Oncology Live®
August 2014
Volume 15
Issue 8

When Science Outpaces Payers: Molecular Diagnostics Pose Reimbursement Dilemmas


As precision medicine continues to evolve in cancer care, the development of highly sophisticated tests that leverage the explosion of knowledge about the molecular and protein characteristics of an individual patient's tumor has emerged as its own scientific frontier.

Mark Capone

As precision medicine continues to evolve in cancer care, the development of highly sophisticated tests that leverage the explosion of knowledge about the molecular and protein characteristics of an individual patient’s tumor has emerged as its own scientific frontier. Scientists and companies pushing these edges say when personalized therapy succeeds, it’s worth every dollar spent, not only in lives saved but also in costs avoided—on expensive chemotherapies that would not have worked, or hospital costs from avoidable adverse events, or both.1

“Personalized medicine can change the trajectory costs in our healthcare system,” said Mark Capone, president of Myriad Genetic Laboratories. Based on his meetings with payers, he believes they are seeing the value.

But not everyone agrees. Many see the industry at a crossroads, with reimbursement issues at the center. The future of molecular diagnostics is both entwined in the broader discussion of paying America’s healthcare tab and constitutes its own separate beast, for reimbursement issues present a steep scientific and regulatory challenge. Most of the experts who spoke with Evidence-Based Oncology predicted an industry shakeout would occur, with some promising small companies joining large ones while others will disappear.

Right now, the divide looks like this: Payers have seen a new cost category explode across their balance sheets, and they are determined to understand what they are funding and whether tests are necessary. Molecular diagnostic companies, meanwhile, say they can’t understand what they call a penny-wise, pound-foolish approach. Why, they say, should insurers pay ever-rising sums for cancer therapies, with prices measured in tens and hundreds of thousands of dollars, but balk at a $3000 test2 that would tell doctors whether the drug is likely to work?

“We overtreat people continuously in this country,” said Macey Johnson, vice president of managed care and reimbursement at bioTheranostics, based in San Diego, California. “It’s overkill to give people all these drugs, with oncology being the poster child.”

As both regulators and testing companies implement a new reimbursement law, many stakeholders see opportunities for change. “It brings the industry into the bright light,” said Mike Barlow, vice president of operations at Palmetto GBA of South Carolina, the Medicare contractor that developed the MolDx program to create billing expertise around an emerging industry. “Too often, the lab industry has been operating as an afterthought.” What’s harder to gauge is how much the recent reimbursement woes are driving the science— either by slowing new discoveries or directing research toward tests for which payment is perceived to be easier. Some say there’s no doubt that venture capitalists who make decisions on whether to invest in molecular diagnostic companies find the current landscape unsettling.

There’s a direct connection between science and the funding that pays for it, said Rina Wolf, vice president of commercialization strategies, consulting, and industry affairs at XIFIN, a California- based firm that provides research, technical, and health economics support for the molecular diagnostics industry. Today’s uncertainty can make venture capitalists nervous, Wolf said, especially as the bar for reimbursement gets higher. “You can have a company that has a tremendous protocol from a scientific standpoint, but if they can’t raise the money to validate it, especially the clinical utility piece, it’s not going to go anywhere.” Most of the focus on reimbursement for molecular diagnostic testing has been on the Centers for Medicare & Medicaid Services (CMS), for obvious reasons: First, most commercial payers use CMS payment schedules as a benchmark3; second, many new, sophisticated tests involve cancer diagnoses, and cancer increasingly strikes individuals over the age of 55 years.4

The recent adoption of a federal law aims to put molecular diagnostics on a path to certainty.5 However, unhappiness over current CMS reimbursement policy prompted a lawsuit to be filed on April 16, 2014.6 The California Clinical Laboratory Association, on behalf of some members and an unnamed Medicare beneficiary, sued the US Department of Health and Human Services in federal court in the District of Columbia, asserting that today’s interim billing practices place too much control in the hands of regional Medicare contractors. As a result, the suit alleges, contractors are using pricing policy gaps to make decisions about whether a test should be covered at all, which unfairly denies patients access.6

A Scientific and Regulatory Stew

As with any fledgling industry, one challenge has been defining it: There are different types of tests with different levels of oversight. The FDA has jurisdiction over some tests but not others. The FDA may give “clearance” to a companion diagnostic developed alongside a specific drug.

Laboratory-developed tests (LDTs), are not FDA-regulated but must meet standards of the Clinical Laboratory Improvement Amendments (CLIA) before their results can be considered valid.7

The pace of science, however, may mean that a companion diagnostic with the FDA’s blessing may be superseded by an LDT test if the approved therapy is found to have wider applicability. Now, the FDA is seeking to exercise greater oversight over LDTs.

In a notification sent to Congress in July, the agency said more oversight is necessary to protect patient safety in a changing era in which tests can be manufactured with components not legally marketed for clinical use, used to direct critical treatment decisions, and involve highly complex devices and algorithms. The FDA plans to craft a “risk-based approach” that would link the level of oversight for a given test or assay with the risk patients might face from its usage.

The proposal has generated controversy.

More than 20 laboratory directors from academic centers complained in a letter to the Office of Management and Budget that greater regulation would, among other things, duplicate oversight and stifle innovation. By contrast, the American Association for Cancer Research applauded the agency’s action.

No timetable for a final decision has been announced.

Meanwhile, billing for multianalyte algorithmic tests that determine risk factors, which are based on algorithms that are often proprietary, also has been controversial. Some within CMS believe that Medicare should only cover elements that detect the presence of something in the body, not a calculation.3

Molecular diagnostic testing presents two distinct regulatory challenges for CMS. First, it is never easy when scientific advances this important happen this quickly, so quickly that they threaten to outpace the expertise within the agency that must fund them.

Second, and perhaps more critically, long-term regulatory rhythms and lab fee schedules were never designed for such complicated tests, so CMS must now build a brand new framework for this industry, propelled by a provision tucked into the recent “patch” of the Sustainable Growth Rate (SGR).

Even when change is positive, any time a regulatory agency does something for the first time, there’s uncertainty during the transition from the old way of doing things to the new one. The fact that all this is occurring alongside the high-profile rollout of the Affordable Care Act (ACA) only complicates matters.

Big Splashes and Growing Pains

Molecular diagnostic testing is still a comparatively young discipline. The Association for Molecular Pathology (AMP) formed in 1995;8 AMP cofounded The Journal of Molecular Diagnostics in 1999.9

Commercialization took hold over the next decade, with companies like Myriad Genetics and Genomic Health becoming well known, particularly in the field of breast cancer. By the time AMP and co-plaintiffs secured their June 13, 2013, US Supreme Court victory over Myriad on the question of whether the company could patent a gene, Myriad’s footprint in BRCA1 and BRCA2 testing was firmly established.10

Genomic Health, meanwhile, made successive splashes at the 2003 and 2004 June meetings of the American Society of Clinical Oncology (ASCO) with its Oncotype Dx test, which predicts both chemotherapy response and potential for recurrence in breast cancer. (Genomic Health’s 2004 results were featured at ASCO’s “Best of Oncology” session.)11

For tests to gain widespread use, companies had to bill insurers and CMS. During the next decade, the industry crafted its fees around a billing system designed for less sophisticated clinical laboratory tests. What emerged was a process called stacking, in which each step in the chain had its own code.3 In a May 2013 presentation in New Orleans, Michael Longacre, reimbursement director for corporate/shared services, Becton Dickinson, offered an example in which a single test had six different codes.12 What was worse, according to a UnitedHealthcare report, was that the same five or six steps could describe vastly different tests. A bill for a genetic test for Canavan disease might look just like a test for Tay-Sachs, leaving payers unable to tell what they were funding, much less whether it was medically necessary.3

As molecular diagnostic testing became more common, payers winced at rising costs in a category that did not even exist a few years prior, coupled with their inability to fully track spending. Many advocates for molecular diagnostics also concede that code stacking was not sustainable.

Faced with the prospect of exponential growth in the molecular diagnostics field (Figure), payers have begun to push back. As reported in Evidence-Based Oncology, payers started shifting in 2011 from seeking proof of clinical validity to asking for evidence of clinical utility—ie, studies that show a given test directly guides or alters physician behavior. As Beth Davis, senior director of health policy and reimbursement for MDx Health, told Evidence-Based Oncology at the time, “showing how doctors use a test in real-world settings can be difficult if payers will not cover it, because that has the practical effect of making it unavailable to most patients.”13

Figure. Illustrative Growth Scenarios for Molecular Diagnositc and Genetic Testing Spending, 2010-2021

Source: UnitedHealth Center for Health Reform & Modernization, 2012.

By 2012, multiple efforts were afoot to address payment in molecular diagnostic testing. The rise of the clinical utility standard led the Baltimore- based Center for Medical Technology Policy (CMTP) to develop an Effectiveness Guidance Document, or EGD. This multistakeholder effort, supported by leaders in the pharmaceutical and diagnostic testing industries as well as by payers, represented an effort to develop criteria for evaluating tests in personalized medicine.13

The bigger battle, however, involved getting rid of stacking. Commercial payers and CMS were both determined to get their arms around a market that CMS’ chief medical officer called a “tsunami,” which by 2010 had grown to $6.2 billion and was increasing by 15% to 20% a year.12 Starting in 2009, the American Medical Association (AMA) Current Procedural Technology (CPT) editorial panel worked to collapse all the stacked codes into 127 new CPT codes. After a year of talks, CMS elected to adopt the new codes effective January 1, 2013.3,12,14 There was just one problem, however. The AMA cannot set prices; only CMS does that. And CMS punted.

The Year of Living Dangerously

There was hope that CMS would adopt the streamlined codes with existing prices, but that didn’t happen. Instead, in late 2012, CMS set off a year of uncertainty by letting its regional billing contractors set their own prices, a process known as gap-fill.15 The expressed mission was to collect pricing data that would lead to new maximums, or National Limitation Amounts, by January 1, 2014.3

However, the old stacking system meant most contractors were in the dark about what they had been paying for, and chaos ensued. Many molecular diagnostic companies spent the early months of 2013 not being paid at all. For some, payment did not start until after Forbes contributor Scott Gottlieb, MD, wrote a March 27, 2013, column on the topic, stating, “This sort of bungling may be without precedent, even for the Medicare agency.”16

Having developed MolDx, Palmetto GBA of South Carolina emerged as a potential solution for the nation. The MolDx program has unique identifiers to differentiate between various types of tests, such as the difference between FDA-approved tests and LDTs. Some hoped that Palmetto GBA would fill the void for all, while others vehemently opposed this idea. As with all things in molecular diagnostics, opinions differ widely based on individual interests and experience, and that’s been one of the challenges in resolving the payment quagmire.

Of the vast clinical laboratory industry, sophisticated molecular diagnostic tests make up a small part, and they are a smaller part still of what Medicare covers. Getting Congress’ involvement is difficult when the industry itself is split on what solutions should look like. Wolf said the message from Congress has been, “‘When you come to some consensus amongst yourselves, come talk to us.’ Different stakeholders have different agendas.”

Lobbying ensued throughout 2013 to address molecular diagnostic payment issues while CMS worked on the Medicare fee schedule, and, of course, the disastrous launch of the ACA website, In December 2013 came another surprise: plans to revamp the entire Clinical Laboratory Fee Schedule (CLFS), with an eye toward annual summer updates based on technological advances. The tumultuous year ended with as much uncertainty as it began.

Toward a Long-Term Solution

What’s happening in molecular diagnostic reimbursement is happening alongside the broader movement in healthcare reform. The quest is on to get payers, and CMS in particular, away from a feefor- service model that rewards ordering procedures and toward a system that pays for services that help patients. Molecular diagnostic testing companies insist they will have a good story to tell—that they will prove their value in reducing waste and improving safety and cancer survival rates. Getting from here to there will be the hard part.

Of course, molecular diagnostic testing companies are just one part of cancer care and a sliver of the healthcare system. This spring, their cause was tucked into a louder drama over the effort to scrap the SGR in favor of value-based reimbursement. On April 1, 2014, Congress enacted a final fix, or “patch,” to forestall drastic cuts to Medicare payments, which would have covered shortfalls in forecasting. The patch came with a provision, “Improving Medicare Policies for Clinical Diagnostic Laboratory Tests,” which stabilizes prices and gives everyone a time-out to develop a long-term payment structure. The law calls for a transition to “market-based” pricing, which some have called “value-based.”

Come January 1, 2015, the law will strip CMS of its authority to apply annual CLFS changes based on “technological changes,” as announced in December. But, the law comes with price tags, in the form of significant reporting requirements—and fines of up to $10,000 a day for failure to comply.5 From afar, the law appears to provide more time, along with outside expertise and oversight, to the process CMS attempted in 2013. Key deadlines include:

  • An expert advisory panel must be in place by July 1, 2015
  • Labs must start reporting payer rates by January 1, 2016
  • CMS must start filling in codes for certain existing tests now paid under miscellaneous codes by January 1, 2016
  • A market-based system for advanced diagnostics will be effective January 1, 2017.5

Overall, molecular diagnostic companies are cautious, but optimistic. A typical response came from Genomic Health:

“We are encouraged to see value-based pricing included in the SGR Patch legislation that passed in March, with a new reimbursement methodology designed to align private managed care and public Medicare rates. We believe this will provide transparency and predictability to the reimbursement process under the Medicare program for diagnostic tests like ours,” said Emily Faucette, vice president of corporate communications and investor relations at Genomic Health.

Myriad’s Capone said attracting investment requires certainty in what he called “the three Rs” of the field—reimbursement, regulation, and “rights to intellectual property,” which covers whether a company’s discoveries can be patented and refers to interpretations from multiple Supreme Court rulings. While Capone believes these interpretations are a step in “the wrong direction,” on the intellectual property front, he is more optimistic about progress on the first two Rs in light of the new law. “As always, the devil is in the details, but we’re very confident this legislation is good for the industry,” Capone said. A movement toward market- based pricing will take ambiguity out of reimbursement. But that doesn’t mean the process will be easy. Some industry sources said they would be watching who makes up the advisory panel.

Others said recent turnover at CMS, coupled with the agency’s duties to implement healthcare reform, might make it hard to retain focus. And that’s on top of a fundamental question: Just what is “market-based” pricing? Said Palmetto GBA’s Barlow, “This is not a service that is truly market driven. To say that you are developing market-based pricing is going to require significant effort to determine, ‘What is the market?’”

Apart from implementing payment, the process may yield discussion on what gets covered in the first place, and what levels of evidence should be required. This is where the industry may see great divergence, with more established companies taking advantage of their ability to raise capital for studies. Barlow indicated that scientific bar would remain high, not go lower. “The days of ‘do more, get more’ have to come to an end,” Barlow said. “The utilization of services has to be based on need for the services. It has to be good for the patient.”

How Much Regulation? Different Views

All the uncertainty has raised the question: Would FDA regulation of more of the market, cumbersome as that might be, bring more certainty of scientific acceptance and prompt payment?

The FDA has had its eye on the industry for some time, and issued a report in October 2013, “Paving the Way for Personalized Medicine: FDA’s Role in a New Era of Medical Product Development,”17 outlining its potential role in nurturing molecular diagnostics. In fact, industry experts like Bruce Quinn, MD, PhD, of FoleyHoag LLP, have highlighted the contrast between the FDA’s view of the role of molecular diagnostics compared with CMS’ stands. In a February presentation in San Diego, California,18 Quinn pointed to the FDA’s 60-page report, which was being prepared while CMS was issuing five new proposals to cut prices for molecular diagnostics.

But overall, as far apart as they are on other issues, industry sources who spoke with Evidence-Based Oncology and Palmetto GBA’s Barlow said those who look to the FDA should be careful what they wish for. “Be careful of the devil you dance with,” said Barlow, who said the molecular diagnostics industry would be wise to create its own standards for areas with regulatory gaps. “You cannot operate without oversight. The healthcare industry needs some sort of structure for how these tests come to market,” he said.

Myriad’s Capone said his company is prepared for more FDA oversight if it comes. “We generate the same level of evidence, regardless of whether the FDA would regulate the test or not,” he said. Companies that are not currently funding research at that level would see higher costs if the FDA had to approve every test, he said. Overall, however, Capone is optimistic about where molecular diagnostic testing is headed.

“We are truly at the very beginning of the journey,” he said. “I do think we will be able to bring innovations to the market much faster, but ultimately the potential is extraordinary."


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