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TMFHelical (99.09)

More on MAKO

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August 23, 2012 – Comments (4) | RELATED TICKERS: MAKO.DL , ISRG

I commented last month on my decision to sell MAKO Surgical and sit on the sidelines, despite still thinking quite highly of the company's prospects.  The key reason for this was  I am of the opinion that they will IFthey can demonstrate that the use of their system has cost benefits (long over short term) and desrves to be reimbursed.

MAKO is a recommendation in the Rule Breakers newsletter, and  well regarded, or at least heavily discussed, by many subscribers.  A recent discussion there wondered (in small part) whether public relations / advertising / customer inquiry could get hosptials to take a closer look at the company's robotic product offering.  This is a past (mostly) of my comments in that thread in which I expand on why I'm inclined still to wait with MAKO.


Call your local hospital and ask if they have MAKO."


I think it would be better if you called your health plan, and asked them if they covered the procedure.  I continue to believe that this is where the issue lies.


From the last 10K


If hospitals, surgeons and other healthcare providers are unable to obtain coverage or reimbursement from third-party payors for MAKOplasty procedures, hospitals may not purchase the RIO system and surgeons may not perform MAKOplasty, which would harm our business and financial results.


          Our ability to successfully commercialize MAKOplasty depends significantly on the availability of coverage and reimbursement from third-party payors, including governmental programs such as Medicare and Medicaid as well as private insurance and private health plans. Reimbursement is a significant factor considered by hospitals in determining whether to acquire new capital equipment such as our technology. Although our customers have been successful in obtaining coverage and reimbursement, we cannot assure you that procedures using our technology will be covered or reimbursed by third-party payors in the future or that such reimbursements will not be reduced to the extent that they will adversely affect capital allocations for purchase of our RIO system.
          We anticipate that in the U.S. our products will be purchased primarily by hospitals, which bill various third-party payors, including governmental healthcare programs, such as Medicare, and private insurance plans for procedures using our technology. Ensuring adequate Medicare reimbursement can be a lengthy and expensive endeavor and we cannot provide assurance that we will be successful. In addition, the U.S. Congress may pass legislation impacting coverage and reimbursement for healthcare services, including Medicare reimbursement to physicians and hospitals. Many private third-party payors look to Medicare’s coverage and reimbursement policies in setting their coverage policies and reimbursement amounts. If the Centers for Medicare and Medicaid Services, or CMS, the federal agency that administers the Medicare program, or Medicare contractors limit payments to hospitals or surgeons for MAKOplasty procedures, private payors may similarly limit payments. In addition, state legislatures may enact laws limiting or otherwise affecting the level of Medicaid reimbursements. As a result, hospitals may not purchase the RIO system and surgeons may choose not to perform MAKOplasty, and, as a result, our business and financial results would be adversely affected.
          Medicare pays acute care hospitals a prospectively determined amount for inpatient operating costs under the Medicare hospital inpatient prospective payment system, or PPS. Under the Medicare hospital inpatient PPS, the prospective payment for a patient’s stay in an acute care hospital is determined by the patient’s condition and other patient data and procedures performed during the inpatient stay using a classification system known as diagnosis related groups, or DRGs. CMS implemented a revised version of the DRG system that uses Medicare Severity DRGs, or MS-DRGs, instead of the DRGs Medicare previously used. The MS-DRGs are intended to account more accurately for the patient’s severity of illness when assigning each patient’s stay to a payment classification. Medicare pays a fixed amount to the hospital based on the MS-DRG into which the patient’s stay is assigned, regardless of the actual cost to the hospital of furnishing the procedures, items and services provided. Accordingly, acute care hospitals generally do not receive direct Medicare reimbursement under PPS for the specific costs incurred in purchasing medical devices. Rather, reimbursement for these costs is deemed to be included within the MS-DRG based payments made to hospitals for the services furnished to Medicare eligible inpatients in which the devices are utilized. Accordingly, a hospital must absorb the cost of our products as part of the payment it receives for the procedure in which the device is used. In addition, physicians that perform procedures in hospitals are paid a set amount by Medicare for performing such services under the Medicare physician fee schedule. Medicare payment rates for both systems are established annually.
          At this time, we do not know the extent to which hospitals and physicians would consider third-party reimbursement levels adequate to cover the cost of our products. Failure by hospitals and surgeons to receive an amount that they consider to be adequate reimbursement for procedures in which our products are used could deter them from purchasing or using our products and limit our sales growth.
 [They should indeed know this- RC] In addition, pre-determined MS-DRG payments or Medicare physician fee schedule payments may decline over time, which could deter hospitals from purchasing our products or physicians from using them. If hospitals are unable to justify the costs of our products or physicians are not adequately compensated for procedures in which our products are utilized, they may refuse to purchase or use them, which would significantly harm our business.
          Notwithstanding current or future FDA clearances, if granted, third-party payors may deny reimbursement if the payor determines that a therapeutic medical device is unnecessary, inappropriate, not cost-effective or experimental, or is used for a non-approved indication. Although we are not aware of any potential customer that has declined to purchase our RIO system based upon third-party payors’ reimbursement policies, cost control measures adopted by third-party payors may have a significant effect on surgeries performed using MAKOplasty or as to the levels of reimbursement.
 [Wonder if this is still true - RC] All third-party payors, whether governmental or private, whether inside the U.S. or outside, are developing increasingly sophisticated methods of controlling healthcare costs. These cost control methods include prospective payment systems, capitated rates, benefit redesigns, pre-authorization or second opinion requirements prior to major surgery, an emphasis on wellness and healthier lifestyle interventions and an exploration of other cost-effective methods of delivering healthcare. These cost control methods also potentially limit the amount which healthcare providers may be willing to pay for medical technology which could, as a result, adversely affect our business and financial results. In addition, in the U.S., no uniform policy of coverage and reimbursement for medical technology exists among all these payors. Therefore, coverage and reimbursement for medical technology can differ significantly from payor to payor.
          There also can be no assurance that current levels of reimbursement will not be decreased or eliminated in the future, or that future legislation, regulation, or reimbursement policies of third-party payors will not otherwise adversely affect the demand for our products or our ability to sell products on a profitable basis. Our customers are currently using existing reimbursement codes for knee arthroplasty.
 [this is often a problem with new medical tech and procedure, I wonder if the ICD-10 code expansion delay is a problem for MAKO - RC].  Knee arthroplasty performed in the hospital inpatient setting is currently assigned to MS-DRG 469 (“Major Joint Replacement or Reattachment of Lower Extremity with Major Complication or Comorbidity”) and MS-DRG 470 (“Major Joint Replacement or Reattachment of Lower Extremity without Major Complication of Comorbidity”), and surgeons currently bill Current Procedural Terminology, or CPT, code 27446 (“Arthroplasty, knee, condyle and plateau; medial OR lateral compartment”), and code 27438 (“Arthroplasty, patella with prosthesis”), for services performed in connection with MAKOplasty PKA procedures using our technology. Our customers also have available Ambulatory Payment Classifications, or APC, code 0425 and CPT code 27446 for unicompartmental arthroplasty, APC code 0048 and CPT code 27438 for patellofemoral procedures, and CPT code 73700 (“CT lower extremity without contrast”) for imaging services related to MAKOplasty PKA. If unicompartmental and bicompartmental knee resurfacing procedures gain market acceptance and the number of such procedures increases, CMS and other payors may establish billing codes for unicompartmental and bicompartmental knee resurfacing procedures that provide for a smaller reimbursement amount than knee arthroplasty, which could adversely affect our financial results and business.
          Our customers use existing reimbursement codes for hip arthroplasty. Hip arthroplasty performed in the hospital inpatient setting is currently assigned to MS-DRG 469 (“Major Joint Replacement or Reattachment of Lower Extremity with Major Complication or Comorbidity”) and MS-DRG 470 (“Major Joint Replacement or Reattachment of Lower Extremity without Major Complication of Comorbidity”), and surgeons will bill Current Procedural Terminology, or CPT, codes 27130 (“Arthroplasty, acetabular and proximal femora prosthetic replacement (total hip arthroplasty), with or without autograft or allograft”) and 27132 (“Conversion of previous hip surgery to total hip arthroplasty, with or without autograft or allograft”), for services performed in connection with MAKOplasty THA procedures using our technology. Our customers have available CPT codes 73700 (“CT lower extremity without contrast”) and 72192 (“CT pelvis without contrast material”) for imaging services related to MAKOplasty THA. If CMS and other payors do not reimburse physicians under these codes for services performed in connection with MAKOplasty THA procedures, our financial results and business could be adversely affected.
          In international markets, market acceptance of our products will likely depend in large part on the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and by region in some countries, and include both government sponsored healthcare and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. In addition, even if we do obtain international reimbursement approvals, the level of reimbursement may not be enough to commercially justify expansion of our business into the approving jurisdiction. To the extent we or our customers are unable to obtain coverage or reimbursement for procedures using our technology in major international markets in which we seek to market and sell our technology, our international revenue growth would be harmed, and our business and results of operations would be adversely affected.


That was a lot, but the bottom line is I'm still inclined to wait here until this clarifies.  I can understand an initial speculative position today, as I too believe there is long term potential here, but I would not be overweight myself.  To compare to Intuitive (as many like to do), they noted in their 2003 annual report:


 "Domestic institutions typically bill the services performed with our products to various third-party payors, such as Medicare, Medicaid and other government programs and private insurance plans. Because our da Vinci Surgical System has been cleared for commercial distribution in the United States by the FDA, Medicare reimbursement is available for use of the device in laparoscopic and thoracoscopic procedures and procedures conducted under an approved investigational device exemption application. We believe that the additional procedures we intend to target are generally already reimbursable by government agencies and insurance companies." [Page 19,20 under 'Third-Party Reimbursement', where they go on to note this is still a risk].  This added language was not present in the 2002 filing.  I don't see that level of confidence regarding reimbursement yet from MAKO.


Why should an investor considering MAKO care?  Well, I think many have all seen and are influenced by the Intuitive chart and comparison to MAKO.  Focus on how it did before and after 2003.

 

Reimbursement matters.  The health plans have an ever increasing say in care delivery.  It can not be minimized in my opinion and investors need to be aware of this shift in control.  So .. Show me the value MAKO, and get reimbursers to go on record saying they support the procedure.  I'll likely be investing after I see that.

Ralph

Helical Investor

4 Comments – Post Your Own

#1) On August 23, 2012 at 4:10 PM, materialsman92 (36.84) wrote:

very good point ralph, i'll be looking forward to this...

btw what do you think is needed for these institutions to reimburse mako procedures?

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#2) On August 23, 2012 at 4:36 PM, TMFHelical (99.09) wrote:

materialsman92

 MAKO needs to have the value proposition for a MAKOplasty studied, reviewed, and reported.  They can then approach insurers (particularly medicare) with this study and make the value case.  I think they will be able to do this.  Just the reduced time in the hospital following the procedure should be a large piece of the value proposition.  They have a study that should report this quarter that could go a long way to proving this out.  

Multicenter cost analysis of knee arthroplasty (Lavernia,Bosco, Slover, Coon)  (page 6)

Should the data in this study look really good, I'd be inclined to start getting back in. 

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#3) On August 23, 2012 at 5:27 PM, dcgatlanta (43.88) wrote:

Great blog.  Thank you!

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#4) On August 23, 2012 at 6:02 PM, materialsman92 (36.84) wrote:

thank you very much TMFHelical :)

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