iRhythm Holdings, Inc. (IRTC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the iRhythm Technologies commentary on CMS 2021 final ruling on Medicare physician fee schedule CMS' 2021 Final Ruling on Medicare Physician Fee Schedule Conference Call. [Operator Instructions] 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 facts 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-K 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, December 2, 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 of 2019, the AMA CPT Editorial Panel replaced 4 Category III codes with 8 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 RUC proposal in a form of a proposed ruling and follow 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 for -- 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 welcome 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 the 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 1/4 of our revenue. We believe a local contracting path is an attractive and familiar option for the company and leverages the long-standing 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 I code -- 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 2 paths from here. First, we'll use the RUC valuation work that came out of the initial ruling as the starting point for our 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 AMA, 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 valuations 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 in monitoring. And with that, we can open the call for a few questions. Thank you for your time.

[Operator Instructions] Our first question comes from David Lewis with Morgan Stanley.

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 iRhythm uses to take to address that confusion. How long do you think that process is? Do you think this a 1-year process? Is it a 2- to 3-year process?

David, so you're referring to getting back to a national pricing?

Yes, sir.

Yes. Look, I think it's longer than a year. It's probably within the 1- to 2-year framework. My understanding is work for 2022 is already underway and our ability to influence that. So I think it's probably safe to say that the local contracting pricing will be in effect for about 2 years and then we'll be naturally trying to do it faster, but I think it's safe to say 2 years is probably about right.

Okay. And just maybe 2 more for me. The first one for Kevin is just the reimbursement debate obviously has stemmed for years, and you can argue, 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. If base is sort of the RVU information and the proposed rule from CMS and how those processes 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. 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 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, CMS has a rather rigid framework that requires precise inputs like an invoice that don't exist in these categories. And 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, can get the benefit of a fairly-valued remuneration. So I don't think we're back at ground zero at all. I'm extremely confident. And importantly, as I said, look, this 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 going to intend -- we intend to continue to collaborate with them and try to push this forward, not only for us but for the industry, and problem solved.

Okay. Very 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 to a year ago, it actually would have been a bull case for many investors. But from here, we take out that 1 year price bump in 2021. I think it's going to lead investors to come back to what is the structural volume story for this business. So without giving sort of '21 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?

Yes, David, these -- because the prescriber is not involved in the pricing decision because we're billing on behalf of patients, I don't see any impact on the volumes that we've previously described to you and to others on our call. And I'll just roughly paraphrase it. 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 U.K. with both a nice approval as well as the AI award, 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 as bullish as I've ever been about the business.

Our next question comes from Robbie Marcus with JPMorgan.

Kevin, I find it odd that within 24 hours, you have the U.K. go all-in on digital health with the whole reimbursement scheme and a massive support behind it. And it looks like Medicare, whether it was that PFS wasn't set up to handle it or whatnot, they decided to back away from going it all-in on digital health reimbursement for AI technologies. So what do you think it will take to help educate CMS? And what can your experience in the U.K. and the NICE's decision just 2 days ago, helped bring to the table?

Yes. It is a rather strange coincidence that the region of the world that we think is least advanced, advanced quickly, and the one that we'd like to think as the advanced health care system is the ones still stuck in a rigid model. Look, I think it's going to take the broad society support that I discussed. CMS works hand-in-hand with the medical societies in the valuation process. In fact, 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, cardiac PET imaging went through this. We also know that INR monitoring went through a variety of, let's call them, summersaults with CMS, where things didn't fit exactly as prescribed. And CMS is known to bend and known to take input and known to eventually value things. So 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 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 and this morning is what gives you confidence that when you go back to the MACs, really, Novitas and Noridian to begin early next year to discuss the rate going forward, that it should be sort of a status quo with maybe the bull case of some upside to or book ended between the CMS rate that was proposed? What gives you confidence the rate won't go down, and then it's really just a price increase wasn't affirmed, rather, than something of a price cut?

Yes. Look, I think it comes to the long-standing relationships that we have with these administration centers or local contractors. In both cases, Noridian and Novitas and to some extent, Palmetto on the East Coast. These things span back almost 7 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 new data that came out of the initial ruling that we intend to use. So that gives me confidence that we're going to be we're going to be shooting for that -- 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 them for lowering if there isn't any new data that would suggest that the price of our service would be less.

Our next question comes from Joanne Wuensch with Citibank.

A couple of questions. The category I code will go into effect in 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?

Yes, Joanne, it's likely that the local Medicare MACs will just crosswalk the existing rate over until they finish their discussions with us. This comes up in some of the commercial contracting discussions that we've been having as people say, hey, we don't know if we can get our IT systems and everything else geared up for accepting new CPT codes. So we'll just accept whatever is there. So I think it's going to be in the event that we don't get it done by January 1. And as I said, I think it's probably going to take a quarter to do that, that people will accept the crosswalk of the existing code. Health plans do not want to deny coverage or benefits to beneficiaries for administrative reasons. 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 is there a case to be made that given additional clinical data and given the RUC analysis and everything else that the old code is really not the right code anymore that it should be something higher?

Yes. That's what I mentioned in my prepared remarks, Joanne, that 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 MACs. Again, this is about 1/4 of our business overall, but nonetheless important. And all of that work is public. The local -- 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 going to use those as the basis for having those discussions at a local level.

And my last question is, I mean, all of our work wouldn't indicate that having a Category I code is actually a good thing in itself versus a temporary Category III code. Do you see that also and how do you think that might impact volumes?

Yes, we do. And this is why -- when David was asking the question, does this imply that we're back at square zero and I politely pushed back and said, no. The validation process associated with Category I 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, to fit into like I wooden shoe, right? The wooden shoe doesn't flex maybe is the way to think about it from my days of working in the Netherlands. But nonetheless, it's one that we'll benefit from for certain.

Our next question comes from Kaila Krum with Truist Securities.

So you'd mentioned this has a direct impact on about 1/4 of your revenue. So how does this impact your relationships with private payers and/or sort of the balance of your revenue base?

Kaila, look, I don't believe it does. And we've commented on this in the past when we described the initial ruling or the benefits of the initial ruling where we said 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 ones. 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 hook-up is now a permanent code in and it is valued as well. So that can be used for us. And I think those are 2 additional side benefits that will flow to the business over time.

Okay. Great. Now that makes a lot of sense. And I guess, I'm just curious, I mean, are there any sort of historical precedents that we can look 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.

Boy, Kaila, I would -- I'm far from being an expert in knowing or understanding CMS decisions outside of our own. We would have to research that for you. I do know what I've described here is that the diabetic retinopathy code didn't pass CPT 1 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 happens 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 certainly look and ask our payer teams if they know of anything and get back to you. But I'm not aware of anything. Yes. Sorry, go ahead.

No, you're fine. I just had 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 more sort of unpredictable? Just would love to get your thoughts on that.

Help me to understand a little bit more of that going into next year, does this make the conversion of their commercial contracts faster or slower? Is that your question?

So I guess, I mean, does having to go through sort of the MAC can make the reimbursement process lower or more sort of unpredictable versus having the established rate and everything in place? It almost seems like the ability to be able to go to Novitas and have those discussions is almost like more of the same and shouldn't impact the reimbursement process, make it slower or unpredictable, but just want to clarify that comment.

Yes. As I said earlier, I don't believe this is going to be a challenging process. It is going to take some time. And as I said in the prepared remarks, 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 the right pricing level. And I don't -- and it's about 1/4 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, I don't think this is going to be terribly disruptive to us.

Our next question comes from Margaret Kaczor with William Blair.

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 as 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 depends on whether you're talking about a temporary code or a permanent code, Margaret. In the work that we did initially with Novitas on a temporary code basis, as we've described before, we needed to put together what we believe where to practice expense inputs. And that's where we arrived at, I think at the time, it was $311. It's since increased from that to about $320. Now that there's a permanent code in place. There's no question that the technology 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 our perspective, the initial ruling is going to help us here because all of that work was done by the RUC as the 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 think -- I'm hoping it's going to be more conversational than it's going to be contentious in any way. And again, the 5 to 7 years of experience, I guess it's now 7 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 this -- 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 going to 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 as a follow-up to that, is there a specific deadline that they have to hit? Meaning, if you guys started the year with existing rates and then you're kind of bridging it, I guess, until those final rates with contractor are negotiated. Why wouldn't they just keep the rates? And if you look at your confidence around this process versus the RUC process earlier this year, are you feeling better or worse?

Well, look, this is 1 day in the making, right? So we learned about this yesterday. So we're still formulating the plans. It is highly possible, as in the case of 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 yet -- given that this is just a -- less than 24 hours in the making for us here have the specific steps in the timing and all the other items that you're asking about. But we'll certainly plan on providing those to you as we move forward. But rest assured, I am totally confident in the data that we have and confident in the outcome of what will happen here.

Our next question comes from Marie Thibault with BTIG.

Just 1 question from me. Yes. I wanted to go back to sort of the second pathway where you're going to be working with stakeholders and CMS to advance efforts on national pricing. I appreciate you might not have the specific steps or the exact time lines there, but I'm wondering if there are any specific time point 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 curious kind of when we might hear next about your progress there.

Yes. Again, I'm sorry but this is still early for us, but this has been in our kind of contingency planning. 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 happen, what would we do? And this plan that I've described of broadening the audience to include more medical societies to help CMS, should not rely on component level valuations. It's something we've been thinking long and hard about. At this point, I don't know if I can describe to you the exact steps. 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, whether 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 possibly hundreds of thousands of patient lives with cardiac arrhythmias through our service. And I think we want CMS to understand those value elements. So 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, as David had asked, is just a 1-year or a 2-year exercise. It's somewhere between 0 and 24, and we'll try to keep you posted. But there are well described milestones for getting back into a queue with CMS for permanent, I guess, final rulings again.

Our next question comes from Michael Polark with Baird.

Maybe a follow-up to Marie's question there and ask it 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, rule making, that sort of stuff?

Well, it's certainly possible. I mean, the physician fee schedule, my understanding is it was constructed and approved by, 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 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 the proxy supply costs that I described in the prepared remarks. It turns out in the end that they didn't -- they couldn't quite get comfortable as comfortable as they thought initially with the final ruling on that. But there is -- that does signal to me and it does signal to others is 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 want to try to do this in a way that doesn't affect the mandate of being a balanced budgets 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 want to try to get them comfortable with that. And I think that's the right thing to do in terms of creating lasting [indiscernible] that's not controversial. And we'll work with them as a partner and figure out how best to bring it forward.

Helpful. Maybe 1 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?

Well, boy, I'm -- I'll need to get back to you. I'm not trying to skirt the question here. I just don't know the mechanics of what happened with the -- with that. So I'm unfamiliar with anything being at having a lower price. I don't know if any of my colleagues have that information either Dan or Doug, are you aware of anything there that ...

Yes, this is Doug. They basically released a little bit of a negotiating process. May have not -- we had not been selling -- we've not been selling the part at the GBP 310 level. It was fairly part of this. You'd just see -- just getting a snippet of pricing negotiations there.

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 and thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.