Life Science Reimbursement and Policy Frontiers

Heroic Interventions: Misallocation of Healthcare Resources?

2009-11-09T15:49:00.002-05:00

On November 3, Syncardia Systems, Inc. announced a milestone surgery performed in May at the Cleveland Clinic: the first use of a total artificial heart to support a patient to a dual heart and liver transplant. The story is heroic and the technical achievement is striking. The patient, Dr. Michael Zabell, had been admitted to the hospital to wait for a heart transplant on August 18, 2008. By January 8, 2009 (143 days later) his heart was too weak to sustain him, and his liver was failing; doctors needed to implant Syncardia’s temporary total artificial heart to keep him alive until a matching heart and liver could be found. One hundred and thirteen days later, on May 1, 2009, Dr. Zabell received a donor heart and liver in a 14 hour surgery involving two different transplant teams. According to Syncardia, “Today, Zabell is enjoying life at home with his wife and two daughters.”

Is there a problem in this story? One of the leading tertiary care centers in the country used a bed for 256 days (plus unspecified post-transplant time), at a cost certainly well over $1 million, to bridge a patient to a dual-organ transplant. We might reasonably ask “Why?”, and the answer might be troubling. They did it because they could, and because there was something in it for the device company, the medical team, and the clinic. This achievement was about reputation and public perception: being first. It was not in the context of a clinical trial that could lead to further improvements in artificial heart technology or breakthroughs in surgical technique. It did not likely involve “saving” a donor heart that might otherwise have been wasted – there are far more candidates for transplant than there are organs.

Dr. Zabell, of course, appears to have benefitted as well – although we know nothing about his quality of life, medical traumas, course of care, or state of mind during those 8 months of pre-transplant hospitalization and his post-transplant course. Nor do we know anything meaningful about his post-discharge quality of life: there is a wide range of conditions encompassed by “enjoying life at home with ... wife and family.” It may seem small-minded to raise objections. This is, of course, because the patient has been named – he is a real person, quoted in Syncardia's press release with warm words about his doctors ("Dr. Smedira is not only an outstanding surgeon but he’s really a wonderful guy. Cleveland Clinic has an outstanding group of surgeons, physicians and hospital staff, including my cardiologist Dr. Starling. I can’t say enough about the care.". The technical and logistical achievement has been humanized.

But the information that might allow us to make an objective evaluation of the wisdom of the procedure has been withheld. We know very little right now about the details of the case. In addition to the issues I’ve already mentioned, it would be interesting to know why the patient was never a candidate for discharge home with an implantable LVAD, why he was selected as a candidate for the Syncardia heart, why and when his liver function deteriorated so significantly, and how the costs of the case were covered. That information is, of course, personal and sensitive; we can’t demand it now that we know Dr. Zabell’s name, and that is at it should be. But there was a choice: name the patient and withhold the substance; or maintain patient confidentiality and detail the clinical circumstances and decision processes. The decision made reveals a great deal about the motivations of the decision makers.

Some will argue that this case exemplifies what is great in American medicine – the constant striving to do what could not previously be done. Others will see it as the worst – a clear example of our intoxication with the heroic, leading to misallocation of scarce resources. But it should not be seen in isolation. The amounts we spend on end of life care dwarf those of any other country. Some increasingly common practices – chronic hemodialysis, requiring thrice weekly ambulance transport to an outpatient clinic for irreversibly bed-bound and cognitively compromised elders age 85 and over, for example – are indefensible in social policy and/or pharmacoeconomic terms.

A modest proposal for addressing this general problem was broached this summer – Medicare coverage of end of life counseling. The resulting political firestorm – cynical as it may have been – likely took the idea off the action agenda for some years. We just may not be grown up enough to deal in a reasonably rational and humane way with a vexing problem that accounts for a meaningful portion of our excess medical spending.

Sequenom data debacle will have systemic effects: Dealing with Federal agencies just got harder

2009-10-08T14:39:00.003-04:00

The ongoing data integrity scandal at Sequenom is very bad news for anyone seeking FDA clearance or insurer coverage for an innovative medical technology or pharmaceutical. For all the safeguards, system controls and audits that are part of a well-controlled and maintained clinical data system, the entire edifice still relies upon faith – the faith of government agencies, insurers, service providers, physicians and patients – in the essential integrity of the clinical data reported by companies and clinical trial sponsors.

Here is the unfolding story. Sequenom is a publicly-traded San Diego based genetic diagnostics company that had been a stock market darling on account of its late first trimester maternal blood test for Trisomy (Downs Syndrome). The appeal of the test rests in its ability to provide a definitive diagnosis of Downs Syndrome earlier in the pregnancy than is otherwise possible and without the need for amniocentesis (with its attendant risks). Sequenom’s shares were being watched closely by the analyst community, and it share price peaked at @ $25 on a January 28, 2009 Press Release and Investors’ Teleconference that trumpeted new clinical data demonstrating a 100% positive predictive value and a 99.9% negative predictive value for the Downs Syndrome test.

An April 29, 2009 Sequenom press release announced a delay in the expected June launch of the test, on account of “discovery by company officials of employee mishandling of R&D test data and results.” The share price plummeted to < $3.00. On September 28, the company released the results of an investigation by independent members of the Board, which concluded that none of the previously released data on the test could be relied upon, and announced the firing of the CEO/President, the Senior VP for Research and Development, the CFO, one other officer, and three other employees. An October 5 regulatory filing disclosed that Sequenom’s management had met with representatives of the U.S. Attorney's Office, the Securities and Exchange Commission, and the Federal Bureau of Investigations. Shares are trading at @ $3.37 as I write.

We don’t as yet know exactly what happened inside Sequenom, whether there was intent to deceive or simply a breakdown in controls, and if there was intent whether it originated from the top, or how and by whom the data errors were discovered. We do know that corrupt data were disseminated to the public and to regulatory agencies, that a lot of money was lost by investors, and that the test was close to launch. Had the company not stepped forward (and there is as yet no information as to how the problem was discovered and by whom) when it did, the test would have been covered by most insurers and widely and rapidly adopted – all on the basis of flawed or falsified data.

The medical device industry has for years urged CMS to consider “external data” – data from sources other than the agency’s own data files, in calculating payment rates and/or in making coverage determinations for various services. After all, some new technologies are used earlier in non-Medicare patients, and there can be substantial and relevant data from external sources that can illuminate service costs and impacts before there is a large body of Medicare data. Openness to all data sources would, the argument goes, yield better and faster decisions than reliance solely on Medicare data. CMS has generally responded that it is not sure it can rely upon data that are externally generated and controlled – it simply doesn’t trust such data. In recent years there has been a bit more openness – but the Sequenom debacle can only heighten distrust and set back recent progress.

Waiting for Obama ... and the Return of Common Sense and Political Civility

2009-09-08T21:25:00.004-04:00

I'm writing on Tuesday night, a bit less than 24 hours before President Obama's apparently critical speech to Congress - and the nation - on healthcare reform, and I'm wondering what bizarre new disease has infected the body politic and brought us to the present sad state of affairs. I refer, of course, to the poverty of our political debate.

Healthcare is front and center, but it is only one of many examples. The uproar over "death panels" wasn't really about healthcare at all, but a deep and fundamental antipathy toward the institutions of government. Elected members of the
Congress refuse, in surprising numbers, to squelch the "birthers" bizarre claim that the President wasn't born were he was born. Most recently, the President of the United States has been excoriated for having the temerity to use the start of the school year as the occasion for an educational pep talk to students. It appears that if you disagree with someone today, it is perfectly okay - even de rigeur - to use any unpleasant label you like (nazi, socialist, communist, fascist) to characterize the other side. And this is going on not just in the internet and cable fringes of respectability, but also in the institution that laughably calls itself "the world's greatest deliberative body." That claim was proved false years ago, and no one is doing much to improve things.

The fact that I've identified primarily right of center and Republican miscreants shouldn't be taken as a partisan position. The Democrats are in the majority, so they are the targets right now. I'm perfectly convinced that Democrats and left-wing bloggers would be just as embarrassingly irrational and rhetorically excessive if they were on the outs and on the attack.

Returning to healthcare: Listening to the debate, such as it is, a visitor would never see that there is a broad consensus on the nature of the underlying problems in our health care system, and pretty fundamental agreement on about 85% of the content of the proposals generated by the various Congressional committees. Our institutions are designed, among other things, to prevent significant action when there is no clear majority sentiment. But if the Congress cannot translate the current level of health policy agreement into legislation, it is is terminally disfunctional. and if Obama can't cut through the silliness, he is less politically astute than I ever thought.

So I'm waiting - to see how the speech will go; to see if there is anything like a return to reason and responsibility; to see if in a little while I can go back to puzzling through interesting questions of reimbursement and business strategy.

Healthcare Reform: What's Missing

2009-08-18T13:04:00.003-04:00

It is the middle of August, the Public Option is on life support, and it won't be getting End of Life Counseling. Comparative Effectiveness Research is alive but may have to operate with one hand tied behind its back. But the healthcare reform effort continues to move forward, bloody and only slightly bowed by a combination of special interests and irrational fears. And there are a good number of important and constructive changes that are likely to be enacted and which will contribute to better quality and control of costs: near universal coverage; more insurance sector competition (likely in the form of not for profit cooperatives); elimination of pre-existing condition exclusions; mandated minimum coverage requirements including preventive services; electronic health records; etc.

The politics of healthcare reform in 2009 have confirmed, not for the first time and certainly not for the last, something I used to stress to my political science students 30 years ago: the U.S. political system isn't designed to do major programmatic reform; we do incremental change, usually in small steps. That is often a good thing, keeping both conflict and risk dampened. It can be a problem in crises that can only be respolved by major and rapid directional change. Time will tell whether we are doing enough fast enough to correct the faults that are increasingly apparent in our healthcare delivery and financing systems.

I can, however, point to at least two possible reforms that are consistent with the expressed goals of the reform effort, that could make a substantial contribution to quality improvement and cost control, but that are not being considered: payment for clinical decision support systems; and capitation to implement pay-for-performance principles. In different ways, each of these measures would address flaws in the dominant fee-for-service healthcare payment system. In diferent ways, their challenge to the fee-for-service model makes them politically difficult. I'll address each separately.

Clinical decision support systems. Every day our store of data linking linking personal physical and/or genetic characteristics and diagnostic test results to the appropriateness and effectiveness of therapeutic options grows. In the near future, with widespread use of electronic health recorda and broadened funding for comparative effectiveness research, the rate of accretion of new dat will increase dramatically. There is more to know, more information to process and incorporate into clinical practice, than any one can relly keep up with. One solution to this information overload is the ongoing development and implementation of sophisticated clinical decision support systems - computerized models that provide practitioners with the data management and processing tools they need to find the right therapy for the right patient at the right time - the fundamental goal of the emerging personalized medicine movement, the necessary mantra for giving evey patient the best care we know how to provide. Well designed and maintained clinical decision support systems will assure that therapy prescription is not one size fits all, that comparative effectiveness findings will not be used to dictate the same treatment for everyone, and that every clinician has effective and efficient access to the most recent research and clinical practice findings that bear on the patient before them.

Broadly implemented, such systems would yield enormous quality improvement and cost reduction. But they will also be quite expensive to develop, distribute and maintain. The investment would yield a very high payback to society ... but the investment needs to be made, and the tragic fact is that our current healthcare financing system provides no obvious mechanism for a payback to a private investor (or group). There is currently no way to get paid for using a decision support system, and therefore no way for a physician or group or hospital to recoup the capital and maintenance costs associated with using it. In the context of a fee-for-service system, the upfront cost of installation for a non-revenue-producing tool would be prohibitive; and that means that the upfront cost of development would also be prohibitive. Maybe some extraordinarily wealthy foundation would step up to the development cost; still no implementation funding. The government could afford to fund development, and perhaps some implementation - but if end of life counseling raised fears of mandatory euthenasia, what would be the response to government-developed treatment protocols imbedded in a computerized decision (support) system? The political hurdle is daunting.

Here is an idea. Any physician, group or institutional provider acquiring, implementing and using a "certified" clinical decision support system would receive 105% (I don't know if that is the right number, but you get the idea) of the established fee-for-service payment amount for every service billed. The end user has a rationale for buying the system; the potential develop has a customer base willing to pay .... The system savings would be fa greater than the 5%, and quality would be greatly enhanced. Do it all in the private sector. It might just work.

Capitation. Sceptics say we tried capitation in the eighties and it failed; the people rejected the capitated HMO model. The unconvinced say that the capitation model was shanghaied by the HMOs' cost accountants, who found it easier to make money by squeezing resources out than by actually managing care. Now we talk about pay-for-performance, and implement it by imposing penalties for failure to achieve quantitative quality targets - a step in the right direction, but a mixed message at best.

Once again, Massachusetts may lead the way on an important healthcare reform dimension. It is unlikely to be by implementing a major systemic change, but Mass. has already developed one feasible model for implementing near-universal capitation without major disruption to the insurance coverage system. The work was done by the Special Commission on the Healthcare Payment System, a body created by the General Court in Section 44 of Chapter 305 of the Acts of 2008, and is described in the Commission's Recommendations issued July 16, 2009. The report was referenced in news articles when issued, and has receded from view as the national reform debate heated up. Whether it will surface again as a serious proposal remains to be seen.

The Special Commission's proposal, based primarily on work done by social policy research firm Mathematica, calls for insurers to make capitated payments, risk-adjusted in order to prevent selection bias, to Accountable Care Organizations (ACOs). ACOs, which could take any number of forms, would then be responsible for providing all of the necessary care enrollees require, either directly or through contracts with providers. The critical aspect of the plan is that there would be a strong incentive to provide preventive care and early intervention in order to avoid the high cost associated with unnecessary acute episodes of care, equally strong incentives to design and implement more cost-effective and less waseful or duplicative, models for the delivery of care. Patients would retain choice, but might have to pay a premium for "out of network" providers.

There are problems with the Special Commission's recommendations. For one thing, the system would need to encompass both public and private payers, and that would require a statewide Medicare waiver. For another, reconciling a major state model change with the substantial national reforms likely to be enacted will be an enormous challenge in cordination. But Massachusetts has at the very least generated a creative and plausible model for changing the perverse incentives of the fee-for-service health payment system without destroying the underlying structure of our health insurance system. It is a viable model for achieving many of the goals of healthcare reform that are well recognized but poorly addressed in the proposals under review by the Congress.

Medicare's Inpatient New Technology Add-on: The Trials of InfraReDx, the Triumph of Spiration

2009-08-04T15:29:00.004-04:00

The problem of adequate payment for innovative new technologies has from the beginning been a difficult one for the Medicare Inpatient Prospective Payment System (IPPS) for acute care hospitals. Since cases are assigned to DRGs on the basis of diagnosis and/or surgical procedure, and payment for each DRG is based primarily upon historical cost data, the system from the outset had no mechanism to properly recognize the cost of newly introduced technologies that improved outcomes but entailed incremental spending.

Effective FY 2002, Medicare implemented a mechanism - the Inpatient New Technology Add-on - designed to address this issue (see 66 CFR 46917). Under the new program, if a qualifying new technology added substantial cost, Medicare payment to the hospital would be the applicable DRG payment plus 50% of the cost attributable to the new technology. The Program held, over hospital and medtech industry protest, that 50% payment struck a good balance between a financial impediment to technology adoption and a blank check. Besides, the add-on was simply a temporary mechanism, allowing reasonable adoption until the cost of the technology could be reflected in the standard calculation of payment for the DRG. The most notable observations from 9 years of experience with the add-on (including decisions just announced for FY 2010) are the surprisingly small number of technologies that have applied for the extra payment, how few of the applications have been successful, and how minor an impediment the 50% limit on incremental payment has been. We'll use two applicants for FY 2010 - InfraReDx's Lipiscan vulnerable plaque diagnostic and Spiration's IBV intrabronchial valve system - to document the process and the problem.

CMS has clearly articulated 3 standards that must be met for new tech add-on qualification:

Newness - the first commercial distribution of the technology must be sufficiently recent so that cost of the technology is not reflected in the data used to calculate DRG relative weights; effectively, this means first commercial introduction less than 2 years prior to application; commercial introduction is the FDA clearance date, unless there is some reason distribution was delayed;
Cost - the incremental cost attributable to the new technology must bring the charge per case above the lesser of a) 1.75 times the mean standardized charge (MSC) for the DRG or b) the MSC for the DRG + 75% of one standard deviation above the MSC; CMS annually publishes the threshold amount for each DRG; if a technology would be used for patients in multiple DRGs a volume-weighted MSC is calculated; and
Substantial clinical improvement - there must be evidence that the new technology provides real clinical benefits as compared to existing technologies or services.

Only one technology qualified for the new technology add-on for FY 2009 - the Syncardia CardioWest temporary total artificial heart. On its face, the CardioWest device is anything but new: a direct descendant of the Jarvik 7 heart, CardioWest has been used as a bridge to transplant with FDA approval since October 2004 (after use in clinical trials for many years). But because artificial hearts were denied Medicare coverage until a coverage policy revision in May 2008, data on the cost of the CardioWest has never found its way into calculation of DRG payment rates. Consequently, Syncardia's application for an add-on was accepted for FY 2009, and has now been extended to FY 2010. It will likely qualify for a third and final year of add-on payments in 2011. The case for meeting the cost threshold was ironclad, and the CardioWest does inarguably succssfully bridge some patients to transplant who have no other therapeutic option.

Only two new add-on applications were pursued to the end of the process for FY 2010 (four applications referenced in the NPRM for FY 2010 were withdrawn for various reasons - different forms of "inevitable rejection" - before the Final Rule was completed). In the case of the InfraReDx Lipiscan, CMS had in the NPRM questioned whether the device met any of the three qualifying criteria, and requested public comment on all three. The challenge re: the "newness" criterion was most interesting. The Lipiscan was cleared for marketing in 2008 under the 510k route, referencing as predicate an earlier InfraReDx technology first cleared, for a different indication, in 2006. How, CMS asked, could a device be claimed to be "substantially equivalent" to existing technology in an application to one agency but new and innovative in an application to another. Further, CMS quoted FDA's 510k approval letter to make its point:

“The LipiScan Coronary Imaging System utilizes the same basic catheter design as the predicate, the InfraReDx NIR Imaging System (June 23, 2006). These devices have a similar intended use, use the same operating principal, incorporate the same basic catheter design, have the same shelf life, and are packaged using the same materials and processes. The modifications from the lnfraReDx NIR Imaging System to the LipiScan Coronary Imaging System are the improved
catheter design, improved user interface (including PBR and console), and the additional
testing required to support an expanded indication for use.”

Was the new indication for use sufficient to establish Lipiscan as "new" for add-on payment purposes? The answer seemed to be "no", but the question was left open for public comment. And InfraReDx ultimately had a compelling comment to make - the predicate device had never been distributed because it had commercially unacceptable operating problems - i.e. it didn't work. No one had ever bought one, so no cost for it had ever been reflected in DRG weights. An interesting inversion: if the predicate device had been clinically and operationally acceptable, the Lipiscan would have failed the newness criterion.

This one victory was not sufficient to carry the day. Nor was CMS' eventual agreement, after much parsing of numbers, that LipiScan met the cost criterion. The sticking point became substantial clinical improvement. InfraReDx relied on the fact that it had demonstrated a diagnostic capability - the identification of vlulnerable plaque - that was wholly original, and that the use of that diagnostic capability would allow better identification of risks and targeting of therapeutic interventions. It even submitted an opinion from counsel arguing (in essence) that under the applicable statute "better diagnosis" constituted "clinical benefit". This may have been a tactical error. CMS acknowledged the unique diagnostic capability of Lipiscan, but concluded that there was no documented clinical evidence to demonstrate, or any consensus among clinicians, that the diagnostic - whatever its virtues - produced improved outcomes. That, the agency insisted, was their standard: application denied.

On the newness criterion, the Spiration IBV valve system confronted a problem opposite to that of both the Lipiscan and the CardioWest heart. The IBV was approved by FDA under the Humanitarian Device Exemption (HDE) mechanism in 2008. There was now comparable prior product on the market. But use under an HDE requires approval by each user hosital's IRB, and at publication of the NPRM no IRB approvals had yet been received. As a device cannot be new until it receives final regulatory approval, qualification for the add-on depended upon receipt of IRB approval before publication of the Final Rule for FY 2010. Happily, Spiration was able to document initial IRB approval on March 12, 2009, and that was recognized by CMS as the initial commercial distribution date for the IBV System.

Spiration's challenge with regard to substantial clinical benefit was closely related to the IBV's HDE approval route. An HDE requires demonstration of "safety and potential benefit", far less than the demonstration of safety and effectiveness required by the PMA process. HDEs are typically granted based on very limited clinical trials - in Spiration's case, fewer than 10 patients. There was no randomized clinical trial required for HDE approval, and no data from a randomized trial available for review. The NPRM questioned whether there was evidence of cliical benefit and requested public comment.

The comment received was universally positive. Every commenter made essentially the same case from personl experience: postoperative air leaks from pulmonary surgery are extremely dificult to treat, clinically problemmatic, and expensive; the experience with the IBV was positive; the system appeared to close air leaks effectively. CMS, impressed by the consistency of comments from the clinical community, accepted the propositio being argued. The final rule makes it clear that the agency isn't fully and finally convinced, but that the argument is strong enough to carry the day: application approved.

Both the Lipiscan and the IBV System ultimately were judged to qualify under the cost criterion, but in bolth cases the process was laborious. One reason was that both technologies could be used on patient swho fell into a large number of different DRGs, and the method for calculating a weighted standardized cost across mltiple DRGs is convoluted. Furthermore, there is a lot of moving back and forth between costs and charges required in the calculation; every time charge data must be converted to costs, or cost data must be converted to charges, there are statistical manipulations that are clear to CMS but not to many outside the agency. Professional help is essential here. But a further interesting problem was that both InfraReDx and Spiration refused to provide information on the selling price of their devices - even though that information would have simplified the calculations enormously and (in both of these cases) guaranteed meeting the criterion. Spiration went even further to protect proprietary data: it would not give CMS data on the number of valves used in each procedure (the number can vary depending on patient-specific needs), necessitating an enormously convoluted and potentially misleading process of inference.

CardioNet: Reimbursement at the heart of the matter

2009-07-15T21:55:00.004-04:00

It has not been a good year for investors in 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 stock closed on July 14 at $6.20, down 83% from it 52 week high of $35.89. For the second half of 2009, the company’s share price mirrored the broader market. In Q1 of 2009 it outperformed the market, returning by late April to the level it had enjoyed in mid-July 2008. But the trend turned in May; CardioNet shares have plummeted in the last 2 ½ 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 made specific corporate strategy decisions that increased its exposure to reimbursement risk.

Let’s look at the background and review some pertinent history. CardioNet provides Mobile Cardiac Outpatient Telemetry (MCOT) 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 that have not been adequately evaluated by those other techniques.

Diagnostic tests like MCOT are represented by two CPT codes. One code identifies the Professional Component (PC) of the test – the physician’s interpretation of the test result as it relates to the individual patient; the second code identifies the Technical Component (TC) of the test – in this case the resources required to provide and conduct the test and generate a test report (the MCOT equipment, the monitoring center with its technology and staff, the computerized analysis of data, the generation of a report to the physician, etc.) CardioNet operates as a physiological testing laboratory – monitoring patients nationwide from its base in Pennsylvania and billing insurers for the TC of the test; the referring physician bills for the PC, which is small compared to the TC.

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 a single regional Medicare Part B carrier, Highmark Medicare Services. 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 PC and CPT 93229 for the TC – effective January, 2009, and a carrier-determined reimbursement rate for the TC of $1,123.07.

CardioNet had gone public earlier in 2008, and the analyst community is extremely sensitive to reimbursement issues, particularly for single product companies where one reimbursement decision can be make-or-break. That sensitivity can sometimes take the form of rumor-fed speculation, often resulting in share price instability. CardioNet was not immune to this phenomenon, and on April 28, 2009 the company issued a press release to refute analyst 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 has been nothing but bad news since. On June 30, a press release announced a downward revision of guidance for 2009 based on lower than expected commercial reimbursement rates. Analyst concern over Medicare reimbursement was heightened by this news, and confirmed in a July 12 CardioNet announcement of a revised Highmark TC payment rate effective September 1 – a more than 30% reduction to $754. 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 ; a failure by the target to comply with conditions of the agreement were cited as the reason. The jilted acquisition target, BioTel, Inc., disagreed vehemently and is weighing its legal options. It is difficult to dismiss the reimbursement catastrophe as an underlying cause.
We cannot yet know whether CardioNet did the best possible job of reimbursement advocacy, why it didn’t prevail, or why it was apparently blindsided by Highmark’s action. So we can’t, from outside the company, determine which of the following three possible scenarios best describes this case:

Weak or ineffective advocacy for a case that ought to have prevailed on its objective merits;
An objectively weak case that could not prevail on its merits; or
A payer decision that was in fact arbitrary, or based on factors other than objective analysis of costs.

What we can know is that CardioNet made a number of conscious business strategy decisions that, whether or not they were dictated by compelling business reasons, increased its reimbursement jeopardy.

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. Had operations been regionalized, there would have been a different contractor for each region. A single contractor would then have impacted only a portion of the Medicare business, not all of it. 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.

If multiple carriers were handling CardioNet’s claims, Medicare would have had an incentive to set reimbursement at a single nationally-determined level, especially if there were regional disparities that could not be supported by differential costs. But a single explicitly national rate established centrally 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. Furthermore, local carriers do not have substantial payment policy staffs wide broad experience in understanding cost profiles and operating requirements across many different types of provider organization; the sophistication of their decision processes varies widely and cannot be relied on.

Second, CardioNet chose to operate 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, there is no such documentation, as there is no arms-length transaction between technology supplier and testing facility. Under these circumstances, Medicare invokes special accounting rules applicable to “related party transactions”; the relevant aspect of those rules is that transfers between related parties occur at the cost of manufacture or acquisition – no margin (markup) is recognized. Thus, to the extent CardioNet wants to provide real cost data, Medicare will calculate the cost of providing the TC without allowing 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 there was a more conservative choice available: sell the technology to testing facilities until reimbursement was clearly established, and 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. When things were going well, it seemed as if CardioNet management was on top of the key issues; when they went sour, management appeared to be caught unaware and unprepared, having oversold financial growth and understated risk.

Will Comparative Effectiveness Research lead to Rationing?

2009-06-25T19:36:00.007-04:00

Senators Ron Kyl (R-AZ) and Mitch McConnell (R-KY) recently introduced the ''Preserving Access to Targeted, Individualized, and Effective New Treatments and Services Act of 2009" (S1259), a legislative proposal that Sen. Kyl's office said was designed to prevent comparative effectiveness research (CER) from being used to ration healthcare. The economic stimulus package passed earlier this year contained $1.1 Billion for such research; the House Democrats' draft health reform plan now being debated provides an additional $100 Million per year for the next three years for CER; the research is a fundamental building block of the President's approach to health reform. Are we inviting rationing of health care when we support the reform effort?

A few Republican Senators aren't the only ones nervous about CER. AdvaMed, the leading medical device industry trade association, is cautiously supportive, so long as CER is not "used by Medicare, insurance companies, or other public or private payers to deny coverage". PhRMA is worried that CER could take treatment decisionmaking out of the hands of physicians and patients. BIO "is concerned that comparative effectiveness information may be used strictly as a means to contain costs, rather than deliver health care value by improving patient health outcomes". None of these associations uses the dreaded R word, but their concern is clear - in the wrong hands (i.e. the government's hands), CER could be used to justify insurers' decisions not to pay for services and technologies doctors want to prescribe and companies want to sell. And isn't that rationing?

Well ... No, not by any rational use of the term. Formally, rationing is the limitation of the amount of some scarce commodity that is available to an individual, family or community - think about food or gas rationing during WW II. Rationing can be overt and explicit policy in response to unavoidable supply limitations, as in those examples, or it can be indirect, through the purposeful limitation of supply - think about planned limitations on kidney dialysis treatment capacity in Britain until just a few years ago, or waiting lists for artificial hip procedures in Canada on account of conscious budget allocation decisions. Any purposeful management of a supply deficit for a good or service that people want and need can fairly be characterized as rationing. We've typically not done anything like that in healthcare in the United States, and CER doesn't open the door to it. CER won't artificially limit the supply of technologies or services; CER won't limit the amount of healthcare, either segmentally or in toto, available to individuals; CER won't arbitrarily impose fixed budget ceilings that translate into service shortages.

What CER does promise to do is to gather reliable information about the relative merits of different treatment options for particular classes of patients under defined circumstances. The information would be used in different ways by different health system stakeholders. It is pretty universally agreed that:

doctors would and should use CER findings to make better therapy choices or recommendations to patients; and
patients would and should use CER findings to more effectively evaluate physicians' advice and to be better informed participants in decisionmaking about their healthcare.

What seems to be in dispute is whether health insurers should be allowed to use CER findings to define the circumstances under which they will or will not pay for specified technologies or services. Let's look at the language of S1259:

Purpose:Notwithstanding any other provision of law, the Secretary of Health and Human Services--
(1) shall not use data obtained from the conduct of comparative effectiveness research, including such research that is conducted or supported using funds appropriated under the American Recovery and Reinvestment Act of 2009 (Public Law 111-5), to deny coverage of an item or service under a Federal health care program (as defined in section 1128B(f) of the Social Security Act (42 U.S.C. 1320a-7b(f))).

This is pretty remarkable. Medicare and Medicaid, faced with data from a CER study indicating that Treatment A is clearly superior to Treatment B for a particular clinical problem for all patient groups under all conditions studied, would be prohibited from denying coverage to the clearly inferior treatment. I'll say it again differently: Medicare would be required by law to cover and pay for a treatment option known to be inferior because the data establishing inferiority were collected in a CER study.

This is nonsense. We want insurers, including Medicare and Medicaid, to use the best available data to cover what works and not cover what doesn't. And that is exactly what Medicare and every private insurer has been doing for years. The coverage analyses and decisions, often with detailed documentation of the determinants of the decision, are available online for anyone to review: when and where Medicare will pay for an implantable left ventricular assist device; under what circumstances Aetna will or will not pay for continuous mobile cardiac monitoring to help diagnose cardiac rhythm disorders; etc. Making these decisions is what insurers do, and they would be irresponsible - with our well-being as well as with our tax monies or premium payments - if they didn't use the best available information to make them.

Stakeholders potentially adversely (financially) affected by insurance coverage decisions have historically had recourse to two arguments: that the insurers are "interfering with the practice of medicine" (sometimes transposed into "interfering with the sanctity of the physician-patient relationship"); or that they are rationing care. As we've come to understand that docors are as human, fallible and self-interested as the rest of us, the first argument has lost its bite. Now, those who see wide dissemination of better information as a threat are left to play the rationing card. Get below the surface, and it is absurd - but we'll see whether it retains any power.

The reimbursement challenge for advanced prosthetics

2009-06-10T11:09:00.005-04:00

We are aging, and inevitably that means that we - or at least some of our parts - are wearing out. Increasingly, there are demands for wider availability of "replacement parts" to restore physical functionality and quality of life. And while tissue engineering and stem cell research may hold the promise of biological replacement parts, grown to order from the patient's own cells, clinical realization of that promise remains in the fairly distant future. For years to come, advances in prosthetic devices will be the dominant mode for replacing the function of non-functional body parts or organs. Our imagination tends to be grabbed by the technology projects that aim at vital organ replacement - Abiomed's AbioCor Total Replacement Heart (apparently, excuse the expression, moribund), the various artificial pancreas projects that receive publicity from time to time (such as this one), liver replacement technologies, wearable artificial kidneys, etc. - but the real current action seems to be in the orthopedic arena, where basic technology is in place, but there are exciting innovations in the pipeline.

It seems reasonable to ask: "Who will pay for these prosthetic devices, and for which patients?"
The "who" is fairly clear. The population in need is primarily elderly and the dominant payer will be Medicare. The Medicare program has a long-standing and well-understood prosthetic device benefit (see Section 1834(h) of the Social Security Act), which provides payment for devices that replace the functionality of permanently non-functional body parts or organs. The benefit covers the obvious orthopedic prostheses for amputees, but also extends to implanted replacement knees, hips and other joints, external and implanted mechanical circulatory support devices, total parenteral nutrition (i.e. replacement of non-functional gut), ostomy and colostomy procedures and supplies, and a host of other technologies. For covered prosthetic devices, Medicare pays for any medical procedures required to initiate device use, the device itself, and any supplies and equipment required for ongoing functionality. To meet the "permanence" standard, the program requires clinical evidence that the impairment in function be "of long and indefinite duration" - the potential for recovery of function at some indeterminable future time is not disqualifying. For clinical procedures, implanted devices and professional services provided under the prosthetic device benefit, Medicare pays under the various payment schemes for hospitals and physicians. External prostheses and prosthetic device benefit supplies and equipment are paid under the rules and procedures for durable medical equipment, with a 20% patient copay obligation.

Coverage for prosthetic devices - determination of whether Medicare will pay for a particular device class, and if so under what circumstances - is subject to the conventional coverage standard of "reasonable and necessary". As usual, it is in the application of this standard that the potential for controversy resides. Even for vital organs, where complete failure means death, Medicare has struggled with three difficult questions:

What is the threshold - the degree of organ failure - for coverage under the prosthetic device benefit;
When is a device good enough - i.e. a sufficiently effective replacement - to warrant coverage; and
Is there a performance level for a prosthetic device beyond which incremental improvement is defined as unnecessary and therefore non-covered? How good a replacement are we willing to provide?

The most common implanted prosthetic devices are replacement hips and knees. We all know someone with one or more of these (I myself have two replacement knees). Qualification for coverage is straightforward - without the replacement the patient cannot walk; with it he/she can; every insurer finds it reasonable and necessary to cover replacement of these joints to restore mobility. And while the devices have been incrementally improved over the years to wear better, last longer, get placed easier and more precisely, etc. - all unequivically good things for patients, surgeons and insurers, there have been no substantial changes in the degree of functional capability they provide, and therefore no significant coverage issues raised. Insurers might resist a hypothetical new model knee that provides 10% increased functional longevity at a 50% increase in cost, but that value calculation is itself pretty straightforward.

A recent newsletter report about replacement ankles raised a significant coverage policy question. There are several FDA approved ankle arthroplasty (replacement) devices, a fair number of orthopedic surgeons want to do favor them and want to use them, but insurance coverage is rare. Dr. Michael Pinzur, writing in Foot & Ankle International, the official journal of the American Orthopaedic Foot and Ankle Society, wants to know why:

"It seems curious that the FDA agrees with the [foot and ankle society] that total ankle replacement is a reasonable treatment option . . . while several insurance providers do not find ankle replacement as a reasonable treatment option for ankle arthritis," and
"Should insurance companies make decisions on what treatments are appropriate and what treatments are deemed experimental?"

It turns out, of course, that FDA has never opined that total ankle replacement is a reasonable treatment option. Ankle replacement systems are class II devices. FDA has cleared at least three through the 510k process, but that signifies nothing about "reasonable" (a word and a consideration wholly absent from FDA marketing approval processes) and very little about anything else beyond the fact that the systems were deemed "substantially equivalent" to systms already on the market.

Medicare has no formal coverage statements on ankle arthroplasty, indicating that coverage may be granted on a case by case basis by the medical directors of the various fiscal intermediaries. But several major private insurers ( e.g. Anthem, Cigna,) provide detailed reviews of ankle replacement and why they don't cover the procedure: lack of reliable supportive clinical data (in part because FDA did not require clinical results for market clearance), uncertainty of superiority over surgical options, high percentage of re-ops required, lack of data based guidance concerning circumstances/sandards for use, etc. In short, advocates for ankle replacement haven't yet done what insurers reasonably expect them to do - make a strong clinical case for why and when the technology provides benefits beyond the available treatment alternatives. Contrary to Dr. Pinzur's view, this kind of decision is precisely what insurers always do, and what we need them to do.

The third question - when is a prosthesis too advanced to be necessary - is raised by recent developments in artificial lower limb prostheses, with the advent of computer- assisted joints which allow prostheses to perform in increasingly natural ways. New knee and ankle prostheses (like this one) under development will allow recipients almost perfectly normal looking gaits, much improved balance on uneven surfaces, and greatly decreased workload for given amounts of movement (translating into dramatic improvement in stamina). These prostheses will raise the ceiling on amputees' athletic performance and will provide them with capabilities increasingly approaching full normality, but functional and aesthetic. Wow! - but will insurers pay?

The answer, I think, is "Maybe someday, but not very soon." Insurers pay for prostheses that are reasonable and necessary to restore function, and the restoration target is predicated on the functional level deemed "normal" for the individual. We can see this in current coverage policies for non-computerized limbs, where Medicare and private insurers all provide prostheses capable of supporting the functional level deemed obtainable by the individual patient absent the amputation. A patient bedbound or wheelchair-bound for reasons unrelated to an amputation would not be covered for a prosthetic limb; one capable assisted ambulation becvause of cardiac conditions will be covered for the most basic prosthesis; one capable of ambulation on an uneven surface for extended periods of time will qualify for a more advanced prosthesis. Aesthetics do not enter the equation; neither does enhanced mobility for athletic or avocational purposes. Insurers will pay what is necessary for technology to help an amputee maximize his/her independance, maximize mobility in normal day to day activities, and get back to work ... but they will not pay more for appearances, or to facilitate running a marathon or climbing a mountain.

Normal function is socially defined. As these advanced technologies become available and their potential is more widely understood, it is likely that it will become increasingly difficult for insurers to maintain the "necessity" line where it is today. Technology invariably carries rising expectations with it. What is readily available and desirable becomes required. I think that will happen with advanced prostheses, aided by (relatively) decreasing unit costs as volumes grow. But not for a while, perhaps for a long while.

Medicare and Health Technology Innovation: Facilitator or Obstacle?

2009-05-13T09:59:00.003-04:00

If we listen to the leadership of the Obama healthcare reform effort, we cannot help but be impressed by the consistent focus on the development and utilization of innovative health technologies as a significant element in efforts to improve quality and control costs. The theme was reiterated on May 11 by Margaret Hamburg, FDA commissioner-designate, in a confirmation hearing (Video here) before the Senate Health, Education Labor and Pensions Committee. And the Congress - at least the majority - is on board as well; witness full HELP Committe hearings on innovative healthcare delivery systems scheduled for May 13 and 14 .

At the same time, recent Medicare program regulatory publications and coverage policy determinations can only cause us to question whether the commitment to innovation has as yet penetrated to the operational level. Last week, advocates of personalized medicine and genetic tesing were handed a setback as Medicare issued a Proposed Decision Memo for Pharmacogentic Testing for Warfarin Response. Warfarin is a commonly prescribed anticoagulant used to prevent blod clot formation in at risk patients; at any given time, millions of Americans are on Warfarin therapy. The potential vlue of pharmacogentic testing for Warfarin sensitivity is outlined in the NCA:

Warfarin has a narrow therapeutic window, meaning that there is a small difference in dosage (at times, less than one milligram of warfarin per day) between dosing that is too little, just right, or too much. Standard clinical practice for warfarin titration requires periodic testing of its anticoagulant effect. This is assessed with the prothrombin time (PT) and the International Normalized Ratio (INR). In the PT/INR test, the ratio of the patient's PT to the mean PT for a group of normal individuals is calculated, and that ratio is then raised to a power which adjusts for differences among different types of reagents used in the test procedure. Commonly, the PT/INR is assessed frequently during the first few weeks or months while warfarin therapy is begun, and after that, less frequently when the patient demonstrates a stable response. More frequent testing may be required if the patient exhibits signs of over- or under-treatment or if the patient begins (or stops) taking another drug that is recognized to affect warfarin action or metabolism.

The putative use of pharmacogenomic testing is to predict a patient’s response to warfarin before the initiation of the drug. This would be an once-in-a-lifetime test, absent any reason to believe that the patient’s personal genetic characteristics would change over time.

The Warfarin test had been seen as a major step forward for genetic testing bcause of the size of the potential affected population and the therapeutic utility of the test - more accurate prediction of patient-specific Warfarin response wold, it was argued, hlp to reduce adverse events associated with over-dosing and/or under-dosing during early stages of the dose titration process. But Medicare's NCA concluded that "CMS believes that the available evidence does not demonstrate that pharmacogenomic testing to predict warfarin responsiveness improves health outcomes in Medicare beneficiaries", and proposed that "."Pharmacogenomic testing to predict warfarin responsiveness is covered only when provided to Medicare beneficiaries who are candidates for anticoagulation therapy with warfarin and only then in the context of a prospective, randomized, controlled clinical study when that study meets [specific detailed] standards." Coverage with Evidence Development (CED) - viewed by some as an entry wedge for promising but as yet unproven technologies, by others as one more way for Medicare to temporize in accepting innovations.

This week, the imaging community received a similar jolt, as CMS published its Decision Memo for Screening Computed Tomography Colonography (CTC) for Colorectal Cancer affirming a proposed non-coverage determination originally released in February. CTC advocates point to the sensitivity of the test, its lower cost, and its greater acceptability to the patient population as compared to colonoscopy. Research indicates that many individuals who ought to be screened are unwilling to undergo the colonoscopy procedure; CTC would increase the proportion of at-risk individuals screened, thereby identifying and allowing early treatment of more colorectal cancers; while CTC requires a confirmatory colonoscopy for "positives", advocates claim the total cost impact of using the new technology for initial screenings would also be beneficial.

During the formal 30 day comment period following that release, CMS had met (on March 3) with representatives of the American Cancer Society, the American College of Radiology, and the American Gastroenterological Association, as well as (on March 10) with representatives of the Medical Imaging and Technology Alliance; the Agency also received 357 written comments on the proposed non-coverage decision. Industry representatives and the supportive medical societies had been hopeful that their meetings and comments, along with new clinical data provided during the comment period, would change CMS' proposed policy.

A review of the formal comments is instructive. First. they were overwhelmingly in favor of coverage for CTC - "Of the total 357 comments, 16 expressed agreement with the proposed decision not to expand the colorectal cancer screening benefit to include coverage of the CT colonography screening test, and 337 commenters were opposed to it. Of the 357 total commenters, 101 were one of a couple of variations of form letters. Four commenters did not offer a specific opinion on whether on not the test should be covered for average risk individuals". CMS tends to discount the form letters, as they are generated by highly-interested third parties (usually the affected technology companies), but they do in fact provide a sense of the depth of spport from the general user communty.

Among organizations submitting comment, 6 favored coverage for CTC and 4 supported CMS' proposed noncoverage policy. CTC supporters were the American Cancer Society, medical societies the American College of Radiology (combined comments with the Society of Gastrointestinal Radiology and the Society of Computed Tomography and Magnetic Resonance) and the American Gastroenterological Association, device industry trade associations the Advanced Medical Technology Association (AdvaMED) and the Medical Imaging and Technology Alliance, and private insurer United Health Care. Those opposed were the American College of Gastroenterology (ACG), the American College of Preventive Medicine (ACPM), the American Society for Gastrointestinal Endoscopy, and insurance industry trade association American’s Health Insurance Plans (AHIP). A pattern is discernible: organizations that "win" if CTC is covered are favorable to the technology (CT companies, imaging organizations, radiologists); "losers" (gastroenterologists, many insurers) are opposed to coverage. There is also room for simpler disagreement (e.g. American Cancer Society, American College of Preventive Medicine).

It is tempting to view these coverage policy developments as institutional efforts by CMS to avoid incurring the costs asociated with new technologies. But a careful reading of the documents - which in both cases are lengthy, highly detailed, and heavily documented - leads to a more complex and less emotionally satisfying understanding. For warfarin testing, CMS essentially concludes that, whatever the accuracy of pharmacogenetic testing for dosage titration, the practical protocols for use of the test are not yet established and/or documented in a manner that provides clearevidence of superiority in clinical practice; more needs to be known about how to use the test before it can be seen as superior to current titration protocols; ergo CED:

A clinical study seeking Medicare payment for pharmacogenomic testing to predict warfarin responsiveness provided to the beneficiary pursuant to Coverage with Evidence Development (CED) must address one or more aspects of the following question.

Prospectively, in Medicare aged subjects whose warfarin therapy management includes pharmacogenomic testing to predict warfarin response, what is the frequency and severity of the following outcomes, compared to subjects whose warfarin therapy management does not include pharmacogenomic testing?

Major hemorrhage
Minor hemorrhage
Thromboembolism related to the primary indication for anticoagulation
Other thromboembolic event
Mortality

Answer those questions in clinical practice for the Medicare population, the challenge is made, and then come back for broad coverage outside the research setting.

For CTC, CMS concludes that none of the published research on CTC effectiveness allows conclusions to be drawn about the utility of the test in the Medicare (> age 65) population, and that population differs in meanigful ways from the populations repoted in published research:

Overall, when considering potential benefits and potential harms, there is insufficient evidence to conclude that the use of CT colonography improves health outcomes in Medicare beneficiaries. Data on the health outcomes, potential benefits and harms from small lesions, extracolonic findings and radiation are needed from well designed clinical studies. In addition, with the higher prevalence of polyps in the older Medicare population, the rate of referral to optical colonoscopy is extremely important and also unknown at this point. If there is a relatively high referral rate, the utility of an intermediate test such as CT colonography is limited.

Medicare is consistent. Innovative technologies must be shown to be relevent to the Medicare population, and they must be shown to bepractically useful in the clinical setting. The lesson is clear: bringing innovative technologies into standard use is a more complex challenge than is sometimes assumed by developrs.

A Ray of Light for Fledging Companies: Mass. Life Sciences Center Announces First Accelerator Loans.

2009-04-30T15:36:00.001-04:00

On April 29, 2009, the Massachusetts Life Science Center (MLSC), the focal institutional face of Governor Deval Patrick’s much-vaunted $ billion Life Sciences Initiative, announced its first Accelerator Program loans. As reported in Mass High Tech and the Boston Globe, seven firms received a total of $3.4 million in State funds designed to assist them in moving toward product commercialization.

The victorious seven, chosen from a pool of 88 applicants for the first round of Accelerator funding, represent a diverse cross-section of the Massachusetts life sciences industry cluster:

Oncology drug company Eutropics Pharmaceuticals;
Tissue engineering biotech InVivo Therapeutics;
Molecular diagnostics company Good Start Genetics (a prize winner in Harvard Business School’s 2008 business plan competition;
Device companies Pluromed and Wadsworth Technologies; and
Biotech/pharma tools and services companies Spectra Analysis and Wolfe Laboratories.

Accelerator Program loans are limited to $500,000, and MLSC anticipates several rounds of loan announcements annually. The loans are intended to help companies move forward to the point where they can attract required private sector funding. Of the loan recipients announced on April 29th, none appears to have yet received venture funding (although Pluromed last year announced closing of a $4 million Series B financing from “private investors, including 7 current and former CEOs of U.S. medical device companies.”

The good news here is that the Life Sciences Initiative is actually beginning to put money directly into the hands of deserving startups. Governor Patrick’s announcement of the initiative, made at the 2007 Bio International convention in Boston, had inspired a high level of excitement in the startup community, excitement that gradually dissipated and turned, in some quarters, into cynicism as the actual composition and distribution of the $ billion “pot” began to take shape: too little truly new money (fully half was repackaging of existing programs); too much for pure research rather than enterprise development; too much locked into State university structures and too little in the hands of early stage entrepreneurs. Most importantly, it was unclear how any of the monies would be used to meet a problem acknowledged by the Governor and weighing heavily on startups – how to navigate the “valley of death” between academic grants and private sector investment.

The Accelerator Program loans are an imperfect solution to bridging the structural funding gap that so bedevils so many life science startups. They’d be “less imperfect” if there were more of them, if they were larger, and if they could be made earlier in the enterprise life cycle. But I think it is essential to acknowledge both the positive contribution the current loans can make, and the considerations that direct program monies to well-established startups – while maintaining the search for tools to address the still unmet needs of potentially valuable but still fragile very early stage enterprises.

Among the defensible reasons for MLSC not making grants or loans to the earliest stage companies, I’d focus first on the fact that MLSC lacks competence to make objective and intelligent decisions about the relative worth/potential of the earliest stage applicants. That is not a knock on the MLSC staff, and it is not something that can be fixed. No public agency will have the resources to evaluate the fundamental scientific underpinnings of a nascent life sciences enterprise – that’s the NIH’s bailiwick; no public agency can have the broad analytical capability to evaluate the market potential of a wide range of product concepts – that’s what VCs do, and if they could do it for the earliest stage companies they would be making more early stage investments; and no public agency can evaluate the capabilities of an untried and unproven management team – VCs know how to do that, and they do it by assuming that untried means not competent.

Second, I’d remember that MLSC is looking to leverage the funding it provides into economic growth – i.e. it needs to show a return on investment for the state economy. While a successful very early stage investment will have a higher rate of return than a later stage investment, that higher rate of return needs to be discounted by the markedly lower chances of success for the earliest stage investments. MLSC’s responsibility to the taxpayers demands that it do what it can to minimize its investment risk while remaining true to its mission. Avoiding the earliest and least predictable investment opportunities is one tool to accomplish this; partnering with private sector investors with proven track records for making good choices is another.

Third, there is something to be said for allowing natural selection to thin the enterprise herd before placing a financial bet. We want to support new enterprises lead by first-time entrepreneurs if their ideas are sound and they have the ability to execute. Trial by fire isn’t kind, or pretty, but it can be effective. An entrepreneur who has the commitment and competence to get his/her fledgling company far enough along to allow objective analysis of its chances for success, who is able to take the first critical steps into and across the funding valley of death, is actively demonstrating the most critical qualities required to gain private funding and take the company to the next stage.

I’m not advocating abandoning all efforts to support the earliest stage entrepreneurs. There are many things other than direct financial grants that can be done, and/or are already being done, to assist them. State initiatives like M2D2 at the University of Massachusetts (technical component at U. Mass. Lowell, clinical component at U. Mass. Worcester) and the Mass Technology Transfer Center (MTTC), multi-institutional cooperatives like CIMIT, university-based programs like MIT’s Venture Mentoring Service and Boston University’s Office of Technology Development, as well as private industry initiatives like MassMEDIC’s MedTech IGNITE program are part of an extraordinarily rich Massachusetts ecosystem of support for new enterprises in the life sciences.

Will Healthcare Reform Stifle Technology Innovation?

2009-04-15T10:51:00.004-04:00

At CIMIT's Innovation Grand Rounds yesterday, an audience member posed an intriguing question (paraphraphed as follows): "Since almost all the real health technology innovation we see is generated in the U.S., will our move toward a more European-style, single-payer system destroy our ability to innovate?".

Let's ignore, for the moment, that the question greatly overstates domestic hegemony in the innovation department; even as we ought to be aware of centers of health technology innovation developing and growing elsewhere around the world, it remains true that the U.S. continues to produce a disproportionate share of new diagnostics, therapeutics and healthcare management technologies. And let's not get sidetracked by the observation that we are today no closer to a single-payer system than we ever have been (you need only refer to congressional resistance to a publicly administered health insurance plan that would compete with private plans), or the fact that most European health care systems are moving toward diversification of payers, not unification. A real question remains: Will the reforms currently in the works weaken the ability of U.S. life sciences companies to develop and commercialize innovative technologies?

The CIMIT panelists (moderator Michael Greeley of Flybridge Capital Partners, Dr. Marsha Moses of Predictive Biosciences and Children's Hospital Boston, Dr. Elazar Edelman of the Harvard - MIT Health Sciences and Technology Program and Harvard Medical School, Dr. Joe Smith of Johnson & Johnson's Corporate Office of Science and Technology, and Zen Chu of Accelerated Medical Ventures), all viscerally entrepreneurial, thought not. The consensus: We'll continue to innovate - it's cutural, part of our national DNA; but there will be a turn toward innovations that generate cost-savings rather than enhanced capabilities regardless of cost. One panelist even opined that he wished that Medicare would just come out and formally adopt cost-effectiveness standards so that we could unambiguously get on with the job. And no one even flinched at the heresy.

I don't think our desire or our ability to innovate in the life sciences are at risk from any reforms that are likely to receive serious consideration in the current administration - and certainly not fom any current proposals. And I agree that there is likely to be a turn toward innovations that can lower the cost of high quality care - Christensen's disruptive innovations. But I also think it would be foolish to believe that our innovation rate cannot be affected by our healthcare reimbursement system - most particularly, by the ability of that system to allow returns to life sciences capital investments commensurate with that available to investments in other sectors. The entrepreneurial spirit needs to be fed.

I'm also impressed by the disjunction between the CIMIT panel's easy acceptance of the possibility of formal cost-effectiveness standards and the continued industry doubts about relatively benign initiatives toward Comparative Effectiveness Research. The ECRI Institute provides a rich compendium of background materials on CER, including a comprehensive catalogue of trade association and professional society position papers, for those who might be interested in digging deeply into the subject. An April 14 Wall Street journal report is characteristic: "A $1.1 billion infusion for research that compares the effectiveness of differing treatments raises thorny issues on how that research might be used, including the possibility of denying patient access to treatment options, according to some members of Congress and drug and medical-device companies." This despite the fact that it is very clear from multiple sources that current law forbids such use of CER, that current legislative proposals are all designed to reinforce rather than undermine the prohibition, and that testimony from administration officials, including a letter to concerned Senators from DHHS Secretary-designate Sibelius as reported in the Pink Sheet Daily on April 13, is consistent: no intent or desire to use CER to make national coverage policy.

Comparative Effectiveness Research - The Emerging Opportunity

2009-04-04T15:36:00.006-04:00

Industry's initial response to the health care system reform plans being talked about (a lot in public) and worked on (largely out of the public eye) in Washington has been, on the whole, cautious. No one really wants to defend the status quo, but there is widespread fear that whatever changes are made will have a negative effect on the commercial viability of life science companies. This should not be surprising - change is always threatening, and the threat seems greatest when, as is the case for health reform right now, the nature and extent of the change is uncertain.

Much of industry's current concern is focused, as I discussed in my last post, on the potential threats associated with increased funding for and utilization of Comparative Effectiveness Research (CER). It is easy to image CER being used to prevent market entry for some new technologies, or to stop payment or require market withdrawal for established products when new and better alternatives emerge. At the same time, the fundamental conceptual virtue of CER is so clear that it would be silly to flatly oppose conducting the research. Industry is reduced, because it is so focused on the potential threat of CER, to supporting the principle while opposing the use of CER findings by regulators and/or payers - i.e. trying to stuff the genie back into the bottle.

This is a losing strategy; CER studies are going to be conducted in increasing numbers, funded by private payers as well as government agencies. This would have been true independent of the Obama initiatives, but will certainly be accelerated by current reform efforts. The information CER studies generate is going to inform emerging clinical practice patterns and, ultimately, public and private insurer coverage policies. And there are substantial commercial opportunities to be exploited by companies that understand, embrace, and plan for the coming changes.

The most important thing to understand about CER is that it is a critical element in a larger ongoing systemic change - the move toward what is commonly referred to as Personalized Medicine (the right treatment for the right patient at the right time), and what Clayton Christensen has conceptualized as the evolution from "intuitive medicine" toward "precision medicine"(see The Innovator's Prescription: A Disruptive Solution for Health Care). Christensen's formulation is instructive because he provides a framework for identifying the opportunities that will be generated - indeed, required - by the health care system that will emerge, whether gradually on account of natural change processes or rapidly because of government-driven reforms, in the coming years.

I won't try to reconstruct Christensen's entire analytic schema; his book is too good, and his argument too subtle, for effective summarizing in this space. But I can point out a short list of the changes he sees as inevitable and the opportunities implied by those changes:

The move toward precision medicine will be driven by the development of increasingly accurate and refined diagnostic technologies - diagnostics that allow assignment of a particular patient to a therapy that is virtually certain to be successful; these diagnostics will include genetic and molecular clinical laboratory tests, but also increasingly refined imaging technologies and other diagnostic tools. Overall, opportunities in the diagnostic sector will be greatly enhanced by the system changes that are coming.
Realization of the promise of new and more discriminating diagnostic tools requires better and more comprehensive information exchange between and among institutions and practitioners; CER findings need to be incorporated into clinical decision support tools that can interface with individual electronic health records and that are accessible to practitioners but secure within the framework of loose organizations that Christensen refers to as "value networks". There is, therefore, an enormous emerging opportunity in health information technology (HIT).
Implicit in the growing commitment to CER is an opportunity in clinical research management and evaluation. Recent years have seen the emergence of innovative clinical research data management and evaluation technologies or systems, typically as the proprietary solutions offered by contract research organizations. FDA's (tentative?) embrace of adaptive clinical trial designs is the leading edge of a broader class of innovative tools or extracting meaningful information from clinical experience. As examples, look at the value propositions offered by PharmaPros, Cytel, and others.
For therapeutic technologies, the emerging opportunity is inextricably tied to embracing the CER paradigm - proactively identifying the patient subsets and/or circumstances for which the technology is most likely to be effective, accepting a smaller target market in order to achieve a higher efficacy rate. This dynamic is well understood by biopharmaceutical companies adapting to the business model implications of genetic "companion diagnostics"; broader CER initiatives will extend the dynamic more explicitly to device technologies. As a practical matter, this will frequently mean designing research studies that allow adequately powered comparison of outcomes across different clearly defined diagnostic subcategories. At the end of the day, companies that get out in front of the CER wave will prosper, and those that lag behind will not.

Comparative Effectiveness Research - Threat or Opportunity

2009-03-24T15:38:00.004-04:00

The Obama administration is promising major health care reform, and this time … unlike all the times before since the creation of Medicare more than 40 years ago … the promises seem likely to be kept. We’ll see. What is most interesting to me is that of all the reform elements that have been proposed – broadened insurance coverage, mandatory electronic health records, a public insurance option to compete with private insurers, radiology benefits management, a defined approval path for biosimilars, a deepened commitment to so-called “personalized medicine”, etc. - the one causing the most anxiety to life science companies seems to be “comparative effectiveness research”.

The commitment to comparative effectiveness research (lets call it CER) has already been made. The February economic stimulus package contained $1.1 billion for CER. The 15 person council to set priorities and coordinate the commitment of that money was appointed March 18. And it is hard to argue that better knowledge about the relative merits of different medical therapies isn’t a good thing. So why is it that the formal CER policy statements of the key trade associations are so guardedly supportive, and the private communications of many industry heavies are clearly negative?

It is not as if we don’t already compare one therapy to another in clinical research all the time. Every controlled clinical trial involves such a comparison, and FDA increasingly wants to see active controls – best available therapy – rather than placebo controls. Insurers, too, in their coverage decisions, ask to see therapeutic outcomes as they compare to alternatives already covered. In the established processes for securing market entry and initial utilization, CER is already the coin of the realm.

The perceived threat is that the new CER initiative … which focuses on comparative outcomes in clinical practice (as opposed to clinical trials) … will extend the utilization of clinical research results in at least two ways:

To withdraw insurance coverage of an approved therapy when research indicates the relative superiority of another; and
To inject structural consideration of relative cost into the coverage process.

Both of these extensions envision more or less “global” CER findings: one therapy revealed to be superior to another as a general rule. Both would rightly be considered substantial threats by industry, and both would be strenuously opposed using well-defined and frankly shopworn arguments about the proper relative roles of physicians and payers (clinical choices ought to be the exclusive realm of the physician, medicine is an art not a science), and the proper utilization of cost-effectiveness data (none - you can’t put a price on human life).

But the fact is that worry about administrative restrictions on therapy choice by insurers and the injection of cost considerations into coverage decisions, and any momentum that either of those initiatives might in fact have (a lot for insurer restrictions on therapy choices, very little so far for cost as a critical element in limiting coverage) long predates the current vogue for CER. Those dynamics continue independent of the level of CER spending, or any formal commitment to a CER initiative.

The real import of the CER initiative is more subtle and far reaching than is reflected in industry’s conventional response – CER can be a critical enabler of the realization of the promise of personalized medicine: the right treatment for the right patient at the right time. I look to Clayton Christenson’s formulation in his challenging recent book The Innovator’s Prescription: A Disruptive Solution for Health Care (McGraw-Hill, 2009). Christenson charts the ongoing evolution of medicine from intuitive (decisions based upon the experience, special skills and intuition of highly-trained physicians) through empirical (decisions based upon validated statistical probabilities) toward precision (evidence-based determinations that are 100% accurate). The advent of precision medicine is largely enabled by genomics, proteomics and molecular diagnostics – variables and tools that are providing great insight into why some medicines work for some people and not others and how we can identify which medicine will work for a particular patient.

CER moves therapy selection – even absent genetic determinants - toward the precision medicine model. It isn’t the blunt instrument industry seems to imagine – obliterating established markets with large-scale studies. It is ultimately a highly refined tool, providing insight as to the circumstances under which one therapy is preferable to another: What are the characteristics of the patients helped by Option A? What were the circumstances under which they did best? And when and for whom was Option B better? It is, viewed this way, a piece of Christenson’s disruptive solution. Paired with reliable patient evaluation tools and diagnostics, CER can provide the knowledge to enable lesser-trained professionals to achieve better clinical outcomes at lower cost. Just what the doctor ordered … and an enormous opportunity for industry. I'll address the nature of that opportunity in a subsequent post.

Reimbursement analysis and planning can help build value for your life science startup

2009-03-12T21:28:00.001-04:00

Capital is scarce in the current financial climate, and needs to be conserved. There is no money for a startup to spend on “like to haves” – it all need to be committed to “need to haves”. Early investment in reimbursement analysis and planning seems like a luxury under these circumstances. Besides, given the scarcity of VC money for new investments, you’ll likely be partnering with an established company that has in-house reimbursement expertise. And with the disappearance of the IPO as an exit strategy, you don’t plan to ever have to bring your technology all the way to the market – an acquirer will be doing that, and they’ll take care of reimbursement when the time comes, won’t they?

Perhaps that is true… if you’re really lucky … and if you’re willing to sell your interest at a discount. The thought process exemplified by the preceding paragraph is, in reality, a recipe for coming out on the short end of any deal – giving away a good piece of what you’ve worked long and hard to create. I would argue that a prudent investment in sound reimbursement analysis and planning is one of the very best and most important investments a young life science startup can make, irrespective of your financing and exit strategy. My argument can be summarized in three general points.

First, you need to remember the value, to either investors or acquirers, of risk mitigation. Removing uncertainty from an investment proposition – “taking risk out of the deal” – will always raise enterprise value. For an innovative medical technology, reimbursement uncertainty is a major risk factor. If you can provide a compelling analysis of the reimbursement status of your product, and a clear description of the resources and activities required to achieve optimal reimbursement, you will remove a major unknown from the investment analysis and thereby raise the value of your company to any investor or acquirer. And the cost of doing the necessary analysis and developing the roadmap to reimbursement is a small fraction of the amount required to address even relatively minor issues of technology risk. In terms of return, the money is better spent on reimbursement planning.

Second, you never want to enter any negotiation with less information about a critical deal element than the other party. Superior information translates directly into a negotiating advantage. If a potential investor or acquirer knows more than you do about the reimbursement issues relevant to your technology, you will be at a profound disadvantage in the discussion of valuation. If you have the information advantage, the negotiating leverage shifts to you. (That is why theoretical discussions of the efficiency of markets always include the assumption of equal information.) A full and complete understanding of the reimbursement status of your own technology is essential to assuring that you enter any negotiation in the strongest possible position, and – properly employed - will yield a significant return.

Third, the ability to demonstrate command of reimbursement issues relevant to your technology is an important element in establishing the credibility and excellence of your management team – and thereby helps to build an investor’s or acquirer’s confidence in the work the team has already done and its ability to continue to lead. You are asking people to make a substantial investment in the future success of work you have begun. Failure to understand and begin to address an issue widely recognized as critical to success is an error of omission that can only reflect poorly on a management teams overall performance.

I am not advocating the need to take on a heavy continuing reimbursement planning cost early in the technology development cycle. You want and need a level of resources committed to reimbursement that is appropriate to the progress you have made in defining your product and advancing your technology, as well as to the generality or specificity at which issues can be addressed. The investment can and should be measured and prudent – after all, capital is scarce and needs to be conserved. If you spend your money wisely, however, some of it will be spent on assuring that you understand the reimbursement issues raised by your technology and on developing a plan to address them.

If reimbursement is so important … why do so many companies address it so half-heartedly and so late?

2009-02-27T20:28:00.000-05:00

Everyone knows how important reimbursement analysis and planning is to the success of innovative life science products – devices, diagnostics, pharmaceuticals and biologics. Ask any venture capitalist, private equity investor, strategic marketing analyst, or C-level executive; go to any new technology conference or seminar. The story is consistent and near universal: reimbursement is a critical success variable – if not the single most critical, then certainly one of the top two or three; reimbursement uncertainty is widely recognized as a principal barrier to the clinical adoption and commercial success of innovative medical technologies.

Yet despite the depth and breadth of the belief in the centrality of reimbursement to commercial success, the same respondents will likely acknowledge that most young life science companies fail to make adequate or timely investments to analyze their reimbursement obstacles and/or opportunities, or to plan to address them. How can we explain this disjunction between the widespread recognition of a critical strategic issue and the frequent failure to address it effectively?

Each case is unique, with its own narrative and combination of contributing factors. But some of those factors may be observed across many cases, and help to provide the core of a general explanation for the failure of young life science companies to do timely and effective reimbursement analysis and planning. Three such factors deserve special mention:

Financial and personnel resource constraints common to life science startups demand that management make choices among competing demands; the payoff from investment in reimbursement analysis and planning seems distant, while investments in basic science, product design, prototype manufacturing, supply chain logic and/or other product development issues yield immediate returns in the form of milestone achievement and the ability to move a linear step-by-step development process forward; as a result, deferring the reimbursement investment is often the “obvious” option; the belief is that investment in reimbursement will pay off in the marketplace, but that it doesn’t build enterprise value along the way;

Reimbursement is often viewed as a modular function, largely independent of other strategic and operational activities, that can be “dropped into” a company without substantially affecting or being affected by other critical functional areas; this view creates license to begin thinking about reimbursement “when we’ve gotten past our critical technical challenges” or “once we have our clinical program well defined” or “once our next round of funding comes through and we have the financial capacity to make new hires”, etc.; companies believe that dealing with reimbursement can be delayed because there is no perceived cost to delay – so long as there is payment available for the product when it finally comes to market; and

For the first-generation leadership of many life science companies, those with primarily technical or clinical training and background, the vocabulary of reimbursement comprises an impenetrable foreign language, and the mechanics of our systems for medical technology reimbursement are illogically complex; the truth of these perceptions is irrelevant; true or not, they have the effect of reinforcing the tendency to defer dealing with reimbursement issues in favor of other issues that are in the decision makers’ areas of personal expertise and comfort; no one enjoys dealing with an issue that “thinking about … makes my head hurt” or “I need to have explained over again time after time, and can’t seem to ever retain…” (these are real comments from clients about reimbursement planning!); it is easy, in that situation, to let the subject slide, to convince yourself that you can deal with it later.

The truth is that deferring reimbursement analysis and planning is far more expensive than addressing it early on. Early investment in reimbursement yields enormous long-term payback in terms of total product development cost and time to revenue as well as potential short-term benefits in enterprise valuation. The notion that reimbursement can be dealt with as a discrete and independent module is flatly wrong. Reimbursement issues cannot adequately be addressed unless reimbursement strategy is understood as integral to every stage of corporate business, product development and clinical strategy. I’ll expand on these points in subsequent blog postings. But the takeaway should be clear: for young life science companies, deferring reimbursement analysis and planning for technologies under development can be an extremely costly strategic error.