Originally Published IVD Technology January/February 2003
Commentary
Is the current reimbursement structure limiting R&D in IVDs?Joseph Ferrara
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| Joseph Ferrara is vice president of consulting services at Boston Healthcare Associates (Boston). He can be reached via jvferrara@bostonhealthcare.com. |
The complex nature of reimbursement for laboratory tests is a familiar challenge for the commercial lab industry. Assuming that a payer will cover a test ordered by a physician, the lab must select the proper reimbursement code from a list that may or may not have a choice that adequately describes the technology employed. And such payments may or may not be enough to cover increasing technology costs. This often-frustrating reimbursement process also affects IVD manufacturers, which is especially apparent with the commercialization of novel molecular markers. As the costs associated with the development of these markers rise, manufacturers are increasingly concerned that the coding and payments for these tests may have structural limitations that will prevent them from recouping R&D expenses.
The Limits of Coding and Payment
As the understanding of the genetic basis of disease grows, a consensus is building that the causes of many diseases may not be simple mechanisms but rather complex combinations of many factors. The IVD industry has responded accordingly by making substantial investments in R&D that have accelerated the development of molecular diagnostic markers and analytical platforms.
This increase in genomic understanding and the subsequent growth in R&D investment present two issues for the healthcare system, particularly regarding reimbursement: definitive diagnosis will likely require testing for multiple markers of disease, and the tests themselves will become increasingly costly to develop and therefore more expensive. One of the promises of this new diagnostic paradigm is cost-effectiveness. While the increase in molecular testing may be more expensive for the health system initially, the results of the tests will be more definitive, thereby allowing for more targeted therapies and reducing health system costs downstream.
But are the current approaches to reimbursement for IVDs equipped to handle this burgeoning genomics-driven testing paradigm? The current procedural terminology (CPT) that provides the codes for clinical lab use has encountered problems due to the range of technologies emerging from the explosion in automated, gene-based research. Not only does the relentless stream of new technologies make it difficult for the CPT editorial panel of the American Medical Association (AMA) to develop generic descriptions suitable for such a coding system, but also the association faces the possibility that it may issue codes for technologies that may not be widely adopted or may shortly become obsolete.
Furthermore, for molecular diagnostics, CPT coding is generally based on a technology or work description, and not the particular gene or disease marker being tested. Thus, CPT codes are designed to describe the steps involved in isolation and amplification without describing the associated disease condition. This lack of disease-specific information makes it difficult to track the number of tests being performed for certain conditions, which has broad implications for healthcare system analysis and research.
The long-term consequences of the CPT codes on reimbursement for molecular diagnostics may be even more substantial. Coding and payment based only on analytical technology and work performed may not account for important differences between tests, such as reagent expense that varies depending on the condition being tested. The inability of the coding system to account for differences in the reagent expenses incurred by labs directly affects a laboratory's ability to obtain appropriate payment and offer certain tests profitably. Further upstream, this inability limits IVD manufacturers' efforts to recoup R&D expenses associated with a particular test.
The inadequacies of the CPT coding system with regard to molecular diagnostics are presently being discussed. The AMA and other professional organizations such as the College of American Pathology and the American College of Medical Genetics, along with IVD manufacturers, are reexamining the structure of the CPT codes and making recommendations on how it should be revised. This effort may result in a coding structure that takes into consideration novel analytical technologies and provides a methodology to account for disease- or reagent-specific test distinctions.
However, the problems with coding and payment for IVDs extend beyond molecular diagnostics. Companies that market novel immunoassays have also encountered difficulties with reimbursement when introducing a new test. Even if a new CPT code is granted for the new test, payment may be based primarily on the fact that the test is an immunoassay, regardless of the novelty of the marker and the potentially substantial R&D costs associated with its discovery.
Valuation and R&D Investment
The limitations of the CPT coding system and associated payments for IVDs have affected laboratories' use of innovative technologies and markers. These limitations have also affected IVD manufacturers by restricting their investment in new IVDs.
Payers have created mechanisms to reimburse for novel tests, such as Medicare's "gap filling" process. However, innovative novel tests are often grouped in payment terms with tests that have similar analytical methods but little else in common. IVD companies look at the opacity and inconsistencies in this process and factor these limitations into the valuation of their early-stage technologies. When coding and payment do not accommodate variations in new technology costs, the resulting environment is not good for R&D investment.
Why should an IVD manufacturer invest substantial funds to discover and develop a novel marker, only to find out reimbursement to labs may be no more than it is for another test that is similar in its analytical technology, or even in work performed, but has significantly lower reagent costs? It is not surprising that many companies with promising applications in clinical testing have been migrating toward drug discovery and development.
Similarly, given reimbursement considerations, companies with technologies that have been developed for drug discovery may be reluctant to deploy these technologies in the diagnostics arena, even though these technologies could have enormous clinical value.
Certainly, labs and IVD manufacturers would welcome an effective reform of the current coding structure for laboratory tests and the associated payment approach. With more-accurate coding language, these stakeholders could seek payment that more closely reflects the expense and clinical implications of a particular test, and not payment based solely on laboratory technology and operational costs.
Payer Perspective
Payers would also welcome such a change because it would allow them to set payment for a test based not only on the laboratory work involved, but also on a test's particular clinical and cost benefits.
For example, clarity in the coding for lab tests would enable payers to grant reimbursement for a test that is more closely in line with its clinical impact, taking into account the cost-benefits or health economics of the test. In addition to recognizing the limitations and inconsistencies of the reimbursement environment for lab tests, many payers realize that if these limitations result in underpayment, the long-term consequences may include less direct R&D investment in potentially lifesaving diagnostic technologies that could be made available to patients.
Conclusion
Since it will take time for the reimbursement changes being considered to be implemented, what can laboratories and IVD manufacturers do now?
IVD companies must work with payers at an early stage regarding their technologies to gain insight on the potential for coverage, likely reimbursement parameters, and the clinical and economic data needed for payers to make informed decisions. It is imperative for companies to understand how the cost of their technologies affects the health system, perhaps even before making a substantial investment in R&D. These health economic factors must then be communicated to payers, showing how the new technology will affect their patient population in terms of potential clinical and economic benefits.
IVD companies should also make an effort to educate payers on the real costs of R&D behind novel diagnostic technology, In fact, many payers understand the negative effect that underpayment to labs, and ultimately to IVD manufacturers, will have on future R&D investment in diagnostics.
Refining the reimbursement coding and, by extension, payment for IVDs will benefit laboratories, IVD companies, payers, and ultimately patients. Such changes will create an environment in which reimbursement can truly reflect the real cost of a new test, both in terms of R&D investment and the economic benefit to the health system. As the potential of many new IVD technologies is beginning to emerge, there is an urgent need for diagnostics stakeholders to collaborate to reform and design a reimbursement structure that will make the promise of these technologies a reality.
Joseph Ferrara is vice president of consulting services at Boston Healthcare Associates (Boston). He can be reached via jvferrara@bostonhealthcare.com.
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