“We have marketing approval and we have an insurance reimbursement code.” This is what some of the medical device companies traded on the Tel Aviv Stock Exchange (TASE) declare, and investors are supposed to be at ease. True, a US Food and Drug Administration (FDA) marketing license is fairly clear and unequivocal - from the moment it is granted, marketing the product for all the indications specified on the license is permitted. But anything reimbursement-related is far less clear-cut.
“Sometimes medical device companies identify a reimbursement code that exists in the market, and convince themselves that it applies to them,” says Dan Mendelson, CEO and co-founder of Avalere, one of the top insurance reimbursement advisors in the US. “In valuation estimates, they assume that they will instantly and effortlessly receive the full amount that the competitor received. This is fine for an initial business plan - but it is not reality.”
Mendelson explains, “Does the product really fit the code? Sometimes you will find yourself competing with a large pharmaceutical company, which will convince the insurers that you do not absolutely fit. Sometimes private insurance companies decide not to reimburse for a product, even if it is an exact fit for an existing code, if there is insufficient clinical data proving its efficacy. They are allowed to do this, and the code has no legal or contractual value. A code also does not ensure that payment for the product will be made in full. And whatever happens - you have to go through a ton of bureaucracy.”
The fastest way to receive reimbursement is to show the insurance companies that it is worthwhile for them. In fact, many Israeli companies gradually learned to do this by combining marketing elements in their clinical trials - in other words, a financial comparison with competitors, or with existing practice.
In recent years, it has been common to say that a product that does not save insurance companies money from day one won’t succeed in the new healthcare economy, but, while the companies are digesting this bitter truth, it is also changing.
“Today, medical device manufacturers that do not save money from day one can also succeed, if they help hospitals or insurance companies meet quality indicators,” explains Mendelson. Quality indicators are a concept that began shortly before the new healthcare law ("Obamacare") went into effect, according to which hospitals that meet certain patient-care criteria are rewarded, and hospitals that fail to meet them are penalized. An insurance company that meets certain quality indicators receives government authorization to charge higher premiums.
When to make a marketing attempt?
Since then, a complicated situation has been created: marketing must be planned in such a manner that the product meets specific quality measures, but during the period in which the trial takes place, the measures may change. A difficult dilemma has come about surrounding the question of when the clinical trial should take place.
If it is done only after marketing approval has been granted, market entry is delayed. On the other hand, if the trial is carried out too early, quality measures could change, and the whole trial will have been for naught.
If the company has not prepared, in terms of financing, not to begin significant sales immediately after FDA approval, and finds itself needing to conduct another clinical trial, it could find itself in a cash flow crisis. “And then it will need to raise money, or be sold at a deep discount,” says Avalere Regional EMEA Director Debbie Garner. Sometimes this is an opportunity for investors - occasionally, a company will decide to enter the TASE exactly at this stage, after the venture capital funds that brought it to the FDA, and didn’t see their investments translate into sales, have become discouraged.
How can one find out what the quality measures are, and even see the changes made to them? The answers may be found on the Medicare website, for example, on the National Quality Forum website, and in specialized professional groups relevant to the specific product, which publish the quality measures that may be adopted later by the government and insurance companies.
With regards to the overall state of the market, Mendelson says: “During the time in which there was concern over what direction Obamacare was headed in, there was an unnatural cooling off in medical devices. Now, as some of the uncertainty has been lifted, the big companies and venture capital firms are coming out of defensive mode, and are seeking growth, and there might even be an awakening of interest in investment in young medical device companies.”
Published by Globes [online], Israel business news - www.globes-online.com - on June 29, 2014
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