When Science Outpaces Payers: Reimbursement in Molecular Diagnostics

For several years, the future of cancer care has revolved around “personalized medicine.” This process leverages all that can be learned about a patient’s tumor from genetic or protein characteristics, and treats the cancer with a therapy or cocktail that matches the tumor’s profile, based on clinical trials.

The development of highly sophisticated tests, which pair cancers with custom treatments, has become its own scientific frontier. Scientists and companies pushing these edges say when targeted therapy succeeds, it’s worth every dollar spent, not only in lives saved but in costs avoided—on expensive chemotherapies that would not have worked, or hospital costs from avoidable side effects, 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 its own separate beast, for reimbursement issues present a steep scientific and regulatory challenge. Almost everyone who spoke with Evidence-Based Oncology predicted an industry shakeout would occur. Some promising small companies will join large ones, while others will disappear. (An example: Myriad Genetics’ acquisition of Crescendo Bioscience, and its rheumatoid arthritis test, for $270 million.²)

Right now, the divide looks like this: payers have seen a new cost category explode across their balance sheets; 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 drugs, with prices measured in tens and hundreds of thousands of dollars, but balk at a $3000 test³ that would tell doctors whether the drug will 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 CMS, for obvious reasons: first, most commercial payers use CMS payment schedules as a benchmark⁴;

second, many new, sophisticated tests involve cancer diagnoses, and cancer increasingly strikes Medicare eligible seniors.⁵

The recent adoption of a federal law aims to put molecular diagnostics on a path to certainty.⁶ However, unhappiness over current CMS reimbursement policy prompted a lawsuit filed April 16, 2014.⁷ The California Clinical Laboratory Association, on behalf of some members and an unnamed Medicare beneficiary, sued HHS 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.⁷

A Scientific and Regulatory Stew

As with any maturing 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. FDA may give “clearance” to a companion diagnostic developed alongside a specific drug. Laboratory-developed tests, or LDTs, are not FDA-regulated but must be standards of the Clinical Laboratory Improvement Amendments (CLIA) before their results can be considered valid.⁸ The pace of science, however, may mean that a companion diagnostic with FDA’s blessing

may be superseded by an LDT test if the approved therapy is found to have wider applicability. Wolf and others point to the example of a companion diagnostic for a BRAF mutation that Roche developed in tandem with vemurafenib for the treatment of late-stage skin cancer.⁹ “When Roche went through FDA, there was only 1 known mutation,” for which the drug was indicated, Wolf said. “Now there are 3.”

Then there is the emerging area of multi-analyte algorithmic tests, which determine risk factors based on algorithms that are often proprietary. Billing for these tests 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.⁴

Molecular diagnostic testing presents 2 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 the provision tucked into the recent “patch” of the Sustainable Growth Rate (SGR).⁶ Even when change is good, 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 1995¹⁰; AMP cofounded the Journal of Molecular Diagnostics in 1999.¹¹ 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 secured its 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.¹²

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.)¹³

For tests to gain widespread use, companies had to bill insurers and CMS. During the next decade, the industry grafted 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.⁴ In a May 2013 presentation in New Orleans, Michael Longacre, reimbursement director for corporate/shared services, Becton Dickenson, offered an example in which a single test had 6 different codes.¹⁴

What was worse, according to a UnitedHealthcare report, was that the same 5 or 6 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.⁴

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. Payers began to push back. As reported in Evidence-Based Oncology, on the scientific

front, around 2011 payers shifted from seeking proof of clinical validity to asking for evidence of clinical utility, or 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.”¹⁵

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 multi-stakeholder 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.¹⁵

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.¹⁴

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.^4,14,16 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.”¹⁷ The expressed mission was to collect pricing data that would lead to new maximums, or National Limitation Amounts, by January 1, 2014.⁴ Trouble was, the old “stacking” system meant most contractors were in the dark about what they had been paying for a complete test, 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’ 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.”¹⁸

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 gets paid by Medicare. 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,

www.HealthCare.gov. 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 fee-for-service model that rewards lots of procedures and instead pay for things that help patients. Molecular diagnostic testing companies insist they will have a good story to tell—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 1 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 timeout 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.⁶

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, 2017.⁶

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 will be watching who makes up the advisory panel. Others said recent turnover at CMS, coupled with the agency’s duties to implement healthcare reform, may 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 bars will 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,”¹⁹ outlining its potential role in nurturing molecular

diagnostics. In fact, industry experts like Bruce Quinn, MD, PhD, of Foley Hoag LLP, have highlighted the contrast between the FDA’s view of the role of molecular diagnostics compared with CMS. In a February presentation in San Diego, California,²⁰ Quinn highlighted the FDA’s 60-page report, which was being prepared while CMS was issuing 5 new proposals to cut prices for molecular diagnostics.

But overall, as far apart as they are on other issues, both 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 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.” References

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18. Gottlieb S. Medicare has stopped paying bills for medical diagnostic tests: patients will feel the effects. Forbes. http://www.forbes.com/sites/scottgottlieb/2013/03/27/medicare-has-stoppedpaying-bills-for-medical-diagnostic-tests-patientswill-feel-the-effects/. Published March 27, 2013. Accessed May 2, 2014.

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