Back Page: Diagnostic Dilemma

Nov 01, 2004

As more biotech products come on the market, insurance coverage and reimbursement for treatment will become increasingly dependent on molecular diagnostic and cellular testing. After all, specific biological markers can predict the likelihood that an anticancer drug will work or define the treatment group for a clinical trial.

Gerald N. Rogan, MD

Executives can see this dynamic at work by examining how Medicare carriers reimburse Herceptin (trastuzumab). They will pay, or deny payment, for Herceptin depending on whether patients' breast cancer cells over express the Her2Nu receptor. Likewise, a company that doesn't differentiate cohorts by the Her2Nu receptor when conducting a Herceptin clinical trial would be required to test a much larger number of patients to prove Herceptin works. In that way, tests for biological markers are now an important part of biotechnology drug development, both for coverage decisions and for clinical study group selection.

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Different Reimbursement Models Medicare reimburses diagnostic tests differently than it does for biotherapeutics. Beginning in 2005, Medicare payment for drugs equals average sales price plus 6 percent, assuring adequate reimbursement to the pharma company for its R&D costs. By contrast, Medicare establishes fees for new diagnostic laboratory tests through entirely different processes.

Cross-walking. The Centers for Medicare and Medicaid Services (CMS) most often use the cross-walking method when establishing prices for new diagnostic tests. This means the government simply looks at prices assigned to similar existing laboratory tests on the market, and prices new tests accordingly. Although this method would generate a payment to the lab based on the cost to produce the test, it doesn't consider that laboratory's current or future R&D costs.

Gap-filling. Another way of establishing laboratory test prices, though less common, is the "gap-fill" method. Medicare part B laboratories now submit their retail prices to carriers who, in conjunction with CMS, determine an allowable price.

If the laboratory develops a test kit for resale to retail labs, the prices submitted to carriers by retail laboratories typically will include the cost of the kit plus a markup exceeding the anticipated Medicare discount. Therefore, the gap-filling process probably will assure that the payment level covers the R&D costs of the test kit. However, if the lab that develops a test performs it without a test kit, CMS may price the tests without a markup, which doesn't allow companies to recover their R&D investment.

Recoup R&D The new Medicare law suggests CMS will consider the laboratory resources required to perform the test when deciding the payment. But the question remains: Will those resources include reasonable R&D costs in the allowable for diagnostic tests?

Regulations addressing Section 942(b) (Improvement in oversight of technology and coverage) of the Medicare Modernization Act of 2003 should appear in 2005. That section authorizes the public to comment and make recommendations on the appropriate basis for establishing payment amounts for listed tests. CMS also established its Council on Technology and Innovation (CTI), which will address coverage, coding, and reimbursement of new technology. In doing so, CTI becomes the point of contact to facilitate more collaborative and transparent interactions between CMS and industry.

To that end, pharma companies should let their voices be heard. They should show CTI their support for getting the diagnostics industry the kind of coverage and reimbursement that will allow them to recoup their R&D costs.

It is reasonable and necessary for these industries to work together. By supporting an adequate reimbursement model for the diagnostics industry, pharma will help ensure that their new drugs, which are dependent on these diagnostic tests, will remain affordable to publicly funded programs.

Gerald N. Rogan, MD, is a Medicare expert. He can be reached at (916) 978-9636 and or

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