case load, will break even
• Each is separately calculated based on
prior year cost and projected utilization
– A (very) soft cap on spending
– No consideration of impact on other systems
 EACH MEDICARE PAYMENT SYSTEM IS
A MANAGED FIXED-SUM GAME
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• A total system spending target is set

– Independently for MDs, Outpatient, Inpatient
• Volume projections for each service
category are established
• Relative value of each service is adjusted
– Based on analysis of prior year costs
• Payment for each service is derived
– As if target were a hard spending cap
 HOSPITALS AND PHYSICIAN GROUPS
KNOW THE FINANCIAL SCORE
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• Medicare and total operating margins

– For each department
– For each DRG, APC, or visit type
– For each identifiable diagnosis, service,
surgical procedure, etc.
• They invest in winners, disinvest in losers
• Successful companies create new winners
for hospitals and medical groups
 DIRECT ECONOMIC IMPACT DOESN’T
EXPLAIN EVERYTHING
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• Hospitals and large physician groups may

have broader long term goals
– Reputation for clinical and/or technological
leadership
– Specific areas of national or regional
excellence
– Comprehensiveness of service offerings
– Community/regional/national visibility
• Visibility/reputation lead to referrals
 INFORMATION IS THE KEY TO
OPTIMIZING REIMBURSEMENT
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• Understand the clinical, regulatory and

institutional environment
• Demonstrate command of all the available
information
• Collect the best and most comprehensive
possible data
• Perform or commission the needed
analyses
 BUILD A ROBUST RESEARCH
CAPABILITY
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• Get your results out as early as possible

– Peer-reviewed papers carry the most weight
– Conference presentations have some worth
– Data collected in monitored trial or study can
be useful
• But control and validation will be questioned
– Sponsor-conducted retrospective or ad hoc
studies can be dismissed
• But not if you’ve made yourself an unimpeachable
source
 AGGRESSIVELY PLAN AND MANAGE
YOUR REIMBURSEMENT STRATEGY
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• Identify your empirical data requirements
• Map the timelines for coding and coverage
decision processes
• Find the shortest path that doesn’t
compromise your chances of success
• Manage the process like any project
• Research performed for reimbursement
planning has far broader business strategy
applications… USE IT.
________________________________________

Thank You
Edward E. Berger, Ph.D.
Larchmont Strategic Advisors
2400 Beacon St., #203
Chestnut Hill, MA 02467
Tel: 617-645-8452
Email: eberger@larchmontstrategic.com

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