Introduction
Is your clinical laboratory interested in growing its revenue base by developing a new commercial test? Perhaps you have heard about labs providing a novel test that your providers would order in high volume but haven’t been able to identify a vendor who sells a turnkey solution. It’s likely that you’ve been thinking about a laboratory developed test (LDT).
LDT’s play an important role in clinical diagnostics allowing laboratories to create innovative assays to meet unmet medical needs. However, developing a financially viable LDT requires careful planning and consideration of several key factors. The purpose of this guide is to review the financial, operational, and clinical elements that contribute to creating a commercially successful test in your diagnostic laboratory.
Table of Contents
What is a laboratory developed test?
As defined by the FDA, “LDT’s are in vitro diagnostic products (IVDs) that are intended for clinical use and are designed, manufactured, and used within a single laboratory that is certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA) and meets the regulatory requirements under CLIA to perform high complexity testing.”
Similar LDT’s can be offered by a different laboratory but it is a regulatory requirement that another laboratory independently compete all the steps to offer such a test. Said differently, the first laboratory to produce the test cannot provide the reagents, consumables, and bioinformatic processes to another laboratory as a turnkey solution, unless the other laboratory is willing to complete all the LDT validation requirements.
IVDs are commercial products and are intended for use in the collection, preparation, and examination of specimens taken from the human body, such as blood, saliva, or tissue. LDTs, a subcategory of IVDs, can be used to measure or detect a wide variety of substances or analytes in the human body, such as proteins, glucose, cholesterol, or DNA, to provide information about a patient's health, including to diagnose, monitor, or determine treatment for diseases and conditions. Some examples of current molecular LDT tests include multi-oncogene profiling of solid and hematological tumors, pharmacogenetic analysis for response to certain prescription drugs, identification of pathogens and antibiotic resistance genes related to different respiratory or skin and soft tissue infections, non-invasive prenatal testing for inherited conditions, and predictive risk analysis for a variety of heart, eye, and cancer diagnoses.
What is the process for creating laboratory developed test?
Creating an LDT is a complex undertaking with multiple stages that have very different knowledge, infrastructure, financial, and operational requirements. At a minimum. an LDT requires adequate funding, strategic planning, a licensed and accredited analytical laboratory, and a validated assay and result reporting mechanism. Figure 1 shows a high-level overview of the general process and a non-exhaustive list of many of the sub-requirements.
In our experience, we believe that laboratories need to spend substantially more time in three areas: 1) strategic planning, specifically defining the clinical validity and tying these to the purported health and economic outcomes of testing and 2) mapping how raw laboratory results will be analyzed and presented to the provider during the test configuration step, and 3) clinical validation. As payors are demanding evidence that a new test provides clinical utility AND cost savings as a prerequisite for reimbursement, the importance of these issues will only increase.
Why is molecular testing particularly well suited to be LDT’s?
Molecular techniques like quantitative PCR and next-generations sequencing (NGS) can be readily adapted to detect different genetic targets. Importantly, well characterized DNA reference and variant sequences from the Human Genome Project greatly facilitates identification and characterization of specific genetic loci. Further, synthesis of the nucleic acid primers and/or probes that detect and amplify these loci of interest can be done quickly, with high quality, and at low cost by multiple US based manufacturers. This easy access to custom-prepared consumables allows labs to create and modify highly specific tests for specific genes or variants relevant to their patient populations in relatively short time frames.
What are the ideal parameters for a commercially viable molecular LDT?
History is littered with both start-up and established laboratories who created a novel diagnostic test that failed to turn a profit. While there are many reasons for a test to fail financially, many can be traced to insufficient market needs and reimbursement strategy development during strategic planning. Some of the fundamental requirements that must be known before doing any science or instrumentation purchase include:
• Demonstration of actionable clinical utility by supporting provider decision making and leading to improved health and economic outcomes.
• Knowing who will order the test and realistic sample volumes.
• Test cost sensitivity.
• Rapid turn-around-time.
• Ease of test specimen acquisition, handling, and transport.
• Test specimen shipping costs.
• A non-burdensome, semi-automated process to create, analyze, and report final data.
What is clinical utility?
Clinical utility in the context of laboratory testing refers to the likelihood that a test's results will inform downstream management actions and improve patient outcomes. It goes beyond simply measuring the analytical performance or diagnostic accuracy of a test, focusing instead on how the test results can be applied to enhance patient care. Clinical utility encompasses various aspects, including the test's impact on clinical decision-making, patient outcomes, clinical workflow, and healthcare costs.
The importance of clinical utility for clinical decision-making cannot be overstated. When a test demonstrates high clinical utility, it provides valuable information that helps healthcare providers make more informed choices about patient management, treatment selection, and prognosis. For example, a test with strong clinical utility might guide physicians in selecting the most appropriate therapy, avoiding unnecessary biopsies, or identifying patients at high risk for certain conditions. This can lead to improved patient outcomes, more efficient use of healthcare resources, and potentially reduced costs.
From a reimbursement perspective, clinical utility is crucial for laboratories performing tests. Payers, including the Centers for Medicare and Medicaid Services (CMS), increasingly require evidence of clinical utility when making coverage and reimbursement decisions. A test that demonstrates clear clinical utility is much more likely to be adopted by healthcare providers and covered by insurance, which directly impacts the financial viability of the laboratory offering the test. Additionally, showing clinical utility can differentiate a laboratory's test offerings in a competitive market, potentially leading to increased test utilization and revenue.
How are laboratories reimbursed for providing molecular LDT services?
Three primary payors exist for laboratories: private insurance carriers, Medicare/Medicaid, and individual consumers. However, payors do not base compensation on testing methodology, instrumentation, or IVD vs. LDT status. Payment rates are set independently of laboratory testing cost and by doing so encourage laboratories to find cost efficient technologies to provide their services. It is common for LDT’s to be very cost efficient and why laboratories often chose this testing approach.
When working with private insurance companies, laboratories typically have negotiated contracts that establish agreed-upon rates for specific tests. The laboratory bills the insurance company directly for services provided to insured patients. The insurance company then processes the claim, determining coverage based on the patient's plan and any applicable copays or deductibles. After processing, the insurer pays the laboratory the contracted rate, which may be less than the full billed amount. Patients are often responsible for any remaining balance not covered by their insurance.
When patients do not have insurance coverage, choose not to use their insurance, or their insurance carrier denies payment, laboratories may bill them directly as self-pay patients. Many laboratories offer discounted rates or payment plans for uninsured individuals to make services more accessible. Many laboratories are transitioning to offering upfront pricing transparency and collect payment at the time of service to reduce billing complexities and ensure compensation for their services.
For services provided to Medicare and Medicaid beneficiaries, laboratories must follow specific billing procedures and fee schedules set by the Centers for Medicare & Medicaid Services (CMS). The Clinical Laboratory Fee Schedule (CLFS) determines the payment rates for most tests under Medicare Part B. These rates are generally based on the weighted median of private payor rates, test costs, and program sustainability and are updated periodically. Laboratories submit claims directly to Medicare or Medicaid, which then process and pay for covered services according to the established fee schedule. Unlike private insurance, patients typically do not have copays or deductibles for clinical laboratory services under Medicare.
What is the regulatory status of laboratory developed tests?
The FDA recently finalized a rule that explicitly classifies LDTs as medical devices under the Federal Food, Drug, and Cosmetic Act. While the Final Rule has not been implemented yet, it may upend nearly 50 years of regulatory precedent by subjecting LDTs to FDA oversight and regulation as in vitro diagnostic (IVD) products. There has been significant industry pushback against FDA regulation of LDTs, which will undoubtedly lead to continued lobbying efforts for congressional intervention.
Summary
LDTs offer significant flexibility, particularly in molecular testing using techniques such as quantitative PCR and next-generation sequencing (NGS). These technologies are well-suited for creating highly specific tests for genetic targets due to their adaptability and the availability of custom-prepared consumables. However, successful LDT development requires careful strategic planning, clinical validation, and demonstration of clinical utility.
Key factors for a commercially viable molecular LDT include actionable clinical utility, accurate market need assessment, realistic sample volumes, cost-effective testing, and a streamlined reporting process. Clinical utility, which refers to the impact of a test on clinical decision-making and patient outcomes, plays a critical role in the reimbursement process by payors, including private insurers, Medicare, and Medicaid. With the publication of the FDA Final Rule about LDT’s in July 2024, the long-term regulatory status of LDT’s is uncertain and should be closely monitored by all stakeholders.
Additional resources related to molecular LDT’s
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