I NDUSTRY W HITEPAPER S ERIES VI

May 2011

REIMBURSEMENT CONSIDERATIONS
AFFECTING MEDICAL
TECHNOLOGY TRANSACTIONS:
The Economic Case for Due Diligence

Charles E. Schneider
Vice President, Global Health Economics, Reimbursement & Public Policy
 Musculoskeletal Clinical Regulatory Advisers, LLC

Table of Contents

Abstract ............................................................................................................. 1

Introduction ........................................................................................................ 1

Recent Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Fluid Political & Payor Systems Affect Planning, Timing & Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Shifting Focus in Transactions: A More Nuanced Approach ................................................... 4

Key Reimbursement Value Drivers ............................................................................... 4

Mitigating Risk While Creating Value Messaging Supporting Product Adoption and Unit Sales .......... 5

Conclusions ......................................................................................................... 5

About the Author .................................................................................................. 5

DISCLAIMER:
MCRA is a retained consultancy providing services to emerging and multinational medical technology companies. Mr. Zigler provides counsel to these
companies, as well as health care provider organizations, medical facility administrators, physicians, insurance carriers, guideline development companies
and employer groups. Readers of this whitepaper should not rely upon information discussed within this manuscript. Rather, individuals must conduct
their own due diligence, evaluate regulations and conduct their own value analysis to determine whether statements and conclusions made within this
whitepaper are applicable and appropriate to the reader’s situation.
 May 2011

REIMBURSEMENT CONSIDERATIONS AFFECTING

MEDICAL TECHNOLOGY TRANSACTIONS:
The Economic Case for Due Diligence

ABSTRACT commercialization. Throughout this process, innovators seeking

Medical technology transactions now require detailed review of the
reimbursement landscape. Clear pathways must be shown, or a
thoughtful plan presented, that support assumptions offered by the
innovator before a new technology will be seriously considered by
the investment community.
Those seeking strategic partners, equity investors or exits through
acquisition must be well organized and present strong evidence that
coding, coverage and payment pathways exist or may reasonably be
established. Prepared materials should address core questions sum-
marized in this article, including strategic reimbursement plans that
tactically support patient access to the technology, impact estab-
lished treatment options, and perhaps create reimbursement barri-
ers to entry. Access to capital and strategic partnerships is available
to emerging technology companies and those seeking to acquire
them. Creating strong value messages through health economic
outcome studies, cost-of-care analyses and risk avoidance models,
innovators will better position themselves in the minds of investors,
while maximizing valuations ascribed to the transaction.
INTRODUCTION
Medical technology development thrives upon innovation and the
inventor’s ability to transition the product from a simple concept to
to maximize valuations are becoming more adept at incorporating
health economic outcomes within their trials, while evaluating,
anticipating and driving reimbursement strategies.
Drawing upon MCRA’s corporate transactional experience, this
white paper offers stakeholders a snapshot of recent medical tech-
nology deals, while illustrating how reimbursement pathways affect
commercial sales expectations, and how health economics now
play an integral role in the diligence process. Though not a compre-
hensive manuscript or intended to provide counsel, this article con-
siders recent trends affecting emerging and established technology
companies, and provides general areas of review now considered
important to acquiring companies when evaluating whether to
invest or acquire viable assets, or divest underperforming ones.
RECENT TRANSACTIONS
As illustrated in Table 1, transactions within the musculoskeletal
medical technology market space were completed despite macroeco-
nomic challenges. According to Frost & Sullivan, the 2008 and 2009
recession was a major factor affecting the value and number of health
care transactions which occurred in these years. As markets stabilized,
2010 offered greater clarity in the marketplace with credit facilities
and transactions becoming more available. However, Frost & Sullivan

KEY CONSIDERATIONS FOR THE INNOVATOR

• Present a Well Organized Reimbursement Story, Landscape & Plan
• Strengthen Transactional Positioning Through Presentation of Health Economic Outcomes Supporting
Technology Adoption
• Remain Vigilant About Market Trends & Regulatory Initiatives Likely to Affect Transactional Assumptions
• Organize Clinical & Health Economic Evidence Necessary to Effect Coding, Coverage & Payments for
Associated and Competing Procedures
• Present Cogent Strategies to Effect Patient Access to the Subject Technology
• Demonstrate a Capacity to Execute the Reimbursement Plan
• Anticipate Milestone Objectives Linked to Future Valuations and Payouts

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May 2011

notes an apparent shift in approach and strategy when evaluating
transactions involving health care companies. Recent surveys by Dow
Jones also suggest more selective investments by larger companies
seeking to add to their portfolio along continuums of care, when
value drivers support transactional decisions.
Acquiring companies engaging MCRA in their purchase or invest-
ment now require: (i) a clear understanding of regulatory matters
affecting the technology or class, (ii) processes to ensure quality sys-
tems and good manufacturing practices associated with technology
production are well established and compliant, (iii) careful consider-
ation of intellectual property and any claims or patent opportunities
which may exist, (iv) valuation of clinical outcomes, regulatory
approval pathways, and additional claims which may supplement
labeled indications, (v) demonstration of compliance with company
guidelines, Federal and State laws, and (vi) great emphasis upon
reimbursement strategies and pathways to market described within
prospectus. The extent to which commercial barriers may exist, a
seller’s ability to mitigate specific risks and prove business assump-
tions impacts an innovators ability to secure capital and execute
desirable transitions.
Contemplating health economic outcomes and commercialization
pathways, reimbursement value drivers have played an increasing
role in the completion of transactions, and affect payment terms
in these deals.
Lessons learned from prior transactions have increased the level
of analysis required relating to reimbursement and market access.
Investors now must understand whether:
• The technology is new and displaces current treatment
standards, or represents minor modifications to established
technologies, and at what cost.
• The technology will change prescription patterns, and sales
points affecting commercialization of the product.
• The product or treatment approach will be meaningful in the
future and time horizon for obsolescence.
• Incremental value associated with the treatment net of fully
loaded costs.
• Market differentiators.
• Reimbursement pathways.
• The technology is sold anywhere in the world, has an established
revenue stream and CE Mark or U.S. FDA market approval.
• A description of predicate technology, history or approval
pathways and regulatory expectations.
MCRA counselors frequently assist technology companies with their
planning, while articulating pathways to market success. Relying
upon their practical experience, advisers work with clients to avoid
errors, mitigate commercial risks and maximize value for stakehold-
ers affected by the technology. Avoidable errors for example might
include a hypothetical company that is considering the acquisition
of a technology.
Following acquisition, the company must complete the FDA approval
process, and facilitate publication of quality articles necessary to real-
ize unit sales and revenue expectations. Were the evidence collected or
articles written that were not well married to the labeled indications,
the value of the technology might well be reduced. Publications that
do not follow labeled indications may not be used to support sales
and are of little value to reimbursement pathways.
By contrast, a company that has considered reimbursement pathways
during its study design, collected economic outcomes during the trial
and is able to demonstrate value to payors, prescribers and other
stakeholders is better positioned for future commercial success.

TABLE 1: MUSCULOSKELETAL MEDICAL TECHNOLOGY TRANSACTION ILLUSTRATIONS (2008 – 2011)

Amount Paid Tr. 12

Year Acquired/Provider/Seller Acquirer/Receiver/Buyer ($ Millions) Mo. Rev.
2011 Rikco International, LLC. DJO Global, Inc. $254.6 3.5x
2010 ApaTech Ltd. Baxter International Inc. $330 5.5x
2010 Lifecore Biomedical Landec Corporation $50 1.9x
2010 Beijing Montagne Medical Device Co. Zimmer Holdings, Inc. $52 5.9x
2010 Osteotech, Inc. Medtronic, Inc. $123 1.3x
2009 Pegasus Biologics, Inc. Synovis Life Technologies, Inc. $12.1 1.3x
2009 Ascent Healthcare Solutions, Inc. Stryker Corporation $525 4.8x
2009 Finsbury Orthopaedics DePuy Orthopaedics N/A 1.8x
2009 Fidia Advanced Biopolymers, s.r.l. Anika Therapeutics, Inc. $17 1.5x
2008 Lifecore Biomedical Warburg Pincus $239 3.4x
2008 INBONE Technologies, Inc. Wright Medical Group, Inc. $28 2.5x
2008 LifeCell Corporation Kinetic Concepts, Inc. $1,700 8.5x
2008 Eurocut Ltd. Sandvik Materials Technology $1.0 0.1x
2008 Theken Spine, LLC Integra LifeSciences $200 5.9x
2008 Abbott Spine Zimmer Holdings, Inc. $360 3.3x

Source: Viscogliosi Brothers, LLC (2011)

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 May 2011

demand higher levels of evidence. Whether the technology was

SUCCESSFUL INNOVATORS ARTICULATE approved through the PMA or 510(k) process has now gained
PATHWAYS TO COMMERCIAL SUCCESS interest by payors. And whether the technology class has shown
• Intellectual Property comparable cost effectiveness and utility are now considered by
insurance carriers, technology assessment organizations and
• Quality Systems
guideline development companies.
• Manufacturing Systems
• Management Systems Shifting the financial burden to the care provider, a re-emergence
• Clinical Standards of case rates, capitation and fee schedules have once again become
• Regulatory Pathways commonplace. In response, facility administrators and prescribers
• US/OUS Reimbursement have become more organized and aggressive in their procurement
• HEOR Value Messaging agreements with manufacturers, thereby affecting product pricing.

Provider consolidation, physician employment, and use of

accountable care organizations now require the physician gate-
FLUID POLITICAL & PAYOR SYSTEMS AFFECT
keeper to become more selective in his prescription. While pay-
PLANNING, TIMING & VALUATIONS
ment penalties, such as those associated with hospital-acquired
Understanding reimbursement trends within sub-markets also
conditions, make the health care provider a more active consumer,
remains a critical function of due diligence. In today’s transactional
highly interested in clinical and economic impact as compared
environment, closer scrutiny of the technology, procedure, com-
with alternative treatment options.
parator treatment options and body of evidence may well affect val-
uations, and may lead to more frequent use of milestone payments
Likewise, commercial insurer coverage policies limit access to tech-
and risk sharing agreements between buyer and seller.
nologies when the health plan perceives the body of evidence is
insufficient. Payor consolidation and transition to publicly traded
The economic burden associated with health care has placed a great
companies allows greater pressure to be applied to health care
deal of constraints upon the payor, provider and medical technolo-
providers. Deferrals to third party assessment and guideline devel-
gy industry. An average U.S. health care average inflation rate of
opment companies, coupled with a lack of transparency offered by
6.2% far exceeds adjustments in wages, and exceeds productivity
commercial carriers, increase the burden placed upon the medical
measures of the broader economy. Public and private institutions,
technology company. While there are good examples of overcoming
therefore, have been required to curb health care costs through leg-
each of these challenges, proper diligence must be based upon
islative and operational means. Such systemic and political changes
weighting the market, evaluating the technology, assessing alterna-
therefore affect whether prospective patients will receive new or
tive treatment options, measuring the degree of professional
existing technologies, providers will receive optimal reimbursement
support and evidence base which has or may be developed.
rates, and impact the rate and timing of product adoption.
Underlying each of these areas is the health economic and value
Beginning in earnest through passage of the Medicare Modernization
message required for product commercialization. Notwithstanding
Act of 2003, then through the Deficit Reduction Act of 2005, the
established coding, coverage or payment mechanisms that may
U.S. Department of Health & Human Services began to transform
enable product sales, market pressures now demand vigilance in
Medicare, Medicaid, CHIP and other public programs. From passive
order to maintain favorable coding and payment pathways, tactics
payor to active consumer, regulatory changes have evolved and con-
to ensure future enabling pathways and support unit sales, as well
sider proof that technologies are clinically safe, effective and provide
as the continuing demonstration of value to stakeholders.
a durable treatment effect over time. Near-term changes will further
require demonstration of cost effectiveness through production of
Value in this context includes a keen understanding of recurring
value dossiers.
and non-recurring expenses, outcomes affecting meaningful clinical
success and overall reduction in cost, pricing alternatives and a
Continuing to evolve the U.S. health care system, the Affordable Care
thoughtful analyses showing risk avoidance. Comparable utility of
Act (ACA) was enacted in May 2010. This body of legislation contin-
the technology or intervention relative to other treatment options
ues to fall under scrutiny by the court systems and now may be chal-
has also become a decision point affecting payor adoption, and
lenged through political shifts in power and appropriation. Investors,
should be considered by the innovator (i.e. relative value to society
technology innovators and industry stakeholders have been affected
in comparison with alternative treatment options for the same or
by the lack of clarity associated with legislative changes, and whether
similar medical condition).
the ACA will be implemented in whole or in part.
To the degree U.S. stakeholders demand higher levels of evidence,
Notwithstanding, organizations such as the Centers for Medicare &
affect net margins and are able to demonstrate risk mitigation, value
Medicaid Services (CMS), commercial carriers, hospital organiza-
dossier’s prepared by technology innovators are a useful tool in the
tions and other interested stakeholders have implemented transfor-
transaction process.
mational approached to payment systems, coverage and patient
access, as well as coding and administrative systems that affect prod-
uct commercialization. For example, coverage policy processes now

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May 2011
SHIFTING FOCUS IN TRANSACTIONS:
A MORE NUANCED APPROACH
While transactions in the past were seen as ways to strengthen
product portfolios, corner markets and protect revenue streams,
today’s acquirer appears more tactical in their placement of equity
and acquisition. For example, investors appear now to require
greater degrees of diligence prior to completing their transactions,
to ensure clear regulatory and reimbursement pathways exist. Risk
mitigation has become a cornerstone of transactions, with acquir-
ers seeking stronger evidence to validate assumptions made by the
seller, as well as a cogent plan to address market opportunities and
potential challenges.
Likewise, valuations are now influenced by product pricing relative
to market conditions, which must be rationalized through quality
analysis using payment amounts and comparable cost of care assess-
ments; unit sales projections validated through market access analy-
ses; and the strength of clinical and health economic outcomes
available through study or published within accessible literature.
KEY REIMBURSEMENT VALUE DRIVERS
Whether considering equity placements, mergers, acquisitions or
strategic relationships, principles involved in any medical technology
deal must consider the reimbursement environment, and potential
affects upon patient access to the technology, payment rates and
their influence upon pricing, mechanisms such as coding and
whether technologies may be considered within payor data systems,
and how the use of the technology will affect the overall clinical
outcomes and cost of care.
Key reimbursement value drivers used by MCRA consultants in
their diligence of technologies include a description of the product,
indications for use and description of the associated procedure(s).
While seemingly simple questions, answers may dramatically affect
whether insurers will provide coverage for the technology, whether
CPT-4, ICD-9, ICD-10-PCS or HCPCS codes may be used for the
primary procedure(s), whether market projections will be based
upon labeled indications versus the hope of off-label sales, as well
as other factors impacted by the reimbursement landscape.
Other key areas of concern include substantive review of the reim-
bursement landscape, publications associated with the treatment
option, alternative treatments and underlying medical condition.
Strategies that further education through publication and messag-
ing, a careful and detailed review of studies completed (or in
process), evaluation of reimbursement mechanisms deployed dur-
ing the study, collection of meaningful clinical and health economic
outcomes, and quality management and compliance of the study.
Contemplating migration of service into alternative treatment sites,
one must consider the location and whether reimbursement mech-
anisms, such as codes, payment rates and coverage, enable patient
access to alternative treatment sites. As procedures become more
commonplace, physicians may begin to consider lower acuities of
care. In the absence of coverage or payment mechanisms, and if one
does not consider regulatory requirements as to whether services
may be performed and reimbursed within these different treatment
locations, sales volume and pricing may be adversely impacted.
4
For example, some procedures historically performed in the acute
care setting are being performed by the experienced surgeon within
the hospital outpatient or freestanding ambulatory surgical center.
Using national average allowable payment rates as a proxy for reim-
bursement, transitioning from a favorable MS-DRG to an APC pay-
ment rate may not contemplate the fully loaded costs associated
with the procedure and associated technology costs. Transitioning
to in-office procedures may also provide greater patient access and
efficiencies, however product pricing and payor coverage must be
considered to ensure the feasibility of the technology.
Technology adoption by the payor and clinical communities must
also be well considered. Well established and proven technologies,
such as disc replacement and interdiscal ablation therapies, continue
to receive cool reception from payors. Conversely, emerging tech-
nologies suffer from a lack of use or published experience, thereby
demanding execution of plans that consider publication of out-
comes and physician experience, patient selection and target popu-
lations. Whether emerging treatment alternatives or standard of
care, all medical device, biologics and pharmaceuticals must now be
supported by dossiers that clearly demonstrate net value. Preferably,
value is comparable to alternative treatment options and reflects
actual experience rather than theoretical assumption.
DUE DILIGENCE CONSIDERATIONS
• Strategic Reimbursement Plan
• Product Description & Indications for Use
• Technique Guides
• Comparable Treatment Alternatives
• Coding for Subject Technology
• Coding for Alternative Treatments
• Future Coding Change Considerations
• Provider Payment Rates
• Treatment Migration by POS
• Reimbursement Landscape & Projections
• Insurance Coverage Guidelines
• Technology Assessments
• Clinical Trial Management Issues
• Literature Review Assessment
• Health Economic Publications
• Value Messaging Tools & Models
• Publication Portfolio Strategies
• Payor Education & Initiatives
• Clinical Community Adoption Statements
• Treatment Guidelines
• Local Use Protocols
• Sales Projections by Place of Service
• Projections by Target Markets
• Product Pricing
• Reimbursement Guides & Tools
• Strategic Contracting Considerations
 May 2011

MITIGATING RISK WHILE CREATING VALUE MESSAGING

SUPPORTING PRODUCT ADOPTION AND UNIT SALES
Risk is best mitigated through the completion of quality studies, TAILORED COMMUNICATIONS: Value Messaging Illustrations
untarnished by bias, and supported by the clinical community.
Greater weight is afforded when technologies are reviewed prospec- Prescribers • Clinical & Health Economic Outcomes
tively, as compared with proper controls, through the rigors of a • Actual Cost of Care Analyses
pre-market approval (PMA) process. However, such studies are Facilities • Productivity Models
time consuming and costly. Therefore, the creation of adjunctive • Efficiency Models
analyses, value models and publications describing the patient pop-
Payors • Clinical Risk Avoidance
ulation for which the technology is indicated, utility value and net
benefits, will lessen reimbursement risks while supporting product • Financial Risk Avoidance
adoption strategies. Regulators • Value Analyses
• Literature Reviews
Risk may be further reduced through the development and execu- Investors • Comparable Utility Values
tion of a reasoned Reimbursement Plan, contemplating methods
affecting coding, coverage, payment, pricing and market adoption.
That is, understanding mechanisms associated with code develop-
CONCLUSIONS
ment, evidence development, clinical trial management, compliance,
Transactions continue to develop within the medical technology
payor education, prescriber and provider systems administration
space, albeit at a slower pace than in previous years. As access to
market trends should be considered when developing strategies.
equity and exits are becoming more difficult, innovators are encour-
Detailed planning based upon experience with these issues will help
aged to prepare well-organized plans that clearly show reimburse-
validate unit sales and pricing projections, and establish clear objec-
ment pathways and strategies necessary to support projections
tives relating to payor adoption, development of new codes or
offered in a prospectus.
assimilation within established coding constructs and how best to
integrate technologies within treatment algorithms thereby securing
Strengthening one’s position, the innovator is encouraged to consider
market share, while creating reimbursement barriers to competing
underlying value drivers which enable market access, affect unit sales
treatments which too affect company value.
and pricing models. Development and execution of reimbursement
strategies, health economic outcomes through prospective or retro-
Positioning technologies with prescribers through sales assets have
spective studies, creating value messaging and models, while demon-
been a hallmark within the medical technology market space. Given
strating risk mitigation and avoidance will strengthen presentations
economic and political trends discussed above, the technology inno-
to possible investors.
vator must now consider value messaging designed to educate a
broader population of stakeholders including prescribers, hospital
As suitors become more cautious about their equity placements and
procurement officers, payors, guideline development companies,
acquisitions, innovators may wish to consider whether future pay-
employers, consumers and others. Value messaging may include
ments may be linked to reimbursement milestones, and whether
sponsorship of major health economic outcome studies, outcomes
strategies may be reasonably executed to support transaction terms.
of which are succinctly delivered to stakeholders. Value messaging
Doing so, the technology innovator may well position the company
may also come in the form of white papers, presentations, market-
or technology in a favorable position for investment and future
ing briefs, interactive models, and through a host of other mediums.
commercial success of the technology.
Value messages may be designed to educate stakeholders about the
technology, differentiation from alternative treatment options, com-
MCRA is a full-service consulting firm, offering strategic counsel
parable clinical, cost and economic outcomes, and avoidance of risk.
and management support services to emerging and well-established
medical technology companies, as well as innovators, investors and
other interested stakeholders. For more information, please contact
Mr. Schneider at cschneider@mcra.com or call (202) 552-5800.

ABOUT THE AUTHOR

Mr. Schneider serves as the Vice President of Global Health
Economics, Reimbursement & Public Policy for the Washington,
DC-based consulting firm Musculoskeletal Clinical Regulatory
Advisers, LLC.
MCRA consultants provide counsel and due diligence services
to large cap and emerging technology companies, as well as
investment firms.
For further information about this white paper or services
offered by MCRA, please contact Mr. Schneider directly by
calling (202) 552-5800 or through electronic mail at
cschneider@mcra.com. Please send correspondence to
1331 H Street NW, 12th Floor, Washington, DC 20005.
5
Regulatory • Clinical • Intellectual Property • Reimbursement

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