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Feds set reimbursement targets, increasing government payments' impact on device world, M&A

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Med tech companies must continue to stay on their toes regarding government reimbursement, which has gotten tougher in recent years. And in case you were thinking (or hoping) that the trend might change under the new, to-be-announced head of the federal Centers for Medicare & Medicaid Services, Secretary of Health and Human Services Sylvia Burwell, last week set explicit goals toward paying providers based on quality and not quantity, as the agency aims to put the fee-for-service model to sleep--permanently.

HHS Secretary Sylvia Burwell

"Many health care providers today receive a payment for each individual service, such as a physician visit, surgery, or blood test, and it does not matter whether these services help--or harm--the patient. In other words, providers are paid based on the volume of care, rather than the value of care provided to patients. Today's announcement would continue the shift toward paying providers for what works--whether it is something as complex as preventing or treating disease, or something as straightforward as making sure a patient has time to ask questions," HHS wrote in a release.

The umbrella agency that oversees the FDA and CMS seeks to tie 30% of traditional Medicare payments to value or alternative payment models. These include bundled payment arrangements and Accountable Care Organizations, in which physicians are rewarded by the government for being frugal through shared savings programs, meaning the docs receive some of the saved money.

These programs already affect the industry in tangible ways. For example, Todd Ebert, CEO of group purchasing organization Amerinet previously told FierceMedicalDevices that hospitals are already bundling an increasing number of payments to lower their costs for services like orthopedic surgery, meaning the providers offer a single aggregate payment per patient encounter or surgery, including for complications suffered 30 to 90 days thereafter. This way, suppliers don't get paid twice if their products fail the first time around.

In addition, Medtronic ($MDT) and other industry players are moving into home healthcare and hospital services in response to the alternative payment models. "As more health systems and Accountable Care Organizations look toward maximizing value and population health models, post-acute care providers are playing a critical role in ensuring patients remain healthy through the transition from the hospital to their homes," the general manager of Medtronic's Cardiocom telehealth business, Daniel Cosentino, said in recent a statement.

Devices that catch diseases at an early stage and prevent downstream costs will also flourish, such as Hubble Telemedical's Triad network, which is a system for capturing and sharing retinal images with off-site experts for the diagnosis of diabetic retinopathy. Welch Allyn recently purchased Hubble, noting that diabetic retinopathy exams are tied to incentive payments in various programs designed to improve efficiency, such as Meaningful Use Programs tied to the use of electronic health records, as well as ACOs, which got a boost from the Affordable Care Act.

Indeed, several other M&A transactions have been driven by the new hospital incentives. Medtronic purchased Cardiocom in 2013 for $200 million and shortly thereafter formed its Hospital Solutions business around it. Becton Dickinson ($BDX) is on track to purchase CareFusion ($CFN) for $12.2 billion in part to help hospitals avoid penalties for hospital-acquired infections via CareFusion's medication management services. And St. Jude Medical ($STJ) said its purchase of the CardioMEMS HF System for monitoring heart failure patients will help hospitals avoid financial punishment under the ACA's Hospital Readmissions Reduction Program.

The Department of Health and Human Services says it aims to tie 90% of payments to incentive programs like the Hospital Readmissions Reduction Program by 2018. From almost zero in 2011, the agency aims to use alternative payment models for half of all payments by 2018, up from 20% today. This is the first time the agency has set explicit, quantifiable targets for these programs.

Still, the self-proclaimed "historical" announcement shouldn't be an earthshaker in the device world. As you have seen, these programs were already making an impact, and smart companies are already adjusting.

But the shifting reimbursement sands are also legitimate cause for concern in the device industry. Lower healthcare inflation means there is less money to go around. AdvaMed just publicized a study finding that "medical interventions in the most recent time period analyzed were 20 times less likely to receive a positive national coverage determination (from CMS) compared to 10 years ago." -- Varun Saxena (email | twitter)