WHAT IS HEALTHCARE REIMBURSEMENT?

An average American born 200 years ago could expect about half of your friends and neighbors to die before turning 40. In a Slate article, Why are you not dead yet, Laura Helmuth asked around and came up with a small sample of what would have killed our friends and us:

• Adrian’s lung spontaneously collapsed when he was 18.
• Becky had an ectopic pregnancy that caused massive internal bleeding.
• Carl had St. Anthony’s Fire, a strep infection of the skin that killed John Stuart Mill.
• Dahlia would have died delivering a child (twice) or later of a ruptured gall bladder.
• David had an aortic valve replaced.
• Hanna acquired Type 1 diabetes during a pregnancy and would die without insulin.
• Julia had a burst appendix at age 14.
• Katherine was diagnosed with pernicious anemia in her 20s. She treats it with supplements of vitamin B-12, but in the past she would have withered away.
• Laura (that’s me) had scarlet fever when she was 2, which was once a leading cause of death among children but is now easily treatable with antibiotics.
• Mitch was bitten by a cat (filthy animals) and had to have emergency surgery and a month of antibiotics, or he would have died of cat scratch fever.

Medical advances have dramatically improved our lifespan and healthspan with life expectancy doubled in the past two centuries. Medical breakthroughs, such as anesthesia, antibiotics, germ theory, insulin, X-ray, vaccines, blood transfusion, and immunology, enable us not to die from illnesses that killed many in the past. Often the stories of medical advances centered on the dogged pursuit of the researchers and their research discoveries, and rightly so. However, this storyline inadvertently gives an illusion that the road from medical discovery to medical practice is a guaranteed onward march.

A 2019 documentary film, “Jim Allison: Breakthrough,” highlights some twists and turns along the long, bumpy road to bring a research discovery to market. Jim Allison is an immunologist who spent decades studying how the immune system reacts to cancer cells. In 1996, he reported that mice injected with an antibody that slowed a T-cell inhibitory molecule (known as CTLA-4, whose function is like a brake on the immune system) showed a rapid reduction in tumors. What’s even more astonishing is that the mice treated with the injection showed immunity when injected with new cancer cells.

However, pharmaceutical companies met the illuminating research findings, however with skepticism. Several clinical trials of immunotherapy drugs for cancer since 1980s had ended in devastating disappointments, which led some to believe immunotherapy would never work. The risk of failing is high when it comes to developing oncology drugs: 9 out of 10 drugs that work on animals do not work on humans, and the attrition rate is 70% in Phase II clinical trials and 59% in Phase III trials. It doesn’t help when the proposed new drug takes a different approach that few can comprehend. In about two years, Dr. Allison pitched several pharmaceutical and biotech companies to fund the development of the drug and clinical trials to test the safety and efficacy of the new drug. Sadly, the answer always came back the same – no.

The challenges Dr. Allison encountered, unfortunately, are not unique. The term “the Valley of Death” refers to the early stages of transitioning original scientific research to marketable products. Uncertainty and lack of funding are commonly cited factors that make this phase difficult to survive. In the case of Dr. Allison, persistence and perseverance brought a stroke of luck and provided the strength to overcome plentiful curveballs during the clinical trials. In March 2011, more than a decade after the publication of the initial discovery, the new drug ipilimumab (Yervoy) was approved by the Food and Drug Administration (FDA) to treat metastatic melanoma. The film’s postscript stated that “Ipi and successor immuno-oncology drugs have treated nearly a million patients worldwide.” In 2018, Dr. Allison was awarded the Nobel Prize in Physiology or Medicine along with Tasuku Honjo.

The film didn’t mention that the Centers for Medicare and Medicaid Services (CMS) started reimbursing ipilimumab in 2011. Even though the move by CMS, the largest payer for healthcare in the US, is somewhat expected, it’s not insignificant for expanding access to cancer immunotherapy drugs. In 2012, about 1,200 Medicare fee-for-service (FFS) beneficiaries received ipilimumab treatment and Medicare paid nearly $68 million for ipilimumab administered in doctors’ offices alone. By 2019, the number of immuno-oncology drugs reimbursed by Medicare increased to 12, and the total Medicare payments for these drugs administered in a doctor’s office were close to $2 billion in 2019.

Payers, including private health plans and public programs, account for a large share of medical technologies/services purchases. Reimbursement, the policies and practices that define a health plan or a public payer’s terms of coverage and payment for a medical technology, not only affects market access for new healthcare products/services, but also influences the kinds of innovation that venture capitalists (VCs) choose to invest. The influence or perceived influence of payer’s reimbursement policy may derive from different aspects, for example:

– Reimbursement policy may specify patient population and coverage criteria for a medical innovation (e.g., only patients with advanced cancers who failed first and second-line treatments can receive the treatment), which may affect a medical innovation’s market size.

– Payment rate established through reimbursement policy might affect product pricing (e.g., payment rate for a surgical procedure might set an upper limit for any implantable devices to be used in the procedure)
– The established payment rate for one product/service relative to that of other comparable products/services might influence healthcare providers’ and patients’ choice of care.

Before a new medical innovation can be covered and reimbursed, the description of the new drug, equipment, test, medical service, or procedure must be translated into universal medical alphanumeric codes either through asking for a new code or identifying existing codes. Like a musical score that uses standard symbols to indicate the melody, tempo, and intensity of a musical piece, medical coding transforms diagnosis, procedures, medical services, and equipment documented in medical records, such as physician notes and laboratory results, into standard medical codes so that healthcare providers can bill private or public payers for their services. In the case of ipilimumab, for example, CMS first created a temporary code (C9284) for the injection of ipilimumab at a dose of 1mg, effective on July 1st, 2011, and then replaced it with a permanent code (J9288), effective on January 1st, 2012. It’s the responsibility of product developers to request coding changes and provide evidence to support such changes, which adds another layer of complexity on the path to reimbursement.

Even with insurance coverage and favorable payment rate, it’s ultimately the decision of healthcare providers to incorporate a new medical advancement into clinical practice. Usually, healthcare providers are the direct purchasers of medical products, such as new drugs and new medical devices, and then receive reimbursement from payers when using these new products in a patient encounter. In this scenario, reimbursement is a chain of events involving healthcare providers and payers, and different value propositions and economic models are needed for different stakeholders.

Healthcare providers’ clinical decisions are also influenced by clinical practice guidelines developed and maintained by specialty societies, government agencies, and other entities. Being recognized as part of the standard of care shows the impact of a medical innovation and ensures its long-term success. In melanoma, for example, since the introduction of ipilimumab in 2011, several new treatments have been approved for treating metastasis melanoma, and melanoma survival improved rapidly. In 2019, the American Society of Clinical Oncology (ASCO) convened an expert panel and developed ASCO guidelines on melanoma treatment, which includes recommendations on ipilimumab and other drugs for metastatic melanoma.

Briefly, healthcare reimbursement refers to the complicated and intertwined process where a medical product or service is paid for. It consists of coding, coverage, rate-setting by payer, and the value translation to healthcare providers. FDA approval allows a new medical product for sale and marketing in the US. Getting marketing approval, however, is not a guarantee of market access when a medical product is used in patient care. Ensuring reimbursement for innovation is essential for a successful launch into the market and the long-term success and impact of the innovation.

So, how may healthcare reimbursement influence venture capitalists’ decisions on what innovations to invest? To shed light on this, I sought the expertise of Dr. Ajit Singh, a partner at the venture capital firm Artiman. Dr. Singh is known for early-stage technology and life science investments. I had the opportunity to interview Dr. Singh almost two decades ago for the Chinese magazine International Medical Devices when he served as the CEO of Siemens’ Oncology Care Systems Group.

Dr. Singh delves into the concept of ‘product-market fit,’ which is important when evaluating early-stage startups. Coined by Andy Rachleff, the founder of Benchmark Capital, product-market fit entails meeting an unmet need within a specific market segment where willing users are ready to adopt and pay for the product.

Dr. Singh emphasizes that in healthcare, the concept of product-market fit becomes more intricate due to the involvement of various gatekeepers. These stakeholders, such as clinicians, patients, and insurance companies, each have different perspectives and expectations. “This creates an additional layer of complexity for VC investors in due diligence because the criteria, or a metric of success, across different stakeholders are never identical, especially when the outcomes are measured in statistical terms. While there is no readymade answer or template for these types of assessment, there are frameworks for clinical and economic utility that can be employed,” elaborated by Dr. Singh.

An essential aspect of both the reimbursement process and VC’s investment assessment lies in providing convincing evidence. While proof of efficacy is relevant universally, more evidence is needed for different stakeholders. FDA’s mandate is to ensure products on the US market are “safe and effective.” Following FDA approval, CMS determines whether a product is “reasonable and necessary” for the care of Medicare patients and may ask for more evidence, for example, on clinical benefits or subpopulation. Besides clinical evidence, private payers may require cost-effectiveness analysis to assess the gains in health outcomes relative to the cost of the innovation and budget impact assessment on their covered population. Providers will want to know whether a new product improves the quality of care compared to the alternatives or standard of care, whether it’s easy to use, and whether it will boost their facility’s bottom line.

A medical breakthrough often represents the culmination of decades of exploration, involving wandering in the unknowns, formulating hypotheses, and verifying them through experiments. Healthcare reimbursement is a man-made ecosystem with interconnected parts managed by various organizations, each with its own history, purpose, structure, organizational constraints, internal and external dynamics, and idiosyncrasy.

This book aims to provide a detailed account of the healthcare reimbursement ecosystem. However, healthcare reimbursement encompasses a wide spectrum of medical innovations provided in various care settings. CMS alone has over ten payment systems for services rendered in different care settings or by different types of healthcare providers. Each payment system represents a smaller reimbursement ecosystem within the broader ecosystem, with its own processes, methods, and requirements. This book primarily focuses on services provided in three common care settings: inpatient hospital, outpatient hospital, and doctor office.

While the book uses examples to illustrate technical procedures or complex methods used in the reimbursement process based on publicly available information, it’s important to note that every medical innovation is unique and may follow a different reimbursement pathway. The reimbursement pathways discussed in the book may or may not be applicable to other medical innovations, depending on factors such as care setting and type of medical innovation.

Healthcare is one of the most regulated and debated topics, and healthcare reimbursement, including coverage determination and rate-setting for public programs like Medicare and Medicaid, is no exception. The book presents different viewpoints and competing interests of stakeholders within the ecosystem, as they all play a role in the reimbursement journey. This includes instances where their involvement may cause delays or detours. The author does not advocate for any position but aims to provide a fair account of different viewpoints.

This healthcare reimbursement ecosystem is constantly evolving, with annual updates and tweaks, and major changes implemented every now and then, often triggered by legislative actions. The information presented in the book reflects the author’s best knowledge at the time of writing. However, verifying the most current policies and procedures is crucial when developing reimbursement plans. Still, the comprehensive account of the ecosystem provided in these pages can help you understand and prepare for the challenges ahead.

The book is organized around key parts of the healthcare reimbursement ecosystem. The first chapter introduces payers and providers, the central players of the healthcare ecosystems, and traces their historical paths in shaping the US healthcare systems as we know it today. The next three chapters delve into coding, payment systems, and coverage determinations, which are separate but inter-connected aspects of healthcare reimbursement. The following two chapters explore the various roles that providers play within the healthcare reimbursement ecosystem, and the evidential and value expectations from payers and providers. Finally, the book concludes with a discussion on strategies to navigate the healthcare reimbursement maze.