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Preventing Coverage Delays Is Key to Device Profits

    Originally Published MDDI January 2004 Reimbursement

Originally Published MDDI January 2004


Securing reimbursement requires careful consideration of many options. Moving quickly through the process is crucial to the profitability of a device.

Greg Radinsky

An innovative medical technology does not always equate to a commercially successful product in the current marketplace. The timing of a product's entry to market can significantly affect its success. A recent McKinsey & Co. study stated that a six-month delay could reduce profits by 33% over the life cycle of a product.1 Moreover, the product life cycle for many advanced medical technologies is less than two years. Medtronic, for example, derives about two-thirds of its current revenue from products introduced within the past two years.2 In today's competitive market environment, any delay in receiving coverage and adequate reimbursement can be devastating to a medical technology company. Such delays ultimately impact time to market. A company's ability to swiftly navigate the reimbursement quagmire is increasingly critical to a product's success.

Clinical Trial Costs 


The first reimbursement decision a company needs to consider carefully is how it plans to fund clinical trials. Options include paying the entire cost itself, cost sharing with a strategic partner, or obtaining reimbursement from Medicare, a private payer, or both during the study. The company's cost for the clinical trial can be greatly reduced if Medicare or other payers cover some of these expenses.

In many cases, Medicare limits coverage for clinical trials of medical devices that do not qualify for automatic coverage. A medical technology company can automatically qualify to receive Medicare coverage for its clinical trial if it meets the following criteria:

• The trial has a therapeutic intent and enrolls diagnosed beneficiaries.
• The subject or purpose of the trial is within a Medicare benefit category.
• The trial has desirable characteristics as defined by the Centers for Medicare and Medicaid Services (CMS). 
• The trial is funded by the National Institutes of Health (NIH), the Centers for Disease Control (CDC), the Agency for Health Care Quality Research (AHQR), the Department of Defense (DOD), or the Department of Veterans Affairs (VA), or the trial is supported by centers or cooperative groups that are funded by any of these government agencies.3

If a trial meets these requirements, Medicare reimbursement for the routine patient-care costs of a the trial is covered.4 Routine costs include conventional care, items or services required solely for the provision of the investigational device, and reasonable and necessary care arising from the provision of an investigational device.3 The toughest requirement to meet is to secure sponsorship of the study by one of the listed government entities. It can be particularly difficult for a small company to compete for the limited number of sponsorships available from these agencies.

The first reimbursement decision a company needs to consider carefully is how it plans to fund clinical trials.

Building a relationship with a government agency can be time-consuming, and the red tape associated with working with the government could increase a product's time to market. However, companies must view such agencies as strategic partners. Developing a strategic relationship with a government entity can substantially reduce a study's financial risk by ensuring that clinical trial costs are covered.

These relationships can also bolster trial enrollment by providing better access to both the targeted patients and the referring physicians for the study. Many clinical trials get delayed for years—and some never get completed—because of the difficulty in finding patients who meet a given clinical trial's qualifying criteria. It is important that medical technology companies carefully weigh the trade-offs between working with a government agency and going solo.

A company also needs to consider whether it will be reimbursed for a device approved under an investigational device exemption (IDE) (see sidebar below). 

IDE approval is critical for many companies to continue forward with a clinical trial. Medicare does not reimburse investigational items or services under normal circumstances. However, for medical technologies approved as IDEs, Medicare has had a long-standing policy of considering reimbursement for all those used in a clinical trial.

Category A devices are novel, innovative technologies for which absolute risk has not been determined. As a result, CMS does not provide coverage for devices in this category. The agency is unsure whether these devices are safe and effective. Category B devices are new generations of proven technologies for which underlying questions of safety and effectiveness have been resolved.

Medicare generally provides coverage for devices that are categorized under Category B, as long as the devices are reasonable and necessary for the diagnosis or treatment of a patient's condition. It is important to note, however, that this determination is not automatic. Category B status paves the way for clinical investigators to seek Medicare reimbursement for the device. Accordingly, Category B status often helps decrease the device sponsor's trial costs.6 This is particularly important for device companies that have limited resources for getting products to market. 

Medicare Coverage 

Even after devices have received FDA marketing clearance, obtaining approval for Medicare coverage and the reimbursement process are significant hurdles that can affect a product's time to market. It can take anywhere from 15 months to more than five years for a new technology to become available to Medicare beneficiaries.7 

Medicare coverage is critical for innovative breakthrough products because CMS coverage decisions are often adopted by private payers as well. Because new technologies that are incremental improvements on existing products can be filed under a 510(k) application, Medicare coverage is a much less critical issue for these devices. 

CMS determines whether a product is reasonable and necessary either through a national coverage decision (NCD) or a local coverage decision (LCD). 

Reasonable and necessary has been interpreted to mean that the medical product is safe and effective, medically necessary, and not experimental. However, CMS has struggled over the years with defining this language. 

The agency has attempted to include a requirement of cost-effectiveness, but the medical device industry has foiled agency attempts to include this criterion. Manufacturers are concerned that this consideration could lead to the rationing of new technologies. However, in May 2000 CMS proposed in a notice of intent that Medicare coverage would be granted if a product meets the following three requirements: it falls within a Medicare benefit category; it demonstrates a medical benefit; and it demonstrates added value to the Medicare population.8 Nonetheless, it is widely believed that CMS will consider the cost impact of Medicare coverage decisions informally—especially as healthcare costs continue to rise. 

The vast majority of coverage decisions are made locally by entities contracted by Medicare to administer the program. These decisions apply only in that contractor's specific region. NCDs supersede all prior LCDs made by local carriers and fiscal intermediaries. NCDs are usually made either when a technology has a significant cost impact on the Medicare program or when conflicting LCDs exist.

From the perspective of a device manufacturer, LCDs often offer advantages over NCDs. LCDs usually require fewer initial resources, generate an immediate revenue stream, provide a shorter time frame, and avoid the all-or-nothing outcome associated with a national decision. Carefully selecting the appropriate locus of coverage activity is important to ensure that a product's time to market is not significantly delayed. 

Humanitarian Device Exemption 

The vast majority of coverage 
decisions are made locally by 
entities contracted by Medicare to administer the program. These decisions apply only in that contractor's specific region.

The significant costs of conducting a clinical trial to treat small patient populations often do not make sense financially for a manufacturer. FDA's humanitarian device exemption (HDE), which went into effect October 24, 1996, is an alternative approval route that manufacturers should consider. An HDE can significantly reduce costs and shorten a product's time to market.9 An HDE provides an incentive for manufacturers to develop devices intended to benefit patients in the treatment and diagnosis of diseases or conditions that affect fewer than 4000 individuals in the United States per year. To qualify for an HDE, a device must have no comparable device available to treat or diagnose the disease or condition.

If granted, the company that is awarded the HDE is exempt from conducting any clinical trials to demonstrate its device's efficacy. In addition to this time and cost savings, the company is also exempt from filing a premarket approval or 510(k) application, either of which requires submitting many volumes of information to FDA. However, an HDE application must contain sufficient scientific and clinical information for FDA to determine whether the device poses a significant risk to the patient. 

The HDE's stringent requirements have deterred many companies from seeking this exemption. So far, FDA has approved only 30 HDE applications.9 Despite an exemption allowing the humanitarian use device to be marketed in the United States and clearing the pathway for receiving reimbursement, HDEs have several limitations.

First, a manufacturer is not allowed to make a profit from the sales of a humanitarian use device (HUD). However, a manufacturer is allowed to offset the cost of the device's research, development, fabrication, and distribution. Offsetting such costs can provide enough justification for many companies to consider this option.

Second, with an HDE approval, the company will not have proved safety and efficacy. The company will only have demonstrated that the probable benefit from the device outweighs the risk of injury or illness when compared with currently available forms of treatment. This basic requirement limits a company's ability to promote the technology for other uses and restricts the labeling of the HUD.

Third, once an HUD is approved, it may be difficult to attract patients for an additional study to prove safety and efficacy. If patients can gain immediate access to the technology via the HUD, they are unlikely to wait to enroll in a clinical trial.

Fourth, a company needs to allocate additional resources to ensure that its product is covered and adequately reimbursed. Manufacturers would still need to work with local medical directors to receive coverage. Private payers are often reluctant to provide coverage for HUDs, and they typically require prior authorization. In addition, an HUD can only be used after institutional review board (IRB) approval has been obtained to use the device for the FDA-approved indication. This prerequisite can severely restrict access to the product. If a healthcare provider only uses a limited number of products each year, it may be unwilling to invest resources into receiving IRB approval. Also, IRB approval for a product not already available can restrict a physician's access to the device. 

Notwithstanding, both large and small medical technology companies have used this exemption for a variety of reasons, despite its limitations on potential profits. For example, Medtronic received an HDE for its gastric stimulation system, and Guidant received an HDE for its intracranial stent system.10, 11 

Large companies often decide to file an HDE for one of the following reasons:

• To help patients immediately.
• To build a relationship with a new subspecialty of physicians.
• To reach the marketplace quicker.
• To increase the barriers to entry for other firms to invest in that specific technology platform.
• To field discussion within the medical community about broader applications of the technology platform.
• To gain physician adoption before a larger investment is made for a clinical trial or future indications.

Smaller companies can also tap into these benefits. For example, Pharmanetics, a smaller technology company, received HDE approval for the Ecarin clotting time test. The test is used for patients suffering from heparin-induced thrombocytopenia who receive Refludan while undergoing cardiopulmonary bypass.12

Pharmanetics believes that direct thrombin inhibitors will ultimately be used for additional indications and may be administered with other drugs. The company hopes to leverage this approval to help fund and attract venture capital firms to invest in its technology platform.

HDE regulations allow manufacturers to charge for the device's research, development, fabrication, and distribution costs.13 Recouping these costs can enable a smaller device company to continue to operate and to promote the technology. It also provides a cushion that allows time to attract funding from venture capital firms or acquisition by a larger device company. Despite the HDE's limitations, it is a way for some companies to compete when ordinarily it would be cost prohibitive to enter a particular market. The option certainly provides an avenue that enables a company's products to reach the market quicker.

Communication with the Federal Government 

In designing a clinical trial and determining the best coverage route to pursue, it is important to maintain continuous communication with the appropriate federal agencies. Both FDA and CMS have a role in the Medicare coverage and payment process. Submitting FDA applications correctly from the start of the process saves considerable time and resources that can significantly affect the product's revenue stream.
Moreover, communication can help ensure properly designed clinical trials. Approval is directly related to the quality of the studies manufacturers submit to FDA. Oftentimes, manufacturers are afraid to contact the government for fear that an agency may tell them they cannot do something. Although this should not be the case, there are some important steps to take when communicating with any government agency. 

FDA and CMS are different agencies, with separate goals and cultures. FDA is primarily concerned with safety. In contrast, CMS, a purchaser of healthcare services and products, is largely concerned with whether a technology will improve health outcomes compared with competing technologies. When preparing to meet with each agency, manufacturers must understand the role each one plays in the Medicare coverage and payment process.

In most cases, a manufacturer will want to meet first with FDA to discuss the design of the trial. Later in the process, a manufacturer can schedule a meeting with CMS's Coverage and Analysis Group to receive input based on its coverage requirements. 

The existence of a variety of Medicare payment systems for medical devices makes the 
reimbursement process even more complex.

It is important to realize that CMS and FDA may not always share all the information the manufacturer has submitted to each agency. It is also important to recognize that many departments within a government agency may not always communicate with each other. Accordingly, it is important to ensure that both agencies and all relevant departments receive the pertinent information regarding the submission. It is critical to present consistent information to both agencies and be factually accurate. A perception that facts have been misrepresented can tarnish the company's reputation for many years with the particular agency.

In addition, it is important that manufacturers not rush submissions to FDA. Submissions should be drafted carefully and should be reviewer-friendly to prevent delays and misunderstandings. It is imperative that manufacturers keep a written record of all substantive communications with the government. This record is critical to protect the company if there is ever confusion resulting from a meeting or conversation.

If a company hires a consultant to assist in the process, it is crucial that he or she has specific experience relating to the technology and a reputable history in working with the specific government office. Early and continuous communication can contribute greatly to helping a manufacturer move swiftly through the regulatory approval and coverage process. A smooth regulatory experience can ensure that a product reaches the market quickly.

Private Payers and MCOs 

Medical device companies must have an effective communication and reimbursement strategy for working with managed-care organizations (MCOs) to ensure rapid coverage by these groups. Managed care is predicted to continue to grow in the United States—currently more than 125 million Americans rely on more than 2.5 million group health plans for medical coverage.14
Private payers generally do not seek out new technologies to provide coverage. In fact, an FDA-approved device or procedure does not automatically receive coverage from a health plan or from Medicare. In addition, a national MCO's policy to cover a service does not guarantee coverage by the plan's regional affiliates. However, it is likely that an MCO will be influenced in its decision by a Medicare coverage policy. 

Medical technology companies need to understand how MCOs adopt new technologies. Device manufacturers must identify key decision makers for an MCO. These individuals are primarily medical directors, but can also include an MCO's case managers or members of its various committees. Before beginning a study, it is helpful for manufacturers to seek input from private payers to understand what information they require to provide coverage. 

Educating these individuals throughout the product's initial stages of coverage and reimbursement approval is crucial. For most new technology products, manufacturers need to provide an MCO with substantial data to support the use of its device. These data typically include published literature (preferably peer reviewed), assessments by other organizations, and endorsements from key opinion leaders. MCOs typically conduct a technology assessment (TA) in which they evaluate a technology in terms of effectiveness, safety, indications for use, and cost—especially if the cost savings is not readily evident.15 For example, the Blue Cross Blue Shield Technology Evaluation Center uses the following criteria to evaluate devices:

• The appropriate governmental regulatory bodies must approve the technology.
• Scientific evidence must permit conclusions about the effect on health outcomes.
• The technology must improve the net outcome.
• The technology must be as beneficial as any established technology. 
• The improvement must be attainable outside the investigational setting.16

The TA is designed to carefully evaluate the scientific evidence and to compare the new device's benefits to the existing standard of care. Although MCOs review manufacturer-supported peer review studies, they more carefully evaluate the design and methods of the study.15 In addition, MCO TAs may take into account state mandates, publicity, demand, competition, and litigation. Preparing a strategy up front to address MCOs' concerns provides a greater likelihood that they will provide coverage for a manufacturer's new product.

Coding and Medicare Payment 

After a CMS coverage decision, CMS and its contractors require a method to confirm that the covered product or service was provided or performed. Procedure codes provide this proof. If a new product or service is introduced, often a new procedure code must be created. This step creates another major reimbursement hurdle that can affect a new technology's time to market.

It can take as long as 27 months after launch for a new code to be implemented.7 If suitable coding is not assigned, new technologies may fail to get reimbursed at their appropriate level. The government uses a variety of coding systems, including ICD-9-CM, CPT (i.e., HCPCS Level I), and HCPCS Level II. CPT codes are used for both diagnostics and procedures to describe physician services. ICD-9-CM codes are used to report diagnoses to the payer. HCPCS codes are assigned to physician services and medical equipment used in outpatient settings.

It is also important to recognize that many departments within a government agency 
may not always communicate with each other.

A comprehensive discussion of the different coding and payment systems is beyond the scope of this article. However, it is important to note that it is more difficult to have much influence on this process than on the coverage process. The ability to collect an adequate amount of reliable utilization data can be difficult because providers often inadvertently bill the wrong codes for new technologies. Manufacturers' access to coding meetings such as the AMA's CPT panel is limited. In addition, decisions on new CPT codes are generally made only once a year, and existing physician reimbursement codes are only reviewed every five years. Even with these limitations, though, manufacturers need to prepare early to address these challenges. Early preparation can at least guarantee that a manufacturer is ready during the limited coding submission opportunities. 

The existence of a variety of Medicare payment systems for medical devices makes the reimbursement process even more complex. Medicare has fee schedules (i.e., price lists) that provide a fixed payment for items or services. Fee schedules reimburse physicians and other healthcare providers for items and services that are not bundled into prospective payment systems (PPSs). Bundled services would include items such as durable medical equipment and clinical laboratory tests.

Medicare has established a separate PPS for inpatient and the outpatient settings. The Medicare program implemented these systems to reward efficient healthcare providers for cost-effective delivery of patient services. In the inpatient setting, the PPS limits the amount of reimbursement to hospitals by setting a fixed price for a particular diagnosis-related group (DRG). It is important for a manufacturer to focus on how its device reduces total cost or enhances care that is medically necessary. 

Outpatient services performed at a hospital that are not included as part of the inpatient stay under Medicare Part A are reimbursed under the Outpatient Prospective Payment System (OPPS) that went into effect in August 2000. These services typically include clinical visits, emergency room visits, x-rays, and surgical procedures that are not performed as part of an inpatient stay. OPPS's incentive system is designed to reduce rising healthcare costs and limit beneficiaries' coinsurance levels. Services, supplies, drugs, and devices are grouped into ambulatory payment classifications (APCs) for particular procedures.

Each APC has a separate payment rate that is meant to account for all of the items used in the procedure and assigns a relative payment weight, based on the median costs of the services within the APC. However, a hospital receives multiple APC payments for a single visit if multiple services are delivered during that visit. Similarly, ambulatory surgical center (ASC) services are assigned to one of eight payment groups analogous to the APCs.7

For the PPSs and the APC payment system, it is critical that a medical technology company have a device that can demonstrate its cost savings. It often is not enough that a new device provides a solution to a medical need unless that benefit provides a substantial improvement over an existing therapy. As a result, it is critical for companies that develop devices to compile as much cost data as possible during the clinical trial process to demonstrate cost savings—in addition to data demonstrating efficacy and safety. Such data can be expensive to collect. With this in mind, it may be appropriate for a company to consider aligning itself with a strategic partner if it cannot adequately fund this process.

For certain kinds of new products, the inpatient DRG and outpatient APC systems have affirmative mechanisms to make additional payments. However, it is difficult to qualify for additional payment—particularly for the new-technology adjustment under the DRG system. Moreover, the additional payment adjustment is temporary and often only lasts for a couple of years.

CMS has a separate reimbursement system for physicians. Physician services are separately payable by Medicare based on resource-based relative value scale (RBRVS) fee schedules updated annually by CMS. These payments are in addition to and separate from any DRG or APC payments for hospital services. Under the RBRVS system, physicians and other providers are allowed to bill for services using CPT codes. CPT codes are assigned relative value units that reflect the practice costs involved in performing a given procedure. 

Likewise, it is important for a medical device company to develop and publish cost data that can help increase the physician's payment for the particular procedure. It is important to note that physicians often not only compare their reimbursement amount to competing procedures, but they will also measure the time it takes to perform the procedure. Without satisfying both of these factors, adoption of a new technology could be hampered. 

Physicians also can have much influence in hospitals as to whether they prescribe a particular device. However, in some cases, a physician's reimbursement may be very different from a hospital's reimbursement. As a result, it is critically important to satisfy both of these important stakeholders. If either party is not satisfied with its reimbursement, this too can impede adoption of a particular technology.


It is no longer enough for a new medical technology to provide a solution to an unmet clinical need, nor is it sufficient to simply reduce the cost of a current treatment. Medical device companies must also move quickly through the reimbursement process to meet time-to-market and profit objectives. Even a few months' delay to market can substantially affect the success of a new technology given today's competitive medical landscape.

Considering the resources needed to ensure a smooth reimbursement path, it is not surprising that most small medical device companies have little or no sales revenue. Many eventually opt to be acquired by a larger company. However, it is not impossible for a smaller company to achieve success in this labyrinth of reimbursement complexity.

The following factors are key to developing a successful reimbursement strategy. It is essential for a company to assess its available resources. In this industry in particular, available resources define where the firm fits within its competitive environment. With the complex steps involved in assembling persuasive cost data, it is essential that a manufacturer devote adequate resources to this task. Most companies will at some time fall into a sector in which they have minimal resources. In these cases, it is important to consider forming strategic alliances to help fund the clinical trial process. Alliances can include not only relationships with other medical technology companies, but also with various government agencies and MCOs.

Moreover, companies should also consider maximizing these relationships to explore options such as qualifying for automatic Medicare coverage. Manufacturers must understand that a variety of stakeholders must be satisfied before the medical community embraces a new product. It is not enough to just focus on a single stakeholder in the development of a reimbursement strategy. Hospitals, physicians, private payers, and MCOs all play an important role in the success of most products.

Delays in coverage and inadequate payment will only continue to plague medical device companies' success. Developing an effective reimbursement strategy that addresses the challenges is not just an option, but rather is a necessity to be successful in today's medical marketplace. 


1. GL Jain, “Medical Device Development: Concept to Commercialization—A Long Journey,” Medical Plastics Data Services, May 2001. 
2. Medtronic Inc., Annual Report 2002, available from Internet:
3. Centers for Medicare and Medicaid Services, Medicare Coverage Policy, Final National Coverage Decision, (Baltimore, MD; CMS, Sept. 19, 2000).
4. Medicare Prescription Drug and Modernization Act (2003), H.R. 2473, Sec. 733 (b) Medicare Coverage of Routine Costs Associated with Certain Clinical Trials. 
5. Dawn N Norman et al.,“Medical Device Clinical Trials: A Small Company Perspective,” Regulatory Compliance NewsLetter, Fall 2002. 
6. Ted Mannen, “IDE Status Offers Direct Route to Reimbursement,” MD&DI 25, no. 5 (2003); 62–68; available from Internet:
7. “Outlook for Medical Technology: Will Patients Get the Care They Need?, Report 2, The Medicare Payment Process and Patient Access to Technology,” prepared by The Lewin Group (Washington, DC: AdvaMed, 2000).
8. “Medicare Proposal Will Help Standardize Coverage Decisions for Additional Treatments,” [on-line] available from Internet: Counter=202 [cited Oct. 20, 2003]. 
9. “Humanitarian Use Devices,” available from Internet: (cited Oct. 12, 2003). 
10. “Gastric Stimulation System Receives Humanitarian Device Exemption from FDA,” April 7, 2000, available from Internet: (cited April 20, 2003). 
11. “Guidant Receives Humanitarian Device Exemption for New Intracranial Stent,” Oct. 3, 2002, available from Internet: (cited Apr. 20, 2003). 
12. “Pharmanetics Receives Humanitarian Device Exemption for Ecarin Clotting Time Test to Monitor Refludan,” May 17, 2000, available from Internet: (cited April 18, 2003). 
13. Code of Federal Regulations, 21 CFR 814.104 (2003).
14. Phyllis C Borzi, The Evolving Role of ERISA Preemption and Managed Care: Current Issues of Importance to Employers, Fiduciaries and Providers, Q286 A.L.I.-A.B.A. 17, 19 (1999). 
15. Steve Garber et al., “Managed Care and the Evaluation and Adoption of Emerging Medical Technologies,” (paper presented at HIMA 2000 Annual Meeting, Phoenix), March 23, 2000. 
16. “Blue Facts,” available from Internet: http:// (cited Oct. 12, 2003). 

Copyright ©2004 Medical Device & Diagnostic Industry

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