By Lucy Parkinson, Research Analyst, LSN

When a potential investor approaches a diagnostics company, some of the first words out of their mouth are likely to be “How are you going to deal with the reimbursement problem?” At the Redefining Early Stage Investments Conference, we heard from diagnostic entrepreneurs who were rethinking the reimbursement model from the ground up.

A traditional business model for a diagnostics company involves persuading care providers that they ought to use the test, and then convincing HMOs that they ought to reimburse it. For a new product, this can be a tough sell; insurance plans often won’t specifically cover an innovative test, leaving the company to scratch for reimbursement on a case-by-case basis. They have to prove over and over that the test is more accurate or more cost-effective than the competition. Even companies providing an established product may find their revenues at the mercy of Centers for Medicare & Medicaid Services billing coding changes. Given these challenges, how can a diagnostics company build an attractive business plan that will win over investors?

Find the gaps in a divided marketplace. Most healthcare practitioners work in a highly specific area, yet many medical conditions manifest in ways that cut across these divisions. Sometimes, linked comorbidities are split between two different areas of medicine – for example, diabetes and eye problems. A diabetic patient might not have the time or inclination (or even the insurance coverage) to get their eyes checked out. An innovative business plan for an ophthalmic diagnostic might therefore include targeting clinics that deal with diabetes, and vice versa. We’ve heard from diabetes diagnostics looking to eye clinics for a new market; these related yet divided conditions show up all over the life science map, and diagnostics for many indications could take advantage of them.

Bypass the gatekeepers. We heard one diagnostics CEO say “I want to see people using our device in Walmart and CVS.”  If you have the right product – in this case, a device for a huge potential market that can deliver an automated result in minutes at a sub-$100 cost – you can seek direct routes to consumers. Similarly, the consumer market for wearable medical devices is exploding; this is, thus far, the only subsector of the medical device space where a company has successfully crowdsourced development of a product.

Rethink what your technology can do.  We heard from the developer of a diagnostic test so sensitive and robust that it can be administered entirely by mail, with the patient receiving a diagnostic kit at home and returning a swab straight to the diagnostic lab.  What is this company’s new business idea for this powerful new platform? Crowdsourced clinical trials. Rather than trial participants having to be regularly monitored by researchers at one location, they can be enrolled in the trial and then participate remotely, anywhere, anytime, bringing a huge increase in scale and a decrease in costs (including for participants).

Diagnostics might seem like a crowded field, but if your technology is powerful, a little innovative thinking about what it can do can completely change your approach to attaining revenue. You’ll stand out to investors if the reimbursement problem isn’t a problem to you at all.

Tags: diagnostics, innovation, RESI