Dive Brief:

• A regional Medicare rate setter updated reimbursement rates for long-term cardiac monitoring services that are roughly one-third of historical rates, sending cardiac wearables leader iRhythm's stock price spiraling and presenting a significant challenge for the future success of the market.
• Novitas Solutions, a Medicare Administrative Contractor (MAC), set rates for shorter-term and longer-term cardiac monitoring services at $103 and $115 on Saturday, respectively. The update is an increase over rates posted in January, which ranged between $40-$50; however, the update is substantially lower than historical rates of around $310 for longer-term monitoring, which is the majority of iRhythm's business.
• CEO Michael Coyle said during a Monday conference call that after the company met with Novitas twice in February, the new rate was a surprise and will force iRhythm to withdraw its Zio XT product from the Medicare fee-for-service segment.

Dive Insight:

While Novitas published the first round of lower rates in late January, the pricing saga really began in December when CMS decided not to set national pricing for a handful of cardiac monitoring services, leaving the decision to regional MACs.

That put Novitas in an influential position as the majority of long-term claims are processed through them. CMS passing on setting a national price also made iRhythm's business vulnerable as about 25% of its revenue comes from Medicare, and Coyle said that iRhythm accounts for over 90% of all longer-term monitoring claims processed through Novitas.

Investors seemed to respond to that vulnerability. iRhythm's stock price was down by over 37% Monday morning, continuing a two-month downward spiral for the company after the stock more than tripled from January 2020 to January 2021.

iRhythm projected that the rate change would cut into first-quarter revenue by about $13 million. The company also estimated 2020 net revenue would be roughly $41 million lower under the most recent Novitas codes, dropping to $224 million.

Coyle said that iRhythm will no longer offer its Zio XT services through Medicare as costs are no longer covered. He added that the move will impact about 250,000 beneficiaries.

Truist Securities said that withdrawing from Medicare makes sense because "if the company is losing money on every Medicare patient, the business model is not sustainable."

Still, they added, "We had thought the company could still generate a slight profit from these patients, but management indicated that when considering all the selling costs, it would be providing this service at a loss."

Coyle said that the company will continue to work with Novitas but was not confident.

"I think it gets to be a more uphill battle to have them change their mind," Coyle said.

Wall Street has recently been bullish on the cardiac monitoring space due to the growing, under-penetrated market and patients' increased adoption of wearables. The space has also caught the eye of large medtechs, which have bought up the majority of the market over the last four to five months — Philips bought BioTelemetry for $2.8 billion in December, Boston Scientific spent $925 million on Preventice in January, and Hillrom agreed to acquire BardyDx in January for $375 million.

The impact of the Notivas pricing changes varies for each company. Baird analyst Mike Polark said that long-term use makes up roughly 10-15% of Preventice's and BioTelemetry's total revenues, compared to roughly 95% of iRhythm's revenues and a similar level for BardyDx.

Hillrom is fighting to step back from its BardyDx deal, citing the January Novitas rate change led to conditions of the deal not being met. BardyDx filed its own complaint in the Delaware Court of Chancery.

Hillrom reaffirmed its position that conditions of the deal have not been met after the most recent Novitas update in a Sunday press release.

iRhythm and others in the industry can still pursue national pricing from CMS in the next Physian Fee Schedule. However, Baird's Polark questioned if CMS would set a national price at historical levels.

"There is scant evidence to suggest CMS is positioned to deliver a materially different outcome," he wrote.

Wall Street analysts agreed a significant question still hanging over the company is whether commercial payers will lower their rates to a similar range as Novitas.

Coyle said that about 90% of commercial contracts have been set at rates closer to historical levels.

"This is a good sign as many investors have been concerned about where commercial rates will come in. There is still, of course, the chance that commercial payers follow the Novitas lead," Truist analysts wrote.

Coyle acknowledged that one reason iRhythm can no longer work with Novitas, aside from the company losing money on Medicare patients, is that "it would significantly push down the overall pricing that we have in the existing commercial segments."