Medicare’s physician fee schedule includes billing codes for digital therapeutics for the first time. Stakeholders say these codes could help turn around reimbursement challenges weighing on the entire digital medicines sector.

By Frank VinluanWhen the FDA approves a drug, passing that regulatory bar of safety and efficacy puts it on the path toward likely reimbursement by government and commercial payers. The same has not been true for digital therapeutics. A proposal from the Centers for Medicare and Medicaid Services signals a change in federal thinking about such technologies, which could pave the way for broader coverage of novel digital medicines.
For the first time, CMS’s proposed physician fee schedule, a comprehensive annual listing of the fees that Medicare uses to pay doctors, now includes digital therapeutics. The proposal does not cover all digital therapeutics under multiple benefit categories, as the Digital Therapeutics Alliance (DTA) had asked nearly a year ago. Rather, the proposal includes three codes for FDA-cleared “digital mental health treatment devices.” The proposal is open to comment through Sept. 9; the final rule will be issued by the end of the year.
The CMS proposal comes as reimbursement continue to weigh on the digital therapeutics sector. Pear Therapeutics attributed its 2023 bankruptcy to its inability to secure payer coverage of its FDA-cleared apps for substance use disorder, opioid use disorder, and insomnia. Better Therapeutics failed to land coverage for its FDA-authorized type 2 diabetes app, leading the company to shut down in March. Akili Interactive, developer of a game that treats attention deficit hyperactivity disorder, was acquired last month.
The Reimbursement Chicken & Egg Problem
Digital therapeutics reimbursement is like a chicken and egg problem, said Rich DeNuzio, chief commercial officer of Click Therapeutics, a digital therapeutics developer that acquired some of Better Therapeutics’ assets in May. To commercialize a digital therapeutics product, you need billing codes, he said. But to get billing codes, you need to have a digital therapeutic product. Absent specific billing codes, clinicians have been forcing novel digital products into existing codes, even if they were not an exact fit. That leaves reimbursement claims subject to challenges.
Though the proposed physician fee schedule only includes three digital therapeutics billing codes, the Digital Therapeutics Alliance and its member companies embrace the proposal as a win. CMS recognition is important because Medicare coverage of new technologies paves the way for commercial insurance to follow, DeNuzio said. Looking longer term, DeNuzio and others in the sector would like to see passage of the Access to Prescription Digital Therapeutics Act, which would amend the Social Security Act to permit CMS to cover and reimburse for prescription digital therapeutics. The bill was initially introduced in 2022. DeNuzio notes it can take five to seven years to get a bill passed. But in the near term, the three proposed billing codes are a welcome change.
“This does not solve everything, it’s movement in the right direction,” DeNuzio said.
Digital therapeutics go through clinical testing much faster than drugs, but that faster development leads to a mismatch in expectations, according to Dan Karlin, chief medical officer of psychedelic medicines developer Mind Medicine (MindMed). A drug goes through multiple phases of clinical development in order to show efficacy, which in turn translates into some assignment of value, he said.
The regulatory threshold for digital therapeutics has been lower than that of drugs because the patient risk is lower – you pick up the device and then you put it down, Karlin said. But this lower risk threshold results in less data available to assign value. That means when a digital therapeutics company reaches the point of asking prescribers to prescribe and payers to pay, the digital technology does not necessarily have the same level of evidence as a drug, said Karlin, who previously served as chief medical officer of NightWare, a company that developed an FDA-cleared device to reduce nightmares in patients with post-traumatic stress disorder (PTSD), and as Pfizer’s head of clinical, informatics, and regulatory strategy for digital medicine.
Karlin acknowledges some digital therapeutics companies pin their commercialization struggles on insurance companies, but he says this view is too simplistic. Payers look at evidence, as do physicians. Digital therapeutics companies are also asking patients to engage with a novel therapy in a new way. Karlin said all of these stakeholders, who are accustomed to reviewing drug-level evidence, look at digital therapeutics evidence as lacking.
“It all adds up to create a difficult landscape for everyone — prescribers, payers, and ultimately patients,” Karlin said. “What inclusion in the fee schedule does is validate that despite what we’ve seen in this space, high-level thinkers are saying, ‘Hey, there’s something here. There’s something here with potential to help patients.’”
The changing view of digital therapeutics at the federal level extends to the FDA, which is broadening its scope to include software used alongside drugs. Agency draft guidance issued last year states that such products will be reviewed through the agency’s divisions that evaluate novel drugs. For the purposes of reimbursement, that means payers would view a digital therapeutic as a drug as long as it’s paired with an approved drug, DeNuzio said. Click Therapeutics is moving in this direction with the Better Therapeutics assets. DeNuzio said those technologies will be combined with his own company’s expertise to develop software with potential uses in combination with metabolic disorder drugs. This strategy will take time because these technologies would need clinical testing.
MindMed has a similar strategy. The company is developing digital tools intended for use alongside its psychedelic drugs; this software would support the patient and the clinician. When the company reaches the point of an FDA submission, the software would be part of the drug application package as a combination product, Karlin said.
Obstacles to Investing in Digital Medicines
Reimbursement struggles for commercialized digital therapeutics have not helped overall investment in the sector. In a report recapping digital health investments for the first quarter of 2024, Pitchbook said the digital health category — which in addition to digital medicines encompasses telehealth; health coaching and wellness; digital care management — has stabilized with about $1 billion in funding spread across nearly 80 deals per quarter. That’s well below prior years totals. Pitchbook said it expects reimbursement struggles for digital therapeutics will drive consolidation in the sector — Akili and Better Therapeutics are prominent examples. But the Digital Therapeutics Alliance says the proposed CMS billing codes signal to investors that there is a viable reimbursement pathway for companies developing digital products.
Bob Kocher, a partner at Venrock, is not fully persuaded of an investor return to digital therapeutics. Introducing new billing codes means there’s a way for novel prescription digital technologies to be paid for, removing one of the hurdles for digital therapeutics companies and one of the risks investors see, he said. But these technologies still need to get adopted, and for that, clinicians are looking for better data. The digital medicines that have reached the market are helpful additions, but not game changers that compel physicians to adopt them, Kocher said.
Longer clinical trials are not the answer. Companies need to invent new technologies with effects that are transformational, Kocher said. A pharmaceutical example is Gilead Sciences’ pricey hepatitis C medication Sovaldi, which won adoption with cure rates topping 90%. GLP-1 metabolic disorder medicines offer a more recent example of drugs with compelling data that have won over physicians and patients (and are starting to move the needle with payers). In digital therapeutics, Kocher said he is looking for effect sizes in clinical trials “so large that you can’t ignore them.”
“I think it’s more like Siberia,” Kocher said of the investment climate for digital therapeutics. “It’s not viewed as an attractive area for investment because there’s not been digital therapeutics that are so good that they get adopted.”
Seeking Reimbursement & Investment? Show Me the Data!
Joe Perekupka, CEO of venture-backed Freespira, acknowledges the funding and commercialization challenges facing digital therapeutics companies. His startup is working in behavioral disorders, an area long dominated by medications. Freespira’s FDA-cleared technology employs a wearable sensor that measures breathing and carbon dioxide levels and sends data to a software app that visualizes these measures. Visualization helps patients regulate breathing to avoid panic attacks and reduce PTSD symptoms, Perekupka explained. This prescription digital therapeutic is commercialized mainly through partnerships with health plans.
Earlier this year, Freespira raised more than $22 million in new funding. Perekupka said his company won over investors with data from clinical trials, real-world evidence that shows consistent and durable outcomes in patients, and cost savings to health plans. Freespira has also shown willingness to share in the risk of providing a novel digital technology by offering health plans value-based pricing in which the reimbursement of the treatment is tied to measurable patient outcomes.
“One of the biggest challenges we’ve seen with new [digital therapeutics] companies is they look at the FDA as the finish line,” Perekupka said. “We see that FDA clearance or approval as the midpoint. Commercialization is the biggest challenge in delivering a new product to the market, it’s not the FDA piece.”
The inclusion of digital therapeutics in the physicians fee schedule will pressure companies to conduct well-controlled clinical trials, Karlin said. Digital therapeutics studies need to look more like drug studies. The idea that an open-label study can produce the level of evidence sought by prescribers and payers won’t work anymore, Karlin contends. He points to his former employer, NightWare, and Click Therapeutics as companies that have embraced clinical testing of digital offerings.
A Click Therapeutics mobile app developed in partnership with Otsuka Pharmaceutical received FDA clearance in April for use in addition to medication to treat major depressive disorder. Click, whose pipeline includes a schizophrenia digital therapeutic being developed in partnership with Boehringer Ingelheim, conducts clinical trials with reimbursement in mind, DeNuzio said. A payer should be able to review a digital therapeutic evidence package, and if the word “digital” is stripped out, be able to decide whether to cover the treatment, he explained.
“Look at our partnerships with Otsuka, Boehringer-Ingelheim, these are real trials like they’re drugs,” DeNuzio said. “If you want to be covered, you better have the right data package. Otherwise, you might as well go to health and wellness.”
Illustration: marchmeena29, Getty Images