iRhythm Technologies Inc

NASDAQ:IRTC

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the iRhythm Technologies, Inc. Q2 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Leigh Salvo. Please go ahead.

[Leigh Salvo]

Thank you all for participating in today's call. Earlier today, iRhythm released financial results for the second quarter ended June 30, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, those statements related to the impact of COVID-19 on our business, expectations for recovery and processing clinical backlog, market opportunity, product performance, market expansion and penetration, productivity improvements, reimbursement, release of clinical data, operating trends and our future financial expectations, including revenue, gross margin, profitability and operating expenses are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

In addition, we will refer to adjusted EBITDA, which is defined as EBITDA excluding stock-based compensation expense. Adjusted EBITDA is a non-GAAP measure that is used to help investors understand iRhythm's ongoing business performance. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q respectively with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 5, 2021. iRhythm disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

And with that, I'll turn the call over to Doug Devine, Interim CEO and Chief Financial Officer. Doug?

[Douglas Devine, executive]

Thanks, Leigh. Good afternoon and thank you all for joining us. During our prepared remarks today, I'll start with a quick review of second quarter highlights and then update you on progress we are making on our key operating priorities. Dan Wilson, EVP of Strategy and Corporate Development will cover reimbursement. And then, I'd like to welcome Mark Day, our EVP of R&D to the call to share some of our current Zio platform advancements and initiatives.

After that, I'll close with a more detailed review of Q2 results and our outlook for the remainder of the year. We'll then open up the call for your questions. Starting with Q2 highlights. Our results reflected continued demand for our Zio platform as well as solid execution on our operating goals by the entire iRhythm team who are working tirelessly to meet the needs of our physicians and patients.

During the second quarter, revenue was $81.3 million, representing a year-on-year increase in revenue of 59.8% and sequential growth of 9.4% over the first quarter. Zio AT had a record quarter, reaching approximately 10% of overall company revenue for the first time. Registrations for our Zio Services exceeded our capacity, particularly during the March, April and May timeframe, which resulted in processing times extending by approximately a week. This led to a higher than usual number of units awaiting clinical processing at quarter-end, which limited reported revenue growth in Q2 '21 and increased some of our costs.

We expect to be back to normal turnaround time by the end of third quarter. We also made continued progress in identifying and planning for cost efficiencies that will be implemented in the medium term. These were outlined in our last call and I will cover them more a little later. We ended the second quarter with $255.7 million in cash and short-term investments, which highlights the financial strength of the company.

Investing for long-term growth remains top of mind. And importantly, we have the financial resources to do so. Lastly, we had 2 new 510(k) clearances during the quarter for our next-generation hardware platform and our fourth generation deep learned AI algorithm. One for a new and improved design of our Zio monitor and the second for updating artificial intelligence capabilities. Both are key building blocks for our scalability and operational efficiencies. The new Zio Monitor is designed to significantly improve patient comfort while the advancements to our AI capabilities are expected to further improve rhythm and beat diagnostic accuracy.

Notably, our new AI algorithm release is already delivering benefits, including contributing to improvements in our unit processing times and our ability to return to more normalized report turnaround times by the end of Q3. We are pleased with these highlights and also encouraged by the progress we're making on focused areas we discussed last quarter.

As a reminder, these include driving continued demand for our Zio Service, leveraging our platform to expand both our market share and our addressable market, making adjustments to our business model that we believe will provide operating efficiencies that will deliver sustainable profitability and growth and pursuing multiple paths toward reimbursement that are more in-line with the benefits and underlying value of our technology.

During the second quarter, we continue to see opportunity in the United Kingdom, which again outpaced overall company growth. As you may recall, last September, iRhythm was the recipient of NHS funding as the winner of its artificial intelligence in Health and Care award. That award was recently disclosed to be 4.8 million pounds or approximately $6.8 million and has enabled us to commence trials of our Zio Service in selected sites across the U.K.

Combined with a nice recommendation last December, we have seen very strong revenue growth in the first half of this year as we brought new grant sites online. As we move into the execution phase and bring fewer new sites online, we expect revenue growth in the U.K. to be more measured for the remainder of 2021.

Further, we are in the process of building out our operational infrastructure within the U.K. that can support this future growth and take our learnings and successes from the U.K. to serve as a playbook to other countries in the future. We are also making progress on our new manufacturing facility, which will house all of our production capabilities starting in 2022 and enable increased scalability and enhanced operating efficiencies in the medium term.

And on product development and innovation, as we've highlighted in the past, iRhythm has long-established its ongoing commitment to improving the patient and provider experience demonstrated by our significant investments in next-generation capabilities across our diagnostic platform. The 2 new 510(k) clearances we announced during the quarter are great examples of this work.

Overall, we're very pleased with the financial and operating results in the second quarter and remain focused on continuing to make progress on our priorities over the remainder of 2021, including with regard to our priorities on reimbursement, which Dan will discuss. Dan?

[Daniel Wilson, executive]

Thank you, Doug. As part of the reimbursement discussion, I'll cover where we are at with our efforts to establish national pricing with CMS, discuss our continued engagement with the MACs to establish more appropriate Medicare pricing, provide an update on commercial pricing and then close with a summary of how we are collectively approaching reimbursement.

Starting with CMS national pricing. As we shared in our press release last month, CMS published the calendar year 2022 Medicare physician fee schedule proposed rule in mid-July. In the proposed rule, CMS did not propose national rates for long-term ECG monitoring CPT codes. Instead, CMS proposed to continue with contractor pricing for calendar year 2022. The proposed rule is followed by an open comment period before CMS issues the final rule in the November-December timeframe. In the proposed rule, CMS noted that they continue to seek public comments and information to support future rulemaking to establish a uniform national payment for these codes by further understanding the practice, expenses incurred in providing these services.

During the open comment period, iRhythm intends to provide comments and will continue to work with CMS in support of its efforts to establish national pricing that fairly represents the costs incurred to provide these services, the unique benefits they provide and in consideration of continued access to these services for Medicare beneficiaries.

On a related note, CMS commented separately in the proposed rule that more and more services under the Medicare physician fee schedule include innovative technologies such as software algorithms and artificial intelligence and recognition that the current pricing methodology employed by CMS does not account for these technologies.

We are encouraged that CMS is recognizing the difficulty in pricing vertically integrated AI-based business models like our own within existing pricing methodologies. We will use the open comment period and other channels to provide our perspectives and suggested paths forward. iRhythm has also joined other industry stakeholders and societies, representing AI solutions that aim to support health care delivery by providing input on possible solutions.

In summary, we will be using the open comment period between now and mid-September to provide comments to CMS's proposed rule and are joining other industry stakeholders to continue support of potential national pricing for calendar year 2022. However, we believe the more likely outcome is that we will remain with carrier pricing in 2022 while continuing to pursue national pricing in the following year's cycle for calendar year 2023.

Now turning to our ongoing discussions with Novitas and the other regional MACs. Since our last earnings call in May, we met with several other MACs to garner their support for evaluating an alternative pricing model. We understand that the MACs are communicating and will likely work together to evaluate the pricing of the long-term ECG codes. We remained encouraged by the willingness of Novitas and the other MACs to explore this alternative pricing model, which we believe is a better representation of the true cost of delivering the service.

We along with other industry participants will be submitting cost data under this alternative pricing model to an independent third-party who will validate the data and submit to the MACs. We currently anticipate the alternative model information will be submitted to the MACs in the September or October timeframe. We cannot provide any assurances that Novitas or other MACs will update pricing based on this information nor the timing of any potential actions.

As an update on our commercial payer discussions, nearly all of our commercial payers have re-contracted our Zio XT Service since the establishment of the Category 1 codes on January 1, 2021 with most cross-walking to pre-existing rates.

Overall, commercial pricing in the second quarter of 2021 was consistent with commercial pricing in the first quarter of 2021 and was down low single-digits on a percentage basis when compared to 2020 pricing. We currently do not expect commercial pricing to change materially in the second half of 2021. As we look to 2022, we believe that our commercial payers have more flexibility in pricing of services and will consider the overall clinical and economic value of Zio XT.

Thus, we are focused on providing the evidence that demonstrates Zio XT's high diagnostic yield, the efficiencies the service brings to their patient populations and the improved clinical and economic outcomes. We have a strong health economics and outcomes resource team that is focused on producing these data. And our recent partnership with the National Association of Managed Care Physicians will add to the robust data that we continually share with commercial payers.

As mentioned previously, however, we do believe that if we are unsuccessful in improving Medicare rates before calendar year 2022, it is prudent to expect that some of our commercial rates may begin to be negatively impacted next year. To close on reimbursement, we have multiple avenues available to potentially achieve higher Medicare reimbursement and we are actively pursuing all of them.

We believe we have the right strategies in place to achieve this, but recognized that it may take some time. We are confident in the value of our technology platform and the clinical and economic benefit that it delivers to patients, physicians and to the health care system. And we are hopeful that the value of the Zio XT platform will ultimately be recognized under the existing Medicare reimbursement system.

Regardless, we will continue to pursue other opportunities to monetize the value of our platform through new indications such as silent AF, new products such as Zio AT and the technology we are developing with fairly geographic expansion as well as other alternative revenue models that will all incrementally reduce our exposure to Medicare fee-for-service over time.

We look forward to sharing more details on each of these efforts as we make progress. I'll now turn the call over to Mark, who will discuss those recent FDA clearances, how they further bolster our competitive positioning and why we are even more excited about the future of our Zio Service. Mark?

[Mark Day, executive]

Thanks, Dan. As Doug noted, in the second quarter, we received FDA clearance for 2 new technology platforms that represent iRhythm's future. The first clearance was for the Zio Monitor, our third-generation biosensor, while the second was for our next-generation of deep learned algorithms. Together, these clearances demonstrate our commitment to leading the category we first created over a decade ago. And I'd like to share more details about each.

I'll start by describing the Zio Monitor, the first product clearance of this new hardware platform. The Zio Monitor is a smaller, thinner and lighter version of the current Zio XT biosensor, a device that more than 3 million patients have relied on to record a comprehensive view of their heart's electrical activity over 2 weeks. While the Zio XT device still provides industry-leading performance, the new Zio Monitor meaningfully improves on it in many important ways. This new form factor is nearly 60% lighter, 25% smaller and 30% thinner and also includes a new breathable and waterproof outer layer, all of which allows our custom adhesive to confidently and comfortably secure to all our patients.

These refinements were designed with our patients in mind and with the understanding that more comfortable whereas improves compliance, which in turn leads to even more complete an accurate diagnostic data. Again, this is a biosensor platform that will become the cornerstone of our service. And we intend to pursue additional product clearances on this platform in future.

Next, I'd like to describe the clearance we received for our second-generation of deep learned ECG detection algorithms, our fourth generation algorithm overall. Since 2018, iRhythm has been a leader in using FDA cleared, deep learned algorithms for classifying and characterizing diverse heart rhythms. With this latest clearance, we're now using AI to detect beats, beat types and heart rates. We have also further enhanced the deep learned rhythm detection capability we previously introduced. This new clearance amounts to a significant improvement in our AI beats detection capabilities, enabled by the greater than 750 million hours of curated heartbeat data in our database, likely the world's largest repository of labeled ECG recordings.

Our new deep learned algorithm was recently deployed. And we're already seeing positive impact to both diagnostic accuracy and the scalability of our service. We see this latest clearance is further differentiating us in the market and is a key step in developing new products and services, fundamentally enabled by our AI expertise. We look forward to sharing more about this in the future.

Finally, I'll quickly touch on the meaningful progress we've been making in our partnership with Verily. As a reminder, the context of this partnership is the understanding that silent atrial fibrillation is a key public health challenge, particularly in the United States. And that detecting this type of asymptomatic atrial fibrillation likely benefits from a long monitoring duration. With that perspective, we're working to build the first offering of a medical grade, long term, continuous and noninvasive solution to detect and characterize atrial fibrillation. The solution we're developing utilizes Verily steady watch platform in combination with our algorithm analytics, clinical back-end and workflow tools.

We're on track to submit to the FDA for 510(k) clearance by the end of this year. When we receive clearance, we'll enter a market evaluation phase to establish the efficacy of the solution through clinical evidence and to explore the optimal business model associated with this potential paradigm shift in monetary. In many ways, we expect this process to be similar to when we first brought Physio service to market a decade ago. That is a thoughtful investment into clinical evidence that lays the foundation to change clinical practice. We look forward to sharing updates as we progress along this journey.

In sum, these 2 new clearances and our ongoing product development efforts represent our commitment to driving innovation to extend our leadership position in the ambulatory monitoring industry. From our start, we have been an innovation-focused company. And we continue to see many opportunities to improve and expand our technology platform while delivering important and valuable benefits to patients, providers and the health care system.

Now I'll turn it back to Doug to cover our second quarter results and the second half outlook. Doug?

[Douglas Devine, executive]

Thanks, Mark. As I noted earlier, total revenue in the second quarter was $81.3 million, reflecting year-over-year growth of 59.8% and a sequential increase of 9.4% over the first quarter. Gross margins were 68%, down 1.6% year-on-year and 0.4% quarter-on-quarter. Adjusted EBITDA defined as EBITDA less stock-based compensation expense was negative $4.6 million, an increase of $4.1 million year-on-year and $0.6 million quarter-on-quarter.

Cash and short-term investments were $255.7 million at quarter-end, down $6.6 million from Q1 '21. Taking a more detailed look at the second quarter financial results. Revenue grew sequentially with quarter-on-quarter growth of 9.4%. Q2 '21 revenue growth was a mix of volume growth, improvements in collections performance with some contracted and noncontracted payers and some favorable pricing adjustments for Zio AT.

Approximately $4.5 million of Q2 '21 revenue was due to improved collections from the prior period revenue and higher adjudicated reimbursement from certain payers and is not expect to reoccur in future periods. Zio XT in the U.S. drove the majority of our volume growth in the second quarter, while Zio AT in the U.S. and Zio XT in the U.K. outpaced overall company growth on a percentage basis.

Zio AT volumes grew significantly quarter-over-quarter, crossing 10% of revenue for the first time. We saw strong Zio AT performance continue into July and anticipate it will be a growth driver for the remainder of the year. New account onboarding decreased slightly compared to the first quarter of 2021, with June onboarding down as we delayed account launches to focus on reducing our clinical backlog.

Looking at new store same-store mix. New store accounted for 25% of year-over-year growth, down from 28% in the first quarter of 2021, primarily due to strong rebound in existing account volumes from the COVID impacted Q2 2020. Home enrollment was approximately 20% in the second quarter of 2021, down slightly from the first quarter of 2021.

Turning our attention to the rest of the P&L. Gross margin for the second quarter was 68%, a 0.4% decrease compared to a gross margin of 68.4% in Q1 of 2021. The decrease was primarily due to higher overtime costs related to previously discussed capacity shortfalls, offset by volume benefits. Q2 '21 gross margin benefited from approximately $4.5 million of revenue not related to Q2 '21 volumes discussed above and would have been approximately 2 percentage points lower on a proforma basis.

Operating expenses for the second quarter of 2021 were $72.3 million, down 7.7% from Q1 of 2021 and up 30.1% year-over-year. The sequential decrease in operating expenses included a $2.5 million decrease in bad debt due to improved collections, a $10.3 million decrease in stock-based compensation offset by an increase in hiring and investments. Both bad debt and stock compensation included onetime adjustments and as such should not be considered representative of cost structure moving forward.

Comparing year-on-year OpEx. Q2 '21 OpEx was up 30.1% due primarily to hiring and legal spending, offset by a decrease in Verily milestone expenses. Quarterly adjusted EBITDA of negative $4.6 million in Q2 2021 was approximately flat to Q1 2021 adjusted EBITDA of negative $5.2 million.

Cash and short-term investments decreased $6.6 million from the first quarter of 2021 to $255.7 million. Purchases of property and equipment of $5.9 million, repayment of long-term debt of $2.9 million and EBITDA loss of negative $4.6 million consumed cash, offset by working capital improvements and proceeds from employee stock purchases.

Cash stabilized as claims submissions began to normalize. Accounts receivable increased by $3.4 million from $60 million in Q1 2021 to $63.4 million in Q2 2021, still significantly elevated above the Q4 2020 balance of $29.9 million.

Accounts receivable is expected to decline in second half 2021 as backlog claims processing becomes fully caught up.

Finally, the net loss for the second quarter of 2021 was negative $17.4 million or a loss of $0.59 per share compared with a net loss of $20.4 million or $0.75 per share for the same period of the prior year. We are currently holding approximately 10% of 2021 year-to-date Zio XT claims, down from approximately 70% as of Q1 2021 quarter-end. We have submitted all Novitas claims, remaining held claims are for a limited number of commercial payers.

As we discussed last quarter, we have initiated a process of evaluating our operating profile to identify opportunities to scale more efficiently, increasing our revenue conversion per unit and reducing our cost to serve. Key strategies include reducing device manufacturing costs through design and automation, reducing clinical scan times through increased AI and workflow improvement, improving revenue cycle management through reduced contractual allowances, cost of claims and bad debt and finally examining various go-to-market options that would reduce sales and marketing costs per unit.

Collectively, we identified opportunities where we believe we can drive double-digit percentage reductions to our cost to serve with reductions fully implemented in the 2023-2024 timeframe. And as a result build a strong, sustainable operating foundation that can profitably support a range of reimbursement levels.

In second half 2021, higher costs associated with capacity limitations will exceed the impact of cost structure reductions. We look forward to sharing more details on our cost improvement initiatives as well as our market expansion opportunities later this year.

Turning to guidance. For the full year 2021, we expect revenue to range from $320 million to $325 million, representing year-over-year growth of 21% to 23%. Revenue guidance for the year does not assume any changes to Medicare reimbursement. And as previously mentioned, discussions with Novitas and the other MACs are remain ongoing. We expect revenue in the third quarter 2021 to grow sequentially over the second quarter by approximately 3%. Registration volumes in the quarter are expected to be approximately sequentially flat with revenue volume growth coming from reducing the clinical backlog of Zio reports offset by non volume-related revenue drivers in Q2 2021, not reoccurring in Q3 2021.

For the fourth quarter of 2021, we expect revenue to be approximately flat as compared to Q3 2021, with growth in registration volumes offset by clinical backlog reductions in Q not reoccurring in Q4. Gross margin in the third quarter of 2021 is expected to decline approximately 3% compared to Q2 2021 due to the non volume-related revenue drivers in Q2, not recurring in Q3 and higher costs associated with capacity limitations. OpEx is expected to increase by approximately $13 million in Q3 2021 as compared to Q2 2021 due to bad debt and stock compensation not benefiting from the factors that impacted Q2 2021, growth in hiring and investment, growth in stock compensation due to hiring and retention and increases in legal spending.

Additionally, the next Verily milestone is forecasted to be achieved in the second half of 2021. If the milestone is reached in Q3 '21, this will add $3 million to Q3 2021 OpEx. Additionally, we will continue to pay down debt for our amortization schedule and we'll continue to build out our new manufacturing facility in the second half of 2021. As you've heard, work is underway. We believe this quarter's results demonstrate the progress we are making. I would also note that the CEO search is actively underway with healthy interest. We look forward to providing additional updates as appropriate. The iRhythm team remains focused on and excited about the opportunities we have and I have the greatest confidence in our future.

And with that, we would like to open up the call for questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Robbie Marcus from JPMorgan.

[Sarin Murlidar, analyst]

You’ve got Sarin on for Robbie here. Just to start-up a question on the reimbursement you mentioned. In an unfortunate scenario where Medicare rates don't moved this year. What -- can you quantify or kind of size impact that we would see on commercial rates heading into next year?

[Douglas Devine, executive]

Yes. We would -- this is Doug. I mean we would be speculating. As we have said before, if we don't have any further -- any favorable movement between the MACs and Medicare as we head into the negotiations for 2022 contracts that, I mean that certainly puts risk into there. At the same time, we have -- we're in frequent communication with the commercial payers. We are -- we have a good story on the clinical benefits and the economic benefits that our product provides. And so we are working to minimize any impacts there. But at the same time, it would be too much speculation to put a range on what type of impact we could potentially see.

[Sarin Murlidar, analyst]

I got it. And on the guidance that you gave was helpful, useful commentary there. In terms of what the mix is looking like from new center versus existing center growth, you gave some commentary on the quarter. Any commentary you have for even what the outlook looks like for the back half of this year?

[Douglas Devine, executive]

Well, I think what you're seeing -- we saw the lowest number coming from new store this quarter. But I attribute that to being that the existing stores were all very depressed in Q2 2020. That being the -- I mean the deepest quarter of impact in COVID. And you still are seeing some very real COVID impacts in Q3 of 2020. And so just the fact that those existing stores are rebounding significantly is going to make the component of growth that's coming from new store lower. But we've been very happy overall with our new store account openings. And so we're very confident that we continue to make the progress we want to make in new store account openings -- new store openings.

[Operator]

Your next question comes from Malgorzata Kaczor from William Blair.

[Brandon Vazquez, analyst]

This is Brandon on for Malgorzata. We're still kind of punching in the numbers here obviously in our model. But it feels like in the beginning of this year or at least year-to-date so far that the ECG market and patch-based ECG specifically is accelerating, especially, given the guidance that you gave. So just curious, what -- if you guys could talk about what you're seeing in the field, it seems like the adoption of patch-based ECGs is moving along nicely, perhaps even faster than in the past. Is that a fair characterization? And if so, what kind of drivers are making that happen out in the field?

[Douglas Devine, executive]

Well, I think -- I think the biggest thing that I would say is that our new account openings and the interest in new accounts and signing on to our product remains very high, remains high by historical levels and we continue to work through that. I mean we would say, this is the clinical efficacy of our product and the economic benefits that our product provides. So I think it's just a continuation of the trends we've been seeing. As we mentioned in the call, we did see in March, April and May in particular, we saw very significant strength in the existing accounts increasing volumes. And we do interpret that to be that is -- as COVID continues to impact people's behaviors that that was a low point in caseloads. And that there was some acceleration of patients coming back to see the doctors in that time period.

[Brandon Vazquez, analyst]

Okay. That's helpful. And it's maybe looking in a longer-term and maybe towards TAM expansion. I think it's been something like 10 months now since we saw the presentation of MSTOPS, which was all around pretty overwhelmingly positive data. I can appreciate that maybe we'll wait to get more definitive updates on TAM expansion. But any updates that you could provide in terms of what's been going on behind the scenes engaging with payers? I think Edna was the one specifically that MSTOPS was run with anything that they saw intriguing there that maybe leaves you any more or less encouraged for that TAM expansion opportunity?

[Douglas Devine, executive]

Let me -- let Dan take that question.

[Daniel Wilson, executive]

Yes. Thanks, Brandon for the question. I would say, in the early days of our market development and selling targeted detection programs, we believe the value proposition is resonating with payers and integrated payer providers. So we're very excited about the progress we've made in the last 6 months or maybe the 10 months since MSTOPS in our early go-to-market strategy. We have a great team behind this effort and are pushing it forward. We're certainly looking to build this out even more fully. And there's aspects of the service or capabilities that we're adding here to still leveraging our core Zio XT platform but building around that. And we look forward to sharing more details as we make progress there.

[Operator]

Your next question comes from Cecilia Furlong from Morgan Stanley.

[Fang Chu, analyst]

This is Calvin on for Cecilia. Just one on reimbursement and one on data. The first one is just understanding you believe next July when Pro tool comes out, that would be the more major catalyst versus this November- December. My understanding though was the lack of update in July didn't necessarily preclude I guess a development in the final rule. So I'm just curious, have you seen to-date any public comments of significance either from societies like ACC, HRS or other participants? I think last year during the commentary, we saw comments from either societies but also from some of your competitors as well. So just curious anything to-date worth calling out or expect to see perhaps that could make a real impact into the final rule?

[Daniel Wilson, executive]

Yes, Calvin. It's Dan, I can address that. So I would say as it relates to the proposed rule, we were encouraged and do view the proposed rule this year as positive progress. CMS continues to seek information and is looking for ways to appropriately price the service. It is clear there are challenges in how best to price vertically integrated AI-based business models like our own. But CMS is actively seeking ways to sum for this, both specifically with our own code as well as seeking comments from stakeholders around AI-based services.

So we intend to use the open comment period between now and mid-September to provide our perspectives and also work with other industry stakeholders to provide comments that we hope are helpful to CMS. So we will continue to seek national pricing for calendar year 2022 and that remains a possibility, which is encouraging. But we do believe the more likely outcome as we said in our prepared remarks that we will remain contractor pricing for 2022 and reenter the cycle next year.

[Fang Chu, analyst]

Understood. And just one quick one on MSTOPS. I think we were expecting to see some cost effectiveness data, either in midyear this year or in the back half. Just wanted to check in on that. Are we still expecting to see that in the near term? And can you maybe just comment on the confidence and how good the data sense is going to be?

[Daniel Wilson, executive]

Yes, sure. This is Dan. I'll take that one again. So for -- on MSTOPS, the data that was released today and it's last year. We believe the publication around the clinical outcomes data is coming shortly. I don't have any specific timing or details to point you to, but do believe that's in the near-term. For the economic data piece, that remains in the works, but delayed a bit from our original thinking that it would be mid this year. I don't have updated timing to give you today, but other than to say that remains in the works. But I would also say that we do believe that having this data and the economic data in particular, care reviewed and published will be a big boost to our efforts. But we also have our own economic models and can work with payers and integrated payer providers to review their data, their specific data and have a discussion around the economic benefits of a targeted detection program. And that is an element of our go-to-market strategy today within that.

[Operator]

Your next question comes from Bill Plovanic from Canaccord.

[William Plovanic, analyst]

So just -- I'm going to focus on the model. I mean you guys are really having success in driving revenue. And I'm kind of curious, if you broke that up, you've seen this big increase in the Zio AT business, which I would believe has a pretty significant price premium. So what does the underlying unit growth look like just in patients year-over-year? I don't know if you shared that and I apologize if you did.

[Douglas Devine, executive]

Yes, we haven't shared that specific number. We've given you the impact on how to adjust for the quarter of our volume that is Medicare pricing. So I'll let you give that, 25% Medicare pricing, price went from 3.11 gross to 1.15 gross, and that will get you in the ballpark of how to translate this -- the magnitude of the revenue growth into -- closer to a volume growth. And then, and obviously, Zio AT has grown significantly. And you are correct that Zio AT particularly with the decline in Zio XT pricing, it's more than 2x the Zio XT price at this point.

[William Plovanic, analyst]

Okay. And forgive me if you answered this question. But the uptake at the AT, I mean, are you seeing some of the physicians transfer over to that product just because of the pricing on the XT?

[Douglas Devine, executive]

No. I wouldn't say we have any indication that -- I think the physicians doesn't directly impact them what the Medicare reimbursement level is. When I look at AT, I would point to a couple of factors. I mean first, we're extremely happy with the level of volume growth and the increased adoption that we're seeing on Zio AT. And we definitely highlight that compared to -- we're still well below 10% penetrated in the MCT market as compared to where we are at a higher penetration rate with Zio XT. So there's quite a bit of room for Zio AT to continue to grow at a good clip. But I would say, our sales force is getting steadily -- longer, we have the product and feel. Our sales force is getting better and more efficient at selling the product. We've had a very good clip of setting up of selling and setting up new accounts. I mean primarily accounts that currently do Zio XT. But there is a significantly greater amount of that AT growth is coming from the new store volumes as opposed to on the XT side.

[Operator]

Your next question comes from David Rescott from Truist.

[Samuel Brodovsky, analyst]

It's Sam on for David. Just the first one, going to reimbursement again. With MACs pricing in 2022, how do we think about the potential change we can see there? Is it possible that MACs could increase payment at a significant rate or are we more likely to see more of a smaller sequential step up?

[Daniel Wilson, executive]

Yes. Sam, it's Dan. I can take that one and Doug can add his things he sees. So I would make a couple of comments. Obviously, we're going to stop short of providing guidance on what a potential outcomes, what the potential outcome is. But we'll reiterate a couple of points. One, we remain very encouraged by the willingness of Novitas and the other MACs to explore an alternative pricing model, which, again, we believe is a better representation of the true cost of delivering the service.

And as mentioned previously, the reason at the better representation of the true cost of delivering the services. It includes historical R&D cost as an example. And remember that the challenge we are facing is that we are a vertically integrated service provider. And there are no commercial invoices that CMS can point to and say that this is a commercially validated price of the supply or equipment that is used in this service, such as our wearable biosensor and software tools. If there were, one could argue that the historical cost to develop the hardware-software and the cost to produce the cost to sell and market the product as well as the overhead would all be captured in that commercial price of the hardware software. So we believe this alternative model solves for a lot of those challenges. And Novitas and the other MACs will not providing any commitments or willing to review the data. So we're optimistic that this is a viable strategy to more appropriate pricing. Obviously, with caveat, we cannot provide any assurances that Novitas or the other MACs will ultimately update pricing based on this information nor the timing. But our focus is on presenting them this information and continuing the discussions with them. And again, we remain encouraged that they remain at the table with us to discuss.

[Samuel Brodovsky, analyst]

Great. That's helpful. And I'll just ask one more on reimbursement and provide what I would add. But if we think about -- is there maybe a level on macro reimbursement, say, maybe like a $200 or $250 reimbursement for MACs where you feel like commercial payers may be less likely to shift their rates significantly going forward? And just any color you can provide about that differential would be really helpful.

[Douglas Devine, executive]

Yes. So this is Doug. I mean obviously, the higher the level of MAC pricing is the less impact we would expect there to be or less risk we would expect there to be to commercial payers. But I think we need to be careful to not to speculate here. And then, I mean, the other thing I would say is that while we're still in carrier pricing, I mean, the commercial players are very aware that this is a process that's still underway on the Medicare side. So I do think that national -- when we achieve national pricing, that is likely to be more impactful and more taken into a stronger account by the commercial payers than a MAC price, which is going to be seen as an intermediate step in a longer process. And that is very much what we have been seeing with the -- with this year's MAC pricing development. So I -- like I said, I would give you the guidance that MAC pricing changes to MAC pricing is going to be less influential to the commercial payers than the CMS national pricing would be.

[Operator]

Your next question comes from Suraj Kalia from Oppenheimer & Co.

[Suraj Kalia, analyst]

So forgive me if you mentioned this already, just jumping in between calls. What was the contractual allowance in the quarter? And I'll just throw my other question also. And then, you mentioned about gross margins seemed lower. I think catch the reason for that. And if you could also just expand on your comment about revenue cycle management improvement, how would that -- just kind of put some additional color on that to help us understand how OpEx could be reduced, margins should be improved, any color would be greatly appreciated.

[Douglas Devine, executive]

No problem. So first, contractual allowances is how we account for the difference between the contractual price that we signed with the commercial payers and the amount that they -- that the commercial payer actually pays us. And so during the quarter, we actually had very good performance of improving the collections that on past contractual allowances with a number of both -- with a number of commercial payers, which resulted in us taking some onetime favorable adjustments to revenue.

But anyway, that is what the contractual allowances is. And it's really the difference between -- when we close each quarter, we have an expected level of what those contractual allowances, i.e., what the contract -- what the level of holdbacks that the commercial payers are going to be going to pay us. And then, there's always a true-up that if we've collected more or potentially less. But in this case, it was significantly more than was expected over those historical periods and that result in a favorable adjustment. So when you look at revenue cycle, there's 3 components to revenue cycle. One component is exactly what we are saying, those contractual allowances. And when we improve contractual allowances, that's going to result in top-line growth. And then, the other 2 components of revenue cycle are bad debt, which in this case is nonpayment by the patients. And in the commercial market, we treat bad debt on the patient side as an OpEx charge, an SG&A charge. And then, the other component is the actual cost of processing the claim that we have some third-party assistance, and then we have an internal team that is processing the claims. And so the opportunity here is to reduce that claims, reduce those costs with the largest impact of that being -- and we don't disclose the specific numbers. But when we file initial claims, X percentage of those claims will be denied. And then, we have a claims team that will go in and work those denials and X percentage will be reduced to Y percentage. And so you can see that if we can reduce that initial denial rate by pick your number, 25%, 40%, then, that's going to result in first better claim -- better collections performance. But second, most of my cost in the revenue cycle are based on working those denied claims. And so if I have 25% or 40% less denials upfront, then, that's going to cost me significantly less on a per claim basis to work denials.

[Suraj Kalia, analyst]

And just forgive me, the contractual allowance was 10% before this quarter. Did it go up, remain the same?

[Douglas Devine, executive]

We haven't disclosed the exact percentage of contractual allowances in the commercial market, it has historically been in the low teens.

[Operator]

There's no further question at this time, you may continue.

[Douglas Devine, executive]

Okay. I would like to thank everyone for joining. We're very happy with the quarter we've had and look forward to sharing more information as we go forward. Thank you.

[Operator]

This concludes today's conference call. Thank you all for joining. You may now disconnect.