Reimbursement status can make or break a healthcare investment

Medical device innovation is thriving: implants that restore function, diagnostics that detect disease earlier than ever, tools that make complex surgeries accessible. For investors, the opportunity to back that evolution is hard to ignore. Medical device investing can look deceptively straightforward — identify a company with a compelling technology, a strong management team, and a real clinical problem to solve, and returns should follow. In practice, many promising devices fail commercially despite checking all of those boxes.

While FDA approval is often heralded as the most important milestone in the lifecycle of a device, experienced healthcare investors know that the path to commercial success often comes down to a company's ability to navigate a complex, often opaque system that decides whether and at what level a device will be reimbursed.

We have seen genuinely innovative medical devices backed by clinical evidence and run by capable teams struggle commercially due to reimbursement challenges. Conversely, we have also observed medical device companies with modest clinical differentiation build durable businesses as a result of positive reimbursement decisions. To help investors better assess risks and opportunities inherent to the US reimbursement system, we use medical device investments to illustrate how reimbursement impacts investment outcomes.

Distinguishing commercial winners from simply effective devices

Beyond the obvious requirement that a medical device function as intended in order to be successful, investors should ask three key questions to understand a product's potential for commercial success.

Four interrelated factors that determine investment outcomes

Understanding likely reimbursement outcomes and trajectories is key to determining the likelihood of commercial success for a medical device. The rules for payer reimbursement are complex, with multiple stakeholders, unpredictable timelines, and a range of payment levels. Even strong clinical evidence is not a guarantee of a positive reimbursement outcome.

Given this inherent uncertainty, investors must model an interconnected set of factors and stress-test a range of reimbursement scenarios to determine whether a device can achieve the outcomes necessary to support their investment thesis.

• —The FDA approval pathway influences the reimbursement approval process.
• —New billing codes take more time.
• —Medical society guidelines impact both payer decisions and provider adoption.
• —Payer mix, patient demographics, and site of care drive coverage economics.

Three variables define a medical device's reimbursement status:

• Code:A standardized billing number (CPT code) that tells insurers what procedure or device was used and allows healthcare providers to seek reimbursement.
• Coverage:A formal decision by the insurer to authorize and pay for that procedure.
• Payment rate:The actual dollar amount the insurer will reimburse.

The FDA approval pathway influences the reimbursement approval process

Medical device companies pursue one of three pathways to obtain FDA approval, each with direct implications for reimbursement review. While third-party payers independently apply their own standards of evidence when deciding whether and how much to pay for a device, they routinely draw on clinical data generated during FDA review.

High-risk and novel devices that go through the PMA process compile an independent body of clinical evidence, which can then support payer reimbursement applications. Devices cleared through 510(k) may reach FDA approval more quickly, but with a thinner evidence package — which can make payer evaluation harder. De Novo devices occupy a middle ground: novel but lower-risk, with variable evidence requirements determined by device type and FDA discretion.

The practical implication: more novel devices carry longer and less predictable reimbursement timelines, with a median timeframe of 5.7 years from FDA approval to Medicare coverage.¹ When coverage is ultimately secured, however, the reward is typically greater.

• 510(k)Device type: Class II Perceived risk: Low to moderate Evidence required by FDA: No independent clinical trial because of previously approved similar devices.
• PMADevice type: Class III Perceived risk: High Evidence required by FDA: Full clinical trial to demonstrate safety and effectiveness.
• De NovoDevice type: Novel and lower to moderate risk Perceived risk: Lower risk device with no close market precedent Evidence required by FDA: Variable; determined by device type/FDA.

New billing codes take more time

A device that fits neatly into an existing billing code can achieve a faster path to reimbursement, while a truly novel device requires a new code, which involves physician society endorsement, formal applications, and Medicare/Medicaid review.

Until a permanent code is established, a device may sit within a Category III tracking code, signaling to payers that this is an emerging technology without guaranteed reimbursement. That signal can deter physicians from using the device regardless of its clinical merit.

Medical society guidelines impact both payer decisions and provider adoption

Whether a relevant medical society has weighed in on a newly FDA-approved device affects how quickly payers move. While payers pay close attention to guidelines, not all guidelines are created equal. Medical societies have varied evidence requirements and no legally mandated timeframe for review, making it difficult to predict whether and when a new device will be added to guidelines.

The National Comprehensive Cancer Network (NCCN) updates its oncology guidelines annually and carries enormous weight in payer coverage decisions. Subspecialty societies that update their guidelines less frequently, such as every five or ten years, could delay wider adoption of a new medical device. Physicians also defer to medical society guidelines before adopting a new technology, directly affecting the growth trajectory of an approved device.

Payer mix, patient demographics, and site of care drive coverage economics

While Medicare is typically the first to establish formal coverage for a new device, and private insurers often use Medicare's decisions as a reference point for their own coverage decisions, patient demographics determine which one is more critical to commercial success. Medicare coverage alone will rarely unlock the full commercial opportunity for a device targeting a younger demographic. Working-age patients are typically covered by private insurance, and until that device has successfully cleared the reimbursement hurdle with private payers, its commercial scale will be limited.

Also, where a device is used matters as much as who uses it. The same device may receive different codes and meaningfully different payment rates depending on whether it is deployed in an inpatient hospital setting or an outpatient clinic. A surgical implant paid through a fixed, bundled hospital payment is reimbursed differently than a diagnostic test billed on a per-test fee schedule, directly affecting the revenue model and adoption rate. Lower reimbursement rates in certain settings can make a procedure economically unviable for providers.

Case study: Veracyte

Veracyte (Nasdaq: VCYT), one of Madryn's former portfolio companies, provides a good example of the variability within reimbursement timelines. Veracyte is a global genomic diagnostics company that provides advanced molecular tests to improve cancer diagnosis and treatment decisions. The company's Prosigna breast cancer assay helps determine if patients with a certain type of early-stage breast cancer will benefit from chemotherapy.

Detailed below is a milestone-by-milestone account of Prosigna’s path from FDA clearance to paid coverage across payer types:

Why reimbursement can be difficult to model

These four factors rarely operate independently, with reimbursement for a device less a binary outcome and more about how multiple variables interact. Consider the example of a De Novo device in a subspecialty with infrequently updated medical society guidelines. The device enters the market with a thinner evidence package, requires a new billing code, and faces a medical society that may not revisit its guidance for years. Each delay compounds the others, extending the timeline to desired commercial scale, and significantly impacting the potential return on investment.

Underwriting the reimbursement potential, not just the technology

Medical devices that fail commercially despite capable teams typically do so for one of two reasons: the science or the reimbursement outcome. In the earlier stages of device development, both risks are considerable. But by the time a device reaches the investment stage, the scientific case is substantially derisked and what remains is the reimbursement risk.

While payers draw on the clinical evidence generated during FDA review, coverage decisions are made independently. Investors need to assess where a device sits in the billing code lifecycle, which medical societies have or have not weighed in, how far Medicare coverage is likely to precede private payer coverage, and whether the anticipated payment rate holds across sites of care. A credible medical device investment thesis treats reimbursement not as a milestone to be checked off, but as part of a dynamic, layered risk model, with explicit timelines, a range of plausible outcomes, and stress-tests around both. Understanding how reimbursement risk shapes the investment case is where much of the opportunity lives — which is why reimbursement expertise, not just clinical or regulatory fluency, is a defining edge in medical device investing.

A credible medical device investment thesis treats reimbursement not as a milestone to be checked off, but as part of a dynamic, layered risk model, with explicit timelines, a range of plausible outcomes, and stress-tests around both. Understanding how reimbursement risk shapes the investment case is where much of the opportunity lives—which is why reimbursement expertise, not just clinical or regulatory fluency, is a defining edge in medical device investing.