Medtech Swayed Insurers
By Peter Benesh

Say you're the CEO of a medtech company with a new technology. You've got FDA approval. Investors like the stock. Up it goes.

But then, it looks as if insurers are not convinced. They label your breakthrough "investigational" or "experimental" or "unproven."

In insurance-speak, that means they might not pay for it.

The Street gets anxious, and the stock drifts south.

What do you do?

Alexis Lukianov, chairman and CEO of NuVasive (NUVA), faced that problem.

"I tried to explain to the Street that we did not have a major reimbursement issue," he said.

The issue was mostly a misunderstanding, he says. Insurers, he says, were indeed paying for NuVasive's minimally invasive XLIF spine-repair procedure, even though they called it "investigational."

XLIF is done through the patient's side, rather than the front or back. The XLIF approach does not require back muscle and bone dissection or nerve retraction. NuVasive says it allows for a more complete disc removal and implant insertion compared with traditional procedures.

NuVasive makes the devices and the implants used in XLIF procedures. After an XLIF procedure, a patient can be up and walking within a day.

Insurers paid for it as if it were a conventional procedure, Lukianov says, but on their Web sites they persisted in listing it as investigational. For investors, any implications of "maybe" cast doubt.

Adding to the confusion, Lukianov says, is difficulty another company has had with a procedure bearing a similar name: AxiaLIF from Trans1TSON.

Some surgeons using AxiaLIF have found it hard to get full reimbursement, said a December report by Millennium Research Group, a medtech analysis firm.

The report, called U.S. Markets for Minimally Invasive Spine Technologies 2010, says the U.S. market for minimally invasive spinal fusion will rise at a solid compound annual rate of more than 12% through 2014. NuVasive says U.S. spinal fusion revenue will be about $4.6 billion this year.

Lukianov mounted a PR campaign. NuVasive pulled together more data and got testimonials from spinal specialists and their professional group, the North American Spine Society.

On Friday, with shares at 29, off 36% from their 12-month high of 45 set in June, NuVasive announced that two insurers, first Aetna (AET) and then UnitedHealth Group (UNH), had confirmed reimbursement for XLIF.

In a statement, NuVasive applauded Aetna for the "reversal from its previous policy that labeled XLIF as unproven."

It soon had other reasons to applaud. NuVasive's stock rose as much as 43% that day, before closing up 35% at 40. It closed Wednesday at 40.30.

That shows how vital insurance reimbursement is in medtech, says Sameer Harish, an analyst with Needham & Co. He rates NuVasive a strong buy, with a price target of 60.

The policy decisions by Aetna and UnitedHealth put to rest investor questions about reimbursement, he says.

"For NuVasive it was the biggest hurdle, but not the last," Harish said.

Insurers still to come onboard include Cigna (CI) and Humana (HUM).

Reimbursement is a make-or-break issue in medical technology, says William Plovanic, an analyst with Canaccord Adams.

For an insurer to reverse a coverage decision is relatively uncommon, he says. NuVasive did a good job convincing two insurers to "reverse their negative opinions," he said. He rates the stock a buy.

A new medical technology has four hurdles to overcome, says Les Funtleyder, an analyst with Miller Tabak.

The device must work. It must be approved by the Food and Drug Administration. Insurers must be willing to pay for it. And physicians must adopt it.

There's a "feeling-out process," he said. Over time, as reports come back from the field, insurers decide they will either pay or give reasons why they won't.

"Some insurers will approve stuff early and some won't," Funtleyder said. "There's no rule of thumb, which is why investors put so much emphasis on reimbursement."

Sometimes insurers don't have enough evidence to reimburse, he says. That evidence must come from practitioners who provide their data to decision-makers on insurance company committees.