Schafer: Insurers are final hurdle for medical device companies

Torax Medical got its start in 2002 and still hasn't made a nickel.

But the problem is not one of the hurdles that fretful congressmen talk about, a lack of capital or difficulty getting a product through the U.S. Food and Drug Administration.

Torax has raised about $70 million so far from patient investors, and its lead surgical implant product was approved by the FDA early last year.

The reason Torax is still more or less a start-up is that health insurers won't pay for the procedure that uses the company's FDA-approved product.

That problem — getting the "payers" in health care to actually pay for a new device — is right up there with stretched regulatory approval processes and a shortage of capital as an explanation for why medical device innovation is collapsing. It's just not one you hear as much about.

Torax co-founder and CEO Todd Berg explained that "the reason you don't is most companies don't get this far."

Berg is not a whiner about reimbursement, speaking about it in a matter-of-fact way as one challenge among others for device entrepreneurs. He added that "I am presuming good faith by all involved."

But the situation at Shoreview-based Torax is far from unique in Minnesota's medical device industry.

Edward Black, principal of the consulting firm Reimbursement Strategies of Woodbury, said makers of all kinds of medical devices are finding it increasingly difficult to get health insurers to pay for their new products.

Black said it's worth remembering that one of the principal goals of health care reform, both with government policy and with what's happening in the marketplace, is slowing the growth of health care costs. And one result may be that medical directors at insurance companies feel "emboldened" to say no.

It's not a case of payers being shortsighted on the benefits of new devices, Black said. He recalled hearing an executive of UnitedHealth Group tell an industry audience that innovators need to convincingly demonstrate that their new device will result in at least a 20 percent improvement in costs or clinical outcomes to get approved for payment.

"I just went through this with Cigna for a client," Black said. "I provided Cigna with eight different clinical studies, some of greater value than others, upon which to reverse a coverage decision. And they won't say exactly why they didn't, but they say it's still experimental or investigative."

That's the way insurers now describe the Torax device — a year and half after an FDA panel voted unanimously to recommend approval.

Torax's lead product treats gastroesophageal reflux disease, or GERD. It's a condition that has stomach acid reaching up into the esophagus, usually because the sphincter at the bottom of the esophagus doesn't close well enough. Estimates are that as many as four in 10 Americans have some symptoms of GERD. Doctors commonly treat it with pharmaceuticals like Nexium that inhibit acid secretion in the stomach.

But as Berg explained, patients aren't always helped by drugs, and besides, those pharmaceuticals don't even address the core problem. Why not help the sphincter at the low end of the esophagus keep closed?

The result was the Torax Linx, a small implant of interlinked beads with magnetic cores that looks a little like a child's bracelet. It's placed around the sphincter, with the magnetic attraction weak enough to allow for normal passage of food into the stomach, but strong enough to help keep acid from bubbling up.

The device has to be implanted, but it's far less disruptive to the body than the procedure now paid for by insurers for difficult GERD cases called a Nissen fundoplication. In this procedure, the physician grabs the upper part of the stomach and wraps it around the esophagus. Among the potential problems is that patients can lose the ability to vomit.

Torax gets about $5,000 for its device, Berg said, but the two procedures cost about the same, at $15,000 to $20,000.

Once the Linx was approved by the FDA in early 2012, Berg thought insurers would soon start paying for it. And Berg said the large insurer Aetna did, in fact, show some genuine hustle — by getting its denial of coverage in place within a week of FDA approval.

Now Linx cases are handled this way: the health care provider applies for coverage in advance, and it's denied. The health care provider then appeals, and it's usually granted. So the patient is treated.

The health care provider then prepares another Linx case with roughly the same set of facts as the prior one, and it gets denied. And so on.

Torax is providing information that insurers request, of course, but Berg is at a loss to explain the case against paying for Linx.

"If we're still here in two years, then they will start ­paying for it," Berg said. "I think it's about that sophisticated."

In other industries this whole question of whether a product that's been shown to actually work is going to be paid for is far simpler, because the end user and payer and decisionmaker are usually the same person. Not so, of course, in health care.

And of the issues affecting innovation in medical devices, a key industry in Minnesota, it's the one that seems most beyond the reach of any concerned policymaker. It's far simpler to propose fixes like additional tax credits to spur early stage investment or streamlining regulatory processes for new devices.

In our recent conversation in his office, talking about the hurdles facing medical device entrepreneurs, Berg said out loud what I had already concluded.

"I couldn't start Torax today," he said. "It couldn't be done."

lee.schafer@startribune.com • 612-673-4302