Status Update

Dec 2, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the iRhythm Technologies commentary on CMS twenty twenty one final ruling on Medicare physician fee schedule conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the conference to your speaker today, Leigh Salvo, Investor Relations. Please go ahead, ma'am. Good morning, and thank you all for participating in today's call. Joining me are Kevin King, CEO Doug Devine, CFO and Dan Wilson, EVP of Strategy, Corporate Development and Investor Relations. Before we begin, I'd like to remind you that management will make statements during this call that include forward looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward looking statements. All forward looking statements, including without limitation, those statements related to CPT coding decisions, our expectations regarding government and third party payer adoption of CPT coding decisions and the timing thereof and other statements relating to reimbursement coverage. These statements involve risks, material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual report annual and quarterly reports on Form 10 ks and Form 10 Q, respectively, filed with the SEC. This conference call contains time sensitive information and is accurate only as of the live broadcast today, 12/02/2020. IRhythm 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. And with that, I'll turn the call over to Kevin. Thanks, Leigh. Good morning, everyone, and thank you all for joining. I'd like to start the call today with a quick summary of our CPT process to date. In October 2019, the AMA CPT Editorial Panel replaced four Category III codes with eight new Category I codes. The next step in the process was for the medical societies and the AMA to present a set of proposed values for the new codes to CMS, which occurred earlier this year. CMS then deliberated on the AMA ROC proposal in the form of a proposed ruling, and followed that with a final ruling here in December. In the proposed and final ruling process, CMS noted an awareness of the uniqueness of our business model and circumstances of being vertically integrated as a service. That is that we are a developer, a manufacturer, and a provider of the service. In the proposed rule, CMS proposed a proxy pricing for the supply cost related to the wearable biosensor, which several commenters supported. Because the independent diagnostic testing facilities that furnish the extended ECG services are also the manufacturers of the wearable biosensors, there are no invoices that reflect the sale or purchase of the supply item or the related software required to scan and analyze the extended ECG data recorded on the sensor. CMS proposed to employ a crosswalk to an existing supply that had been previously used for pricing purposes. A percutaneous kit, neurology test simulation, as a proxy item and at a price of $413.24 CMS commented in the proposed rule that although this kit is not clinically similar to the extended external ECG patch, they believe it was the closest match from a pricing perspective to employ as a proxy until they were able to arrive at an invoice that is representative of commercial market pricing. And CMS welcomed the submission of invoices and other additional information for use in the pricing of the extended ECG patch medical tape recorder supply. In the final ruling, however, we believe CMS was challenged to apply the crosswalk methodology because of the potential precedent setting nature of crosswalking a proxy value. Likewise, while invoices from third parties were provided during the common period, they were deemed not to be accurately reflecting relevant prices for the service and were therefore not accepted as input by CMS either. We believe this led to CMS electing in the final rule to utilize local contract pricing for the global and technical codes for calendar year 2021. Notably, this appears to be similar to the case with another code for diabetic retinopathy, which, like our service, uses algorithms and artificial intelligence components to deliver the service. In describing their methodology in the case, CMS stated that AI applications are not well accounted for in our practice expense methodology. CMS also referenced another similar AI based service in their ruling for this code, and stated that the analysis portion of the service cannot be adequately reflected under the physician fee schedule payment methodology. In both instances, CMS chose contractor pricing. While we aren't certain, we believe these decisions highlight a recognition of the challenges valuing new technologies like our own within a rigid framework. While we were expecting a national pricing decision, it's very important to note this is not a rate cut, rather a rate increase was not approved. And the changes relate to roughly one quarter of our revenue. We believe a local contracting path is an attractive and familiar option for the company and leverages the longstanding working relationships we have with several local contractors. Separate but related, we believe our commercial contract pricing is unaffected, as is our ability to pursue Medicaid contracting and reimbursement for our home enrollment service. And most importantly, the clinical validation that is associated with the category one CPT codes remain. And we believe this positions us well to improve patient access and physician willingness to adopt the technology. We'll be taking two paths from here. First, we'll use the ROC valuation work that came out of the initial ruling as the starting point for discussions with local Medicare administration contractors. It's likely this will take a few months to complete, and we will be providing updates as appropriate. Second, we will continue to collaborate with CMS and other stakeholders to advance national pricing. We plan to broaden the audience to include medical societies beyond our core relationships with ACC, HRS, and ANA. For example, the American Academy of Ophthalmology. The aim here is to achieve broad society endorsement to establish methodologies that don't rely on component level evaluations to price integrated digital health services. And to reach beyond code by code approvals to cover the entire emerging segment of digital health and subscription services. We're looking forward to embarking on these initiatives and continuing to establish Zio as the standard of care and monitoring. And with that, we can open the call for a few questions. Thank you for your time. Thank you. Our first question comes from David Lewis with Morgan Stanley. Your line is now open. Good morning. Kevin, just a few questions for me. I guess just finishing up where you left off here. So clearly there's some confusion at CMS. And you sort of outlined some of the steps that we needed to take to address that confusion. How long do you think that process is? You think this is a one year process? Is it a two to three year process? David, hi. Good morning. So you're referring to getting back to a national pricing? Yes, sir. Yeah. Look, I think it's longer than the year. It's probably within the one to two year framework. My understanding is work for 2022 is already underway and, you know, our ability to influence that. So I I think it's probably safe to say that the local contracting pricing will be in effect for about two years, And then we'll be naturally trying to do it faster. But I think it's safe to say two years is probably about right. Okay. And just maybe two more for me. The first one Kevin is just the reimbursement debate obviously has stemmed for years. And you can argue it even goes back to the pre IPO days. So some are going to conclude that this decision sort of suggests that we're back to square zero and we're kind of starting over. Based on sort of the RVU information and the proposed rule from CMS and how this process has played out, what would you say to investors who believe you are kind of back to ground zero? Why is that or is not the case? Well I don't think we're back to ground zero. I think we've made tremendous progress here. Know, we have a permanent CPT code, code sets that have replaced temporary codes. We have communicated and it has been supported that the evidence generated by iRhythm is superior to other methodologies, and we've created a new category. There's widespread acceptance and adoption of the technology, digital technologies, including artificial intelligence. I think the challenge is that as I described, you know, CMS has a rather rigid framework that requires precise, inputs, like an invoice, that don't exist in these categories. And, it's it's our job to help them, to remodel or to affect change such that not only iRhythm, but every other digital health company and every other subscription service company in health care, you know, can get the benefit of fairly valued remuneration. I don't think we're back at ground zero at all. I'm extremely confident. And importantly, as I said, look, is not a rate cut. This isn't a price increase per se. And I'm extremely confident of where we are. It's disappointing we didn't get across the finish line on this particular point. But our relationships with, AMA, CMS, all of these organizations are good, we're gonna intend to we intend to continue to collaborate with them and try to push this forward, not only for us but for the industry. Okay. Helpful, Kevin. Just last one for me. Obviously, as you mentioned, stable reimbursement on a go forward basis, no price cut. But I mean stability, if you go back a year ago, actually would have been a bull case for many investors. But from here, we take out that one year price bump in 2021. I think it's going lead investors to come back to what is the structural volume story for this business. So without giving 'twenty one guidance, Kevin, how do you see sort of the underlying sort of structural volume opportunity growth rate for this business as you look out over a multiyear period of time? Thanks so much. Yes. David, these because the prescriber is not involved in the pricing decision, you know, because we're billing on behalf of patients, I don't see any impact from the volumes that we've previously described to you and to others on our call. And I'll just roughly paraphrase I think the question you asked, would this be a 20% to 25% volume growth business looking forward? And I confirmed that in our last earnings call. And I don't see anything here that would change that. In fact, the news that we have, coming out of The UK, with both the NICE approval as well as the AI award, you know, help us there as well as the traction that we have with Zio AT. No impact here on Zio XT from a volume perspective. So I'm as confident and bullish as I've ever been about the business. Great. Thanks so much. You're welcome. Thank you. Our next question comes from Robbie Marcus with JPMorgan. Your line is now open. Great. Thanks for taking the question. Kevin, I find it odd that within twenty four hours you have The U. K. Go all in on digital health with a whole reimbursement scheme and massive support behind it. And it looks like Medicare, you know, whether it was the PFS wasn't set up to handle it or whatnot, they decided to back away from going all in on digital health reimbursement for AI technologies. So what do you think it'll take to help educate CMS? And what can your experience in The UK and NICE's decision just two days ago help bring to the table? Yeah, it is a rather strange coincidence that the region of the world that we think is least advanced quickly And the one that we'd like to think as the advanced healthcare system is the one still stuck in a rigid model. Look, think it's going to take the broad society support that I discussed. As you know CMS works hand in hand with the medical societies in the evaluation process. In fact, you know, the RUC process is an AMA process. And our work with other societies working together to try to affect change, broadly as opposed to on the kind of code by code basis is probably the best long term strategy for affecting change. That said, you know, cardiac PET imaging went through this. We also know that INR monitoring went through a variety of, let's call them somersaults with CMS where things didn't fit exactly as prescribed. And, you know, CMS is known to vent, and known to take input, and known to, you know, eventually value things. So I'm I'm hopeful that the long standing relationships we have with them, AMA and others, and the ones we intend to build with the societies will will help convince CMS that there are different ways of evaluating practice expense inputs when invoices are not available. Got it. And then one of the most common questions I've gotten overnight in this morning is, you know, what gives you confidence that when you go back to the MAX, really Novitas and Noridian to begin early next year to discuss the rate going forward that it should be, you know, sort of a status quo with maybe, you know, the bull case of, you know, some upside to or, you know, bookended between the CMS rate that was proposed. You know, what gives you confidence the rate won't go down and that it's really just a price increase wasn't affirmed rather than something of a price cut? Thanks a lot. Yes. Look I think it comes to the longstanding relationship that we have with these administration centers or local contractors. You know, in both cases, Noridian and Novitas, and to some extent, Palmetto on the East Coast. You know, these things span back almost seven years of, working relationships. I wouldn't say on a day to day basis, but pretty deep. They understand our technologies. Our technologies have been validated. We've been audited by these organizations in the past. And we've used the RUC process with Novitas the first go round. And now we have, you know, new data that came out of the initial ruling that we intend to use. That gives me confidence that we're to be shooting for the higher end of where we were. I don't know if we'll get there. I hope we do. But that's certainly where the discussions will begin. And, there isn't really a basis for lowering if there isn't any new data that would suggest that the price of our service would be less. Great. Thanks, You bet. Thank you. Thank you. Our next question comes from Joanne Wuensch with Citibank. Your line is now open. Good morning and thank you for putting this call together quickly. A couple of questions. The Category one code will go into effect on January. We're on December 2, and the old reimbursement rates don't exist anymore at that stage. What happens or has to happen between now and January for reimbursement for CMS patients to be in place? Yeah, Joanne, it's likely that the local Medicare MACs will just crosswalk the existing rate over until they finish their discussions with us. This this comes up in some of the commercial contracting, discussions that we've been having as people say, hey. You know, we don't know if we can get our IT systems and everything else geared up for, you know, accepting new CPT codes, so we'll just accept whatever's whatever's there. So I think it's gonna be or in the event that we don't get it done by, January 1, and as I said, I think it's probably gonna take a quarter to do that, the people will will accept, the crosswalk of the existing code. Health plans do not wanna deny coverage or benefits to beneficiaries for administrative reasons. That that would not be a good thing for them to do or for us to do. And I think there's a strong recognition of that. And and is there a case to be made that given additional clinical data and given the rough analysis and everything else that the old code is really not the right code anymore, that it should be something higher? Yeah. That's what I mentioned in my prepared remarks, Joanne, that, you know, what we're going to do is, we're going to, take the RUC valuation work that came out of the initial ruling and use that as the starting point for our discussions with local Medicare max. Again, you know, this is about a quarter of our business overall, but nonetheless important. And, you know, all of that work is public. All of Medicare centers will see all of the write ups that were presented in the final rulings. And all of those valuations are available. So we're gonna use those as the basis for having those discussions at a local level. Thanks. And my last question is, I mean, all of our work would indicate that having a Category one code is actually a good thing in itself versus a temporary Category three code. Do you see that also? How do you think that might impact volumes? Thanks. Yeah, we do. And this is why when David was asking the question, you know, does this imply that we're back at square zero? And I politely pushed back and said no. You know, the validation process associated with Category one code remains. And we think this does help patient access, and it does help physician willingness to adopt the technology. We've commented on that previously. While it may be at the margin, it is positive. And it does signal a validation of the technology, without a doubt. This is not something after millions and millions of tests are done that's experimental, investigational, nor lacking evidence. It's one that is validated that's struggling as a category, to fit into like a wooden shoe, right? The wooden shoe doesn't flex maybe is the way to think about it from my days of working at The Netherlands. But nonetheless, it's one that we'll benefit from for certain. Thank you. You're welcome. Thank you. Our next question comes from Kayla Krum with Truist Securities. Your line is now open. Hi guys, thanks for taking our questions. You've mentioned this has a direct impact on about one quarter of your revenue. So how does this impact your relationships with private payers and or sort of the balance of your revenue base? Hi, Kayla. Look, I don't believe it does. And, you know, we've commented on this in the past when we described the initial ruling or the benefits of the initial ruling where we said, you know, crosswalking the 2019 revenue to the initial ruling would take us up in high single digits. And that was largely CMS. And we did not believe that the commercial contracts that we have in place would largely be affected, mostly because they were already paying higher than where we were and higher than the initial ruling was. So I'm not overly concerned about that. Many of these contracts are already completed and have been crosswalked to the existing commercial rates that we have. So I'm feeling pretty confident about that. There is the benefit of the permanent code allowing us now to go after Medicaid state level pricing or contracting. Also, the home enrollment, for hookup, is now a permanent code, and then it is valued as well. So that can be used for us. And I think those are two two additional side benefits, that will flow to the business over time. Okay. Great. No. That makes a lot of sense. And I guess I'm just curious. I mean, are there any sort of historical precedents that that that we can look to to sort of provide an example of a technology where maybe MACs have raised a rate or established a permanent code with a higher rate? Just would love to get your thoughts on that, understanding this is kind of a different unique scenario. Thank you. Boy, Kayla, I would I'm far from being an expert in knowing or understanding CMS decisions outside of our own. We'd have to research that for you. I do know, you know, what I've described here is that the diabetic retinopathy code didn't pass CPT one for the same reason. That's not really answering your question. I do know that INR monitoring, was challenged for quite a while and eventually got approval. But I don't know what happened in the temporary coding, if the local pricing ever came in higher or not. I'm sorry I don't have that data. We can look we can certainly work we can certainly look and ask our our payer teams if they know of anything and get back to you, but, I I'm not aware of anything. But that doesn't mean yeah. Go sorry. Go ahead. No. You're fine. I just had one, one final question. Just in terms of, your expectation going into next year, does I mean, does this, does this change sort of make the reimbursement process slower or or more sort of unpredictable? Just would love to to get your your thoughts on that. Help help me to understand a little bit more that, kids, going into next year, does this make the the conversion of their commercial contracts faster or slower? Is that your question? So I guess I mean, you know, does does having to go through sort of the max make the reimbursement process slower or more sort of unpredictable versus having the established rate and and everything in place. You know, it it almost seems like, you know, the the ability to be able to go to, you know, Novitas and and and have those discussions is almost like a more of the same, and shouldn't impact, the reimbursement process, make it slower or unpredictable, but just wanna clarify that, that comment. Yeah. I I as as I said earlier, I don't I don't believe this is going to be a challenging process. It it is going to take some time. And and as I said in the prepared remarks, you know, we're going to work on that. And it's going to take a few months. But aside from that, I think this should be fairly straightforward conversation. The data is already available. The relationships are in place with numerous local carriers. And we'll try to contract with as many as possible to establish, you know, the right pricing level. And it's about a quarter of our business. I don't see any impact to volume. I don't see any impact to commercial contracting rates. So aside from the few months to get in line with the local carrier pricing calendars, don't think this is going to be terribly disruptive to us. Thanks, Kevin. Yeah, you bet. Thank you. Our next question comes from Margaret Kaczor with William Blair. Your line is now open. Hey. Good morning, guys. I wanted to maybe go into a little bit more detail around kind of the MAC negotiation process. And what I'm trying to understand is what's important to them. So are they budget driven folks? Do they look at the same proxy CMS does? Do they have a way to value those digital solutions? Is that something that they've set precedent for or not? Well, I think it it I think it depends on whether you're talking about a temporary code or a permanent code, Margaret. In in in the work that we did initially with, Novitas on a on a temporary code basis, as we've described before, we needed to put together what we believe were the practice expense inputs. And that's where we arrived at. I think at the time it was $311. It's cents increased from that to about 320. Now that there's a permanent code in place, there's no question that the technology is, is validated, if you will. It's not experimental. It's not investigational. So this, from a contracting standpoint, ends up becoming the same valuation exercise. And from my or from our perspective, the initial ruling is going to help us here because all of that work was done by the ROC as a governing body. And, I think that that's a good starting point for us to go to the conversations with them about this. So I'm hoping it's going to be more conversational than it's going to be contentious in any way. And again, the five to seven years of experience, I guess it's now seven years of experience that we have with them, I think will help as well. This is not like we're an unknown entity. So I'm not expecting this to be considered a rate cut. I think the way for all of us to be thinking about this is that we were hoping for a rate increase that was not approved. So, minimally, we should stay where we are, and we're gonna we're gonna go for swing for the fences, if you will, in terms of our ability to apply the RVUs that were generated out of the initial process. Okay. And and as a follow-up to that, is there a specific deadline that they have to hit? Meaning, you know, if you guys started the year with existing rates and then you're kinda bridging, I guess, until those those final rates with the with the contractor are negotiated, why wouldn't they just keep the rate? And if you look at your confidence around this process versus the rec process earlier this year, are you are you feeling better or worse? Well, look, this is this is one day in the making. Right? So we learned about this yesterday. So, you know, we're still formulating, the plans. It is highly possible, as in the case of the commercial contractors, where when the initial ruling came out, they said, look, we'll just take the new codes and apply the current pricing. It could very well be that that's the stance that they take. And again, that's not necessarily a bad outcome. That's just not a price increase. I don't I don't yet, given that this is just a twenty less than twenty four hours, in the making for us here, have the specific steps and the timing and all of the other items, that you're asking about. But we'll we'll certainly plan on providing those to you as we move forward. But rest assured, we're totally confident in in in the data that we have and and confident in the outcome of the of of what will happen here. Got it. Thanks, guys. Yes, you bet. Thank you. Our next question comes from Marie Thibault with BTIG. Your line is now open. Hi. Thanks for taking the questions. One question from me. I wanted to go back to sort of the second pathway where you're gonna be working with stakeholders and CMS to advance efforts on national pricing. I appreciate you might not have the specific steps or the exact timelines there, but I'm wondering if there are any specific time points where we might get insight into the progress you're making. Will we see any public discussion? Will this pop up in PFS proposal again? Just Just curious kind of when we might hear next about your progress there. Yeah. Again, I'm sorry. You know, this is still early for us, but this has been in our kinda contingency planning. You know, I think we thought this local pricing decision was a possible but very low, outcome. And associated with that, of course, we asked ourselves, well, if that happened, what would we do? And this plan that I've described of broadening the audience to include, you know, more medical societies to help CMS to not rely on component level evaluations is something we've been thinking long and hard about. I I at this point, I don't know if I can describe to you the exact steps. I I think that's a little bit early. But I will say that we will continue to be as collaborative and as transparent with, all of our stakeholders, it's investors, whether it's providers, and continue to build the strong relationships that we have with societies. We think this is the right thing to do for the industry as we move towards artificial intelligence, as we move towards digital services. You think about the value that we've created here during the pandemic and how we've helped, you know, possibly hundreds of thousands of patients' lives, with cardiac arrhythmias, through our service. And, I I think we want CMS, to understand those that those value elements. So we'll we'll we will commit to communicating to you the steps along the way. I think some of these things will be conversations that are not part of a structured process. But as the structured process falls into play and resubmissions and things like that occur, we'll certainly keep you in mind. And I think that, you know, as David had asked, is this a one year or two year exercise? It's somewhere between 24, and we'll, we'll try to keep you posted. But, you know, there are well well described milestones for for getting back into a queue with, with CMS for for permanent, I guess, final final rulings again. Understandable. Thank you. Yeah. Thank you. Our next question comes from Michael Pollard with Baird. Your line is now open. Hey, good morning. Maybe a follow-up to Marie's question there asked on something more directly. Do you think an act of Congress is required in this instance to loosen up some of the rigidity that you're alluding to in CMS' process? Or do you think this can be addressed exclusively by dealing directly with the agency rulemaking, that sort of stuff? Well, it's certainly possible. I mean, you know, the physician fee schedule, my understanding is, you know, was constructed and approved by Congress at some point in time, probably decades ago. But also there are examples, as I've described, with INR monitoring, with cardiac PET imaging, and other types of things where CMS has said one thing on one day and then said another thing on another day. And, you know, that's through the education process and the understanding. I think the initial attempt here, how do I say this, so I think CMS fully recognizes the value of digital health services and companies like ours that are vertically integrated. And I think it's for this reason that they selected proxy supply cost that I described in the prepared remarks. It turns out in the end that they couldn't quite get comfortable, as comfortable as they thought initially with the final ruling on that. But that does signal to me and it does signal to others that there is recognition that these are different services. And there is a willingness and openness to consider alternatives. So I would like to think this is not an act of Congress, but rather this is an educational process of getting people comfortable. You certainly wanna try to do this in a way that doesn't affect the mandate of being a balanced budget for CMS overall. I mean, we're not even a we're a very, very small percentage of overall, but nonetheless precedent setting in terms of if you do it for one, do you have to do it for all? And we wanna try to get them comfortable with that. And I think that's the right thing to do in terms of creating, you know, lasting. It's not that's not, controversial. And we'll work with them as a partner and and figure out how best to bring it forward. Helpful. Maybe one follow-up, on The U. K. Guidance publication, earlier this week, obviously, positive determination. I did notice in that, long document they at some part in your engagement with that group, the price for Zio XT appears to have been lowered from what seems to have been a proposal and is now at a slightly lower rate. So I'm just curious how that came to be, what happened in that process to kind of move you from some higher level to some lower level? Oh, boy. I'll need to get get back to you. I'm not not trying to skirt skirt the question here. I I just don't know the mechanics of what happened with with the with that. So I you know, I'm unfamiliar with anything being having a lower price. I don't know if any of my colleagues have that information. Either Dan Dan or or Doug, are you aware of anything there that Yeah. Hi. This this is Doug. They basically released a little bit of the negotiating process. They have not we had not been selling we we've not been selling the park at Yep. At the £310 level. It was fairly part of this. So you're just getting a snippet of pricing negotiations there. Okay. Yes, that sounds makes sense. Thank you very much. Thanks. Thank you. This concludes the question and answer session. I would now like to turn the call back over to Kevin King for closing remarks. Great. Thank you, operator. Thank you, everyone, for joining today's call. I know this was put in place rather quickly. Hopefully you know that we've stepped forward here to help you to understand our business, the implications of this change, and that, we remain as confident as ever in our business. And, we'll continue to be as open and transparent with you as we go forward. Thanks for your support, and, we look forward to talking with you on our next earnings call. And of course, we're always around to help answer questions for you. Take care. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.