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

Good day, and thank you for standing by. Welcome to iRhythm Technologies Inc. comments on Novitas updated rate publication conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Leigh Salvo. Thank you. Please go ahead.

Thank you, and thank you all for participating in today's call. Joining me are Mike Coyle, CEO; Doug Devine, CFO; and Dan Wilson, EVP, Strategy, Corporate Development and Investor Relations. Earlier today, iRhythm issued a press release regarding updated Medicare pricing for Zio XT service. A copy of the press release is available on the company's website. 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, statements regarding CPT coding decisions, the company's expectations regarding government and third-party payer adoption of CPT coding decisions and timing thereof and other statements relating to reimbursement coverage, progress on the claims backlog and the preliminary financial results for the first quarter of 2021. 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-K and Form 10-Q, respectively, with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, April 12, 2021. iRhythm disclaims any intention or obligation, except as required by law, to update forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Mike.

Thank you, Leigh. Good morning, and thank you all for joining us this morning. On today's call, we will discuss the updated reimbursement rates recently announced by Novitas, the implications that these rates will have on our ability to continue to service Medicare patients with our Zio XT service, the expected financial impact on our business and our plans to use to expand customer advocacy to impact 2021 MAC rates and to establish CMS national pricing. We will also provide commentary on preliminary unaudited first quarter 2021 financial results for the company. This past weekend, regional Medicare administrative contractor, Novitas Solutions, published revised reimbursement rates for Category I CPT codes 93243 and 93247 at $103 and $115, respectively. The updated rates are retroactive to January 1, 2021, and replaced rates initially published on January 29, 2021. While these rates are higher than the rates posted on January 29, they fall significantly below the RUC recommended pricing that were supported by the American Medical Association, the American College of Cardiology and the Heart Rhythm Society last year, and are well below the historical reimbursement rate of approximately $311, which was established by Novitas in 2012 when the Zio XT system had considerably less functionality and substantially less supporting clinical and economic evidence. In 2016, Novitas performed an additional evaluation and reaffirmed this $311 rate. We are disappointed that following this most recent evaluation, which included a review of the RUC recommended pricing, the rates posted by Novitas are meaningfully lower than the historical rates and are, in fact, below our cost to deliver the service. Accordingly, unless we are able to establish rates for these codes that allow us to sustainably provide the Zio XT service, we will be forced to stop servicing the Medicare fee-for-service segment under these billing codes. Over the next 30 days, we will be developing a plan for the orderly transition out of providing the Zio XT service to the Medicare fee-for-service segment. We will use this period to see if direct negotiations with Novitas can result in an acceptable alternative. We would highlight that the Medicare rates recently announced impact only Zio XT and that Zio AT continues to be reimbursed under codes that remain unchanged. As a reminder, Medicare Zio XT revenues represent approximately 25% of our total 2020 revenues. To recap events to this point, we, along with other industry participants, had the opportunity to meet with Novitas in February to provide a detailed overview of the clinical and economic benefits of long-term continuous ECG monitoring relative to traditional Holter monitoring, to differentiate the components of delivering this end-to-end service and the valuation work that formed the basis of the RUC recommendations. In these discussions, we outlined the unique advantages of long-term continuous ECG monitoring and our Zio XT service, which offers a single-use, patient-friendly device that enables high compliance rates, an end-to-end systems analysis platform that combines an FDA-approved deep learning algorithm with certified cardiographic technician review, a digital platform that enables virtual care pathways and an actionable and scalable cloud-based portal for report interpretation. This combination results in a clinically superior service that delivers significantly higher diagnostic field, more accurate and timely diagnosis for patients and drives a reduction in the overall health care resource utilization. We emerged from our conversations with Novitas confident that they understood the value of long-term continuous ECG monitoring and its significant clinical advantages over traditional Holter monitoring. However, based on the rates posted this past weekend, it is clear that there is much work to do to have the full clinical and economic value of the Zio service appropriately reflected in the Medicare payment rates in line with what the contractual pricing we have established has been with the commercial payers who have negotiated pricing consistent with the AMA RUC recommendations. While we know what rates Novitas arrived at for the newly established codes, we have not been briefed by them on either the valuation methodology they used or the cost inputs that went into their calculation of these new rates. We look forward to working with Novitas to better understand how these rates were arrived at and to ensure appropriate cost inputs were used to arrive at these published rates. As leaders in this space, we embrace our role in ensuring patient access to this new standard of care and that threat -- it is not threatened, and that meaningful innovation that translates into significant patient and provided value can be realized and not stifled. First, in a moment, I will ask Doug to provide commentary on the financial impact of these posted rates. Before doing so, let me make a few comments on where we go from here as it relates to Medicare pricing. First, we remain ready and willing to work with Novitas as well as other MACs to explore alternative methodologies and to establish rates that fairly reflect the value of long-term continuous ECG monitoring. We feel strongly that new methodologies that appropriately value AI-based digital health business models need to be considered in order for health care innovation to continue. In a parallel effort, national pricing discussions with CMS for the 2022 fiscal year are now underway. Last month, we met with CMS on this topic and provided additional data and methodologies that could show the value of the Zio XT service in addition to those used in the AMA RUC process. We will continue our pursuit of national pricing for 2022, but it is too early in the process to say whether CMS will look to establish national pricing for these new codes during this cycle or whether they will elect to retain contractor pricing with the MACs for 2022. In addition, our direct effort to -- in addition to our direct efforts with the MACs and CMS, we are now expanding our efforts to foster direct stakeholder advocacy input into these important Medicare pricing decisions. This effort includes a multi-pronged approach to activating the specialty physician societies, including the AMA, the ACC and HRS, our individual physician customers and patients to directly engage decision-making authorities and the clinical importance of long-term continuous ECG monitoring. Both the ACC and HRS were strong advocates for the establishment of the new category I CPT codes and the associated proposed value for those codes that came out of the AMA RUC process, and they made that position very clear to Novitas during the most recent rate evaluation process. We thank them for their strong support. We will now be working with individual physicians and patients who benefit daily from this technology to make their voices heard in this important effort. Now turning to commentary on the preliminary first quarter financial results. We continued to see strong demand for our Zio service and saw a nearly double-digit sequential volume growth in the first quarter as compared to the fourth quarter of 2020. Zio XT continued to grow meaningfully, while growth of Zio AT and growth of the U.K. businesses outpaced overall company growth. We are very pleased with the strong primary demand and our continued market penetration. This strong demand for our service gives us confidence that the clinical and economic value of our service is recognized in the marketplace. We look forward to sharing more details on our first quarter call in early May. I will now turn the call over to Doug to provide comments on the impacts of the new rates and to provide additional commentary on our preliminary first quarter financial results. Doug?

Thanks, Mike. Starting with the financial impact of the newly posted Novitas rates. We have analyzed the impact of the updated Novitas rates would have had on full year 2020 reported revenue had those rates been in effect in 2020. The updated Novitas rates would have negatively impacted 2020 Medicare revenue by $41.3 million and would have decreased 2020 total company revenue from $265.2 million to $223.8 million or a decrease of 15.6%. In addition, 2020 total company gross margins would have decreased from 73.5% to 68.6%. For the full year 2020, Medicare revenue associated with the CPT codes 93243 and 93247 represented approximately 25% of our overall revenue. Now turning to commentary on our preliminary unaudited first quarter financial results. We estimate that the volume for the first quarter 2021 grew approximately 9% over volume in the fourth quarter of 2020. This volume growth exceeded our initial expectations of 5% growth communicated on our fourth quarter call in late February. We saw continued strong volume growth from Zio XT, Zio AT and in the U.K. Offsetting the volume growth is the impact of the newly posted Novitas rates to Medicare pricing and a low single-digit decrease in pricing to third-party direct bill revenue. We estimate that the updated Novitas rates, when compared to historical 0297T rates had a negative $13 million impact on the first quarter 2021 revenue. We will share more details on our full Q1 2020 financial results on our earnings call in early May. And finally, as an update on our held Zio XT claims, we have made steady progress since our Q4 2020 earnings release in late February when we were holding approximately 90% of Zio XT claims. As of the end of the first quarter, we are holding approximately 70% of Zio XT claims, which has further dropped to approximately 65% of Zio XT claims currently. We expect to make further progress on claims processing from this point, although we do plan to continue to hold our Zio XT Medicare claims until we have better visibility on the possibility of further updates to rates with Novitas. We do expect it will take multiple months to fully work through the backlog and the delay in claims processing will delay some Q2 2021 revenue recognition into the second half of 2021. We plan to provide estimates on these impacts with our Q1 21 earnings release in early May. The delay in revenue recognition timing is expected to be temporary and reversed mostly in the second half of 2021. The high level of health claims will delay most Q1 21 cash flows into Q2 '21 or potentially beyond. We have adequate balance sheet liquidity to manage through these delays and cash flow timing. I'd now like to turn the call back over to Mike for his closing remarks.

Thanks, Doug. Given these newly posted rates will force us to discontinue Zio XT services in the Medicare fee-for-service segment if we are unable to successfully renegotiate acceptable rates, we will immediately begin to implement measures to manage operating expenses. As it relates to changes in our operating model, we are prepared to make adjustments to any number of elements of the business to ensure the continued long-term health of the company. As demonstrated by the volume growth we saw in the first quarter, demand for our Zio XT service is very strong and continues to grow. While lower Novitas pricing will significantly impact revenue growth and margin profiles in the Medicare segment of our business, we have numerous levers available to us to preserve growth for the overall discontinues. These include, but are not limited to, reevaluating the market segments we serve, adopting policies and investing in systems that can improve net revenue and margin contributions from our commercial customer sales, optimizing our operating expenses and adjusting our operating model. We will be taking the appropriate time to review our operating structure and these potential adjustments over the course of the next several weeks and expect to provide an update during our Q1 2021 earnings call in early May. And while it is too early to discuss specific adjustments we may make, if 2020 has taught us anything, it is that we have the unique ability to adapt our business to challenging circumstances. Finally, it's important to keep in mind that while reimbursement dynamics in the Medicare segment of our U.S. Zio XT business are important, the company has numerous other key long-term opportunities that will continue to be strong growth drivers for us, including Zio AT penetration in the U.S., international market expansion and expansion of indications for use of the service and to asymptomatic atrial fibrillation. To close, I would like to reiterate our disappointment that Novitas did not reflect the clinical and economic value and long-term continuous ECG monitoring and Zio XT provide to patients, physicians into the Medicare system. We know that we share a common goal with Novitas of improving the standard of care for Medicare for all our patients and improving clinical outcomes while lowering the cost of health care. Unfortunately, until we have more appropriate rates can be established, we will not have the option of serving Medicare patients with the Zio XT service. We will continue to explore all avenues available to secure more appropriate reimbursement for Medicare patients so that we can continue to deliver the service to all potential patients who can benefit from it. With an unwavering focus on patients and their providers, we know we can continue to deliver significant value that the market recognizes. I look forward to providing you with further updates on our Q1 earnings call. And I will now open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Robbie Marcus from JPMorgan.

Great. Really, 3 for me. I'll just give it to you all upfront here. First off, what do you think broke down in the discussions with Novitas when you have the proposed rate from the national Medicare at $380, you have nice jumping in with both feet adopting the technology and then Novitas after, what, 7, 8, 9 years, reimbursing at $310, cutting it by so much. So that's one. Two, what can you do to get other reimbursement rates? What's the steps from here? I imagine this is probably just not the final end of the journey. And then three, what's really behind the decision to pull out fully from Medicare here because your COGS are still below a good deal, probably [ have in ] at $75 to $80 range, plus or minus. So the $150 would still give you a profit. What's the thought process for fully pulling out of Medicare market here?

Thanks, Robbie. So first on the -- what happened in terms of the -- how we landed on these much lower rates, that's something that we're still attempting to sort out. Obviously, we had our 2 meetings with Novitas in the February time frame, the first one focused on really just highlighting the clinical and economic advantages of long-term ECG and Zio XT data really driving that discussion for the rest of the industry. And then the second follow-up meeting, which really was an introduction to the RUC recommendations on how pricing was established, the economics to drive that pricing. After that meeting, we obviously encouraged Novitas as they met with other stakeholders and determined what approach that they were going to use in order to establish pricing, what methodology was going to be used, what cost inputs were going to be used to open the dialogue with the rest of us in the industry so that we could have an active discussion of that prior to the posting of the rates. The first real substantive discussion of those rates since those meetings really came with Saturday's posting. So we do believe Novitas is going to give us an opportunity to speak with them here going forward. But obviously, now that these codes have been posted, obviously we're thinking that it's going to be a bit of an uphill climb here to just get them revisit it, but that will be our intent here going forward. Second, in terms of what can be done from here. Obviously, we chose to focus on the Novitas as the primary MAC here for this work because of the history that you referenced that in 2012 they established the original code at $311, that they did a detailed review of it in 2016 and essentially reaffirmed that amount. And obviously, our ability to then reference those data points was why we focused on Novitas. And frankly, it seemed to us the other MACs were looking to Novitas to take the lead on doing this analysis. Now that we have the answer, obviously, we have a couple of options open to us. The first and I think the most important one that we're going to principally focus on is establishing national pricing using the CMS national pricing process that is now underway to establish 2022 physician fee schedules. And obviously, we were -- we had the opportunity, as we referenced in the prepared remarks, to meet with CMS midway through March to not only address the methodologies that had been used with RUC, but to add some additional methodologies and data that we think could fall into a more traditional approach that they're used to looking at for crosswalking technology. So we've provided that to them, they asked for additional follow-up data, which we sent to them, and they are digesting that right now. So we are obviously pleased that we had the opportunity to present that to them, but it is premature to tell whether that is going to trigger a decision around establishing national pricing for these codes in this cycle or whether we will have another year in 2022 of the carrier-based pricing through the MACs. And then the third question you had was really what's behind the decision to need to withdraw from the provision of service into Medicare at these prices. And although you correctly highlight the high gross margin opportunity that we have had, there are significant additional costs that go in terms of servicing these accounts in terms of patient bad debt, the cost of collection and items that basically drive up the overall cost of the service on a variable cost basis. And the reality is that these rate levels, we actually would be losing money on each of these services that we provided into the Medicare accounts. So it really makes it not something we really have a choice about. It's something that really is kind of forced on us by just the economic what we have here. So hopefully, we'll have an opportunity to make that much clearer to Novitas here to get them to revisit. There's very strong primary demand as you saw in the numbers that we presented for the service. I think that is a clear validation of the resonance that we see in the marketplace for the clinical and economic advantages of the long-term ECG monitoring in general, but really the implementation that we have with Zio XT, the enhanced diagnostic yields, the options that are going to be left to physicians who basically have converted their business to Holters to either go back to Holter where diagnostic yields, depending on the studies you want to look at, fall in the 12% to 24% range and give up on what Zio has been providing, which a 14-day data at 96% diagnostic yield. But maybe even more importantly, the opportunity to basically identify arrhythmias that would otherwise missed, so patients can be appropriately treated. So that's what's been driving the strong uptake in demand across both the Medicare and the private pay segments of our business. We think that demand is going to continue to be strong because of the differentiation of our program within the commercial payer segment. But obviously, we really don't have a choice at these reimbursement rates to be able to provide this service into Medicare in the absence of some changes to this code.

Great. And maybe if I could just sneak one more in here. Do you have any -- do you anticipate any of the commercial payers lowering their prices and using this as a reference? Typically, we see it in the 1.3 to 1.5x Medicare rate. Do you anticipate any of the commercial payers bringing the rates down? And if so, over what time frame?

Well, I think as we mentioned in the prepared remarks, we have seen some low single-digit declines in overall pricing in the commercial pay area. But keep in mind that we have essentially renegotiated or, let's say, crosswalked, every one of those contracts here since January 1 to the new CPT I codes. So the fact that we have been able to complete that process with now roughly 90% of those renegotiations being complete and having only very modest reductions in ASP in that segment, I think, speaks to the fact that the vast majority of our private pay customers have really crosswalked to their prevailing pricing that had existed previously. There are a small number of these commercial contracts that do have a direct linkage to overall Medicare pricing. But again, that was under essentially the history that we've had here of that sitting in the $311 sort of range and then having a multiplier on it. Now that the rates that have been posted are as low as they are, obviously, we're not going to be able to serve in that segment. And so they don't really become price points for comparison, if you will, for the private payers because if private payers want that level of pricing, we can't offer it to them. And so that would be a choice between using the service and not using the service. So from our perspective, there is some potential here for the commercial payers to basically relook at the use of the service. But we think given the very long-term relationships that we've had here, the fact that we generally sit down with these commercial payers on a quarterly basis and step them through detailed data of their utilization that points out to them how effective the service is in diagnostic yield and identifying patients on the first go who actually have arrhythmias, what those arrhythmias are and gets them into treatment rapidly versus having 3 out of 4 of them on Holters who get indeterminate results and have to keep coming back into the system. This is a compelling value proposition to them. And so that has been what has been very successful in us not only maintaining pricing, but obviously, pricing that was well above the $311 that we have been getting in the Medicare segment.

Our next question comes from the line of Cecilia Furlong from Morgan Stanley.

Great. I guess just first off, curious on just discontinuing service to Medicare, how should we be thinking about the time to fully implement? And how long do you hold Medicare claims as you continue your negotiations with Novitas? And I guess, near-term, too, what can you see really driving Novitas payment higher?

Okay. On the -- let's deal with the whole claims question first. And let me just ask Doug Devine to comment on our strategy for holding claims in Medicare.

So we have up to 12 months to submit claims to Medicare. I mean some of our commercial payers are shorter. We have 12 months. So we will -- as -- allow a reasonable amount of time to go by to see whether this process resolves itself. And then at some point, we'll have to make the call to send those through.

On your question about sort of next steps with Novitas. Obviously, we have indicated our willingness to sit down with Novitas at their earliest convenience to talk about what went into the decision process, and frankly, to remind them that if we just look at our current run rates, we would have expected about 250,000 Medicare patients to receive the Zio service during the course of this past year. And we have very specific detailed data on improvements in diagnostic yield for them, the percentage of patients who actually have had meaningful arrhythmias identified for treatment. And we can and will be stepping them through those specifics to make sure that they understand the real impact that this is having for their physicians who are servicing the Medicare patients in their area. So that will be sort of job one. But then we'll be very interested to understand their methodology. Obviously, as I mentioned, they haven't spoken to us about how pricing was being established. I think we all know the history here that the difficulty here in the physician area is that basically it's a cost-based model. They're assuming a physician in practice buying at arm's length technology and then applying it in their practice. And using the invoices associated with those individual purchases to be able to establish fair pricing -- or fair cost inputs to establish pricing. It's obviously very different for us. And frankly, the other providers of fully integrated services and long-term ECG, where, in fact, there is substantial internal investment that has gone in the development of the advanced AI algorithms, 750,000 hours of ECG data that are driving our ability to do real-time applications of analysis, the ability to actually have a tiered cardiac technician organization that can basically triage simpler to more complex rhythms to be able to very efficiently process what turns out to be 20,000 minutes of ECG data for every record that comes in on a 14-day case. So there are significant cost impacts -- inputs that we simply can't provide the invoices for because we're doing them internally. And we've obviously tried an alternative methodology here with the RUC process to use the arm's length negotiations we have in the commercial pay segment of our market to establish what those commercial payers view as the appropriate value of that overall offering, including Medicare Advantage, right, which basically has, as we showed in public data in the RUC process, generally pays $300 for that service. And so that will be our next step is to basically understand how Novitas arrived at their pricing to allow the advocacy of our customers who are generating essentially this 250,000-patient pool who are using the Zio XT service to help drive home the value that they're accruing, not just in terms of the better outcomes for patients, but also lowering the overall cost to the health care system because patients aren't coming back and back and back for indeterminate testing as in with Holter or even being upgraded to MCT technologies, which even at our old pricing, are 2.5x as expensive. So we think we have the right value proposition and we are obviously anxious to continue that discussion with Novitas. But as I said, now that they have posted those codes, I think it gets to be a more uphill battle to have them change their mind, but we are going to enlist our customer base to see if we can get that done. You also had your first question, sorry, I didn't respond to it. What was it again?

Just time lines around discontinuing service to Medicare, how we should think about that flowing through from a cadence standpoint?

Sure. Well, it's not as easy as it sounds to simply be able to identify registration patients who are Medicare patients. So we have work to do on our systems to be able to essentially have a robust process for being able to determine their method of payment into Medicare so that we can basically indicate that the service can't be made available. So we have a planning period here of at least the next 30 days to go work that through, but we do expect to begin implementing on this during this quarter.

Okay. And just as a follow-up, I guess, from your standpoint, when does it make sense to really start engaging more aggressively with other MACs? And then just in terms of your decision to withdraw from Medicare, have you had conversations or with other industry participants just around similar mindset?

Well, obviously, this is all hot off the press. So I think -- we're thinking about it just in terms of our own participation from the standpoint. I think if you look at what we showed, Novitas in terms of just long-term ECG in general under both codes, iRhythm in the most recent year, where all the data were published, represented about 84% of the volume. And I think when you start looking at the longer code, the 7- to 15-day code, we probably generate well north of 90% of the claims in that particular area. So we really haven't thought about this as industry level participation. But I would point out, we firmly believe, especially on that 14-day code, that we have a meaningful cost advantage from the years of investment that we've done relative to the development of the advanced AI technology so that any competitor who is participating in that space, we believe, will have an even higher cost structure. And if we can't make it work with our cost structure, that obviously is going to be very difficult for anyone else. So -- and again, I would just correct the terminology. We don't -- we're not choosing to exit the Medicare segment, we want to participate in the Medicare segment. It just isn't financially feasible to take a loss on every case that we support. I mean it's just not possible from a fiduciary perspective. So that's what's behind the decision, very reluctant and one that, obviously, we're very loathe to make. But at these reimbursement rates, we really simply don't have an alternative.

So our next question comes from the line of Joanne Wuensch from Citibank.

I just need some clarification about a couple of things. It sounds like you've renegotiated your private pay or the majority of your private pay, most of which have locked in their current rates. If the -- but with some headwinds. Can you quantify those headwinds? And please confirm that I heard that correctly?

Yes. I mentioned, Joanne -- as we mentioned in the text that we saw a low single-digit decline in the average selling price in our total commercial segment, so-called non-Medicare segment of the market here during the course of this renegotiation process. Obviously, this was against the backdrop of the $46 pricing that was sitting in the system for Novitas, which caused us in certain places where we would have just held the negotiations out longer, just chose to lock in the pricing. But most of that reduction that I just referenced really came from outliers. Those who are much higher than our average pricing, where we really wanted to bring that pricing in line, so as not to have concerns about being out of line in certain customer segments. So collectively, though, the vast majority of the commercial contracts that we renegotiated came the pricing that had been prevailing prior to -- during the time we were paying under the temporary code. So the vast majority of them essentially are happy with their service. And as I said, we spend a lot of time managing that by sitting down with them and showing the benefits that they are getting from the XT service in these quarterly business reviews. And that basically has now been transitioned. Obviously, with this announcement, I'm sure we're going to have some private payers looking at -- the commercial payers looking at that and saying, should that imply now there's a lower price point in the marketplace that iRhythm is prepared to sell its service into. And obviously, as we mentioned, it's the principal reason we can't support Medicare under these rates is not only the fact that we would essentially be losing money with every case, but it would significantly push down the overall pricing that we have in the existing commercial segments if we were to do that. So from my perspective, that -- I'm pleased with where we landed, given how much we had to renegotiate each contract under the new codes.

I appreciate that. I have 2 other questions, and I'll just ask them together. Is this renegotiation for 1 year, 2 years or another term that you can share? And then the second question I have has to do with -- I want to make sure that the first quarter numbers get set up, right, when we all go back to our models. There's a percentage of the Medicare claims that you are not filing. Is there a way to quantify what percentage of those Medicare claims you're not filing for the first quarter impact?

Let me ask Doug to comment on the Medicare claims question.

So first, I mean we will be recognizing revenue for Q1 at the price published by Novitas on Saturday for our Zio XT Medicare claims regardless of whether we have filed a claim or not. So the claim -- filing of the claim status is not going to -- it impacts cash in Q2, but it's not going to impact revenue recognition. I could take the contract line -- contract, if you want, Mike?

Sure. Would you?

Yes. So obviously, we don't have a standard contract line. We have customers who have multiyear contracts with us. We have customers who have 1-year contracts with us. We have customers who have 6-year contracts. Those are in the minority, but we will have a certain number of contracts that are coming up for renewal July 1.

Our next question comes from the line of Margaret Kaczor from William Blair.

I guess to start out with, I'd love to take a step back and knowing that you've done this decision with consultation from your consultants within kind of the reimbursement time frame as well as kind of your own history within the health care market, Mike, and the rest of you guys who have been around for a while. You're all sitting there at the table. Were you guys thinking about any precedent? Or is there even, frankly, some analogous situation out there for this? And how did that play out and over what a period?

Yes, Margaret, I would say even in this space, there is a precedent in terms of not participating in certain segments. Obviously, Medicaid has not provided any reimbursement for the service for the time period that we've been in the market. And obviously, we were unable to really service that section of the market. From a Medicare perspective, obviously, this is a much bigger number of patients. And obviously, at the end of the day, we would hope that we'll be able to find a solution that allows us to service it. But again, it -- the pricing that would actually take you below cost is a different ball game, right, in terms of -- it, simply from a fiduciary perspective, is not possible. So we'll continue to participate aggressively in the Medicare segment for AT and we will obviously continue to work to see if we can get a reimbursement rate here that would allow us to participate with XT. But it really is a situation where we don't see that we have much of a choice.

So yes, sorry, I'm going to reask the question a second time just to be clear. Do you guys have any precedent where someone exited or didn't end up serving in the Medicare population and then were able to renegotiate and maybe Novitas or CMS accelerated that process of trying to understand what's going on in the marketplace.

Nothing comes to mind in terms of a specific segment. And again, I just want to be cautious here in terms of the use of terms. We're not exiting the Medicare segment. We'll be continuing to service Medicare patients just with the MCT segments with Zio AT.

Okay. Sorry about that. All right. And then -- so let's take this a step further. At this point, patient access, unfortunately, is getting damaged because of the situation that Novitas is creating with this rate that is there any kind of push that Medicare will try to address it quickly? And I know you talked about the proposed rule for fiscal '22, but are there other mechanisms that Medicare could have to address this?

Well, I think I already mentioned the primary sort of vehicles for us in terms of next steps. The primary one is what you just mentioned, which is to use the annual physician schedule work here that is Medicare is in the middle of, CMS is in the middle of to actually get these codes revisited for national pricing. And as I said, we have made additional proposals here in terms of how to think about the establishment of value for these particular codes and we are anxious to engage Medicare on that topic. And typically, in the July-August time frame, they make decisions about which are going to actually get codes assigned to them. So we're hoping that will take place here in the reasonable near term. Absent that or in addition to that, obviously, we have the opportunity of MAC pricing being established. We completely are ready to reengage Novitas as they see fit for expansion of the discussion and we would really like the physician advocacy that I think will be coming into both CMS and Novitas to put us in that we're in an opportunity to have MAC pricing be established that works for everyone. And then, of course, we operate in 3 jurisdictions under 3 separate MACs. So we have additional MACs we can engage and are engaging to actually now move to the next steps to these multiple, if you will, shots on goal to get this addressed.

Okay. No, that's great. And then one last question for me, just a follow-up to your commentary around Robbie's question. And I believe you've kind of talked a few times is about providing Medicare a more traditional way of setting rates for you all. So does that imply you're going to provide them or have provided them with a sense of what that single-use license for software would be or any other details of what you're providing that would give us a sense of where things will shake out.

Yes. I think you know that we have had this process much more complicated by the fact that there are certain entities that have a financial interest in having a bad outcome here and that they have used that to try to influence the process with certainly CMS, where we know that there are published inputs to the process that had that as an objective. And so we're being very cautious about tipping our hand, if you will, of the specific strategy that we're using with CMS. But to your point and to my prior commentary, we do think that there are some alternatives who use more traditional approaches for crosswalking that actually can interject approaches to be able to evaluate and value some of these advanced analytic platform technologies and so we have done such work and have now presented that work. And from our perspective, we are anxious to see if that is an alternative that CMS views as a little easier to fit into their traditional framework.

Our next question comes from the line of Kaila Krum from Truist Securities.

Thanks for taking our questions and for hosting this call on short notice. So first one from us. Do you guys have a sense for what other companies like Boston or Philips will do within this category and whether or not they'll continue to service these patients? And I guess, I mean, if other companies are willing to lower price, does that create a risk for you from a pricing or just market share perspective?

Yes. I would, Kaila, just restate what we said before. First, I have no idea how the competitors are going to respond to the creation of these codes. I do know that when we're talking about the long-term ECG, which is what this discussion is about, whether we're talking about the 3- to 7-day code, but even more importantly, we're talking about the 7-plus to 15-day code at these reimbursement levels, it seems impossible to do what needs to be done in order to process 20,000 minutes worth of electrogram information that you need to have advanced analytic platforms. And we think this is why we have not seen much in the way of competitive product entries into that long-term -- the 14-day segment that we principally bill under. And of course, that's where the benefit comes from long-term ECG in terms of being able to then look at enough data sets, to the length of data sets to really capture very low frequency but high-risk arrhythmias and to look for things like paroxysmal atrial fibrillation, which is wildly under-diagnosed when you just use Holter monitors, but gets a much higher degree of diagnosis when you actually do the 14-day analysis. And you saw this in the mSToPS data, right, in terms of, essentially, it's that ability to look over that longer-term that gives you the capacity to actually identify this is a patient who needs therapy, an oral anticoagulant therapy. And that is what translated in the mSToPS data to a 40% reduction in complications associated with major adverse events in patients who actually were identified and then put on oral anticoagulants and the significant reduction by 33% in rehospitalizations. And that's the piece that really comes from this segment. So we -- and as I mentioned, we tend to deal with the overwhelming majority of the claims in that space. So to the extent that a physician really finds that valuable, and obviously, you can see from the growth in our just reported quarter-over-quarter numbers for Q1, that there is a large pool of patients who view this as very attractive. So from my perspective, we think that, that segment is where we're focusing our efforts and we're not sure we're going to see a lot of activity from competitors in that space.

Got it. Okay. That makes sense. And then, I guess, I mean, what is sort of the process or the steps that you have to take in order to get a national rate in place sort of sooner rather than later? Because it sounds like -- I mean, this could be a 2022 event, which would make the proposed rule in just a few months here a very relevant catalyst for you guys again. And then, I guess, as part of that question, could Novitas influence national pricing? Or are there other voices you think would be stronger in that discussion?

Sure. Well, the pricing -- or the setting of national pricing is typically done in an annual cycle and we are right now in the middle of the input phase of that cycle, right, where CMS is going to establish which codes they are going to actually nationally price and make those effective typically on January 1 of next year, so 2022. So right now is when they are taking input from various sources on what those codes are that should be addressed and what the appropriate rates should be for those codes. So we're actively involved. I mentioned the mid-March meeting that we had and we will continue to provide inputs on that. We would expect a decision to take place on that, as I said, in sort of the July-August time frame, which is typically when they will announce which codes they intend to nationally price. And of course, they tend to become then effective on the first of the next year. So that's where we are with that. In terms of national pricing, obviously, the CMS in this cycle had allowed the MACs to determine pricing at the local level for these 2 codes that are of relevance to us. The MACs have, as far as we can tell, they have great authority to establish those codes and then they apply to their MAC jurisdiction. The national pricing does sit with CMS. And so we think these are 2 fairly distinct processes and we don't have good visibility as to what the interaction between those 2 processes would be.

Our next question comes from the line of Marie Thibault from BTIG.

Two questions here, I guess, very briefly as a follow-up to Kaila's questions. You mentioned, we obviously are used to seeing the PFS proposal in the July-August time frame. Would you know ahead of that time frame, whether they are planning to include the codes? And on another note, I guess, what discussions, if any, have you started to have with the other MACs? We've certainly seen the global code come out of Palmetto, so curious where you are with some of the other MACs out there.

Sure. Whether we would get an advanced indication of what would be coming in July-August is not clear. There's no obligation for them to do that. And so typically, we would expect them simply to publish what they're going to address in terms of which codes and at what pricing. So I wouldn't set any expectations that we would know something in advance of that. And then in terms of the other MACs, I really don't want to get into the specific strategy that we're talking about with MACs, but we have begun to engage additional MACs and actually had done that here in the last couple of weeks. So we'll begin to really increase our attention on those now that we know where things have landed with Novitas.

Okay. That makes sense. And maybe one question away here from some of the nitty-gritty, but curious if the Novitas decision is going to accelerate any of your plans in terms of perhaps international expansion? Or how it might impact how you think about growing your sales force this year?

Sure. Well, obviously, our sales investments would not need to be as aggressive. Most of those investments have been around capacity, right? And so given that if we are going to basically reduce the participation in the Medicare segment and then stop ultimately XT sales into those areas, we should be able to moderate our investment in expansion. But I would point out, you've heard the growth rate that we have here, Q1 over Q4 sequentially in the 9% range. So there is a need to continue to expand. It just will be at a lower rate than we would otherwise have to do. And I'm sorry, your other question was as what?

I think -- oh, about international work as well. And I had one follow-up.

And as I mentioned in the prepared remarks, our strategy for international, our expansion with AT in all segments, Medicare as well as commercial segments, and our work in silent AF, where we actually believe there are significant opportunities for client bill implementations. We think all of those strategies sort of run independent of this and are important, and obviously, we will continue to invest in those.

Yes. Okay. One quick follow-up, if I may. I think Doug mentioned that a certain number of commercial contracts come up for renewal on July 1. Could you give us a sense of what percentage that is, how meaningful that is?

And let me ask Doug to just comment.

It's a small percentage.

Our next question comes from the line of Bill Plovanic from Canaccord.

Thank you for taking my questions and answering our questions in this challenging time. Just one point of clarification for me because I think everything has been asked at this point. But I think you said about 10% of the commercial contracts still need to be executed. How do we think about those? Are these the most challenging, the price to the MAC pricing? Or is there something special about this final 10% roughly? Or is this just a timing issue?

Let me ask Doug to comment on that.

The remaining contracts are not ones where there's an issue of tying into the MAC. It's -- they've just been taking -- quite simply, they've just been taking longer in their negotiation process. And I think there's a degree of they were waiting -- some people were waiting to see how the situation would play out.

Okay. And then in terms of just -- and this is my final question. In terms of just holding off on kind of the actual billing, I mean, as you think of cash flows, obviously, you're pushing cash flows out, your bad debt could be impacted significantly. I mean is bad debt a reduction of revenue or does that impact the operating expenses? And is that something you expect to increase -- be a change from prior levels? And that's all the questions I have.

So let me ask Doug.

For the Medicare segment, bad debt is not a reduction to revenue. For other segments of our business, it is. I would more put it as that there is a substantial cost from processing claims twice. So we will take a little bit -- we'll take an appropriate amount of time to evaluate. We've got the cash on the balance sheet. So we'll take an appropriate amount of time because we're trying to balance against a fairly high cost of if we have to submit all the Medicare claims twice, there is a real cost to that.

Our next question comes from the line of David Saxon from Needham.

I was just wondering if you could talk about the direct bill group. It seems like they'd be in a similar situation with regards to their Medicare volumes. So what are you expecting from that category?

The largest participants in the direct bill segment are actually self-insured payer providers, right? So this would be people like Kaiser. This would be people like VA, who obviously have their own sort of insurance products that they're paying out of. And so that becomes less of an issue here in terms of the rebilling for Medicare. I know some competitors do a lot more of sort of the direct bill and then having the hospital system bill itself into Medicare, but our sort of the largest direct payers -- or providers in our direct segment, our client bill, are these integrated payer providers.

Got it. And then if I could just ask one on 2021. Since you'll have Medicare through April from what it sounds like and assuming high single-digit or low double-digit volume growth for the rest of the business, should we be thinking something like -- sorry, $230 million to $250 million for 2021 revenue?

Obviously, this is in our earnings call that will come here in early May and obviously gives us a little more chance to digest the dynamics flowing out of the weekend here. But we're not going to provide guidance in terms of growth. The purpose of what we showed in terms of the financial comparisons for last year and then giving you some insight into the volume growth that we've had here in the first quarter is really just to provide some perspective on the business. We'll actually do our earnings release on the normal schedule.

Understood. And then lastly for me, can you just talk about the sales force morale? Have you seen any change in attrition since the end of January when Novitas initially put out their proposed rate?

Our turnover has actually been much lower than we've seen in prior years up until now. Obviously, we have a lot of communication that we need to do with our field to make sure they understand the robust underlying growth that we have, especially in the commercial pay segment, and that we're going to be very aggressively working for alternatives here to be able to continue to supply Medicare. But from our perspective, we don't take it for granted. These folks have been tremendously valuable to us in terms of driving adoption of the service, and we see significant growth ahead just from the underlying commercial and direct bill side of our business and -- or the direct bill and client sides of our business. And so we're going to be working closely with the field to make sure in full transparency they know what's happening and actually, their customers, their customer relationships, I think, are what are going to help us to get robust advocacy into not only Novitas, but into the CMS process.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mike Coyle, CEO of iRhythm for closing remarks.

Thank you very much, and thank you all again for joining us today. I would like to conclude by assuring everyone that this reimbursement decision does not change our commitment to providing patients and clinicians with the superior service and support that they have come to expect from iRhythm. We will continue to pursue all appropriate avenues to establish appropriate Medicare pricing for our Zio XT service and we will provide updates as practicable. And as a final comment, I want to quickly recognize the team at iRhythm and their unrelenting efforts. Through a patient and quality first ethos, our employees have worked tirelessly to deliver the Zio service to patients and providers. I am truly appreciative of all their hard work and their dedication. Thank you, and we look forward to sharing more details on our progress and plans for the business on our Q1 call. Thank you for joining us this morning.

This concludes today's conference call. Thank you for participating. You may now disconnect.