By, Meredith Wilkerson. Ph.D.
Whether you are developing a therapeutic, diagnostic, or medical device, FDA approval is not the end of the road. We often hear from founders: “once our [innovation] is FDA approved, we will be acquired.” Indeed, many founders become hyper-focused on obtaining FDA approval, and sometimes we see them forget that ultimately, acquirers care about how they will make money. In the past few years, we have seen acquirers in the medical device sector put an ever-increasing emphasis on startup companies proving the market prior to an acquisition, thus shifting this economic risk (and capital burden) onto founders and early-stage investors.
For most (but not all) device startup companies, the best way to garner enough adoption to become an attractive acquisition target is through establishing reimbursement from payers. Unfortunately, many medical device startups wait too long before developing a reimbursement strategy for their new product. This can result in critical errors in regulatory and/or clinical strategies that can negatively impact reimbursement, extending timelines for adoption and acquisition, and requiring painful conversations around capital and expectations with existing and new investors. The reimbursement strategy must be developed in parallel with regulatory and clinical strategies for new medical devices to avoid additional costs, time, and product launch disasters.
In most cases, firms that invest in the healthcare sector are passionate about improving patient outcomes and making the world a better place – but they only get to continue doing so if they make money to return to their own investors. When investors vet an early-stage medical device opportunity, they spend time carefully assessing the founder’s strategy to gain traction and make money. Part of that assessment is based upon the likelihood of the device – and/or procedure – receiving adequate coverage from insurers relevant to the target patient population. For example, if the device targets elderly patients, it’s nice to have coverage from the private insurers, but it is essential to have coverage from Medicare. Additionally, founders often need to pursue unambiguous coding, which removes barriers to adoption and speeds along the sales pipeline. If relying on unlisted codes, even if a startup is ultimately successful, there is a burden placed upon providers as early adopters to supply additional information to satisfy reporting requirements to receive reimbursement. Then, the startup is undoubtedly faced with an extended deployment timeline and a blunted adoption curve. Achieving these goals can take years, so investor confidence rests in the founder’s understanding of the coding, coverage, and payment specifics of their reimbursement strategy within the context of their regulatory and clinical plans. Founders are wise to consider the following questions:
- If a trial is necessary, is the correct patient population (namely, the population that the preferred insurers care about) being adequately assessed?
- Can the new technology be covered by existing codes? The answer to this question should be considered when estimating R&D costs and the timeline to product launch.
- Will payment be adequate for providers (e.g., hospitals and physicians) in each setting the product will be used? The answer to this question can affect a device’s unit economics and whether it will be preferred over the competition.
In addition to all this, investors also assess the potential for a technology to be adopted into the market long-term. One driving force of long-term adoption is alignment with value-based care programs to advance the quality of care, increase patient access, and account for bundled prices at the point of care. Unlike the traditional and fragmented fee-for-service model, value-based reimbursements are based on providers reporting to payers on demonstrated improvement of the human condition. Medical device interventions that improve, for example, rates of hospital readmissions, adverse events, population health, patient engagement, and quality of life will be positioned to help healthcare organizations decrease spending and improve quality of care. Successful founders will be the ones who demonstrate an understanding of how their medical device can help payers and providers increase the value of care while driving down costs.
While drawing up your next medical device on the back of your napkin, ask yourself: how do I coordinate a reimbursement strategy with the regulatory and clinical plans for this medical device to be adopted into the market long-term? Forward-thinking device makers are prepared for the increasing focus on solutions that favor better outcomes and more cost-effective care management over procedure volume. Sustaining this mindset throughout innovation will help you to develop a device that meets not only the needs of the FDA but also presents a lower financial risk to payers and providers in being adopted into the market.
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