Good day. Welcome to the Inspire Medical Systems fourth quarter and full year 2018 earnings conference call. Today's conference is being recorded. Following the speaker's remarks, we will have a Q&A session. At this time, I would like to turn the conference over to Mr. Bob Yedid. Please go ahead, sir.
Thank you for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer, and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released financial results for the fourth quarter and full year ended December 31, 2018. A copy of the press release is available on the company's website. I'd like to remind you on the call that management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including our discussion of operating trends and our expectations of future financial performance, including full year 2019 guidance, and our expectations with regard to near and long-term growth potential of our business, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ.
Accordingly, you should not place undue reliance on these statements. See our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, filed with the SEC today for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. The conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 26, 2019. With that, it's my pleasure to turn the call over to Tim Herbert, CEO. Tim?
Thank you, Bob. Thanks, everyone, for joining us today. I am pleased to welcome you to our fourth quarter and full year 2018 earnings call. We ended the year with significant operational and financial momentum that has carried us over into the start of 2019. I'll provide you with the details around what is driving our continued strong performance. Our CFO, Rick Buchholz, will follow with a comprehensive review of our fourth quarter and full year 2018 financial results. Following this, we'll open up the call for your questions.
I like to do at the outset of these calls, I want to reinforce our mission at Inspire, which is to deliver positive and consistent patient outcomes for those with untreated obstructive sleep apnea and to increase the awareness and adoption of Inspire therapy in the United States and Europe, as well as in new regions such as Japan. Before we get to the operational results, I would like to touch on the successful follow-on offering we completed in December 2018, which raised $69.8 million of net proceeds for Inspire. Importantly, this financing will enable us to hire additional sales and marketing personnel, primarily in the U.S., and to expand commercial programs in Europe and in Japan. In addition, we will accelerate our investment in product development to further enhance our technology platform.
We are grateful for the support of all the investors who participated in the offering, and we remain focused on creating long-term shareholder value. Regarding our performance in 2018, we continue with our balanced commercial growth strategy, which is primarily focused on the U.S. market with the objective of, first, increasing patient flow at existing centers and secondly, training and opening new implant centers. In addition to our focus on the U.S. market, we intend to continue growing the adoption of Inspire therapy in Europe, directing our commercial activities on those countries that have established reimbursement, primarily Germany and the Netherlands. Our European team will also continue to pursue reimbursement in other key European countries. As we previously discussed, we have regulatory approval in Japan. Further, we have updated our regulatory filing to include the new Inspire IV neurostimulator and the new sensing lead.
We are also working with the reimbursement authorities in Japan and are encouraged by the progress to date. With all that said, we anticipate the first implants of Inspire therapy in Japan to occur in the second half of 2019 and target a formal launch in 2020. We are also beginning the process of expanding into other countries in the Asia Pacific region. As our fourth quarter 2018 top-line results indicate, this growth strategy continues to generate strong performance from all aspects of our business. Worldwide revenue for the fourth quarter of 2018 was $16.6 million, a significant increase of 66% compared to the same period of the prior year. This overall strong performance to end the year resulted in full year 2018 revenue of $50.6 million, a 77% increase over 2017.
These results exceeded our previously provided 2018 revenue guidance, which was $47.5 million-$48 million. We added 22 new U.S. centers during the fourth quarter, ending the year with a total of 206. Throughout 2018, we had an increase of almost 50% over the 139 centers we had at the end of 2017. Regarding territory managers, we added six during the fourth quarter, ending 2018 with a total of 46. For the year, we added 18 new territory managers, representing a 64% increase over the 28 territory managers we employed at the end of 2017. We began 2019 with nine regional managers, a newly added level of sales management, and have hired additional field critical representatives to help with case coverage. We expect that these new centers and territory managers will have a positive impact on our overall growth.
With our progress in reimbursement, as we will discuss shortly, we are increasing our goal of opening new centers at a rate of 12 to 14 per quarter versus our 2018 goal of 10 to 12 new centers, increasing our goal of adding four to five territory managers per quarter, an increase from our 2018 goal of three to four. Moving on to market access, also known as reimbursement. This continues to be a priority for the team and is an area where we have recently achieved significant progress. In the U.S., we continue to have two key reimbursement strategies: expanding written positive coverage policies, and concurrent with this process, continuing to obtain individual prior authorizations. As we previously announced in January, the major reimbursement-related achievement occurred when Evidence Street issued a favorable assessment of Inspire therapy.
Evidence Street is the corporate technical assessment group of Blue Cross Blue Shield Association. This is a national federation of 36 Blue Cross and Blue Shield companies that, when combined, is one of the leading health associations in the U.S., covering 97 million lives. This assessment has already had a meaningful impact on generating positive coverage decisions. In the first seven weeks since receiving the favorable assessment, positive coverage policies of Inspire therapy have been issued by eight Blue Cross Blue Shield health plans, covering approximately 16.6 million lives. We expect that the additional regional Blues policies will be issued throughout 2019. Adding to the growing list of positive coverage policies beyond Blue Cross Blue Shield, we are pleased to announce today that EmblemHealth has issued a positive coverage policy of Inspire therapy, which takes effect April 2019.
EmblemHealth, New York's largest not-for-profit health plan, covers approximately three million members across New York, New Jersey, and Connecticut. The national coverage policy from Aetna issued in 2018 continues to have a positive impact on our approval rates and reducing the review cycle times, a key trend which we expect to continue, especially with the recent receipt of positive coverage policies from several Blues plans. Although we are obviously excited about the momentum with these new policies, I would like to remind you that we expect that it will take at least five to six months to begin to see a meaningful impact from these coverage policies, as it takes time to work through the implementation process with the payers and the implanting centers.
With regards to prior authorizations, our overall prior authorization approval rate in 2018 is approximately 55%, which is notably higher than the approximately 50% we experienced in 2017, the average time to approval was reduced to below 90 days in 2018 versus 124 days in 2017. As we continue to develop additional coverage policies, we expect that the average time to prior authorization approval, as well as approval rates, will continue to improve. We also believe that with the more streamlined process enabled by positive coverage policies, many centers are submitting prior authorizations on their own. In these cases, we do not have full exposure to these submissions. Therefore, in the short term, we'll continue to report on these metrics, but our long-term goal is to reduce the burden of individual prior authorizations. Thus, these metrics will become less meaningful in evaluating Inspire's overall progress going forward.
Our internal team supported 639 prior authorization submissions in the fourth quarter of 2018, or an average of 49 submissions per week. For the year, we supported centers in submitting 2,477 prior authorizations. Our weekly average in 2018 by quarter was 43, 48, 51, and 49 submissions respectively. Please note, slight increase in the third quarter reflects the bolus of resubmissions of Aetna patients following the issuance of their positive coverage policy. In terms of prior authorization approvals, 395 patients received a prior authorization approval in the fourth quarter of 2018, and a total of 1,230 patients received approvals for the full year 2018. This compares to the 583 prior authorization approvals in 2017, which represents a 111% improvement year-over-year.
As I mentioned, we will continue to monitor these metrics and report on them as long as they remain a relevant data point for assessing the performance of our business. Regarding CPT coding, we have a brief update on the application to convert the Category 3 add-on code to a Category 1 code. Remember that this add-on code is only for the implant of our sensing lead. The CPT meeting was held a few weeks ago in Scottsdale, and our application was on the agenda. After several discussions just prior to the meeting, it was determined that there was still confusion amongst the AMA committee members over this code application, and further, the utilization numbers with this Category 3 code did not match the actual growth of Inspire implants.
This is likely because centers do not consistently report the Category 3 code if there's no payment associated with it at this time. Therefore, it was determined to be best to table this discussion for the time being, and the application was withdrawn prior to formal presentation and discussion. We do not believe this will have any impact on the adoption growth of Inspire therapy, particularly in light of the progress we have achieved with the development of the positive coverage policies. We'll continue to keep you informed on the status of this code moving forward. Moving on to clinical evidence. We will continue our aggressive efforts to build the therapy dossier through the publication of clinical data. As an example, in the fourth quarter, we announced the publication of data from the first 508 Inspire therapy patients included in the 2,500-patient ADHERE registry.
The data demonstrated that Inspire therapy is an effective treatment option with high patient satisfaction and low likelihood of adverse events. We expect several additional publications will be issued throughout 2019, and we remain committed on the ongoing evaluation of Inspire therapy with the intention of continuous improvement and consistency of the already strong patient outcomes. Another key aspect of our U.S. commercial strategy is our direct-to-patient initiatives, which include our social media strategy. This strategy has been successful in reaching and educating prospective patients about Inspire therapy, and we continue to broaden these efforts to correspond with the growing number of U.S. implanting centers. These initiatives have led to an increase in web activity in 2018 as compared to the prior year. For the full year 2018, we averaged approximately 36,000 web visitors each week and had approximately 1.3 million engaged visitors.
Moreover, we had about 425,000 physician searches, which resulted in roughly 22,000 contacts with healthcare providers. We remain focused on identifying improved methods to educate patients and finding more efficient tools to connect potential patients with healthcare providers. We recently launched a number of new direct-to-patient marketing initiatives to improve our education of prospective patients and have others planned throughout 2019. At the forefront of these initiatives is a redesigned website that will make navigation by patients easier and significantly streamline the process of connecting patients with qualified providers in their area. Switching gears to discuss the R&D activities. Our product development team continues to work to improve the patient experience while maintaining enhancing therapy outcomes. We recently announced the FDA approval of our new sensing lead in the U.S.
We launched this new sensing lead at several medical centers in the U.S. and will be expanding this launch in the next month. This sensor was previously launched in Europe in 2018, and we have received very good feedback from the physicians to date. We also have projects ongoing to improve the physician programmer, the patient remote control, and longer term, we have initiated the design activity for our Inspire V neurostimulator. Later in 2019, we will report on the key design features that will be incorporated into this new product. This will be a multi-year effort to develop the Inspire V device and gain regulatory approval. As you can see, we are very excited about our long-term outlook. Specifically looking forward to 2019.
I am pleased to provide you with our initial full-year revenue guidance in the range of $67 million-$70 million, representing an increase of 32%-38% over full year 2018. Although we are not providing quarterly guidance, the fourth quarter of each calendar year is typically the busiest for medtech companies as patients in high-deductible health plans seek to schedule procedures prior to their deductibles resetting at the start of the year. This often results in a seasonally weaker period in the first quarter. We do expect that there may be some seasonality in Inspire's business during the first and fourth quarters of the year, although in past years, this seasonality has been masked by strong growth triggered by the addition of new territory managers and centers, as well as the underlying adoption of Inspire therapy.
In summary, we are excited by our continued progress and enter 2019 with significant momentum in our business. To reiterate what I have said before, our primary goal is to generate the highest therapy outcomes possible for patients. We continue to execute a focused growth strategy aimed at increasing the number of implanted centers, territory managers and territories on a quarterly basis. Along with further advancements in reimbursement that build upon our recent positive coverage decisions, we are confident that we remain well-positioned for long-term success. With that, I'd like to turn the call over to Rick for his detailed review of our financials.
Thanks, Tim. We are extremely pleased with our financial performance in the fourth quarter of 2018. We continue to demonstrate strong execution across our business and remain focused on expanding our team to support the growing demand for Inspire therapy in the United States and Europe. For the fourth quarter ended December 31, 2018, total revenues were $16.6 million, which is a 66% increase over the $10 million generated in the fourth quarter of 2017. U.S. revenue in the fourth quarter was $14.8 million, a robust increase of 77% from the $8.4 million generated during the same period of the prior year. This growth was due to continued market penetration in existing territories, the expansion of our U.S. sales reps in new territories, increased physician and patient awareness of our Inspire system, and a greater number of prior authorization approvals.
Our U.S. average selling price remained consistent at $23,300 for both the fourth quarter of 2018 and 2017. In the fourth quarter, European revenue increased 11% to $1.8 million from $1.6 million in the fourth quarter of 2017. Approximately 85% of the increase was volume driven, primarily by the activation of new sites in Germany and the establishment of reimbursement in the Netherlands. While 15% was attributed to a price increase with the introduction of the new neurostimulator in Europe in the second quarter of 2018. During the fourth quarter, the European average selling price was $21,500 compared to $21,100 during the fourth quarter of 2017. Our geographic mix of revenue in the quarter was 89% in the U.S. and 11% in Europe, with a slightly greater revenue concentration in the U.S. market as compared to the second and third quarters of 2018.
The gross margin in the fourth quarter was 80.7%, compared to 81.1% in the fourth quarter of 2017. The fourth quarter 2018 gross margin was impacted by an accounting change, as our third-party logistic costs are now included in cost of sales. This lowered our gross margin by 100 basis points in the fourth quarter of 2018. Total operating expenses for the fourth quarter 2018 were $18.3 million, an increase of 53% from $11.9 million in the fourth quarter of 2017. The majority of the operating expense increase was driven by our continued sales force expansion, including sales leadership and sales support functions. The increase in OpEx is also due to increased R&D spending and increased general corporate costs associated with being a public company.
Our net loss for the fourth quarter was $4.8 million, compared to a net loss of $4.3 million in the fourth quarter of 2017. The diluted net loss per share for the fourth quarter of 2018 was $0.22 per share. For the full year 2018, our total revenue was $50.6 million, a 77% increase over the $28.6 million of revenue generated in the full year 2017. U.S. revenue in 2018 was $44.4 million and increased 83% over 2017. European revenue in the full year 2018 was $6.2 million, an increase of 45% over 2017. As of December 31, 2018, cash equivalents, and short-term investments totaled $188.2 million, compared to $16.1 million at the end of 2017. This strong cash position reflects the completion of Inspire's IPO in May 2018 and our follow-on offering in December of 2018, which in aggregate raised a total of $181.8 million of net proceeds.
The weighted average number of shares for the fourth quarter was 21.8 million shares, and as of December 31, 2018, there were 23.4 million shares outstanding, reflecting the additional shares sold by the company in our follow-on offering in December. We anticipate the weighted average number of shares for the first quarter will be approximately 23.5 million. Turning to guidance for 2019. Based on our strong results and our positive outlook, we are expecting our full year 2019 revenue to be in the range of $67 million-$70 million, which represents growth of between 32% and 38% over the full year 2018 revenue.
We also anticipate that gross margins for 2019 will be in the range of 79%-81%. In summary, we are very pleased with our financial performance in the fourth quarter of 2018, and we are well-positioned to make the necessary investments to support our growth objectives in 2019. Barbara, please open up the call for questions. Thank you.
Okay. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause just for a moment to allow everyone an opportunity to signal for questions. Okay. We will take our first question from Richard Newitter. Please go ahead, Mr. Newitter.
Hi. Thanks for taking the questions and congrats on an excellent year. Maybe just the first, since you're sharing your 2019 outlook here, 32%-38%. It's a very healthy growth rate. I guess, maybe give us a little color on any cadence factors we should be thinking about as you move through the year, and what's contemplated with respect to Blue Cross Blue Shield and the Aetna ramp?
Thanks, Rich. We have several factors that really play a role in our guidance for 2019. First of all, we had a really strong 2018, which we're very excited about. We will continue to work our cadence, if you will. We will continue to work on prior authorization submissions, while in parallel, we'll work to expand our coverage policies. With that, we've increased our hiring cadence of territory managers, four to five on a quarterly basis, and increased our number of centers that we plan to add, as we mentioned. We've also gotten recent news in getting eight Blue Cross Blue Shield plans covered since we received the positive assessment on January 7th from Evidence Street.
We know it does take time to find those patients to make sure we have centers up and running in those coverage policy areas, if you will, as well as making sure we have territory managers in those areas as well. As Tim mentioned, it might take five to six months with getting those policies to really take hold throughout 2019.
Okay. Progressing through the year and Blue Cross Blue Shield, it's probably not really factored in meaningfully to those numbers until the back half, is what I think I'm hearing. The second question I had, do you have any statistics or data on the number of prior authorization submissions currently? What % are comprised by or fall into the Aetna and Blue Cross Blue Shield insurers? Just trying to get a sense for what % of your backlog, so to speak, or your pipeline is comprised of Blue Cross Blue Shield and Aetna patients.
Fantastic. Thanks, Rich. Aetna, as you recall, prior to issuing the positive coverage policy back in July of 2018. Then we had those resubmissions that dominated a lot of the approvals. In fact, a third of our growth in the third quarter of last year was Aetna. We track that closely. I think Aetna right now, it's a rough number, but it's probably in the lower mid-teens % of approvals is what Aetna is today. That's pretty good because that's a stark increase over the prior year, which was basically zero, right? Because Aetna wouldn't do any prior authorization. The good news with Blue Cross Blue Shield is they have been approving, albeit they've been taking patients through 2nd-level appeal, even 3rd-level appeal, which we call the EMR or external medical review.
What these new coverage policies are going to do is significantly reduce the time for those prior authorization approvals. The team is working very closely. We also have several consultants working with other Blues regional plans to get those policies written such that in the back half of the year, that we could drive down that review cycle time and really have an impact on the year. That's what we're pushing for. That's kind of the key driver, the cadence that we want to implement. It really comes about the timing for those Blues plans to write the policies, get them implemented, and get them active with the centers.
Okay, thanks a lot.
If you find your question has been answered, you may remove yourself from the queue by pressing star two. We will take our next question from Chris Pasquale from Guggenheim. Please go ahead.
Thanks. Congrats on a great quarter and some outstanding progress. First Tim, can you update us on what you're seeing from Aetna today in terms of their turnaround time on submissions? You mentioned the bolus of Aetna submissions that went in the third quarter. Did that lead to a subsequent bolus of approvals this quarter, or are most of those submissions still in process?
Thanks, Chris. The Aetna. Once the policy came out, remember it took us a little while with the logistics because they had to update their policy. Then they had to update the codes within the policy. Then we needed that to trickle down to the centers. By about the middle of the third quarter, we pretty much had that stabilized, and we were able to submit. The net result of that was a third of our growth in approvals was Aetna cases in that third quarter. We continue to see that cadence happen now. We believe that most of the Aetna cases get approved in, on average, less than five days because they're all approved at the prior authorization phase. They're not required to go to approval.
We kind of look back at the fourth quarter and estimate that the number of approvals from Aetna make up about 15% of our approvals in the quarter. It does have a significant impact. We're going to continue to drive that going forward, and it's really exciting for Aetna and the Aetna patients. That policy, I think, really had a positive influence on Evidence Street, which in turn, of course, has such an influence over all the Blues plans. It's really putting the wheels in motion and really getting the policy train moving.
Thanks. You started to touch on this with the answer to Rick's question, but I think there's a little bit of confusion given that Aetna was not paying for cases at all, it was kind of going from nothing to something, some of these other plans were, albeit through a protracted process, just how incremental these positive coverage decisions really are. Can you spend a minute on how having coverage impacts some other things like physician engagement, patients' willingness to go to even begin the process and things like that where you're seeing a benefit, even though these plans maybe were technically paying for the procedures previously?
Yeah, absolutely. Let me answer that a couple different ways. First, let's go to the centers and look at with the physicians. Now, our support team does everything we can to kind of streamline the process, the centers are the ones that really have to submit the prior authorizations, the physicians are the ones that have to fight for the patients with the insurance companies. It's really important that this streamlined process is going to make it easier for these physicians, it's going to reduce the fatigue on these physicians. Because working with the patient to go through or working with an insurance company to go through 3 levels of appeal, as we mentioned, the time to approval went from 124 days to less than 90 in just one year. We believe that number 90 is going to significantly reduce again here in 2018.
The benefit from that is going to be a reduced amount of physician fatigue in dealing with insurance and prior authorization. That's not what physicians want to do. They want to treat patients. The second part is even patients themselves. When they come to our website, if you go to our website and you stay there very long, you're going to see a little chat line pop up and ask if you have any questions in regard to Inspire therapy. The number one question that we get asked is, "Does my insurance company cover this?" It's important to be able to let patients understand that, yes, insurance companies will cover this. As you remember, Rick, we went through some of the cadence of the number of dropouts that we had through the appeal process.
Again, that's patient fatigue, where it takes so long to get an insurance approval, they are fatigued, and they withdraw themselves from the process. These coverage policies are going to have a significant impact on reducing that dropout rate because patients can now get approved in just a few days. Just like we did with Aetna, we're going to continue to monitor the impact that these Blues plans will have in the next few quarters. More importantly, we will also be putting the pressure on other insurance companies to enact right positive coverage policies.
Thanks.
Thank you.
We will take our next question from Jonathan Block from Stifel. Please go ahead, sir.
Great. Thanks, and good afternoon. Tim, while we sort of have you, let me just ask on the policy today, on the coverage policy from Emblem, if you could elaborate a little bit on that decision. Is that consistent with some of the earlier policies from the Blues? In other words, BMI of less than or equal to 32. Did it also have a pediatric indication? Then as sort of a follow-on, can you talk about some of the Blues that did come with a pediatric indication and maybe to what extent that was an upside surprise for you? Then I've got a follow-up.
Okay, fantastic. There's several questions in there, so let me kind of walk through those in detail. Let's go back a little bit to Evidence Street. Evidence Street came out with a favorable assessment, and when they did their review, they only included the first FDA approval letter for Inspire. You got to go way back, but our initial approval was for AHI range of 20 to 65, and subsequently we had a PMA supplement that lowered that AHI down to 15. Evidence Street didn't incorporate that into the review. Our Kathy Sherwood's been working with Evidence Street to make sure that they have that necessary information. Evidence Street has recognized that, and we think that they're going to come back with an update maybe mid-year that will get that AHI back down to 15.
It was not their intention to just slice it at 20, but they wanted to include the full indication from the FDA. We expect that that will come back down to 15. The second step on that, what you're seeing with a lot of the blues policies, is they're coming out with a BMI of 32. Evidence Street, as itself, came out and they had a BMI less than 35. Some of the blues have tightened up the parameters there, and we continue to work with our investigators to look at the data from patients between BMI of 32 and 35. We'll continue to publish data on that. From our standpoint, we're very excited to have these policies in with the BMI less than 32.
That happens to match the BMI that we used during the STAR trial, which is the pivotal trial in New England Journal of Medicine. Since then, we've moved that BMI higher up. It's important to note that the FDA, when they approved Inspire therapy, did not put a BMI limitation on Inspire therapy. That is something new from the insurance companies. We will work with each of them, and we believe in time, we'll be able to expand that, and it won't have a significant impact in the short term on the company. The third item in there was the pediatric population. This is something that's very rare, that an insurance company actually steps up and writes positive coverage for a population whereby we do not even have FDA approval yet. We're being very careful with that. We are communicating with the FDA.
We do have an ongoing trial of 50 patients at 15 leading children's hospitals in the U.S. for a pediatric population with Down syndrome. What we're very encouraged by is the Blue Cross Blue Shield Association really taking notice and investigating that population and, in fact, writing positive coverage policy for them. Okay, now I'm circling all the way back to your first question on EmblemHealth. EmblemHealth, they did put the proper AHI range in, which is 15 to 65. This initial policy does have a BMI of less than 32, but they did not include the pediatric population, which is just fine. Again, we don't have FDA approval on that to market that therapy yet anyways.
We will continue to work with EmblemHealth to be able to support their population, and we'll continue to show them data that it is a viable therapy for patients with a BMI greater than 32.
Okay. Yeah, you did a much better job of answering that than I did of asking it. Thank you. The second question, just in the K, you have buried that advertising expenses here was $7.8 million. It was up from $5.5 million last year. You've got almost $190 million in cash. You're starting to get some of these payers coming on board. Can you just talk about the outreach in increasing awareness? Are we going to see sort of a methodical increase to advertising expenditure? Is that something, Tim, with the balance sheet and the payers coming on board, that you can start to accelerate pretty meaningfully? Thank you.
Hey, John, this is Rick. I'll take that one. Yeah, we did increase in 2018. We expect to increase maybe a little bit more aggressively in 2019, given that we are increasing the number of centers that we're adding, as well as territories. When we do add those new territories, we will do radio and social media strategy and programs in those new territories. We will increase that ratably. We will continue to have that, what I call kind of controlled, sustained growth in adding reps and territories and centers to maintain those good patient outcomes. We're going to continue to be methodical, even though we have a strong balance sheet.
Okay. Thanks for your time, guys. I'll follow up offline.
Thanks, John.
Okay, we will take our next question from Larry Biegelsen from Wells Fargo. Please go ahead.
Good afternoon, guys. Thanks for taking the questions and congrats on the really strong quarter and year. Hey, I apologize if I missed this, but the Category I CPT code for the sensing lead, I had this emailed to me. It sounds like there was a change there. Could you talk a little bit about It sounds like you pulled the application. Can you talk about why and what the next steps are?
Absolutely. Thanks, Larry. We did submit it. It was on the agenda. We were working very closely with the American Academy of Otolaryngology, which is the ENT society. They did submit the application. They did have strong representation at the meeting in Scottsdale to be able to present it. They did have time to discuss it with the AMA committee members prior to the meeting, there was questions still outstanding of the purpose of the code, the understanding of the code, and then they look at the statistics and the metrics and the usage of that code as compared to the growth rates projected and discussed by Inspire. There's a discrepancy in the numbers. Again, I mentioned earlier, I think we think the key reason is a lot of centers just don't file that code because it's a Category III code. There really isn't any payment.
That creates a little bit of a challenge. Category III in itself creates a little bit of a problem, both with the system as with payment, and working to convert those are always difficult. The AAO proposed that, and we concurred, that the right thing to do is let's back up again and spend a little bit more time educating and not trying to force this through and having this code rejected, because then we have difficulty rebounding and bringing it back through. They withdrew the code, and we'll come back and resubmit it to the AMA. In the meantime, we'll continue to educate the AMA members on the importance of it. From the hospital standpoint, it has no impact on their payment level.
Their payment level is all based on the primary code, which is 64568, and the national average Medicare payment this year is $27,700. It's a good payment level to support not only the device cost but capitated cost for performing the procedure. The only person who is affected by this non-vote, if you will, or the code not being converted today, is the physician or the surgeon payment. They're still being paid their normal surgical fee for 64568, but the Category III code will be slightly delayed again, and we thought that that might increase the payment about $600-$800 per procedure. Again, it's only the surgeon payment.
We don't believe it's going to have any significant impact, as the majority of our procedures to date are performed at high academic centers or the large private centers whereby the surgeons are salary based anyways. We're going to continue to work with the ENT Society, but don't think it's going to have any impact.
Thanks for that. Just curious, when do you plan You said you're going to resubmit, Tim. When do you plan to resubmit? What does the guidance assume about additional payer coverage in 2019? Bigger ones like Humana and United, where are you on those two? Just lastly, Tim, reimbursement in Japan, how is that going? Remind us again of the timing there. Thanks for taking the questions.
Thank you, Larry. Okay, I think I got all those. There's one more submission left for this cycle. I think there's actually two, but we won't be ready for the first one. We're going to continue to work with the AAO if we will be ready for, I think it's a November submission. I'll have to track that. It may be likely that we're going to wait till the next cycle before we resubmit that. As far as guidance go, we like our guidance set up using a prior authorization model. As I mentioned, it's going to take five, six months to be able to get these policies active, working through the logistics of the payers and the centers, and we're going to continue to work our cadence to drive more and more prior auth, or I'm sorry, more and more positive coverage policies through all 2019.
Kathy has her team, along with three contractors with assignments to all the individual Blues plans, as well as some of the larger plans. We are in communication with some of our favorites, with United and Cigna and Humana and the other non-Blues large payers. We're working with all parties to make sure that they're educated on the clinical evidence we have published, and we continue to publish additional information. Our guidance really isn't driven a lot by assuming more coverage policies are in play, but we are assuming and expecting that we will get more coverage policies this year, which will really have more of an impact in 2020 and beyond. Did I answer all three of those questions? What was the third one?
That's it. I'll take it offline.
Japan.
Appreciate. Yeah. If you didn't mind saying it upfront in the prepared remarks. We can take it offline.
Let me comment on Japan. We do have the approval in Japan, but that approval was for our original products. Now what we have, we submitted our regulatory submission to include the new Inspire IV neurostimulator and the new sensing lead that was just approved by the FDA recently. We did have an interactive review and questions from PMDA, which is the FDA of Japan. We believe that review is going positively and expect approval sometime this year. With that, we'd like to do our first implants with the new products. Secondly, we're working in concert with the societies in Japan. There are three societies actively working on Inspire: sleep, ENT, and cardiovascular. They have formed a committee with the oversight from PMDA, again, that's the FDA of Japan, to help launch Inspire and to establish therapy guidelines. Those guidelines have been drafted.
We expect to see some of those results in the near future. The submission is twofold. One side is from the company and the other side, I'm talking regulatory, I'm sorry, reimbursement submission are from both sides and we expect that to be submitted to the MHLW, which is the reimbursement authorities in Japan, and they have also been active. We do expect to do the first implant, but we're really looking to do a formal launch in 2020.
Thanks so much for taking the questions.
You bet, Larry.
Okay, we will take our next question from Isaac Ro from Goldman Sachs. Please go ahead.
Good afternoon, guys. Thank you. Just another question on the Blue Cross effect here. It'd be helpful if you could give us any sense of whether or not the additional coverage you got at the end of the year was helpful to revenue. Essentially, trying to get a sense of what's embedded for the rest of 2019, given how much coverage you've gotten in the last few weeks and probably the fact that you're going to get more in short order. It'd be helpful to try and isolate that piece.
Absolutely, Isaac. Thank you very much. We do think Aetna had a positive impact. As we mentioned before, a third of our prior authorization growth in the third quarter were from Aetna, and those kind of reflect more in fourth quarter implants. We did have a significant number of approvals in the fourth quarter, some of which have been implanted. Again, going back to our discussion about the patients with high-deductible plans working to get their cases done before their high deductibles reset at the beginning of the year. Aetna is included in our guidance. We do think Aetna is going to continue to have a positive impact going forward. From the Blue standpoint, remember when we talked last time, we didn't have Evidence Street until just the beginning of January.
Then from there, the next step was to be able to work with individual Blue's plans to write policies. By writing those policies, once we get the policies, then we have to work to get them logistically implemented in their organization and active with our implanting centers. We do think it's going to take a little bit of time to make it happen. Now, the next key step to this, Isaac, is looking at developing positive coverage policies with some of the key Blue's policies in some of our higher implanting territories. We are working hand-in-hand with our consultants and with the medical directors in the Blue's policies to get these put in place. Once we have those in place, that is going to have a significant impact, but we don't have those yet.
Those patients are still working through the prior authorization process. Again, at least our review cycle is less than 90 days now as compared to 124 previously. I think when we get nearer later in the year, you're going to see that number significantly reduced. That's going to be the impact. That's going to be the answer to the question that you're asking. We do think it's going to have a positive impact. Blues' policies are not in as part of our guidance right now because we have a lot of work to do to get those implemented and to get additional policies expanded.
That's helpful. Just to clarify, for the guidance that you set out for this year, does that guidance assume you get additional favorable coverage from those other Blues and, as a result, get some revenue from those wins?
No. It's very important for us, Isaac, to put out guidance that we have strong confidence in, and we know we can grow this business with our prior authorization model. We know we can get those patients approved, albeit they have to go through quite an extensive cycle time. We also don't quite know the impact of the time it's going to take to get those positive coverage policies up, running, and active, as well as additional coverage policies in some of our high implanting areas. We didn't include a lot of risk in our guidance based on the assumption that we will get those policies in place. Instead, we put forward numbers that we're confident in that we can drive with our prior authorization process.
Got it. Thanks for the clarification. If I could sneak in one more quickly on gross margin. I appreciate your comments on that third-party logistics item that presents a headwind. I'm curious, aside from that, what would realistically be gross margin at the low end of the range to actually be down year-on-year? Just seems like there's so much momentum in the core business that you should be able to generate pretty good gross margin this year, all things considered.
Yeah, we expect to be in the range of 79%-81%, Isaac. Depending on the acceptance of the sensing lead in the U.S., which initially in Europe it's been strong and been well-received, we expect to be at the higher end of that gross margin throughout 2019.
Thanks, guys.
Thanks, Isaac.
Okay, we will take our next question from Kyle Bauser from Dougherty & Company.
Hi, Tim and Rick. Congrats on the quarter. Can you hear me okay?
Yes, Kyle
Hey, Kyle.
Great. Apologies if you already covered this, can you talk about the size of the opportunity for the upcoming expanded indication for pediatrics with Down syndrome in terms of prevalence and incidence, also talk about your market development efforts and if they'll be modified for these cohorts at all? Can you leverage the same physician call points? Will direct consumer efforts be modified, et cetera?
Great question. Tricky to answer. We are doing our assessment of how large that population is. One second. We think it might be 100,000. Between, from a dollar standpoint with ASP, Kyle, we estimate the market is wide, between $100 million-$200 million additional market opportunity beyond our $10 billion market opportunity that exists now. Let me comment on that. Those are preliminary market numbers we're just putting out. It's a different dynamic with this population in that, unfortunately, these kids have a hard time. They just can't use CPAP. The compliance rates with CPAP is very low. We also have a very organized group with the parents of these pediatric cases. I think the market or our ability to communicate with this population, it's going to be quite different, and it's not going to be just like the adult population.
We'll continue to develop that. Right now, we're still in a clinical study, and we are developing 15 leading children's hospitals to do these clinical studies. What's important about this clinical activity, it is actually developing an installed base to be able to take care of these kids once the therapy is approved by the FDA. What's really encouraging is that Blue Cross Blue Shield has already written it in as part of their Evidence Street guidelines, and several of the policies have already picked up coverage for this population. It's not as large of a population at all compared to the adult untreated obstructive sleep apnea market. It's a very important population and one of those "why we do what we do" reasons.
As we get closer to working with the FDA and looking at the timing of such said approval, we will be doing a lot more work on the whole market size and what we do to make our investments accordingly into that market, and how do we communicate with the parents of this population who are very well organized, as are the pediatric ENTs that are those that kind of serve that population.
Thanks. That's helpful. Then regarding the Inspire app that you're developing, which will be able to obviously communicate with the system via Bluetooth and then allow you to view the data in the cloud. You've talked about how you'll be able to see trends between hospitals and find out which ones are doing really well. Can you kind of quantify how you'll measure the success? Of course, the average nightly use time of the system seems like it'd be a good and obvious metric. I'm curious what sort of other performance metrics from the app we might be able to capture to identify these high-performing centers.
I think our engineers are jumping up and down that you asked that question. Thank you. It's an important initiative to us. We have launched Inspire Cloud, as you know, and it is our cloud-based patient management system. Right now, the only input into the Inspire Cloud is from the physician and from the physician programmer. What we're doing is we're just starting that platform. Now we're going to start developing tools to be able to add additional information into the Inspire Cloud, which is going to ease the physician's ability to really manage their patients. One key step on that, as you mentioned, is we are currently developing the Inspire app, which will be on a patient's cell phone. They can track their own progress, and they can see what their therapy goals are and how they're responding to those goals.
The next step after that is to be able to interface that device with Inspire Cloud and be able to have physicians see real time how their patients are doing by uploading that data to the cloud and having the physician be able to see how one patient's doing or how all of their patients are doing. More importantly, they can de-identify and see a broader group of patients and see how their patients are comparing to other therapy, other patients. What it's all about is really driving patient outcomes. We like to say around here that we're outcome obsessed. We really want to keep driving outcomes and make sure that we drive consistent positive outcomes and continue to improve. Inspire Cloud and this app is just one more tool to be able to track and follow the progress of our patients.
That's great. Thanks for taking the question.
You bet, Kyle.
Okay. We will take our next question from Ravi Misra from Berenberg Capital Markets.
Hi, Tim. Hi, Rick. Can you guys hear me okay?
Yeah, Ravi. How you doing?
Just a couple of questions. One on the guidance, just you spoke about this compression of time to approval, and then you also kind of mentioned this concept of patient fatigue. I'm just curious, with some of these payer conversions, are you able to maybe reengage some of those patients and get them re-energized for this? How does that factor in, if at all, to the guidance for 2019? Maybe just my last follow-up would be, just on the sensing lead, could you just help us understand, is this something that I understand the kind of lower profile makes it more comfortable for the patient, but is it something that's able to reduce OR times or kind of any efficiencies in the procedure itself? Thank you.
Mm-hmm. Yeah, absolutely. First up, on your first question, really, Aetna is kind of the example. Aetna is a little bit more of an example in that Aetna did not previously prior authorize. In the third quarter, we had a bolus of new resubmissions from Aetna patients, which in fact were approved, and that did have impact on revenue, and it is great that we are able to get those patients implanted, and that is wonderful for the Aetna patients and wonderful that they are able to get the therapy. We do think to a lesser extent, it is going to have an impact on the Blues because remember, the Blues were approving, and I used to always talk about two numbers, and the other number being if we could get patients all the way through the process, we could get 74% of them approved.
Our overall net approval rate was only 55%. The gap is the patient fatigue or the patients that drop out. As we develop positive coverage policies with every payer, that gap is going to be minimized because we are going to reduce patient fatigue because the majority of patients will be approved in very short order to, you use the term compression of time, which is exactly what we are looking for. We want that 90 days to approval to continue to go down and make it easier for patients to get the therapy. Your second question on the 4340 sensing lead, which previously launched in 2018 in Europe, and then we just launched it in just a few centers so far in the United States, and we will be expanding that in the next month. It is a lower profile product.
The stimulation lead body or the wire, if you will, we use that same design in the new sensing lead, and that gives us the low profile, but it also provides us with operational efficiencies. We think that is a twofold. It is smaller, it is more comfortable. We will show you pictures of the presentation. I think it is going to be uploaded on our website. You can download, there will be a picture of it that shows areas of blue, where if you dyed areas where physicians can handle the lead. We think it is going to make it easier for the physician to implant and thereby will reduce OR time slightly, but really be a more robust product going forward. Feedback from Europe has been very strong and we are very encouraged by getting it started here in the United States. Let me summarize this.
I want to thank everybody for your questions. Just one closing comment. We remain very pleased with the robust pace of growth we are demonstrating in our business while maintaining high quality and strong patient outcomes. Importantly, market demand continues to grow for our innovative and effective solution for patients with obstructive sleep apnea who are unable to successfully use CPAP. I remain grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, continued motivation to achieve strong and consistent patient outcomes. The Inspire team's commitment to patients is unmatched. Thank you all for joining the call today. We certainly appreciate your continued interest in Inspire and look forward to providing you with further updates throughout 2019.
Okay, this concludes today's call. Thank you very much for your participation. You may now disconnect.