UPDATE 3-Cyberonics shares tumble on reimbursement concerns

(Adds company comment)

BOSTON, Aug 28 (Reuters) - Shares of medical device maker Cyberonics Inc (CYBX.O) tumbled as much as 20 percent on Thursday amid concern that reimbursement for its brain stimulation treatment for epilepsy will be cut.

Analysts said the Centers for Medicare and Medicaid Services (CMS) held an advisory panel meeting on Wednesday on outpatient hospital rule payment policy. The session included a discussion of a proposed 52 percent cut for the insertion or replacement of leads for the company's vagus nerve stimulation (VNS) treatment.

According to analysts at Stanford Group, CMS said the reimbursement reduction would correct inaccurate billing practices, including hospitals incorrectly charging for pulse generators in the same code for lead changes.

Stanford analysts said a physician from Johns Hopkins said at the meeting that, if the proposed cut becomes final, he would no longer insert the VNS therapy in patients.

"Statements from physicians at the meeting lead us to believe the cut will have dramatic effects on insertion of the actual neurostimulator device," the analysts said.

The analysts believe it is likely there will be a significant cut in reimbursement and the new reimbursement policy will go into effect Jan. 1, 2009.

Cyberonics Chief Financial Officer Greg Browne said: "We presented at the advisory panel and the panel agreed with our recommendation that CMS take another look at the proposed reimbursement rate."

"We were pleased with it," said Browne, adding that written submissions to CMS were due next week with a final reimbursement rate decision expected on Nov. 1.

The VNS system is a stopwatch-sized device that is implanted in the chest with leads that stimulate a nerve in the neck leading to the brain. Treatment of epilepsy patients to control seizures has been its primary use.

U.S. health regulators approved the VNS system for severe, treatment-resistant depression in 2005. But efforts to gain all-important acceptance from Medicare for reimbursement as a depression treatment failed, curtailing what could have been a major expansion into a much larger patient population than epilepsy.

Cyberonics shares closed down $4.65, or 18.5 percent, at $20.45 on Nasdaq after dropping as low as $19.96 earlier. (Reporting by Toni Clarke, additional reporting by Bill Berkrot in New York; editing by Jeffrey Benkoe/Andre Grenon/Braden Reddall)