By Frederick Kiechle
10/09/07

MDx Testing: In-House Versus Sending Out

There are a number of issues involved in determining whether to conduct MDx testing in-house as opposed to outsourcing to a reference laboratory. This article will address—among other issues—cost factors, types of molecular tests, and the contentious role of gene patents from different perspectives.
An Overview of Cost and Patent Issues

Cost is, of course, one of the key factors in determining whether to conduct tests in house or not. “If you send an assay test to a reference laboratory, recognize that you are, in fact, sending money right out the door,” says Frederick Kiechle, MD, PhD, FCAP, FASCP, Director, Clinical Pathology at Memorial Regional Hospital (Hollywood, FL). “The reimbursement will never equal the charge that is sent to you by the reference laboratory and if you are in a no mark-up state, you cannot up-charge. You have to bill the insurance company exactly what they bill you, and you will get back about 0.05%, and with Medicaid you would get 0.001%.”

However, Kiechle provides the following example of what he terms “losing less money” as the chart below for hepatitis C quantification illustrates.

As the chart indicates, if you send out the test the loss would be over $36,000. However, doing it in-house will result in a savings of $3,000. “There are about four to six molecular tests that are true losers—albeit it is through no fault of the industry or pathology laboratory,” he says. “It’s just the fact that reimbursement does not equal the cost of doing the test, in spite of efforts at all levels to try to fix it. This is a controversial issue, which may involve patent royalties—we can’t forget that the patent system was established to protect and promote inventions, not investments.”

At the end of 2001, Kiechle notes that there were 18,174 patented human DNA sequences and 365 patents were single-nucleotide polymorphisms. “The question is, if I had 10 of those mutations in my genome, would I have to pay a use patent for my enzymes to keep me alive and use those patented genes to do transcription and finally translation to keep me alive and well,” he says. “While the answer is unknown at this point, this demonstrates how ridiculous the process of gene patenting becomes if you take it to the extreme.”

A 2005 issue of Science reported on a study that reviewed a number of different patents with an eye on reviewing the scope and claims in the patent. The study looked at two multi-gene diseases (Alzheimer’s and breast cancer) and four single-mutation diseases (ataxia telangiectasia, Canavan disease, familial dysautonomia, and hereditary hemochromatosis). “The study reviewed a total of 74 patents, and there were approximately 1,167 claims. The total number of claims with single problems was 448 (almost 50 percent) and those with cumulative (more than one problem) were 667. The problems involved claim discoveries, such as the patent holder did not specifically describe all the claims, or there are claims for more than the inventor discovered. For example, a patent claimed the rights over all DNA sequences that encode for the protein without actually describing the DNA sequence.”

According to Kiechle, examiners actually spend approximately 18 hours per patent and he suggests that perhaps this is not sufficient time to review a complicated molecular gene patent. “The patent examiners are also financially rewarded for quickly pushing patents through the office. The solution, which Canada has implemented, is to simply stop patenting gene sequences. The invention is the information.”

The impact of gene patents, looking at biomedical research, is minimal, he notes. Work-arounds have been developed, including licensing the patent; inventing around the patent (this occurs with polymerase chain reaction [PCR], and other alternative amplification methods that became available because companies wanted to have their own method for amplifying DNA and didn’t want to pay royalties for PCR); working off-shore where a patent or claim doesn’t exist; public database use for sequences that are actually in the public domain and are available on Web sites; court challenges to dispute the patent; and outright infringement.

Finally, a telephone survey of molecular laboratory directors that was published in a 2003 issue of the Journal of Molecular Diagnostics found that 25 percent had discontinued performing genetic tests because of patents and 53 percent did not develop new clinical genetic tests because of patents. The study covered 22 patents for 12 genetic diseases.

A Contrarian View on Patents and Costs

As Kiechle has pointed out, there are a number of issues (i.e., criticisms) surrounding patents. Critics have asked, how are these tests patentable, and why are patents allowed? They have also claimed that patents raise costs, hinder the development of improvements and new tests, and limit patient access to health care.

“To address these issues, we have to start with the basics,” says Geoffrey Karny, a partner with Baker & Daniels LLP (Washington, DC). “By issuing a patent, the U.S. government grants the legal right to exclude others from making, using, selling, or importing an invention for a limited period of time. It is a property right, even though it is intangible. It is not a reward, and it is not the right to sell or a guarantee of commercial success. For example, you can have a patent on a new drug, but if you need FDA approval, you are not going to be able to sell it. You can have 50 patents, but you are not necessarily going to succeed in the marketplace. Despite Dr. Kiechle’s assertion that the patent system is about inventions, not investments, it’s about both. The patent system exists to stimulate the investment needed to bring an invention to market.”

According to Karny, patents are granted to stimulate invention and technological progress. “It takes a lot of time, money, and effort to develop a new product. It doesn’t fall out of the sky after a paper is published. Somebody needs to make it happen—to get a product to the marketplace,” he explains. “I was able to find some information online about the costs of bringing a diagnostic to market. According to Trimark Publications, the average cost to develop a diagnostic product is $5 million, of which $2 million is associated with FDA approval.

“Perhaps a better way to look at this, even though it is not a direct cost analysis, is to look at some of the Securities and Exchange Commission (SEC) documents for diagnostic companies,” he says. For example, the prospectus for Genomic Health’s 2005 initial public offering states that the company will use $20 million of the proceeds to fund research and development (R&D). Third Wave’s 10-K discloses that it spent $8.4 million for R&D in 2005.
“Development will not happen if somebody is going to knock off the product,” Karny cautions. “I would not want to be the company doing the heavy lifting in R&D only to have a competitor freely copy the finished product.”

Another reason patents are granted is so others can build upon the new information disclosed by a patent. “That information is put out there in the public for people to work on, to develop improvements, and to design around,” he notes. “It is good to design around patents because that stimulates further innovation.”
There are a number of requirements for obtaining a patent. The most basic one is determining what can be patented. “The patent statute refers to any process, machine, manufacture, or composition of matter—making it pretty broad,” Karny notes. “In 1980, the Supreme Court, when dealing with a genetically engineered organism, said, ‘anything under the sun made by man’ is patentable. Of course, the invention has to have utility, meaning that it must have a real-world use. It must also have novelty, which means that it’s not known, not in the public domain, and not disclosed in the technical literature. Keep in mind, however, that the determination of novelty is made when the patent is filed.” In addition, the invention must not be obvious; that is, not predictable by a person of ordinary skill in the technology.”

Another requirement is disclosure. “When you file a patent application, you have to describe the invention in sufficient detail to enable a person skilled in that technology to make and use it,” Karny elaborates. “Why? So, someone can build upon that technology. So a patent reflects a very basic concept—without the insight and actions of the inventor, the new method or product would not even exist.”

That leads to the question of how someone can patent something that is naturally occurring, such as a gene. “The answer is that a naturally occurring product cannot be patented,” he says. “However, we must look at the claims to see what has been patented. These are found at the end of the patent document. They precisely describe the invention. You will see that what is claimed is an isolated DNA molecule, not a gene.”

An example is, “an isolated DNA molecule encoding protein X.” As Karny explains, “Isolated DNA molecules do not occur in nature. This isolated DNA molecule is patentable, if it were previously unknown and if the inventor found a practical use for it. That is how genes are patentable. Another example is a claim to a method of predicting a patient’s susceptibility to colon cancer by determining the presence of certain DNA sequences. Here, you are not patenting the genes; you are patenting the use of the genes in a method that can predict a patient’s susceptibility to colon cancer by identifying sequences in a tissue sample. The method is an invention and, if it meets the other requirements, it is patentable.

“There are lots of myths about patents,” he continues. “Let’s look at the realities. One myth is that there is a thicket of patents on any given gene. Yes, but the reality is that it doesn’t matter. Multiple patents on one invention are generally an artifact of the patent prosecution process. However, there is usually only one owner. For example, there are supposedly 14 patents for BRCA1 genes, but there is only one owner, Myriad.”

Karny also notes that the conclusions published in the Science paper about poor patent quality were completely unsupported, noting that none of the 74 patents were identified. “In addition, most of the issues related to scope, which non-patent lawyers simply do not understand. Further, the multiple (nine) ‘problems’ per patent claim do not comport with the reality of litigated patents. While there may be a number of issues involved in the litigation of any patent, you are not going to see allegations of nine errors in a claim. Patent litigation usually comes down to the meaning of a couple of words in the claims.”

Regarding the assertion that patents are preventing access to medical care, Karny believes that it is more a matter of a lab not wanting to pay for a license (i.e., it all comes down to money). “Everything is a cost of doing business—wages for employees, rent for a facility, the cost of reagents, and patent licenses.
“In conclusion, how can we patent molecular diagnostic tests?” Karny asks rhetorically. “Well, they are patented just like any other invention. They are not information—gene tests are inventions. Allowing patents on them helps stimulate commercialization of new products and further innovation.”

A Perspective on Testing Decision and Oversight

“In terms of general features that we look at in terms of whether to send a test out or do it in-house, some of the factors and components include reagents, personnel, overhead, royalty payments for intellectual property, development costs associated with doing the test yourself, and turn-around time,” says Jeffrey Kant, MD, PhD, FCAP, FAAAS, Professor of Pathology & Human Genetics and Director, Division of Molecular Diagnostics at the University of Pittsburgh Medical Center.

“For send-out testing, the reagents are obviously not an issue,” he notes. “However, in terms of personnel costs, you are saving time and other than overhead you have no costs. Obviously, you don’t have to worry about intellectual property and there is no development cost. The turn-around time is whatever your vendor will provide for you and if it is going to a high-volume place, timing is not an issue—but it is something you don’t have any control over.”

Developing a test in your own laboratory using commercial reagents as opposed to raw reagents, the costs can vary but typically are within a range of $30 to $80. “Clearly you have to devote personnel time to performing these tests and you will bear indirect and direct overhead costs,” Kant says. “The royalty costs on whether there is intellectual property associated with what you are doing can vary from nothing to whatever the market requires. There is some developmental cost associated with bringing the test up and validating it. Many of these tests are done as analyte-specific reagent-based kits, but some are in vitro diagnostic (IVD) approved reagents. While the turn-around time is at your discretion, it has to fit within your available resources and you can deal with urgent samples if you choose to.”

According to Kant, the least expensive approach to testing is with a homebrew (i.e., raw components) or in a laboratory with commercial reagents. “Generally, the costs of reagents here are much lower, maybe $10-$20 and sometimes even less than that. A lot of the cost is associated with the nucleic acid preparation phase of the sample. Personnel requirements to perform the assays are pretty much the same as if you developed it with commercial reagents. The overhead issues are pretty much the same, but you bear the full cost of royalties. You also absorb some part of the commercial kit price if you purchase it. The developmental costs are similar to doing the tests with commercial reagents. Finally, it may be easier to take a pre-developed assay, particularly if it’s an IVD assay.”

In terms of the broader issues, another thing that should be considered is the time that will be involved, both technical and professional, particularly for tests that have professional component Part B reimbursement associated with them. “Clearly, you also have to look at reimbursement, how the test should be coded, what the likely reimbursement will be based on fee schedules, and whether you are going to get paid at all depending on the prevailing coverage decision, which is usually based locally,” he continues. “Case mix is also extremely important, because you might be paid from an indemnity carrier rather than Medicare or vice-versa. Professional component payment can be useful for those tests that offer it. However, this is not available for microbiology-based tests where it is incorporated into the overall fee.”

Overall, Kant notes that it is a weighting process that is dependent on many factors, most of which involve how your lab time could be best used for both technical purposes and programmatic objectives, and whether you have the expertise available and are willing to commit it. He notes that these factors can vary in a tertiary hospital, a smaller hospital, an academic medical center, or a reference laboratory. However, keep in mind that you may not have a choice because some insurance plans have prearranged contracts that dictate an outside provider that tests will be sent to.

The question really is why would you want to do a test in-house. “Generally, it’s because in-house testing is a better value proposition,” Kant says. “The idea is to have a net savings of dollars, whether it is $3,000 or three-quarters of $1 million, which is passed on to the institution as a whole. You may be able to recoup some additional money if you are doing some professional component reimbursement yourself.”

In addition, he suggests that you consider developing expertise in a specific testing area. DNA sequencing, for example, can be applicable to many types of assays. “Of course, if you develop tests, particularly more esoteric ones, there is the potential for outreach business and improved turn-around time,” he says. “There is also the ability to run the assay on demand if necessary to deal with urgent samples.”

Conducting tests in-house also provides greater control over the assay. “If a manufacturer decides to discontinue a key reagent, which has happened, you won’t be affected if you use reagents that were developed in-house. You are also obviously insulated from major changes in cost,” Kant says.
“For academic medical centers, there is also significant intellectual and unquestionable training value to doing the test in your own laboratory,” he continues. “In terms of professional milestones, it provides opportunities for advancement and collaboration in research. This is particularly true if you have an unusual case that comes through. The chart illustrates the savings from conducting BK Viral Load testing, which requires a rapid turnaround time and increased monitoring.

Kant notes that the decision to conduct testing in-house was primarily based on volume. Conversely, the decision to send out a test is often based on having a volume. You also might not have the expertise, either on a technical or professional level, or the resources to conduct these tests. “Another factor is that you’ll need to set up proficiency testing for some of the more esoteric tests, and that is considerably more effort than using a standardized program.”
Labs need to understand that they also have fiduciary responsibility for send-out tests. “Molecular assays are typically expensive and the decision whether to send out tests should be under the lab’s control.” For example, Kant’s lab oversees most of the nucleic acid based send-out testing and conducts a lot of utilization review on a pre-analytic level.

The requisition for a send-out tests is another area worth noting. Kant suggests that you carefully review suggested panels, especially large ones that can be costly, to determine whether all the recommended tests have utility. Conversely, many reference labs are helpful in assessing whether follow up tests can be obviated—i.e., further diagnostic assessment by the clinician has already been made after a first tier of tests is complete.
Finally, Kant summarizes some additional support issues to consider for send-out tests:

• Follow up to ensure that tiered testing occurs as needed (i.e., negative results on initial tests)
• Compliance requirements for billing (i.e., who pays the reference lab, patient or insurance)
• Follow up role for tests that have long turn-around times
• Responsibility for clinical information and patient consent for certain types of genetic testing
• Responsibility for entering results in electronic records
• Procedures for testing that is sent to non-CLIA (Clinical Laboratory Improvement Amendments) labs (i.e., international or research)

A Perspective From a Reference Lab

“If the volume of the test is too low, or if the technology to perform the test is not quite ready for the local laboratory, we are happy to do those tests for you,” says Noriko Kusukawa, PhD, Vice President at ARUP Laboratories (Salt Lake City, UT), and an adjunct associate professor in the pathology department at the University of Utah.

“Laboratory tests, including molecular tests, have a life cycle that starts from discovery of a marker, establishing its medical utility, and the development of the assay,” she says. “Tests that are in this early phase have great value to the reference lab. However, as volume grows, and as technologies become available so that local labs can economically perform the test, then we expect tests to migrate out of the reference labs and into the local labs, bringing testing closer to the patient. We acknowledge this life cycle, and have programs to help the transition.”

ARUP has several programs in place to aid local labs that wish to perform tests. “First, we share validation specimens with local labs that are ready to do the testing,” she explains. “In 2006, we shared approximately 1,500 specimens with 40 laboratories to help them validate their molecular tests.” Most of the transactions occurred in the area of infectious disease and coagulation genetics, followed by some of the more popular genetic tests (such as cystic fibrosis). Kusukawa also notes that she has seen an increase in the number of labs that want to take over hematophatology tests.

Testing in the areas of pharmacogenomics (PGx) including companion diagnostics such as HER2-neu and epidermal growth factor receptor (EGFR), as well as drug dosing tests such as Warfarin, and solid tumor classifications (i.e., breast cancer) appear to still be at the early phase of their life cycle, and are primarily performed by reference laboratories.

The second way that ARUP is assisting local labs is by providing a direct cost-assessment tool. “This tool deals with consumable and labor costs, but does not address professional costs. It is the same spreadsheet that we ourselves use to determine whether to bring a new test on line.”  The chart and sample worksheet below illustrate how the cost-assessment tool works.

“Another cost of performing the test yourself is that you have to deal with intellectual property and licensing agreements,” she notes. “Unfortunately, there is no supportive network within the molecular diagnostic laboratory community to deal with this. Basically, each lab has to work with their own legal counsel or have their business people handle the negotiations, and very few opportunities exist for cross-fertilization or sharing of know-how between labs.”
Kusukawa says that the first thing she looks for in a license agreement is whether the technology is offered exclusively or non-exclusively to her lab. “The problem is not the patent, but how it is managed and licensed. ARUP usually discourages patent holders to do exclusive licenses, as it goes against our guiding philosophy that tests should be performed as close to the patient as possible—also, competitive pressure ultimately benefits the patient. While there are unusual circumstances under which we would take exclusive licenses, more often than not we try to convince patent holders to offer licenses non-exclusively.”

The next thing Kusukawa does is determine what technology has really been offered. “Often patent holders overstate the breadth of their patent. So, in order to really understand, we review the claims and the patent file history. By doing this, for example, we may find that a gene mutation patent might actually be narrowly limited to the use of a particular testing method. In another example, we may find that we are not offered all the rights to do a particular test, but that there are other competing patents that we don’t have access to.

The process is not straightforward, Kusukawa acknowledges, and oftentimes she needs to work with outside counsel to review patents and literature. “This is a challenge for local labs. Navigating a license arrangement is becoming increasingly complicated as time goes by.”

A third concern, of course, is the financial terms. “Usually, there is an upfront or lump sum fee, also known as a ‘license issue fee.’ We have seen deals with an upfront fee of anywhere from $10,000 to a high of $150,000,” she says. “The reason for having this fee varies, but often this is about recovering patent or R&D expenses, or recovering some of the past infringing activity. Sometimes, there might be technology transfer between the lab and the patent holder. It is seldom that a deal does not have an issue fee.”

Then there is also the running royalty, which is often a percentage of test income. “We have seen royalties that are anywhere from 1 to 15 percent. This definitely should be included in the cost assessment of tests,” she notes. “You also need to know how often you have to pay royalties—whether it’s once a quarter, twice a year, or annually. Sometimes, there may be a minimum royalty you need to pay regardless of how much testing you do. How long you have to pay is often defined by the expiration of the patent. Perhaps you can negotiate shorter terms—for example, limit the payment term to 10 years if technology erosion is expected. You may also seek special arrangements that would help you get through times of low volume of the test. Mechanisms need to be in place to know when royalty obligations go away due to, say, a future emergence of a vendor that offers a licensed kit. And, finally, it is always possible that a test touches multiple patents and you may need to coordinate things with more than one patent holder.”

A Final Note

In conclusion, the reality is that the world of MDx testing—specifically, determining whether to send out or conduct tests in-house—is a challenging one from all perspectives.