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Clinical Laboratories Facing Paradigm Shifts for Regulation and Reimbursement

Guest Blogger: Jen Madsen, MPH, Health Policy Advisor, Arnold & Porter LLP (Ms. Madsen will be giving a presentation entitled "Public Policy Issues with Regulation and Reimbursement for Precision Medicine" at the 7th Annual Personalized and Precision Medicine Conference in Baltimore on October 5-6, 2015.
Over the next year, policymakers in Washington will be making decisions on the regulation of laboratory testing and Medicare reimbursement that will fundamentally change the industry’s relationship with government.  Companies will need a sophisticated understanding of the regulatory landscape to comply with new rules and succeed in the face of new market forces.  
Regulation of Clinical Testing. FDA has long regulated medical devices intended for use in humans, including in vitro diagnostics (IVDs), but exercised enforcement discretion with respect to its oversight of laboratory developed tests (LDTs).  
CMS regulates laboratories, including those that develop LDTs, under the 1988 Clinical Laboratory Improvement Amendments (CLIA) (42 U.S.C. § 263a).  CLIA governs the accreditation, inspection and certification process for laboratories, and establishes a process for ensuring the analytic validity of LDTs. However, accrediting bodies under CLIA do not evaluate test validation prior to marketing. The clinical validity of many LDTs is described in the medical literature, but the evidence for a new test may not be.     
On September 30, 2014, at the close of a 60-day notification period for Congress, the FDA formally released two draft guidance documents which detail how the Agency plans to regulate the laboratory developed tests (LDT) industry. The draft guidance would require labs to notify FDA that they are developing LDTs, report significant adverse events to FDA, obtain appropriate pre-market review from FDA based on level of risk, and adhere to the device Quality System Regulations/current Good Manufacturing Practices (GMP) requirements.
Since releasing the guidance, FDA has held a public meeting to seek stakeholder input and received comments from hundreds of interested groups. FDA reportedly has written a final guidance, but it has not yet been released to the public. Key committees in both the House and Senate have taken an interest in the draft guidance, with more hearings possible this fall. The American Clinical Laboratory Association, which believes FDA lacks legal authority to regulate LDTs as medical devices, has both threatened suit and asked Congress to intervene.    
Medicare Reimbursement Changes. Meanwhile, CMS has drafted, but not released, regulations implementing Section 216 of the Protecting Access to Medicare Act of 2014 (PAMA). The law requires laboratories to report to the federal government data on the payments they receive from private payers, Medicare Advantage Plans, and Medicaid managed  care plans.  Failure to comply with the reporting requirements carries the potential for civil money penalties of up to $10,000 per day -- so laboratories need to pay attention to these new rules and be ready to comply.  
CMS will use this data to calculate a weighted median paid for each laboratory test, and those amounts will set new Medicare payment rates for tests starting January 1, 2017. But meeting that deadline could prove difficult, as the statute envisioned final regulations for the data reporting requirement being completed by June 30, 2015. Once the proposed regulations are released, stakeholders will have 60 days to comment on them. Then CMS will need to finalize the regulations, implement an electronic system for labs to submit their payment data, train labs on how to use it, and calculate median payment rates after laboratories collect and report their data.
The proposed rule is expected to answer questions such as:   
Which laboratories are “applicable laboratories”? Laboratories that receive half or more of their Medicare revenues from the CLFS or PFS must comply with the reporting requirement, but CMS may establish exceptions for labs that have low volume or low Medicare spending. Independent laboratories, pathology practices, physician office laboratories and hospitals are waiting to learn whether and how they will be affected.  
Which tests will qualify for special payment rules? The law defines a new category of “Advanced Diagnostic Laboratory Tests” or ADLTs. New ADLTs will be paid at their “list charge” at the time of launch for the first three quarters that they are on the market, and will report payment rates annually to set new Medicare rates. Tests that use algorithms to analyze multiple biomarkers and report a single result, and tests that are FDA cleared or approved, are defined by law as ADLTs. But CMS has the discretion to include (or exclude) other tests.
How will new tests receive codes, coverage, and payment? CMS will be required to establish temporary HCPCS codes for new ADLTs that will be effective for two years, unless extended by the agency. CMS must establish codes for existing ADLTs, and companies may also request a unique identifier. Labs and diagnostic test makers need to understand the new rules for code assignment and how they relate to obtaining Medicare coverage. PAMA allows CMS to reduce the number of Medicare contractors processing claims for laboratory tests. Will one or two contractors’ policies define coverage across the country?
The broader questions facing the industry include: 
Will Congress act on questions of regulatory oversight? The House of Representatives passed the 21st Century Cures Act on July 10 but was silent on the LDT issue despite the ACLA’s objections. The House Committee on Energy and Commerce continues to discuss the issue, and it may be included in companion legislation in the Senate later this fall. But Congress could defer action on the issue until it begins work on a reauthorization of device user fee law, which is set to expire in 2017. FDA has already started discussions with the industry on a new user fee agreement.  
How will regulatory changes affect the lab industry? More certainty about the regulatory and reimbursement environment could ease concerns of reluctant investors about future returns, but require more up-front capital to prove clinical validity to the FDA. And lower Medicare payments could influence other payers’ rates and reverberate throughout the industry.  
Want to learn more about these upcoming regulatory and reimbursement changes? Attend the presentation “Public Policy Issues with Regulation and Reimbursement for Precision Medicine,” given by Jen Madsen, Health Policy Advisor at Arnold & Porter LLP, at the 7th Annual Personalized & Precision Medicine Conference, a satellite event of the American Society for Human Genetics Annual Meeting. The presentation starts at 9 AM on Oct. 5, at the Sheraton Inner Harbor Hotel in Baltimore, MD.
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