Regulatory Editor

The prognosis is looking even bleaker for diagnostics, which are already caught in a deadlock of court rulings on patentability and a general lack of exclusivity.

The latest blows come in the form of deep cuts in preliminary pricing determinations for 2016 and a Centers for Medicare & Medicaid Services' (CMS) proposed payment rule. Implementing changes required by last year's Protecting Access to Medicare Act (PAMA), the rule would "significantly revise the Medicare payment system for clinical diagnostic laboratory tests" (CDLTs), according to a notice slated for publication in Thursday's Federal Register.

The preliminary price determinations alone could translate into cuts ranging up to about 90 percent depending on the test, according to the American Clinical Laboratory Association. But all is not lost, Leerink Partners analyst Dan Leonard said, as he expects many of the pricing cuts proposed Friday to be reversed. (See the chart below.)

"The magnitude of the cuts as well as number of companies impacted give us some confidence that industry will be successful in at least partially scaling these back" before the prices are finalized, Leonard said. But even if cuts the CMS is proposing for 2016 hold, he thinks they'll be softened in 2017 when PAMA requires Medicare reimbursement for each test to match a weighted median of reported private payer payments. The law also mandates that the payment reductions be phased in over the first six years of the new system.

But the CMS is expecting big savings from those weighted prices – $360 million in Part B payments for tests furnished in fiscal 2017, about $2.94 billion over five years and $5.14 billion over 10 years. Much of that savings would come at the expense of small labs that offer many of the CDLTs, the CMS acknowledged in the proposed rule.

Although it's seen as the key to personalized medicine, the diagnostics industry already is struggling to attract the investment needed to deliver on the hope of that promise. Unlike new drugs, diagnostics receive no market exclusivity and often face competition soon after launch. (See BioWorld Today, August 21, 2015.)

Further dampening investment enthusiasm for diagnostics are recent court decisions eroding their intellectual property protection. After the Supreme Court struck down claims to isolated DNA in Myriad and process claims based on laws of nature in Mayo, the Federal Circuit expanded the scope of those rulings, invalidating several patents on diagnostics.

Proposed rule

Despite the struggles and congressional support for personalized medicine, lawmakers looked to diagnostic price cuts to help fund extensions of other Medicare programs when they passed PAMA. The law instructed the CMS to structure a new payment policy that more closely aligns Medicare reimbursement for CDLTs with nationwide market rates, doing away with regional variations.

Currently, Medicare reimbursement is based on the lesser of the billed amount, the fee schedule amount established by Medicare contractors or a National Limitation Amount, which is a percentage of the median of all the state and local fee schedules. Last year, Medicare paid about $8 billion for CDLTs.

Under PAMA, "applicable laboratories" must report rates paid by private payers for each CDLT, including co-pays and coinsurance passed on to patients, and the volume of tests furnished during the reporting period. The CMS proposes to define an applicable laboratory as one that receives more than 50 percent of its Medicare revenues, during the reporting period, for services paid under the clinical laboratory and physician fee schedules.

In the future, payment data would be based on a full calendar year, but the first period would run from July 1 through Dec. 31, 2015, with the reports due to the CMS by March 31. From then on, CDLT payments would be calculated every three years, but data for advanced diagnostic laboratory tests (ADLTs), defined as sole source, would be reported annually.

Labs that fail to report or misrepresent information in their reports would be subject to a civil penalty similar to that imposed on Part B sponsors. The proposed rule would require reports to be certified by the company president, CEO or chief financial officer, a provision that would hold a corporate officer responsible for the truthfulness of the report. The CMS plans to issue guidance on the certification process in January and also expects to release guidance further detailing the civil penalties.

For new ADLTs, the CMS proposes basing the initial payment on the actual list charge of the test for the first three quarters and then a weighted median of private payer rates would be determined. Crosswalking or gapfilling methods would be used to set Medicare payments for other new tests and existing CDLTs for which there is no applicable information to calculate a weighted median.

Comments on the proposed rule are due by Nov. 24.

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