Medicare Demands Force PGx Lab into Bankruptcy

After CMS, Medicare contractor changed policy, pharmacogenomic lab suffered big drop in revenue

CEO SUMMARY: It’s becoming a familiar story. In Houston, a pharmacogenomics lab company started strong in 2011, then payments dropped sharply when Medicare issued restrictive new guidelines for PGx testing. Next, the Medicare administrative contractor handling the claims of CompanionDx Reference Lab canceled the lab’s registry and stopped paying most Medicare claims. In the wake of these developments, Companion DX filed for bankruptcy and closed.

ONE AT A TIME, stories of pharmacogenomics lab companies that have filed for bankruptcy after Medicare audits that resulted in huge recoupment demands are reaching THE DARK REPORT.

That is what happened to CompanionDx Reference Lab of Houston. It was founded in June 2011 to offer genomic diagnostic testing and pharmacogenomics testing to evaluate patients’ metabolic profiles. At the time, the market for these tests was robust, the company said in its bankruptcy filing. Within five years, however, the federal Centers for Medicare and Medicaid Services changed its rules for covering pharmacogenomics (PGx) testing.

That change in coverage, along with the actions of the Medicare Administrative Contractor and other factors forced CompanionDx to file for bankruptcy reorganization in U.S. Bankruptcy Court for the Southern District of Texas on July 5, 2016.

In its bankruptcy filing, CompanionDx reported that it had fewer than 1,000 creditors who were owed $10 million to $50 million and that it had assets of $1 million to $10 million.

In court documents, CompanionDx explained that it entered the market when PGx testing was rising and labs could expect “reasonable payment amounts.” “However, in early 2013, CMS introduced a policy directing individual Medicare Administrative Contractors (MACs) around the United States to individually determine coverage policy,” the court papers said. The MAC governing Texas, Novitas, did not cover the testing, but suggested that CompanionDx develop a patient registry to demonstrate the clinical utility of its testing, said the lab company.

“CompanionDx launched the registry in mid-2014 and rapidly increased sales by the end of that year. However, in early 2015, Novitas canceled the registry and claimed that the trial was not executed properly,” said the court documents.

At about that time, CMS restricted payment for PGx testing and began denying coverage for the majority of such testing that it had paid for since 2009, according to the bankruptcy documents. “As a result, as few as 1% of Medicare patients were covered for testing (down from approximately 50%). Once Medicare, Medicaid, and affiliated MACs cut rates, some insurance companies followed suit,” it added.

To address this issue, CompanionDx added a toxicology lab to provide urine-drug testing and developed a blood-based toxicology test, called Therapeutic Drug Monitoring. CompanionDx also established a reference lab to run tests for hospitals and other labs. The key element of this plan was that hospitals often are in-network under private insurance plans and so reimbursement is reliable, the company said.

Revenue Rises, Falls Sharply

In the court documents, CompanionDx explained that revenue rose steadily from $7.8 million in 2012 to $16.5 million in 2013 to $37.2 million in 2014 and to $49.2 million in 2015 before the bottom fell out last year. In 2016, CompanionDx reported revenue of $1.5 million. In those years, its gross profit rose from $3.8 million in 2012 to $10.8 million in 2013 to $25.6 million in 2014 and to $32.8 million in 2015. Its gross profit was $755,738 in 2016 CompanionDx said.

CompanionDx reported net losses of $827,821 in 2012, $2.3 million in 2013, $6.8 million in 2015, and $2.6 million last year. In 2014, it had net income of $1.7 million. On its balance sheet, CompanionDx reported a net worth of $6.8 million at the end of 2015.

Despite the changes the company made to improve its fortunes, the financial difficulties proved unmanageable, forcing CompanionDx to seek bankruptcy relief, the company reported.

Last fall, the court approved the sale of all property and assets of CompanionDx to a bidder that had offered $2 million in cash. The court approved the liquidation plan on Feb. 21.

Questions Raised Over ZPIC Audits

DURING THE PAST 12 MONTHS, several pharmacogenomics testing laboratories were in the news after federal auditors targeted those labs with audits and multi-million dollar recoupment demands.

In these cases, auditors from the federal Zone Integrity Program Contract (ZPIC) identified a small number of claims as being paid improperly and then extrapolated that small number of rejections to all claims filed over a period of years. The result has been demands for each targeted lab to pay tens of millions of dollars.

Last year, Pharmacogenetics Diagnostic Laboratory (PGxL), of Louisville, Ky., had such an audit and was forced to file for bankruptcy protection. Earlier this year, we reported the comments of an unnamed company official from a second pharmacogenetics laboratory who said his lab was hit with a ZPIC audit in circumstances similar to those of PGxL. (See TDRs, Jan. 9, and Jan. 30, 2017.)

The company official did not want to disclose the name of his lab, saying the case was under appeal and any attention on the case could result in retribution that might complicate and prolong the matter. In agreeing to discuss the circumstances of the audit, the company official requested that all identifying details of the case be removed.

The circumstances for this unnamed lab were similar to the case of PGxL. As in the PGxL case, AdvanceMed, the ZIPC auditor, began an audit of the lab’s claims and requested documents on tests ordered over a multi-year period. In the audit of the unnamed lab, AdvanceMed reviewed a small number of claims and declared that Medicare should not have paid those claims. Then, the auditor extrapolated from the small number of claims to all claims filed over many years, the official explained. The result: a recoupment demand for tens of millions of dollars.

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