Viemed part 2: Medicare Risks and a spotlight on rising costs for ventilators
Viemed's recent revenue run up is a case study in healthcare cost inflation and risks to reimbursement keep me from buying.
Instead of looking solely at the business, I'll look at the product of ventilators and how Viemed is a case study in cost inflation.
What's on the agenda?
What is competitive bidding?
Different types of at home ventilation and their use cases
MEDCAC meeting and medical guidelines.
Office of the Inspector general audit
My thoughts on the future
What is Competitive Bidding? The big news for Viemed in 2020 was that non-invasive ventilators were removed from the Medicare competitive bidding schedule in 2021, but why does that matter? Competitive bidding is an auction for DME suppliers that happens every three years. Instead of setting reimbursement via panel, Medicare allows companies bid to supply DME to Medicare beneficiaries. Whoever wins the bid gets the contract and is paid their bidding price with suppliers usually being awarded bids for local areas. Medicare can also extend those bid rates nationwide and cut/raise reimbursement across the country. Click here for more info intended for patients and here for the supplier DME bidding page.
Medicare cuts are the 800-pound gorilla for DME suppliers closing 40% of DME shops from 2013 to 2017. More recently, a 50% cut to CPAP reimbursement after the 2017 bidding program hurt smaller suppliers and consolidated the supplier base. Lots of industry members argue against the competitive bidding process, but it is curbing healthcare costs, leveraging the market power Medicare holds as the largest payor. Medicare is using its near monopsony (single buyer) power and driving down costs via capitalism, a positive development for the saga of healthcare cost inflation (similar to what a single payor system might do) . Though Medicare cuts are a risk for all DME suppliers, Viemed's position as a larger, specialized supplier of ventilators can keep it open and may even drive more business to them in the case of a reimbursement cut. Even so, Viemed effectively lobbied to have ventilators taken off of the 2021 bidding schedule with bipartisan support from congress through the SMART Act (written before the pandemic). Clearly people recognize the value of home ventilation, but I wouldn't put this risk in the rearview mirror. The #1 reason cited by Medicare for the removal of ventilators from the bidding program is the pandemic and need for ventilators during the crisis. Without such a crisis in 2024, don't be surprised to see it back on the bidding list. This risk may have been merely delayed.
Types of Ventilation: One relevant difference to discuss is the types of ventilation. There are three types of at home ventilation: continuous positive airway pressure (CPAP), bilevel positive airway pressure (BiPAP, also called Respiratory assist devices (RAD)), and home mechanical ventilation (HMV). All of these machines work by pushing air into the lungs. The major difference between CPAP and BiPAP machines are that BiPAP machines have different pressure settings for inhalation and exhalation. HMV machines are similar to BiPAPs, but are portable and meant to be akin to home life support used in conjunction with a respiratory therapist. CPAP machines are intended for those with sleep apnea, but BiPAP machines are intended with patients with more severe cases or even those with COPD. HMV is solely for chronic respiratory failure as a result of COPD and is the primary type of ventilator Viemed sells.
Can you see an issue with the guidelines? The indications for BiPAPs and HMVs overlap! The jump from a CPAP machine to a BiPAP machine is clear in the scientific literature, but the "differences between a BiPAP or a RAD and a home mechanical ventilator are really quite subtle and blurred." (Page 158, Dr. Neil MacIntyre).1 However, the payment for each is very different creating an incentive for Viemed to get reimbursed for HMVs. BiPAP devices are reimbursed at a monthly rate of $40-$394 and capped at a max rental of 13 months, but HMVs are reimbursed at ~$1000/month and are uncapped in terms of length. Because of this difference in cost but a lack of major differences between devices, Medicare convened a panel last July to review at-home ventilation of COPD patients.
MEDCAC panel: the Medicare Evidence Development and Coverage Advisory Committee (MEDCAC) advises Medicare on guidelines for reimbursement. Last July, they convened a panel with experts in COPD, Medicare representatives, and industry experts (including Viemed Chief Medical Officer William Frazier) to discuss at home ventilation for COPD. This page has the meeting minutes, transcript and voting scoresheet for the meeting. After reading the transcript, I had a few takeaways:
A) the difference between BiPAP machines and HMVs is small and there is no scientific literature comparing the two. Both have been shown to be effective for COPD patients. One member likened it to taking a Tesla vs a Honda to reach a destination, HMVs are much fancier and might not provide any additional benefits (page 157, Dr. Coleman).
B) It's actually easier to get prescribed a HMV than a BiPAP machine. Speaking about physicians:
"they are getting in some ways kind of encouraged to do home mechanical ventilation, it's easier to meet that criteria… the criteria is less stringent and if you'd go through all of those things with a BiPAP sheet, I think it would be more readily prescribed" (Page 130, Dr Coleman).
"So criteria currently in the United States, giving somebody a Bi-Pap machine or a respiratory assist device is…..very challenging, so instead you can just do a blood gas and call someone hypercapnic and get them a HMV. They are using the same type of support" (page 155). BiPAP machines can even be used in a hospital and are used in lieu of ventilators in developing countries.
C) Physicians may choose HMV because of the support services rather than the actual device needs. (page 128, Dr. Macintyre).
The answers to the questions didn't inspire confidence with scores barely reaching the threshold of 2.5/5 in 3/4 questions. The panel members were most confident that use of at home ventilation was beneficial, but are unclear on device choice and even more unclear if improvements in patient conditions are due to the device or additional support. If a physician wants extra support for the patient, they'll choose HMV for the respiratory therapist rather than the device.
D) Viemed’s chiefs medical officer, William Frazier, was often a contrarian arguing in favor of HMV (no surprise there, Viemed makes most of their money on HMV). At one point he even starts his point with "This is Bill Frazier again being a contrarian" (page 183). Throughout the transcript he tries to differentiate between HMVs and BiPAPs. According to Frazier, for the most part RADs aren't indicated for chronic respiratory failure by the FDA (page 159) and possible higher pressure from HMVs could make a difference (page 177), but others point out that BiPAPs are used in hospitals and even as a possible substitute for ventilators in low income settings (page 156-7). Frazier seems to be lone wolf when arguing for a stark difference between HMVs and BiPAPs.
OIG Audit: All this lack of clarity and increase in costs led the office of the inspector general to audit Viemed's insurance claims. They sampled 100 claims and found 98 were billed incorrectly for HMV use when a BiPAP (RAD) would have sufficed. Viemed responded and the OIGs response to Viemed's response is noted in the audit PDF.
The OIG recommended Viemed refund $29 million in overpayments back to Medicare. Both sides have some legitimate qualms but I think Viemed won't have to pay the $29 million. To me, the OIG's report looks like wishful thinking because of the overlap in indications for RADs and HMVs. The OIG cites a number of issues with the claims such as minimal use of HMV devices at home (sometimes only 10 minutes/day), prescription of HMV immediately after hospitalization (some recommend waiting for 2-4 weeks to prescribe a HMV), and inadequate medical testing and documentation (blood gas testing, etc.). These are all concerns in relation to overtreatment and increased costs but may not matter for the refund. There are no guidelines for minimum treatment per day (though 10 minutes is very low for a life support-like device) or a clear recommendation on when to prescribe HMV after hospitalization (European guidelines differ from the weak recommendation to wait in the USA) . A lack of medical documentation could be damning, but 89 independent physicians made these 100 claims. What are the chances nearly 100% of them were wrong? In reality, the low barrier to get HMV contributed to the large number of prescriptions. Since the conditions for needing a RAD and HMV heavily overlap, the device choice is up to physician discretion.
My takeaway from the report is this: although Viemed won't have to pay the refund, it shines a light on the BiPAP vs HMV debate possibly causing Medicare to refine guidelines and make it harder to get HMVs. In all honesty, I think the guidelines should be refined to reduce the costs of treatment and reflect the often low device usage and minimal differences between HMVs and RADs.
Final Thoughts: The whole saga is a classic case study in healthcare inflation. A new treatment with promising potential ends up increasing costs for everyone through overtreatment because costs are neither felt by the patient nor the doctor. Since physicians are playing with house money, they have no qualms giving patient a doubly expensive treatment even if may not provide any additional benefit. In this specific case, we need more data comparing HMV and BiPAP machines. With only minimal differences in device abilities, I wouldn't expect a large difference in outcomes when equating for respiratory therapist support. Although I agree with removing NIVs from the Competitive Bidding process since HMVs require services and support and are basically home life support, the guidelines deserve revision. The spotlight is squarely on the guidelines for HMV use and represent a large risk if reimbursement is cut or the guidelines for use become more stringent (Report 1, meeting, Report 2).
That said, I still own a little bit of Viemed. It's just too cheap considering their network of RTs and possible upside with remote patient monitoring possibilities. On the flip side, one could argue the consistent Medicare risk prevents the stock from rerating and it's appropriately priced. I own it in small size < 1% just because it's so darn cheap. I would add if they can diversify their business while maintaining margins and would cut it if they were either forced to refund the overpayments or Medicare sentiment takes a turn for the worse.
Let me know what you guys think. My emails are always open and you can find me on twitter @AduSubramanian. I always enjoy talking about stocks and love getting responses to my pieces.
Page Numbers refer to numbers on the transcript, not the pdf file.