reimbursement considerations affecting medical technology transactions_may2011

8/7/2019 Reimbursement Considerations Affecting Medical Technology Transactions_May2011

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May 2011

REIMBURSEMENT CONSIDERATIONS AFFECTING MEDICAL

TECHNOLOGY TRANSACTIONS:

The Economic Case for Due Diligence

I NDUSTRY W HITEPAPER SERIES VI

Charles E. SchneiderVice President, Global Health Economics, Reimbursement & Public Policy



Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Recent Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Fluid Political & Payor Systems Affect Planning, Timing & Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Shifting Focus in Transactions: A More Nuanced Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Key Reimbursement Value Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Mitigating Risk While Creating Value Messaging Supporting Product Adoption and Unit Sales . . . . . . . . . . 5

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

About the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Table of Contents

Musculoskeletal Clinical Regulatory Advisers, LLC

DISCLAIMER:MCRA is a retained consultancy providing services to emerging and multinational medical technology companies. Mr. Zigler provides counsel to thesecompanies, as well as health care provider organizations, medical facility administrators, physicians, insurance carriers, guideline development companiesand employer groups. Readers of this whitepaper should not rely upon information discussed within this manuscript. Rather, individuals must conducttheir own due diligence, evaluate regulations and conduct their own value analysis to determine whether statements and conclusions made within thiswhitepaper are applicable and appropriate to the reader’s situation.



ABSTRACTMedical technology transactions now require detailed review of the

reimbursement landscape. Clear pathways must be shown, or athoughtful plan presented, that support assumptions offered by theinnovator before a new technology will be seriously considered by the investment community.

Those seeking strategic partners, equity investors or exits throughacquisition must be well organized and present strong evidence thatcoding, coverage and payment pathways exist or may reasonably beestablished. Prepared materials should address core questions sum-marized in this article, including strategic reimbursement plans thattactically support patient access to the technology, impact estab-lished treatment options, and perhaps create reimbursement barri-ers to entry. Access to capital and strategic partnerships is available

to emerging technology companies and those seeking to acquirethem. Creating strong value messages through health economicoutcome studies, cost-of-care analyses and risk avoidance models,innovators will better position themselves in the minds of investors,while maximizing valuations ascribed to the transaction.

INTRODUCTIONMedical technology development thrives upon innovation and theinventor’s ability to transition the product from a simple concept to

commercialization. Throughout this process, innovators seekingto maximize valuations are becoming more adept at incorporating

health economic outcomes within their trials, while evaluating,anticipating and driving reimbursement strategies.

Drawing upon MCRA’s corporate transactional experience, thiswhite paper offers stakeholders a snapshot of recent medical tech-nology deals, while illustrating how reimbursement pathways affectcommercial sales expectations, and how health economics nowplay an integral role in the diligence process. Though not a compre-hensive manuscript or intended to provide counsel, this article con-siders recent trends affecting emerging and established technology companies, and provides general areas of review now consideredimportant to acquiring companies when evaluating whether toinvest or acquire viable assets, or divest underperforming ones.

RECENT TRANSACTIONSAs illustrated in Table 1, transactions within the musculoskeletalmedical technology market space were completed despite macroeco-nomic challenges. According to Frost & Sullivan, the 2008 and 2009recession was a major factor affecting the value and number of healthcare transactions which occurred in these years. As markets stabilized,2010 offered greater clarity in the marketplace with credit facilitiesand transactions becoming more available. However, Frost & Sullivan

REIMBURSEMENT CONSIDERATIONS AFFECTMEDICAL TECHNOLOGY TRANSACTIONS:The Economic Case for Due Diligence

May 2011

KEY CONSIDERATIONS FOR THE INNOVATOR

• Present a Well Organized Reimbursement Story, Landscape & Plan• Strengthen Transactional Positioning Through Presentation of Health Economic Outcomes Supporting

Technology Adoption• Remain Vigilant About Market Trends & Regulatory Initiatives Likely to Affect Transactional Assumptions• Organize Clinical & Health Economic Evidence Necessary to Effect Coding, Coverage & Payments for

Associated and Competing Procedures• Present Cogent Strategies to Effect Patient Access to the Subject Technology• Demonstrate a Capacity to Execute the Reimbursement Plan• Anticipate Milestone Objectives Linked to Future Valuations and Payouts

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notes an apparent shift in approach and strategy when evaluatingtransactions involving health care companies. Recent surveys by DowJones also suggest more selective investments by larger companiesseeking to add to their portfolio along continuums of care, whenvalue drivers support transactional decisions.

Acquiring companies engaging MCRA in their purchase or invest-ment now require: (i) a clear understanding of regulatory mattersaffecting the technology or class, (ii) processes to ensure quality sys-tems and good manufacturing practices associated with technology production are well established and compliant, (iii) careful consider-ation of intellectual property and any claims or patent opportunitieswhich may exist, (iv) valuation of clinical outcomes, regulatory approval pathways, and additional claims which may supplementlabeled indications, (v) demonstration of compliance with company guidelines, Federal and State laws, and (vi) great emphasis uponreimbursement strategies and pathways to market described withinprospectus. The extent to which commercial barriers may exist, aseller’s ability to mitigate specific risks and prove business assump-tions impacts an innovators ability to secure capital and execute

desirable transitions.

Contemplating health economic outcomes and commercializationpathways, reimbursement value drivers have played an increasingrole in the completion of transactions, and affect payment termsin these deals.

Lessons learned from prior transactions have increased the levelof analysis required relating to reimbursement and market access.Investors now must understand whether:

• The technology is new and displaces current treatmentstandards, or represents minor modifications to established

technologies, and at what cost.

• The technology will change prescription patterns, and salespoints affecting commercialization of the product.

• The product or treatment approach will be meaningful in thefuture and time horizon for obsolescence.

• Incremental value associated with the treatment net of fully loaded costs.

• Market differentiators.• Reimbursement pathways.• The technology is sold anywhere in the world, has an established

revenue stream and CE Mark or U.S. FDA market approval.• A description of predicate technology, history or approval

pathways and regulatory expectations.

MCRA counselors frequently assist technology companies with theirplanning, while articulating pathways to market success. Relyingupon their practical experience, advisers work with clients to avoiderrors, mitigate commercial risks and maximize value for stakehold-ers affected by the technology. Avoidable errors for example mightinclude a hypothetical company that is considering the acquisitionof a technology.

Following acquisition, the company must complete the FDA approvalprocess, and facilitate publication of quality articles necessary to real-ize unit sales and revenue expectations. Were the evidence collected orarticles written that were not well married to the labeled indications,the value of the technology might well be reduced. Publications thatdo not follow labeled indications may not be used to support salesand are of little value to reimbursement pathways.

By contrast, a company that has considered reimbursement pathwaysduring its study design, collected economic outcomes during the trialand is able to demonstrate value to payors, prescribers and otherstakeholders is better positioned for future commercial success.

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TABLE 1: MUSCULOSKELETAL MEDICAL TECHNOLOGY TRANSACTION ILLUSTRATIONS (2008 – 2011)

Amount Paid Tr. 12 Year Acquired/Provider/Seller Acquirer/Receiver/Buyer ($ Millions) Mo. Rev.2011 Rikco International, LLC. DJO Global, Inc. $254.6 3.5x2010 ApaTech Ltd. Baxter International Inc. $330 5.5x2010 Lifecore Biomedical Landec Corporation $50 1.9x2010 Beijing Montagne Medical Device Co. Zimmer Holdings, Inc. $52 5.9x2010 Osteotech, Inc. Medtronic, Inc. $123 1.3x2009 Pegasus Biologics, Inc. Synovis Life Technologies, Inc. $12.1 1.3x2009 Ascent Healthcare Solutions, Inc. Stryker Corporation $525 4.8x2009 Finsbury Orthopaedics DePuy Orthopaedics N/A 1.8x2009 Fidia Advanced Biopolymers, s.r.l. Anika Therapeutics, Inc. $17 1.5x2008 Lifecore Biomedical Warburg Pincus $239 3.4x2008 INBONE Technologies, Inc. Wright Medical Group, Inc. $28 2.5x2008 LifeCell Corporation Kinetic Concepts, Inc. $1,700 8.5x2008 Eurocut Ltd. Sandvik Materials Technology $1.0 0.1x2008 Theken Spine, LLC Integra LifeSciences $200 5.9x2008 Abbott Spine Zimmer Holdings, Inc. $360 3.3x

Source: Viscogliosi Brothers, LLC (2011)



FLUID POLITICAL & PAYOR SYSTEMS AFFECTPLANNING, TIMING & VALUATIONSUnderstanding reimbursement trends within sub-markets alsoremains a critical function of due diligence. In today’s transactionalenvironment, closer scrutiny of the technology, procedure, com-parator treatment options and body of evidence may well affect val-uations, and may lead to more frequent use of milestone paymentsand risk sharing agreements between buyer and seller.

The economic burden associated with health care has placed a greatdeal of constraints upon the payor, provider and medical technolo-gy industry. An average U.S. health care average inflation rate of 6.2% far exceeds adjustments in wages, and exceeds productivity measures of the broader economy. Public and private institutions,therefore, have been required to curb health care costs through leg-islative and operational means. Such systemic and political changestherefore affect whether prospective patients will receive new orexisting technologies, providers will receive optimal reimbursementrates, and impact the rate and timing of product adoption.

Beginning in earnest through passage of the Medicare ModernizationAct of 2003, then through the Deficit Reduction Act of 2005, theU.S. Department of Health & Human Services began to transformMedicare, Medicaid, CHIP and other public programs. From passivepayor to active consumer, regulatory changes have evolved and con-sider proof that technologies are clinically safe, effective and providea durable treatment effect over time. Near-term changes will furtherrequire demonstration of cost effectiveness through production of value dossiers.

Continuing to evolve the U.S. health care system, the Affordable CareAct (ACA) was enacted in May 2010. This body of legislation contin-

ues to fall under scrutiny by the court systems and now may be chal-lenged through political shifts in power and appropriation. Investors,technology innovators and industry stakeholders have been affectedby the lack of clarity associated with legislative changes, and whetherthe ACA will be implemented in whole or in part.

Notwithstanding, organizations such as the Centers for Medicare &Medicaid Services (CMS), commercial carriers, hospital organiza-tions and other interested stakeholders have implemented transfor-mational approached to payment systems, coverage and patientaccess, as well as coding and administrative systems that affect prod-uct commercialization. For example, coverage policy processes now

demand higher levels of evidence. Whether the technology wasapproved through the PMA or 510(k) process has now gainedinterest by payors. And whether the technology class has showncomparable cost effectiveness and utility are now considered by insurance carriers, technology assessment organizations andguideline development companies.

Shifting the financial burden to the care provider, a re-emergenceof case rates, capitation and fee schedules have once again becomecommonplace. In response, facility administrators and prescribershave become more organized and aggressive in their procurementagreements with manufacturers, thereby affecting product pricing.

Provider consolidation, physician employment, and use of accountable care organizations now require the physician gate-keeper to become more selective in his prescription. While pay-ment penalties, such as those associated with hospital-acquiredconditions, make the health care provider a more active consumer,highly interested in clinical and economic impact as comparedwith alternative treatment options.

Likewise, commercial insurer coverage policies limit access to tech-nologies when the health plan perceives the body of evidence isinsufficient. Payor consolidation and transition to publicly tradedcompanies allows greater pressure to be applied to health careproviders. Deferrals to third party assessment and guideline devel-opment companies, coupled with a lack of transparency offered by commercial carriers, increase the burden placed upon the medicaltechnology company. While there are good examples of overcomingeach of these challenges, proper diligence must be based uponweighting the market, evaluating the technology, assessing alterna-tive treatment options, measuring the degree of professionalsupport and evidence base which has or may be developed.

Underlying each of these areas is the health economic and valuemessage required for product commercialization. Notwithstandingestablished coding, coverage or payment mechanisms that may enable product sales, market pressures now demand vigilance inorder to maintain favorable coding and payment pathways, tacticsto ensure future enabling pathways and support unit sales, as wellas the continuing demonstration of value to stakeholders.

Value in this context includes a keen understanding of recurringand non-recurring expenses, outcomes affecting meaningful clinicalsuccess and overall reduction in cost, pricing alternatives and athoughtful analyses showing risk avoidance. Comparable utility of the technology or intervention relative to other treatment optionshas also become a decision point affecting payor adoption, andshould be considered by the innovator (i.e. relative value to society in comparison with alternative treatment options for the same orsimilar medical condition).

To the degree U.S. stakeholders demand higher levels of evidence,affect net margins and are able to demonstrate risk mitigation, valuedossier’s prepared by technology innovators are a useful tool in thetransaction process.

May 2011

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SUCCESSFUL INNOVATORS ARTICULATEPATHWAYS TO COMMERCIAL SUCCESS

• Intellectual Property• Quality Systems• Manufacturing Systems

• Management Systems• Clinical Standards• Regulatory Pathways• US/OUS Reimbursement• HEOR Value Messaging



May 2011

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SHIFTING FOCUS IN TRANSACTIONS:A MORE NUANCED APPROACHWhile transactions in the past were seen as ways to strengthenproduct portfolios, corner markets and protect revenue streams,today’s acquirer appears more tactical in their placement of equity and acquisition. For example, investors appear now to requiregreater degrees of diligence prior to completing their transactions,to ensure clear regulatory and reimbursement pathways exist. Riskmitigation has become a cornerstone of transactions, with acquir-ers seeking stronger evidence to validate assumptions made by theseller, as well as a cogent plan to address market opportunities andpotential challenges.

Likewise, valuations are now influenced by product pricing relativeto market conditions, which must be rationalized through quality analysis using payment amounts and comparable cost of care assess-ments; unit sales projections validated through market access analy-ses; and the strength of clinical and health economic outcomesavailable through study or published within accessible literature.

KEY REIMBURSEMENT VALUE DRIVERSWhether considering equity placements, mergers, acquisitions orstrategic relationships, principles involved in any medical technology deal must consider the reimbursement environment, and potentialaffects upon patient access to the technology, payment rates andtheir influence upon pricing, mechanisms such as coding andwhether technologies may be considered within payor data systems,and how the use of the technology will affect the overall clinicaloutcomes and cost of care.

Key reimbursement value drivers used by MCRA consultants intheir diligence of technologies include a description of the product,indications for use and description of the associated procedure(s).

While seemingly simple questions, answers may dramatically affectwhether insurers will provide coverage for the technology, whetherCPT-4, ICD-9, ICD-10-PCS or HCPCS codes may be used for theprimary procedure(s), whether market projections will be basedupon labeled indications versus the hope of off-label sales, as wellas other factors impacted by the reimbursement landscape.

Other key areas of concern include substantive review of the reim-bursement landscape, publications associated with the treatmentoption, alternative treatments and underlying medical condition.Strategies that further education through publication and messag-ing, a careful and detailed review of studies completed (or inprocess), evaluation of reimbursement mechanisms deployed dur-ing the study, collection of meaningful clinical and health economicoutcomes, and quality management and compliance of the study.

Contemplating migration of service into alternative treatment sites,one must consider the location and whether reimbursement mech-anisms, such as codes, payment rates and coverage, enable patientaccess to alternative treatment sites. As procedures become morecommonplace, physicians may begin to consider lower acuities of care. In the absence of coverage or payment mechanisms, and if onedoes not consider regulatory requirements as to whether servicesmay be performed and reimbursed within these different treatmentlocations, sales volume and pricing may be adversely impacted.

For example, some procedures historically performed in the acutecare setting are being performed by the experienced surgeon withinthe hospital outpatient or freestanding ambulatory surgical center.Using national average allowable payment rates as a proxy for reim-bursement, transitioning from a favorable MS-DRG to an APC pay-ment rate may not contemplate the fully loaded costs associatedwith the procedure and associated technology costs. Transitioningto in-office procedures may also provide greater patient access andefficiencies, however product pricing and payor coverage must beconsidered to ensure the feasibility of the technology.

Technology adoption by the payor and clinical communities mustalso be well considered. Well established and proven technologies,such as disc replacement and interdiscal ablation therapies, continueto receive cool reception from payors. Conversely, emerging tech-nologies suffer from a lack of use or published experience, thereby demanding execution of plans that consider publication of out-comes and physician experience, patient selection and target popu-lations. Whether emerging treatment alternatives or standard of care, all medical device, biologics and pharmaceuticals must now be

supported by dossiers that clearly demonstrate net value. Preferably,value is comparable to alternative treatment options and reflectsactual experience rather than theoretical assumption.

DUE DILIGENCE CONSIDERATIONS• Strategic Reimbursement Plan• Product Description & Indications for Use• Technique Guides• Comparable Treatment Alternatives• Coding for Subject Technology• Coding for Alternative Treatments• Future Coding Change Considerations• Provider Payment Rates• Treatment Migration by POS• Reimbursement Landscape & Projections• Insurance Coverage Guidelines• Technology Assessments• Clinical Trial Management Issues• Literature Review Assessment• Health Economic Publications• Value Messaging Tools & Models

• Publication Portfolio Strategies• Payor Education & Initiatives• Clinical Community Adoption Statements• Treatment Guidelines• Local Use Protocols• Sales Projections by Place of Service• Projections by Target Markets• Product Pricing• Reimbursement Guides & Tools• Strategic Contracting Considerations



MITIGATING RISK WHILE CREATING VALUE MESSAGINGSUPPORTING PRODUCT ADOPTION AND UNIT SALESRisk is best mitigated through the completion of quality studies,untarnished by bias, and supported by the clinical community.Greater weight is afforded when technologies are reviewed prospec-tively, as compared with proper controls, through the rigors of apre-market approval (PMA) process. However, such studies aretime consuming and costly. Therefore, the creation of adjunctiveanalyses, value models and publications describing the patient pop-ulation for which the technology is indicated, utility value and netbenefits, will lessen reimbursement risks while supporting productadoption strategies.

Risk may be further reduced through the development and execu-tion of a reasoned Reimbursement Plan, contemplating methodsaffecting coding, coverage, payment, pricing and market adoption.That is, understanding mechanisms associated with code develop-ment, evidence development, clinical trial management, compliance,payor education, prescriber and provider systems administrationmarket trends should be considered when developing strategies.

Detailed planning based upon experience with these issues will helpvalidate unit sales and pricing projections, and establish clear objec-tives relating to payor adoption, development of new codes orassimilation within established coding constructs and how best tointegrate technologies within treatment algorithms thereby securingmarket share, while creating reimbursement barriers to competingtreatments which too affect company value.

Positioning technologies with prescribers through sales assets havebeen a hallmark within the medical technology market space. Giveneconomic and political trends discussed above, the technology inno-vator must now consider value messaging designed to educate abroader population of stakeholders including prescribers, hospital

procurement officers, payors, guideline development companies,employers, consumers and others. Value messaging may includesponsorship of major health economic outcome studies, outcomesof which are succinctly delivered to stakeholders. Value messagingmay also come in the form of white papers, presentations, market-ing briefs, interactive models, and through a host of other mediums.Value messages may be designed to educate stakeholders about thetechnology, differentiation from alternative treatment options, com-parable clinical, cost and economic outcomes, and avoidance of risk.

CONCLUSIONSTransactions continue to develop within the medical technology space, albeit at a slower pace than in previous years. As access to

equity and exits are becoming more difficult, innovators are encour-aged to prepare well-organized plans that clearly show reimburse-ment pathways and strategies necessary to support projectionsoffered in a prospectus.

Strengthening one’s position, the innovator is encouraged to considerunderlying value drivers which enable market access, affect unit salesand pricing models. Development and execution of reimbursementstrategies, health economic outcomes through prospective or retro-spective studies, creating value messaging and models, while demon-strating risk mitigation and avoidance will strengthen presentationsto possible investors.

As suitors become more cautious about their equity placements andacquisitions, innovators may wish to consider whether future pay-ments may be linked to reimbursement milestones, and whetherstrategies may be reasonably executed to support transaction terms.Doing so, the technology innovator may well position the company or technology in a favorable position for investment and futurecommercial success of the technology.

MCRA is a full-service consulting firm, offering strategic counseland management support services to emerging and well-establishedmedical technology companies, as well as innovators, investors andother interested stakeholders. For more information, please contactMr. Schneider at [email protected] or call (202) 552-5800.

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May 2011

TAILORED COMMUNICATIONS: Value Messaging Illustrations

Prescribers • Clinical & Health Economic Outcomes• Actual Cost of Care Analyses

Facilities • Productivity Models• Efficiency ModelsPayors • Clinical Risk Avoidance

• Financial Risk AvoidanceRegulators • Value Analyses

• Literature ReviewsInvestors • Comparable Utility Values

ABOUT THE AUTHOR

Mr. Schneider serves as the Vice President of Global HealthEconomics, Reimbursement & Public Policy for the Washington,DC-based consulting firm Musculoskeletal Clinical Regulatory Advisers, LLC.

MCRA consultants provide counsel and due diligence servicesto large cap and emerging technology companies, as well asinvestment firms.

For further information about this white paper or servicesoffered by MCRA, please contact Mr. Schneider directly by calling (202) 552-5800 or through electronic mail [email protected]. Please send correspondence to1331 H Street NW, 12th Floor, Washington, DC 20005.



Regulatory • Clinical • Intellectual Property • Reimbursement

MCRA is not a law rm and does not provide legal advice to its clients. MCRA recommends that its clients consult an attorney to discuss any legal issuesthat relate to MCRA’s services.

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usculoskeletal Clinical Regulatory Advisers, LLC is the leading neuro-musculoskeletal/orthopaedic consulting rm assisting established and emerging companies in the developmentand commercialization of their technologies. MCRA’s consultants are industry leaders whosupport Clinical, Regulatory, Quality Assurance, Reimbursement, Manufacturing, HealthcareCompliance, and Intellectual Property initiatives. MCRA’s integration of these key value creatinginitiatives, as well as its focused specialization, creates unparalleled expertise to its clientele.

reimbursement considerations affecting medical technology transactions_may2011

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