Specialist Series: Reimbursement Basics

Contributed by Ed Berger
Principal Larchmont Strategic Advisors
Reimbursement strategy counsel to companies across the life sciences spectrum


A basic understanding of the healthcare reimbursement system is an important success factor for any entrepreneur developing a new medical product. Reimbursement is critical to opportunity assessment, business plan development, investor due diligence, and commercial success.  The good news is that, despite widespread concern about the high cost of healthcare, careful analysis and planning can almost always assure commercially reasonable reimbursement for new products that improve patient care.

A reimbursement analysis will consider three interrelated components of the reimbursement system:  coding; payment; and coverage.  Each distinct healthcare product or service must, for fee-for-service billing and payment purposes, be identified by billing code. Billing codes are also used in capitation payment models for tracking, analysis and evaluation purposes.

Physicians’ services, wherever provided, are identified by CPT codes.  When services are provided in a facility setting, the facility submits a separate bill. For emergency room or outpatient services, hospitals use CPT, but for inpatient services, hospitals use a different code set, ICD-10-PCS.  A third code set, HCPCS Level II, provides codes for services and equipment not included in CPT.  And every medical bill, regardless of the billing entity, uses ICD-10-CM diagnosis codes to document the appropriateness of the service for the patient.  Each applicable coding system has its management, requirements, processes, and timelines. Entrepreneurs need to understand how their product will be coded, whether a new code or codes will be required, and if so how to proceed.

Payment is closely associated with billing code; for each insurer, all fee-for-service claims submitted using the same code will result in the equal pay.  Medicare payments are determined for each code through well-defined and highly structured prospective payment systems designed to reward cost-efficiency without sacrificing the quality of patient care.  Most private insurers follow Medicare’s payment structures, but their payment amounts, set through negotiations between insurers and service providers, are typically higher than Medicare.  In developing pricing strategies and business projections, entrepreneurs need to understand how these payment systems will affect the willingness of their physician and/or hospital customers to use their products.

Billing codes and associated payment levels do not guarantee payment. Coverage represents an insurer’s determination of whether or under what circumstances to pay for the product.  Most health care services are covered based primarily on their established conventional use and acceptance.  But products and services utilizing innovative technologies or providing new clinical interventions do not fit into the “established use” model and are therefore likely to be subject to a formal coverage determination.

The coverage determination process is based primarily on an assessment of clinical utility as documented in published research reports, clinical experience, recommendations from relevant professional societies, etc. It is intensely data-driven, and insurers data requirements for coverage purposes often differ from the FDA’s requirements for product approval.  While coverage determinations rarely directly reference cost, cost frequently enters the process indirectly – high-cost services likely to be used in a substantial number of cases are typically subject to more rigorous review than those that are predicted to have a lesser systemic cost impact.  Impact on the total cost per case and the total societal cost is an increasingly important element in insurer fee-for-service coverage determinations and provider utilization decisions under pay-for-performance or capitated contracts.  Entrepreneurs need to anticipate insurers’ clinical and cost data requirements and integrate capture of those data into their clinical programs.