Risk-Sharing and Reimbursement of Diagnostic Tests

by Foley & Lardner LLP

Five industry executives argue for an overhaul of the current approval and reimbursement framework for diagnostic tests. In A Pay-For-Value, Data-Driven Approach for the Coverage of Innovative Genetic Tests a case is made for a move from a Fee-For-Service (FFS) system to a Pay-For-Value (PFV) model based on risk sharing among innovators, payors, physicians and patients.

The Current System Stifles Innovation

To explain the deficiencies in the current FFS system, the authors first note that approximately 25% of all Americans receive health care benefits through the Centers for Medicare & Medicaid Services (CMS). In 2006, a new program, the Coverage with Evidence Development (CED) system was formalized by CMS to allow it to provide cutting-edge health care coverage. The authors argue that the CED process, created for the development of drugs, is not well suited for molecular diagnostics.

The authors summarize the CED process as applied to molecular diagnostics as a three- or more-step system:

  1. Validation of the diagnostic; 
  2. Establishment of clinical utility;
  3. Reimbursement determination; and
  4. If additional indications are requested, return to step (1).

A key limitation of the CED process, the authors contend, is that it negates (by not providing an incentive or collection mechanism for) the vast amount of data the tests can produce and must freely flow between the stages. The CED process also unnecessarily stifles innovation for smaller, venture-backed companies that do not have the resources to survive the extended period of data-gathering and potential non-coverage dictated by the CED process. Moreover, because a great deal of innovation in the molecular diagnostic industry is done by small, venture-backed companies, the long and uncertain CED process can have the effect of dampening innovation in the entire industry.

CED and Molecular Diagnostics

The authors contend that molecular diagnostics present unique financial, timetable and scientific benefits relative to other diagnostics that are not leveraged by the CED process. The main points made by the authors include:

  1. Financial molecular diagnostics target relatively smaller markets as compared to the therapeutic markets with high development costs;
  2. Greater Benefits a relatively inexpensive diagnostic increase in value as treatments and diagnostics co-evolve. The authors give the example that a $3000 diagnostic to determine if a $100,000 cancer therapy should be prescribed as highly valuable in terms of potential cost savings in prescribing the right therapy.
  3. Timetables of molecular diagnostics are slow and therefore trials need to be slow. The authors note that because molecular diagnostics target a smaller patient population, identifying a patient population large enough to support statistically significant results can prove time-consuming and difficult.
  4. The CED process provides no allowance for the rapidity with which molecular diagnostics evolve or acknowledges the dearth of subjects who can contribute to the knowledge pool.

Risk Sharing in a Pay-for-Value System

The authors note that reimbursement for a diagnostic test is the driver for the interactions between the payor (health care insurer), diagnostic provider and the physician/patient. Patients and physicians want diagnostic providers to develop tests that improve treatment decisions. Payors want patients and physicians to efficiently use new diagnostic tests and providers want payors to provide reimbursement for their innovations.

The authors note that on the other hand, diagnostic providers want data supporting the clinical utility of their new tests. Payors want diagnostic supplies to support and help physicians correctly use diagnostic tests. Finally, physicians want payors to provider reimbursement for efficiently practicing medicine.

Under the PFV system, if the diagnostic provider has vey low confidence that the diagnostic will alter treatment (e.g., whether to prescribe drug A or drug B), the payor is not likely to cover the cost of the test or cover a very small percentage of the cost of the test. The decision whether or not to use the test then falls on the physician/patient and the patient is most likely to be responsible for the total cost of the test.

If the diagnostic provider is very confident that the diagnostic test will alter the standard treatment, the diagnostic provider will assume a large percentage of the cost of the test if the test ultimately does not change the course of treatment. The payor will likely follow the diagnostic providers recommendation and pay for the test.

For a test in which the diagnostic provider thinks the test might be useful but lacks clinical utility data; the extent to which the lab wants the data, the lab will assume the percentage cost of the test commensurate with the risk it is willing to take.

The PFV system also allows for exchange of data regarding clinical utility of the tests among the key participants in the system. In addition, the diagnostic test providers are encouraged to support physicians so that they can use information obtained from the test in their decision making process.

Reimbursement Rates

The authors argue that there should be a sliding scale for payment responsibility. A test that has little impact on the course of treatment arguably has little value and therefore should be reimbursed at a low rate. However, for tests that can and do alter the course of treatment, the authors state that these tests should be reimbursed at a corresponding high rate.

An Alternative Approach

Diagnostic testing is key to personalized medicine. Many personalized therapies are administered only after a patient has been tested to ascertain the best therapy or dosage for the individual. Thus, access to and the use of reliable diagnostic tests are important to the implementation and success of personalized medicine.

There is a strong consensus among those involved in the testing component of personalized medicine that current reimbursement schemes are inadequate to incentive research and development of the tests. The proposed scheme, which the authors acknowledge is not as straight forward as the current FFS system, does incentive the development of diagnostics that have significant clinical impact while still allowing physicians and patients access (albeit at the patients cost) to tests that do not alter the course of clinical treatment.

The white paper was authored by Paul Billings, Chief Medical Officer, Life Technologies; Richard Ding, Chief Executive Officer, bioTheranostics, Inc.; Lale White, Chief Executive Officer, XIFIN, Inc.; Rina Wolf, Vice President of Commercialization Strategies, Consulting and Industry Affairs, XIFIN, Inc. and David Lorber, Director of Business Development, XIFIN, Inc.

A copy of the white paper can be downloaded at this link.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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