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Will New Medicare Legislation Hobble Molecular Dx Technology Innovation?


The Medicare Reform Act that President Bush signed into law on Monday will offer seniors a prescription drug benefit, which will likely lead to greater drug consumption and new drug discovery.

But the legislation may also have a dark side: As it stands, it will likely muffle some of the incentives that drive innovation behind certain medical devices, such as molecular diagnostics, according to an industry expert.

Downstream, the new law, which can be read here, may also inadvertently deflate the desire among biopharmas and some clinical customers to invest in certain new technologies — especially pharmacogenomics tools that are behind molecular diagnostics and are not yet recognized by health-care pricing codes.

Regina Herzlinger, a professor of business administration at Harvard Business School, wrote recently that while Medicare may now provide a boost to drug makers as it confers greater purchasing rights to the elderly, it will likely not increase the use of equally important medical devices, including some diagnostics. In fact, she said, the bill may “penalize” some technology innovators by perpetuating, and even enhancing, price regulation.

“Because Medicare prices are dictated by government and do not reflect marginal costs, capital is misallocated,” Herzlinger wrote in a Wall Street Journal op-ed late last month. “And because Medicare dictates product specifications, it penalizes innovations.”

However, a senior official from a clinical diagnostics industry association claims that the new Medicare legislation may have the opposite effect. In fact, he said, one little-noticed provision in the law opens the door to additional medical screening. Though this provision does not cover genetic tests per se, innovators may use it as a stalking horse for gene-based technologies.

Either way, what can molecular diagnostics companies, clinical labs, tool vendors, and biopharmas do to ensure that Medicare expenditures continue to grow in their area?


Before the bill was signed by President Bush on Monday, Medicare did not provide for out-patient medications, except for certain “rare exceptions.” To get drugs, Medicare recipients were required either to buy insurance or to enroll in HMOs. “Because of Medicare’s inadequate pricing for HMOs, it was a very unstable market; most insurers just didn’t want to serve the Medicare HMO market, because the Medicare HMO administrator kept cutting their prices,” Herzlinger told SNPtech Reporter. This dynamic, in turn, had softened discovery for certain drugs, especially orphan compounds, that may benefit the elderly.

This bill, however, “will improve this situation considerably,” Herzlinger said. “This part of the bill is a positive [for drug makers] because it will expand utilization, and that’s very important” for drug development. Specifically, Medicare will be barred from negotiating drug prices when the plan goes into full effect in 2006; private insurers will assume that role.

Furthermore, in a potential, if inadvertent, boost for pharmacogenomics, the legislation may also encourage drug makers to abandon, or at least curtail, their hunt for blockbuster compounds and embrace drugs that target smaller, unfulfilled disease categories, she said. These days, many drugs in certain classes — for example, allergy or statin compounds — differ little from their competitors in safety or efficacy. As a result, “it will be easy for Medicare to start competition among those drugs, and to keep muscling down the price.”

In the case of drugs that have little or no competition — say, Genzyme’s Cerezyme, for Type 1 Gaucher disease — the sponsor will start with a lot of pricing power, she said. “So if I were in the drug-development business, I would start looking for real monopolies and real breakthroughs that are so dramatic in their impact, and where there are no competitors,” she said.

“I think blockbusters are gone,” Herzlinger said. “The whole concept of pharmacogenomics and molecular diagnostic[s] … is going to eliminate blockbusters.”


Molecular diagnostics may not, however, benefit from the new law the way certain drugs are likely to. One reason behind this disparity has to do with the pricing and utilization mechanism laid out in the Medicare bill. The law expands the coverage of most outpatient drugs — that is, the kind patients can pick up at neighborhood pharmacies versus the kind that need to be administered by a physician or in a hospital. But because most molecular diagnostic tests are not used in this way, Medicare reimbursement for these diagnostics and procedures is more tightly regulated.

This phenomenon may stifle innovation by scaring away investors who are worried that Medicare reimbursements for these types of tests will be severely lim-ited. Citing as an example an implantable cardiology device developed by a small US-based company that would be used by many elderly patients, Herzlinger said that venture capitalists lost interest in its technology once they heard it would be reimbursed by Medicare. Because Medicare frequently does not reimburse hosp-itals enough to pay for the device, let alone for the procedure, “the company had a lot of trouble raising money,” she said.

“It’s like pricing filet mignon like hamburger,” Herzlinger said. “You just can’t do that. If you were in a business where you had absolutely no control over the price, and there’s this 800-pound gorilla” — Medicare — “and it tells you what the price is going to be, you’re going to be very nervous about investing, especially in very complicated technology,” she said.

Another reason why Medicare coverage and payments for these procedures are sketchy is that the medical reimbursement codes do not fully cover new technologies. “If you don’t have a code, Medicare can’t pay you,” Herzlinger said. “And there is no code for these tests right now; that’s like not even having a social security number.

“The guys in this business are really taking a leap of faith that they’re going to get the coverage, and that they’re going to get adequate reimbursement,” said Herzlinger. “It’s a great testimonial of the optimism of the American capital markets that [these technologies] continue to be supported, because not only is the intrinsic science so risky, but the whole economic environment is risky, and the regulatory environment is so risky. It’s a triple-risk business.”

To be sure, the field of molec-ular diagnostics is still evolving both at the FDA level and within Medicare, so there are few case studies to observe; many experts are therefore resigned to suspect that experience with other so-called non-ambulatory procedures may be a harbinger of bad things to come for molecular diagnostics, too.

The current difficulties with Medicare reimbursement, however, don’t mean that molecular diag-nostics are shut out of the market entirely. For instance, physicians or hospitals performing certain molecular diagnostics to patients younger than 65 as well as those with private insurance may have better luck being reimbursed.

Additionally, molecular diagnostics innovators, and especially the companies that use them, can take steps to ensure that these innovations gain greater acceptance in future amendments to Medicare legislation. For example, industry organizations, such as the Biotechnology Industry Organization and the Pharmaceutical Researchers and Manufacturers of America, which count molecular diagnostic companies as members, and the American Clinical Laboratory Association, which represents clinical labs, “are very important,” said Herzlinger. In addition, innovators and users ought to know that disease-specific associations can play a role in influencing legislation. She said, for example, that Nanogen has gotten the Cystic Fibrosis Association, a patient alliance, to support the development and use of its 25 ACOG/ACMG analyte-specific reagent for cystic fibrosis. Labs, diagnostics developers, and tool companies ought to use these organizations “as political muscle to counter Congress’s tendencies to willy-nilly cut” the use of these tests. There’s also “good old-fashioned lobbying” to target legislators with a personal link to a disease.

“You need political ammunition to respond to politics,” she said.

However, to David Sundwall, senior medical and scientific officer at the American Clinical Laboratory Association, the new Medicare legislation is good news for members of his group.“

Now, he said, the Medicare law has authorized certain screening procedures for heart disease, diabetes, prostate cancer, and others that had previously not been reimbursed. “These are all steps in the right direction,” he said. “Authorizing them to do this really opens the door for more screening … in the future.” This is the second time Medicare has been given the green light to authorize any kind of screening. However, the new legislation does not authorize reimbursement for genetic screening, Sundwall said, and stressed there is “nothing for or against” genetic screening in the new law. He added that “it is all movement in the right direction.” Just 2 percent of all Medicare expenditures go to diagnostic procedures, though physicians use these tests to guide 70 percent of their therapeutic decision making, according to ACLA. The ACLA counts among its 16 members Quest Diagnostics, ARUP Laboratories, Laboratory Corporation of America, and Myriad Genetics.

Sundwell said he thinks the cost pressures on the health-care system “are inevitably going to enhance the use of screening and diagnostics because, if in fact they deliver on their promise to identify [diseases] earlier.”

— KL


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