IT’S GOING TO BE A DIFFERENT AND TOUGHER WORLD for laboratory companies that market proprietary molecular and genetic tests. That’s the opinion of experts who have studied the final rule governing Advanced Diagnostic Laboratory Tests (ADLTs) that the federal Centers for Medicare & Medicaid Services issued in June.
The final rule implements Section 216 of the Protecting Access to Medicare Act of 2014 (PAMA). It had two major parts. One part established the new payment system for the Medicare Part B Clinical Laboratory Fee Schedule. That included lab test price market reporting and THE DARK REPORT provided an analysis of that part of the final rule in its previous issue. (See TDR, July 5, 2016.)
The other major part of the final rule defines a new category of assays called ADLTs. These tests are different from other clinical diagnostic laboratory tests (CDLTs) in two significant ways, wrote Charles C. Dunham, IV, an attorney in Houston with Epstein Becker Green.
“First, the ADLT must be a CDLT covered under Medicare Part B that is offered and furnished only by a single laboratory,” Dunham wrote in a report to EBG’s lab clients. “Also, the ADLT is not sold for use by a lab entity other than the original developing lab entity or a successor owner.
Criteria for ADLT Status
“Second, the ADLT must be a CDLT that meets one of the following criteria, continued Dunham:
- “The test analyzes multiple biomarkers of DNA, RNA, or proteins combined with a unique algorithm to yield a single patient-specific result, such as a molecular pathology analy- sis of DNA or RNA;
- “The test is cleared or approved by the U.S. Food and Drug Administration; or,
- “The test meets other similar criteria established by the Secretary of the U.S. Department of Health and Human Services.”
Now That CMS Changed Definition of ADLTs, Lab Companies Need to Take Specific Steps
IN ITS FINAL RULE IMPLEMENTING THE PROTECTING ACCESS TO MEDICARE ACT, the federal Centers for Medicare & Medicaid Services set a new definition for advanced diagnostic laboratory tests (ADLTs). Labs seeking to meet this new definition now have specific steps to follow.
“To be designated as an ADLT, a test would need to come from a single laboratory, as defined under the Clinical Laboratory Improvement Amendments of 1988,” stated CMS. This definition includes entities that own the laboratory or that the laboratory owns and that may design, offer, and sell the ADLT.
Attorney Charles C. Dunham, with Epstein Becker Green of Houston, wrote that, “This change [in the final rule] allows multiple laboratories located in different locations throughout the country, under common ownership, to qualify as a single laboratory and furnish the ADLT at each laboratory site.
“A lab will need to apply to CMS for ADLT status and submit documentation that demonstrates that the CDLT meets the two-part test to be determined an ADLT,” added Dunham. “In the final rules, unfortunately, CMS did not include detailed instructions for lab entities. Instead, CMS said all instructions will be provided through sub-regulatory guidance by Jan. 1, 2018.
“CMS has said it will keep information in a lab’s ADLT applications as confidential and proprietary,” he noted. “But that information may still be subject to disclosure under PAMA, the Freedom of Information Act, and other federal laws.
“The same data collection periods for new and existing CDLTs will apply to existing ADLTs, except that labs will need to report private payer rates for ADLTs annually using data from the first six months of the year (meaning January 1 to June 31) immediately preceding the data reporting year,” explained Dunham.
Now that CMS has issued this new definition of ADLTs, labs must answer a number of questions concerning how to develop pricing and marketing strategies for tests, according to Bruce Quinn, MD, PhD, a senior director with FaegreBD, a consulting firm in Washington, DC.
“Probably the most important question a lab must answer is whether its tests could meet the definition of an ADLT,” continued Quinn. “If so, the next question is whether the lab wants their tests to be classified as an ADLT.”
What CMS Pays for ADLTs
In an interview with THE DARK REPORT, Quinn explained that labs currently marketing or planning to develop multi-analyte assays with algorithmic analyses (MAAAs) will want to watch closely how CMS adjusts what it pays for ADLTs. That is because, under PAMA, CMS will set prices annually and close to the market median price level.
“PAMA and the new definition for ADLTs has made pricing and contracting a lot more complicated,” declared Quinn. “It therefore has created a whole new world for labs marketing ALDTs. In many ways, running a lab offering ADLTs will become like a circus act where you must run to keep all the plates spinning.”
Depending on their circumstances, labs will react differently to the various elements of the PAMA Final Rule, particularly those elements that involve ADLTs.
“Some lab companies have extensive data on how different payer segments behave and how their hospital and physician clients use their ADLTs,” Quinn explained. “But other labs have much less understanding about their clients’ use of their tests.
“Labs in the first category are ahead of the game in making long-range pricing and marketing decisions about ADLTs,” he noted. “But labs in the second category are making up their marketing strategies as sales opportunities arise. Those labs will need a consultant with a math background to understand the impact of PAMA for them.
Under the new definition of ADLTs, labs will need to develop more sophisticated contracting strategies,” said Quinn. “Labs will perhaps want to craft multi-year pricing strategies as well.
“Currently, most labs with ADLTs instruct their sales teams to sell as many tests as possible,” explained Quinn. “Then the labs send out claims. But they don’t find out for three months or more if the health plans getting their claims will pay for these tests. Most health insurers don’t pay for these tests. However, now that Medicare will establish a public price for ADLTs, that may encourage more insurers to pay relative to those fee schedules.
“The final rule requires labs to triangulate what a lab’s ADLT Medicare price is under PAMA and what commercial insurers pay for in-network versus out-of-network claims,” he continued. “That is why labs will need to determine an optimal pricing and contracting strategy for each of their ADLTs.
Multi-Year Pricing Strategy
“A lab suddenly faces a multi-year pricing strategy because its prices from commercial payers this year will affect what Medicare pays next year,” he emphasized. “And next year, Medicare will publish what it pays for these tests, meaning all commercial payers will know your lab’s average price for each test it offers.
“For a lab company that gets about 10% of its lab business from Medicare, that federal price won’t matter much,” Quinn explained. “But if its Medicare business is 60% or 70% of total volume, then it has some math to do.
“Keep in mind that the lab’s pricing and contracting strategies are not likely to remain static over time,” he advised. “For example, over time and with more clinical acceptance, commercial payers adopt payment policies for these tests.
“When that happens, the lab’s Medicare volume will decline as a percentage of its total volume and that factor will affect the lab’s pricing strategy for each of its different ADLTs,” he said. “Under PAMA, if a lab accepts lower prices from commercial payers, that will automatically shrink their Medicare price.
“On the other hand, if a lab makes its commercial prices too high, those plans won’t contract with the lab and that could cause the lab’s commercial revenue to drop to zero, or to low levels because of out-of-network rates.
Consider Going Unlisted
“For some labs, there’s another strategy to consider,” he advised. “Today, there are still quite a few MAAA tests (Multianalyte Assays with Algorithmic Analyses) that don’t have a specific code and the lab might prefer to use an unlisted code.
“This strategy might be more common than many people realize,” he added “If a lab does not apply for an MAAA code or for ADLT status, then it may be possible to stay with an unlisted code forever. Some labs have done that for several years.
“CMS will not make a company follow the ADLT rules,” Quinn said. “That’s because a lab company has to apply to get ADLT status. By choosing not to apply for a test to be an ADLT, the lab could use an unlisted code or a CPT code.
“If a laboratory uses an unlisted code, that lab will remain outside of the PAMA reporting rules,” added Quinn. “In that case, there’s nothing to do. I don’t know how many labs will choose this option but it’s a possibility.
“For a lab that has a sole-source test that is not an MAAA, there’s still another avenue to consider. That test could become an MAAA if it gets FDA approval. So then the lab has a number of new questions to answer. For one, should the lab seek FDA approval?” he asked.
Costs vs. Benefits
“If the lab seeks such approval, what’s the cost to do so and how long will it take?” continued Quinn. “What are the advantages and disadvantages? How will that FDA approval affect what the lab can charge for that test to have its own code and then what affect will PAMA have on that test each year?
“There are many issues to consider. Is it worth the risk of having to stay within FDA labeling?” asked Quinn. “If so, how does the lab make that determination?
“I know several labs that are trying to decide whether to get FDA approval, whether to get an ADLT code, and whether all that is worth the extra costs,” he said. “Much of this decision-making will depend on how CMS prices the genomic sequencing codes. If CMS prices the CPT code for 51+ tumor genes at $4,000, then, there’s no need to get FDA approval.
“But if CMS prices the CPT code for 51+ tumor genes at $500, then your lab would be bankrupt unless you have your own price as a unique ADLT,” observed Quinn. “Then, the question to ask is how much will PAMA pricing affect those genetic CPT codes over time?”
Learning the New Math
As it pertains to ADLTs, the PAMA final rule both giveth some things and taketh away other things. Labs offering ADLTs will gain the benefit of a clear path to obtaining Medicare coverage and payment decisions. But that path has unique obstacles and may complicate how labs negotiate pricing with private payers.
Contact Bruce Quinn, MD, at 323-839- 8637 or Bruce.Quinn@FaegreBD.com; Charles Dunham at 713-300-3211 or CDunham@ebglaw.com.