Healthcare's Reimbursement Maze

The Ecosystem Regulates Market Access to Medical Innovation in the US

The odds that a healthcare startup will fail is 90%, and 20% of new businesses fold by just one year in.  Not clearly understanding who will pay for the product and how much of the reimbursement is a deadly and easy mistake to make.

Every day, doctors and patients face difficult choices. Should a patient with stable chest pain undergo a surgical procedure, even though studies show that most patients do not benefit from procedures like coronary artery bypass graft or coronary angioplasty? And should a breast cancer patient with ductal carcinoma in situ receive radiation therapy after surgical excision to prevent recurrences that occur in 20-30% of women over 10 years? Medical innovations, such as those discussed in the book, offer better diagnosis and treatment options for patients in need.

However, for a medical innovation to reach patient care, it must typically be paid for. Healthcare reimbursement refers to the complicated and intertwined process by which a medical innovation receives payment. Healthcare reimbursement is a critical product-to-market question  for entrepreneurs and venture capitalists, as the answers decide the likelihood of building a sustainable and successful business from a medical innovation. 

The healthcare reimbursement ecosystem exerts powerful forces that shape an innovation’s adoption and diffusion in patient care. This book provides a detailed account of the US ecosystem regulating market access to medical innovations. Specifically, in the “Healthcare’s Reimbursement Maze” you will discover:

  • Why medical coding is crucial to reimbursement
  • How the payment systems are designed, evolved, and adapted to new technologies
  • How public programs and private health plans decide whether to cover a new technology
  • The roles of healthcare providers in the reimbursement ecosystem
  • Strategies for navigating the maze of reimbursement

Table of Contents

Preface – A Journey of Ten Thousand Miles

Introduction – What is Healthcare Reimbursement

Market Access Gatekeepers
– The Development of Private Health Insurance
– Medicare, Medicaid, and the Fragmented Health Insurance Market
– The Transformation of the US Healthcare Delivery System in the 20th Century
– Two Centuries of Scientific Breakthroughs – the Fuel of Health System Transformation
– The Rise of Medical Authority

Medical Coding – The Code to Reimbursement
– History and Statutory Authority for Coding Use
– CPT – Describe Work by Clinicians and AI
– Temporary CPT Codes for Emerging Technology and Reimbursement
– More Codes to Track Molecular Diagnostic Tests – PLA, MAAA, U Codes, and Z Codes
– Level II HCPCS Codes for Medical Products
– ICD-10 Diagnostic and Procedure Codes

Payment Systems and Medical Innovations
– The Revolution of Healthcare Payment Systems
– Key Design Features of Medicare Payment Systems
– Why Most Requests for a New DRG Are Denied?
– New Technology Add-on Payment
– The Dilemma of Paying for CAR-T-Like High-Cost Therapies under Inpatient PPS
– Which Is the Applicable Payment System: Inpatient or Outpatient?
– Packaged or Separately Reimbursed? Payment under Outpatient PPS
– Pay for New Technologies under Outpatient PPS
– Pricing a New Diagnostic Test under the Physician Fee Schedule
– Medicare’s Reimbursement for AI

Payer’s Coverage Decision Making
– Modest Medicare Benefit Expansion in Half of a Century
– Medicare Statutorily Excluded Services
– Medicare Coverage Pathways for Statutorily Included Services
– Medicare National Coverage Determination
– Medicare Coverage for Evidence Development Activities
– Medicare Local Coverage Determination
– Medicaid Coverage Determination
– Private Payer Coverage Decision Making

The Multifaceted Roles of Healthcare Provider
– Key Influencer over the CPT and RUC Process
– Advisor in Payers’ Coverage Determinations
– Convener of Clinical Data Registries for CED
– Valued-Based Purchaser

Evidence – the Most Effective Tool to Communicate with Payers and Providers
– Dissect the Evidential Requirements of a National Coverage Determination
– Examine Medicare Contractors’ Evidence Analysis for Two Local Coverage Determinations
– Assess a New Innovation’s Economic Impact
– Communicate Value and ROI with Providers
– Data and Analysis to Support Payment Consideration

PART SEVEN                                                                                                                                                                                                                                                                                                         Strategy to Navigate the Healthcare Reimbursement Maze


A Journey of Ten Thousand Miles

The scene at the dusty construction site of Beijing Xiaotangshan Severe Acute Respiratory Syndrome (SARS) Hospital is still vivid and breathtaking, refusing to fade away from my memory after two decades. Thousands of people in various uniforms buzzed around, and all the essential parts for a hospital, from the building’s roof, and ventilation system, to the communication network and even medical devices, were being installed simultaneously.

I was left in awe by what unfolded before my eyes. For a moment, I just stood there amidst the hustle and bustle, taking it all in. I noticed the bloodshot eyes of the passersby, the hoarse voices echoing through the air, and the exhausted construction workers finding brief respite as they lay or leaned against the walls for a quick nap. These small details offered a glimpse into the extraordinary efforts that made it possible to construct a hospital for SARS patients in just seven days!

Like its counterpart, COVID-19, SARS is caused by a strain of coronavirus. The 2002-2004 SARS outbreak infected over 8,000 people, mostly in China, and tragically claimed nearly 800 lives worldwide.

My visit to the hospital construction site had a purpose: conducting interviews for a special column I was writing for International Medical Devices, a MedTech industry magazine. Working as a journalist and an editor for the magazine was a side gig while I pursued my career as a research scientist at a Beijing research institute, following my graduation with a master’s degree in biomedical engineering. Research work often delves deeply into narrow topics, akin to tendering individual trees and witnessing their growth from sprouts. My work at the magazine provided a vantage point to see the larger forest of healthcare and innovation.

Reporting on the SARS outbreak in 2003 and engaging in post-outbreak discussions and reflections ignited my fascination with health policy and revealed its profound impact on society. It was a collective sigh of relief when the SARS outbreak was contained within several major cities in China, sparing rural areas from its reach.

China established a three-tier health system in the 1950s with a network of health service facilities at county, township, and village levels, achieving nearly universal coverage. However, the introduction of privatization and market-based reforms in the 1980s caused the collapse of the rural healthcare financing mechanism, the rural cooperatives under a planned economy. In the next two decades, focusing on economic growth, little attention was paid to the deterioration of the healthcare delivery system and insurance coverage. By 1998, only 5% of the rural population and 38% of urban residents in China had any form of health insurance coverage.

The SARS outbreak served as a wake-up call for government leaders, highlighting the consequence of underinvestment during the 1980s–1990s. Within a few months of the SARS outbreak, Chinese leaders decided on massive public health system investments, including heavy subsidies to expand a new type of rural cooperative medical scheme. More than 96% of China’s population now has some health insurance coverage.

On a smaller scale, the growth of a startup company during and after the SARS outbreak illustrates the impact of policy changes. When I interviewed Changying Li, the founder of Yi’An, a medical device company manufacturing medical ventilator and anesthesia equipment, the company was barely two years old with fewer than 200 employees. The startup doubled its production in response to soaring demands during the SARS outbreak. And the company doubled again after the SARS outbreak in response to the government’s procurement orders and initiatives to equip rural hospitals with essential medical equipment. Today, Yi’An has established itself in China and globally, with offices in North America and Europe.

In early 2000, public policy was a relatively new topic in China, and top universities had only recently offered Master of Public Administration (MPA) program. Hence, I looked afar. I came to the US in 2006 to pursue my MPA study, embarking on a new journey that aligns with the Chinese saying, “Walk ten thousand miles. Read ten thousand books.”

As my graduation date approached in 2008, the US economy slid into the Great Recession. After my interview at the Healthcare Association of New York State (HANYS), Steve Harwell, then the Vice President, Economics, Finance, and Information, pulled me aside and jokingly said, “I am not as smart as you are, but I can learn, so you should be fine.” During the interview, Steve dived deep into the graduate studies I shared. One was a paper evaluating the subprime mortgage crisis’s impact on hospital financing, and the other was a publication assessing returns on investment in electronic health records. I was pleasantly surprised by the level of detail of his inquiries. Shortly after the interview, I started at HANYS as a health policy analyst.

My timing in entering the health policy arena couldn’t have been better. In a time of crisis, everyone looks to the government for support. My first major assignment was the HITECH Act of the American Recovery and Reinvestment Act, signed into law by President Obama in 2009. The HITECH Act authorized Medicare and Medicaid to provide incentive payments to hospitals and clinicians who demonstrate “meaningful use” of electronic health records (EHR), which drove large gains in EHR adoption in the following decade. Also in 2009, the discussions about a major piece of legislation to expand health insurance coverage heated up. Analyzing various draft provisions before the Affordable Care Act was passed gave me a glimpse of the federal lawmaking process.

Fast forward a decade later, I found myself working at the Association of American Medical Colleges as a director of payment policy research and analytics. While attending a HIMSS annual conference, I noticed that all the sessions on artificial intelligence (AI) were incredibly popular. To secure a seat, one had to arrive at least 10 minutes early. During my graduate studies, I took a class on neural networks, a method in AI. A classmate once told me, after a test run using neural networks in her capstone project, “AI is too big a tool. It felt like firing a missile at a fly.” She was referring to the fact that it often took hours to do a simple test run back then, which made AI not very functional to use.

What had happened in the field of AI over the past decade? This question piqued my interest and led me to discover advancements not limited to AI but also genomics and precision medicine. It was a rekindling of my first passion for science and medical innovation. Before the pandemic, I had been contemplating and writing about alternative payment models for precision medicine.

While the pandemic derailed my original plans, it propelled me towards a career change in the consulting world. I have worked with MedTech companies, hospitals, and trade associations on complex reimbursement issues. However, the fast-paced nature of consulting engagements often leaves little room for delving into the intricacies of the vast reimbursement ecosystem, which planted the seed for the book.

Completing this book has brought a sense of fulfillment and completion to my journey. It has let me connect the dots in my career path, merging my passion for science and health policy. It draws upon my previous research and writings while also uncovering new insights along the way. Writing the book has been a collaborative effort, shaped by the feedback and suggestions of former colleagues and healthcare experts who generously shared their knowledge. I express my deepest gratitude to all those who have contributed to the development of this book, as acknowledged in the dedicated section.

The primary audience I had in mind when writing the book was healthcare innovators and investors. Through my experience as a consultant, I saw their struggles with navigating the complexities of healthcare reimbursement, especially for academics turned entrepreneurs. Suggestions on the potential audience from friends, former colleagues, and healthcare experts who helped review the draft book indicate that healthcare reimbursement may be a maze for a much larger audience. Interestingly, even friends without experience in healthcare reimbursement found the book easy to follow.

This feedback suggests that the book has the potential to help a wider range of people. As I conclude this preface, I am filled with anticipation. I look forward to sharing the contents of this book with readers from diverse backgrounds, including healthcare innovators and investors, researchers and educators, healthcare providers, healthcare incubators, and anyone interested in understanding the intricacies of healthcare reimbursement. I hope that this book will not only inform but also inspire conversations and actions that contribute to the improvement of the healthcare reimbursement ecosystem.

Thank you for joining me on this journey. I invite you to delve into the following pages and turn the healthcare reimbursement maze into an amazing journey of possibilities.

Susan Xu

Rockville, Maryland
June 10, 2023


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.