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CMS Plan to Implement Lab Test Pricing Regulation Gets Critical First Response From Industry

NEW YORK (GenomeWeb) – The Centers for Medicare & Medicaid Services' preliminary proposal for a massive pricing overhaul for clinical diagnostics to take effect in 2017 has already garnered significant industry criticism.

On Friday CMS released a 130-page document laying out its initial plan for how to implement the "Protecting Access to Medicare Act of 2014," which became law last year and seeks to establish a market-based payment system for diagnostics under the Clinical Laboratory Fee Schedule (CLFS).

Under the law, "applicable laboratories" will report to CMS rates from private payors for each clinical diagnostic lab test and the volumes for each test over a specified period of time. Based on this information, CMS will calculate a weighted median payment amount for each test.

PAMA stipulates that Medicare payment for a test cannot be reduced more than 10 percent compared to the price in the previous year between 2017 and 2019 or more than 15 percent between 2020 and 2022. However, labs that fail to report their rates or misrepresent their rates can be penalized as much as $10,000 per day, according to CMS' plan.

While PAMA was still being considered by Congress, diverse stakeholders in the life sciences field that often disagree on policy issues — including labs, diagnostic technology firms, and developers of single-source, algorithm based tests — came together behind the legislation. They did so at the time, recognizing that PAMA offered a better alternative in light of deep Medicare payment cuts hanging over the lab industry. However, CMS' plan appears to have revived enduring policy divisions between makers of "generic" LDTs (e.g. KRAS testing) and labs with "branded" tests (e.g. Genomic Health's Oncotype DX).

In its proposal, CMS defined "applicable laboratory" as one that receives more than 50 percent of its Medicare revenues as paid under the CLFS or PFS. This would rule out hospital labs from having to report fees. Additionally, labs that have Medicare revenues of less than $50,000 wouldn't qualify as an "applicable laboratory," according to CMS.

The American Clinical Laboratory Association (ACLA) in a statement said it had "serious concerns" about this definition of "applicable lab." CMS' plan conflicts with statutory language and congressional intent to establish a "market-based" payment system, the lab industry group said, since this definition would exclude much of the lab market in reporting pricing.

Meanwhile, market analysts viewed the definition as having an upside for large reference labs, such as Quest Diagnostics and the Laboratory Corporation of America. "With this negative outcome related to hospital exclusion, the brunt of the changes fall on the independent market, of which [Quest] and [LabCorp] are clearly the two largest players," Michael Cherny, managing director of Evercore and International Strategy & Investment, wrote in a note to investors over the weekend. However, Cherny added that these two labs are "in a much better place to absorb this outcome."

Given Quest and LabCorp's expansive presence in the US testing space, pricing pressures might lead to more consolidation, he suggested. According to a 2012 RTI International report published in Medicare & Medicaid Research Review, Quest had nearly 30 percent of the 2006 Medicare Part B market share, while LabCorp's share was around 20 percent. Together, these firms, each operating more than 200 CLIA-certified labs in the US, received $1.23 billion of the $6.7 billion CMS paid for lab tests under Medicare Part B.

"Both [Quest] and [LabCorp], with their large national presences, do not have the outsized exposure to Medicare that some smaller labs may have," he wrote. "This could lead to additional opportunities for both standalone large players to pick up additional share, either from pure organic wins (because some small labs have to close due to an inability to manage the reimbursement changes) or through acquisitions (bringing more underlying volume into the portfolio)."

Under PAMA, the private payor payment rate and test volumes that labs will have to submit will cover a specified "data collection period." However, Medicare payment rates are often appealed multiple times by the lab before a final rate is established for a test, and CMS hasn't addressed this complexity, observed Bruce Quinn, a Medicare policy expert and senior director at the law firm Faegre Baker Daniels LLP. "On first reading, CMS seems to have ignored most of these issues," Quinn wrote on his blog.

PAMA also set up a new category of tests, so-called advanced diagnostic laboratory tests (ADLTs) – defined as a test that uses an algorithm to asses a panel of DNA, RNA, or protein markers, or a US Food and Drug Administration-approved or -cleared test. An ADLT must be a single-source test that is sold by the lab that developed it, and CMS goes into great detail in the report to underscore this point.

"We are also proposing that the test must provide new clinical diagnostic information that cannot be obtained from any other existing test on the market or combination of tests (for example, through a synthesis of the component molecular pathology assays included in the laboratory test in question)," CMS wrote in the report. "We considered requiring that a new ADLT be clinically useful, as well as new, but decided against such a policy due to statutory limitations."

Quinn on his blog wondered whether this novelty requirement is "fair or wise," and asserted that CMS interpretation doesn't appear to square with statutory language. "I'd like to say: Nonsense!" he wrote. "The statute defines ADLTs basically as sole-source MAAA [multi-analyte algorithm-based assay] tests … and there is no platform for CMS to create novel sides of the definition."

This requirement would preclude similar ADLTs — such as Genomic Health's Oncotype DX and Agendia's MammaPrint for breast recurrence testing — from entering and competing on the market, Quinn pointed out. "No one would ever be incented to bring out an ADLT in the same general field … because the second test would be so disadvantaged nobody would ever create it and invest in it, while the privileges for the first test go on forever," he wrote. "Even bringing out an improved test version by the same lab might meet the general ADLT definition but not the special CMS novelty test. Bad idea."

Moreover, CMS said labs with ADLTs will have to provide evidence on the algorithms underlying their tests and show that the test provides new information that cannot be garnered from other tests. Currently, the algorithm portions of MAAAs are proprietary, and as such, these assays are often called "black box" tests.

CMS noted that while it doesn't expect to make information submitted on ADLTs public, they also "cannot guarantee that information marked as proprietary and confidential will not be subject to release under the Freedom of Information Act" even if it is marked confidential or proprietary. FOIA exempts trade secrets and commercial or financial information from disclosure, and CMS said that the lab would have to explain how disclosure of an ADLT's proprietary algorithm, for example, would cause competitive harm.

Under PAMA, new codes will enable CMS to identify when FDA-approved or –cleared tests and ADLTs are performed and charged. Quinn pointed out that this would change longstanding CPT coding convention, "which has always avoided giving any privilege to FDA kits for molecular tests."

CMS will update pricing annually for advanced tests and every three years for all other diagnostics. For new non-ADLTs that come on the market in the middle of the three-year pricing cycle, CMS' Medicare Administrative Contractors (MACs) will determine local pricing.

CMS is expected to report preliminary reporting instructions for labs in October, but stakeholders have until Nov. 24 to comment on this proposal. "Because this a proposedrule, all stakeholders will have the opportunity to comment on it and ask that CMS address areas of concern that are identified," ACLA President Alan Mertz said in a statement. "ACLA will comment on the proposed rule and will urge that the laboratory community weigh in with CMS during this critically important comment period."

With PAMA still slated to take effect on Jan. 1, 2017, labs will have to begin collating payment rates from private payors from July 1, 2015, to December 31, 2015, and report this to CMS during the first three months of next year. CMS will publish the final rates that take effect in 2017 in November 2016.