During the past few weeks, I’ve been occasionally discussing a report by Kalorama Information (New York) entitled, “The United States Market For In Vitro Diagnostic Tests.” This report examines the current state of the U.S. IVD market, analyzes the various emerging trends impacting the market, and discusses how these developments could affect IVD manufacturers. This week’s blog presents more of the report’s analyses.

Read: Trends in the U.S. IVD Market: Healthcare System Utilization and Aging Demographics

Clinical Lab Expenditures and Payers
According to the report, the continuing economic recovery and the expansion of the health insured population nationwide through the Affordable Care Act (ACA) are expected to increase health expenditures beyond the U.S. economy’s growth rate. The Centers for Medicare and Medicaid Services (CMS) has projected that total U.S. health expenditures will have a 5.8% growth rate between 2012 and 2022, compared to a projected GDP growth rate of 4.8% during the same period.

“While recent years have been painful for the U.S. IVD industry and its clients, the continued impacts of economic recovery and ACA implementation represent positive factors for future clinical and medical laboratory testing demand,” said the report.

The report stated that Medicare and Medicaid represent 30% of payments for physician and clinical services. At the same time, the declining share of private insurance for U.S. health expenditures during the last decade has resulted from aging demographics (workers retiring and subsequent relying on Medicare or retirement benefits) as well as higher unemployment and underemployment.

“This trend is expected to abate with an improving job market that in conjunction with the ACA, is expected to reinvigorate private insurance spending associated with patient utilization of services,” said the report. “While the contribution of private health insurance to national health expenditure will remain static or slightly fall, private insurance is not projected as a weakening element of lab testing revenue, but rather a slower growing payment source than Medicaid and Medicare.”

The report found that clinical laboratory expenditures in the U.S. are met primarily through private payments. Managed care organizations account for 40% of U.S. clinical lab expenditures, followed by commercial insurance and other non-patient private payers (29%), Medicare and Medicaid (26%), and patients (4%).

“Kalorama Information expects payer distribution in U.S. clinical lab testing to remain largely unchanged through 2018,” said the report. “The shares of the Medicare and Medicaid programs and of patients (out-of-pocket payments) may each gain minimally 1-3% with aging and as coinsurance or deductibles become more of a factor in lab testing.”

Read: Trends in the U.S. IVD Market: Diseases and Testing Venues

The Affordable Care Act
The ACA’s major themes that are most relevant to the U.S. IVD industry, according to the report, are the encouragement of preventative healthcare and the expansion of the health insured population. Higher patient volumes and a greater emphasis on health screening and primary care are expected to impact U.S. IVD demand positively during the coming years and more than offset provisions in the ACA that burden clinical testing.

“Kalorama Information has estimated that the ACA would contribute average annual growth of 1.2% to the U.S. IVD market between 2012 and 2022,” said the report.

The report stated that frequent reimbursement cuts to CMS fee schedules have burdened the U.S. clinical lab industry for years, resulting in revenue losses for independent labs and in industry consolidation, but have not reversed growth in U.S. testing demand and IVD sales. In addition, transition challenges due to the ACA can be expected in some IVD segments, such as lower test consumption in integrated care with efficient, non-redundant routine testing and lower reimbursement rates for more esoteric tests.

“But such stresses are unlikely to affect long-term markets where reimbursement rates and non-fee-for-service payment models are aligned with the accepted clinical value or established utility of a test,” said the report.

Trends in the U.S. IVD Market: Market Segments and Conclusions

Lab Fee Cuts and Molecular Diagnostics Reimbursement
The report stated that Medicare is the key to post-ACA clinical lab test pricing. Beyond its role as the single largest payer for IVD testing services, Medicare increasingly serves as a benchmark for private insurers’ reimbursement rates for lab services and procedures. Medicaid and private insurers often take Medicare’s example in making coverage decisions and setting reimbursement rates for newly introduced and advanced tests.

But the report noted that in practice, Medicare’s clinical lab fee schedule (CLFS) has rarely granted labs increases in year-over-year reimbursement rates for IVD testing. According to the American Clinical Laboratory Association, from 2003 to 2013, CLFS pricing has been frozen or cut in 10 out of 11 years. Since 1984, Medicare reimbursement under the CLFS has been cut by 67% in real, inflation-adjusted dollars.

“Even following a number of CLFS reimbursement cuts in recent years, government pressure on Medicare lab reimbursements is unlikely to relent in the coming decade,” said the report. “The administration’s current budget calls for an extension of annual 1.75% cuts from 2016 to 2023. CMS is also scheduled to begin revaluing CLFS procedure fees beginning in 2015, following an Office of the Inspector General report that discovered Medicare overpayment by 18-30% for routine tests compared to Medicaid and Federal Employee Health Benefits plans.”

According the to report, prior to 2013, Medicare reimbursement for many molecular and other newly introduced IVD tests was possible only through code stacking, rather than billing with a single current procedural technology (CPT) code. With code stacking, labs could bill CMS by test step (e.g., DNA extraction, digestion, amplification, hybridization, and detection) without reference to the analyte or identification of test purpose.

“Molecular pathology CPT codes were introduced by the American Medical Association in 2011 and replaced stacking codes for molecular diagnostic tests beginning in 2013,” said the report. “Labs and other providers are no longer able to bill molecular diagnostic tests using retired stacking codes. Originally, only over a hundred molecular pathology CPT codes were released, but were eventually integrated into a comprehensive tiered coding system. Test- or analyte-specific molecular pathology codes have been unquestionably welcomed by the U.S. lab and IVD communities, though their implementation with CMS billing has been more contentious.”

The report stated the Coalition to Strengthen the Future of Molecular Diagnostics and other industry groups found that Palmetto GBA and other Medicare administrative contractors (MAC) priced some molecular pathology codes below the cost of performing the test. The coalition also found that MACs had cut payment rates by 20% for many molecular tests, compared to effective payments made under code stacking, and by as much as 80% for some tests. In addition, the Personalized Medicine Coalition found that the prices of personalized medicine-related molecular tests had been cut by about 30%.

“Certain molecular pathology codes were not provided a gapfilled price by MACs in 2013 and are effectively excluded from coverage in the administrators’ regions in 2014,” said the report. “Industry associations noted that such an action on the part of MACs conflated the gapfill pricing exercise with coverage determinations. While exclusion from coverage and inclusion on the CLFS is common, the lack of test pricing deprived other payers, notably Medicaid, from establishing a new standard and could presumably cause additional payers to reconsider coverage for some molecular tests.”

I will continue to present more analyses from this report in upcoming blogs. Visit the Kalorama Information website for more information about the company and its IVD market reports.