Status Update

Aug 4, 2020

Press Release

Ladies and gentlemen, thank you for standing by and welcome to the iRhythm Technologies Business Update Call. At this time all participants are in a listen only mode. After the speakers' presentation there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Leigh Salvo. Please go ahead. Thank you. Good afternoon, and thank you all for participating in today's call. Joining me are Kevin King, CEO Doug Devine, CFO and Dan Wilson, EVP, Strategy and 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 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 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 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, 08/04/2020. 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. Thank you, Lee. Good afternoon, and thanks for joining us. I hope you are remaining safe and well relative to the effects of, COVID nineteen. After much anticipation and following their normal process, yesterday evening and this morning, the Centers for Medicare and Medicaid Services or CMS published the proposed Medicare physician fee schedule proposed rule for 2021. The proposed rule updates the payment policies, payment rates, and other provisions for services furnished under their Medicare physician fee schedule, which goes into effect on or after 01/01/2021. The issuance of the proposed rule is followed by a public comment period that closes on 10/05/2020 and will culminate in the CMS' final rule expected on or after December 1 for implementation on 01/01/2021. Therefore, the proposed rule is subject to change. On the call today, I want to provide some background as well as additional detail around the proposed rule and what it means for iRhythm should the proposed rule remain unchanged. We will not be speaking to our financial results nor providing guidance, and we ask that you limit your questions to reimbursement matters. As issued last night and this morning, the proposed rule includes payment rates for two new category one current procedural terminology or CPT code sets related to long term continuous ECG monitoring and recording. These new code sets are in addition to the existing category one CPT codes for monitoring less than forty eight hours and will replace the current category three temporary codes as the primary codes that iRhythm uses to seek reimbursement for Zio XT service. The eight new category one CPT codes were split between two sets of four with rates tied to wear time of greater than forty eight hours and up to seven days, and from greater than seven days up to fifteen days. From a coding perspective, we expect that the new CPT codes will be adopted for reporting purposes by all US payers beginning 01/01/2021 when the new codes become effective. That said, as I mentioned earlier, we are now entering a common period that closes on October 5, and the final rule will be released in early December. Before we discuss the estimated impact of the new codes, it's important to note that the adoption of the new code sets, there is clear recognition of significant value that long term continuous monitoring brings to cardiac disease patients. These additional codes were established to define the associated time and work to monitor, detect, and identify cardiac disease over longer periods of time, which have shown to lead to higher detection rates. IRhythm is the pioneer in this field and has been developing the clinical data for long term continuous ECG monitoring for nearly a decade. Our clinical data has shown that not only does long term continuous monitoring lead to higher detection rates, it often leads to changes in care management. Said another way, the data that is captured over fourteen days is of critical importance when determining care management for patient. The transition of a category one code set is a significant milestone for the company and further enables our ability to change the standard of care in cardiac monitoring. I would also like to recognize those groups who were involved in this process. The staff at CMS, the American Medical Association, the Heart Rhythm Society, and American College of Cardiology all spent tremendous time and energy through the process to educate themselves on not only the clinical utility of long term continuous monitoring, but the complexity of our business model as well. The experience we had through the process gives us great confidence that unique business models like ours that are fully integrated data businesses utilizing artificial intelligence will be valued appropriately. Now turning to what the new codes mean from a financial perspective. In order to better understand the impact and provide full transparency, we, along with our reimbursement consultants, have analyzed the new codes and how they would have impacted our business in 2019 as currently proposed. If we were to apply the new codes and proposed rates, our 2019 revenues would increase slightly based on the full year 2019 Zio XT volume and wear time mix. This estimate is based on our 2019 volume and revenue mix of Zio XT prescriptions and wear times, site of service, and our revenue mix across CMS, direct bill contracted, non contracted third party payers, and client bill. For our Medicare fee for service revenue, the new proposed rates are an increase over our existing rate with Novitas. It is important to note that the 2021 conversion factor in the proposed rule is proposed to decrease nearly 11% compared to the current twenty twenty conversion factor. The conversion factor is applied uniformly across the entire fee schedule and is not unique to specific CPT codes. Despite the decrease in the proposed conversion factor, the proposed RVUs when applied to the proposed conversion factor result in a relative increase in our Novitas rates, which as we interpret as a recognition of the increased clinical value of Zio over the last several years. For our direct bill contracted revenue, which represents contracts with third party titers with a range of negotiated rates, the majority of our revenue in this category are contracts with negotiated rates that are not indexed to CMS rates or contracts that have already been negotiated. For the remaining portion of our direct bill contracted revenue, the contracts contain what is called default language, which determines the payment rate in the case of a code change. Within these subgroup of payers, in some cases, the new rate will be above existing rates. And in some cases, the new rate will be below existing rates. The net impact of these contracts, along with the change in CMS revenue, are included in the estimated revenue impact provided earlier. Looking ahead, we believe that the new national CMS pricing, there are a number of additional tailwinds and opportunities for iRhythm that may lead to higher volumes and higher revenue over time. Category one CPT codes were associated with clinical validation as a new technology, which may improve patient access and physician willingness to adopt the technology. In addition, with national pricing, we have the added flexibility and benefit of utilizing all of our three IDTS, allowing us to scale our clinical operations in certain geographies. And finally, there are other entirely new sources of potential revenue that we can now pursue, including contracting for Medicaid and potentially billing for our home enrollment service. In closing, we're pleased that the proposed rates reflect the significant clinical value of long term continuous cardiac monitoring. We expect the rates to become final in December and go into effect next January. We will be sharing updates between now and January, if any as appropriate. And most importantly, we're excited about the transition to a permanent code and the increased access this will bring patients. We're looking forward to continuing the work of delivering our Zio service to the millions of patients who benefit from it. With that, we'll now turn the call open, to questions. Operator? Our first question comes from David Lewis of Morgan Stanley. Your line is open. Good afternoon. Can you hear me okay? Hi David. Yes we can. Oh good. That's good to know. So Kevin, just a few questions for me this morning. Just to overly simplify a lot of very confusing information this morning, it would be a decent assumption to basically assume that around 80% of your business is at least up around low to mid single digits based on the, reimbursement outlooks you walked through on this call? Is 80% of our business up low single digits based upon this? Well, I think if we bring I I I think the answer is yes. It's kind of an odd way to odd way to cut the data, but, certainly, CMS up, proportionately. Our client bill business is not affected. That's in the low single digits. And the remainder of our contracted businesses I described, it's a blend of completed, to be completed, some will go up and some will go down. I'd say, yes, directionally, it's about right. Okay. Very helpful. And then could we, just you talked about some strategic direction initiatives. I'm just so curious, Kevin, you get a sense of time line of Medicaid initiatives, home enrollment initiatives could begin to be accretive to the P and L. And the other question is, Kevin, is some of this revenue, whatever the revenue accretion is, low to mid single digits next year, that's going to obviously contribute at a rather high margin rate. Is your sort of philosophical view in 2021 as it relates to spending that money or letting it drop through for shareholders? Well, think relative to increased margins, this has been part of our plan for quite a while to get to the upper seventies. You know, we've been at the I think was around 75%, and we've had a long term goal of being between 7580%. This is certainly going to help us there. Our drive towards cash flow breakeven and the messages that we've been giving investors throughout last year and early this year remain. So I don't I don't see, us necessarily picking up spending relative to relative to this specific activity. That said, of course, if we had strategic initiatives that could pay, dividends back to the company in terms of market share growth, shareholder return, we would do it. But I don't think that there's a direct correlation. David, could you repeat the first part of the question again? That was kind of a long question for me to process at the same time. Sorry, I think you got it. I was just trying to get a sense of whether the incremental revenue contribution next year will fall down at a higher rate. So are you committed to dropping through, that incremental revenue dollar or spending it away, reinvesting it effectively? I think for where we stand right now, we would drop through. Think that's the way to think about it. Okay. And then Kevin, I think you were pretty clear on this call, but I just want to kind of reiterate for a clarity perspective. In terms of the third party payer relationships in your direct bill business, generally speaking in these permanent coding situations, they you know, that goes into effect rather immediately. But just confirming that in 2021, you do think third party commercial payers as of Jan one will honor the CMS expanded rates? Yeah, maybe I could just, unpack that a little bit. So, contracted commercial plans, whether they're contracted or cannot, are typically not indexed to CMS rates in our view. I would say that, over the past year, we've been working with many of our contractor payers, and some of them have agreed to move to the new code set for billing purposes, keeping keeping our payment structure the same given that they're not indexed, but, you know, the O two nine seven t family of codes goes away and a new code set comes in, so they have to update their billing system. In the case where they aren't indexed, we feel that we're in a stronger position relative to these plans because there's a higher RVU that puts us in a stronger negotiating position relative to to those contract plans. In some cases, commercial contract plans have predetermined indices relative to CMS pricing or RVUs. In some cases, it's below. In some cases, it's above. And it's it's sort of a starting point for negotiation, if you will. And, you know, when we net all of those factors out, we think in total, you know, our business will be up will be up slightly overall. Okay. Just last question for me, Kevin, very clear. Just the second part of my other question was just the strategic initiatives you referred to as it relates to home enrollment and Medicaid. Can you just give us some timeline in terms of the roll in when some of those initiatives could impact the P and L? Thanks so much and congratulations. Yes. Thank you, David. Yes, look, I think these are potentially longer term benefits for the company. Up until now, we've had essentially zero remuneration for Medicaid. Medicaid is run at a state level and, generally don't honor CPT three codes, and this is something that we'll be able to kick into gear. That said, it will take time for us to to negotiate, those types of payment rates. So it's it's certainly not immediate. I'd probably call it in the two year time frame probably as a safe bet. On the home enrollment side, this is a component that we have to explore here. We believe the code language will allow us to, bill in in some cases, but perhaps not all, for the hookup of our service. Today, in the case of home enrollment, we're not billing for that at all. We don't believe that we're capable of billing for it broadly. But this is something that we think we'll be able to get, and that's something that we'll pursue early next year, in the quotes of this finalist. Operator, do we have another question? Yes. Our next question comes from the line of Joanne Wuensch from Citibank. Your line is now open. Good afternoon and thank you and congratulations. Two quick questions. Was there anything that surprised you when you saw these final codes? I know the process has been long. You've been close to it and very straightforward regarding it, so I'm curious about that. And then is there anything in the codes that makes you change your business model? Sure. Hi, Joanne. This is Kevin. Taking the first question last. No. There's nothing about the code language that is surprising. As we described on previous calls, we worked hand in hand with the various governing bodies, AMA, ACC, HRS, in drafting and constructing that code language. So we are well aware and well informed, and we think this best represents the interest of patients, providers, service providers like ourselves in the industry. Anything, surprising here? Look. I think at the highest level, the movement to a category one is validating and great news for the company. It's it's a positive in all directions. It's positive for customers. It's positive for patients, and it's positive for the company. The initial ruling is highly favorable and that our relative value unit is increased compared to where it was, as a as a calculated value. The conversion factor going down is not so much a surprise, although it's it's enumerated as as a percentage now. But we did know that the, physician payment for evaluation and management, was likely to go up in the coming year. And the way CMS operates in a balanced budget mode, other things would have to change. So, this is related to all CPT codes will will be reduced by some percentage. And the fact that we're coming out of this net positive despite a, you know, nearly 11% decline in the conversion factor, I think, is really validating from the standpoint of of the uniqueness and and value of our service. So it's it's probably more validation, but not a surprise. And the second part of my question, does this change the way that you think about the business in any way? Well, I think, you know, to the comments I was just making to David, I I think, we think about the the total available market as potentially being larger now given that patient access and physician prescribing patterns may increase as a result of having a permanent code versus a temporary code. From an operating perspective, day to day operating perspective, no, it doesn't change anything about our business. We're as confident and as aggressive in pursuing leadership in in the marketplaces we've ever been. I can say that after having discussed this topic for about four years, I'm relieved that it's behind us or or it's resolved or or completed. But, I I wouldn't say there's any major major operational change. Thank you very much. I'm sure we'll find something new to bother you about. That wasn't directed at you. Was yeah. But thank you. Appreciate it. Thank you. Our next question comes from the line of Margaret Kaczor from William Blair. Your line is now open. Good afternoon, guys. Thanks for taking the questions. Hey, Margaret. I wanted to follow-up a little bit on some of the comments made to David. You know, I think CMS was maybe 28% of sales in 2019. So as you guys guide to slightly up, is that both for commercial changes broadly, not just those indexed to CMS and the CMS changes or not? And can you give us a sense of how much of commercial is indexed to CMS? So so so the the the broad answer is it's for the total business is what we were what we were saying. If we if we recast 2019 revenue, assuming these new rates and assuming changes to commercial carriers that might be indexed to it, the net net is that the business will be up slightly. The percentage of our business percentage of our business that is not indexed is a majority. So it's it's it's more a minority that is, either not indexed or has not already been previously negotiated. Okay. That's helpful. And then, you know, as we think about those others that are not indexed in this scenario, you know, over what time frame do you think you'll get a sense of that, you know, those changes? And and do you think they can go up from there or, hard to know? Well, we're we're we're up against the deadline here. Right? Because the existing codes will expire on December 31. So we have to complete all of these contracts before the end of the year. We're well underway with it, and and the articulation of these RVUs is going to be kind of a catalyst or propellant that will allow us to complete those conversations. Yeah. What what percent yeah. Sorry. Yeah. Go ahead. No. No. It it just sounds like we'll we'll get that answered by the end of the year and maybe, you know, incrementally over the next few calls, which will be good. And then in terms of the gross margin, so maybe we don't know the exact COGS per unit that you have, but let's say it's around $100,000,000 we assume a 5% increase in blended ASP, that gets us to maybe 100 or 130 basis points in gross margin benefits. Is that something that's in the ballpark, give or take, if you recast 2019? Recast 2019 say that once again, Margaret? So if you recast it on a gross margin basis, 2019, based on the new rates, is it roughly 100, low 100 basis points in gross margin improvement if it just fell through? Yeah. I'd I'd have to turn to Doug or Doug, for a kind of thought on that. Yeah. So, I mean I mean, so, obviously, there's not gonna be any change in cost with this change in ASP. So, I mean I mean, so you you can, you know, do do the math on that. I mean, we would say, you know, little little, you know, I mean, 5% would be a little bit on the high side. Okay, great. Thank you, guys. Congrats. Okay, thank you. Thank you. Our next question comes from the line of Kayla Krum from Truist Securities. Your line is now open. Awesome. Hey, guys. Thanks for taking our questions. So I mean, is there any reason why, you know, the the proposed rates would significantly change in either direction from here? And and I guess I'm mostly curious about that conversion factor, which which is a lot lower than than we expected. So is that something you you still think is kind of up for debate from here? Just would love to get your thoughts on that. Sure. Caitlin, it's Kevin. So the the conversion factor is something that is is up for discussion in this comment period, certainly. And it is something that is broadly applied across, and it may change in the final ruling. That said, you know, the CMS is required to have a balanced budget. So if some things have gone up, some things must go down. So something else would have to get somewhere on the same order of magnitude. And e m m e and m payments, I think, are fairly substantial, portion portion of the CMS budget, other than and that's why the conversion factor's gone by down by so much. But it's important to note that this is not specific to iRhythm. Right? This is a conversion factor change for all c all CPT codes in 2021. Yep. That that makes sense. Thank you. I appreciate I appreciate those thoughts. And it's just on on your MCT business with Zio AT, any implications, I guess, for for that business going forward? No. These these codes are all specific to our Zio XT service and the prescribing of of things greater than three days up to fifteen days with demarcation at the seven day point that we described. There's no implication for the CPT codes for, for ZOAT. Okay. Okay. I and these sorry. I think that those codes may have been updated as well, but just specific to this call, the the extended wear. It sounds like, the focus is just on the the extended wear business. Extended wear, and I believe Holter monitoring was reviewed, and Holter monitoring stayed, stayed about the same, I think, is what it was. Is that right, Mark? You may have been not there. Yeah. Yeah. So ultra monitoring was reviewed in this period as well, but, I don't think I don't think it changed the material way. Slight increase Okay. Our slight increase in the RVUs, but the overall dollar amount is about the same. Okay. Great. Thank you, guys. Thank you. Our next question comes from the line of Suraj Kalia for Oppenheimer and Company. Your line is now open. Good afternoon, everyone. Kevin, can you hear me all right? All right, Suraj. Yes, I can. Perfect. So Kevin, help us understand, for November when the final rates come out, a read of the current proposal specifically, you know, they are talking about a crosswalk comparison with percutaneous neurostimulation leads, which by definition are more resource intensive. And they also say that this is not clinically appropriate, but they do not have, I forget what the words were, they don't have invoicing for extended patch monitors. When CMS is specifically saying that this is not a clinically appropriate comparator. How confident are you all that this will be maintained in November, in the final proposal of in the final rule and then move on to, Jan first implementation? We're we're we're very confident in in the the data that was provided, and we're very confident in the calculation of the RVU. The the crosswalk of the supply is a reflection that our business model is not a typical business model in that we are the developer, the manufacturer, the supplier, and the provider of the service. So there is no there is no sale of iRhythm to iRhythm. It's just one integrated service. And and so we worked hand in hand as referenced in in the CMS note, and we provided over 500,000 invoices to, CMS for our service across a wide range of of contract, contracted arrangements, commercial carriers, noncommercial carriers, patients that paid out of pocket, CMS rates, everything, and those were all used. At the end of the day, they wanted to find something that was equivalent in supply cost, and they they chose this factor, this, this neurology kit or what was described there. The calculation of a PR, PE review is a very complicated involves over two two dozen steps to calculating that, and there are numerous adjustments, including reductions reductions of direct and indirect cost and a whole variety of assumptions on who utilizes it by specialty such that, you know, there's a net net reduction. And, I I I think that calculation was done well and was supported, and I I'm confident it's it's it's what CMS wanted, and that's where we got the rates. I'm I'm not I'm not concerned about that changing. Got it. And, Kevin, the math that we have done, and maybe you'll haven't specifically set the rate dollar amount, but maybe you could give us how directionally off we are. The math that we did, if we take the practice expense RVUs for this crosswalk code, it gives us the total RVUs in the 10.14 range, and which translates into roughly around $340 for the eight to fifteen days. Am I too far off or, are we reasonably close based on you guys' internal analysis? I think you're very close. I think you're very close. Okay. Thank you, everyone. Okay. Thanks. Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Kevin King for closing remarks. Thank you, operator. Thank you, everyone, for joining the call and hearing about, CPT communications here today. We wish you well and look forward to talking to you on our earnings call later this week. If there are any questions or comments, we could try to address them at this time. Thanks very much, and goodbye. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.