Reimbursement and Coverage Strategies Matter, Here’s Why

For more than two decades, new innovations have been launched into an inpatient market in which prospective payment systems, and unanticipated charges have forced hospitals to operate efficiently or face significant downsizing (or even closure).¹ The bottom line is that new innovations have to fit within the operating margins imposed by third-party payers on hospitals.

The policy of coverage with evidence development (CED) recently adopted by Medicare for provisional coverage of new technologies can be expected to become a new standard practice for private payers’ coverage decisions.² Two real-world examples illustrate how market access is affected by companies’ market initiatives.

1. A Breakthrough Technology Failed to Convince Payers and Hospitals

The Charité Artificial Spinal Disc was once viewed as a revolutionary surgical technology. Charité became the first device of its kind to receive regulatory approval and commercialized in the US and Europe for the total replacement of diseased lumbar disks.³

Positioned as an alternative to spinal infusion, the standard of care at the time Charité was developed in Germany in the mid-1980s and later launched by DePuy a Johnson and Johnson Company, Charité was approved by FDA for the treatment of degenerative disc disease (DDD), specifically for the arthroplasty in skeletally-mature patient at one level who were refractory after at least six months’ conservative medical management.⁴

What Went Wrong?

The commercial and clinical development problems that Charité experienced are chronicled in “The Charité: Lessons in the Launch of a New Medical Device,” by David Arida, et al.5 By 2006, the year in which Arida’s analysis was performed, Charité’s commercial future was already in doubt. Charité had failed to convince CMS and private third-party payers that its use should be covered and reimbursed. CMS had declined to offer a national coverage decision and deferred to its regional carriers. Private payers cited a lack of comparative evidence that the Charité was effective as promoted. Follow-up clinical evaluations of the device and the surgical procedure cast further doubts about its safety and effectiveness.⁶

The Charité device did not become a physician preference item, and its adoption was actively opposed by purchasing departments and other administrative decision makers. Summarizing Arida’s points, DePuy failed to support Charité’s launch and subsequent commercialization in the following critical areas:⁵

A disconnect occurred between the device’s positioning as an alternative to modern spinal fusion method when the clinical trial supporting this claim was a non-inferiority 2-year clinical trial comparing Charité with the Bagby and Kuslich (BAK) cage, a somewhat controversial procedure that had been largely discontinued due to poor outcomes.

By pricing Charité at a level about 2.5 times (around $11,500) that of the BAK cage device’s price without securing new procedural codes at or before launch, DePuy increased hospital’s costs for arthroplasty procedures. 
DePuy put the cart before the horse by building demand for Charité before building evidence to position it as a standard of care in spinal surgery for DDD.

DePuy largely ignored the role of workers compensation insurance carriers in influencing other insurers by not studying the long-term effects of Charité on labor productivity and time to return to work. The potential reduction in workers compensation claims could have been influential with employers and health benefit design consultants.

Charité was also at a competitive disadvantage before its FDA approval in 2004 as a result of the 2003 landmark study, “Total Disc Replacement for Chronic Low Back Pain . . . ,” which concluded that there was no definitive clinical evidence that disc replacement surgery was efficacious, provided continual motion, or resulted in fewer adjacent segment degenerative problems.⁷ The net effect was to create a skepticism in the minds of the surgical community over the true clinical value of arthroplasty.

Lessons Learned

DePuy and other device manufacturers did not fully appreciate that conventional clinical endpoints used to secure 510(k) clearance are not necessarily the outcomes that third-party payers use making coverage decisions, nor the outcomes hospitals use for purchasing decisions. Because hospitals are especially vulnerable to the financial costs and risk exposure associated with the adoption of new technologies, they want comparative effectiveness and economic information that is relevant to their unique environment. With regard the latter information, hospitals want documentation of cost-offsets in resource utilization that can be actually realized—not just paper savings.

The bottom line is that DePuy did not build a body of evidence necessary to establish comparative safety and effectiveness of Charité with payers and surgeons. Without coverage and physician support, hospitals were not able to justify purchasing Charité for cost reasons, and the device failed commercially.

The second case demonstrates that some devices, including those with high capital costs, can be successful if the purchaser can use it to increase revenues, provided reimbursement and coverage are not major hurdles. Its increased success is promising although hospital finances in the new era of healthcare reform may be a rate-limiting factor.

2. Driving Sales by Increasing Patient, Physician and Hospital Demand for Robotic-Assisted Laparoscopic Surgeries

Approved by FDA in 2000, the da Vinci Surgical System by Intuitive Surgical was the first fully robotic surgical device launched in the US.⁷ Approved for use in a variety of laparoscopic procedures, the da Vinci device has been said to have revolutionized the use, market expansion, and acceptance of minimally invasive surgical (MIS) procedures. Its most frequent applications are MIS procedures in gynecology (hysterectomy) and urology (prostectomy), but applications are increasingly commonplace in general surgery, as well as otolaryngology, cardiac, and thoracic surgical procedures.⁸  

The da Vinci overcame physical limitations associated with fixed, nonrotating laparoscopic instruments used in conventional and open surgeries. It is also reported to have reduced surgeons’ hand tremors and fatigue.⁹

The da Vinci is a major piece of capital equipment that consists of a remote console (or dual console depending on the model), a patient side cart, three or four robotic arms with 3-D (or HD 3-D) cameras in each arm, tubing, cables proprietary wrist devices, and other permanent and disposable surgical attachments for each robotic arm. The surgeon is able to view the surgical area with high resolution and guide the device with precise movements using a number of coordinated foot and hand controls.⁹

The da Vinci system claims to offer significant improvement compared with traditional laparoscopic surgery in patient outcomes. It claims to promote less blood loss and fewer transfusions, less postoperative pain and pain medications, fewer surgically-related infections, shortened hospital stays, greater patient satisfaction, less scarring, and decreased recovery times.⁹ It also enables surgeons to increase the volume of MIS performed in the hospital, which in turn generates revenue.
The da Vinci system is Intuitive Surgical’s sole product line. Although there are other manufacturers in the robotic-assisted device surgical space, the da Vinci has no direct competition in MIS.

For the first six months of 2010, the company’s revenues were $679.3 million, of which, $573.3 million were from da Vinci sales and $106.0 from service contracts, compared with $449.0 million in the first six months of 2009.¹⁰ Intuitive Surgical states that by late 2009, the da Vinci had been sold to approximately 1028 academic and community hospitals in the United States, and unit sales were growing at 25% annually.

Intuitive Surgical is, in all aspects, a long-term, relationship-focused partner to purchasing hospitals. In addition to providing value-added technology support services to the hospital, Intuitive Surgical provides marketing and education materials to surgeons who are trained (or want to be trained) on the da Vinci and to patients. In effect, Intuitive Surgical provides the hospital and surgeon with revenue-generating marketing tools to increase da Vinci’s use in MIS. Apart from these activities, Intuitive Surgical has an expensive media and corporate communications function, maximizing opportunities for public awareness about the technology and availability.⁸

Da Vinci’s Limitations

Regardless of the da Vinci’s significant commercial success, the system is not without its critics. The da Vinci device’s major limitations are twofold: First, da Vinci’s upfront purchase price is anywhere between $1 million and $2.3 million, depending on the specific da Vinci system and the hospital’s geographic location. In addition, on­going annual operating costs can reach $340,000.¹¹ The annual service contract between a hospital and Intuitive Surgical varies between $100,000 and $180,000 depending on the model purchased. Equipment acquisition costs represent sunk costs and as such, they cannot be charged in full to patients or payers. This means that procedural volume has to be sufficiently high to cover the equipment’s amortization, operating costs and generate a return on investment.

As implied, the initial costs are incremental, compared with the resource requirements of open surgery. It is estimated that an incremental $2200 is spent per each 10 procedures for disposable medical equipment (shears, needle drivers, etc.).12 In fact, the only potential for cost-savings in a hospital is decreased length of stay, since the da Vinci’s use is also associated with longer times in the operating suite.¹²

The second limitation of the da Vinci device is that there is a paucity of comparative effectiveness outcomes data versus open, traditional surgical procedures. The lack of evidence is due to the difficulty of designing and conducting clinical studies of patient outcomes using the da Vinci versus open or traditional surgery techniques. Most of the supportive evidence concerning da Vinci comes from case studies and small, uncontrolled clinical trials, according to the Canadian Agency for Drugs and Technologies in Health (CADTH). CADTH has released a document concluding that the da Vinci’s clinical and cost effectiveness outcomes in prostectomy (the only indication it evaluated) are largely unknown. Despite the lack of higher order evidence, the CADTH deferred decision-making about acquisition of the da Vinci to the local hospital’s level.¹³

Reimbursement and Regulatory Issues

Approval of the da Vinci system in laparoscopic surgical procedures was characterized by rapidity did not experience much regulatory delay. The device was submitted under the 510(k) review guidelines and the evidence was accepted for meeting safety and efficacy approval criteria. Because FDA does not regulate physicians’ uses of the da Vinci, adoption has been rapid and unfettered.

Because laparoscopic robotic-assisted surgery is covered under existing and routine ICD and CPT coding practices, unlisted codes, or modifier 22 increased procedural services have not been necessary. The only limiting factor of note is that payers have not allowed an additional payment for the robotic technique. When certain payers accept HCPCS Level II codes, a hospital is allowed to submit an S2900 surgical technique code (S) in addition to the code for the primary procedure. However, Medicare does not accept S codes for additional payment unique to robotic-assisted procedures, and national private payers generally follow Medicare policy. Consequently, Intuitive Surgical has been successful in positioning the da Vinci’s use within the framework of existing coding policies and practices and avoided draconian reimbursement constraints that could have been imposed by payers.

Market and Environmental Uncertainties

The serious implication of healthcare reform is the increasing requirement for comparative effectiveness information as a potential condition of coverage by private payers and CMS. As mentioned previously, the da Vinci system’s benefits are largely unsubstantiated by robust clinical evidence. Although it is unlikely that payers will reverse positive coverage decisions, reimbursement for unapproved uses may be delayed as payers’ demands for comparative evidence becomes a more common practice. 

Lessons Learned

The da Vinci system is an example of a successful launch followed by sustained growth of a new device that has strong provider and patient support despite a difficult coverage and reimbursement environment. Its success is due, at least in part, to the uptick in laparoscopic or MIS procedures that have established, documented clinical and economic benefits over traditional, open surgical procedures’ patient outcomes. By working with existing procedural codes Intuitive Surgical was able to bypass some of the difficulties other device manufacturers have encountered in securing reimbursement codes.
The da Vinci Surgical System is a provider-driven technology that has significant revenue enhancement opportunities for hospitals and surgeons. Although empiric, comparative effectiveness research is lacking, da Vinci benefited from a procedural shift from open to laparoscopic procedures (for which reimbursement codes already existed), and its initial perceived value has stood up over time.

Conclusion

The two cases represented in this article illustrate how the current and future stakeholder environments affect manufacturers’ ultimate success in launching new technologies. Both technologies, the Charité and the da Vinci, share product and environmental similarities. However, the da Vinci has been able to establish better perceived market value, based on its approach to physicians, hospitals, and payers.

References

Jeremiah Sparks is senior product manager global strategic marketing at Allergan in Boston. Robert Freeman director and Nancy J. Davidson is senior director for the Aquitas Group (San Diego, CA).