Delivering the promise of personalized medicine diagnostics

Nov. 1, 2011


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Upon completion of this article, the reader will be able to:

  1. Discuss the importance of accreditation by the appropriate agency with regard to molecular diagnostics;
  2. List several emerging molecular techniques and the challenges associated with molecular diagnostics;
  3. Describe the intent and benefits of “personalized medicine diagnostics”;
  4. List several advantages of molecular testing as opposed to traditional culture-based testing’
  5. Describe the concerns that have been raised with regard to current and future reimbursement for molecular diagnostics.

There is a growing interest in both cost savings and greater safety and efficacy associated with a “personalized medicine” approach to drug therapies. Considerable gains will be realized if the right drug can be given to the right patient at the right dose, within any therapeutic area. However, the reimbursement, pricing, coding, and regulatory systems that will support this scientific and clinical paradigm shift are still evolving. In this study, we analyze the current U.S. regulatory and reimbursement environment in order to highlight both roadblocks and opportunities for improving the uptake of laboratory tests that drive drug therapy choices. We present case studies of several tests currently being used within the personalized medicine space to demonstrate factors driving coverage, payment, and adoption issues. At the policy level, regulatory and reimbursement systems must be redesigned to be as effective and efficient as personalized medicine itself and to incentivize rather than impede the use of combination diagnostics and drugs. At the clinical level, we predict an increasingly important role for laboratory experts, pathologists, geneticists, and clinicians who can facilitate test choices through their expert understanding of differentiating factors among the available tests, including their differential accuracy or impact on patient outcomes.


Despite the rising costs associated with therapeutic innovations, pharmaceuticals frequently yield relatively low population-level efficacy, creating a significant opportunity to provide a more targeted approach to medical treatment.1 The potential financial benefits of more personalized prescribing are impressive. It is estimated that 40% to 70% of patients do not respond to available treatments for conditions such as depression, asthma, diabetes, arthritis, and cancer.2 When considering that $808 billion were spent on pharmaceuticals globally in 2009, the resources spent inefficiently or ineffectively translate to approximately $345 billion healthcare dollars.3

Personalized medicine diagnostics, including stand-alone genetic tests, biomarkers, and companion diagnostics, make this targeted approach possible. While not available for every novel therapy, 12% to 50% of clinical pipeline products involve personalized approaches using diagnostics to identify subpopulations appropriate for treatment with diseases such as breast cancer, autism, and heart disease.4

Making the new diagnostic tests available in the clinical setting involves a complex sequence of events and operations that connects research and development of testing approaches to market access, pricing, and reimbursement. In this paper, the nuances of the three most significant though quite different domains are considered in order to shed light on the complex and evolving nature of the personalized medicine market and the pathways currently available to companies bringing new technologies to market. Those three domains are:

1) The regulatory system for laboratory diagnostics;

2) Coverage and payment decisions; and

3) Clinical implementation of technologies, where guidelines, clinical knowledge, and physician choices intersect to drive specific healthcare delivery to patients.

Regulatory environment for personalized medicine diagnostics

Since 1976, the U.S. Food and Drug Administration (FDA) has regulated the manufacture of laboratory tests that are marketed as kits, including review of the clinical performance data that supports the test. Separately, the operation of every clinical laboratory in the U.S. is regulated by the Centers for Medicare & Medicaid Services (CMS) through the Clinical Laboratory Improvement Amendments (CLIA). CLIA requires each lab to maintain documentation of the analytical validity (e.g., precision) of lab tests, but the lab is not required to demonstrate the clinical reliability or appropriateness of the test.

These two regulatory paradigms play out as follows. Within a laboratory, which must be licensed by CLIA, some diagnostic tests represent kits and equipment that underwent FDA approval. Other diagnostic tests are not purchased as kits. Instead, they are created following published methods using reagents, standards, and general bench-top lab equipment. The latter approach is referred to as “laboratory developed tests,” or LDTs. For some personalized medicine tests, both FDA-approved tests and LDTs are available.

The FDA has specified that companion diagnostics under its regulation that direct drug therapy choice should be considered Class III medical devices and follow the Premarket Approval (PMA) process, the most strict level of FDA device review and one that typically requires appropriately designed and conducted clinical trials.5 Recently, the FDA released a draft guidance document to clarify the position of the regulatory agency towards the use of non-FDA approved molecular tests in labs reporting clinical results.

In 2010, the FDA explained that its historical position was based on the traditional nature of LDTs being relatively simple, well-understood pathology tests or contained components that were individually regulated by the FDA.6 Some LDTs in use today, however, are increasingly complex, and are used to identify risk factors for diseases and to inform critical treatment decisions. Therefore, the FDA is reconsidering its historically relaxed oversight of LDTs to ensure that all tests are properly validated by an objective and rigorous third party (such as the FDA) for their intended use. The FDA has also directly noted that the absence of a level playing field creates a disincentive for industry to invest in the evidence development required to support submission to the agency.6 As the FDA seeks to change its system of regulation of LDTs, legislation is being developed in Washington that could create a Center for Advanced Diagnostics Evaluation and Research responsible for ensuring the safety and efficacy of a new category of tests called “advanced personalized diagnostics.” The likelihood of passage is unclear.7

While the FDA and policy makers have increased focus on the regulation of all laboratory tests, laboratories, clinicians, and manufacturers are looking for clarification as to whether there will be a relationship between different levels of regulatory approval and resulting reimbursement, coverage, and payment. Some groups want a level playing field at the level of reimbursement, so that laboratory staff can choose the best test (kit or LDT) without bias from unequal payments. Other groups feel that FDA-approved or -cleared tests face extra development costs to obtain a higher standard of certification, which is a business investment that makes little sense unless it is compensated.

Ultimately, through one mechanism or another, it appears likely that increased oversight by the FDA on personalized medicine diagnostics will occur, and this should ensure that patients will receive tests that use standardized methodologies with demonstrated clinical utility.

Reimbursement for personalized medicine diagnostics

Payer coverage policies are developed to identify which technologies, tests and therapeutics will be paid for and which patient population will have access to them. Drugs are usually evaluated (post-FDA approval) by a Pharmaceutical and Therapeutics (P&T) committee with input from external health technology assessment groups in some cases. In contrast, test evaluation has typically been a less formal process, either being reviewedby the technology assessment committee or being paid for without review if the relevant CPT code is already covered. For high volume or high complexity tests, the payer may be more cautious before paying for the test.8

Personalized medicine necessitates combining both the test and the drug evaluation under one umbrella. Without real-world evidence on clinical utility, duration of effect and cost-impact, payers struggle to appropriately evaluate new tests and treatments.1,9 For novel personalized medicine diagnostics there is currently no mechanism in place to differentiate the coverage and payment between LDTs or FDA-approved kits.

Coding and payment for personalized medicine diagnostics

Once a diagnostic test has been evaluated for coverage, payers also struggle to determine the adequate payment for personalized medicine diagnostics. Despite the fact that diagnostic tests are estimated to influence 60% to 70% of all treatment decisions, they account for only about 5% of hospital costs and 2% of Medicare expenditures in the U.S.10 In both coding and payment for diagnostic tests, there is a focus on the technical components of the test. This methodology fails to account for the clinical value of the diagnostic test results and for the costs of developing evidence demonstrating clinical utility. This methodology also fails to recognize the value that companion diagnostic testing brings to the U.S. healthcare system through cost savings. The AMA has recently approved 63 new molecular codes and nine level-complexity codes to more specifically describe the highest-volume tests that currently use code-stacking and that will come into routine use by 2013.11 With more specific coding in place, payers will be able to better monitor what tests are being paid for and create coverage policies that differentiate among test options.

Clinical implementation of personalized medicine diagnostics

Pathologists and other laboratory directors are involved in choosing tests at the laboratory level to support clinical decision making; however, ordering clinicians rarely stipulate the specific brand or method of test being ordered. Multiple factors impact the tests that are available, including whether a laboratory has developed its own test for a specific target, whether the lab owns a platform that enables testing with certain kit-based versions of tests, and the reimbursement the laboratory can expect for each option.

Diagnostic test case studies

The following case studies provide two examples of how the current regulatory, coverage, coding, and payment environment creates questions related to optimal development and reimbursement pathways for novel personalized medicine tests.

Provider reimbursement case: KRAS mutation detection for Erbitux/Vectibix use

Mutation of a KRAS gene is an essential step in the development of many cancers, including colorectal cancer.12 Currently, the most reliable way to predict whether a colorectal cancer patient will respond to one of the EGFR-inhibiting drugs, such as panitumumab (Vectibix) and cetuximab (Erbitux), is to test for certain “activating” mutations in the gene that encodes KRAS.13 Studies show patients whose tumors express the mutated version of the KRAS gene will not respond to Erbitux or Vectibix.14

KRAS mutation testing is widely available via a variety of testing methods, but there is no consensus as to which currently available method of testing can provide the most accurate and efficient detection of KRAS mutation. Although payer coverage policies for use of Erbitux and Vectibix cover KRAS testing prior to use of the drug, the policies do not attempt to differentiate between testing methodologies.15 There is currently no FDA-approved KRAS test, though QIAGEN has a kit under development. When an FDA-approved test becomes available,with the associated body of clinical evidence required by the agency to grant approval, will payers create differential levels of reimbursement for it versus LDTs in order to ensure that pathology labs will run the diagnostic test companion for the drug?

Regulatory decision-making case: 158V/V variant testing for rituximab (Rituxan) use

Identifying the 158V/V variant can help identify those patients with follicular, CD20-positive, B-cell non-Hodgkin’s lymphoma who are more likely to respond to rituximab (Rituxan) monotherapy than patients with other variants.16 Based on published data, approximately 20% of patients will carry the 158V/V variant and will be identified by this test as more likely to respond (estimated response rate of 90%).17,18,19

This test, sold as “PGxPredict™:RITUXIMAB,” was not FDA-approved and was recently cited in a New England Journal of Medicine article as an example of why more regulation is needed for LDTs.20 In discussing the validity of the ability of the test to identify those patients with the 158V/V variant, the authors of the article, FDA Commissioner Margaret Hamburg and NIH Director Francis Collins, state that, “The FDA has not reviewed the scientific justification for this claim, but health care providers may use the test results to guide therapy.” The authors also state that, “This undermines the approval process that has been established to protect patients, fails to ensure that physicians have accurate information on which to make treatment decisions, and decreases the chances that physicians will adopt a new therapeutic-diagnostic approach.” Should the FDA allow the test to be marketed though it has stated publicly that it is concerned that its data has not been reviewed?


As the pace for diagnostic and personalized medicine innovation accelerates rapidly, payers and other stakeholders are challenged with appropriately valuing novel technologies. Increasingly, payers and health technology assessment groups are expecting some demonstration of clinical utility as a baseline for establishing coverage. But the payment system, as currently set up, fails to distinguish between FDA-approved and non-FDA approved tests because of the test-agnostic nature of CPT codes. Additionally, payers may not be aware of the technological differences between testing approaches. And while the CPT coding process is currently being changed by the AMA to include new molecular codes, the new codes do not change the current system of methods-based payment as opposed to value-based reimbursement. A value-based reimbursement systemwould be superior to a system based on the technological complexity of the test because it would take into account the clinical utility of the test, the validity of the test’s effectiveness, and the cost savings it provides to the healthcare system.

Clinicians’ awareness of test options is also usually limited to tests that their laboratory recommends. Clinical experts in the nuances of laboratory services are likely to play an increasing role in determining the relative benefits and risks associated with LDT versus FDA-approved kit-based versions of tests for the same target. Financial incentives to use one testing method over another, however, may impact test choice. As such, a reimbursement system that favors evidence-based technologies may change these dynamics to align financial incentives with clinical best practices. As payment systems evolve to reconcile evidence with payment levels, pathologists and other laboratory experts will need to take a more active role in informing their clinical colleagues as to the relative value of alternate approaches, and clarifying how FDA-approved tests may provide validation benefits and legal protection in some circumstances.

Susan Garfield, DrPH, is a health economist and public health professional who has held various positions throughout the diagnostics industry. She is currently a vice president with Bridgehead International. Meghan Gavaghan, MPH, has worked in the life sciences industry for the past 10 years and is now a consultant with Bridgehead International. Bruce Quinn, MD, is a board-certified pathologist who is currently a senior health policy specialist with Foley Hoag LLP.


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