Organogenesis Prepares To Restructure In The Face Of New CMS Skin-Substitute Policy

The maker of Apligraf for foot ulcers and venous leg ulcers is facing a more than 30% reduction in Medicare reimbursement starting Jan. 1. Organogenesis’ CEO says the firm is readying a plan to significantly trim its business costs so it can continue to market the PMA-approved, bioengineered product.

Organogenesis Inc. says it is moving rapidly toward a restructuring in the face of substantial payment cuts for its lead product in CMS’ final 2014 hospital outpatient prospective payment system rule, issued just before Thanksgiving.

The regenerative medicine company manufactures Apligraf, which the company touts as the first bioengineered cell-based product to receive a PMA from FDA (in 1998). It is approved to treat diabetic foot ulcers and venous leg ulcers. Apligraf is going to see a more than 30% reduction in reimbursement based on new Medicare outpatient payment policies, with its current payment of approximately $2,000 dipping to a new payment rate of $1,371.

“That is quite negative for Organogenesis and we’re trying to figure out how we will react to that,” Organogenesis CEO Geoff MacKay said in an interview with “The Gray Sheet.”

“But, certainly [the policy] will have a deleterious effect on our company, and we’re just trying to respond in a way that we can still make sure that Apligraf can get to the patients that deserve it,” he added.

The company is still finalizing its restructuring plans and how it will adjust the price of Apligraf, but MacKay said Organogenesis will make a decision on how to move forward prior to Jan. 1, when the final 2014 OPPS rule takes effect.

Bioengineered Apligraf treats diabetic foot ulcers and venous leg ulcers.

Photo: Organogenesis Inc.

MacKay says the company will require a “radical reduction” of its cost structure. “Right now we’re just trying to see every humanly possible way to reduce our cost structure such that we can provide a competitive offering in the marketplace.”

Although Organogenesis is not yet releasing specific numbers, the immediate impact of the rule will be a reduction of the company’s focus on research and development and pre-clinical and clinical investments. “We’re really trying to restructure such that we can maintain Apligraf on the market and make sure Apligraf remains the leading wound care product on the market, but it will come at a great cost by cutting everything in the company that doesn’t pertain to manufacturing, marketing, selling, of Apligraf,” MacKay said.

In the OPPS released Nov. 27, CMS finalized a policy to package payment rates for five categories of device-dependent items and services. As part of that approach, skin substitutes, including Apligraf, were divided into two groups for packaging purposes: high-cost skin substitutes and low-cost skin substitutes. (See (Also see "Packaging Policies Finalized, Comprehensive Payments Delayed In Medicare Outpatient Pay Reg" - Medtech Insight, 9 Dec, 2013.).)

Apligraf and related products were placed in the high-cost group ($1,371.19 rate) — the new rate is significantly less than the previous payment level. Other products estimated to have a cost of at or below $32 per square centimeter were classified in the low-cost group with a payment rate of $409.41.

Skin substitutes have historically been paid under the OPPS as biologicals using the average sales price methodology. But under the new policy, which takes effect Jan. 1, they will be considered a category of drugs and biologicals that function as supplies in a surgical procedure, and thus will be packaged with the procedure. That matches CMS’ existing approach for implantable biologicals to be packaged with a procedure payment.

“We see no reason to distinguish skin substitutes from implantable biologicals for OPPS packaging purposes based on the clinical application of individuals products,” CMS states in the final rule. The agency said the new payment rates are “more reflective of the average resource costs of the procedures because prices for these products vary significantly from product to product. Packaging these products also would promote more efficient resource use by hospitals and would be more consistent with the treatment of similar products under the OPPS.”

But Organogenesis and some of its competitors disagree. They point out that there is a key factor that CMS did not consider that distinguishes certain products in the skin-substitution space that has big implications for cost. Specifically, that factor is FDA regulation. Depending on indication and other factors, skin substitute products can either be regulated by FDA as class III medical devices that require a PMA, or only require 510(k) clearance, or finally as human cell, tissue and cellular and tissue-based products (HCT/Ps), which are formally biologics but don’t require the same pre-market review.

“It is shocking and egregious that CMS could disregard that view of their sister agency, and bundle therapeutics with nontherapeutics” – Organogenesis CEO Geoff MacKay

Organogenesis believes that “the FDA approval process, which costs hundreds of millions of dollars and over a decade, is really where the line in the sand should be drawn,” MacKay explained. “Either you are a proven therapeutic for FDA, like Apligraf and the Shire product Dermagraft, or you’re not,” he added.

In addition to Apligraf, Shire Regenerative Medicine Inc.’s Dermagraft and Integra LifeSciences Holdings Corp.’s skin substitutes, of which there are several, also have PMAs, unlike the other skin substitute products that CMS is packaging under its new policy, which are regulated as either 510(k) medical devices or HCT/Ps.

Industry groups and CMS’ Advisory Panel on Hospital Outpatient Payment opposed the finalization of this policy in general, while clinicians, professional societies and industry submitted comments to CMS that specifically opposed the packaging of this category of device-dependent items and services.

In Sept. 6 comments on the proposed 2014 OPPS and in a Sept. 5 legal memorandum sent to CMS, Organogenesis also argued that Apligraf is a Specified Covered Outpatient Drug and CMS lacks the legal authority to package SCODS or arbitrarily classify them as supplies. It also said the proposed OPPS payment rate for skin substitute procedures did not adequately reflect the cost of wound treatment products such as Apligraf and would not even pay hospitals for Apligraf at its acquisition cost, in addition to other arguments.

CMS was persuaded by comments that there is a significant difference in resource costs among the numerous skin substitute products and that multiple codes based on resource difference may be more appropriate, leading to the agency’s decision to divide skin substitutes into high-cost and low-cost groups. However, CMS rejected most other arguments, including the argument that it should exclude from its packaging policy any products that are approved by FDA via PMA, a biologics license application or a new drug application, which already require extensive clinical testing, as opposed to skin substitutes that are regulated as either 510(k) medical devices or HCT/Ps.

“We proposed to apply the packaging policy to all skin substitutes recognized by CMS, regardless of the FDA regulatory pathway,” CMS wrote.

To Organogenesis, “it is shocking and egregious that CMS could disregard that view of their sister agency, and bundle therapeutics with nontherapeutics – essentially medicines with nonmedicines – and consider them all one and just pay the mean price. To us, it’s not only detrimental to patients, but it’s a complete misuse of taxpayer money because you’re overpaying for a simple wound covering while restricting the proven medicines,” MacKay said.

Good News For Some

While the packaging payment policy was a blow to Organogenesis and companies with similar products, it may be a boon to some companies with lower-cost products.

MiMedx Group Inc. is a developer, manufacturer and marketer of regenerative biomaterials and bioimplants processed from human amniotic membrane, including EpiFix. The OPPS rule will reimburse EpiFix at the high-cost skin substitute rate starting in 2015, but will extend pass-through status to EpiFix through 2014, which means that it will retain the current payment methodology for one more year.

EpiFix is an amniotic membrane allograft for chronic and acute wound healing that is processed from human tissue and is therefore considered an HCT/P that does not need FDA clearance or approval in the U.S.

“We think that CMS has made very rational decisions that balance all the variables to protect their Medicare patients, manufacturers and our tax dollars. These changes were absolutely necessary to correct cost disparities and graft wastage in advanced wound care,” Parker Petit, MiMedx chairman and CEO, said in a Nov. 29 press release.

“The MiMedx allograft is extremely cost-effective because it comes in sizes ranging from 1.5 square centimeters (sq. cm) on up,” Petit continued. And he specifically called out “our two major competitors” for having “considerable waste factors associated with the use of their grafts,” likely referencing Organogenesis and Shire.

“Each of these products is offered in only one size, approximately 40 sq. cm each,” Petit said. “It is quite evident that these products are significantly larger than these median wound sizes; in fact, they are 15 to 20 times larger. Consequently, the remainder of the graft is discarded or wasted since it is a single use product only.”

MiMedx elaborated on the CMS policy in a conference call held Dec. 5. “Our competitors had mispositioned their product cost-wise for many years, and chose not to make any changes,” Petit said during the call. “They are now claiming this payment change will thwart medical innovation. Actually, it thwarts medical waste, which is an important responsibility for all of us,” he added.

MacKay, with Organogenesis, called MiMedx’ claims a red herring. “What we really strive to prove is that our products work and their product has not been demonstrated to work as per FDA,” he said. “To me, it’s a bit of a nonsensical debate.”

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