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Medicare has sharply changed the way it pays for diagnostic tests, cutting payment rates and curtailing coverage for some new tests altogether.
The makeover in the way that Medicare reimburses molecular diagnostics has been foreshadowed for years, but was abruptly put into effect this summer.
Affected are the kinds of tests that probe for gene and protein markers found in our body’s tissues. These tests help doctors diagnose a multitude of diseases and monitor our response to drug treatments. They are used in a variety of medical settings. Some of their greatest promise has been in personalizing the treatment of cancer by tailoring drug therapies to a person’s unique tumor type.
The labs that perform the test are the same outfits that market them. The tests are typically sold as a laboratory service, rather than marketed as a medical device.
The new payment system has cut payment rates across the board, by an average of about 20% (and as high as 80% in some cases) from 2012 levels. Most of the new rates are being based on the work of one Medicare contractor, Palmetto GBA.
Hardest hit by the change, however, are many new diagnostic tests that aren’t yet a part of routine medical practice or may only benefit a small patient group, often with rare disease states. These diagnostics are being dubbed “tier 2” tests since they weren’t assigned discrete “codes” under the AMA’s new coding scheme.
In many cases, that also means that they haven’t been assigned a payment rate.
These tier 2 tests can try to file for Medicare payment under a so-called “miscellaneous” code for new tests. But that is often a dead end. In many cases, Medicare carriers have stopped paying for novel “tier 2” altogether, even tests that were previously reimbursed under the old scheme.
All of these tests typically probe for novel markers, or for a panel of (multiplexed) gene or protein markers whose combination of outputs are used to make predictions about things such as the potential for cancer to spread or respond to a medicine.
Previously, these tests were reimbursed under a “code stack” system that based payment rates on a sum of the cost of each of step used in conducting a particular test. Code stacking had a lot of problems. For one thing, the payment rates didn’t reflect the clinical value of a test, just the cost to perform it. The system also obscured from Medicare’s view what the agency was ultimately paying for.
When a bill arrived at Medicare, it merely listed the different markers that a particular test was probing for, and the laboratory steps being taken to identify these genes or proteins. Ultimately, the “code stack” didn’t reveal to Medicare what the test actually set out to do, and how doctors were using it.
So Medicare is replacing the ambiguous code stacks with a new set of discrete CPT codes that identify each common test by its own billing number. These codes are established by the American Medical Association at the behest of the Medicare agency. The AMA CPT Editorial Panel, which administers the development of new codes (but not reimbursement) for Medicare and all payers, made its first serious effort to come up with a new list of discrete codes back in 2010. After a long delay, the first tranche of 116 “tier 1” discrete codes finally went into effect January 1st.
As I wrote in an earlier article for Forbes, reimbursement for many of the tests were put on hold altogether while Medicare figured out what payment rates it wanted to assign to its new codes. Those rates are now starting to emerge, and the money is finally starting to flow again, although not all of the tests that fall under these “tier 1” codes are being reimbursed.
But the situation is even worse for tests that didn’t get one of the new codes. These novel tests don’t fit into one of Medicare’s new buckets. Many aren’t getting paid for.
This is having a profound impact on investment, and in turn, continued innovation and development. The policy change ends the established model for how novel tests got introduced into medical practice. With no suitable alternative, the new scheme will thwart the introduction of novel diagnostics and limit bets on new technology.
Labs traditionally don’t get paid for research and development. Nor are the sunk costs of R&D fully baked into the price of newly launched diagnostics. In this way, the pricing of diagnostic tests is very different than the pricing of drugs.
Except for a few exceptions, the intellectual property supporting a new diagnostic test is easy to engineer around. So it doesn’t support premium pricing for a new test.
As a result, most diagnostics get priced based on some measure of the cost of performing a test, not the cost it took to develop the novel diagnostic. So paying for diagnostic tests early in their product life cycle, before the clinical utility of a new test was fully demonstrated to Medicare’s approval, was a way of funding that R&D.
Early adoption of tests, often by clinical thought leaders at academic medical centers, wasn’t just a way to offset the cost of developing a new test. It also gave doctors a chance to start incorporating a new test as a part of medical practice. It enabled some doctors to practice medicine at its cutting edge. Typically academic doctors expert on a new marker were able to deploy a test and refine its role in medicine.
Absent a new process for financing the development and introduction of new diagnostics, a lot of promising innovation could be put on hold. Yet all of these tests are an integral part of efforts to “personalize” the delivery of care — a branch of medicine that is supposed to improve clinical outcomes, and hopefully lower costs.
In this way, Medicare threatens to undermine the very sort of personalized medical practice that Congress and the Administration is trying to underwrite by reforming regulations at the Food and Drug Administration and through parts of Obamacare.
There’s also a much broader principle at stake: Medicare as a business partner.
The old coverage model had flaws. But it had been static for years. The payment model conditioned expectations and formed the basis for investment in new test.
Medicare’s abrupt change to that payment model has created a lot of uncertainty that’s putting new investment on hold.
The problem is that Medicare is no ordinary payer. Private payers emulate the agency’s coverage decisions. So Medicare’s ends up setting the market standard.
If the political class wants to put most of the reimbursement of healthcare under the thumb of government, it needs to pay particular care to how its coverage and payment policies affect incentives to new innovation. Medicare isn’t just another payer looking to ratchet down on payment rates in the name of cost containment.
Its decisions end up having a profound impact on investment and development of new products. In short, if Medicare is going to flex so much power owing to its broad reach and government mandates, it needs to be mindful of its impacts.
Medicare’s payment changes are reverberating through the medical marketplace. It has created all kinds of problems for patients and doctors.
Sometimes, doctors’ won’t have enough tissue to run tests on a tumor in series, one at a time as the treatment or diagnosis evolves. Doctors need to use the small sample they have to get all the information right up front. But some of these sorts of “multiplexed” tests that probe for multiple gene mutations off the same sample of tissue are precisely the novel sorts of tests that are in a gray area right now.
Whether test will get covered also depends on where the laboratory doing the test is located, creating a very uneven marketplace for providers and patients.
Some regional Medicare carriers such as Palmetto GBA (which covers California; and North and South Carolina) have set rates that are close to the previous payment levels received by the largest labs for the simplest versions of common tests (versions that might only probe for one or a few variations of a marker). The molecular labs for LabCorp (NYSE:LH) and Quest (NYSE:DGX) are each located in Palmetto’s geographic area. So the carrier has more experience than others in the coverage of molecular diagnostics. Palmetto has also been more flexible than other Medicare contractors in continuing to pay for some “tier 2” tests.
But Medicare carriers in other parts of the country have been much slower to set rates for the 116 standard tests, and are denying coverage altogether for tests that don’t have one of the unique codes. For example, the Medicare carrier CGS, which oversees parts of the Midwest, is telling companies that it won’t pay for molecular tests that haven’t been incorporated into standard treatment guidelines, been substantiated by major clinical articles, and have become a routine part of practice.
That means just about any new test won’t get covered, and even some established tests might not fit the narrow criteria CGS is using.
A list of some of the tests that Medicare won’t pay for can be found on the Palmetto website. Palmetto is one of the few carriers publishing its “non-coverage” decisions.
At the core of this is a more central debate: What level of evidence should a test demonstrate before Medicare will pay it for.
What Medicare is saying, through carriers like Palmetto, is that tests need to show “clinical utility” before the agency pays for it. That means that labs need to prove that the test results will change treatment in a way that improves patient outcomes.
At first blush, this might sounds reasonable. But it’s an imprudent standard that’s at odds with the way that diagnostic tests get used as a part of the practice of medicine.
Diagnostic tests typically supply information that’s fitted into a mosaic of other data. All of this information, combined, helps inform an overall judgment about a patient’s condition and a proper course of treatment. It’s rare that the result of a single test is – in isolation — determinative in guiding a treatment decision. It’s even less common that the outcome of a single test will itself improve a patient’s outcome.
To take a simple example, consider a stethoscope that helps a physician hear a patient’s lungs. The information gleaned from that exam may help the doctor judge that a patient has pneumonia, or heart failure. But by itself, the stethoscope exam can rarely nail the diagnosis, nor select the right treatment.
The stethoscope yields incremental information that helps tip the balance of a physician’s judgment in one direction or the other. It adds to the clinical mosaic.
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The problem is that Medicare’s new requirements thwart the introduction of almost any new test. If a test has to show that it improves clinical outcomes before it gets introduced to doctors and patients, it won’t get introduced in the first place.
The way that the best molecular tests have traditionally become a mainstream part of practice is through deliberate validation from real world use by providers with expertise around a particular marker. The tests are often first performed by a small number of clinical experts who deploy the tests at academic centers of excellence.
By allowing molecular tests to enter the market, they can gain adoption among a small number of clinical thought leaders who are closest to a particular marker. This process of slow introduction and integration into practice has enabled new technology to gain the sort of validation the Medicare program seeks. That is how tests for now more mainstream markers KRAS and EGFR first earned more widespread acceptance. It’s a model that has worked to enable new science to be deployed into clinical practice, by doctors best equipped to make good use of them.
The Medicare agency may think that this process has led it to pay for some molecular tests that didn’t pan out, or reimburse tests before the science fully supported their use. They would be right.
Yet molecular tests represent only about 1% of total spending on laboratory services. It is a fraction of a fraction of the agency’s annual spending.
That doesn’t mean it should be ignored. But the modest spending means that Medicare has the ability to be cautious in how it addresses this category of spending, especially given the potential for this technology to lower costs by enabling the more targeted delivery of medical care. The agency’s abrupt decision to step back from the prior structure has put the market for new technology into turmoil.
If proof of clinical utility is required before the Medicare agency will reimburse a new test then most of these technologies will simply go undeveloped.
This was always the risk to product developers once the new coding scheme went into effect. Medicare was always likely to use its new codes in a punitive fashion, to set coverage policies around the clinical circumstances where certain tests could be used, and what tests it didn’t believe merited any coverage. Now Medicare will be in the position of setting the standard for diagnostic testing, rather than leaving these decisions to be meted out by patients, providers, and the marketplace.
The new transparency this coding system affords is a powerful tool to the agency. It gives Medicare the leverage to further embed itself into decisions around when it judges certain tests to be clinically useful. And when it doesn’t want to pay for them.
Dr. Gottlieb serves as a director to two diagnostic companies that work in clinical areas that have not been affected by the new payment policies.
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