So What Happens if Medicare Stops Paying Its Bills?

Earlier in the quarter, OneMedRadio published a Diagnostics Trends interview with Vijay Aggarwal, Managing Partner of the Channel Group, in which Dr. Aggarwal provided his views on investment and growth strategy within our rapidly changing and still uncertain healthcare ecosystem as it pertains to diagnostics.

The “elephant in the room” is the shifting, uncertain complexity of our regulatory and legislative environment. Exactly to that point, on Wednesday, March 27th Dr. Scott Gottlieb, a Forbes contributor focusing on policy, regulation, and public health posted an article entitled “Medicare Has Stopped Paying Bills For Medical Diagnostic Tests. Patients Will Feel”, which instantly caused a collective shiver among some diagnostics-focused investors and advisory groups.

Rick Pierce, founder of FEP Capital Advisors, an advisory firm in Boston with an extensive background in start-up companies through to profitable exits, IPO’s, market capitalization, and capital markets shared his views on the Forbes article and its implications with us.

“While the article is far too reaching in its generalities and misconstrued facts – even to the point of being misleading, it will serve as fodder to make investing in molecular diagnostics surely more risky in the short term and sideline more conservative investors. Aggressive strategic and professional investors will assess the newly imposed reimbursement risks and uncertainty, impose what they deem an appropriate valuation discount on development stage diagnostic companies, likely greater than the inherent or perceived risk and  be well rewarded in the long run. The losers are young companies and US job creation.”

Rick continued…

“Professional investors are trained to manage risk as it relates to reward and adjust the prices they are willing pay for assets accordingly. Hence, getting to yes with professional investors is all about fulfilling a series of risk parameters balanced with price and probability. The risk list of most diagnostics investors is composed of three major areas: science/technical risk, development/regulatory risk and commercialization/launch risk. Forgetting the first two areas of risk, the Forbes article simply injects a level of uncertainty into commercial/launch risk that makes most professional investors stop their decision making process before even considering technical and development risks. We invest in companies to make money. If companies can’t get paid/reimbursed for goods and services – the investment thesis is broken.

“Reimbursement strategy, from both private and governmental payors if not #1, is high on the commercialization risk list for any diagnostics company or its investors. Therefore, any negative change along the reimbursement continuum equals uncertainty or reduction in valuation. It will surely stifle investments from more conservative strategic or professional investors.

“By passing the buck from the Federal level to the State level and letting a cadre of private reimbursement companies (like Palmetto) set an uneven national standard likely bodes as a harbinger of more broad based cuts in diagnostics in general. Borrowing a NASCAR term, this situation lowers the caution flag for investing in molecular diagnostics companies until these critical issues are resolved.

“However, of greater interest and concern is Government and CMS’ implicit silence in the matter to begin with. Inaction and silence will beget procrastination on the part of the states. This serves to damage the competitiveness of the nation’s diagnostics industry, likely driving more jobs off shore to regain gross margin. Both Democrats and Republicans are on the hook while American’s lose out on so many levels.”

Allison DeMell, President and Founder of Great Lakes Healthcare Innovations, a Meaningful Use, Revenue Cycle, EMR Implementation, and ICD-10 expert advisory group in Ohio added:

“The problem is that they (CMS) never had a clear cut methodology to pay these claims, and that encourages fraud and abuse. We went through the same thing some years ago when physicians were being paid based on a percent of charges instead of a fixed rate per procedure…they’ll (CMS) drag their heels developing a ‘fair’ payment structure, and meanwhile, cancers will go undetected and end up costing us more to treat when the patient actually becomes symptomatic.”

Hopefully investors in the healthcare space and diagnostics in particular will embrace a more optimistic growth perspective, and like the rest of us, continue with business as usual a little lighter on their feet.

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