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Landscape for Diagnostics Will Continue to Change in 2019

Summary

While precision medicine is expected to revolutionize patient therapy, the increasing complexity of diagnostics is leading policymakers to revamp the way these tests are regulated and paid for.

The FDA is expected to issue final guidance on class labeling for companion diagnostics.

In 2019, the FDA is expected to finalize the draft guidance issued in December 2018, which would allow companion diagnostics to be used with any drug in a particular class or group when appropriate. This would be a change from the current labeling structure for companion diagnostics which references a specific drug or drugs. The FDA is accepting comments on this draft guidance until February 5, 2019.

This policy change may increase patient access to treatment through more streamlined approval of drugs that require a companion diagnostic for safe and effective use, as well as access to more drug products as directed by the labeling of a single test.
However, regulators and other stakeholders must still contend with a variety of technical and practical issues. For example, quantitative tests may use different “cut-offs” to make a positive versus negative determination, and FDA and sponsors will need to reconcile possible differences between tests used in clinical trials and other FDA-approved companion tests. Additionally, there are concerns that if a single test can be used for all drugs in a class, this may create a disincentive to bring competing tests to market.

The breadth of the impact of this policy change may be wide. The FDA has approved an average of 6 companion diagnostics per year since 2012, but one of the most recent diagnostic approvals, for a next-generation sequencing (NGS) test, included 16 companion therapeutics across 5 indications.

FDA also continues to implement its unique regulatory scheme for NGS tests. NGS tests can detect many genetic biomarkers at once, but also present the challenge of identifying off-target variants. FDA has put into place an approval system that considers both analytical and clinical validity, relying in part on publicly available curated databases for the latter. FDA recently announced its recognition of the first of these databases. Future approval of these tests for use to identify companion drugs or as standalone diagnostics will depend in large part on the availability of trustworthy data sources that may include a real-world component, as well as approval from FDA third-party validators.

Financial pressure will grow with continued implementation of PAMA and more commercial payer scrutiny.

The federal government will continue its statutorily required activities that may place increasing financial pressure on the laboratory community, at the same time that higher prices for some tests invites more commercial payer scrutiny.

In 2018, CMS began to implement the payment provisions of the Protecting Access to Medicare Act (PAMA), which changed the way Medicare sets rates for laboratory test payment, basing rates on a weighted median of reported commercial payer payments for the same tests. This resulted in a payment reduction of up to 10% (the statutory limit) per test code for many tests.

Implementation of PAMA will continue in 2019 and beyond. Laboratories have entered a new data collection and reporting period in which rates paid by commercial payers now will directly affect Medicare rates in 2021 through 2023. Additionally, CMS will be able to increase its maximum payment rate reduction to 15% per year in 2021. However, not all tests are seeing reduced payment. Per the intent of PAMA, more-complex tests are seeing higher reimbursement rates even as rates for less-complex, higher-volume tests are decreasing. We expect these general trends to continue for the next several years, and CMS may continue to make changes in its methodology as suggested in recent payment rules and OIG reporting.

Separately, laboratory user fees are expected to increase through at least 2022. CMS recently proposed a 20% increase to most user fees for oversight through the Clinical Laboratory Improvement Amendments (CLIA) program. While this is a large proportional increase, the current fee schedules—set in 1992—are seen by many in the laboratory community as overdue for an update, and the absolute financial impact to laboratories will likely be relatively low, with individual fee increases ranging from $3 to $1,588.

Finally, commercial payers are increasingly using laboratory benefit managers (LBMs). A 2018 Avalere survey found that 14% of payers have implemented third-party LBM, and an additional 30% are actively exploring it. Historically, commercial payers have limited use of utilization management (UM) tools (e.g., prior authorization) for laboratories because the administrative costs of UM have outweighed potential savings for what is seen as a largely commoditized set of laboratory services. However, with the advent of more complex and costly test types such as NGS, payers have begun to implememt more UM and contract out coverage decisions to specialized LBMs.

Changing the diagnostic approval pathway may re-emerge as a legislative proposal.

FDA’s oversight of laboratory developed tests (LDTs) has been a point of contention since the agency proposed to start regulating the tests in 2014. FDA pulled back its proposal to regulate LDTs after significant pushback from the laboratory community, but the growing complexity of these tests continues to be a source of concern for the agency and for Congress. Legislative proposals to revamp the diagnostic approval pathway, separating it from medical devices, have been floated in the last several Congresses, and a negotiated version of this bill may find its way to the floor in 2019. Such a proposal could seek to create a unified regulatory framework for the types of tests that must currently seek FDA approval as well as high-risk LDTs. This may create a regulatory or administrative burden for some smaller laboratories that could cause them to abandon use of some of their more complex tests, but overall we expect this more leveled playing field to create more certainty about test validity for physicians, payers, and patients alike.

The next several years will be a time of significant change for the laboratory industry. With technological innovation expected to drive growth in the laboratory industry at more than 5% annually and patients and providers growing increasingly interested in complex diagnostics like genomic testing, oversight of and spending on diagnostics is likely to continue to be a focus of payers and policymakers.

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