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How Medical Billing Coverage Spells Success Or Failure For Drugmakers

Chris Knight, The Motley Fool

The U.S. is by far the global leader in healthcare research, and the reason is that the government promotes the research and development of innovative drugs and devices through reimbursements to the physicians who purchase them. It's this very important drug payback system that confers a huge advantage to healthcare companies selling drugs in the U.S. Any healthcare investor must consider this critical moat when analyzing healthcare equities to add to their portfolio.

It's with these reimbursements in mind that healthcare companies spend upwards of $1 billion on R&D to discover just one new drug. All of this is for nothing if the main healthcare agency in the U.S., The Center for Medicare and Medicaid Services (CMS) , doesn't pay providers back through Medicare and private insurance, or reimburse them for medical care provided.

A doctor using a calculator

Image Source: Getty Images

CMS provides payment reimbursement and coverage for new medical devices and drugs that have been approved by the U.S. Food and Drug Administration. These repayment options are available for physicians, which means that they can reap the benefits of these healthcare companies' innovation but without the risk or footing the bill for R&D costs. This also means that the healthcare companies can strive to be on the cusp of scientific breakthroughs all without having to worry about price differences on the market that tend to follow the higher price tags of new drugs.

Along with assuring that a new product is novel and superior, CMS allows what is called a pass-through status that requires a prescription to be set at a minimum price of $485 before the drugmaker is able to capitalize on its coding benefits. This minimum price often puts a stock's new drug at a big disadvantage considering it may be competing with a generic version carrying a price ten times lower. This is why obtaining coding benefits as quickly as possible is essential for a newly approved drug, otherwise the resistance from patients and doctors alike would almost certainly be too much to overcome the price demands of innovation, and which will influence the share price of the company.

How billing codes determine investors' gains

Initially, a company will usually apply for an easier-to-obtain temporary code that gives a drug around two to three years of payment reimbursement while also providing CMS with data that is used to solidify a more permanent code at a hopefully, sooner rather than later date.

Achieving these codes quickly and accurately is so important that even the smallest of biotechnology companies regularly employ or contract a medical billing expert to select and expedite the coding approval processes. These experts have direct access to insurance coverage reimbursement data, which determines which patients are favored regarding payback. This coverage could be the most important aspect of a healthcare investment.

Which codes a medical establishment submits for a drug depends on a number of different things: the severity of the procedure, whether it is taking place in a hospital or on an outpatient basis, how it is administered and by whom. These all add to the complexity of the approval process.

Frequently, these specific requirements can cause significant variations between two competing companies' drugs, giving one a more timely and larger coverage advantage over the other. It is these variations that gives almost every drug its own unique overall insurance coverage, if one competitor qualifies for a bigger reimbursement scope or can more hastily finish the application process because requirements are more obviously met, then they can gain a tremendous advantage simply because of the circumstances around how a drug aligns with the necessary prerequisites.

What does this mean for your portfolio?

Omeros (NASDAQ: OMER) was approved for its J-Code on July 24, 2019 for drug Omidria and from then, its stock has risen 33.77%. Whereas Kala Therapeutics (NASDAQ: KALA) still hasn't received its J-Code following its January 7, 2019 commercial launch, and its stock has declined 35.70% since that time. These examples demonstrate how shareholders rightly tend to view the importance of medical billing approvals and insurance reimbursement coverage.

When considering what healthcare stock to invest in next, considering how easily and quickly the company's drug can be approved for the most profitable codes is one of the most important factors to pay attention to. If these codes are delayed or even denied, a company may involuntarily postpone becoming profitable, thus requiring itself to take on more debt or issue a public offering, all of which can negatively affect its share price.

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CRKnight has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

This article was originally published on Fool.com